MCGINNIS, SARAH P.,

December 20, 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
VALDOSTA DIVISION
IN RE: ::
CASE NO. 02-70055
MCGINNIS, SARAH P., : CHAPTER 13
Debtor. :
:
MCGINNIS, SARAH P., : ADVERSARY PROCEEDING
Plaintiff, : NO. 02-7004
:
vs. :
:
PENNSYLVANIA HIGHER EDUCATION :
ASSISTANCE AGENCY, :
Defendant. :
:
PENNSYLVANIA HIGHER EDUCATION :
ASSISTANCE AGENCY, :
Movant. :
MEMORANDUM OPINION
On November 25, 2002, the court held a hearing regarding the
Motion of Pennsylvania Higher Education Assistance Agency
(“Defendant”) for Summary Judgment. At the conclusion of the
hearing, the Court took the matter under advisement. After
considering both parties’ briefs and oral arguments, and the
applicable statutory and case law, the Court makes the following
conclusions of law.
PROCEDURAL HISTORY
On January 14, 2002, Debtor filed a voluntary petition under
Chapter 7 of the Bankruptcy Code (“Code”). Pursuant to Bankruptcy
Rule 7001(6) (“Bankr. Rule 7001(6)”), Debtor filed an adversary
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proceeding on February 28, 2002 to determine the discharageability
of her student loan debt.
Except for the issue of whether Debtor’s situation would give
rise to the level of “undue hardship” required by 11 U.S.C. §
523(a)(8), the parties do not dispute the basic underlying facts.
Debtor received a college degree in music history from Birmingham
Southern College in 1974. Debtor left the work force in 1980 to
care for her two small children. After a divorce, Debtor returned
to school in 1990 to receive training as a court reporter. During
her six years at Brown College of Court Reporting, Debtor received
the loans at issue in this adversary proceeding. Debtor did not
graduate from the Brown College program, nor did she pass the exam
to become a licenced court reporter. In 1998, Debtor was diagnosed
with Guillion Barre’ Syndrome. The extent to which Debtor has
recovered from Guillion Barre’ and how much it affects her current
and future job opportunities is disputed by the parties.
Defendant contends that it is entitled to summary judgment as
a matter of law because the facts, even as asserted by Debtor, do
not rise to the level of undue hardship required by law to
discharge student debt. Defendant argues that even if Debtor meets
her burden on the first prong of the test as explained in Brunner
v. New York State Higher Education Services Corp. (In re Brunner),
831 F.2d 395 (2d Cir. 1987)(“Brunner test”), Debtor cannot sustain
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her burden under the second prong of the Brunner test. Brunner, 831
F.2d at 396. The second prong of the Brunner test requires Debtor
to prove that her dire circumstances will continue for a
significant portion of the repayment period for the student loans.
Id. Defendant urges that with a college education and several
years of court reporter training, Debtor should be able to find
adequate employment at some point in the future. Further,
Defendant argues that Debtor does not carry her burden on the third
prong, the “good faith” prong, of the Brunner test because Debtor
has only made four payments on the student loans. Id. Finally,
Defendant argues that Educational Credit Management Corp. v. Carter
(In re Carter), 279 B.R. 872, (M.D. Ga. 2002) is not
distinguishable factually from this case. Carter, 279 B.R. at 874.
Defendant contends that the cases relied upon by the court in
Carter to determine the undue hardship issue were factually similar
to the present case. Id. at 877-878; see Brightful v. Pennsylvania
Higher Educ. Assistance Agency (In re Brightful), 267 F.3d 324 (3d
Cir. 2001); In re Roberson, 999 F.2d 1132 (7th Cir. 1993). In
fact, Defendant argues that the situations in Brightful and
Roberson were worse than Debtor’s situation here. Brightful, 267
F.3d at 326; Roberson, 999 F.2d at 1133-1134.
Debtor argues that summary judgment should not be granted to
Defendant because there are genuine issues of material fact.
1Debtor is 50.
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First, Debtor argues that a genuine issue exists as to whether
Debtor will be able to maintain a minimal standard of living for
a significant portion of the repayment period if her student loans
are not discharged. Debtor contends that her bout with Guillion
Barre’ has left her with chronic back pain, which interferes with
her ability to perform many types of jobs. Debtor argues that as
time goes by her ability to get a job will decrease because of her
lack of experience, age1, and chronic back pain, factors that are
not within her control. Second, Debtor argues that there is a
genuine issue as to whether she made a good faith attempt to repay
her loans. Debtor urges that under case law, payments are not
required. A good faith effort to obtain employment, maximize
income, and minimize expenses is enough according to Debtor. See
Roberson, 999 F.2d at 1136; In re Mallinckrodt, 274 B.R. 560, 565
(Bankr. S.D. Fla. 2002).
Finally, Debtor contends that Carter is factually distinct
from the present case. Carter, 279 B.R. at 874. In Carter, the
court found that the debtor’s situation would improve over time
because the debtor had a college degree in business administration.
Id. at 878-879. Debtor argues that this is not true for her.
While Debtor has a college degree is in music history, she contends
that she cannot use this degree without additional education.
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Further, Debtor points out that she was unable to complete her
court reporter degree and never passed the required court reporter
exam, even though she tried multiple times. Debtor did begin work
as a court reporter under a judicial permit. However, the judicial
permit could not be renewed without passing the exam and has since
expired.
Additionally, the debtor in Carter had no medical disabilities
or other causes which would interfere with her future employment.
Id. at 878. Again, Debtor contends that this is not true for her.
Debtor argues that her bout with Guillion Barre’ was a key factor
in her inability to pass the court reporting exam during her final
attempts. Further, Debtor urges that chronic back pain, which is
a lingering effect of Guillion Barre’, affects her ability to gain
other types of employment. Debtor contends that she is facing a
“total foreclosure of job prospects in her area of training.” Id.
[quoting In re Webb, 132 B.R. 199, 202 (Bankr. M.D. Fla. 1991)].
Further, Debtor argues that age is a significant factor in the
second prong of the Brunner test, which looks at a debtor’s ability
to pay a substantial amount of the debt. The debtor in Carter was
only 39. Id. at 874. Here, Debtor is 50. Debtor argues, with her
severely restricted ability to earn more than minium wage, it is
unlikely that she will be able to repay a significant amount of her
student loan debt.
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Finally, Debtor contends that Carter does not establish a rule
of law. It states only that the facts in Carter do not meet the
second prong of the Brunner test. Id. at 878-879. Debtor argues
that if her situation does not rise to the level of an undue
hardship, then no case would unless it involved a medical
disability. Debtor contends that if Congress had meant to limit
“undue hardship” to only medical disabilities, it would have.
CONCLUSIONS OF LAW
Under 11 U.S.C. § 523(a)(8), Debtor’s student loans are
nondischarageable unless Debtor can prove that repayment of the
loans would subject her to undue hardship. 11 U.S.C. § 523(a)(8)
(1993 & Supp. 2002). Undue hardship is not defined in the Code but
the term has been analyzed by many courts. See 11 U.S.C. §§ 101,
523 (1993 & Supp. 2002); see also Brightful, 267 F.3d at 327-331;
Roberson, 999 F.2d at 1134-1138; Brunner, 831 F.2d at 396-397;
Carter, 279 B.R. at 875-879.
As spelled out in Brunner, the three-prong test: 1) the
debtor’s current financial situation, 2) future financial
situation, and 3) good faith effort towards repayment is widely
accepted. Brunner, 831 F.2d at 396. In Carter, the district court
set a very high standard for undue hardship. Carter, 279 B.R. at
879.
Under Federal Rule of Civil Procedure 56 (“Rule 56″),
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applicable to Bankruptcy proceedings under Bankruptcy Rule 7056
(“Bankr. Rule 7056″), Defendant is entitled to summary judgment if
there is no genuine issue of material fact and Defendant is
entitled to judgment as a matter of law. FED. R. CIV. P. 56, FED. R.
BANKR. P. 7056. However, in the present case genuine issues of
material fact remain. The parties disagree vastly on what Debtor’s
ability is to generate income in the future. Additional evidence
is necessary for the court to make this determination. Therefore,
summary judgment at this juncture would be inappropriate.
Defendant’s Motion for Summary Judgment is denied. An order
in accordance with this Memorandum Opinion will be entered.
DATED this _________ day of December, 2002
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

Arthur Geeslin, Jr

July 17, 2003

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
CASE NO. 02-42227
Arthur Geeslin, Jr., : CHAPTER 7
Debtor. :
:
Arthur Geeslin, Jr., :
Movant, ::
vs. :
:
Peter Skandalakis, :
Respondent. :
::
MEMORANDUM OPINION
On May 12, 2003, the Court held a hearing on a Motion for
Contempt Against Peter Skandalakis (“Respondent”), a Georgia
District Attorney, (“Contempt Motion”) filed by Arthur Geeslin, Jr.
(“Debtor”). During oral argument, the following issues were
raised: Whether Respondent’s actions to collect the forfeited bail
bond because the principal did not appear for trial are subject to
the automatic stay and the discharge injunction, when Debtor has
received a discharge of debts under Chapter 7 of the United States
Bankruptcy Code (“Code”). Further, if the automatic stay and
discharge injunction apply, whether Respondent can claim 11th
Amendment immunity. The Court took the matters under advisement
and the parties were given an opportunity to submit briefs in
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support of their positions. The Court has considered the parties’
briefs, oral arguments, and the applicable statutory and case law.
BACKGROUND INFORMATION
The parties agree that the facts are not in dispute. Debtor
was a commercial surety on a criminal bail bond in the amount of
$125,000 and the principal was a criminal defendant as specified
under O.C.G.A.§ 17-6-1 et. seq. The criminal defendant failed to
appear before the Superior Court of Meriwether County on the
required date. Georgia law provides that “a bond forfeiture occurs
at the end of the court day upon the failure of appearance of a
principal of any bond or recognizance given for the appearance of
that person.” O.C.G.A. § 17-6-70(a) (1997 & Supp. 2002). Debtor
filed a Chapter 7 bankruptcy petition on September 10, 2002.
Debtor received his discharge on December 30, 2002. Respondent,
the District Attorney for the Coweta Judicial Circuit, has
proceeded with an action to collect the criminal bail bond
forfeiture from Debtor. Debtor brought this Contempt Motion
against Respondent in an effort to prevent Respondent from
obtaining a final judgment on the bond and from recovering the debt
from Debtor.
Debtor contends that the bail bond forfeiture was a
contractual obligation between himself and Respondent. Debtor
asserts that he is protected from collection of the debt by the
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automatic stay under 11 U.S.C. § 362(a). Further, Debtor asserts
that the debt is dischargeable in bankruptcy and that it has been
discharged. Therefore, Respondent is in violation of the automatic
stay and the discharge injunction.
Respondent raised two policy issues in support of his position
that actions to collect on bail bond forfeitures should be exempt
from the automatic stay and the discharge injunction. First,
Respondent argues that federal courts should not interfere with
state government functions whenever possible. Moreover, bankruptcy
laws do not provide exceptions to criminal proceedings. Respondent
cited Younger v. Harris, 401 U.S. 37 (1971), in which the Supreme
Court acknowledged that, in matters of equitable relief, a state’s
administration of its own criminal justice system should be free
from federal interference. Younger, 401 U.S. at 44-45. Respondent
urges that the Code must be read and understood in light of this
federalism.
The second policy reason advanced by Respondent is that the
bail system would be undermined if bail bond forfeitures were not
enforced by courts as an exception to the automatic stay and
discharge injunction. Respondent contends that the effect could
cause danger to the public. Respondent urges that a bail bond is
a way to coerce the defendant’s presence at trial by the threat of
forfeiture. If bail forfeitures could be undermined, it might lead
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to increased evasion of states’ bail bond statutes and third-party
sureties could prevent the effects of paying the forfeiture by
hiding behind the cloak of the Code.
In addition to the above policy arguments, Respondent contends
that criminal bail bond forfeitures fall under 11 U.S.C. §
362(b)(4), an exception to the automatic stay, and are exempt from
discharge under 11 U.S.C. § 523(a)(7). In the alternative,
Respondent has asserted the State of Georgia’s Eleventh Amendment
sovereign immunity.
CONCLUSIONS OF LAW
First, Debtor erred procedurally in his attempt to obtain an
injunction. In pertinent part, Bankruptcy Rule 7001 provides that:
“An adversary proceeding is governed by the rules of this Part VII.
The following are adversary proceedings . . .(7) a proceeding to
obtain an injunction or other equitable relief….” FED. R. BANKR.
P. 7001. The injunctive relief sought by Debtor cannot be obtained
under the clear language of Rule 7001(7). FED. R. BANKR. P. 7001(7).
While the Court cannot grant an injunction at this point, the
Court may inquire whether there was a violation of the automatic
stay under 11 U.S.C. § 362(a) and the discharge injunction under
11 U.S.C. § 524(a)(2). Respondent claims that the Eleventh
Amendment prevents such an inquiry. This Court, like all other
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courts, must refrain from considering a constitutional question
unless it is a required query. See United States v. Clemons, 843
F.2d 741, 750 (3d Cir. 1988) citing Ashwander v. Tennessee Valley
Auth., 297 U.S. 288, 341, 345, 347 (1936) (Brandeis, J.,
concurring); see also Burton v. United States, 196 U.S. 283, 295
(1905); Kranson v. Valley Crest Nursing Home, 755 F.2d 46, 50 (3d
Cir. 1985); Stoner v. Presbyterian Univ. Hosp., 609 F.2d 109, 111
(3d Cir. 1979)(per curiam).
As stated by the court in Commonwealth of Virginia v. Collins
(In re Collins), 173 F.3d 924 (4th Cir. 1999), “A federal court’s
jurisdiction over the dischargeability of debt, just like its
jurisdiction to confirm a plan of reorganization, ‘derives not from
jurisdiction over the state or other creditors, but rather from
jurisdiction over the debtors and their estates.’” Collins, 173
F.3d at 929, quoting State of Maryland v. Antonelli Creditors’
Liquidating Trust, 123 F.3d 777, 787 (4th Cir. 1997). By analogy,
this Court has the fundamental power to determine whether
Respondent’s actions violate the automatic stay, as well as the
discharge injunction. As stated in Collins, this power flows from
this Court’s jurisdiction over Debtor and his estate, not
jurisdiction over Respondent. Id. The Eleventh Amendment is not
implicated because the Court is not asserting in personam
jurisdiction over Respondent. See generally, Chandler v. State of
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Oklahoma (In re Chandler), 251 B.R. 872, 876 (10th Cir. B.A.P.
2000)(held that an adversary proceeding asserted in personam
jurisdiction over state, thus Eleventh Amendment was implicated,
but noted issues, such as discharge, fall under in rem
jurisdiction, an exception to the Eleventh Amendment); but see
Mayes v. Cherokee Nation (In re Mayes), 294 B.R. 145, 152-153 (10th
Cir. B.A.P. 2003)(held that a motion to avoid a judgment lien was
a “suit” for sovereign immunity purposes despite the fact that an
adversary proceeding had not been filed).
As noted by the court in Chandler, the United States Supreme
Court held years ago that bankruptcy courts have in rem
jurisdiction over matters that may affect a state. Chandler, 251
B.R. at 877, citing Gardner v. New Jersey, 329 U.S. 565, 573-575
(1947). Bankruptcy courts do have the fundamental power to
determine violations of the automatic stay and the discharge
injunction. See generally Collins, 173 F.3d at 930. If courts were
to recognize Eleventh Amendment sovereign immunity in this context,
“the bankruptcy system would be seriously undermined.” Id. at 930.
If this Court is to find civil contempt, then clear and
convincing evidence must demonstrate that a willful disregard of
the authority of the court took place. See McGregor v. Chierico,
206 F.3d 1378, 1383 (11th Cir. 2000). According to the Eleventh
Circuit, “The clear and convincing evidence must establish that:
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(1) the allegedly violated order was valid and lawful; (2) the
order was clear and unambiguous; and (3) the alleged violator had
the ability to comply with the order.” Id. Further, Debtor bears
the burden of persuasion on each element that must be proven for
an alleged violation of the automatic stay for damages to be
recovered. See Christakis v. McMahon (In re Christakis), 291 B.R.
9, 18 (Bankr. D. Mass. 2003). Debtor bears the same burden in
order to receive damages when there is an alleged violation of the
discharge injunction. See In re Arnold, 206 B.R. 560, 568 (Bankr.
N.D. Ala. 1997).
11 U.S.C. § 362(a) – The Automatic Stay
In relevant part, 11 U.S.C. § 362(a) states that “[e]xcept as
provided in subsection (b) of this section, a petition filed under
section 301, 302, or 303 of this title… operates as a stay.” 11
U.S.C. § 362(a)(1993 & Supp. 2002). According to the court in
United Sav. Assoc. v. Timbers of Inwood Forest Assoc., Ltd., 484
U.S. 365 (1988), “When a bankruptcy petition is filed, § 362(a) of
the Bankruptcy Code provides an automatic stay of, among other
things, actions taken to realize the value of collateral given by
the debtor.” United Sav. Assoc., 484 U.S. at 369. Moreover, 11
U.S.C. § 362(a) has a twofold purpose. First, it gives the debtor
a “breathing spell” from creditors. Chester v. Parker (In re
Parker), 289 B.R. 779, 781-782 (Bankr. M.D. Ga. 2002)(Walker, J.).
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The stay stops all actions directed at the debtor including efforts
to collect debts. See Independent Union of Flight Attendants v. Pan
Am. World Airways, Inc., 966 F.2d 457, 459 (9th Cir. 1992); see
also Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571
(9th Cir. 1992); H.R. Rep. No. 595, 95th Cong., 1st Sess., at 340
(1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6296-6297. Second,
11 U.S.C. § 362(a) prevents the “race to the courthouse,” so that
creditors will be treated equally. In re Printup, 264 B.R. 169, 173
(Bankr. E.D. Tenn. 2001), citing In re Southwest Equip. Rental,
Inc., No. 1-88-00033, 1990 WL 129972, at *3 (Bankr. E.D. Tenn. Feb.
8, 1990).
The automatic stay provided for in 11 U.S.C. § 362(a) takes
effect immediately upon the filing of a petition by the party
seeking bankruptcy protection. See generally ALAN N. RESNICK ET. AL.,
COLLIER ON BANKRUPTCY § 362.11 (15th ed. 2003). Section 362(h) of the
Code states that “[a]n individual injured by any willful violation
of a stay provided by this section shall recover actual damages,
including costs and attorney’s fees, and, in appropriate
circumstances, may recover punitive damages.” 11 U.S.C. §
362(h)(1993 & Supp. 2002). Damages for a willful violation of the
automatic stay must establish that “the creditor deliberately
carried out the prohibited act with knowledge of the debtor’s
bankruptcy case.” Printup, 264 B.R. at 173, citing Walker v.
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Midland Mortgage Co. (In re Medlin), 201 B.R. 188, 194 (Bankr. E.D.
Tenn. 1996).
The Court must address Respondent’s argument that 11 U.S.C.
§ 362(b)(4) creates an exception under which Respondent’s actions
do not violate the stay. Section 362(b)(4) creates an exception
to the stay for actions taken by a governmental unit to enforce its
police or regulatory power. 11 U.S.C. § 362(b)(4)(1993 & Supp.
2002). If Respondent’s actions fall under this exception, there
is no need to address whether the debt was discharged.
Courts have developed two tests to decide whether governmental
actions fall under this exception: 1) public policy test; 2)
pecuniary interest test. See Chao v. Hospital Staffing Serv., Inc.,
270 F.3d 374, 385-386 (6th Cir. 2001); U.S. v. Commonwealth Cos.,
Inc. (In re Commonwealth Cos., Inc.), 913 F.2d 518, 523-524 (8th
Cir. 1991); Word v. Commerce Oil Co. (In re Commerce Oil Co., 847
F.2d 291, 295 (6th Cir. 1988); McAtee v. The Fla. Bar (In re
McAtee), 162 B.R. 574, 577-578 (Bankr. N.D. Fla. 1993). Under the
public policy test, a proceeding is reviewed to determine whether
it “adjudicates private rights” or “effectuates public policy
considerations.” Chao, 270 F.3d at 385-386. Only those proceedings
that effectuate public policy considerations are exempt from the
stay. See id. at 386. Under the pecuniary interest test, a
proceeding is reviewed to determine whether it furthers the
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governmental unit’s pecuniary interest or matters of public safety.
See id. at 385. Only those proceedings that further matters of
public safety are exempt from the stay. See id.
Many courts look to the legislative history when considering
the issue of whether the stay applies to actions by governmental
units. See McAtee, 162 B.R. at 577. According to legislative
history, 11 U.S.C. § 362(b)(4) should be construed narrowly
allowing only actions by governmental units “to protect public
health and safety and not to apply to actions by a governmental
unit to protect a pecuniary interest in property of the debtor or
property of the estate.” 124 Cong. Rec. S17406 (daily ed. Oct. 6,
1976)(statement of Sen. DeConcini), reprinted in 1978 U.S.C.C.A.N.
6505, 6513; see also McAtee, 162 B.R. at 577.
Here, applying both tests, the Court finds that Respondent’s
actions are pecuniary in nature and that those actions would not
further any public health or safety considerations. Respondent
attempted to collect a bail bond forfeiture from a professional
bail bondsman who declared bankruptcy. The Court has been given
no indication that Debtor is the criminal defendant or a family
member or friend of the criminal defendant for whom the bail bond
was issued. The Court finds that this matter is civil in nature
and that Congress’ intent was for 11 U.S.C. § 362(b)(4) to apply
to criminal matters. Therefore, the exception under 11 U.S.C. §
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362(b)(4) does not apply to Respondent’s actions. The Court is not
persuaded by Respondent’s policy arguments that such a
determination will undermine the underlying purposes of the bail
system. The Court finds that a willful violation of the automatic
stay occurred when Respondent attempted to recover the forfeited
bail bond from Debtor.
11 U.S.C. § 524(a)(2) – The Discharge Injunction
The Court will now address Debtor’s claim that Respondent’s
actions are also in violation of the discharge injunction under 11
U.S.C. § 524(a)(2). Debtor’s request for a determination that the
bail bond forfeiture owed to Meriwether County was discharged may
be obtained without an adversary proceeding despite Rule 7001(6).
FED. R. BANKR. P. 7001(6). The Fourth Circuit, in Collins, held
that an adversary proceeding was not required to determine whether
a debt had been discharged. See Collins, 173 F.3d at 929. However,
as Respondent argued, Collins was criticized by one court because
it disregarded the Federal Rules of Bankruptcy Procedure. See Janc.
V. Coordinating Bd. for Higher Educ. (In re Janc), 251 B.R. 525,
541 (Bankr. W.D. Mo. 2000). This Court agrees with the reasoning
of the Collins court. Collins, 173 F.3d at 929-931. To determine
whether Respondent violated the discharge injunction, a necessary
query is whether the debt was discharged in the first place.
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This query begins with 11 U.S.C. § 727, which provides
exceptions to the discharge order if a debtor is not an individual
or if a debtor has committed certain acts. 11 U.S.C. § 727(a)(1993
& Supp. 2002). It is not alleged that Debtor or his actions fall
under the provisions of § 727(a), therefore the query moves to §
727(b). 11 U.S.C. § 727(b)(1993 & Supp. 2002). Under 11 U.S.C. §
727(b) all pre-petition debts are discharged, except those debts
set forth in 11 U.S.C. § 523(a). 11 U.S.C. §§ 523(a),727(b)(1993
& Supp. 2002); see also In re Crull, 101 B.R. 60, 61 (Bankr. W.D.
Ark. 1989). Briefs submitted on behalf of Debtor and Respondent
directed the Court’s attention to 11 U.S.C. § 523(a)(7) because the
debt was incurred when the criminal defendant absconded and was a
type of forfeiture. In pertinent part, 11 U.S.C. § 523(a)(7)
excepts from discharge any debt “to the extent such debt is for a
fine, penalty, or forfeiture payable to and for the benefit of a
governmental unit, and is not compensation for actual pecuniary
loss.” 11 U.S.C. § 523(a)(7)(1993 & Supp. 2002).
Professional bail bondsmen incur debt when criminal
defendants, for which the bondsmen are sureties, abscond prior to
trial. When dealing with the dischargeability of bail bond
forfeitures where the debtor is the owner of a bail bond company,
courts have ruled that professional bail bondsmen’s obligations are
contractual in nature and do not arise out of the underlying
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criminal activity. See Hickman v. Texas (In re Hickman), 260 F.3d
400, 406 (5th Cir. 2001); Collins, 173 F.3d at 931; County of Berks
v. Damore (In re Damore), 195 B.R. 40, 42 (Bankr. E.D. Pa. 1996);
Pioneer Gen’l Ins. Co. v. Midkiff (In re Midkiff), 86 B.R. 239, 240
(Bankr. D. Colo. 1988); Pioneer Gen’l Ins. Co. v Paige (In re
Paige), No. 86 B 8072, 87 E 194, 1988 WL 62500, *4 (Bankr. D. Colo.
April 15, 1988). Moreover, the monetary obligation does not arise
from the commission of any criminal or penal act. See Collins, 173
F.3d at 932. These same courts have interpreted the leading United
States Supreme Court case dealing with 11 U.S.C. § 523(a)(7), Kelly
v. Robinson, 479 U.S. 36 (1986), to allow discharge for debt
created by bail bond forfeitures that are not penal in nature.
Kelly, 479 U.S. at 50; see Hickman, 260 F.3d at 406; Collins, 173
F.3d at 931-932; Damore, 195 B.R. at 42; Midkiff, 86 B.R. at 240
(adopted reasoning in Paige); Paige, 1988 WL 62500, at *4. The
courts in Collins and Hickman held that Congress did not intend 11
U.S.C. § 523(a)(7) to make criminal bail bond forfeitures nondischargeable,
when the debtor is the surety, not the criminal out
of jail on bond. Hickman, 260 F.3d at 407; Collins, 173 F.3d at
932. The facts in Hickman and Collins are similar to those before
this Court because the cases involved people who ran bail bond
companies, then petitioned for bankruptcy. Hickman, 260 F.3d at
401; Collins, 173 F.3d at 926.
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While numerous cases dealing with professional bail bondsmen
allow for a discharge under 11 U.S.C. § 523(a)(7), courts often
rule the opposite, as pointed out by Respondent, when the bail bond
surety is a friend or family member or if the fees are penal in
nature. See City of Philadelphia v. Nam (In re Nam), 273 F.3d 281,
294 (3d Cir. 2001); United States v. Cox, (In re Cox), 33 B.R. 657,
662 (Bankr. M.D. Ga. 1983)(Hershner, J.). The court in Nam held
that, if 11 U.S.C. § 523 (a)(7) allowed a criminal bail bond
forfeiture to be dischargeable, such action would disregard the
plain meaning of the statute and could disable the bail system.
Nam, 273 F.3d at 283. The facts in Nam differ from the facts here.
Id. at 283-284. In Nam, the son was charged with murder, robbery,
and burglary. Id. at 283. The father, who was the debtor, bailed
his son out of jail and arranged for him to return to South Korea.
See id. at 284. The father subsequently filed for bankruptcy and
the bail bond forfeiture was held to be non-dischargeable. See id.
Respondent also cites to Cox as support for his position. In
that case, a criminal was convicted and ordered by the court to pay
the attorneys’ fees for the government’s prosecution of him. See
Cox, 33 B.R. at 658. The convicted criminal petitioned for
bankruptcy and the bankruptcy court held that the debt was nondischargeable
because his debt to the government under 11 U.S.C.
§ 523(a)(7) was penal in nature. See id. at 662. Once again the
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facts in Cox are distinguishable from the facts here. Id. at 658.
Further, there are policy arguments that support the
dischargeability of debt under 11 U.S.C. § 523(a)(7) for
professional bail bondsmen that out weigh Respondent’s policy
arguments. First, “the most important consideration limiting the
breadth of the definition of [forfeiture] lies in the basic purpose
of the Bankruptcy Act to give the debtor a new opportunity in life
and a clear field for future effort, unhampered by the pressure and
discouragement of pre-existing debt.” Hickman, 260 F.3d at 404,
citing Local Loan Co. v. Hunt, 292 U.S. 234, 244-245 (1934).
Allowing dischargeability of bail bond forfeitures should not be
taken to the extreme where bankruptcy courts become “a haven for
wrongdoers.” Hickman, 260 F.3d at 404, citing Fezler v. Davis (In
re Davis), 194 F.3d 570, 573 (5th Cir. 1999). However, this
concern must be balanced with the potential harm to the bail system
if professional bail bondsmen are not allowed to discharge their
business debt. Such an outcome could lead to the collapse of the
bail system because bondsmen could perceive the risk of doing
business as too high. Accordingly, a policy of not allowing the
discharge of bail bond forfeitures, when the debtor is a
professional bail bondsman, could be detrimental to the bail
system, rather than in furtherance of the policies behind the bail
system.
-16-
Here, as stated above, Debtor’s position is analogous to the
Hickman and Collins cases. Hickman, 260 F.3d at 401; Collins, 173
F.3d at 926. The contractual nature of the bond forfeiture and
significant policy factors weigh in Debtor’s favor. Therefore, the
Court finds that debts incurred by Debtor through his professional
bail bonding company were discharged. Thus, Respondent’s continued
actions, to collect on the bail bond forfeiture after Debtor
received a discharge, violate the discharge injunction.
Remedies
Unlike the inquiry whether Respondent’s actions violated the
automatic stay and the discharge injunction, the recovery of
damages would require the Court to address the Eleventh Amendment
sovereign immunity argument asserted by Respondent. See Chandler,
251 B.R. at 875. However, in accordance with Ex Parte Young, 209
U.S. 123 (1908), federal courts are not precluded from granting
injunctive relief to prevent a continuing violation of federal law.
Young, 209 U.S. at 155-156, 159; see also Seminole Tribe of Fla.
v. Florida, 517 U.S. 44, 73 (1996); Green v. Mansour, 474 U.S. 64,
68 (1985).
Notwithstanding Respondent’s violation of the automatic stay
and the discharge injunction, Debtor has failed to meet his burden
to provide the Court with evidence of actual or punitive damages.
Since damages will not be awarded to Debtor, again the Eleventh
-17-
Amendment sovereign immunity issue will not be reached. Further,
the Court cannot make the necessary inquiry to rule on an
injunction because an adversary proceeding has not been filed.
While the Court has full authority to find Respondent in violation
of the automatic stay and the discharge injunction, enforcement of
that contempt order, as a result of these legal conclusions, is
another question. Whether Debtor will be able to persuade the
Court to award injunctive relief is an issue for another day.
To the extent that there is any existing collateral given by
the criminal defendant to Debtor to hold as surety, Respondent may
collect that collateral in one of three ways: 1) by obtaining
relief from the automatic stay under 11 U.S.C. § 362(d); 2)
collection after abandonment of the property by the Chapter 7
Trustee; or 3) by waiting until after the final closing order is
issued in Debtor’s case.
Finally, the Court recognizes that there is an adversary
proceeding in the this case that was filed by another party
regarding this same bail bond forfeiture under different sections
of 11 U.S.C. § 523 than addressed by the Court in this Memorandum
Opinion. The finding in this Contempt Motion that the bail bond
forfeiture was discharged is not binding on the Court in the
adversary proceeding dealing with allegations of fraud. No
evidence or argument has been made by Respondent that the bail bond
-18-
forfeiture involved fraudulent actions by Debtor. Therefore, the
Court has not ruled on such matters. An order in accordance with
this Memorandum Opinion will be entered.
DATED this ____ day of July, 2003.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

ROSEMARY DOUGLAS

March 14, 2007

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE MIDDLE DISTRICT OF GEORGIA
VALDOSTA DIVISION
IN RE: :
:
ROSEMARY DOUGLAS : CASE NO. 05-70649 JTL
: CHAPTER 7
Debtor. :
________________________________________________:
:
ROSEMARY DOUGLAS :
:
Plaintiff, : A.P. NO. 05-7021
:
vs. :
: A.P. NO. 05-7022
EDUCATIONAL CREDIT MANAGEMENT CORP. :
:
Defendant, :
:
UNITED STATES OF AMERICA on behalf of :
UNITED STATES DEPARTMENT OF EDUCATION :
:
Defendant. :
:
_____________________________________________________________________________________________
2
MEMORANDUM OPINION
This matter is before the Court on complaint of Debtor, Rosemary Douglas, to determine the
dischargeability of various student loans. On June 28, 2006, the Court held a bench trial of the issues
presented. The Court heard evidence and argument from counsel for Debtor and counsel for the two
Defendants to the complaint. Following the hearing, the Court took the matter under advisement,
inviting counsel for each party to submit briefs. Defendant Educational Credit Management Corp.
(“ECMC”) submitted its brief to the Court on July 14, 2006. No other briefs were filed with the
Court. The issue for the Court to decide is whether Debtor’s repayment of her student loan debt
would impose an “undue hardship” upon Debtor and Debtor’s son as that term is used in 11 U.S.C. §
523(a)(8).1 The Court, having carefully considered the evidence presented at the hearing, the
argument of counsel, the brief submitted, and the applicable statutory and case law, holds that,
consistent with the reasoning set forth below, excepting Debtor’s student loan debt from discharge
would impose an undue hardship upon Debtor and her dependent son.
FINDINGS OF FACT
At the June 28, 2006 trial, the parties presented the Court with a stipulation of facts. The
Court adopts those stipulations as part of its findings. The Court will make other findings in
accordance with evidence presented at trial.
A. Findings by Stipulation
Defendant ECMC is the holder of nineteen consolidated, guaranteed student loans of Debtor.
Those loans are educational loans made, insured, or guaranteed by a governmental unit as described
1 Further reference to provisions of the Bankruptcy Code will be made only to the section number of the provision. It
should be assumed that statutory references are to the Bankruptcy Code found at Title 11 of the United States Code
unless otherwise indicated.
3
in § 523(a)(8). The total amount disbursed on the loans held by ECMC was $26,120.00. As of July
10, 2005, the total amount owed by Debtor on ECMC’s nineteen loans was $59,857.36. The longest
foreseeable time period for repayment of ECMC’s loans is 300 months.
Defendant United States of America on behalf of the U.S. Department of Education (“DOE”)
is the holder of thirteen consolidated, guaranteed student loans. These loans are also educational
loans made, insured, or guaranteed by a governmental unit as described in § 523(a)(8). The total
amount disbursed on the loans held by the DOE was $21,998.00. As of June 15, 2006, the total
amount owed by Debtor on the DOE’s thirteen loans was $30,726.85.
Debtor is qualified and eligible for the William D. Ford Repayment Program (“Ford
Program”), through which Debtor can consolidate the student loans at issue and service her total debt
with a single monthly payment. Debtor has been advised that she is qualified for the Ford Program.
Congress created the Ford Program in 1993. The Ford Program is administered by the DOE.
The Ford Program offers four different repayment options: (1) Standard; (2) Extended; (3)
Graduated; and (4) Income Contingent. The terms and conditions of the four repayment options are
set forth in the Code of Federal Regulations at 34 C.F.R. § 685.208 through 685.210. A party
participating in the Ford Program may change from one repayment option to another at any time.
Table 1 summarizes the term of each repayment option and the payment Debtor would be required to
make on the loans held by ECMC.
TABLE 1—ECMC Loans
Repayment Plan Term (Months) Initial Monthly
Payment
Total Payments
(Interest + Principle)
Standard 120 $679.68 $81,561.60
Extended 300 $404.17 $121,251.00
Graduated 300 $339.84 $129,382.90
Income Contingent 300 Based on Income Based on Income
4
The term of each repayment option and each option’s corresponding payment for the loans held by
the DOE are set forth below in Table 2.
TABLE 2—DOE Loans
Repayment Plan Term (Months) Initial Monthly
Payment
Total Payments
(Interest + Principle)
Standard 120 $268.74 $32,248.80
Extended 240 $174.58 $41,899.20
Graduated2 240 $134.37 $44,927.28
Income Contingent3 300 Based on Income Based on Income
Debtor could elect to combine the payments and make a single payment to the Ford Program to
service both the ECMC and the DOE loans. Under the Graduated option, the payments would
gradually increase for each debt every two years during the repayment period.
Under the Income Contingent Repayment Plan (“ICRP”) option, the monthly payment is
calculated based upon the borrower’s adjusted gross income and family size. The monthly payment
amount is calculated in one of two ways: (1) the amount that would be paid if the borrower repaid
the loan in 300 months, multiplied by an adjusted gross income minus the poverty level for the
borrower’s family size; or (2) 20% of the borrower’s “discretionary income,” which is defined as the
borrower’s adjusted gross income minus the poverty level for the borrower’s family size. If the
calculation yields a monthly payment between $0.00 and $5.00, the monthly payment is $5.00, unless
the borrower’s income is less than or equal to the poverty level for borrower’s family size, in which
case the payment would be $0.00. If the monthly payment is less than the amount of the interest that
accrues on the loans, the interest is capitalized, i.e., added to the principal, once per year until the
2 According to the parties’ stipulation, this is an estimated monthly repayment amount for the first two months of the
term and based upon total loan repayment. The monthly payment amount will generally increase every two years,
based on the graduation factor in the graduated repayment rules.
3 The parties’ stipulation provides that the payment under the “Income Contingent” option will be calculated
annually and is subject to change based on the poverty guidelines for family size as determined by the U.S.
5
principal balance reaches 10% more than the original principal balance.4 At that point, interest
continues to accrue but is not added to the principal balance. Under the ICRP, the repayment period
for Debtor would be 300 months, at the end of which the entire debt would be cancelled. The parties
stipulate that payments under the ICRP can never exceed 20% of the borrower’s discretionary
income, which is defined above.
The parties stipulate and agree that Debtor’s student loans held by the DOE can be
consolidated under the Ford Program along with those held by ECMC and that there are no obstacles
to such consolidation.5 Payment amounts under the ICRP can be determined using a loan calculator
currently available at the following web address:
www.ed.gov/offices/OSFAP/DirectLoan?RepayCalc/form2.html.
Debtor’s family is composed of two people, Debtor and Debtor’s minor child. The poverty
level for a family of two was $12,830.00 in 2005 and $13,200.00 in 2006. The applicable poverty
level is that determined and published by the U.S. Department of Health and Human Services.6
In addition to the four different types of repayment options, Debtor may seek deferment of
repayment or forbearance under the Ford Program. A deferment or postponement of payments may
be granted where a borrower is conscientiously seeking, but unable to find, full-time employment
(for up to three years) or where a borrower is experiencing an economic hardship as defined by
federal law (also for up to three years).
Forbearance allows a borrower to stop or reduce monthly payments for a limited, specific
period, during which time interest on the loans accrues. If the interest is not paid, it is added to the
Department of Health and Human Services. The Income Contingent option has a maximum term of 25 years.
4 Stipulation at ¶ 8(d) (citing 34 C.F.R. § 685.209).
5 Id. at ¶ 10 (citing 34 C.F.R. 685.220).
6 Id. at ¶ 12 (citing Vol. 69, Fed. Reg. No. 30, pp. 7336-38; Vol. 70, Fed. Reg. No. 33, Feb. 18, 2005, pp. 8373-75;
6
principal balance. Forbearance may be granted based upon a borrower’s poor health, temporary
financial hardship, or if the borrower is obligated to make payments on federal student loans that are
equal to or greater than 20% of monthly gross income or for other reasons acceptable to the DOE.7
To the best of Debtor’s knowledge, she would be eligible and qualified for forbearance or deferment
once she is accepted into the Ford Program.8
B. Findings From Evidence Presented at Trial
When Debtor was 15 or 16 years old she lived with her father in Madison, Florida. While
living in Madison, Debtor was involved in an abusive relationship with an older man. The man
abused Debtor on almost a daily basis. One evening, following a high school football game, Debtor
walked with a group of people to a friend’s house. Debtor’s boyfriend followed the group in his car.
To avoid the man, the group walked to a friend’s older sister’s house, believing the man would not
bother them there. The man kept driving by the house of the friend’s older sister. Debtor decided
that for safety sake, she needed to make her way home. Before leaving the older sister’s house,
Debtor went into the kitchen and armed herself with a knife. While walking down the older sister’s
driveway, Debtor was attacked by her boyfriend who threw her to the ground. Debtor swung the
knife at the man and in the process cut him in the groin area. The man died later from his injury.
Debtor was retained in a youth detention center.
Debtor was prosecuted for the man’s death. She pled guilty to a lesser charge of
manslaughter and served one year and one week in prison. Debtor’s conviction does appear on her
criminal record. While in prison, Debtor received her GED. After Debtor was released, she attended
Abraham Baldwin Agricultural College (“ABAC”) in 1991. Later, she applied and was accepted to
Vol. 71, Fed. Reg. No. 15, Jan. 24, 2006, pp. 3848-49).
7 Id. at ¶ 15 (citing 35 C.F.R. § 685.205).
7
Valdosta State University (“VSU”). While attending VSU, Debtor studied early childhood education
and upon completing her studies received a degree in the same in 1994.
Debtor sat for the Georgia Teacher Certification Test in 1994 and received her certificate to
teach in January of 1995. The certificate expired in 1999 and Debtor did not seek a continuance of
her certification or reinstatement. In May of 2005, Debtor applied to have her certification
reinstated, but has not been notified of whether her application will be granted. While certified,
Debtor applied for teaching positions with the Valdosta City School System, the Cook County
School System, and the Georgia state prison system. Debtor was not hired. It was the unchallenged
testimony of Debtor that she was told by the Valdosta City School System that she was not being
hired because her felony conviction made her too much of a liability when it came to working with
children. The Cook County School System told Debtor the same. Debtor has worked only as a
substitute teacher at Valdosta City and Lowndes County schools, but Debtor testified that she can no
longer substitute because of her criminal conviction. The Georgia Professional Standards
Commission took no negative action against Debtor while she was certified to teach.9 Debtor
testified that simply because a person has a teaching certificate does not guarantee that person a
teaching position.
Debtor testified that when it became apparent that she would not be able to find a teaching
position, she decided to return to school. Beginning in the winter quarter of 1995, Debtor enrolled in
a number of business administration classes. Debtor took business classes at VSU until 1997 when
she became pregnant and was diagnosed with HIV, which is discussed below. Debtor financed her
8 Id. at ¶ 16 (citing 34 C.F.R. § 685.204; 34 C.F.R. § 685.205).
9 The Georgia Professional Standards Commission regulates the teaching profession in Georgia. The Commission
issues teaching certificates in the state.
8
business courses through loans made by the DOE. Debtor withdrew from at least some of the
business courses she had enrolled in after disbursements on the DOE student loans had been made.
Debtor testified that the monies disbursed under the DOE loans were used for class related expenses
such as tuition and books.
Debtor attributes her inability to find a teaching position to her felony conviction. Debtor
also believes that because of her conviction, her teaching certification is not likely to be reissued.
Debtor states that she was never advised that her felony conviction would make finding a teaching
position so difficult. As recently as two months prior to the hearing, Debtor testified that some
official associated with the issuance of teaching certificates told Debtor that the felony conviction
should have been addressed when she first applied to be certified to teach. Debtor testified that the
felony conviction is not so much of an issue with lower paying positions, but is for higher paying
jobs.
Debtor presently raises her 9-year-old son as a single parent. Debtor is 45 years old. Debtor
was married in 1992 or 1993, but officially divorced in 2004. Debtor has received $308.00 per
month in child support from her son’s father since 1997. Debtor’s son’s father also provides partial
health insurance for the child. While pregnant with her son in 1995, Debtor was diagnosed with
HIV, which requires Debtor to undergo medical testing every three months. Since her diagnosis,
Debtor’s illness has escalated to the status of AIDS, but since taking medication, the illness has
remitted back to the status of HIV only. Debtor’s most recent set of tests cost Debtor $770.00.
Debtor is personally responsible for the cost of the quarterly tests and must pay for the tests in
installments. Debtor has no health insurance. Debtor does have the benefit of a government drug
program through which she receives her needed medicines with no co-payment. Debtor’s son also
9
participates in a government drug program, but Debtor is required to pay a small co-payment on
drugs purchased for her son. The drug program Debtor participates in does not assist Debtor in
paying for other medical expenses such as doctor’s visits or the medical tests required by her health
condition. Shortly after being diagnosed with HIV, Debtor applied for Social Security Insurance
benefits but was denied. Debtor testified that if asked by a potential employer about her illness she
would respond truthfully. Debtor believes that her illness would be a factor in her securing another
position.
Since 2003, Debtor has been employed as a receptionist at the Quality Inn. Debtor presently
works an average of 32 hours per week. Debtor testified that to work more hours would cause her to
incur childcare expenses for her son, resulting in a reduction of her net income. Debtor’s net
monthly income is approximately $1,332.00 including the $308.00 received each month in child
support. Debtor’s Schedule J indicated that her monthly expenditures totaled $1,157.00, including
$450.00 per month in rent, a lean $200.00 per month food allowance, and $48.00 per month for
cable. Debtor’s cable cost includes service to a cable modem connected to Debtor’s son’s computer.
The computer was given to Debtor’s son by his father. Debtor’s son uses the cable connection to
access the Internet for school-related purposes and for his entertainment. Debtor stated that she did
not use the computer and that the computer was located in her son’s room.
Despite Debtor’s Schedule J, she testified at trial that her actual monthly expenses currently
total approximately $1,600.00.10 Debtor testified that her monthly electricity bill is usually around
$85.00, a reduction from the $125.00 per month given in her schedules. Debtor testified that she is
extremely conservative with her use of electricity in order to keep the cost down. Regarding
10 The Court’s addition of the expenses testified to at trial yields a total of $1,678.00.
10
increases in her monthly expenses, Debtor testified that her monthly water and sewage expense is
generally $46.00 to $49.00, costs for food are actually $340.00 to $350.00 per month, clothing
expenses are usually $100.00 to $125.00 (Debtor stated that this money was spent on her son and not
on her self), laundry and dry cleaning generally cost around $50.00, and transportation (gas and
maintenance) generally cost approximately $140.00. Debtor testified that during some months, she
must borrow food from friends in order to feed her and her son. The largest adjustment to her
account of monthly expenses was for medical and dental expenses. Because of the quarterly testing
required by her HIV condition, Debtor’s medical expenses, when the costs are broken down per
month, are approximately $300.00. Debtor also testified that an additional $10.00 or $11.00 per
month is generally spent for Debtor’s son’s extracurricular activities, including school field trips and
participation in the school chorus. Accounting for the increases to expenses testified to by Debtor at
the trial, Debtor’s monthly expenses exceed her net monthly income by approximately $346.00.
Debtor does not have a cellular phone. Debtor drives a 1991 Oldsmobile Cutlass Sierra
automobile that is paid for. Debtor does not have renter’s insurance. Debtor testified that she could
not afford even the smallest of additional expenses. Debtor does not have money saved should an
emergency arise. When emergency expenses do arise, Debtor testified that she must cut from other
categories of spending in order to cover the expense. Regarding her transportation expense and
vehicle, Debtor testified that she will drive her vehicle until she has a blow-out before replacing the
tires and that when she does replace the tires on her vehicle it is usually one or two tires at a time.
Debtor’s income history is reflected below in Table 3.
TABLE 3—Debtor’s Income History
Tax Year Adjusted Gross Income
1999 $4,919.00
2000 $8,540.00
11
2001 $16,065.00
2002 $16,503.00
2003 $7,059.0011
2004 $12,519.00
2005 $13,370.56
As mentioned above, Debtor has worked at the Quality Inn as a receptionist since 2003 and
works an average of 32 hours per week. Prior to working at the Quality Inn, Debtor worked at the
Belks Department Store as a customer service representative. The position at Belks required Debtor
to stand a majority of the time she worked. At some point, Debtor developed a back condition,
which required surgery in 2003. Following the surgery, Debtor could no longer work in a position
requiring her to stand for extended periods of time, so she resigned her position at Belks. She
remained unemployed for a period of 8 to 9 months before becoming a receptionist at the Quality
Inn.
The debt represented by ECMC’s nineteen consolidated guaranteed student loans was
incurred by Debtor as she pursued her degree in early childhood education at VSU from 1991 to
1994. Debtor incurred the debt represented by the DOE’s thirteen consolidated guaranteed student
loans as she pursued studies in business administration at VSU from 1995 to 1997. Debtor testified
that she made a very small number of voluntary payments toward her ECMC student loans in 2001.
Debtor mailed those payments, which she believes were from $40.00 to $60.00 per month, to NCO
Financial Services at an address in Philadelphia, Pennsylvania. Debtor made no voluntary payments
toward her DOE loans. Debtor defaulted on both her ECMC and her DOE loans. Following default,
involuntary payments were made toward Debtor’s DOE loans via two wage garnishment payments
11 Debtor testified that the reason for the low income in 2003 was that she was unemployed for 8 to 9 months
following back surgery.
12
and four treasury offsets against Debtor’s federal income tax refunds. Total involuntary payments to
the DOE on its loans totaled over $4,000.00.
Debtor testified that she filed her tax returns each year following her default knowing that any
refund she would be entitled to would be seized and paid toward her student loans. Debtor stated
that filing her tax returns each year, despite knowing any refund would be seized, was her way of
paying something towards her student loans. Debtor testified that the treasury offset provided a
larger payment toward the loans than she could have afforded to pay out of her pocket during the
year. Rather than the treasury offset, Debtor testified that she probably could have paid $10.00 to
$15.00 per month.
Once the wage garnishments began, Debtor testified that she contacted the garnishor asking if
there were other options for repayment available to her. It was the unchallenged testimony of Debtor
that she was told there was no other option available other than the monthly payment of 20-25% of
her gross income.
A witness for the DOE testified that upon default, borrowers are sent an initial notice of
default. If the borrower does not respond to that initial notice, a second notice of default is sent
which addresses the rehabilitation of the borrower’s loans and consolidation. The DOE would have
sent thirteen notices to Debtor on account of her thirteen loans with the Department.
Debtor did not contact the DOE after the notices were sent and Debtor’s loans were
transferred to the DOE’s collection department. Debtor never undertook to rehabilitate or
consolidate her DOE loans. The representative from the DOE testified that borrowers in default are
sent letters from time to time outlining various repayments options and programs like the Ford
13
program, but the witness had no personal knowledge of whether such a letter was sent specifically to
Debtor.
Debtor testified that the first time she learned of alternative methods for paying either her
ECMC or DOE loans was after this adversary proceeding was filed. Debtor stated she learned of the
Ford Program from her attorney who relayed the information to Debtor from a letter dated September
2, 2005, sent by counsel for ECMC. Debtor stated that she had requested deferment of all of her
student loans while she was in school and that in 2002 or 2003 she received a letter stating that she
was in default. Debtor also testified that the letter offered consolidation as an option. Debtor did not
state whether the letter was sent by ECMC or the DOE or which entity’s loans the letter addressed.
There is no dispute that Debtor was in default of her loan payments to both ECMC and the DOE.
On September 15, 2005, Debtor submitted to the DOE a “Loan Discharge Application” based
upon alleged false certification by VSU despite a disqualifying status (i.e., Debtor’s criminal
conviction). In that application, Debtor alleged that at the time VSU certified or originated her loans,
she was unable to meet the “legal requirements for employment” as a teacher in Georgia because of
her criminal record.12 Although called for in the application, Debtor did not provide any information
regarding Georgia’s legal requirements for employment that would have disqualified her from being
hired in the state as a teacher.13 Debtor attached a report of the incident in Florida but nothing else.
By letter dated September 21, 2005, the DOE acknowledged its receipt of Debtor’s loan discharge
application and stated that Debtor had not established that VSU falsely certified Debtor’s eligibility
to borrow and that Debtor had not provided proof that Georgia’s legal requirements barred Debtor’s
12 Debtor’s Loan Discharge Application at 1 (ECMC’s Exhibit 11).
13 Id.
14
employment as a teacher. Debtor did not challenge this decision and did not send in information
supporting her contention.
After learning of the various repayment options through counsel for ECMC, Debtor has not
looked further into payment under the Ford Program. She testified that she could not afford any
payment, no matter how small the amount. Under the ICRP of the Ford Program, Debtor would have
to apply annually to qualify. Debtor testified that she could not afford the basic expenses associated
with making that annual application (i.e., postage, paper, etc.).
DISCUSSION AND CONCLUSIONS OF LAW
Discharging student loan debt in bankruptcy is a difficult proposition and requires a finding
of extreme circumstance by the court. Section 523(a)(8) of the Federal Bankruptcy Code (“Code”)
provides that an educational loan is not dischargeable in bankruptcy “unless excepting such debt
from discharge . . . would impose an undue hardship on the debtor and the debtor’s dependents.”14
The term “undue hardship,” is not defined in the Code. The term, therefore, has been considered by
many courts across the nation with two primary standards emerging: the totality of the circumstances
test and the Brunner test. The Brunner test, which was originally articulated by the Second Circuit
Court of Appeals in 1987, provides that proving undue hardship requires a three-part showing: (1)
the debtor cannot maintain, based on current income and expenses, a minimal standard of living for
herself and her dependents if forced to repay the loans; (2) additional circumstances exist indicating
that this state of affairs is likely to persist for a significant portion of the repayment period of the
student loans; and (3) the debtor has made good faith efforts to repay the loans.15
14 11 U.S.C. § 523(a)(8) (2006).
15 Brunner v. New York State Higher Educ. Serv’s. Corp. (In re Brunner), 831 F.2d 395, 396 (2nd Cir. 1987).
15
In the 2003 case of Hemar Insurance Corp. of America v. Cox (In re Cox),16 the Eleventh
Circuit Court of Appeals joined the majority of circuits around the nation and adopted the Brunner
test as its standard for determining undue hardship under § 523(a)(8). In adopting the Brunner test,
the Eleventh Circuit noted the Seventh Circuit Court of Appeals’ observation in In re Roberson17
that:
The government is not twisting the arms of potential students. The
decision of whether or not to borrow for a college education lies with
the individual; absent an expression to the contrary, the government
does not guarantee the student’s future financial success. If the
leveraged investment of an education does not generate the return the
borrower anticipated, the student, not the taxpayers, must accept the
consequences of the decision to borrow.18
The Eleventh Circuit, considering the 1998 amendments to the Code (which left proof of undue
hardship as the only method for relief), recognized that Congress’s intent “was to make it harder for
the student to shift his debt responsibility onto the taxpayer . . . .”19 The Brunner test, said the
Eleventh Circuit, is the most effective tool for identifying those debtors whose income and
circumstances would make it most unlikely that they could repay their student loan obligations while
still maintaining a minimal standard of living.20 Under the Brunner test, the debtor bears the burden
of proving each of the three prongs by a preponderance of the evidence. Each of the three prongs or
factors must be proven in order for this Court to find that an undue hardship exists, thus warranting
discharge of the debt.
A. Brunner Prong 1—Minimal Standard of Living
16 338 F.3d 1238 (11th Cir. 2003). In the case of McGinnis v. Penn. Higher Educ. Assistance Agency, 289 B.R. 257
(Bankr. M.D. Ga. 2003) (Laney, J.), this Court applied the Brunner test, just a few months prior to the Eleventh
Circuit’s adoption of the standard in Cox.
17 999 F.2d 1132 (7th Cir. 1993).
18 Cox, 338 F.3d at 1242 (citing In re Roberson, 999 F.2d 1132, 1137 (7th Cir. 1993)).
19 Id.
16
Under the first Brunner prong, Debtor must prove that she cannot maintain, based on current
income and expenses, a minimal standard of living for herself and her dependent son if forced to
repay her student loans. In order for the Court to apply this prong, the Court must determine what is
a “minimal standard of living.” The Court agrees with the Bankruptcy Court for the Northern
District of Alabama that a minimal standard of living is a “measure of comfort, supported by a level
of income, sufficient to pay the costs of specific items recognized by both subjective and objective
criteria as basic necessities.”21 As in most student loan repayment situations, some level of sacrifice
is required in order to stay current on payments. A debtor is not required, however, to sacrifice in
such a degree that the debtor and/or the debtor’s dependents are cast into an existence where some
minimal standard of living cannot be obtained. In other words, a debtor is not required, under the
undue hardship standard, to live in “abject poverty” in order to service a student loan debt.22 The
Brunner test strikes a proper balance by “safeguard[ing] the financial integrity of . . . student loan
program[s] by not permitting debtors who have obtained the substantial benefits of an education
funded by taxpayer dollars to dismiss their obligation merely because repayment of the borrowed
funds would require some major personal and financial sacrifices.”23
For purposes of applying the first prong of the Brunner test, the Court adopts the six specific
elements necessary for a minimal standard of living in modern American society as enumerated by
the bankruptcy court in In re Ivory:
1. People need shelter, shelter that must be furnished, maintained,
kept clean, and free of pests. In most climates it also must be
heated and cooled.
20 Id.
21 Ivory v. United States Dept. of Educ. (In re Ivory), 269 B.R. 890, 899 (Bankr. N.D. Ala. 2001).
22 Penn. Higher Educ. Assistance Agency v. Faish (In re Faish), 72 F.3d 298, 305 (3d Cir. 1995). See Brunner, 831
F.2d 395.
23 Faish, 72 B.R. at 306.
17
2. People need basic utilities such as electricity, water, and natural
gas. People need to operate electrical lights, to cook, and to
refrigerate. People need water for drinking, bathing, washing,
cooking, and sewer. They need telephones to communicate.
3. People need food and personal hygiene products. They need
decent clothing and footwear and the ability to clean those items
when those items are dirty. They need the ability to replace them
when they are worn.
4. People need vehicles to go to work, to go to stores, and to go to
doctors. They must have insurance for and the ability to buy tags
for those vehicles. They must pay for gasoline. They must have
the ability to pay for routine maintenance such as oil changes and
tire replacements and they must be able to pay for unexpected
repairs.
5. People must have health insurance or have the ability to pay
for medical and dental expenses when they arise. People must
have at least small amounts of life insurance or other financial
savings for burials and other final expenses.
6. People must have the ability to pay for some small diversion or
source of recreation, even if it is just watching television or
keeping a pet.24
As the finder of fact, the Court must apply its common sense knowledge gained from ordinary
observations in daily life and general experience to determine whether Debtor’s expenses are
reasonable and necessary.25 If Debtor expends funds for items not necessary for the maintenance of a
minimal standard of living or if Debtor expends too much for an item that is needed to maintain that
minimal standard, then it is unlikely that, given Debtor’s present circumstance, the first prong of the
Brunner test is satisfied where such overpayment would permit Debtor to cover the expense of her
student loan debt without sacrificing a minimal standard of living for her and her son.
24 Id. (emphasis added).
25 Id. (citing Pacific Emp. Ins. Co. v. Orren, 160 F.2d 1011 (5th Cir.1947); Southern Shipyard Corp. v. The Tugboat
Summitt, 294 F. 284, 285 (4th Cir.1923); Luna v. Luna, 592 N.W.2d 557, 565 (N.D.1999); Gross v. Connecticut
Mut. Life Ins. Co., 361 N.W.2d 259, 269-270 (S.D.1985); Kenney v. Rust, 17 Mass. App. Ct. 699, 462 N.E.2d 333,
338 (1984), review denied, 391 Mass. 1106, 464 N.E.2d 73 (1984); Richmond v. Richmond, 340 Mass. 367, 164
N.E.2d 155, 157 (1960); Mendoza v. Rudolf, 140 Cal.App.2d 633, 295 P.2d 445, 447 (1956); Johnson v. Snyder, 99
Cal.App.2d 86, 221 P.2d 164, 167 (1950); H.F. Wilcox Oil & Gas Co. v. Johnson, 184 Okla. 198, 86 P.2d 51, 53
(1937); Cary-Glendon Coal Co. v. Carmichael, 258 Ky. 411, 80 S.W.2d 29, 31 (1935). overruled in part on other
grounds, Kentucky Mountain Coal Co. v. Hacker, 412 S.W.2d 581 (Ky.1967); Fitzgerald v. McDonald, 81 Colo.
18
At trial, Debtor’s unrefuted testimony was that her expenses had increased since the time she
filed her original Schedule J. The Court calculated that Debtor’s actual monthly expenses (i.e., those
testified to at trial) totaled approximately $1,678.00, $346.00 more than Debtor’s monthly net
income of $1,332.00. Debtor testified that her monthly expenses included $450.00 for rent, $85.00
for electricity, $30.00 for water/sewer, $34.00 for telephone service, and $48.00 for cable. Debtor
testified that she spends approximately $340.00 to $350.00 per month on food. There have been
occasions when Debtor has been unable to provide food for her and her son and she has been forced
to borrow food from friends. Debtor testified that she spent approximately $100.00 to $125.00 on
clothing for her and her son and approximately $50.00 per month for dry cleaning. According to
Debtor’s testimony, the money spent on clothing is spent purchasing items for Debtor’s son and
usually not for Debtor herself. Debtor’s monthly medical expenses total $300.00 or more each
month, due in most part to Debtor’s HIV condition and her having no health insurance. Debtor has
no automobile payment, but testifies that she spends approximately $140.00 per month on gas and
maintenance for her 1991 Oldsmobile. She spends only $43.00 per month to insure her vehicle.
Debtor states in her Schedule J that she spends nothing per month on recreation, charitable
contributions, homeowner’s or renter’s insurance, life insurance, or health insurance. Debtor’s
remaining expenses are $22.00 per month for her son’s school lunches and $10.00 to $11.00 per
month for her son’s school related activities such as field trips and chorus. Debtor has no money
saved in order to pay for emergency expenses that may arise.
It is the finding of this Court that Debtor’s budget, even at the higher amounts testified to at
trial, is severely limited and bare. What necessities the budget does provide for, it does so in very
conservative amounts. There are items that this Court considers necessary for a minimal standard of
413, 255 P. 989, 991 (1927)).
19
living that Debtor’s budget does not make provision for—including health and renter’s insurance and
surpluses for under-budgeted or emergency expenses. Further, Debtor’s budgeted expenditures on
behalf of her son and his care and education are minimal at best. The limited nature of Debtor’s
budget is understandable considering that Debtor’s income for 2005 only exceeded the national
poverty level by approximately $540.00. The expenses Debtor testified to are certainly reasonable.
By way of oral argument and through its post-trial brief, creditor ECMC suggests that while
Debtor does not live a lavish lifestyle, she could afford to pay the $0.00 to $9.00 per month cost of
servicing her student loan debt by eliminating the $48.00 per month cable television expense.
ECMC also states that the $0.00 to $9.00 per month payment would have virtually no effect on
Debtor’s standard of living.26 Although tempting, the Court cannot agree with ECMC’s contentions.
It does appear at first glance that all debtors could afford to pay at least something toward their
student loan debt, but that is not the standard for discharge. The standard that the Code calls courts
to consider is whether payment of the student loan would impose an undue hardship upon the debtor.
In the Eleventh Circuit, the first consideration is whether payment would prevent the debtor from
maintaining a minimal standard of living. With regard to the repayment of student loans, Congress
has decided not to demand certain levels of sacrifice from debtors.27 The $48.00 Debtor expends
each month to provide basic cable television and cable modem service to her home is an extremely
reasonable price in the Court’s experience. This cable television service provides some small
recreational benefit to Debtor and her son and the cable modem service provides an educational
benefit to Debtor’s son. The Court does not believe that such a service, especially at the price it is
obtained by Debtor, is inconsistent with a minimal standard of living. Even if the Court were to rule,
26 ECMC’s Letter Brief at 3.
27 Ivory, 269 B.R. at 912.
20
however, that the cable expense was unnecessary to maintain a minimal standard of living, Debtor’s
other necessary expenses still exceed her income by several hundred dollars even without the
inclusion of the cable television and modem service expense.
The Court, therefore, concludes that Debtor’s expenses as testified to at trial and as listed in
Schedule J (i.e., those amounts not amended by trial testimony) are reasonable and necessary for
maintaining a minimal standard of living for Debtor and her son. Debtor’s lifestyle is far from lavish
and something less than minimal. Other than the expense for cable television and modem service,
Debtor reports no spending for recreational items. Further, Debtor does not have a cellular
telephone, a usual expense in our society, and Debtor’s vehicle is a fifteen-year-old Oldsmobile on
which she owes nothing. The Court finds that considering Debtor’s current income and expenses,
she does not maintain a minimal standard of living even without being required to service her student
loan debt. Despite Debtor’s extremely conservative lifestyle, a sizeable deficit exists each month
between Debtor’s income and her reasonable and necessary expenses, even without the addition of a
student loan payment. The Court holds, therefore, that Debtor has carried the burden of proving,
under the first prong of the Brunner test, that she cannot maintain, based upon her current income
and expenses, a minimal standard of living for herself and her son if forced to repay her student
loans, no matter how small the payment amount may be. Satisfaction of this prong is not dependent
on the payment amount, but rather a determination by the Court of whether the debtor can maintain a
minimal standard of living if being required to service the student loan.
B. Brunner Prong 2—Additional Circumstances
The second prong of the Brunner test asks whether there are additional circumstances that
exist suggesting that the debtor’s state of affairs is likely to persist for a significant portion of the
21
repayment period of the student loan. The state of affairs referred to in the second prong is the
determination made in the first prong, i.e., that the debtor cannot maintain, based upon current
income and expenses, a minimal standard of living for herself and her dependents if required to repay
her student loan.
Applying prong 2 “does not necessarily require future income predictions.”28 Instead, prong
2 focuses on “the present existence of circumstances—circumstances in addition to a present lack of
ability to pay—that strongly suggest an inability to pay the loan over an extended period of time . . .
.”29 Simply stated, under prong 2, the debtor must prove by a preponderance of the evidence that her
financial situation is not likely to improve. The debtor is not required to prove that her financial
situation will persist due only to a serious illness, psychological problem, disability, or other
exceptional circumstance; other types of circumstances could apply as well. In making its
determination, a court should consider factors such as the debtor’s age, age of the debtor’s
dependents, debtor’s education, work and income history, physical and mental health, and other
relevant circumstances.30 Satisfaction of prong 2 should be based upon a “certainty of hopelessness”
into the future, “not simply a present inability to fulfill [a] financial commitment.”31 A “‘bleak
forecast of the near future . . . [where] the debtor’s straits are only temporary’ is insufficient to
demonstrate undue hardship under the second prong of Brunner.”32 Meeting the standard set forth
under prong 2 is not an easy task for a debtor.33
28 Ulm v. Educ. Credit Mgmt. Corp. (In re Ulm), 304 B.R. 915, 921 (S.D. Ga. 2004).
29 Id.
30 See Ulm, 304 B.R. at 921; Educ. Credit Mgmt. Corp. v. Boykin (In re Boykin), 313 B.R. 516, 521 (M.D. Ga.
2004).
31 Educ. Credit Mgmt. Corp. v. Carter (In re Carter), 279 B.R. 872, 877 (M.D. Ga. 2002) (citing Roberson, 999 F.2d
at 1136) (emphasis added).
32 Id. at 878 (citing Roberson, 999 F.2d at 1137). In Carter, the District Court ruled that prong 2 of Brunner had not
been satisfied since although the debtor was unemployed at the time, there were no impediments to her obtaining
gainful employment in the future—the debtor suffered from no major disabilities, the debtor graduated with a
22
ECMC and the DOE (“creditors”) argue that there is neither a “certainty of hopelessness” in
Debtor’s case, nor any unique or extraordinary circumstance that would cause Debtor to be unable to
honor her student loan obligations into the future.34 According to the creditors, Debtor is young,
intelligent, articulate, and holds a marketable college degree.35 The creditors recognize Debtor’s
allegation that her 1982 manslaughter conviction prevents her from obtaining work in a position that
would allow her to repay her student loans. The conviction, argue the creditors, should not be
considered an “additional circumstance” because it existed long before Debtor incurred the student
loan debt at issue. In support of this proposition, ECMC cites in brief the case of Thoms v. Educ.
Credit Mgmt. Corp.36 from the Southern District of New York.
In Thoms, the debtor received student loans to obtain her bachelor’s degree in psychology and
her master’s degree in social work. The debtor earned approximately $48,000.00 per year with her
net monthly income being $2,878.58. The debtor’s five-year-old son lived with debtor along with
her thirteen-year-old sister and nine-year-old-brother. The debtor received no child support from her
son’s father and had not attempted to compel a contribution. The debtor was not the legal guardian
of her siblings and received no financial contribution for her siblings’ support.37
In its consideration of the second prong of the Brunner test, the court in Thoms stated that the
debtor must show evidence of a continuing inability to repay her student loans over an extended
business degree and a 3.0 grade point average, the debtor had worked managing business records, the debtor had one
year of accounting education, and the debtor’s children (ages three and six) would soon grow old enough to attend
school and therefore pose less of a financial burden. The District Court held that with regards to a likely divorce in
the future, the debtor had not carried her burden of proving how that event would prevent her from making her loan
payments. Id. at 878-79.
33 Id. (citing In re Mallinckrodt, 274 B.R. 560, 567 (S.D. Fla. 2002)).
34 ECMC Letter Brief at 4.
35 Id.
36 257 B.R. 144 (S.D.N.Y. 2001).
37 Id. at 147.
23
period of time, marked by additional, exceptional circumstances.38 The court said that the type of
“additional circumstance” contemplated was a “circumstance that impacted on the debtor’s future
earning potential but which was either not present when the debtor applied for the loans or has since
been exacerbated.”39 The court reasoned that otherwise, “the debtor could have calculated that
factor into [her] cost-benefit analysis at the time [she] obtained the loan.”40 As examples of this type
of additional circumstance, the court listed the debtor’s experiencing an illness, developing a
disability, or becoming responsible for a large number of dependents after receiving the loan.41 In
Thoms, the court held that the second prong of Brunner had not been satisfied since the debtor’s
financial situation was likely to improve, there was a surplus in the debtor’s budget, and certain
expenses were to be eliminated in the near future.42
Here, the evidence relevant to a determination under prong 2 of Brunner is as follows:
Debtor was 45 years old at the time of the trial and Debtor’s son was 9 years old. Debtor’s income is
insufficient to support a minimal standard of living for her and her son and such has been the case
since at least 1999, the earliest year that evidence of income was submitted. The evidence strongly
suggests that the financial distress Debtor is currently suffering will continue into the future.
Although Debtor has earned a bachelor’s degree in early childhood education, it was the
unchallenged testimony of Debtor that she has been refused employment in the field of teaching,
despite her certification, by two school systems in her area and by the Georgia prison system. It was
also the unchallenged testimony of Debtor that when she inquired why she was not being hired, she
38 Id. at 148.
39 Id. at 149.
40 Id.
41 Id.
42 Id. at 149-50.
24
was told that her manslaughter conviction made her too much of a liability. Although Debtor did at
one time work as a substitute teacher, her testimony was that she can no longer work as a substitute
teacher because of her criminal conviction and changes in the hiring standard. The Court finds
Debtor’s testimony credible that she was unable to find a position in her field of expertise because of
her past criminal conviction.
Because of her criminal background, it is apparent from the evidence that Debtor has been
forced to settle for lower-paying positions such as retail service work and the position of motel
receptionist in which she is currently employed. Due to back surgery, Debtor was forced to resign
her position in retail for a position that did not require extended periods of standing. Debtor’s
options, in the way of quality, well-paying positions, are severely limited.
Debtor testified, and it was not challenged, that she was never informed, prior to pursuing her
degree in early childhood education, that her criminal conviction would be a hindrance to her finding
a position as a teacher. Although this is understandable, considering that it appears no Georgia
statute or regulation prohibits an individual previously convicted of a felony from being employed as
a teacher, Debtor pursued her degree with the reasonable expectation that she would be able to find
employment in her chosen field. The Court accepts the unrefuted testimony of Debtor that finding a
quality job outside the realm of teaching is more difficult because of her criminal conviction. Debtor
testified that she allowed her teacher certification to lapse in 1999 because her experience convinced
her that she would not be able to find a position due to her criminal conviction. In May of 2006,
Debtor reapplied for certification and at the time of trial, she had received no response. Debtor’s
unchallenged testimony was that she had been told regarding her application that all of the details
surrounding her conviction would have to be investigated. Despite Debtor’s application for
25
certification, the Court is persuaded by Debtor’s testimony of her past experience, that even if the
certificate is reissued, Debtor will probably not be hired as a teacher. The Court cannot, of course,
be certain of this, but the Court considers truthful Debtor’s testimony that she was told by various
school systems that she could not be hired in the area of early childhood education because of the
liability her conviction would create.
Debtor’s situation is further complicated and worsened by her 1997 diagnosis that she had
contracted HIV. In the past, her condition has worsened to AIDS, but later downgraded back to HIV
as Debtor began a medicinal regimen. Common knowledge of the illness indicates that it is
degenerative in nature. Relevant, however, is the evidence presented that Debtor’s condition
requires that she undergo testing every quarter, which costs approximately $770.00. Also, Debtor is
required to take medication to treat her condition. Debtor testified that the medication leaves her
feeling fatigued. Debtor does receive the benefit of a drug program, which assists in the purchase of
her medications, but Debtor does not have the benefit of health insurance and is, therefore,
personally responsible for the expenses related to her quarterly testing. Although the Court does not
rest its determination under prong 2 on Debtor’s illness, it is necessary to consider Debtor’s medical
condition, the costs associated with that condition, and the current effects of the condition, as factors
in determining whether her financial distress is likely to persist.
The Court concurs with the creditors that Debtor appears to be intelligent and articulate.
However, the Court disagrees with ECMC and the DOE that Debtor has a marketable college degree.
Although Debtor does have a college degree, the evidence in this matter is clear that, because of her
criminal conviction, Debtor’s degree has not been marketable. The Court agrees that a college
degree is in itself generally marketable, but the evidence in this case supports a finding that any
26
benefit Debtor would otherwise receive from the degree has been cancelled by the plague of her past
conviction.
Regarding the Thoms standard for “additional circumstance” suggested by the creditors, the
Court first notes that the standard is not mandatorily applicable in this district or circuit, but the
Court recognizes the general usefulness of the standard in considering prong 2 of Brunner. Applying
the Thoms standard, the Court concludes that Debtor’s health condition, both her back problems and
her HIV diagnosis, post-dated the student loans in question and therefore qualify as additional
circumstances under Thoms. As to Debtor’s criminal conviction, the Court believes that although the
“condition” of her conviction preexisted her student loan debt, the effect of that condition was
exacerbated by Debtor’s attempts to find employment in the field of early childhood education.
Debtor’s testimony was that she had not received any warning that her criminal background would
negatively affect her being able to find a position as a teacher. It would be difficult, therefore, for
Debtor to have taken her criminal background into account when conducting the cost-benefit analysis
discussed in Thoms.
Debtor has been hindered greatly by her criminal conviction, somewhat by her back injury
and surgery, and in some degree by her serious medical condition. Debtor has been stuck in the
poverty range since 1999 and there appears to be no promise of that situation improving. Time will
certainly not remove Debtor’s criminal conviction, nor will Debtor’s physical condition improve
with time. The only reasonable conclusion that can be reached from the evidence presented is that
Debtor is in dire straights financially and, because of the additional circumstances identified above,
Debtor is most likely to remain there from this time forward. This being so, the Court holds that
Debtor has satisfied her burden of proving, by a preponderance of the evidence, that additional
27
circumstances exist suggesting that Debtor’s state of affairs is likely to persist for a significant
portion of the repayment period of the student loan. Debtor has thus satisfied prong 2 of the Brunner
test.
C. Brunner Prong 3—Good Faith
“With the receipt of a government-guaranteed education, the student assumes an obligation to
make a good faith effort to repay those loans, as measured by his or her efforts to obtain
employment, maximize income, and minimize expenses.”43 Satisfaction of this third prong of the
Brunner test requires a showing that the debtor made efforts “to satisfy the debt by all means—or at
least by some means—within the debtor’s reasonable control.”44 A lack of bad faith is not the
applicable test for deciding the third prong of Brunner.45 Actual payments are not required to prove
good faith.46 The debtor is tasked with proving that either a good faith effort was undertaken to
repay the student loans or “that the forces preventing repayment [were] truly beyond his or her
reasonable control.”47 “Since a debtor’s good faith is interpreted in light of his ability to pay, a
complete failure to make even minimal payments on a student loan does not prevent a finding of
good faith where the debtor never had the resources to make payments.”48 The “good faith” prong of
Brunner has been described as:
a moving target that must be tested in light of the particular
circumstances of the party under review . . . . [T]he characterization
of that effort must reflect not only a party’s objective conduct, but
also the environment in which that conduct occurs. In those instances
in which the debtor cannot maintain a minimal standard of living
43 Roberson, 999 F.2d at 1136 (citation omitted); In re Wallace, 259 B.R. 170 (C.D. Cal. 2000).
44 Ulm, 304 B.R. at 922.
45 Id.
46 McGinnis, 289 B.R. at 267 (citing In re Mallinckrodt, 274 B.R. at 568).
47 Brunner, 46 B.R. at 755; see Wallace, 259 B.R. at 183 (citing Lebovits v. Chase Manhattan Bank (In re Lebovits),
223 B.R. 265 (Bankr. E.D.N.Y. 1998)).
48 Lebovits, 223 B.R. at 274.
28
even without payment of student loans, the demonstration of good
faith does not necessarily command a history of payment. It does
require a history of effort to achieve repayment, such as when a
borrower diligently uses a deferment period to attempt the
reorganization of her financial affairs.49
At issue with regard to this third prong are the creditors’ contentions that Debtor cannot be
found to have made good faith efforts to repay her student loans since Debtor made only nominal
payments towards her loans and because Debtor failed to avail herself of the Income Contingent
Repayment Plan (“ICRP”) or some other repayment option available under the Ford Program. As to
the general requirement of proof under this “good faith” prong of Brunner—that good faith is
demonstrated by a debtor’s efforts to maintain employment, maximize income, and minimize
expenses—the evidence and conclusions of the Court are as follows. The evidence shows that
Debtor has been steadily employed since 1999, other than for a eight to nine month period of
unemployment following back surgery. Debtor has worked at her current position with the Quality
Inn since 2003. There is no evidence that Debtor has worked a forty-hour per week schedule, but
Debtor explains that added childcare costs would not justify additional hours. Debtor currently
works approximately 32 hours per week.
Debtor testified that she has been unable to find quality, higher paying positions due to her
criminal background. As mentioned above, Debtor testified that she applied for employment as a
teacher with two school systems and the Georgia prison system but was told she could not be hired
because of the liability she posed due to her criminal conviction. After being told that she could not
be hired as a teacher by the two school systems and the prison system, it was reasonable that Debtor
did not apply for other teaching positions and turned her efforts toward finding some other type of
49 Wallace, 259 B.R. at 184 (citing Maulin v. SallieMae (In re Maulin), 190 B.R. 153, 156 (Bankr. W.D.N.Y.
1995)).
29
position instead. It is the Court’s finding that considering the negative effect Debtor’s criminal
conviction has on her ability to find quality, higher paying positions, Debtor has obtained
employment and remained employed and has maximized her income under the circumstances she is
faced with. The Court is certain that if the opportunity to work as a teacher had not been foreclosed,
Debtor’s financial position would be improved. Referring back to the Court’s discussion under the
first prong of Brunner, it is clear from Debtor’s budget and expenses that Debtor has minimized her
expenses.
As to the creditors’ first contention that there was no good faith effort to repay since Debtor
made few payments on her loans, the evidence is clear that Debtor has made very few voluntary
payments toward her ECMC loans and no voluntary payments toward her DOE loans. Over
$4,000.00 has been paid involuntarily, however, toward the DOE loans by way of two wage
garnishments and several federal income tax refund set-offs. Debtor testified that she filed her
federal income tax returns knowing that she would be due a refund and knowing that the DOE would
seize the refund. Debtor stated that filing her returns knowing that the refunds would be seized was
her way of paying something toward her student loan debt being as she could not otherwise afford to
make payments.
As mentioned above, “the demonstration of good faith does not necessarily command a
history of payment” but “does require a history of effort to achieve repayment.”50 Here, the evidence
is that Debtor has not been able to make payments on her student loans while maintaining a minimal
standard of living for her and her son. The Court will not, therefore, find that Debtor did not make a
good faith effort to repay simply because only nominal voluntary payments were made to ECMC.
50 Id. (citing Maulin, 190 B.R. at 156).
30
Although the fact that Debtor made only nominal payments is an important factor in determining
whether Debtor made a good faith effort to repay, other evidence should be considered in this case.
ECMC and the DOE also argue against a determination of “good faith” based upon Debtor’s
failure to research and avail herself of the various repayment options available under the Ford
Program. As discussed above, under the Ford Program, qualifying borrowers can repay their student
loans under one of four repayment options. Under the ICRP, one of the four repayment options, the
monthly payment is calculated based upon the borrower’s adjusted gross income and family size.
The specifics of the payment calculation are set forth above, but relevant to this discussion is the
parties’ stipulation that based upon Debtor’s adjusted gross income and family size, the monthly
payment on her student loans would be somewhere between $0.00 and $9.00. Even after the
presentation of evidence, the Court is still unable to determine exactly what the monthly payment
would be.
It was the testimony of Debtor that she did not learn of the Ford Program or of the ICRP until
after her bankruptcy case had been filed and the instant action commenced. Debtor stated that she
was made aware of each through a letter sent by counsel for ECMC. The evidence shows that
Debtor’s only attempt to explore repayment options was after a wage garnishment was initiated,
when Debtor contacted the listed garnishor and inquired into other repayment options. Debtor’s
unchallenged testimony was that she was told there was no other repayment option other than the
payment of 20-25% of Debtor’s monthly gross income, which Debtor testified she could not afford.
In its brief, ECMC cites various cases in support of its position that the failure of a debtor to
avail herself of the repayment options available militates against the finding of a good faith effort to
repay. The Court agrees that in many situations that is indeed true. One of the primary cases cited
31
by ECMC was U.S. Dept. of Educ. v. Wallace (In re Wallace).51 In Wallace, the debtor had paid his
loans for several years while working as an attorney. When the debtor was unable to pay, he sought
and obtained deferments. The debtor also made an $8,000.00 lump sum payment on his loans. The
court in Wallace stated that these facts indicated an earlier good faith effort to repay. The real issue
in Wallace, with regard to the “good faith” prong of Brunner, was whether the debtor continued in
his good faith efforts to repay after he initiated the adversary proceeding seeking discharge of his
student loan debts. The court in Wallace explained that “[a] debtor’s good faith can be measured by
evaluating how he responded to repayment opportunities that were presented to him.”52
In Wallace, the debtor reviewed literature describing the various repayment options, but
concluded that under the ICRP, his payment would be $390.00 per month. The court stated that
“[b]ecause he could not afford payments of such magnitude, he reasonably did not pursue the
‘income contingent’ plan.”53 The debtor was later informed by counsel for one of his student loan
creditors that his payments could be as low as $369.00 per month under the ICRP. The debtor
testified that he did not choose to participate in the ICRP at that point because his disposable income
was less than $100.00 per month and even under the ICRP, payment would have caused his standard
of living to fall well below the minimal standard of living.54 The debtor advised his creditor’s
counsel of that fact.55 At a later hearing, counsel for the same creditor represented to the debtor that
he had the further option of applying under a “special circumstances” regulation. The hearing was
continued to allow the debtor to explore and/or apply for such a repayment option, but there was no
evidence the debtor ever did. Again, at a subsequent hearing, the counsel for the creditor made
51 Wallace, 259 B.R. 170.
52 Id. at 184.
53 Id. at 184 (emphasis added).
54 Id.
32
another concession, which would allow the debtor’s payment of $369.00 per month to be
apportioned between it and Hemar, another student loan creditor. The result would be that the debtor
would make one payment, rather than the $369.00 payment plus another payment to Hemar. There
was no indication that Hemar would accept the proposal, however. There was no evidence that the
debtor contacted Hemar or attempted any further negotiations with the creditors.56 Although the
court in Wallace concluded that it appeared the debtor ceased his good faith efforts to repay after the
filing of the adversary proceeding when he failed to apply for or inquire about the alternate
repayment options offered by the creditor’s counsel, the court nonetheless remanded the issue to the
bankruptcy court for further development of the record regarding whether the debtor’s good faith
efforts continued.57
Here, Debtor inquired into other repayment options when she contacted the garnishor. It was
the undisputed testimony of Debtor that she was told there were no options other than paying 20-
25% of her monthly gross income. Considering the discussion above regarding Debtor’s budget,
Debtor, like the debtor in Wallace, reasonably concluded that she could not afford such a payment
and filed for bankruptcy protection. The rule from Wallace that good faith efforts to repay should
continue after the case filing and even after the filing of an adversary proceeding on dischargeability
of the student loans, is a sound and reasonable rule. The facts in the case at bar are distinguishable
from those in Wallace, however. Here, the evidence is that Debtor learned of the ICRP by a letter
from counsel for ECMC sent to Debtor’s counsel after the commencement of this adversary
proceeding. The evidence is that Debtor failed to apply for participation in the ICRP. Again, like in
55 Id.
56 Id.
57 Id. at 186.
33
Wallace, Debtor’s inaction was reasonable given her inability to afford any payment toward her
student loans at the time the offer of the ICRP was made. The ability of a debtor to pay should be a
primary factor considered by courts in determining whether a debtor made a good faith effort to
repay.
Considering Debtor’s financial distress and the actions that she did take to repay her student
loans and to inquire into alternative payment solutions, the Court finds that Debtor has satisfied her
burden under prong 3 of Brunner. Debtor’s financial situation is grave and the prospects of that
situation improving are non-existent. Debtor’s activity with regard to her student loans must be
considered within the context of this larger situation. The Court finds it reasonable that after being
told by the garnishor that the only repayment option was to pay 20-25% of her monthly gross income
that Debtor considered her chances of finding a suitable repayment option hopeless. The Court also
finds it reasonable that after being notified by ECMC’s counsel that the ICRP was an available
option that Debtor took no action considering her inability to afford even a minimal standard of
living for her and her son.
CONCLUSION
This is a very difficult case for the Court, as most cases concerning the discharge of student
debt are. The heightened standard for discharging student loans is absolutely necessary to prevent
abuses of the educational loan system and to safeguard the financial integrity of that system in order
to preserve its benefits for future students who will rely on the system as the means for obtaining a
college education. The discharge of student loans is reserved for those most extreme instances of
financial destitution. It is the Court’s finding that this debtor finds herself in such a situation.
34
For the reasons stated above, the Court holds that Debtor has carried her burden of proving,
under the standard set forth in In re Brunner and adopted by the Eleventh Circuit Court of Appeals in
In re Cox, that excepting Debtor’s student loan debt from discharge would impose an undue hardship
on Debtor and her dependent son. As such, the student loan debt at issue, representing loans made
by ECMC and the DOE, is held to be dischargeable.

SYLVESTER W. DEPASTURE

November09, 2000

IN THE UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: )
) CASE NO.: 04-70470- JTL
SYLVESTER W. DEPASTURE, )
)
Debtor. ) CHAPTER 7
)
________________________________________________________________________
SYLVESTER W. DEPASTURE, ) ADVERSARY PROCEEDING
)
Debtor, ) CASE NO.: 09-07006
)
vs. )
)
UNITED STATES OF AMERICA, )
)
SIGNED this 09 day of November, 2009.
________________________________________
JOHN T. LANEY, III
________________________________C_H_IE_F_ U_N_I_TE_D_ S_T_A_T_E_S_ B_A_N_K_R_UP_T_C_Y_ J_U_D_G_E
Defendant, )
_________________________________ )
Memorandum Opinion
This matter comes before the court on Sylvester W. Depasture’s (“Debtor”)
motion for summary judgment requesting that the tax liability of the Debtor for years
1994 and 1995 be declared discharged pursuant to 11 U.S.C. § 727. This is a core matter
within the meaning of 28 U.S.C. § 157(b)(2)(I).
This adversary case was filed on February 17, 2009. Debtor filed his motion for
summary judgment on August 21, 2009, which included a statement of uncontested facts.
On September 14, 2009, the United States on behalf of the Internal Revenue Service
(IRS) filed its Opposition to Debtor’s Motion For Summary Judgment and Cross Motion
for Summary Judgment, including its own statement of uncontested facts. On October 6,
2009, Debtor filed his response to the IRS’ opposing brief. No oral argument was heard
on the motions.
Statement of Facts
The facts in this case are undisputed. According to Internal Revenue Service
(IRS) official records, Debtor filed his 1994 and 1995 federal income tax returns on April
12, 1995 and April 13, 1996, respectively. (Def.’s Ex. A & C, Certificates of Official
Record). Section 6501(b) of the Internal Revenue Code provides that a return filed before
its deadline is deemed filed on April 15th of the relevant year. Hence, the IRS deemed the
1994 and 1995 tax returns filed on April 15, 1995, and April 15, 1996.
Debtor entered into an agreement with the IRS with respect to tax years 1994 and
1995 to extend the statute of limitations on tax assessments until December 31, 1999. The
IRS issued a statutory Notice of Deficiency proposing to assess deficiencies in tax for
each of these years on October 19, 1999. Pursuant to I.R.C. § 6213, Debtor petitioned the
United States Tax Court with respect to his proposed tax deficiencies for 1994 and 1995
on January 18, 2000, 90 days after issuance of the notice of deficiency. The Tax Court
issued a decision determining those liabilities on July 1, 2003. The Debtor did not appeal
the Tax Court decision. The IRS assessed the additional tax liabilities as determined by
the Tax Court on January 16, 2004. Debtor filed a Chapter 7 petition on March 30, 2004.
The Court granted Debtor a discharge on July 9, 2004. Neither the Debtor nor the IRS
filed a Complaint to determine the dischargeability of the tax debt. On January 28, 2009,
Debtor reopened this case seeking a determination of his tax liabilities for tax years 1994
and 1995 pursuant to 11 U.S.C. § 505(a).
Conclusions of Law
Under § 505 of the Bankruptcy Code, the bankruptcy court “may” determine the
amount and legality of any tax, fine or penalty whether or not contested before a judicial
or administrative tribunal of competent jurisdiction. 11 U.S.C. § 505(a). Thus, the power
of a bankruptcy court to determine a Debtor’s tax liability is discretionary and may or
may not be exercised based on the equities of the particular case. In re Galvano, 116 B.R.
367, 372 (Bankr. E.D. N.Y. 1990).
The court has considered, among other things, “the complexity of the tax issues to
be decided, the need to administer the bankruptcy case in an orderly and efficient manner,
the burden on the bankruptcy court’s docket, the length of time required for trial and
decision, the asset and liability structure of the Debtor, and the prejudice to the taxing
authority.” Starnes v. United States ( In re Starnes ), 159 B.R. 748, 750 (Bankr. W.D.
N.C. 1993) (citing In re Hunt, 95 B.R. 442, 445 (Bankr. N.D. Tex. 1989)). One other
factor to be considered is the Debtor’s “fresh start” provision. In re Thornton, 1995 WL
442192 at 6 (Bankr. M.D. Ga. 1995).
In the instant case, the Court agrees with Debtor’s assertion that the determination
of the tax issues in this case are not of such complexity that it requires the expertise of the
Tax Courts. Furthermore, the burden on the bankruptcy docket is low and the length of
time required for decision is short. The Debtor here has sought relief in this Court to
determine whether or not he is eligible for a discharge of his 1994 and 1995 tax
liabilities. In order to grant this Debtor a fresh start, it is necessary to determine whether
the assessment on January 16, 2004 conformed to the legal requirements set forth in the
Internal Revenue Code.
The IRS assessments were timely made.
As a general rule, taxes must be assessed within three years after a return is filed.
I.R.C. § 6501(a). Debtor’s 1994 and 1995 federal income tax returns were deemed filed
on April 15, 1995, and April 15, 1996, respectively. I.R.C. § 6501(b). Therefore, pursuant
to § 6501(a), the IRS had until April 15, 1998, and April 15, 1999, respectively, to assess
additional tax for these tax years. Pursuant to § 6501(c)(4),1 this 3-year period may be
extended by the consent in writing of the Secretary and the taxpayer, and the expiration
period thus extended may be further extended by subsequent timely agreements in
1 “Where, before the expiration of the time prescribed in this section for the assessment of any tax
imposed by this title, except the estate tax provided in chapter 11, both the Secretary or his delegate
and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed
at any time prior to the expiration of the period agreed upon. The period so agreed upon may be
extended by subsequent agreements in writing made before the expiration of the period previously
agreed upon.” 26 U.S.C. § 6501(c)(4).
writing. In this case, the Debtor and the IRS entered into a valid consent agreement
(Form 872) extending the assessment period to December 31, 1999.2 I.R.C. § 6501(c)(4).
I.R.C. § 6503(a)(1) suspends the 3-year § 6501(a) limitations period (as
extended) upon the issuance of a statutory notice of deficiency. § 6503(a)(1) provides in
pertinent part:
The running of the period of limitations provided in § 6501 * * * shall (after the
mailing of the notice under § 6212(a)) be suspended for the period during which the
Secretary is prohibited from making the assessment or from collecting by levy or a
proceeding in court (and in any event, if a proceeding in respect of the deficiency is
placed on the docket of the Tax Court, until the decision of the Tax Court becomes
final), and for 60 days thereafter.(emphasis added)
A contractually extended limitations period, authorized by § 6501(c)(4), is a
limitations period within the meaning of § 6501. Meridian Wood Products, Inc. v. United
States, 725 F.2d 1183, 1186 (9th Cir. 1984). Therefore, the extended limitations period is
subject to the suspension provision of § 6503(a). Id. As provided by § 7481(b), a
decision of the Tax Court becomes “final” upon the expiration of 90 days after the
decision is entered. I.R.C. § 7481(b).
The Tax Court entered its decision against the Debtor on July 1, 2003, and the
Debtor did not appeal the decision. Therefore, the Tax Court decision became final 90
days from the date of the decision, on September 29, 2003, pursuant to I.R.C. § 7481(b).
Pursuant to § 6503, the limitations period would be further suspended for an additional
2 There was initially some confusion between the parties as to whether the agreement signed was a
Form 872-A rather than a Form 872. The difference between the two documents is significant. Form
872-A is an open-ended agreement with no definite expiration date. Because there is no definite
expiration period, the issuance of a notice of deficiency marks the end of the expiration period. The
facts show that Debtor and IRS agreed to extend the expiration period to a definite date, December 31,
1999. Furthermore, Debtor’s prior stipulation to the United States Tax Court includes a reference to
Form 872. Thus, this Court finds that Debtor could only have signed a Form 872 to extend the
expiration period to December 31, 1999.
60 days (November 28, 2003). This is the point at which the parties’ disagreement comes
to a head. The Debtor contends that the IRS may not “tack on” the remaining 73 days of
the limitation period that was extended pursuant to the § 6501(c)(4) agreement (Form
872). The IRS contends that the 73 days remaining in the limitations period between the
October 19, 1999 notice of deficiency and the December 31, 1999 expiration date should
be tacked on or continued to run when the suspension ends, effectively extending the
limitation period to February 9, 2004, rendering the January assessment timely.
It has long been held that it is appropriate to add or “tack on” the days remaining
when the limitations period was interrupted or suspended by the issuance of a notice of
deficiency. Ripley v. Comm’r, 105 T.C. 358, 363 (1995) (unexpired portion of original
period of limitations held properly “tacked” onto suspension period of section 6503);
Meridian Wood Products, Inc. v. United States, 725 F.2d 1183, 1186 (9th Cir. 1984)
(finding that extended limitations period is subject to suspension provision of § 6503(a));
see also Bales v. Commissioner, 22 T.C. 355, 359 (1954) (quoting Olds & Whipple v.
United States, 86 Ct. Cl. 705, 22 F. Supp. 809, 819 (1938) (interpreting section 277(b) of
the 1926 Revenue Act, the predecessor of section 6503(a)(1): “We think the language of
the statute is not reasonably susceptible to any other construction. It plainly states that the
running of the statute of limitation shall be suspended and this can only mean that when
the period of suspension ceases the limitation period again commences to run.”)).
The Debtor is focused on the actual language in the first paragraph of Form 872,
which provides that if a notice of deficiency in tax for any period is sent to the taxpayer,
then the time for assessing the tax will be further extended by the number of days the
assessment was previously prohibited, plus 60 days. The Debtor believes this to mean
that because the IRS was previously prohibited from making an assessment until
September 29, 2003 (150 days after the entry of the Tax Court’s decision), the IRS only
had 60 days thereafter to make an assessment.
This belief is erroneous in the wake of preceding case law. In Ramirez v. U.S.,
the court addressed the timeliness of an assessment, considering the language in the first
paragraph of Form 8723 extending the period for assessment in the event that a timely
notice of deficiency is issued and the statutory suspension of § 6503(a)(1). 210 Ct.Cl.
537, 538 F.2d 888, 890-893 (1996). The court clearly elaborated as follows:
Section 6503(a)(1) suspends the running of the period of limitations, when a
notice of deficiency is sent, for the period during which an assessment is
prohibited and for 60 days thereafter. In light of the striking similarity between
section 6503(a)(1) and the proviso contained in the agreement, we think the latter
was designed to foster the policy underlying the former. Id.
In reaching this conclusion, the court reasoned that the word “extend” is
tantamount to “suspend” given that section 277(b) of the Revenue Act of 1924,
precursor to section 6503(a)(1) of the current Code, used the word ‘extended’ to achieve
the same effect that ‘suspended’ achieves in the current section of the Code. Id.
Moreover, the Debtor is confusing how a suspension of a statute of limitations
operates. Once the suspension under either the proviso of Form 872 or the statutory
language of § 6503 comes to an end, the limitations period begins to run again. The
Debtor seems to have confused the 60-day suspension provided in either § 6503 or Form
872 as a grace period during which the IRS may make an assessment. This is an
erroneous interpretation of the law. The 60-day period of extension/suspension is a
3 Form 872 states in pertinent part: “However, if a notice of deficiency in tax for any such period(s) is
sent to the taxpayer(s) on or before that date, then the time for assessing the tax will be further
extended by the number of days the assessment was previously prohibited, plus 60 days.” (emphasis
added).
period of time in which the IRS is forbidden from making an assessment. See Ramirez,
538 F.2d 890-893. Thus, once that period ends, the statute of limitations will continue to
run its course. Id.
The assessment limitations period was tolled by statute in Debtor’s case as follows:
• For the 90 days after the notice of deficiency was mailed. I.R.C. §6213;
• Plus the period during which the Tax Court case was pending. I.R.C. § 6503(a);
• Plus 90 days after the Tax Court issued its decision in Debtor’s § 7463 “small
case” until that decision became final. I.R.C. § 7481(b);
• Plus 60 days. I.R.C. § 6503(a)(1) or Form 872 proviso.
This brings the end of the tolling period to November 28, 2003. The issuance of
the notice of deficiency on October 19, 1999 in no way truncated the agreed upon
expiration date of December 31, 1999. Therefore, the 73 days left remaining between the
October 19, 1999 issuance of the notice of deficiency and the agreed upon limitation
date of December 31, 1999 would be tacked onto the date the suspension ended. This
results in the assessment period coming to an end on February 9, 2004. Because the IRS
assessed the Debtor’s tax liabilities for 1994 and 1995 on January 16, 2004, the tax
assessments were timely made. Given that the IRS’ tax assessment is deemed timely
under the standard 3-year statute of limitations, the Court need not delve into whether
the IRS was entitled to a six-year statute of limitations under I.R.C. § 6501(e).
The tax liabilities are nondischargeable pursuant to 523(a)(1)(A) and 507(a)(8)(ii).
11 U.S.C. 523(a)(1)(A) provides that a “discharge under section 727 . . . of this
title does not discharge an individual Debtor from any debt for a tax or a customs duty of
the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title,
whether or not a claim for such tax was filed or allowed.” 507(a)(ii) tax claims are those
assessed within 240 days before the date of the filing of the petition. 11 U.S.C.
507(a)(ii). The Debtor filed his Chapter 7 petition on March 30, 2004, less than 240 days
after January 16, 2004. Because the 1994 and 1995 tax liabilities were assessed fewer
than 240 days before the date of Debtor’s Chapter 7 petition, the tax liabilities are
nondischargeable as a matter of law pursuant to sections 523(a)(1)(A) and 507(a)(8)(ii)
of the Bankruptcy Code.
Accordingly, the Debtor’s motion for summary judgment will be DENIED and
the United States’ cross-motion for summary judgment will be GRANTED. An order in
accordance with this Memorandum Opinion will be entered.

ANGEL LUIS CRUZ

October 2000

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: : CASE NO: 94-40692
:
ANGEL LUIS CRUZ, :
SSN: 584-86-2920 ::
CHAPTER 13
ZORAIDA CRUZ, :
SSN: 091-56-8511 ::
Debtors. ::
ANGEL LUIS CRUZ and :
ZORAIDA CRUZ, ::
Movants, ::
vs. ::
EDUCATIONAL CREDIT :
MANAGEMENT CORPORATION and :
ALLIED INTERSTATE, INC. ::
Respondents. :
MEMORANDUM OPINION
On September 6, 2000, the court held a hearing on Debtors’
motion for contempt against Educational Credit Management
Corporation and Allied Interstate (“ECMC”). The court took under
advisement the issues of whether ECMC’s interception of Debtors’
tax refund was in violation of the discharge injunction and
whether collateral estoppel barred ECMC’s actions. The court has
considered the evidence, ECMC’s brief, and the applicable
statutory and case law. For the reasons that follow, the court
will deny Debtors’ motion.
-2-
FACTS
On May 22, 1987, Debtor Angel Cruz obtained an educational
loan in the amount of $2625.00 evidenced by a Promissory Note
(“Note”). ECMC is the holder of the Note.
On June 24, 1994, Debtors filed a voluntary petition under
Chapter 13 of the Bankruptcy Code (“Code”) and on September 16,
1996, ECMC filed a Proof of Claim for $2271.90. On February 26,
1998, Debtors objected to this Proof of Claim. ECMC did not
respond to the objection and, on July 9, 1998, this court entered
an order disallowing the claim. The order stated that the claim
was disallowed and that the “claim has been paid in full.” Doc.
#46.
After completing their Chapter 13 plan payments, Debtors
received a discharge on June 17, 1999. The order discharging
Debtors excepted any debt “for a student loan . . . as specified
in 11 U.S.C. § 523(a)(8).” Doc. #58. On July 16, 1999, the
court entered a final decree closing the case.
On March 3, 2000, ECMC intercepted Debtors’ federal income
tax refund in the amount of $1522.00. ECMC applied the tax
refund to Debtor Angel Cruz’s student loan balance. On July 12,
2000, this court granted Debtors’ motion to re-open their Chapter
13 case to pursue the present contempt action.
ECMC disputes that its claim was paid in full. The court’s
order, dated July 9, 1998 disallowing the claim, did not
-3-
determine the dischargeability of the claim. According to ECMC,
dischargeability may be determined only by an adversary
proceeding. ECMC further asserts that its failure to object to
the disallowance of the claim does not matter because student
loans are presumptively nondischargeable. Moreover, because
there has been no determination of dischargeability, ECMC also
argues that collateral estoppel does not bar its actions.
Debtors, however, argue that collateral estoppel does bar
ECMC’s actions. The language in the July 9, 1998 order is clear;
the “claim has been paid in full.” Therefore, Debtors assert
that the school debt was discharged. Debtors dispute that an
adversary proceeding is required. They argue that this case is
not any different merely because a school loan is involved; the
fact that such loans are presumptively nondischargeable is
irrelevant. As Debtors’ counsel argued at the hearing,“[i]f any
other creditor had failed to respond to an order stating the
‘claim has been paid in full,’ estoppel would apply.”
On the issue of damages, Debtors assert that ECMC should be
ordered to return the $1522.00 the tax refund that it
intercepted. Debtors also request punitive damages in the sum of
at least $500.00 for aggravation and agony that they allege has
resulted from ECMC’s letters and phone calls.
DISCUSSION
The issue before the court is whether the court’s order
-4-
disallowing ECMC’s claim discharged that debt. Also before the
court is whether ECMC’s failure to object to the court’s
disallowing its claim collaterally estops ECMC from collecting
post-bankruptcy. For reasons that follow, the court finds in
favor of ECMC on both issues.
This court and other courts within this circuit have held
that the disallowance of a claim does not necessarily discharge
that debt. See Bell v. ECMC, 236 B.R. 426 (N.D. Ala. 1999);
Pearson v. U.S. Dep’t of Educ. and ECMC (In re Pearson), No. 95-
30158, AP No. 99-3051 (Bankr. M.D. Ga. filed Sept. 1,
2000)(Hershner, C.J.); Mathis v. Nebraska Student Loan Program,
Inc. (In re Mathis), No. 95-41678, AP No. 97-4003 (Bankr. M.D.
Ga. filed Nov. 20, 1997)(Laney, J.); In re Shelbayah, 165 B.R.
332, 335 (Bankr. N.D. Ga. 1994)(holding that “the allowance or
disallowance of claims is unrelated to the dischargeability of
those claims under section 523.”). The court agrees with this
line of cases.
As ECMC points out, Bell and Mathis were decided on facts
very similar to the case before the court. In both cases, a
student loan creditor filed a Proof of Claim to which debtors
objected. Also, the creditors in each case did not respond to
the objection. In Bell, the court reduced the claim and in
Mathis, this court disallowed the claim. See Bell at 428; Mathis
at 4. The court in Bell held that the order reducing the claim
did not reduce the debt owed by Bell. 236 B.R. at 430.
-5-
Likewise, this court in Mathis held that the disallowance of the
claim did not discharge the debt. See Mathis at 6 (citing In re
Shelbayah, holding that claim disallowance and dischargeability
are different concepts).
The reasoning from these cases is clear in the plain
language of § 1328(a) of the Code. In pertinent part, that
subsection provides:
(a). . . the court shall grant the debtor a discharge of all
debts provided for by the plan or disallowed under section
502 of this title, except any debt–
. . .
(2) of the kind specified in paragraph (5), (8), or (9)
of section 523(a) of this title;
11 U.S.C. § 1328(a).
Furthermore, the court’s June 17, 1999 discharge order tracked
this language. As ECMC noted, that discharge order specifically
excepted from discharge any debt “for a student loan or
educational benefit overpayment as specified in 11 U.S.C. §
523(a)(8).” Doc. #58.
Therefore, the court finds that its July 9, 1998 order
disallowing ECMC’s claim did not effectuate a discharge of
Debtors’ debt to ECMC. Educational loans are presumptively
nondischargeable and Debtors will need to file an adversary
proceeding to determine the dischargeability of their debt to
ECMC.
The court now turns to the issue of collateral estoppel.
“Collateral estoppel or issue preclusion forecloses relitigation
-6-
of an issue of fact or law that has been litigated and decided in
a prior suit.” I.A. Durbin, Inc. v. Jefferson National Bank, 793
F.2d 1541, 1549 (11th Cir. 1986). In order for collateral
estoppel to apply, the following four elements must be satisfied:
(1) the issue at stake must be identical to the one decided
in the prior litigation;
(2) the issue must have been actually litigated in the prior
proceeding;
(3) the prior determination of the issue must have been a
critical and necessary part of the judgment in the earlier
decision; and
(4) the standard of proof in the prior action must have been
at least as stringent as the standard of proof in the later
case.
See In re Mathis at 7; See also Merrill v. Walter E. Heller &
Company of Alabama, 594 F.2d 1064, 1067 (5th Cir. 1979)(holding
that the debtor has the burden of showing that collateral
estoppel applies).
Under the first element, the court finds that the issue at
stake is not identical. The issue in the prior litigation
involved a claim objection while the latter one entails the
dischargeability of a student loan.
Under the second element, the court finds that the issue has
not been actually litigated. As the court in Mathis noted,
sustaining Debtors’ objection to the claim was more akin to a
default judgment which typically renders collateral estoppel
inapplicable. See Mathis at 8.
Similarly, the court finds that the third element has not
-7-
been established. The court disallowed the claim because of no
response. Therefore, the determination could not have been a
critical and necessary part of the judgment. Id. at 9.
The court finds that the burden of proof is the same in both
proceedings and accordingly, the fourth element has been
established. However, given the fact that the three other
elements have not been established, the court finds that ECMC is
not collaterally estopped from collecting on the debt postbankruptcy.
In conclusion, the court finds that its order disallowing
ECMC’s claim did not discharge Debtors’ liability to ECMC.
Dischargeability may be determined by an adversary proceeding.
The court also finds that ECMC’s interception of Debtors’ tax
refund was not barred by collateral estoppel. Therefore, the
court finds that ECMC did not violate the court’s order.
Accordingly, the court will deny Debtors’ motion for contempt.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this ______ day of October, 2000.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

CROMER FARMS, INC

July 18, 2000

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
ALBANY DIVISION
IN RE: CASE NO. 99-10321-JTL
CROMER FARMS, INC.,
DEBTOR.
CROMER FARMS, INC., ADVERSARY PROCEEDING
NO. 99-1015-JTL
PLAINTIFF,
V.
TY TY PEANUT COMPANY, INC.,
DEFENDANT.
MEMORANDUM OPINION
Procedural History and Default Judgment Issue
Debtor filed this Adversary Proceeding on March 30, 1999
seeking the recovery of certain allegedly preferential
payments. Defendant, Ty Ty Peanut Company, Inc. (“Ty Ty”),
answered and counterclaimed for its debt to be determined
nondischargeable under § 523 of the Bankruptcy Code (“Code”).
Debtor did not timely answer the counterclaim. The clerk
entered a default against Debtor on the counterclaim on June
10, 1999. (Doc. 8.)
Subsequently, counsel for both parties submitted and the
court signed a consent order with an attached stipulation
-2-
extending the time in which Debtor could answer the
counterclaim. (Docs. 10 and 9.) Debtor answered within the
time allowed by the consent order. (Doc. 11.) Based upon the
language of the consent order, the default judgment was
therefore waived unless Ty Ty can succeed in arguing either
that the Chapter 12 case would not have been dismissed upon
motion of Debtor, or that even if the Chapter 12 case had been
dismissed upon Debtor’s motion, the court would have retained
jurisdiction over this Adversary Proceeding and entered a
default judgment.
Under the first argument, the court agrees with cases that
hold that a debtor’s right to voluntarily dismiss a Chapter 12
case is not unlimited. See Graven v. Fink (In re Graven), 936
F.2d 378 (8th Cir. 1991) (court may delay action on debtor’s
voluntary dismissal until fraud is investigated; if fraud is
shown, court may convert case to Chapter 7 despite debtor’s
motion to dismiss); In re Goza, 142 B.R. 766 (Bankr. S. D.
Miss. 1992) (court may delay action on debtor’s voluntary
dismissal until debtor provides an accounting). These cases
stand for the proposition that it was not Congress’s intent in
enacting §1208(b) of the Code that chapter 12 become “a
frequently traveled thoroughfare for the unscrupulous seeking
to hinder, delay and defraud their creditors.” 142 B.R. at
771. The court in Graven discussed the interaction between
subsections 1208(b) and (d) of the Code:
-3-
We conclude that the broad purpose of the bankruptcy
code, including Chapter 12, is best served by
interpreting section 1208(d) to allow a court to
convert a case to Chapter 7 upon a showing of fraud
even though the debtor has moved for dismissal under
subsection (b). . . . Once fraud is found, the
provisions of section 1208(d) are triggered and the
court has the authority, under subsection (d), to
dismiss the case or convert it to Chapter 7.
936 F.2d at 385.
Accordingly, for Ty Ty to succeed under the first
argument, it would have to prove that Debtor had abused the
purposes of chapter 12 by engaging in fraud. Ty Ty has failed
to present the court with evidence of Debtor’s attempting to
defraud its creditors. Therefore, this chapter 12 case would
have been dismissed upon Debtor’s motion.
Under the second argument available to Ty Ty in the
consent order, the counterclaim asks that Ty Ty’s debt be
excepted from the discharge that may be entered upon completion
of a plan in this case. If the case had been dismissed upon
Debtor’s motion, the court would have found this Adversary
Proceeding to be moot, as no discharge would be possible, and
would have refused to retain jurisdiction over this Adversary
Proceeding. Therefore, because Ty Ty cannot succeed on either
argument available to it under the consent order allowing a
late answer to the counterclaim, the court denies Ty Ty’s
request for a default judgment.
In reaching the merits of the parties’ claims, the court
is guided by its order of December 29, 1999. (Doc. 16.) This
-4-
order memorializes the agreement of counsel that the court may
decide the case based upon the Stipulation of Facts (“Stip.”),
(Doc. 17), the deposition of Royce Cromer (“Depo.”), (Doc. 18),
and any admissions in the pleadings. The following will be
findings of fact and conclusions of law based upon the evidence
before the court as if there had been a complete trial of the
case.
FACTS
Royce and Ann Cromer are each 50% shareholders of Cromer
Farms, Inc. (Depo. at 5.) Royce Cromer is the Secretary-
Treasurer of the corporation, (Depo. at 8), and makes all of
the day-to-day decisions regarding the operation of the farm.
(Depo. at 79-80.) In June 1998, Ty Ty sued Debtor and Royce
Cromer individually. (Stip. ¶ 3.) Debtor admits that on or
about August 18, 1998, Debtor executed a note and security
agreement that granted to Ty Ty a security interest in all
Debtor’s inventory, equipment, accounts receivable, livestock,
and all crops grown or to be grown on any of its farming
operations. The security agreement provided that Debtor would
not sell, transfer, lease, or dispose of any of the collateral
except with Ty Ty’s prior written consent. (Stip. ¶ 2.)
In September 1998, Debtor and Royce Cromer resolved Ty
Ty’s lawsuit with a confession of judgment, which was an
extension, renewal, and refinancing of the August 1998 note.
-5-
(Stip. ¶¶ 3, 4.) The confession of judgment is before the
court as “Exhibit A” to the Answer and Counterclaim of
Defendant, (Doc. 4), and as “Exhibit A-2″ to the Stipulation of
Facts. (Doc. 17.)
Paragraph 3 of the confession of judgment provides:
Defendants acknowledge and agree that this agreement
is made in order that they may refinance and
restructure their obligations and acknowledge and
agree that, under all circumstances, that defendants’
obligation to repay $60,000.00 shall be and is
nondischargeable under the provisions of the
Bankruptcy Code of 1978, as amended and codified at
11 U.S.C.A. § 101-1330, and, agree that, if they
subsequently file bankruptcy, said obligation shall
be deemed nondischargeable as contemplated in 11
U.S.C.A. § 523. Defendants further acknowledge and
agree that, should they default in any way in their
obligations hereunder, that the entire indebtedness
set forth herein, plus interest, shall be
nondischargeable.
During negotiations regarding the confession of judgment,
Royce Cromer stated, “Everyone will get paid. All I need is
some time.” (Stip. ¶ 5.) At his deposition, Royce Cromer
testified that he understood that under the confession of
judgment, any monies received by the farming operation were to
go to pay Ashburn Bank for its first lien, and anything left
over would be divided 50% to Ty Ty and 50% to other creditors.
(Depo. at 17.) Since 1994, however, Ashburn Bank had allowed
Mr. Cromer to use some of its funds to pay laborers and other
operating and personal expenses without requiring any prior
approval, and Mr. Cromer continued this practice. (Depo. at
36-37.)
-6-
After the confession of judgment, Ashburn Bank had not
been paid back in full, and although Mr. Cromer had paid Ty Ty
with some of the money, he stopped paying Ty Ty when they got
“nasty” with him. (Depo. at 38.) Debtor and Royce Cromer
breached the terms of the confession of judgment by failing to
remit to Ty Ty 50% of the farming operation proceeds in excess
of Ashburn Bank’s lien. (Stip. ¶ 10). These proceeds included
F.S.A. payments and disaster payments for 1998 crops received
by Debtor after the confession of judgment. (Stip. ¶¶ 14-20.)
As of the date of the Stipulation of Facts, Debtor had made no
payment to Ty Ty since August 1998. (Stip. ¶ 11.)
Ty Ty now claims that the debt it is owed for the proceeds
it should have received under the confession of judgment is
nondischargeable under § 523(a)(2)(A), (4), and (6) of the
Code. For the reasons that follow, the court finds that the
debt is dischargeable under each of these subsections.
DISCUSSION
§ 523(a)(2)(A)
Under Grogan v. Garner, 498 U.S. 279 (1991), Ty Ty has the
burden on each of the counts under § 523(a) by a preponderance
of the evidence. Ty Ty’s argument under § 523(a)(2)(A)is that
when Mr. Cromer stated during negotiations for the confession
of judgment that everyone would get paid and all he needed was
time, Mr. Cromer had no intent at that time to repay everyone,
-7-
including Ty Ty. In proving a false representation, Ty Ty
must prove that Debtor, through Royce Cromer, misrepresented
its intent to pay the debt to Ty Ty. See American Express
Travel Related Servs. Co., Inc. v. Rusu (In re Rusu), 188 B.R.
325, 329 (Bankr. N.D. Ga. 1995). Representations regarding a
debtor’s intentions are actionable only when fraud is proved by
showing the debtor had no intention to perform its promise at
the time the representation was made. See Kuper v. Spar (In re
Spar), 176 B.R. 321, 327 (Bankr. S.D.N.Y. 1994).
Ty Ty has failed to prove by a preponderance of the
evidence that, at the time Mr. Cromer, who was the Secretary-
Treasurer of Debtor and its de facto chief operating officer,
made the statement referred to, he had no intent to repay
everyone including Ty Ty. The conduct of Debtor subsequently
in not making payments to Ty Ty when it was paying other
operating expenses could be considered some evidence that the
statement was a false representation known to be false at the
time it was made. However, the court does not find that this
satisfies the burden of proof. Based upon the evidence, the
court finds by a preponderance that Mr. Cromer believed the
statement to be true when he made it.
§ 523(a)(4)
Under this subsection, Ty Ty alleges that Debtor
embezzled Ty Ty funds by failing to remit proceeds from the
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farming operation, and that Debtor committed fraud while acting
in a fiduciary capacity. First, Ty Ty has not established that
the proceeds were funds of Ty Ty’s that could be embezzled.
For purposes of this subsection, embezzlement “is the
fraudulent appropriation of property of another by a person to
whom such property has been entrusted or into whose hands it
has lawfully come.” Teamsters Local 533 v. Schultz (In re
Schultz), 46 B.R. 880, 889 (Bankr. D. Nev. 1985). Under this
subsection, Ty Ty must establish that Debtor was not entitled
under the law to use the funds as they were used. First State
Ins. Co. v. Bryant (In re Bryant), 147 B.R. 507, 512 (Bankr. W.
D. Mo. 1992). When debtors use funds to try to keep their
business operations functioning, courts hesitate to find the
necessary fraudulent intent. Id.
In this case, the receipt of funds after the confession of
judgment did not constitute funds of Ty Ty. Debtor was not
required to segregate any of the proceeds, and while Debtor’s
use of the funds to pay operating and some personal expenses
violated the agreement with Ty Ty, it was not unlawful in any
other sense. Also, Ty Ty has not proved that Mr. Cromer acted
with the necessary fraudulent intent. Therefore, the court
finds that Debtor did not embezzle the proceeds.
Second, under this subsection, Ty Ty must establish that
there was an express trust before Debtor or Royce Cromer can
qualify as fiduciaries who may have committed fraud in a
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fiduciary capacity. See Davis v. Aetna Acceptance Co., 293
U.S. 328, 333 (1934) (under the Bankruptcy Act of 1841, debtor
must have been a trustee before the wrong and without reference
thereto; statute refers to technical trusts, not trusts implied
from contract); Betz v. Gay (In re Gay), 117 B.R. 753, 754
(Bankr. M.D. Ga. 1989) (“[T]he concept of fiduciary . . .
should be narrowly defined and limited in its application to
what may be described as technical or express trusts.”). The
court does not find that Ty Ty’s evidence shows an express
trust as to the funds that were received by the farming
operation after the confession of judgment. Therefore, the
debt is dischargeable under this subsection.
§ 523(a)(6)
Under § 523(a)(6), Ty Ty alleges that Debtor willfully and
maliciously injured Ty Ty by deliberately expending funds that
Ty Ty was entitled to receive. The Supreme Court has ruled
that in order to prevail under this subsection, the creditor
must establish “a deliberate or intentional injury, not merely
a deliberate or intentional act that leads to injury.”
Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). This exception to
discharge requires that the actor intend the consequences, not
just the act. Id. at 61-62. A knowing breach of contract will
not qualify. Id. at 62.
The evidence in this case shows that Debtor received funds
-10-
and paid back some of the crop loan to Ashburn Bank, and used
some of the funds for other farm expenses. Mr. Cromer
testified that he paid Ashburn Bank some of the money he
received from his crops, but also paid some current farm and
personal expenses in accordance with the procedure he had
followed at Ashburn Bank since 1994. It is undisputed that
Debtor had obligated itself to pay Ashburn Bank’s current crop
loan in full and then to pay 50% of the remaining funds to Ty
Ty. Debtor did not do so. However, the court finds that Ty Ty
has not carried its burden to show that this failure was with
intent to injure Ty Ty or its property. Therefore, the court
finds that Ty Ty has failed to carry the burden as to the
nondischargeability of this debt under subsections
523(a)(2)(A), (4), and (6).
Collateral Estoppel
Finally, Ty Ty argues that the language regarding
nondischargeability in the confession of judgment collaterally
estopps Debtor from asserting the dischargeability of Ty Ty’s
debt. It is important to note that the confession of judgment
contains only legal conclusions and has no findings of fact to
support nondischargeability.
The court is guided by the Eleventh Circuit’s decision in
Halpern v. First Georgia Bank (In re Halpern),810 F.2d 1061
(11th Cir. 1987). The facts in Halpern are similar to the
-11-
facts in this case, but in Halpern, the consent judgment at
issue contained detailed findings of fact that contained all
the elements necessary for a § 523(a)(2)(A) claim. Id. at
1063. The court in Halpern’s decision to apply collateral
estoppel to the admitted facts, which it then considered as
evidence of nondischargeability, was affirmed by both the
district court and the Eleventh Circuit.
In this case, however, there are only bare conclusions of
law that the debt is nondischargeable. Such conclusions are
not binding on this court. See id. at 1063-64 (distinguishing
between findings of fact in state court consent judgment, which
may be entitled to preclusive effect, and ultimate issue of
nondischargeability, which is exclusively for the bankruptcy
court to determine). As Judge Kahn stated in his opinion
below, “[T]hose provisions of the consent order in which
[debtor] promised to forgo a discharge and agreed that the debt
was nondischargeable are completely without legal effect.”
First Georgia Bank v. Halpern (In re Halpern), 50 B.R. 260, 262
(Bankr. N.D. Ga. 1985), aff’d, 810 F.2d 1061 (11th Cir. 1987).
Accordingly, the court finds that collateral estoppel does not
apply to the assertion of nondischargeability in the confession
of judgment.
CONCLUSION
First, the court finds that Ty Ty has not presented the
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evidence necessary to entitle it to a default judgment under
the wording of the consent order allowing a late-filed answer
to the counterclaim. Second, under § 523(a)(2)(A), (4), and
(6), the court finds that Ty Ty has not carried its burden of
proof and therefore the debt is dischargeable. Finally, the
court finds that collateral estoppel does not apply to the
conclusion of nondischargeability in the confession of
judgment.
Accordingly, the court will enter a judgment in favor of
the Plaintiff-Debtor on this counterclaim. Because the main
action has been dismissed with prejudice, this Adversary
Proceeding is now concluded. Each party will bear its own
costs. An order will be entered in accordance with this
Memorandum Opinion.
DATED this 18th day of July 2000.
___________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

WAYNE BARBER

August 17, 2004

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
VALDOSTA DIVISION
IN RE: ::
WAYNE BARBER, : CASE NO. 03-71139
: CHAPTER 7
Debtor. ::
WILLIAM BASS, CAROLYN BURGESS, : ADVERSARY PROCEEDING
AND HAVEN HILL ESTATES : A.P. 03-7062
:
Plaintiffs, ::
vs. ::
WAYNE BARBER, ::
Defendant. :::
MEMORANDUM OPINION
On June 29, 2004, a Final Pre-Trial Conference was held
in the Adversary Proceeding No. 03-7062, William Bass, Carolyn
Burgess, and Haven Hill Estates (“Plaintiffs”) versus Wayne
Barber (“Defendant”). The complaint in the adversary
proceeding was to determine the dischargeability of a debt.
Plaintiffs conceded that, while they did have a state court
default judgment against Defendant, collateral estoppel did
not apply to whether the judgment was non-dischargeable.
However, Plaintiffs contended that if this Court were to find
in favor of Plaintiffs, as to the non-dischargeable nature of
the debt, collateral estoppel would apply to the amount of
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damages. Thus, the state court default judgment would be
determinative of the amount of the non-dischargeable debt.
Both parties were asked to submit briefs on the issue. The
Court has considered the parties’ briefs, as well as
applicable case law. Based on the reasons set forth in this
Memorandum Opinion, the Court finds that collateral estoppel
would not apply to the amount of the judgment. Therefore, the
state court judgment would not be determinative of the amount
of the non-dischargeable debt should the Court find in favor
of Plaintiffs.
BACKGROUND INFORMATION
In May 2000, Defendant was hired to provide paving
services at Haven Hill Estates Subdivision in Norman Park,
Georgia. An agreement was reached and reduced to writing. In
exchange for the paving services and materials necessary to
complete the job, Defendant was to be paid $60,000. On or
about May 18, 2000, Defendant informed Plaintiffs that he had
completed the job. Plaintiffs contend that Defendant was paid
but that Defendant did not complete the job as specified in
the agreement. Defendant does not dispute that a ‘prime
coating’ was not laid down as part of the paving services he
rendered. However, Defendant contends that the agreement was
altered orally. Defendant contends that he completed all
-3-
services as agreed upon in the orally modified agreement.
On April 25, 2002, Plaintiffs filed suit against Defendant
in the Superior Court of Cook County, Georgia. Plaintiffs’
complaint alleged fraud, breach of contract, breach of
warranty, and negligent construction. Additionally,
Plaintiffs asked for $31,430 for the repair of the allegedly
defective paving, $3,500 for loss of rental income, $250,000
in punitive damages, as well as attorneys fees and costs.
Defendant concedes that he received notice of the lawsuit, did
not file a response to the complaint, and the lawsuit went
into default. After the bar date passed to reopen the
default, the Superior Court of Cook County held a hearing on
damages. No evidence has been presented to this Court on
whether Defendant received notice of the hearing on damages.
The court entered a judgment for Plaintiffs against Defendant
in the amount of $40,474.50 in actual damages and $50,000 in
punitive damages.
Defendant contends that his financial condition was
deteriorating at the time of the state court litigation and he
was advised by his defense counsel to file for bankruptcy
protection, rather than incur the cost of the litigation.
Defendant subsequently filed for bankruptcy protection under
Chapter 7 of the United State Bankruptcy Code (“Code”) on July
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17, 2003. This adversary proceeding was filed on October 9,
2003.
CONCLUSIONS OF LAW
When deciding whether collateral estoppel applies to an
issue, this Court must apply the law of the state in which the
judgment was entered. See In re St. Laurent, 991 F.2d 672,
675-676 (11th Cir. 1993); Sterling Factors, Inc. v. Whelan (In
re Whelan), 236 B.R. 495, 501 (Bankr. N.D. Ga. 1999). Under
Georgia law, three elements must be present for collateral
estoppel to apply. See Kent v. Kent, 265 Ga. 211, 212, 452
S.E.2d 764, 766 (Ga. 1995). First, the Court must determine
whether the issue is identical to issue already resolved in
the state court. See id. Second, the Court must look to see
whether the issue was “actually and necessarily” litigated in
the state court case. Id. Third, the Court must decide
whether the resolution of the issue was essential to the state
court case. See id.
Plaintiffs concede that collateral estoppel is not
applicable as to the issue of whether the state court judgment
is non-dischargeable. However, Plaintiffs attempt to
distinguish the issue of the amount of the state court
judgment because an evidentiary hearing was held on the issue
of damages, the court considered the evidence, and the court
-5-
entered a judgment in a dollar amount that was different from
Plaintiffs’ prayer for relief.
In support of this proposition, in addition to other
authority on collateral estoppel and fraud, Plaintiffs’
submitted one unpublished opinion and one published opinion
written by the Chief Bankruptcy Court Judge in this District.
Jackson v. Hensley (In re Hensley), No. 95-51784, A.P. No. 95-
5068 (Bankr. M.D. Ga. Oct. 4, 1996)(Hershner, C.J.); Fincher
v. Holt (In re Holt), 173 B.R. 806 (Bankr. M.D. Ga.
1994)(Hershner, C.J.). In Hensley, during the state court
proceeding, the debtor actively participated in pre-trial
motions and hearings but failed to show up on the day of the
trial. Hensley, slip op. at 2-3. In Holt, the debtor filed
the complaint in the state court proceeding but failed to
respond to a motion for summary judgment and requests for
admissions filed by the opposing party. Holt, 173 B.R. at 811.
The state court dismissed the debtor’s complaint, granted
summary judgment to the opposing party on two of her three
counterclaims, and went on to conduct a trial on the third
counterclaim against the debtor. See id. The debtor failed to
show up on the day of trial. See id. In both Hensley and
Holt, the state courts heard and considered evidence prior to
entering the judgments against the debtors. Hensley, slip op.
-6-
at 3; Holt, 173 B.R. at 811-812. In both cases, the
bankruptcy court determined that collateral estoppel applied
to the issues before the court and did not conduct a separate
trial as to the non-dischargeability of the state court
judgment. See Hensley, slip op. at 15; Holt, 173 B.R. at 816-
818. Thus, in both cases, the court declared the state court
judgments, except for attorneys fees in the Holt case, to be
non-dischargeable. See id.
In response, Defendant submitted a case, also decided by
Chief Judge Hershner, in which the court ruled that collateral
estoppel did not apply because the debtor did not engage “in
dilatory and deliberately obstructive conduct” in the state
court proceeding, despite the fact that he had participated in
the proceeding prior to the default judgment being entered.
Chevy Chase Bank, FSB v. Harkins (In re Harkins), 302 B.R.
927, 929 (Bankr. M.D. Ga. 2003); Hensley, slip op. at 1; Holt,
173 B.R. at 808. In Harkins, the debtor claimed to have
relied on the advice of counsel when he did not respond to the
request for admissions because he was preparing to file for
bankruptcy. Harkins, 302 B.R. at 929. The state court struck
the debtor’s answer and entered a default judgment against the
debtor. See id. at 928. The state court did not hear evidence
to determine the amount of damages prior to entering the order
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which set the amount of the default judgment. See id.
The case before this Court is different from the three
cases cited by the parties. In those cases, the debtors
participated in the state court actions. See id.; Hensley,
slip op. at 2; Holt, 173 B.R. at 811. In the two cases cited
by Plaintiffs, collateral estoppel was applied when an
evidentiary hearing occurred after the debtors participated
extensively in the state court proceeding but failed to attend
the trial. See Hensley, slip op. at 3; Holt, 173 B.R. at 811.
In the case cited by Defendant, collateral estoppel was not
applied when an evidentiary hearing was not held. See Harkins,
302 B.R. at 928.
The case before this Court lies some where in between the
two scenarios presented by the parties. Here, Defendant did
not answer the state court complaint and the case went into
default. However, a hearing was held on damages and evidence
was heard by the state court, prior to the court’s entering a
judgment in a specific amount against Defendant. Plaintiffs
concede that collateral estoppel does not apply to the issue
of non-dischargeability of the state court judgment.
Plaintiffs have failed to direct the Court to authority which
supports their position that collateral estoppel should apply
to the amount of the state court judgment because the state
-8-
court held an evidentiary hearing to set the amount, prior to
entering the judgment against Defendant, when it concededly
does not apply to substantive liability issues.
The Court is persuaded that the situation in this case is
more like the one in Harkins, where the court did not apply
collateral estoppel to the state court judgment. Id., 302 B.R.
at 929. The Court reaches this conclusion because, while
there was a hearing after which the state court determined the
amount of the damages, there was no hearing to determine if
Defendant was liable. Instead, the substantive liability
issue was determined by default. Therefore, the issue of
Defendant’s liability was not “actually and necessarily”
litigated in the state court. Kent, 265 Ga. at 212; 452 S.E.2d
at 766. Some courts do reason that a debtor cannot blatantly
ignore a state court proceeding, then get a “second bite at
the apple” in a bankruptcy proceeding. Bush v. Balfour Beatty
Bahamas, Ltd (In re Bush), 62 F.3d 1319, 1324 (11th Cir.
1995); see also Jones v. Wilson (In re Wilson), 72 B.R. 956,
959 (Bankr. M.D. Fla. 1987). However, Defendant acted on
advice of counsel when he chose to allow the lawsuit to go
into default and file for bankruptcy protection, rather than
incur the cost of litigation. The Court is not persuaded that
Debtor did anything deliberate that could be considered an
-9-
abuse of the judicial process. See Bush, 62 F.3d at 1324.
Therefore, the Court will not apply collateral estoppel
to the issue before the Court. If the Court should find in
favor of Plaintiffs and against Defendant on the issue of nondischargeability,
collateral estoppel will not establish the
amount of any non-dischargeable judgment. An order in
accordance with this Memorandum Opinion will be entered.
DATED this 17th day of August, 2004.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY
JUDGE

DARRYL HUFF

October 5, 2005

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
DARRYL HUFF : 04-40055 JTL
: CHAPTER 13
Debtor. :
MEMORANDUM OPINION
This case is before the Court on the motion of the debtor,
Darryl Huff, to allow the substitution of collateral. On
September 1, 2005, the Court held a hearing on the matter and
at the conclusion of the hearing, took the matter under
advisement. After considering oral arguments, as well as
applicable statutory and case law, the Court, for the reasons
given below, denies Debtor’s motion to substitute collateral
and hereby directs that all insurance proceeds due and payable
by USAA Casualty Insurance Company as a result of the postconfirmation
destruction of Debtor’s 1998 Pontiac Grand Prix
automobile be paid to secured creditor AmeriCredit Financial.
FACTS
On January 8, 2004, Darryl Huff (hereinafter, “Debtor”)
filed a Voluntary Petition under Chapter 13 of the United
States Bankruptcy Code. Debtor’s Chapter 13 Plan (hereinafter,
the “Plan”) was confirmed on April 23, 2004. The only
creditor, secured or otherwise, listed in Debtor’s Plan was
AmeriCredit Financial (hereinafter, “AmeriCredit”). The Plan
indicates that AmeriCredit was owed a debt of $14,357.00
2
secured by a first priority security interest in Debtor’s 1998
Pontiac Grand Prix automobile. The automobile is co-titled in
the names of Debtor and his wife, Vicki Lynn Hill. Debtor’s
confirmed Plan values the Grand Prix automobile at $7,025.00
for purposes of repayment under the Plan. In accordance with
the Plan, the Trustee is to make monthly payments of $184.00 to
AmeriCredit for the four-year, eight-month term of Debtor’s
Plan. As of September 1, 2005, the remaining balance owed to
AmeriCredit was $6,109.71.
Debtor and his wife, Vicki Lynn Huff, purchased the Grand
Prix automobile on April 9, 2001 as evidenced by the “Retail
Installment Contract and Security Agreement” (hereinafter,
“Sales Agreement”).1 AmeriCredit filed the Sales Agreement
with the Court on April 20, 2004 as part of its Proof of
Claim.2 The Grand Prix automobile was purchased from Carl
Black Pontiac/Buick/GMC/Isuzu, which assigned the contract and
security agreement to AmeriCredit via an assignment clause
located on page 1 of the Sales Agreement.3
Page 2 of the Sales Agreement contains “Additional Terms
of Th[e] Contract and Security Agreement.” The paragraph
titled “INSURANCE” provides in pertinent part as follows:
1 Retail Installment Contract and Security Agreement
(hereinafter, “Sales Agreement”), attached to Proof of Claim
No. 003.
2 Proof of Claim No. 003.
3
You [the purchaser] agree to buy property
insurance on the Property protecting against
loss and physical damage . . . . You will
name us [AmeriCredit] as loss payee on any
such policy . . . . You may purchase or
provide the insurance through any insurance
company reasonably acceptable to us. You
will keep the insurance in full force and
effect until this contract is paid in full.4
Debtor’s wife, Vicki Lynn Hill, in compliance with the
terms of the Sales Agreement, purchased property insurance on
the Grand Prix automobile from USAA Casualty Insurance Company
(hereinafter, “USAA”).5 Vicki Lynn Hill is named on the Policy
as the “Insured.” The policy period is stated as “MAY 04 2005
to NOV 04 2005.”6 The Grand Prix automobile is identified as
vehicle 02 in the Policy, with “AMERICREDIT FINANCIAL, DALLAS
TX” listed in a notation as the “LOSS PAYEE” for “VEH 02.”7
Debtor’s name appears on the Policy only as an “operator” of
the vehicles insured and as “co-owner” of vehicle 04, which is
identified as a 1985 Chevrolet S10 pickup truck.8
3 Sales Agreement, p.1.
4 Id. at p.2 (emphasis added).
5 The particulars of the insurance coverage secured by
Debtor=s wife, Vicki Lynn Hill, are evidenced by the insurance
policy (hereinafter, the “Policy”) that was admitted into
evidence as Movant’s Exhibit 2 during the hearing on the motion
to substitute collateral held by the Court September 1, 2005.
6 Movant’s exhibit 2, Policy, p.1.
7 Id.
8 Id.
4
Part D of the Policy, titled “Physical Damage Coverage,”
contains specifics on the payment of proceeds from the Policy
in case of loss.9 The paragraph in this part titled “Loss
Payable Clause” states in pertinent part:
Loss or damage under this policy will be
paid, as interest may appear, to the named
insured and the loss payee shown in the
Declarations . . . . When we [the insurer]
pay the loss payee we will, to the extent of
payment, be subrogated to the loss payee’s
rights of recovery.10
Debtor’s vehicle was totally destroyed in an automobile
accident. The insurance proceeds due and payable by USAA are
$5,180.35.11 Debtor filed Motion to Substitute Collateral on
July 5, 2005 asking that the Court permit Debtor to use the
proceeds paid by USAA to purchase a “substantial substitute of
collateral for the lien holder . . . .” and to “substitute that
collateral for the collateral presently listed with AmeriCredit
Financial.”12
DISCUSSION AND CONCLUSIONS OF LAW
Debtor’s motion to substitute collateral must be denied in
order for the Court to be consistent with the relevant
9 Part D begins on page 13 of the Policy.
10 Movant’s exhibit 2, Policy, p.15.
11 Response of AmeriCredit, p.2; Testimony in hearing
September 1, 2005.
12 Debtor=s Motion to Substitute Collateral, p.1.
5
controlling authority on this issue. The Chapter 13 estate is
comprised of “all legal or equitable interests of the debtor in
property as of the commencement of the case.”13 These
interests include “proceeds, product, offspring, rents, or
profits of or from property of the estate.”14 Where insurance
proceeds are determined to be property of the bankruptcy
estate, then in accordance with 11 U.S.C. ‘ 1327(a),15 the
confirmed Chapter 13 Plan will dictate how the proceeds are to
be disbursed.16 Alternatively, where insurance proceeds are
not property of the bankruptcy estate, then disbursement is
determined by the terms of relevant agreements that give rise
to particular legal interests in the proceeds.17
The answer to whether the insurance proceeds are property
of the debtor’s bankruptcy estate depends on whether the debtor
13 11 U.S.C. § 541(a)(1) (2005).
14 11 U.S.C. § 541(a)(6) (2005).
15 11 U.S.C. § 1327(a) states that “the provisions of a
confirmed plan bind . . . each creditor, . . . whether or not
such creditor has objected to, has accepted, or has rejected
the plan.”
16 Ford Motor Credit Co. v. Stevens, 130 F.3d 1027, 1029
(11th Cir. 1997); In re Arkell, 165 B.R. 432, 434 (Bankr. M.D.
Tenn. 1994) (Lundin, J.).
17 First Fidelity Bank v. McAteer, 985 F.2d 114 (3d Cir.
1993) (holding that proceeds from credit life insurance policy
were not property of the bankruptcy estate; therefore, secured
creditor could recover all proceeds paid, even the amount
exceeding the “crammed down” value of secured creditor=s
collateral listed in the debtor=s confirmed Chapter 13 Plan).
6
has an interest in the proceeds.18 Where the debtor and
secured creditor “share” an interest in the proceeds, the
proceeds constitute property of the bankruptcy estate and
disbursement will follow the dictates of the confirmed Chapter
13 Plan.19 The courts considering this issue agree that the
proper exercise for determining the respective rights of the
parties in insurance proceeds is to consider the “nature and
type of . . . insurance policy involved, and its relationship
to the property of the bankruptcy estate.”20 In cases where
the secured creditor was named as “loss payee” in the insurance
policy covering the secured collateral, the secured creditor
was deemed to have an interest in the insurance proceeds.21
See Stevens, 130 F.3d at 1029.
18Stevens, 130 F.3d at 1029. It is important to note that
simply because the debtor has a property interest in the
insurance policy, does not necessarily mean that the debtor has
a property interest in the proceeds of that policy.
19 Stevens, 130 F.3d at 1030 (citing In re Feher, 202 B.R.
966, 970 (Bankr. S.D. Ill. 1996)). See In re Arkell, 165 B.R.
at 435 (holding that “casualty insurance proceeds from the
destruction of property of a Chapter 13 estate are property of
the Chapter 13 estate”).
20Stevens, 130 F.3d at 1030; In re Feher, 202 B.R. 966
(Bankr. S.D. Ill. 1996) (citing In re Hill, 174 B.R. 949, 951
(Bankr. S.D. Ohio 1994)).
21 In re Witherspoon, 281 B.R. 321 (Bankr. S.D. Ala. 2001);
In re Feher, 202 B.R. 966 (Bankr. S.D. Ill. 1996); In re
Habtemichael, 190 B.R. 871 (Bankr. N.D. Mo. 1996); In re Suter,
181 B.R. 116 (Bankr. N.D. Ala. 1994); McCauley v. Chrysler
Credit Corp., 173 B.R. 453 (Bankr. M.D. Ga. 1994) (Hershner,
C.J.). See In re Bailey, 314 B.R. 103 (Bankr. N.D. Miss.
2004); Robinson v. Citizens Bank & Trust Co., 2003 WL 1728414
7
It should be noted that mere ownership of the insurance
policy by the bankruptcy estate does not necessarily mean that
the bankruptcy estate has sole interest or ownership of the
proceeds of that insurance policy.22 Situations may exist
where “a creditor or beneficiary other than the debtor may be
entitled to [insurance] proceeds . . . .”23 Where a secured
creditor is deemed to have an interest in insurance proceeds,
that interest “flowing from the destruction of the secured
collateral@ cannot exceed the secured creditor’s interest in
the collateral itself.24 The secured creditor’s interest in
the proceeds would be “defined at the time of the confirmation
of the Chapter 13 plan . . . .”25 In sum, where both the
debtor (via the bankruptcy estate) and the secured creditor
(via the insurance policy) have an interest in the insurance
proceeds, the secured creditor shall be paid the value of its
interest in accordance with the confirmed Chapter 13 Plan and
(Bankr. S.D. Ga. 2003); In re Coker, 216 B.R. 843 (Bankr. N.D.
Ala. 1997); Carey v. General Motors Acceptance Corp., 202 B.R.
796 (Bankr. M.D. Ga. 1996) (Hershner, C.J.); In re Arkell, 165
B.R. 432.
22 Stevens, 130 F.3d at 1029.
23 Id. (citing First Fidelity Bank v. McAteer, 985 F.2d
114,117 (3d Cir. 1993); In re Louisiana World Exposition, 832
F.2d 1391, 1399 (5th Cir. 1987)).
24 Id. at 1030 (citing In re Feher, 202 B.R. 966, 970-71
(Bankr. S.D. Ill. 1996); In re Arkell, 165 B.R. 432, 434
(Bankr. M.D. Tenn. 1994)).
8
any remainder shall be paid to the debtor as the party in whom
the automobile revested when the Chapter 13 plan was
confirmed.26
A. AmeriCredit Financial Services, as named “loss payee”
under the insurance Policy, does have an interest in
the insurance proceeds.
As mentioned above, “[i]n order to determine the parties
respective rights with regard to the insurance proceeds from
the destruction of the [secured collateral], one must consider
the nature and type of insurance policy involved, and its
relationship to the property of the bankruptcy estate.”27 This
test was laid out in the case of Ford Motor Credit Co. v.
Stevens where the Eleventh Circuit Court of Appeals considered
circumstances similar to those in the case at bar. In Stevens,
Ford Motor Credit, the secured creditor, was named as “loss
payee” in the debtor’s insurance policy covering the debtor’s
Ford pickup truck. When the pickup truck was destroyed postconfirmation
and the insurance company paid out the proceeds
due under the policy, the Eleventh Circuit held that proceeds
25Id.
26 In re Habtemichael, 190 B.R. 871, 873 (citing In re
Moore, 181 B.R. 522 (Bankr. D. Idaho 1995); In re Suter, 181
B.R. 116 (Bankr. N.D. Ala. 1994); In re McCauley, 173 B.R. 453
(Bankr. M.D. Ga. 1994) (Hershner, C.J.); In re McDade, 148 B.R.
42 (Bankr. S.D. Ill. 1992); In re Pourtless, 93 B.R. 23 (Bankr.
W.D. N.Y. 1988); In re Tucker, 35 B.R. 35 (Bankr. M.D. Tenn.
1983)). See also Stevens, 130 F.3d 1027.
27Stevens, 130 F.3d at 1030.
9
were payable to Ford Motor Credit to the extent it was still
owed under the debtor’s confirmed Chapter 13 Plan. The excess,
the Eleventh Circuit held, was payable to the debtor.
In reaching its conclusion, the Eleventh Circuit
considered the “nature and type” of the insurance policy and
the policy’s “relationship to the property of the bankruptcy
estate.” The court stated that the insurance policy was
“intended to protect both the owner and the secured creditor”
should the secured collateral be destroyed.28 The proceeds of
the policy, the court held, “act as a substitute for the
insured collateral.”29 Ford Motor Credit, therefore, had an
interest in the proceeds in accordance with the terms of the
policy. The court limited Ford Motor Credit’s interest in the
proceeds to the value of its interest in the secured collateral
itself—the amount Ford Motor Credit was still owed under the
debtor’s confirmed Chapter 13 Plan.
In the case at bar, AmeriCredit was Debtor’s secured
creditor as to Debtor’s 1998 Pontiac Grand Prix automobile.30
AmeriCredit required Debtor “to buy property insurance on the
Property protecting against loss and physical damage” and to
28 Id.
29 Id.
30 Debtor’s Chapter 13 Plan.
10
name AmeriCredit as loss payee on any such policy.31 Debtor’s
wife purchased insurance on the automobile. AmeriCredit was
named in the insurance Policy covering the Grand Prix
automobile as “loss payee” for that vehicle. Therefore, like
in Stevens, it can be concluded that the Policy in this case
was “intended to protect both the owner and the secured
creditor” should the Grand Prix automobile be destroyed.
31 Sales Agreement, p.2 (emphasis added).
The Grand Prix automobile was in fact destroyed and
insurance proceeds are now due and payable in accordance with
the Policy. Because AmeriCredit was named in the insurance
Policy as “loss payee” for proceeds paid on the Grand Prix
automobile and, like in Stevens, the Policy was intended to
protect AmeriCredit in case its collateral was destroyed,
AmeriCredit does have an interest in the insurance proceeds
paid as a result of the post-confirmation, total destruction of
Debtor’s Grand Prix automobile.
B. It is unnecessary to determine whether Debtor or his
bankruptcy estate has an interest in the insurance
proceeds.
11
A Chapter 13 bankruptcy estate is made up of “all legal or
equitable interests of the debtor in property as of the
commencement of the case,” which includes “proceeds, product,
offspring, rents, or profits of or from property of the
estate.”32 Where the debtor owns an insurance policy (i.e.,
the debtor is named as the “insured” on the policy), the policy
is property of the debtor’s bankruptcy estate.33 However,
simply because the policy is property of the estate does not
necessarily mean that the proceeds of the policy are property
of the estate.34 The language of the policy or other
circumstances may entitle a creditor or other beneficiary to
the proceeds.35 Should it be determined that the debtor does
in fact have an interest in the proceeds, then the “proceeds
are considered property of the bankruptcy estate and
distribution of the proceeds is governed according to the terms
of the bankruptcy plan.”36
In most cases that address the issue at hand, the courts
are considering insurance policies owned by the debtor (i.e.,
debtor is named as “insured”). In those cases, even where one
32 11 U.S.C. § 541 (a)(1), (6) (2005).
33 Stevens, 130 F.3d at 1029.
34 Id.
35 Id.
36 Id.
12
of the debtor’s secured creditors is named loss payee under the
policy, the debtor, and thus his bankruptcy estate, can still
be held to have an interest in the proceeds.37 Determining
whether the debtor himself has an interest in the proceeds is
important where the proceeds paid as a result of the secured
collateral’s destruction exceed the amount owed to the secured
creditor under the confirmed Chapter 13 Plan. The issue in
those cases is whether the debtor is entitled to any excess or
if the secured creditor is entitled to the full amount of the
proceeds, including any excess.
An example of this type of case is McCauley v. Chrysler
Credit Corp., where Chief Judge Hershner held that the debtor’s
secured creditor and named loss payee under debtor’s insurance
policy must turn over insurance proceeds paid to the secured
creditor that exceeded the amount of the secured creditor’s
confirmed claim.38 In that case, the insurance policy showed
the debtor as the owner of the secured collateral vehicle and
the secured creditor as loss payee. The vehicle was destroyed
post-confirmation and the insurance company issued a check for
the proceeds jointly payable to the debtor and the secured
creditor. The debtor in McCauley conceded that the balance of
the secured creditor’s claim should be paid from the proceeds,
but the debtor demanded return of the excess. Chief Judge
37 Id. at 1029-30.
13
Hershner held that the secured creditor, as named loss payee,
was entitled to the amount representing the unpaid portion of
its claim under the debtor’s confirmed Chapter 13 plan, and the
debtor was entitled to any excess.
Unlike in McCauley, Debtor in this case is not the owner
per se of the Policy. Debtor’s name is not listed as the
“insured” on the Policy. Further, the “Loss Payable Clause” in
the Policy states that “Loss or damage under this policy will
be paid, as interest may appear, to the named insured and the
loss payee shown in the Declarations . . . .”39 It is
undisputed that the Grand Prix automobile was co-owned by
Debtor and his wife and that the automobile was property of
Debtor’s bankruptcy estate. What is unclear is whether the
proceeds of the insurance Policy are property of Debtor’s
bankruptcy estate. Such a distinction is unnecessary in
deciding this case since the monies due and payable by USAA
under the Policy do not exceed the balance of AmeriCredit’s
claim under Debtor’s confirmed Chapter 13 Plan.
Respondent AmeriCredit urges that “because [AmeriCredit]
is the loss payee of the insurance policy, the proceeds of the
policy are not property of the estate.”40 AmeriCredit relies
38 McCauley, 173 B.R. at 455.
39 Movant’s exhibit 2, Policy, p.15.
40 Response of AmeriCredit, p. 2.
14
on the case In re Suter for this proposition. The court in
Suter held “because [secured creditor] was the loss payee of
the insurance policy, the proceeds of the policy are not
property of the bankruptcy estate and are payable to [secured
creditor], at least to the extent of [secured creditor’s]
interest in the property insured.”41 In Suter, the insurance
proceeds exceeded the balance of the secured creditor’s claim
under the confirmed Chapter 13 Plan and the debtor was awarded
recovery of the excess.
The holding in Suter, however, is inconsistent with one of
the conclusions of Stevens where the Eleventh Circuit, under
circumstances similar to those in Suter, held that “the
disbursement of insurance proceeds caused by the destruction of
the [secured collateral] fell within the property of the
bankruptcy estate.”42 However, the Eleventh Circuit went on to
hold in Stevens that “[h]aving a confirmed secured claim with
regard to the [vehicle], [secured creditor] was certainly
entitled to collect on its claim from the insurance proceeds as
substitute collateral. [Secured creditor] was not entitled,
however, to recover more than the amount of its secured claim
as confirmed by the Chapter 13 plan.”43 Therefore, even though
41 In re Suter, 181 B.R. at 119 (emphasis added).
42 Stevens, 130 F.3d at 1031.
43 Id.
15
AmeriCredit is incorrect, because of the holding in Stevens, to
rely on Suter for authority that the proceeds are not property
of Debtor’s bankruptcy estate and, therefore, the rightful
property of AmeriCredit, the courts in both cases reached the
same result. Both courts ultimately held that secured creditors
with confirmed secured claims are entitled to payment from
insurance proceeds to the extent of their claims where they are
named loss payees on the policies.
In the case at bar, secured creditor AmeriCredit has a
balance of $6,109.71 owed on its confirmed claim. Upon
destruction of Debtor’s Grand Prix automobile, USAA Casualty
Insurance Company owed $5,180.35 under the Policy, an amount
less than the amount owed to AmeriCredit on its confirmed
claim. Unlike those cases where it is vital to determine
whether the debtor has interest in the insurance proceeds
exceeding the secured creditor’s confirmed claim, such a
decision is unnecessary in the case at bar. Should such a
decision be required, the Court would be called to consider
issues such as whether Debtor’s not being named an insured on
the insurance policy would affect the outcome of the case. No
such inquiry is required today, however.
The Court, by this opinion, is not making the broad
statement that substitution of collateral will be disallowed in
all circumstances where a secured creditor’s collateral is
16
destroyed and insurance proceeds are paid or are payable. The
Court cautions that this holding is limited to the facts of
this case and that the outcome may differ in cases where the
collateral has not revested in the debtor by the time the
collateral is destroyed. Such would be the case where
destruction occurs pre-confirmation44 or where a provision in
the debtor’s Chapter 13 Plan states the collateral does not
revest in the debtor upon confirmation.
CONCLUSION
AmeriCredit was named as loss payee in the insurance
Policy covering Debtor’s 1998 Pontiac Grand Prix automobile.
The automobile secured AmeriCredit’s confirmed claim against
Debtor’s bankruptcy estate. The automobile was destroyed postconfirmation.
AmeriCredit’s confirmed claim totals less than
the insurance proceeds paid for the destroyed vehicle. In
accordance with the decision of the Eleventh Circuit in Ford
Motor Credit Co. v. Stevens, it is concluded for the foregoing
reasons that AmeriCredit, as named loss payee on the insurance
Policy, is entitled to payment of all the insurance proceeds
due and payable, such payment to serve as substitute for its
collateral. Debtor’s Motion to Substitute Collateral will be
DENIED and an order will be entered in accordance with this
memorandum opinion.
44 See Carey, 202 B.R. 796.
17
DATED this 5th day of October, 2005.
/S/ JOHN T. LANEY III
JOHN T. LANEY III
UNITED STATES BANKRUPTCY JUDGE

SGE MORTGAGE FUNDING CORPORATION

November 2001

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
VALDOSTA DIVISION
IN RE: ::
CASE NO. 99-71191
SGE MORTGAGE FUNDING :
CORPORATION, : CHAPTER 11
:
Debtor, : ADVERSARY PROCEEDING
: NO. 00-7013
SGE MORTGAGE FUNDING :
CORPORATION ::
Plaintiff, ::
vs. ::
ACCENT MORTGAGE SERVICES, :
INC., et al. ::
Defendants. :
MEMORANDUM OPINION
On July 13, 2001, the court held a hearing on the motions
for partial summary judgment of First Family Financial Services,
Inc., Associates Financial Services of America, Inc., and
Associates Home Equity Services, Inc., (collectively,
“Associates”), and the Committee of Investors Holding Unsecured
Claims (“Committee”). The parties filed briefs, response briefs,
affidavits and stipulations of fact. At the conclusion of the
hearing, the court took the motions for partial summary judgment
under advisement. The court has considered the parties’ briefs,
affidavits, stipulations of fact, oral arguments, and the
applicable statutory and case law. For reasons that follow, the
1 The Associates and the Committee stipulate that Exhibit “A”
contains some sample Investor Contracts which do not differ in any
material respect from all of the Investor contracts entered into by
SGE with each individual investor. (Id. Stipulations of Fact at ¶ 3).
Although SGE agrees that all “known” transactions were memorialized
into written contracts, SGE avers that there may exist Investor
Contracts that do not mirror the language in the sample Investor
Contracts. (See Doc. #605 at ¶¶ 3-5).
-2-
court will grant in part and deny in part, the Associates’ motion
and will deny the Committee’s motion.
FACTS
The prepetition debtor, SGE Mortgage Funding Corporation
(“SGE”), was a residential mortgage broker licensed in Georgia.
A large portion of SGE’s business involved SGE’s solicitation and
origination of loans to potential borrowers desiring to obtain
loans secured by real estate. SGE funded its mortgage loan
origination business through cash investments made by individual
investors. The transactions between SGE and these investors were
memorialized in a written contract (“Investor Contract”). (Doc.
#559, Exh. “A”).1
Each Investor Contract provided that the investor would loan
SGE a certain amount of money. SGE would utilize these funds in
its lending business to individual borrowers. In return for the
investors’ loan, SGE would pay the investor a monthly amount
based on an interest rate designated in the Contract. (Exh. “A”
at ¶ 1).
Each Investor Contract also identified a specific borrower
and loan which SGE represented that it had made using the
-3-
investor’s funds. If for some reason, the loan to the borrower
did not close, the Contract provided that the funds advanced to
SGE by the investor would either be returned to the investor or
the funds would be used for some other transaction. Upon closing
the loan to the specific borrower identified, the Contract
further provided that SGE would “transfer and assign all of its
right, title, and interest in and to Borrower’s Note and deed to
secure debt to [the] [investor].” (Id. at ¶ 5). This transfer
and assignment was to be recorded in the county where the real
estate was located. Although the loan documents were to remain
the property of SGE, these documents were to serve “as
collateral. . . for repayment of the debt owed by [SGE] to [the]
[investor].” (Id.). Moreover, the Contract required SGE to
deliver the original documents to the investor if the investor so
requested. Unless the investor requested otherwise, SGE would
serve as the servicing agent for the loan that SGE had made to
the borrower with the investor’s funds. (Id. at ¶¶ 2-5).
The Associates are consumer lending companies licensed in
Georgia. One aspect of the Associates’ business is to make bulk
purchases of portfolios of real estate loans from mortgage
brokers. All three of the Associates entities engaged in bulk
purchases of loans from SGE. First Family Financial Services
purchased approximately 230 mortgage loans for which it paid SGE
approximately $3.5 million. (Id. at ¶ 23). Associates Financial
Services of America purchased approximately 30 mortgage loans
-4-
from SGE at a purchase price of approximately $1.3 million. (Id.
at ¶ 24). Associates Home Equity Services paid SGE approximately
$564,000.00 for approximately 26 loans it purchased from SGE.
(Id. at ¶ 25). The transactions between these entities and SGE
were memorialized into written agreements. (Doc. #559, Exh. “B”,
“C” and “D”). After the Associates purchased the loans from SGE,
the Associates assumed all aspects of loan management. (Doc. #559
at ¶ 19).
However, before SGE sold these loans to the Associates and
other bulk purchasers, SGE had been engaged in a classic Ponzi
scheme. Upon closing a mortgage loan to an individual borrower,
SGE would assign that loan to not only one investor, but numerous
investors. Like many Ponzi schemes, SGE used funds obtained from
later investors to pay the monthly principal and interest
payments due to the earlier investors. SGE drew the Associates
into its fraudulent scheme by selling loans to the Associates
which SGE had “double-booked” to numerous investors.
On September 27, 1999, an involuntary petition under Chapter
7 of the Bankruptcy Code (“Code”) was commenced against SGE. On
December 10, 1999, this case was converted to a Chapter 11 case.
On June 28, 2000, SGE as debtor-in-possession, filed this
adversary proceeding to determine the validity, priority, and
extent of the interest in the loans claimed by the investors and
the bulk purchasers. Numerous investors and consumer lending
companies such as the Associates were named as defendants.
-5-
After several months of discovery, the Committee and the
Associates filed motions for partial summary judgment to which
several consumer lending companies, investors, and SGE
responded. These motions present two issues: (1) whether the
Uniform Commercial Code (“UCC”) or the Georgia real estate
recording statutes (“recording statutes”) governs the priority of
interests in the loan transactions; and (2) whether the
Associates are holders in due course of the loans they purchased
from SGE.
DISCUSSION
In dealing with motions for summary judgment, Federal Rule
of Civil Procedure 56 is made applicable to adversary proceedings
in bankruptcy cases by Federal Rule of Bankruptcy Procedure 7056.
Summary judgment is proper “if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to
judgment as a matter of law.” FED R. CIV. P. 56(c); Celotex Corp.
v. Catrett, 477 U.S. 317, 322 (1986). Like a district court, a
bankruptcy court must determine that there are no issues of
material fact and accept all undisputed facts as true in order to
find that summary judgment is warranted as a matter of law. Gray
v. Manklow (In re Optical Technologies, Inc.), 246 F.3d 1332,
1334 (11th Cir. 2001). An issue is “material” if it affects the
2 This entity consists of approximately 100 individual investors who are
present and former clients of Carlyle Wealth Planning, Inc. These
individuals invested approximately $6,000,000.00 in the Casko
Investment Company to fund the lending to individual borrowers. SGE
was the “servicing agent” for the Carlyle/Casko investments. (See
Doc. #559, Exh. “A”).
-6-
outcome of the case under the applicable law. Redwing Carriers,
Inc. v. Saraland Apartments, 94 F.3d 1489, 1496 (11th Cir. 1996).
In the typical motion for summary judgment, the court must
apply the undisputed facts to the applicable law. However, the
first issue before the court requires it to determine which law
is the applicable law.
The Committee and the Carlyle/Casko investor entity
(“Carlyle/Casko Investors”2), argue that the recording statutes,
not the UCC, is the applicable law. The Committee contends that
the investors and bulk purchasers, such as the Associates, failed
to record the assignments of the deeds to secure debt. As a
result, these entities have no ownership interest in the loans
superior to that of the trustee. Therefore, the Committee and
the Carlyle/Casko Investors contend that the loans are property
of the estate. The Committee also argues that the Associates’
interests are likewise unperfected. Although the Associates may
have purchased the notes of which they have possession, the
Committee contends that the Associates failure to record the
assignments is fatal to their perfection.
The Associates and SGE argue that the UCC is the applicable
law. Although real estate was involved in the transactions
3 The court notes that Accent Mortgage Services, Inc. (“AMS”), another
consumer lending company defendant filed a response to the Committee’s
Motion. In their response, AMS adopted the Associates’ brief in full.
Therefore, the court’s reference to the Associates encompasses AMS as
well.
-7-
between SGE and the investors, the Associates contend that the
UCC governs because the transactions entailed the transfer of
promissory notes, which are negotiable instruments.3
Similar to the Carlyle/Casko Investors, individual investors
James and Debra Mills (“Mills”) filed a response to the
Associates’ and the Committee’s motions maintaining that the UCC
is not the applicable law. The Mills assert that the mortgages
assigned to them by SGE were not included in the ones that SGE
assigned to the Associates in their bulk purchase. Even if this
is not the case, the Mills argue that SGE executed an assignment
of the actual security deed to them which they then recorded.
Under the applicable recording statutes, the Mills maintain that
recording the deed and assignment is sufficient to perfect their
interest. The Mills further insist that having possession of the
original notes is not necessary to perfect their interest in the
collateral.
Under Georgia law, transactions that result in the “creation
or transfer of an interest in or lien on real estate . . .” are
excluded from Article 9 of the UCC. O.C.G.A. § 11-9-104(h)(1994
& Supp. 2000). Therefore, the focal point of the issue before
the court is whether the transactions between SGE, the
-8-
Associates, and the investor entities create or transfer an
interest in real estate.
The Associates rely on the case of Chen v. Profit Sharing
Plan, 216 Ga. App. 878, 456 S.E.2d 237 (1995). In a case
involving a transaction similar to the one between SGE and the
investor entities, the Georgia court of appeals concluded that
the parties’ transaction did not involve a creation or transfer
of an interest in real estate. See Chen, 216 Ga. App. at 881,
456 S.E.2d at 241. Therefore, the court held that the UCC was
the applicable law. Id.
In Chen, Blankenship granted a security interest in his real
property to Chen. This security interest was evidenced by
Blankenship’s executing a promissory note and security deed to
Chen. Under the terms of the promissory note, Blankenship was to
pay Chen 120 monthly installments. Before Chen received the
first payment from Blankenship, Chen entered into an agreement
with the Profit Sharing Plan (“Plan”). In exchange for a loan
from Plan, Chen assigned it the first 60 payments under the
Blankenship note. Chen also assigned to Plan the Blankenship
note and security deed. In addition to these assignments, Chen
executed a document which provided that Plan would be the
servicing agent of the Blankenship note. Plan agreed to reassign
the note and security deed to Chen after Plan received the 60
payments. Id. at 879, 456 S.E.2d at 239.
Approximately two years after this agreement, Plan made
-9-
another loan to Chen whereby Chen pledged the Blankenship note
and security deed as collateral. Chen executed a transfer and
assignment of the note and security deed. Along with the
transfer and assignment, Chen also executed an addendum in which
Chen agreed to sell the remaining 60 installments to Plan. The
addendum contained a default provision allowing Plan to retain
the collateral in the event Chen failed to make the payments.
After making 18 payments to Plan, Chen defaulted on the second
loan and Plan sent a letter to Chen indicating its intent to
retain the collateral. Id. at 878-79, 456 S.E.2d at 239.
The central issue in Chen was whether Plan’s letter to Chen
was adequate notice under O.C.G.A. § 11-9-505(2). The trial
court found that the notice did satisfy the requirements of § 11-
9-505(2). Id. at 882, 456 S.E.2d at 241. On appeal, Plan argued
that Chen was not entitled to notice under § 11-9-505(2) because
pursuant to § 11-9-104(h), the transaction was excluded from
Article 9 of the UCC.
Reversing the trial court, the court of appeals rejected
Plan’s argument that its transaction with Chen was excluded from
Article 9. Id. at 881, 456 S.E.2d at 241. The court concluded
that this transaction did not involve the “creation” or
“transfer” of an interest in real estate, but instead involved
the “pledge of collateral or ‘lien’ against negotiable
instruments.” Id. The court explained that a “pledge creates a
lien on the property by the pledgee while legal title remains in
-10-
the pledgor.” Id. Simply stated, “possession passes, but not
title.” Id. As to the transfer and assignment that Chen
executed, the court analyzed the documents which were executed
and concluded that these acts were done so that Plan could hold
the security deed and note as security for the loan. Id.
Furthermore, “title to these instruments never vested in Profit
. . . [therefore,] [Plan] only acquired a lien against the
commercial paper, i.e., the security deed and note.” Id.
Accordingly, the court held that Article 9 of the Georgia
Commercial Code was applicable to the transaction. Id.
Chen is consistent with the vast majority cases and
commentators who have dealt with this issue. See Fogler v. Casa
Grande Cotton Finance Co. (In re Allen), 134 B.R. 373 (B.A.P. 9th
Cir. 1991); Ryan v. Zinker (In re Sprint Mortgage Bankers Corp.),
177 B.R. 4 (E.D.N.Y. 1995); First National Bank of Boston v.
Larson (In re Kennedy Mortgage Company), 17 B.R. 957 (Bankr.
D.N.J. 1982); Army National Bank v. Equity Developers, Inc., 245
Kan. 3, 774 P.2d 919 (1989); Rodney v. Arizona Bank, 172 Ariz.
App. 221, 836 P.2d 434 (1992); 4 James J. White & Robert S.
Summers, Uniform Commercial Code, § 30-7 at 45-49 (4th ed. 1995);
Jan Z. Krasnowiecki, et al., The Kennedy Mortgage Co. Case: New
Light Shed on the Position of Mortgage Warehousing Banks, 56 AM.
BANKR. L.J. 325 (1982).
Most of the above authorities base their reasoning on UCC §
9-102(3) and Official Comment 4 to that subsection which makes
4 The court notes that Georgia, unlike many other states, has not
adopted the Official Comments to the UCC. However, because O.C.G.A. §
11-9-102(3) was adopted verbatim from UCC § 102(3), due consideration
is to be given to the official comments. See Roswell Bank v. Atlanta
Utility Works, Inc., 149 Ga. App. 660, 255 S.E. 2d 124 (1979);
Warren’s Kiddie Shoppe, Inc. v. Casual Slacks, Inc., 120 Ga. App. 578,
171 S.E.2d 643 (1969).
-11-
Article 9 applicable to “realty paper.” See e.g., In re Allen,
134 B.R. at 375; White & Summers, supra, § 30-7 at 45. In
pertinent part, Official Comment 4 provides:
[T]he owner of Blackacre borrows $10,000 from his neighbor
and secures his note by a mortgage on Blackacre. [Article 9]
is not applicable to the creation of the real estate
mortgage. However, when the mortgagee in turn pledges this
note and mortgage to secure his own obligation to X,
[Article 9] is applicable to the security interest thus
created in the note.4
In following Comment 4 to UCC § 9-102(3), courts generally have
concluded that Article 9 governs perfection in a note secured by
a real estate mortgage and that no action needs to be taken with
regard to the mortgage; it is best “to concentrate on the note.”
Allen, 134 B.R. at 375; see also Rodney, 172 Ariz. App. at 223,
836 P.2d at 436 (holding “that a debt for purchase of real
property (and the promissory note that is evidence of that debt)
cannot be separated from the mortgage (or deed of trust) securing
that debt.”).
However, the analysis does not end there. The court agrees
with the commentators that in analyzing this issue, one must
recognize that the parties to these types of transactions live in
two separate worlds; the “mortgagor’s world” and the “mortgagee’s
world.” See Krasnowiecki, supra, at 334. As Krasnowiecki
-12-
explains:
[A]t one end are the interests of the mortgagor in the land
and those who take interests in the land from the mortgagor.
At the other, the interests of the mortgagee are evidenced
by the note and the mortgage. . . . At the mortgagor’s end,
the land can be sold subject to the mortgage (or with
assumption of the mortgage), or the mortgagor may pay off
the mortgage and secure a satisfaction of record and then
either keep the land or sell it. . . . At the mortgagee’s
end, the mortgagee . . . may sell the mortgage and note
outright to someone else or he may pledge it as a security
for [a] loan . . . .”
Krasnowiecki, supra, at 334. White & Summers have adopted
Professor Krasnowiecki’s view. See White & Summers, supra, § 30-
7 at 46.
The primary case upon which Krasowiecki bases his position
is the case of In re Kennedy Mortgage Company, 17 B.R. at 957.
Kennedy’s principal activity involved originating loans to
mortgage applicants. In addition to lending its own money to
these mortgage applicants, Kennedy loaned funds that it obtained
from various lenders. These funds were in the form of
“warehousing” lines of credit. One such lender was First
National Bank of Boston (“FNBB”). In exchange for the
warehousing line of credit from FNBB, Kennedy executed
assignments of mortgages to FNBB which were delivered to FNBB
along with the corresponding promissory notes. FNBB failed to
record the assignments. Id. at 958-59.
Because the notes were negotiable instruments which are
perfected by possession, the court held that FNBB was perfected
-13-
by taking possession. Id. at 965. Moreover, the court concluded
that FNBB’s failure to record the assignments were not fatal to
FNBB’s perfection. Id. The court explained that “FNBB has a
perfected lien on the note and the mortgage is only collateral to
the note. The mortgage without the debt is of no effect.” Id.
The court in Kennedy also addressed the second sentence of
Official Comment 4 to UCC § 9-102(3) which reads, “[t]his Article
leaves to other law the question of the effect on rights under
the mortgage of delivery or non-delivery of the mortgage or the
recording or non-recording of the mortgagee’s interest.” The
court explained that the “other law” refers to the real estate
recording laws which exist to “establish priorities and rights of
individuals who are affected by the chain of title or
encumbrances on the real estate.” Id. at 964. In other words,
the “other law” protects those in the “mortgagor’s world.” See
White & Summers, supra, § 30-7 at 48. The court noted that under
New Jersey real estate recording laws, mortgages and assignments
of mortgages may be recorded. Kennedy at 964. However, merely
because the real estate recording laws provide that assignments
may be recorded, “this fact does not affect the validity of an
assignment of a mortgage which has not been recorded.” Id.
Adopting the Kennedy approach as well as Krasnowiecki’s
analysis, the Kansas supreme court in Army National Bank
concluded that the recording statutes were intended to protect
-14-
the mortgagor and those dealing with the underlying land. 245
Kan. at 15, 774 P.2d at 928.
In Army National Bank, Equibank acquired nine notes which
were secured by nine corresponding mortgages on real property.
In exchange for a loan from the Bank of Kansas City (“BOKC”),
Equibank pledged the nine notes to BOKC and assigned the nine
mortgages to BOKC. Because BOKC was a creditor of the mortgagee,
not a creditor of the mortgagor, the court held that perfection
could be effected only by possession of the notes. Id. at 19,
774 P.2d at 930. If BOKC had been the creditor of the mortgagor,
the court noted that BOKC would have been required to record the
mortgage in order to have been perfected. Id. The court
explained that this approach is consistent with the purposes of
the recording acts, which is to protect the interests of the
mortgagor. Id.
The court notes the case of Peoples Bank of Polk County v.
McDonald (In re Maryville Savings & Loan), 743 F.2d 413 (6th Cir.
1984), clarified on reconsideration, 760 F.2d 119 (1985). In
this case, Peoples Bank loaned money to Maryville. As collateral
for this loan, Maryville assigned a mortgage and note to Peoples
Bank. Peoples Bank recorded the assignment, but failed to take
possession of the note. The bankruptcy court concluded that
Peoples Bank did not perfect its interest. In re Maryville, 27
B.R. 701, 709 (Bankr. E.D. Tenn. 1983). The district court,
however, reversed the bankruptcy court and held that since the
-15-
recording was accomplished, this was sufficient for perfection
under Tennessee law. In re Maryville, 31 B.R. 597, 599 (E.D.
Tenn. 1983).
Affirming in part and reversing in part, the Sixth Circuit
split the perfection of the mortgage from the perfection of the
note. Maryville, 743 F.2d at 415-16 (6th Cir. 1984). The court
concluded that Article 9 applied to Peoples Bank’s interest in
the promissory notes and, because it failed to take possession of
the notes, Peoples Bank’s security interest in the notes was
unperfected. Id. at 416-17. The court further concluded,
however, that Article 9 did not apply to Peoples Bank’s interest
in the mortgage. Therefore, because the assignments were
properly recorded, Peoples Bank was perfected as to the mortgage.
Id. at 417.
After the court’s ruling, the bankruptcy trustee received
funds from “non-foreclosure sources.” In an attempt to clarify
how these funds were to be handled, the trustee moved for
reconsideration. Maryville, 760 F.2d 119, 120 (6th Cir. 1985).
In a supplemental opinion, the court found that the funds paid to
the trustee were proceeds of the notes. Id. at 121. Because
Peoples Bank failed to perfect its interest in the notes, the
court held that the trustee must prevail. Id. The court noted
that the result “might be to the contrary” if the funds were
foreclosure funds stemming from the mortgage, an interest in
which Peoples Bank was perfected. Id.
-16-
A great deal of the majority line of cases are critical of
the result in Maryville. See, e.g., Allen, 134 B.R. at 375
(concluding that the result in Maryville “produces the worst of
both worlds. . . .”); Army National Bank, 245 Kan. at 18, 774
P.2d at 929-30 (reasoning that “a mortgage cannot exist
separately from the note it secures.”). In Army National Bank,
the court explained that splitting the perfection of the note and
the mortgage could create a situation whereby two separate
parties are simultaneously and respectively perfected in the note
and the mortgage. Id. This situation, in turn, may result in
the respective parties having a “note absent its security or a
mortgage which may be worthless.” Id.
White and Summers also criticize Maryville. See White &
Summers, supra, § 30-7 at 49. They propose that splitting the
perfection of the note and mortgage would effectively require the
mortgagor to pay twice to get free and clear title to his real
property. Id.
The court agrees with the reasoning of the majority line of
cases and commentators. In applying that reasoning to the facts
of this case, the court must first determine whether the
transaction occurred in “mortgagor’s world” or the “mortgagee’s
world.”
As to the transactions between SGE and the investor
entities, the court finds that these transactions occurred in the
world of SGE, the “mortgagee’s world.” Similar to the majority
5 Due to the vast number of individual investors in this adversary
proceeding, they have been designated either group “A”, “B”, or “C” in
the court docketing system. “Group C” consists of approximately 26
individual investor entities which are represented by the law firm of
Sims, Fleming & Spurlin, P.C.
-17-
line of cases, SGE pledged the mortgages and notes as collateral
for SGE’s own obligation to the investors. Although the
assignments of the mortgages and the Investor Contract described
the property and the individual borrower, the court nevertheless
finds that the transaction occurred in SGE’s world.
At oral arguments, however, “Group C”5 of the individual
investors addressed this very point. Given the fact that the
Investor Contract identifies a specific borrower and a specific
tract of land, Group C argues that each investor intended to fund
a particular loan, thereby taking an interest in a particular
parcel of real property. Furthermore, SGE was to return their
money to them if the loan to the individual borrower failed to
close. Group C argues that these facts distinguishes them from
the majority line of cases.
The court acknowledges that these distinctions do not seem
to be addressed by any of the cases. For example, in Chen, the
underlying real estate transaction between Chen and Blankenship
already had been consummated before Chen pledged the note to
Profit. Therefore, unlike the investors’ loan to SGE, Profit’s
loan to Chen was not contingent on whether Chen’s loan to
Blankenship closed. Likewise in Sprint Mortgage, there was no
-18-
attempt by the debtor/mortgagee to earmark the specific loans
made to the mortgagee to the specific mortgages that the debtor
assigned. Group C argues that these factual differences are
sufficient to distinguish them from the majority line of cases.
Although these are meritorious distinctions, the court finds
that, at all times, the investors’ interest was a money
investment interest. The language of the Investor Contract is
clear: “[t]he loan documents . . . shall be considered as
collateral or security for only for repayment of the debt owed by
[SGE] to [the investor].” (Doc. #559, Exh. “A” at ¶ 5)(emphasis
added). At all times, the investors were dealing with SGE and
never took an “interest[] in the land from the mortgagor.” See
Krasnowiecki, supra, at 334. Therefore, the court finds that
SGE’s assignment to the investors did not a create or transfer an
“interest in or lien on real estate . . . .” O.C.G.A. § 11-9-
104(h).
The fact that the assignments were or were not recorded has
no bearing on perfection. See Kennedy at 964. The Mills argue,
however, that O.C.G.A. § 44-14-60 is specific authority governing
the transfer of security deeds. They assert that this code
section “fully anticipates that an assignment should be
recorded.” (Mills’ Mem. In Opp’n, Doc. #617). The court agrees
with the Mills that § 44-14-60 provides the manner in which the
assignment of a security deeds may be recorded. However, as the
-19-
court in Kennedy recognized, “[t]he fact that [the recording
statutes provide that] assignments of mortgages may be recorded
does affect the validity of an assignment of a mortgage which has
not been recorded.” Kennedy at 964 (emphasis added). The
purpose and intent of the recording statutes are to protect those
in the “mortgagor’s world.” See, e.g., Army National Bank at 19.
These transactions occurred in the “mortgagee’s world” which is
outside the scope which § 44-14-60 is intended to protect.
Accordingly, the court rejects the Mills’ argument.
The court finds that Article 9 of the Georgia UCC applies to
the transactions between SGE and the investor entities. As a
result, the investor entities are perfected only to the extent to
which they have possession of promissory notes.
The court notes that because of the fraudulent conduct of
the prepetition debtor, very few if any of the investor entities
are in possession of the original promissory notes. Therefore,
the court realizes that this is an unfortunate result for the
investor entities. However, the court must apply the law based
on the facts which are presented.
The court finds that Article 9 also applies to the
transactions between SGE and the Associates. Like the
transactions with investor entities, the transactions between SGE
and the Associates occurred in the “mortgagee’s world.” Although
the notes were purchased by the Associates and not pledged to
6 This is the former version of § 11-3-302 as it read prior to July 1,
1996. Because all transactions in question took place prior to July
1, 1996, the pre-1996 version is the applicable law. See Choo Choo
Tire Services, Inc. v. Union Planters Nat’l Bank, 231 Ga. App. 346,
498 S.E.2d 799 (1998).
7 See supra note 6.
-20-
them like the investors, this distinction is immaterial. In
addition to pledging a mortgage and note, transactions within the
mortgagee’s world includes “sell[ing] the mortgage and note
outright. . . .” See Krasnowieki, supra, at 334.
The court now turns the issue of whether of the Associates
are holders in due course of the promissory notes which they
purchased from SGE. Pursuant to O.C.G.A. § 11-3-302:6
(1) A holder in due course is a holder who takes the
instrument:
(a) For value; and
(b) In good faith; and
(c) Without notice that it is overdue or has been
dishonored or of any defense against or claim to it on
the part of any person.
O.C.G.A. § 11-3-302(1).
A “[h]older [is defined as] a person who is in possession of a
document of title or an instrument . . . .” O.C.G.A. 11-1-
201(20).7 Therefore, to the extent that the Associates are in
possession of the notes which they purchased from SGE, the court
finds that the Associates are “holders” as defined under Georgia
law. The court will now examine the three other requirements
under § 11-3-302(1).
-21-
A holder takes an instrument for value “[t]o the extent that
the agreed consideration has been performed or that he acquires
a security interest in or a lien on the instrument otherwise than
by legal process. . . .” O.C.G.A. § 11-3-303(a).
A holder must also take the instrument in good faith.
O.C.G.A. § 11-3-302(1)(b). Good faith is defined as “honesty in
fact in the conduct or transaction concerned.” O.C.G.A. § 11-1-
201(19). To constitute bad faith, a purchaser must have acquired
the instrument “with actual knowledge of its infirmity or with a
belief based on the facts or circumstances as known to [the
purchaser] that there was a defense or [the purchaser] must have
acted dishonestly.” Citizens & Southern Nat’l Bank v. Johnson,
214 Ga. 229, 231, 104 S.E.2d 123, 126 (1958); Commercial Credit
Equipment Corp. v. Reeves, 110 Ga. App. 701, 704, 139 S.E.2d 784,
787 (1964).
Lastly, a holder must take the instrument without notice of
default or defense. O.C.G.A. § 11-3-302(1)(c).
A person has ‘notice’ of a fact when:
(a) He has actual notice of it; or
(b) He has received a notice or notification of it; or
(c) From all the facts and circumstances known to him
at the time in question he has reason to know that it
exists.
O.C.G.A. § 11-1-201(25). See also Hopkins v. Kemp Motors Sales,
Inc., 139 Ga. App. 471, 473, 228 S.E.2d 607, 609 (1976)(holding
that knowledge of a fact as defined in the UCC is actual
-22-
knowledge).
In this case, the Associates, the Committee, and several of
the investor entities have stipulated that the Associates
collectively paid SGE approximately $5.36 million for
approximately 306 loans. (Doc. #559 at ¶¶ 23-25). Therefore, the
court finds that the Associates took the notes for value.
As to good faith and notice, these issues are not quite as
clear. Along with their brief in support of their original
motion for partial summary judgment, the Associates filed
affidavits executed by Michelle A. Bryan, Marilyn D. Britwar,
Kathleen A. Timkin, and Kathleen A. Larson. (Doc. #449, Exhs. “A”
& “C”-“E”). Among other things, these affidavits attested to the
Associates’ good faith and lack of notice that the notes which
they purchased from SGE were subject to other claims.
However, because these affidavits were not originals, but
were copies of affidavits submitted in another court action, SGE
objected to their being part of the record. On May 17, 2001, the
court entered an order sustaining SGE’s objection and disallowing
the affidavits. (Doc. #532). Remarkably, other than these
disallowed affidavits, the Associates never filed any supporting
documentation attesting to their good faith and lack of notice.
Furthermore, in the Committee’s response to the Associates’
original motion, the Committee submitted affidavits executed by
8 The court notes that Affiant Sanford A. Cohn is an investor/claimant
in this case and Affiant Kevin B. Buice is an attorney of record for
numerous parties in interest. (See Exh. “A” at ¶ 11; Exh. “B” at ¶ 2).
-23-
Sanford A. Cohn and Kevin B. Buice.8 (Doc. #489, Exhs. “A” &
“B”). These affidavits attest to a lack of good faith and notice
on behalf of the Associates in their purchase of the notes from
SGE. Although SGE did not submit any evidence, SGE asserts that
issues of material fact exist as to good faith and notice. (Doc.
#604 at pp. 3).
The court agrees with SGE and finds that issues of material
fact do exist as to good faith and notice. Under Federal Rule of
Civil Procedure 56, the moving party bears the initial burden of
demonstrating the absence of any genuine issue of material fact.
See Celotex, 477 U.S. at 324; see also Clark v. Coats & Clark,
Inc., 929 F.2d 604, 608 (11th Cir. 1991)(holding that the moving
party has the burden of establishing its right of summary
judgment). In this case, the Associates have failed to carry
their burden. Therefore, the court finds that issues of material
fact exist as to whether the Associates took the notes which they
purchased from SGE in good faith and without notice of default or
defense.
The court will render a separate memorandum opinion on SGE’s
motion for summary judgment.
CONCLUSION
The UCC is the applicable law to the transactions between
-24-
the Associates, the investor entities, and SGE. None of these
transactions involved the creation of an interest in real estate.
Therefore, the court will grant the Associates’ motion for
partial summary judgment as to that issue only. Regarding the
issue of whether the Associates are holders in due course of the
notes which they purchased from SGE, the court finds that issues
of material fact exist as to the elements of good faith and
notice. The court will deny the Committee’s motion for partial
summary judgment.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this ____ day of November, 2001.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

WILLIE N. SCOTT

June 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
WILLIE N. SCOTT : CASE NO. 01-41914
BESSIE M. SCOTT, ::
CHAPTER 13
Debtors. :::
WILLIE N. SCOTT :
BESSIE M. SCOTT, ::
Movant, ::
vs. ::
WELLS FARGO HOME MORTGAGE, :
INC., ::
Respondent. :
MEMORANDUM OPINION
On April 15, 2002, the court held a hearing on the motion of
Willie and Bessie Scott (“Debtors”) to compel Wells Fargo Home
Mortgage, Inc. (“Respondent”) to pay the premium on a mortgage
insurance policy. At the conclusion of the hearing, the court
took under advisement the issue of whether Debtors are entitled
to recover attorney fees from Respondent. The parties were given
an opportunity to submit briefs. After considering the evidence,
the parties’ oral arguments and briefs, and the applicable
statutory and case law, the court will deny Debtors’ request for
attorney fees.
1 Although the parties do not dispute that Respondent acquired the Mortgage
after 1995, the court notes that Debtors’ schedules reflect that Debtors
incurred their indebtedness to Respondent in 1989. (See Schedule “D”).
-2-
FACTS
On or about February 4, 1987, Debtors purchased real
property located at 2405 Dawson Street, Columbus, Georgia, 31903
(“property”). This purchase was financed by a loan from Georgia
Federal Bank, FSB. Debtors granted to Georgia Federal Bank, a
security interest in the property by executing a Security Deed.
(See Debtors’ Motion, Doc. #12, Exh. “A”). The mortgage was
later acquired by First Union Mortgage Corporation (“First
Union”). Sometime after 1995, Respondent acquired the mortgage.
Apparently, these transfers of Debtors’ mortgage to First Union
and subsequently, to Respondent were a result of an assignment or
these entities becoming successors in interest.1
On or about September 27, 1995, Debtors purchased a Disaster
Mortgage Protection Policy (“DMP”) from Ace USA (“Ace”). The DMP
provided for a payoff of the mortgage in the event of certain
defined disasters which rendered the property uninhabitable. The
premium for the DMP was $3.23 per month.
On August 1, 2001, Debtors filed a voluntary petition under
Chapter 13 of the Bankruptcy Code (“Code”). In a letter dated
November 30, 2001, Ace notified Debtors that effective January 1,
2002, the DMP would be canceled for non-payment of premiums. (See
-3-
Doc. #12, Exh. “B”).
On December 12, 2001, Debtors filed a motion to compel
Respondent to pay the DMP premium. On January 16, 2002,
Respondent filed a response. Although Debtors had already filed
their motion, they sent a letter to Respondent indicating that
they would have to “seek a ruling” from the court if Respondent
did not reinstate the DMP. (See Doc. #17, Exh. “2”). After
several continuances, the court held a hearing Debtors’ motion on
April 15, 2002.
According to Debtors, the Security Deed requires Respondent
to remit payments to Ace from escrow. Debtors argue that
Respondent’s failure to make these payments creates a false
mortgage default. Therefore, Debtors allege that this conduct is
an attempt by Respondent to collect on a prepetition debt.
Respondent, however, contends that it had a right to
terminate payments to Ace in spite of the Debtors’ bankruptcy.
Respondent argues that it terminated payment to Ace because of
Debtors post-petition default, not for Debtors failure to make
payments on a prepetition debt. Respondent also asserts that it
has no duty to pay DMP premiums through escrow because the
“mortgage insurance payments” to which the Security Deed refers
do not apply to the DMP payments. (Doc. #12, Exh. “A”, para. 2).
Basically, the DMP was not an item required to be paid through
escrow. The DMP was a policy which Debtors voluntarily
purchased. Had the DMP been a requirement pursuant to the
-4-
Security Deed as Debtors assert, the policy would have been in
effect since 1987, when the Security Deed was originally
executed.
On or about March 1, 2002, Respondent reinstated the DMP by
paying the premium. Therefore, Debtors concede that their motion
is now moot. However, the issue of whether Debtors are entitled
to attorney fees has not been resolved.
Debtors argue that bringing this motion and litigation were
the only means they had to force Respondent to reinstate the DMP.
Accordingly, Debtors contend that they are entitled to recover
$921.78 in attorney fees from Respondent. This amount represents
7.2 hours at $125.00 per hour plus out-of-pocket expenses of
$21.78.
Respondent argues, however, that there was no need for
Debtors to bring this motion. Debtors never contacted Respondent
upon receiving the notice of cancellation to explain that postpetition
payments were to be funded through the Chapter 13
Trustee’s office. Had Debtors attempted such contact, Respondent
submits that this issue could have been resolved easily without
litigation. Furthermore, it is agreed that neither the contract
nor the Code authorizes attorney fees in a motion to compel
proceeding. Accordingly, Respondent argues that Debtors should
not be allowed to recover attorney fees.
-5-
DISCUSSION
Under the “American Rule,” “the prevailing litigant is
ordinarily not entitled to collect a reasonable attorneys’ fee
from the loser.” Alyeska Pipeline Service Co. v. Wilderness
Society, 421 U.S. 240, 247 (1975). However, wilful violation of
a court order, bad faith or oppressive conduct, or recovery of a
common fund for the benefit of others may operate as an exception
to the American Rule. See id. at 562 n.6. Also, the Court has
recognized statutory or contractual provisions which authorize
attorney fees to the prevailing party as exceptions to the
American Rule. Id.
In this case, the only possible exception is whether there
is an applicable statute authorizing attorney fees. Therefore,
the court must determine whether federal or state law would
govern. This inquiry depends on whether the underlying dispute
involves a question of state contract law or solely a question of
federal bankruptcy law. See BankBoston v. Sokolowski (In re
Sokolowski), 205 F.3d 532, 535 (2d Cir. 2000); see also Johnson
v. Righetti (In re Johnson), 756 F.2d 738, 741 (9th Cir.
1985)(noting that state law applies with respect to attorney fees
in breach of contract disputes).
Because this issue involves a dispute over Respondent’s
obligation pursuant to a provision in the Security Deed, the
court finds that this issue amounts to a breach of contract
-6-
dispute. Because the Security Deed was executed in Georgia and
concerns Georgia real estate, Georgia law is applicable.
Debtors rely on O.C.G.A. sections 13-6-9 and 13-6-11.
O.C.G.A. § 13-6-9 provides that “[a]ny necessary expense which
one of two contracting parties incurs in complying with the
contract may be recovered as damages.” Typically, Georgia courts
have interpreted this code section to apply to those “reasonable
and necessary costs” of fulfilling the contract. See Gainesville
Glass Company v. Don Hammond, Inc., 157 Ga. App. 640, 642, 278
S.E.2d 182, 185 (1981); (citing Crawford & Assoc., Inc. v.
Groves-Keen, Inc., 127 Ga. App. 646, 194 S.E.2d 499 (1972). This
means the measure of damages suffered by the failure of one party
to perform its part to the other party. See id. (citing State
Highway Dep’t v. Knox-Rivers Constr. Co., 117 Ga. App. 453, 160
S.E.2d 641 (1968).
The pertinent question is whether “damages” in O.C.G.A. §
13-6-9 encompasses attorney fees, however, the court does not
need to get to that inquiry. As the court in Gainesville Glass
held, the plaintiff has the burden of proving that the items of
expense it incurred were necessary under the contract. See id.
As Respondent points out in its brief, Debtors have failed to
show that Respondent even had a duty under the Security Deed to
pay the premium. In the absence of evidence that Respondent had
such an obligation under the Security Deed, the court finds that
Debtors have failed to meet their burden under this subsection.
-7-
The other subsection on which Debtors rely provides that:
The expenses of litigation generally shall not be allowed as
a part of damages; but where the plaintiff has specially
pleaded and has made prayer therefor and where the defendant
has acted in bad faith, has been stubbornly litigious, or
has caused the plaintiff unnecessary trouble and expense,
the jury may allow them.
O.C.G.A. § 13-6-11. The law is clear that an award of attorney
fees under this statute are “ancillary and recoverable only where
other elements of damages are recoverable.” Barnett v. Morrow,
196 Ga. App. 201, 202, 396 S.E.2d 11, 12 (1990); See also Cleary
v. Southern Motors, et al., 142 Ga. App. 163, 165, 235 S.E.2d
623, 625 (1977); Willis v. Kemp, 130 Ga. App. 758, 761, 204
S.E.2d 486, 490 (1974).
The court acknowledges those cases which allow the recovery
of attorney fees in equity where no monetary damages were
recovered but equitable relief such as an injunction or specific
performance was granted. See Clayton v. Deverell, 257 Ga. 653,
655, 362 S.E.2d 364, 366 (1987); Golden v. Frazier, 244 Ga. 685,
687, 261 S.E.2d 703, 705 (1979); Adams v. Cowart, 224 Ga. 210,
215, 160 S.E.2d 805, 809 (1968).
However, in those cases, the plaintiffs prevailed and
obtained the equitable relief which they sought. “There is no
authority for the proposition that merely seeking equitable
relief, which for whatever reason is unobtainable, entitles one
to recovery under O.C.G.A. § 13-6-11.” Barnett, 196 Ga. App. at
203, 396 S.E.2d at 13.
-8-
In the instant case, there is no evidence demonstrating that
Debtors would have prevailed in their motion to compel. Merely
because Debtors sought such relief which became moot when
Respondent agreed to reinstate the premium does not amount to
prevailing as defined under the cases.
As to the other arguments under O.C.G.A. § 13-6-11 asserted
by Debtors, they are likewise unpersuasive. Debtors argue that
Respondent was stubbornly litigious and there was no bona fide
dispute as to Respondent’s obligation under the Security Deed.
First, a refusal to pay a disputed claim or debt is not the
equivalent of being stubbornly litigious. See Gordon v. Ogden,
154 Ga. App. 641, 642, 269 S.E.2d 499, 501 (1980)(holding that a
refusal to pay a disputed claim is not equivalent to stubborn
litigiousness nor does it amount to unnecessary trouble and
expense); Palmer v. Howse, 133 Ga. App. 619, 621, 212 S.E.2d 2,
4 (1974).
In the case before the court, Respondent merely refused to
pay a disputed claim. The evidence demonstrates that there was
a genuine dispute as to Respondent’s liability under the Security
Deed. Therefore, Respondent was merely refusing to pay the
premium because it disputed that it had an obligation to do so.
Accordingly, the court finds that Respondent was not being
stubbornly litigious in this regard.
As to Debtors’ assertion that there was no bona fide
dispute, this is contrary to the evidence. At the motion
-9-
hearing, Respondent argued that the language in the Security Deed
was not applicable to the policy at issue. Therefore, a bona
fide dispute remained as to whether Respondent had an obligation
under the Security Deed to reinstate the policy. The fact that
Respondent later agreed to pay the premium and reinstate the
policy does not indicate that there was an absence of a bona fide
dispute. Based on the evidence, the court finds that there was
a bona fide dispute.
CONCLUSION
The court finds that neither O.C.G.A. § 13-6-9 nor O.C.G.A.
§ 13-6-11 authorize Debtors to recover attorney fees. Under §
13-6-9, Debtors have failed to demonstrate that Respondent had a
duty to pay the premium. Therefore, Debtors have failed to meet
their burden to show that the motion to compel was a necessary
expense.
The court also finds that Respondent was not stubbornly
litigious as defined under § 13-6-11. Accordingly, the court
will deny Debtors request to recover attorney fees from
Respondent.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this _____ day of June, 2002.
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____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

PICKLE LOGGING, INC

November 18, 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
ALBANY DIVISION
IN RE: ::
CASE NO. 02-10824
PICKLE LOGGING, INC., ::
CHAPTER 11
Debtor. ::
DEERE CREDIT, INC., ::
Movant, ::
vs. ::
PICKLE LOGGING, INC., ::
Respondent. :
MEMORANDUM OPINION
On October 10, 2002, the court held a hearing on the Motion
of Deere Credit, Inc. to Reconsider Order on Motion for Adequate
Protection and to Reconsider Order on Motion to Determine Secured
Status, both orders dated September 3, 2002. At the conclusion of
the hearing, the court took the matter under advisement. After
considering the evidence presented at the hearing on August 16,
2002 and the continued hearing on August 21, 2002 hearing, 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.
-2-
FACTS
Pickle Logging, Inc. (“Debtor”) is an Americus, Georgia based
company doing business in the tree logging industry. In an effort
to cure an arrearage to Deere Credit, Inc. (“Movant”), Debtor
refinanced eight pieces of equipment. The refinancing was done
with Movant.
On April 18, 2002, Debtor filed for Chapter 11 bankruptcy
protection. Prior to the bankruptcy filing, in addition to the
refinancing mentioned above, Debtor had put the same eight pieces
of equipment, as well as other assets, up as collateral in
transactions with other creditors. Because there were multiple
security interests in the eight pieces of equipment, Debtor filed
motions to determine the secured status of a number of different
creditors. After consent orders resolved much of the conflict
between secured creditors as to priority and extent of security
interests, the final issue remained as to the value of the eight
pieces of equipment. The values assigned to each piece of
equipment would determine the amount due to the secured creditors
for adequate protection.
At a hearing held on August 16, 2002 and the continued hearing
on August 21, 2002 to determine the value of the eight pieces of
equipment, the present issue was raised: whether Movant had a
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perfected security interest in one specific piece of equipment, a
548G skidder serial number DW548GX568154 (“548 G skidder”), which
had been mislabeled in both the financing statement and the
security agreement as a 648G skidder, serial number DW648GX568154.
After hearing testimony from expert witnesses that a 548G skidder
is substantially different in appearance, performance, and price
from a 648G skidder, the court held that Movant did not have a
perfected security interest in the 548G skidder because of the
mislabeling. Therefore, Movant was an unsecured creditor as to the
548G skidder. The court did not assign a value to the 548G skidder
for adequate protection payments. Movant has asked the court to
reconsider its September 3, 2002 orders regarding adequate
protection payments and the secured status of Movant as to the 548G
skidder.
Movant contends that the mislabeling is not seriously
misleading because it is off by only one digit. Movant urges that
a person of ordinary business prudence would be put on notice to
inquire further about the 548G skidder despite the mislabeling.
Therefore, Movant has a perfected security interest in the 548G
skidder and would not be subordinate to Debtor.
Debtor argues first that the 548G skidder owned by Debtor is
not listed in the security agreement or the financing statement,
therefore Movant does not have a security interest in the 548G
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skidder. Furthermore, Debtor argues that a person of ordinary
business prudence would know that a 548G skidder differs
substantially from a 648G skidder. Debtor contends that the
mislabeling is seriously misleading because of the difference in
the two models. Debtor argues that there is nothing patently
erroneous about the serial number listed on the security agreement
or the financing statement to put a person of ordinary business
prudence on notice to inquire further. Finally, Debtor contends
that, in order for a secured party to have a security interest in
a piece of collateral, the security agreement must include a valid
description of the collateral. Under contract law, Movant might
have the right to reform the contract. However, because of the
Chapter 11 bankruptcy proceeding, this remedy is not available to
Movant. Even with reformation, Debtor, with the status of a lien
creditor, would have higher priority than Movant would receive with
a reformed security agreement.
CONCLUSIONS OF LAW
Under the Bankruptcy Code (“Code”), a debtor-in-possession has
the same rights and powers as a trustee. See 11 U.S.C. § 1107.
Additionally, under the “strong arm” provision of 11 U.S.C. §
544(a)(1), a debtor-in-possession acquires the status of a
hypothetical lien creditor, deemed to be perfected as of the filing
date of the bankruptcy petition. 11 U.S.C. § 544(a)(1); see also
-5-
First American Bank & Trust Company of Athens, Georgia v. Harris
(In re Stewart), 74 B.R. 350, 353-354 (M.D. Ga. 1987).
Under Georgia law, the definition of a lien creditor includes
a trustee in bankruptcy. See O.C.G.A. § 11-9-102(a)(53)(C). Since
a debtor-in-possession acquires the same rights and powers as a
trustee, a debtor-in-possession has the status of a lien creditor
under Georgia law as well. See generally, WWG Industries, Inc. v.
United Textiles, Inc. (In re WWG Industries, Inc.), 772 F.2d 810,
811-812 (11th Cir. 1985). Further, under Georgia law, a party with
an unperfected security interest is subordinate to a lien creditor.
See O.C.G.A. § 11-9-317(a)(2)(B). The question is whether Movant’s
security interest in the 548G skidder is perfected despite the
mislabeling on the security agreement and the financing statement.
Pursuant to O.C.G.A. § 11-9-203(b)(3)(A), a security interest
in collateral is not enforceable against the debtor or third
parties unless the debtor has signed, executed, or otherwise
adopted a security agreement that contains a description of the
collateral. O.C.G.A. § 11-9-203(b)(3)(A); see also O.C.G.A. § 11-9-
102(a)(7). The description of the collateral in the security
agreement and the financing statement, if required, must comport
with O.C.G.A. § 11-9-108(a). O.C.G.A. § 11-9-108(a); see also
O.C.G.A. § 11-9-504(1). The description of collateral is
sufficient if it reasonably identifies what is described. See
-6-
O.C.G.A. § 11-9-108(a). “The question of the sufficiency of [a]
description of [collateral] in a [recorded document] is one of
law….” Bank of Cumming v. Chapman, 245 Ga. 261, 264 S.E.2d 201
(1980), quoting First National Bank of Fitzgerald v. Spicer, 10 Ga.
App. 503(1), 73 S.E. 753 (1911).
Any number of things could be used to describe collateral and
satisfy O.C.G.A. § 11-9-108(a). A physical description of the
collateral, including or excluding a serial number, could be used
so long as it “reasonably identifies what is described.” O.C.G.A.
§ 11-9-108(a). The description merely needs to raise a red flag
to a third party indicating that more investigation may be
necessary to determine whether or not an item is subject to a
security agreement. See Abney v. I.T.T. Diversified Credit
Corporation (In re Environmental Electronic Systems, Inc.), 11 B.R.
965, 967 (N.D. Ga. 1981). A party does not lose its secured status
just because the description includes an inaccurate serial number.
See Yancey Brothers Company v. Dehco, Inc., 108 Ga. App. 875, 877,
134 S.E.2d 828, 830 (1964). However, if the serial number is
inaccurate, there must be additional information that provides a
“key” to the collateral’s identity. Id.
Here, the description in the security agreement and the
financing statement are identical. (See Movant’s Ex. 1). Both
documents list a 648G skidder with the serial number DW648GX568154.
-7-
(See id.). There is nothing obviously wrong with the model number
or the serial number. 648G is a model number for one type skidder
sold by Movant. (See id.). The serial number listed for the
disputed skidder is in accordance with other serial numbers issued
by Movant. (See id.). The insurance value listed on the security
agreement for the disputed skidder is only $10,000 less than the
648G skidder, serial number DW648GX564990 (“648G-4990 skidder”).
(See id.). With the $35,000 difference in insurance values between
the 648G-4990 skidder and the 648G skidder, serial number
DW648GX573931 (“648G-3931 skidder”), a $10,000 difference in
insurance values would not raise a red flag. (See id.).
According to testimony at the August 16, 2002 hearing, Debtor
owned more than one of Movant’s skidders, including at least two
548G skidders and at least two 648G skidders. There is nothing in
either the financing statement or the security agreement that
raises a red flag to a third party. A potential purchaser of the
548G skidder in dispute here could easily assume that the skidder
is not covered by either the security agreement or the financing
statement.
If just the model number was incorrect or if just the serial
number was incorrect, the result may be different. It is apparent
from the other items listed on the security agreement and the
financing statement that the model number is reflected in the
-8-
serial number. If the model number was not repeated in the serial
number, then it would be apparent that something was wrong with one
of the two numbers. At a minimum it should raise a red flag to a
person of ordinary business prudence that further investigation is
necessary. However, with both of the numbers reflecting a 648G
skidder, there is nothing to indicate that there was a mistake.
Therefore, the court’s order dated September 3, 2002 will not
be changed. The 548G skidder is misdescribed in both the security
agreement and the financing statement. The rights of Debtor, as
a hypothetical lien creditor, are superior to the rights of Movant.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this _____ day of November, 2002.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

NOAH J. PETERSON

June 3, 2004

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
NOAH J. PETERSON, : CASE NO. 03-40732
CONNIE C. PETERSON, : CHAPTER 13
:
Debtors. ::
UNITED STATES DEPARTMENT OF : CONTESTED MATTER
TREASURY, INTERNAL REVENUE :
SERVICE, ::
Movants, ::
vs. ::
NOAH J. AND CONNIE C. PETERSON, ::
Repsondents. ::
NOAH J. AND CONNIE C. PETERSON, ::
Movants, ::
vs. ::
UNITED STATES DEPARTMENT OF :
TREASURY, INTERNAL REVENUE :
SERVICE, ::
Respondents. ::
MEMORANDUM OPINION
On April 6, 2004, the Court held a hearing on the Motion
of U.S.A./I.R.S. for Relief from the Automatic Stay to
Exercise the Right of Setoff and the Motion of Noah J. and
Connie C. Peterson (“Debtors”) for Contempt against the United
-2-
States Department of Treasury and the Internal Revenue Service
(“U.S.A./I.R.S.”). At the request of the parties, at the
conclusion of the hearing, the court took the matter under
advisement. The Court has considered the parties’ briefs and
oral arguments, as well as applicable statutory and case law.
For the reasons that follow, the Court finds that
U.S.A./I.R.S. did not waive its right of setoff.
CONCLUSIONS OF FACT
Both parties are in agreement regarding the facts.
Debtors filed a Chapter 13 Bankruptcy petition on March 14,
2003. On July 18, 2003, U.S.A./I.R.S. filed a proof of claim
in the amount of $68,416.82. Debtors filed their 2002 tax
return on or about October 28, 2003, which entitled them to a
refund in the amount of $4,226.00. On March 10, 2003,
U.S.A./I.R.S. filed its Motion for Relief from the Automatic
Stay to Exercise Right of Setoff. On March 15, 2003, Debtors
filed their Motion for Contempt against U.S.A./I.R.S.
CONCLUSIONS OF LAW
Debtors concede that U.S.A./I.R.S. has satisfied all of
the requirements under 11 U.S.C. § 553 for setoff. 11 U.S.C.
§ 553 (1993 & Supp. 2003). However, Debtors now argue that
U.S.A./I.R.S. waived its right of setoff because it did not
assert a claim to a setoff in its proof of claim. Debtors
-3-
cite to Tavormina v. ITT Comm. Fin. Corp. (In re Aquasport,
Inc.), 115 B.R. 720 (Bankr. S.D. Fla. 1990) as support for
this contention. Aquasport, 115 B.R. at 721-722.
U.S.A./I.R.S. responded by arguing that the Aquasport case is
factually distinct from the case before the Court. Id. at 721.
Further, U.S.A./I.R.S. cited to other cases that support its
position that failure to assert the right of setoff in the
proof of claim did not waive its right of setoff. See Weems v.
U.S. (In re The Custom Ctr., Inc.), 163 B.R. 309, 316-317
(Bankr. E.D. Tenn. 1994); In re Sound Emporium, Inc., 48 B.R.
1, 2 (Bankr. W.D. Tex. 1984) aff’d, 70 B.R. 22 (W.D. Tex.
1987).
Unfortunately for Debtors, their argument is not
persuasive because the case they cited in support of their
argument was reversed on that specific point by the district
court. See In re Aquasport, 155 B.R. 245, 247 (S.D. Fla.
1992), aff’d, ITT Comm. Fin. Corp. v. Tavormina, 985 F.2d 579
(11th Cir. 1993). The district court did uphold the
bankruptcy court’s decision that the creditor was not entitled
to a setoff. See id. at 249. However, the district court
specifically stated, “A review of these arguments, the
pertinent portions of the record, and the relevant case law
leads this Court, in accordance with the standard of appellate
-4-
review that this Court must follow, to a conclusion at odds
with the one reached by the bankruptcy court. In effect, this
Court determines that ITT did not procedurally waive its right
to setoff in the instant case.” Id. at 247 (emphasis added).
Further, the Court finds the Custom Ctr. decision, cited
by U.S.A./I.R.S., to be more persuasive. Custom Ctr., 163 B.R.
at 316-317. The court in Custom Ctr. stated that “The
bankruptcy statutes and the rules of procedure do not require
a rule that a creditor waives setoff by failing to assert it
in the original proof of claim. However, setoff can be denied
on equitable grounds that would normally justify denying
setoff.” Id. at 316 (citations omitted). The court went on to
state, “The creditor’s actions or failure to act during the
bankruptcy case may give rise to equitable grounds for denying
setoff.” Id. In analyzing the case law on point, the court
observed that other courts’ decisions often did not focus on
the failure to assert a right of setoff in a proof of claim,
but on the creditor’s continued failure to assert the setoff
as the bankruptcy case progressed. See id. The court
concluded that there is “no hard and fast rule that a creditor
waives setoff by failing to assert it in the creditor’s
original proof of claim.” Id. at 317.
-5-
Here, U.S.A./I.R.S. was unaware of Debtors’ entitlement
to a refund until Debtors’ filed their 2002 tax return, which
occurred after U.S.A./I.R.S. filed its proof of claim. In
fact, Debtors did not file their 2002 tax return until after
the 180 day bar date for government entities to file a proof
of claim. U.S.A./I.R.S. filed its Motion for Relief from the
Automatic Stay to Excise Right of Setoff once it became aware
of Debtors’ 2002 tax refund. None of U.S.A./I.R.S.’s actions
can be construed to be a waiver of its right of setoff.
Therefore, the Court finds in favor of U.S.A./I.R.S. The
Court grants U.S.A./I.R.S.’s Motion for Relief from the
Automatic Stay to Exercise Right of Setoff and denies Debtors’
Motion for Contempt Against U.S.A./I.R.S. An order in
accordance with this Memorandum Opinion will be entered.
DATED this _____ day of June, 2004.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY
JUDGE

JOHNSON, ARLENE J.,

December 6, 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
CASE NO. 02-41260
JOHNSON, ARLENE J., : CHAPTER 13
Debtor. :
:
JOHNSON, ARLENE J., : ADVERSARY PROCEEDING
Plaintiff, : NO. 02-4026
:
vs. :
:
SPEEDEE CASH OF COLUMBUS, INC., :
Defendant. :
:
SPEEDEE CASH OF COLUMBUS, INC., :
Movant. :
MEMORANDUM OPINION
On November 29, 2002, the court held a hearing regarding the
Motion of Speedee Cash of Columbus, Inc. (“Defendant”) for Summary
Judgment. At the conclusion of the hearing, the court took the
matter under advisement. After considering Defendant’s brief and
uncontroverted Stipulation of Uncontested Facts, both parties’ oral
arguments, and the applicable statutory and case law, the court
makes the following conclusions of law.
FACTS AND PROCEDURAL HISTORY
The facts for the most part are not in dispute here. On
January 20, 2001, Arlene J. Johnson (“Debtor”) entered into a
contract with Defendant pursuant to a title pawn transaction.
Debtor pledged to Defendant the Certificate of Title to a 1992
-2-
Lexus 300 ES (“Lexus”) in exchange for $1,000. The contract
indicated that the pawn was for a period of thirty days, which
could be extended in thirty-day increments if mutually agreed upon.
However, the maturity date listed on the contract was March 21,
2001, a period of approximately sixty days. The first thirty days
of the pawn contract were “free,” after which the fee was 25% of
the total loan amount per month. Additionally, the contract
provided for a ten-day grace period after the maturity date during
which Defendant promised not to sell the property and Debtor was
entitled to redeem the property by paying the outstanding balance,
plus any fees and charges incurred. Debtor did not pay Defendant
in full by the maturity date. Instead, Debtor made payments and
extended the pawn contract through January of 2002.
Debtor filed her first Chapter 13 petition on December 26,
2001. Pursuant to 11 § U.S.C. 362, an automatic stay was in
effect. Defendant did not attempt to recover the Lexus while the
stay was in effect. During the pendency of Debtor’s first Chapter
13 case, Defendant did not receive any monies from Debtor or the
Chapter 13 trustee. However, after Debtor’s first Chapter 13 case
was dismissed on April 29, 2002 and the automatic stay was lifted,
Defendant repossessed Debtor’s Lexus using the self-help procedure
allowed by Georgia law. Debtor had made no payment to Defendant
since November 2001.
-3-
On May 31, 2002 Debtor filed her second Chapter 13 petition
and subsequently filed this adversary proceeding. After an
emergency hearing for turnover of the Lexus on June 3, 2002, the
court ordered Defendant to return the Lexus to Debtor upon proof
of full insurance naming Defendant as loss payee. By June 7, 2002,
Debtor had paid $1,000 toward the balance due. On July 2, 2002,
Defendant filed an answer and counter-claim. The parties proceeded
with this adversary proceeding for final determination of the
complaint and counter-claim. On October 15, 2002, Defendant filed
the motion for summary judgment on the complaint and counter-claim
that is currently before the court.
Defendant contends that it has shown that there is no genuine
issue of material fact and that it is entitled to summary judgment
as a matter of law. Under the Georgia Pawnshop Act (“Act”),
Defendant had all possessory and legal ownership rights as of the
day of repossession. Therefore, Debtor had no right to bring the
Lexus back into the bankruptcy estate. Pursuant to O.C.G.A. § 44-
14-403(b)(3), Georgia law transferred ownership of the Lexus to
Defendant when Debtor failed to redeem the car within the grace
period. Defendant argues that the Lexus is not part of Debtor’s
estate and should be returned to Defendant.
Debtor argues that summary judgment should not be granted to
Defendant for three reasons. First, Defendant has failed to prove
-4-
that it is a licensed pawn dealer in the state of Georgia, which
is required before Defendant is entitled to special treatment under
the Act. Second, since the Act is in derogation of the common law,
the Act must be strictly complied with before a pawn dealer can
receive the special treatment provided for by the Act. The
contract did not comply with the Act in two different ways: 1) the
length of the initial contract was sixty days; and 2) the grace
period listed on the contract was for ten days, not thirty days as
required by Georgia law. Since the Act’s contractual requirements
were not strictly complied with, Defendant should not receive the
favored treatment that pawn dealers typically receive under the
Act. Third, the Act is in violation of the Federal Constitution
because it does not afford adequate due process protections to
Debtor.
CONCLUSIONS OF LAW
Under Federal Rule of Civil Procedure 56, applicable to
Bankruptcy proceedings under Bankruptcy Rule 7056, a party is
entitled to summary judgment if there is no genuine issue of
material fact and the moving party is entitled to judgment as a
matter of law. FED. R. CIV. P. 56, FED. R. BANKR. P. 7056. The
parties have agreed that there is no genuine issue of material
fact.
In Georgia, common-law rights, such as the English common-law
-5-
right to void a usurious contract, have been codified. See
generally Houser v. The Planters’ Bank of Fort Vally, 57 Ga. 95
(1876). In fact, in Georgia, the act of charging usurious interest
rates has even been criminalized. See O.C.G.A. § 7-4-18. The Act
allows Defendant to collect interest, charges, and fees on personal
property pawns that would otherwise be considered usurious and
criminal. Compare O.C.G.A. § 44-12-131 with O.C.G.A. § 7-4-18.
Further, pawnbrokers are exempted from O.C.G.A. § 7-4-18. O.C.G.A.
§ 7-4-18(a). Rights created by statute in derogation of the common
law must be “exercised in the way which the [s]tatute prescribes,
and in no other way….” Persons v. Hight, 4 Ga. 474 (1848); see
also Diggs v. Swift Loan and Finance Company, Inc., 154 Ga. App.
389, 391, 268 S.E.2d. 433, 435 (1980). Therefore, the Act must be
strictly complied with before Defendant would be entitled to
summary judgment as a matter of law.
The contract between Debtor and Defendant does not comply with
the Act in two ways. First, the contract is for approximately
sixty days, twice as long as allowed for in the Act. See O.C.G.A.
§ 44-12-131(a)(1). While Defendant may have been trying to give
Debtor, or all of its customers for that matter, a “break” by
allowing the first thirty days to be “free,” this contract term is
in violation of O.C.G.A. § 44-12-131(a)(1). Defendant argues that
the contract is for thirty days, with a renewal of thirty days.
-6-
However, the contract is dated January 20, 2001, with a maturity
date of March 21, 2001, making the contract length approximately
sixty days. (See Aff. of Ron Meeks, Doc. 7, Ex. A).
Second, pursuant to O.C.G.A. § 44-14-403(b)(1), the grace
period for pawn transactions involving automobiles is thirty days.
O.C.G.A. § 44-14-403(b)(1). The contract only grants a ten-day
grace period. (See Aff. of Ron Meeks, Doc. 7, Ex. A). Defendant
argues that it gave Debtor the benefit of the thirty-day grace
period. This argument is not persuasive on the Motion for Summary
Judgment. Regardless of whether Debtor received more than the ten
days stated in the contract, this contract term is in violation of
O.C.G.A. § 44-14-403(b)(1). Defendant is not entitled to summary
judgment as a matter of law because the contract is in clear
violation of the statutory requirements for automobile title pawns.
Defendant’s Motion for Summary Judgment is denied. An order
in accordance with this Memorandum Opinion will be entered.
DATED this _________ day of December, 2002
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

STEPHANIE M. DAVIS

July 8, 2004

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
STEPHANIE M. DAVIS, : CASE NO. 02-42744
: CHAPTER 7
Debtor. ::
GEORGIA POWER CO., : ADVERSARY PROCEEDING
: A.P. 04-4003
Movant/Defendant, ::
vs. ::
STEPHANIE M. DAVIS, ::
Respondent/Plaintiff. :::
MEMORANDUM OPINION
On June 18, 2004, the Court held a hearing on the Motion
of Georgia Power Co. (“Defendant”) for Summary Judgment. At
the conclusion of the hearing, the Court took the matter under
advisement. The Court has considered Defendant’s briefs and
both parties’ oral arguments, as well as applicable statutory
and case law. For the reasons that follow, the Court denies
Defendant’s Motion for Summary Judgment because it is not
entitled to judgment in its favor as a matter of law.
PARTIES’ CONTENTIONS
Defendant contends that it did not violate the automatic
stay when it demanded that Stephanie M. Davis (“Plaintiff”)
-2-
pay the amount she owed Defendant from the time she filed her
Chapter 13 petition to the date of the conversion of her case
to Chapter 7, plus a deposit, as provided for in 11 U.S.C. §
366. 11 U.S.C. § 366 (1993 & Supp. 2003). Defendant argues
that it is entitled to the past due amount plus the deposit
because 11 U.S.C. § 348(d), which treats post-petition preconversion
debts as having been incurred just prior to the
original petition date, excludes administrative expense
claims. 11 U.S.C. § 348 (1993 & Supp. 2003). Defendant argues
that the debt incurred by Plaintiff for electric service
during the pendency of her case prior to the conversion is an
actual and necessary expense. Therefore, Defendant argues
that its claim for the post-petition pre-conversion amount is
automatically entitled to priority status as an administrative
expense.
Further, Defendant argues that the conversion did not
impose a new automatic stay. Defendant maintains that it is
not in violation of the automatic stay for attempting to
collect on the post-petition pre-conversion debt, in addition
to a deposit. Defendant argues that it did not need to wait
twenty days post-conversion prior to making the demand, as
required in 11 U.S.C. § 366, because, under 11 U.S.C. §
348(a), the conversion did not affect the date of the original
-3-
order for relief. 11 U.S.C. §§ 348, 366.
Plaintiff argues that 11 U.S.C. § 348(d) provides for the
discharge of post-petition pre-conversion debts. 11 U.S.C. §
348. Therefore, Defendant was not entitled to collect the
post-petition pre-conversion debt at the time it requested the
deposit. Defendant was in violation of the automatic stay by
doing so. As to Defendant’s administrative expense claim
argument, Plaintiff argues that there is nothing automatic
about the status of an administrative expense claim. Even if
Defendant was entitled to an administrative expense claim, it
would have only received a higher priority claim. However,
the debt still would have been dischargeable.
CONCLUSIONS OF FACT
Stephanie M. Davis (“Plaintiff”) did not respond to
Defendant’s Statement of Uncontested Facts. Therefore, the
facts as alleged in Defendant’s Statement of Uncontested Facts
are deemed admitted by Plaintiff. Defendant began providing
Plaintiff with electric service some time in or around April
2000. Plaintiff did not have a good payment history with
Defendant. Plaintiff was issued numerous warnings by
Defendant that her electric service would be turned off if she
did not pay her account current. Plaintiff also submitted six
checks to Defendant that were returned for insufficient funds.
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Plaintiff filed a Chapter 13 Bankruptcy petition on
October 29, 2002. It was not established whether Plaintiff
owed Defendant any money at the time of the filing of her
Chapter 13 petition. However, Defendant did not receive
notice of the Chapter 13 filing. If Defendant had received
notice of the Chapter 13 filing, per Defendant’s standard
practice, it would have “finaled out” the previous account and
created a new post-petition account to avoid inadvertent
violations of the automatic stay.
On December 26, 2003, Defendant was informed through
Plaintiff’s counsel that Plaintiff intended to convert her
case to Chapter 7. On December 30, 2003, Plaintiff filed a
Notice of Voluntary Conversion to Chapter 7. On January 8,
2004, Defendant notified Plaintiff that she was required to
pay her outstanding bill of $532.77 plus a security deposit to
prevent her electric service from being terminated. Plaintiff
did not pay Defendant. On January 13, 2004, Defendant
terminated Plaintiff’s service.
On January 14, 2004, Defendant informed Plaintiff, through
counsel, that she would need to pay the balance due plus the
security deposit to reestablish service. On the same day,
Plaintiff filed this adversary proceeding seeking an order
from this Court to require Defendant to reestablish electric
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service, for the Court to set a security deposit, and asking
for actual and punitive damages, as well as attorneys fees.
On January 16, 2004, the Court held an Emergency Hearing
during which the parties agreed that Defendant would
reestablish Plaintiff’s electric service and set a security
deposit. The parties did not agree that Defendant was legally
required to do so.
CONCLUSIONS OF LAW
Section 348 of the United States Bankruptcy Code (“Code”)
provides for the effect upon conversion of a case from one
chapter to another under the Code. 11 U.S.C. §348. The
conversion constitutes an order for relief under the chapter
converted to but conversion does not affect “the date of the
filing of the petition, the commencement of the case, or the
order for relief.” 11 U.S.C. § 348(a). Section 348(d)
specifically provides for the treatment of post-petition preconversion
debts. 11 U.S.C. §348(d). “A claim against the
estate or the debtor that arises after the order for relief
but before conversion in a case that is converted under
section…1307 of this title, other than a claim specified in
section 503(b) of this title, shall be treated for all
purposes as if such claim had arisen immediately before the
date of the filing of the petition.” Id.
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While Defendant makes a valid argument that the postpetition
pre-conversion debt may be eligible to receive
priority status as an administrative expense, the Court does
not read the Code to provide this status automatically. See 11
U.S.C. §§ 348(d), 503(b) (1993 & Supp. 2003); see also
Martinez v. Public Serv. Co. of Colo. (In re Martinez), 92
B.R. 916, 918 (Bankr. D. Colo. 1989). Section 503(b)
specifically requires notice and a hearing prior to the
determination that a post-petition debt is entitled to
priority status as an administrative expense. 11 U.S.C. §
503(b). Further, even if Defendant’s argument on this issue
were correct, nothing in the Code allows Defendant to attempt
to collect the debt via self-help, as it did in this case. See
11 U.S.C. § 503.
The Court is persuaded to agree with Defendant that it did
not have to wait twenty days from the conversion date to
demand a deposit from Plaintiff. See 11 U.S.C. §§ 348(a), 366.
Section § 348 “does not effect a change in the date of the
filing of the petition, the commencement of the case, or the
order for relief.” 11 U.S.C. § 348(a). However, the Court is
not persuaded to agree with Defendant that reading 11 U.S.C.
§ 366 in conjunction with 11 U.S.C. §§ 348(d) and 503(b)
somehow allows Defendant to demand payment of the post-
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petition pre-conversion debt, in addition to a deposit, to
continue utility service post-conversion. In fact, the case
law on point is to the opposite. See Smith v. GTE North
Inc.(In re Smith), 170 B.R. 111, 113, 115 (Bankr. N.D. Ohio
1994); Martinez, 92 B.R. at 917-918; In re Deiter, 33 B.R.
547, 548 (Bankr. W.D. Wisc. 1983). Under 11 U.S.C. § 366,
Defendant was entitled only to the deposit. 11 U.S.C. § 366.
Nothing in 11 U.S.C. §§ 348 or 503 entitled Defendant to
anything more at the time the demand was made. 11 U.S.C. §§
348, 503.
Finally, if a hearing would have been held to determine
whether Defendant was entitled to an administrative expense
claim for the post-petition pre-conversion debt, it is
unlikely that the Court would have made such a determination.
The Chapter 7 Trustee in this case has filed a “Report of No
Distribution.” (See Doc. #20). There are no assets from which
administrative expense claims could be paid. Therefore, a
motion for allowance of an administrative expense claim would
likely be denied.
For the reasons stated above, Defendant is not entitled
to judgment as a matter of law. Therefore, the Court denies
Defendant’s Motion for Summary Judgment. An order in
accordance with this Memorandum Opinion will be entered.
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DATED this 8th day of July, 2004.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY
JUDGE

BARBARA CUNNINGHAM

April 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
VALDOSTA DIVISION
IN RE ::
BARBARA CUNNINGHAM : CASE NO. 01-71080
:
Debtor. : CHAPTER 7
:
BARBARA J. CUNNINGHAM : ADVERSARY PROCEEDING
: NO. 01-7051
Plaintiff, ::
vs. ::
GEORGIA DEPARTMENT OF :
REVENUE, ::
Defendant. :
MEMORANDUM OPINION
On February 7, 2002, the court held a hearing on the Georgia
Department of Revenue’s (“State of Georgia”) motion to dismiss
Debtor’s complaint for the determination of tax liability.
During the hearing, the court raised the issue of abstention and
allowed the parties to submit letter briefs addressing the
abstention issue. At the conclusion of the hearing, the court
took under advisement the issue of abstention and the State of
Georgia’s motion to dismiss. After considering the parties’
briefs and the applicable statutory and case law, the court will
abstain from making a determination of Debtor’s tax liability to
the State of Georgia.
1 However, the court notes that in Debtor’s response to the State of Georgia’s
Request for Admissions, Debtor admits that she did have authority to sign
checks on the company’s accounts and did sign checks on the company’s
accounts. (Pl.’s Resp. to Req. for Admis., ¶¶ 5, 6).
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FACTS
Prior to January 1997, Debtor’s husband entered into a
franchise agreement to own and operate a Popeye’s restaurant. In
January 1997, Debtor’s husband formed J.C. & B.C., Inc.
(“Company”) to operate the franchise. Apparently, the
appropriate documentation was never filed with the Secretary of
State in order to properly incorporate the Company under Georgia
law. (See Pl.’s Resp. to Interrog.). Therefore, no corporation
was ever formed. Debtor was to be the vice-president and
Debtor’s husband was to be the president of the Company.
Although she was purported to be the vice-president of the
Company, Debtor contends that she had no say in its operation.
Debtor states that her assistance in the operation of the
franchise was limited to cleaning, preparing food, and paying
the bread supplier. (See id. at ¶ 1). Debtor further states that
she had no authority to hire and fire employees. (See id. at ¶
13). In addition, Debtor denies any involvement in the Company’s
bookkeeping or payroll. (See id. at ¶¶ 16-17). According to
Debtor, her husband was the only person authorized to sign on the
company’s account or issue payroll checks. (See id. at ¶¶ 8,
17).1
-3-
On July 9, 2001, Debtor filed a voluntary petition under
Chapter 7 of the Bankruptcy Code. In Schedule E, Debtor listed
the State of Georgia as an unsecured priority creditor with a
$104,985.38 claim which is disputed.
On October 17, 2001, Debtor filed a complaint against the
State of Georgia for determination of dischargeability of debt.
The complaint alleges that the State of Georgia has wrongly
assessed Georgia sales and use taxes against Debtor. Debtor
contends that these taxes should be assessed against the Company,
which she apparently contends is a sole proprietorship of her
husband.
On November 20, 2001, the State of Georgia filed its answer.
On January 14, 2002, the State of Georgia filed a motion to
dismiss Debtor’s complaint and a brief in support of its motion.
In its answer and motion, the State of Georgia contends that it
is immune from suit in federal court pursuant to the Eleventh
Amendment of the United States Constitution. The State of
Georgia has not filed a proof of claim, therefore, it asserts
that it has not waived its Eleventh Amendment immunity. (See
Mims’ Aff., Doc. #12, Adv. Proc. subfile).
On January 18, 2002, Debtor filed a motion to amend its
complaint in order to clarify that she was seeking only a
determination of tax liability and was not seeking a
determination of the dischargeability of debt. (See Doc. #13,
Adv. Proc. subfile). On February 7, 2002, the court entered an
2 In Debtor’s amended complaint, she asserts that no discharge has been
entered in this case. (See Doc. #18, ¶ 1,Adv. Proc. subfile). However, the
court notes that Debtor’s discharge was entered on November 6, 2001. (See
Doc. #28, main case file).
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order allowing Debtor’s amendment to her complaint. (See Doc.
#16, Adv. Proc. subfile). On February 19, 2002, Debtor filed her
amended complaint. (See Doc. #18, Adv. Proc. subfile).2
In response to the State of Georgia’s motion to dismiss,
Debtor argues that the determination of tax liability is not a
suit as defined under the Eleventh Amendment. Debtor also argues
that the State of Georgia waived its sovereign immunity by opting
out of the federal bankruptcy exemptions in § 522 of the Code and
adopting its own exemptions.
At the hearing on February 7, 2002, the court noted that
this case is a no-asset case. Therefore, the court raised the
issue of whether abstention would be proper. The court referred
the parties to a few cases on this issue and allowed the parties
to address this authority in letter briefs before ruling on the
matter.
In Debtor’s letter brief filed on February 18, 2002, Debtor
argues that abstention in this case would undermine the purpose
of Chapter 7 which is to give debtors a fresh start. Further,
Debtor argues the State of Georgia would not suffer any prejudice
if the court does not abstain. According to Debtor, whether the
creditor would be prejudiced is a key concern in determining
whether abstention is appropriate. Therefore, looking solely to
-5-
the fact that this case is a no-asset case overlooks a key
concern.
The State of Georgia, however, argues that abstention is
appropriate in this case. The State of Georgia contends that
courts generally abstain from make a tax liability determination
in no-asset cases because no bankruptcy purpose would be served.
DISCUSSION
The issues before the court are (1) whether the Eleventh
Amendment of the United States Constitution divests the court of
jurisdiction to determine Debtor’s tax liability to the State of
Georgia, and (2) whether the court should abstain from making a
determination of Debtor’s tax liability. Without making any
conclusions as to the Eleventh Amendment immunity issue, the
court will abstain from determining Debtor’s tax liability to the
State of Georgia.
Pursuant to § 505 of the Code, the court “may determine the
amount or legality of any tax. . . .” 11 U.S.C. § 505(a)(1).
The power of the bankruptcy court to determine a debtor’s tax
liability under this code section is discretionary with the only
restraint being a previous prepetition determination made by
another competent tribunal. See 11 U.S.C. § 505(a)(2); see also
Gossman v. United States (In re Gossman), 206 B.R. 264, 266
(Bankr. N.D. Ga. 1997)(Murphy, J.); In re R-P Packaging, Inc., In
-6-
re Plicon, Corp., Nos. 99-42537, 00-41153 (Bankr. M.D. Ga. filed
March 21, 2002)(Laney, J.).
In deciding whether a court should abstain from making a
determination under § 505 of the Code, courts typically analyze
several factors including, but not limited to efficient and
orderly case administration, the complexity of the tax issues,
the asset and liability structure of the debtor, and prejudice to
the debtor and the taxing authority. See Gossman at 266; R-P
Packaging at *15; Wood v. United States (In re Wood), No. A93-
72186, 1994 WL 759753, at *1 (Bankr. N.D. Ga. Nov. 21,
1994)(Brizendine, J.). In analyzing these factors, courts
primarily have considered whether a bankruptcy purpose would be
served if a tax determination is made. See Wood at *1.
The weight of authority demonstrates that abstention is
generally appropriate in no-asset Chapter 7 cases. This is
because no bankruptcy purpose would be served by a tax
determination if no distribution will be made. See Thornton v.
United States (In re Thornton), No. 92-40405, 1995 WL 442192, at
*6 (Bankr. M.D. Ga. June 23, 1995)(citing Kaufman v. United
States (In re Kaufman), 116 B.R. 367, 372 (Bankr. E.D.N.Y. 1990);
Starnes v. United States (In re Starnes), 159 B.R. 748, 750-51
(Bankr. W.D.N.C. 1993)(holding that abstention was proper in noasset
post-discharge case);; Byerly v. Internal Revenue Service
(In re Byerly), 154 B.R. 718, 720 (Bankr. S.D. Ind. 1992); Cain
v. United States (In re Cain), 142 B.R. 785, 788-89 (Bankr. W.D.
-7-
Tex. 1992); In re Diez, 45 B.R. 137, 139 (Bankr. S.D. Fla. 1984).
The court agrees with the above the authority and finds it
applicable to the facts of this case. This case is a no-asset
case in which no distribution will be made. While the court
agrees with Debtor that prejudice to the creditor is a factor to
be considered, Debtor’s argument is misplaced. As the Second
Circuit has held, when the debtor is the only party that would
benefit from a § 505 determination, abstention is proper. See
New Haven Projects LLC. v. City of New Haven, et al. (In re New
haven Projects, LLC), 225 F.3d 283, 289 (2d Cir. 2000). Because
the discharge has already been entered in this case, Debtor is
the only party who would benefit from a tax determination.
As to Debtor’s argument that abstention would undermine
Debtor’s ability to obtain a fresh start, the court regrets that
Debtor failed to contest the tax assessment under Georgia
procedures. However, that fact does not require the court to
make a determination of her tax liability when that determination
can have no effect upon the estate. The court finds that no
bankruptcy purpose would be served in this case by determining
Debtor’s tax liability to the State of Georgia. Therefore, the
court will exercise its discretion to abstain from making such
determination.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this ____ day of April, 2002.
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____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

SAMMY A. CAVES

April 22, 2004

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
SAMMY A. CAVES : CASE NO. 03-41518
Debtor. : CHAPTER 11
::
COLUMBUS BANK & TRUST CO., : CONTESTED MATTER
Movant, ::
vs. ::
SAMMY A. CAVES :
Respondent. :::
MEMORANDUM OPINION
On January 26, 2004, the Court held the final day of
a multi-day hearing on the Motion of Columbus Bank & Trust
Co. (“Movant”) for Relief from the Automatic Stay. The
main issue was whether Movant should be granted relief from
the stay to pursue its state court action against Sammy A.
Caves (“Respondent”) and other co-defendants. At the
conclusion of the hearing, the Court took the matter under
advisement. The Court has considered the evidence, the
parties’ briefs and oral arguments, as well as applicable
statutory and case law. Under the test set out in In re
South Oakes Furniture, Inc., 167 B.R. 307 (Bankr. M.D. Ga.
1994)(Walker, J.), the Court finds that Movant is not
entitled to relief from the automatic stay. South Oakes
-2-
Furniture, 167 B.R. at 309 (citations omitted).
THE PARTIES’ CONTENTIONS
Movant contends that Respondent has not satisfied the
three prongs of the test set out in South Oakes Furniture.
Id. Movant argues that Respondent has not met his burden
to prove that the continuance of the state court action
will greatly prejudice either Respondent’s bankruptcy
estate or Respondent personally. Movant further contends
Respondent failed to prove that any potential prejudice to
Respondent’s bankruptcy estate or Respondent, if forced to
proceed in state court, would considerably outweigh the
hardship to Movant, by maintenance of the stay. Finally,
Movant contends that it has established “a probability of
prevailing on the merits of [its] case” by showing that
Respondent either knew of or had a duty to know of criminal
acts Movant alleges were committed by Preferred Alliance,
Inc. (“P.A.I.”) and/or its agents, a corporation of which
Respondent was a shareholder and director. Id.
Respondent contends that his bankruptcy estate and
himself personally will be greatly prejudiced if the state
court action is allowed to move forward. Respondent argues
that he has not been able to participate in discovery or
file dispositive motions, such as a motion for summary
-3-
judgment, because of the automatic stay. Further,
Respondent argues that if the state court proceeding is to
move forward, that he will be unfairly associated with the
other defendants. If Respondent should lose in the state
court proceeding, collateral estoppel may prevent the
Bankruptcy Court from deciding the issue of
dischargeability of the debt. Additionally, judicial
economy calls for the consolidation of the action in
Bankruptcy Court. As to the second prong of the test in
South Oakes Furniture, Respondent argues that the prejudice
to Respondent, if the state court action moves forward,
considerably outweighs any hardship to Movant, if forced to
move forward in Bankruptcy Court. Id.
Finally, Respondent argues that Movant has not
established “a probability of prevailing on the merits of
[its] case” because Movant has not proven by clear and
convincing evidence, as required by Georgia’s Racketeer
Influenced and Corrupt Organizations (“R.I.C.O.”) law, that
Respondent is guilty of R.I.C.O. violations. O.C.G.A. §§
16-14-1 through 16-14-15 (2003); South Oakes Furniture, 167
B.R. at 309 (citations omitted); see Simpson Consulting,
Inc. v. Barclays Bank PLC, 227 Ga. App. 648, 654, 490
S.E.2d 184, 190-191 (1997). Respondent argues Movant has
-4-
proven, at most, that Respondent was not a very attentive
investor and director. Respondent urges that this does not
meet the higher standard required to find Respondent guilty
of criminal conduct, which is required by Georgia’s
R.I.C.O. law. See Avery v. Chrysler Motors Corp., 214 Ga.
App. 602, 604, 448 S.E.2d 737, 739 (1994).
FINDINGS OF FACT
While the facts are contested, from depositions, the
Court was able to discern a timeline of events that led to
Movant’s Motion for Relief from the Automatic Stay. Prior
to August 2000, Respondent became aware of P.A.I. through
an acquaintance of his, Dr. Murray Newlin. Respondent
testified at his deposition that about a year after he had
heard of P.A.I., but with no investigation into P.A.I. or
its business operations, he invested in the company.
Respondent admits that he knew very little about
P.A.I.’s business practices. Respondent understood that
P.A.I. sold discounted services marketed through
independent contractors. It was Respondent’s understanding
that there was money to be made through renewals of the
discounted service packages. Respondent was aware that
P.A.I. sold discounted healthcare service and vacation
pacakges. Respondent admits he knew that approximately
-5-
one-third of P.A.I.’s customers would request refunds.
However, Respondent contends his understanding was that
this level of requests for refunds was typical in
telemarketing operations. Respondent admits to
participating in telephone conferences regarding sales
figures but stated in his deposition that he knew little
about P.A.I.’s day-to-day operations.
Respondent’s initial investment was approximately
$50,000 to $100,000, after which he owned approximately 5-
8% of the company. After later investments, Respondent
owned approximately 16-17% of the company. In total,
Respondent invested approximately $400,000 in P.A.I. This
amount excludes a $200,000 transaction that is
characterized by Respondent as a transaction for tax
purposes, completed at the suggestion of Respondent’s
accountant.
In August 2000, Respondent held a P.A.I. Shareholders’
Meeting at his home. While Respondent is not sure when, he
was appointed as a director of P.A.I. During the summer or
fall of 2000, a line-of-credit was established for P.A.I.
at SunTrust Bank (“SunTrust”). Eventually, Dr. Newlin and
Respondent assumed liability on the SunTrust line-ofcredit.
Of money paid by Respondent towards the SunTrust
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line-of-credit, P.A.I. re-paid Respondent $50,000, after
P.A.I. began doing business with Movant.
In March 2001, P.A.I. set up a merchant account with
Movant, so that P.A.I. could process credit card
transactions. On May 23, 2001, Respondent signed a
personal guaranty on the merchant account. In August 2001,
Respondent held a second Shareholders’ Meeting at his home.
Also in August 2001, Movant asked to speak with Respondent
regarding charge-back requests on P.A.I.’s merchant
account. Movant contends that Respondent told Dr. Newlin
to tell Movant to deal directly with P.A.I., not with
Respondent, regarding the charge-back issue. Respondent
does not deny this because at the time he felt that he did
not know enough about P.A.I. to discuss financial matters
with Movant. In middle to late 2001, Respondent visited a
P.A.I. call center in Connecticut which primarily dealt
with customers’ requests for charge-backs and membership
terminations. During that visit, Respondent observed call
center employees dealing with customers over the phone.
In December 2001, Respondent put $200,000 into a P.A.I.
account at SunTrust. In January 2002, the money was
removed from the P.A.I. account and returned to Respondent.
As stated previously, Respondent characterized this
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transaction as one for tax purposes. Also in January 2002,
Respondent attended two meetings with Movant regarding the
high number of charge- back requests Movant was getting on
P.A.I.’s merchant account. After the meetings, Movant
discontinued processing credit card transactions for
P.A.I.. Some time after Movant discontinued processing
P.A.I.’s credit card transactions, Respondent resigned as
a director of P.A.I. Movant contends that Respondent knew
of alleged fraudulent and criminal actions taken by
P.A.I.’s agents and employees. However, Movant failed to
submit any admissible evidence to contradict Respondent’s
deposition testimony that he was unaware of P.A.I.’s dayto-
day operations and that, if any fraudulent or criminal
activity occurred at P.A.I., he was unaware of it.
In March 2002, Movant initiated a lawsuit in Muscogee
County Superior Court against Respondent and other codefendants,
based on contract claims and Georgia R.I.C.O.
violations. During the pendency of the state court action,
but prior to the commencement of Respondent’s bankruptcy
proceeding, the trial court ruled in favor of Movant on the
contract claims on a motion for partial summary judgment.
Respondent filed an appeal of the decision prior to filing
for bankruptcy protection. The State of Georgia, at some
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point, intervened in the state court proceeding, but has
since settled its dispute with Respondent.
Respondent filed a Chapter 11 bankruptcy proceeding
under title 11 of the United States Code (“Code”) on June
17, 2003. 11 U.S.C. §§ 1101 through 1174 (1993 & Supp.
2003). Movant received relief from the automatic stay on
July 18, 2003, for the limited purpose of completing the
appeals process. Prior to the Georgia Court of Appeals’
decision on the contract issues, Movant filed its Motion
for Relief from the Automatic Stay to pursue its Georgia
R.I.C.O. claims. The Georgia Court of Appeals later
affirmed in part and reversed in part the decision of the
trial court on the contract issues. The Georgia Court of
Appeals decision was rendered after the first hearing date
on Movant’s Motion for Relief from the Automatic Stay,
September 19, 2003, but before the continued hearing date,
January 26, 2004. The result is that some of the contract
claims are still at issue.
CONCLUSIONS OF LAW
As the Court stated in Scott v. Williams (In re
Williams), 302 B.R. 923 (Bankr. M.D. Ga. 2003)(Laney, J.),
the party opposing a motion for relief from the automatic
stay bears the burden of persuasion on all issues except as
-9-
to equity. Williams, 302 B.R. at 926; see also 11 U.S.C. §
362(g)(1993 & Supp. 2003). However, implicit in this
statement is that Movant must first make a prima facia
showing that it is entitled to the relief requested. See
generally, Overhead Door Corp. v. Allstar Bldg. Prod., Inc.
(In re Allstar Bldg. Prod., Inc.), 834 F.2d 898, 900 (11th
Cir. 1987). The Court finds that Movant met this initial
burden.
The burden falls on Respondent to rebut the showing
made by Movant. As both parties are aware, this Court has
adopted the test in South Oakes Furniture as the test to
apply in situations where a movant requests relief from the
automatic stay to move forward with a state court
proceeding. South Oakes Furniture, 167 B.R. at 309
(citations omitted); see Williams, 302 B.R. at 926. “The
test developed by courts to determine if it is appropriate
to lift the automatic stay and allow the continuation of
[a] lawsuit pending in state court is whether: a) Any
‘great prejudice’ to either the bankrupt estate or the
debtor will result from continuation of a civil suit, b)
the hardship to the [non-debtor party] by maintenance of
the stay considerably outweighs the hardship to the debtor,
and c) the creditor has a probability of prevailing on the
-10-
merits of his case.” South Oakes Furniture, 167 B.R. at 309
(citations omitted).
It is evident to the Court that there would be
prejudice to Respondent and his bankruptcy estate if the
automatic stay is lifted and the state court proceeding
goes forward. However, it is also clear to the Court that
Movant would suffer a hardship if the automatic stay is not
lifted and it is forced to proceed in this Court with its
action against Respondent. On balance, these two factors
cancel each other out. The Court will focus on the third
prong of the test, as did the parties in their briefs and
oral arguments. Id.
The third prong of the test requires Respondent to
prove that Movant does not have a probability of prevailing
on the merits of the underlying case. Id. Respondent
argues that Movant must have a higher likelihood of
prevailing on the merits of its case than a probability
because the underlying Georgia R.I.C.O. action requires
clear and convincing evidence of R.I.C.O. violations before
Movant would be able to recover at the state level. See
Simpson Consulting, 227 Ga. App. at 654, 490 S.E.2d at 190-
191. The Court agrees with Respondent that the underlying
Georgia R.I.C.O. action requires the higher clear and
-11-
convincing evidentiary standard. See id. However, the
Court has found no authority that the there is a burden on
Movant to show a substantial likelihood of prevailing on
the merits of its case, as Respondent urges.
The higher evidentiary standard of the underlying
Georgia R.I.C.O. action was not considered by the Court in
the initial hearing. Movant responded at the continued
hearing and in its reply brief by arguing that Respondent
either knew of alleged criminal activity being conducted at
P.A.I. or, as a director of P.A.I., Respondent is charged
with knowledge of such activities. Therefore, Movant
argues that Respondent would be guilty of Georgia R.I.C.O.
violations under conspiracy or enterprise liability because
of his status as a shareholder and director of P.A.I.
However, Movant did not submit case law which would
persuade the Court to come to that same conclusion.
On balance, the Court finds that Movant does not have
a probability of prevailing by proving, by clear and
convincing evidence, that Respondent committed the alleged
Georgia R.I.C.O. violations. See id. The Court must be
careful to not a make a decision on the merits. This is,
after all, a motion for relief from the automatic stay, not
an adversary proceeding to determine the ultimate issue
-12-
involved in the pending litigation. However, the Court
must review the facts to determine if they show a
probability of Movant prevailing on the merits of its case.
See South Oakes Furniture, 167 B.R. at 309 (citations
omitted). The Court finds that the evidence does not show
that Movant has a probability of prevailing on the merits
of the underlying Georgia R.I.C.O. claims. Therefore,
Movant’s Motion for Relief from the Automatic Stay is
denied as to the Georgia R.I.C.O. claims.
This ruling should not be construed to be determinative
of the ultimate issue in the pending litigation. After a
dispositive motion or full trial, in the Bankruptcy Court,
the Court could rule in favor of either party. This ruling
should only be construed to indicate that Respondent, as
the party opposed to relief from the automatic stay, met
its burden, not that the Court has ruled in favor of
Respondent as to the merits of the underlying Georgia
R.I.C.O. action.
Since the Court is denying Movant’s request for relief
from the automatic stay as to the Georgia R.I.C.O. claims,
the Court will also deny relief from the automatic stay as
to the contract claims. The remaining issues regarding the
contract claims can be resolved through the claims
-13-
objection process in the Bankruptcy Court.
An order in accordance with this Memorandum Opinion
will be entered.
DATED this ____ day of April, 2004.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY
JUDGE

CLARENCE CHESTER BROWN, SR

January 30, 2004

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
CLARENCE CHESTER BROWN, SR., : CASE NO. 03-41647
Debtor. : CHAPTER 13
:
CLARENCE CHESTER BROWN, SR., : ADVERSARY PROCEEDING
Plaintiff, : NO. 03-4069
:
vs. ::
SPEEDEE CASH OF GEORGIA, INC., :
Defendant. ::
SPEEDEE CASH OF GEORGIA, INC., :
Movant. :
MEMORANDUM OPINION
On January 9, 2004, the Court held a hearing regarding the
Motion of Speedee Cash of Georgia, Inc. (“Defendant”) to
Dismiss. At the hearing, the parties agreed that Count Two of
the Adversary Proceeding should be dismissed because the
contract in dispute exceeds $3,000.00 and, therefore, does not
fall under the Georgia Industrial Loan Act (“G.I.L.A.”). See
O.C.G.A. §§ 7-3-1 through 7-3-29 (1997 & Supp. 2003). At the
conclusion of the hearing, the Court took the remaining matter
under advisement. The Court has considered the pleadings,
Defendant’s Motion to Dismiss, both parties’ oral arguments,
and the applicable statutory and case law. Under this Court’s
-2-
reasoning in In re Johnson (Johnson v. Speedee Cash of
Columbus, Inc.), 289 B.R. 251 (Bankr. M.D. Ga. 2002)(Laney,
J.), the Court will deny Defendant’s Motion to Dismiss as to
Count One of Clarence Chester Brown, Sr.’s (“Debtor”)
Complaint and grant Defendant’s Motion to Dismiss as to Count
Two of Debtor’s Complaint.
BACKGROUND AND PROCEDURAL HISTORY
On December 19, 2002, Debtor and another party entered
into a contract with Defendant pursuant to a title pawn
transaction. Debtor pledged to Defendant the Certificate of
Title to a 1999 Ford Expedition (“Ford”) in exchange for
$3,500. The contract provided for a ten-day grace period
after the maturity date during which Defendant promised not to
sell the property and Debtor was entitled to redeem the
property by paying the outstanding balance, plus any fees and
charges incurred. Debtor filed a Chapter 13 Petition on July
1, 2003 and subsequently filed this Adversary Proceeding to
determine the validity of Defendant’s lien on the Ford. On
December 22, 2003, Defendant filed its Answer and the Motion
to Dismiss.
Defendant contends that Debtor cannot challenge the
validity of Defendant’s lien on the Ford because the contract
does not fall under G.I.L.A. See O.C.G.A. §§ 7-3-1 through 7-
-3-
3-29 (1997 & Supp. 2003). Without G.I.L.A., Defendant argues
that Debtor has no grounds to void the contract or the lien.
Therefore, Defendant urges the Court to grant its Motion to
Dismiss as to Count One of Debtor’s Complaint as well.
Debtor contends that, under Johnson, he has stated a claim
upon which relief can be granted. Johnson, 289 B.R. at 253-
254. Debtor argues that Defendant holds, at most, an
unsecured claim in the principal amount of $3,500. Therefore,
Debtor urges the Court to deny Defendant’s Motion to Dismiss
as to Count One of Debtor’s Complaint.
CONCLUSIONS OF LAW
The Court has reviewed Johnson, as well as Hooks v. Cobb
Ctr. Pawn & Jewelry Brokers, Inc., 241 Ga. App. 305, 527
S.E.2d 566 (1999), and the statutory scheme for pawn brokers
found at O.C.G.A. §§ 44-12-130 through 44-12-138 & 44-14-403.
O.C.G.A. §§ 44-12-130 through 44-12-138 & 44-14-403 (2002 &
Supp. 2003); Johnson, 289 B.R. at 253-254; Hooks, 241 Ga. App.
at 306-307, 527 S.E.2d at 568-569. The Court does not change
its position from the ruling in Johnson. Johnson, 289 B.R. at
253-254. “Rights created by statute in derogation of the
common law must be ‘exercised in the way which the [s]tatute
prescribes, and in no other way….’ Persons v. Hight, 4 Ga.
474 (1848); see also Diggs v. Swift Loan and Finance Company,
-4-
Inc., 154 Ga. App. 389, 391, 268 S.E.2d. 433, 435 (1980).” Id.
Pursuant to O.C.G.A. § 44-14-403(b)(1), the grace period
for pawn transactions involving automobiles is thirty days.
O.C.G.A. § 44-14-403(b)(1) (2002 & Supp. 2003). The contract
in question grants only a ten-day grace period. (See Compl. &
Def.’s Mot. to Dismiss). Therefore, Debtor has stated a claim
upon which relief could be granted. However, at this stage
procedurally, it is not appropriate for the Court to determine
the validity of the lien. Nothing in this Memorandum Opinion
should be construed as doing so.
Defendant’s Motion to Dismiss is granted as to Count Two
of Debtor’s Complaint and is denied as to Count One of
Debtor’s Complaint. An order in accordance with this
Memorandum Opinion will be entered.
DATED this _________ day of January, 2004.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY
JUDGE

JOHNNY BOZEMAN

January 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
THOMASVILLE DIVISION
IN RE: ::
CASE NO. 97-60549
JOHNNY BOZEMAN, :
JEANNIE BOZEMAN, a/k/a : CHAPTER 13
JEANNIE SHANK, :
Debtors, : ADVERSARY PROCEEDING
: NO. 00-6015
JOHNNY BOZEMAN :
JEANNIE BOZEMAN, a/k/a :
JEANNIE SHANK, :
Plaintiffs, ::
vs. ::
DEPARTMENT OF REVENUE OF THE :
STATE OF FLORIDA, ::
Defendant. :
MEMORANDUM OPINION
On July 11, 2001, the court held a hearing on the motion to
dismiss the Department of Revenue of the State of Florida (“State
of Florida”) as a defendant, the motions to dismiss the United
States of America (“USA”), and the motion for summary judgment of
the Dale County Alabama Child Support Unit (“Alabama”). At the
conclusion of the hearing, the court granted USA’s motions to
dismiss, continued Alabama’s motion, and took under advisement
the State of Florida’s motion. Since the time of the hearing,
the court granted Alabama’s motion for summary judgment.
Therefore, the sole issue before the court is whether the
Eleventh Amendment to the United States Constitution provides
-2-
immunity to the remaining defendant in this case. At the
conclusion of the hearing, the court asked the parties to submit
briefs discussing the issue of sovereign immunity under the
Eleventh Amendment. After considering the parties’ oral
arguments, briefs, and the applicable statutory and case law, the
court will grant the State of Florida’s motion to dismiss.
FACTS
On July 11, 1997, Debtors Johnny and Jeannie Bozeman
(“Plaintiffs”) filed a voluntary petition under Chapter 13 of the
Bankruptcy Code (“Code”). On August 21, 2000, Plaintiffs filed
their initial complaint for violation of § 362 of the Code,
damages, and declaratory and injunctive relief. In this initial
complaint, only USA and Alabama were named as defendants.
Plaintiffs allege that the Internal Revenue Service violated §
362 of the Code by offsetting Plaintiffs’ 1997 and 1998 federal
income tax refunds to pay Plaintiff Johnny Bozeman’s delinquent
child support obligation to Alabama. The demand letter and
notice to offset which were sent to Plaintiff Johnny Bozeman came
from the Offset Coordinator in the Ft. Myers, Florida office.
However, the State of Florida was not named as a defendant in
Plaintiffs’ initial complaint. (Compl. Exhs. “1” & “4”).
Plaintiffs amended their complaint several times in which
they added as defendants, the State of Florida, Charles O.
-3-
Rossotti, Commissioner of the Internal Revenue Service
(“Rossotti”), and Paul O’Neill, Secretary of the Treasury
Department (“O’Neill”). USA filed motions to dismiss USA,
Rossotti and O’Neill as defendants. Alabama filed a motion for
summary judgment and an amended motion for summary judgment. The
State of Florida also filed a motion to dismiss it as a
defendant.
On July 11, 2001, the court held a hearing on the motions to
dismiss USA and the State of Florida as defendants and Alabama’s
motion for summary judgment. At the conclusion of the hearing,
the court granted USA’s motions to dismiss USA, Rossotti, and
O’Neill, and continued the hearing on Alabama’s motion to
September 19, 2001. On September 24, 2001, the court entered an
order granting Alabama’s motion for summary judgment thereby
leaving the State of Florida as the sole defendant in this
adversary proceeding. The court took under advisement the State
of Florida’s motion to dismiss.
In its motion, the State of Florida contends that the
Eleventh Amendment to the United States Constitution provides
immunity to the claims of the Plaintiffs. The State of Florida
makes an alternative argument that the offset refunds were not
property of the estate, therefore, those funds are not subject to
the automatic stay under § 362 of the Code. The court notes that
the State of Florida did not address this alternative argument in
its brief. (See Doc. #62).
-4-
Plaintiffs, however, argue that the State of Florida waived
its sovereign immunity. Plaintiffs assert that when the State of
Florida utilized the federal income tax refund offset program,
the State of Florida entered into an area regulated by federal
statute and thereby waived its sovereign immunity. Plaintiffs
further argue that the State of Florida waived its sovereign
immunity when it sought and received funds from the United
States.
DISCUSSION
The Eleventh Amendment to the United States Constitution
provides:
The Judicial power of the United States shall not be
construed to extend to any suit in law or equity, commenced
against one of the United States by Citizens of another
State, or by Citizens of any Foreign State.
U.S. CONST. amend XI.
Accordingly, states have immunity from suits brought by citizens
of another state. See Edelman v. Jordan, 415 U.S. 651, 662
(1974); Seminole Tribe of Florida v. Florida, 517 U.S. 44, 54
(1996). Although the text of the Eleventh Amendment does not
appear to bar suits brought by citizens against their own state,
it has long been recognized to bar such suits. See Hans v.
Louisiana, 134 U.S. 1 (1890).
While state immunity from suit is extensive, it is not
absolute. However, the United States Supreme Court has
-5-
recognized only two instances in which an individual may sue a
state. See College Savings Bank v. Florida Prepaid Postsecondary
Education Expense Board, et al., 527 U.S. 666, 670 (1999).
First, Congress may abrogate a state’s sovereign immunity. Id.
In order to validly abrogate the immunity, Congress must
“unequivocally express[] its intent to abrogate the immunity,”
and it must also act “pursuant to a valid exercise of power.”
Seminole Tribe, 517 U.S. at 55. The Supreme Court has recognized
the “valid exercise of power” to be Congress’s power to enforce
the provisions of the Fourteenth Amendment. College Savings
Bank, 527 U.S. at 670 (citing Fitzpatrick v. Bitzer, 427 U.S.
445 (1976)). Second, a state may waive its sovereign immunity by
consenting to being sued. See Clark v. Barnard, 108 U.S. 436,
447 (1883). The “test for determining whether a State has waived
its immunity from federal-court jurisdiction is a stringent one.”
Atascadero State Hop. v. Scanlon, 473 U.S. 234, 241 (1985). See
also Pennhurst State School and Hosp. v. Halderman, 465 U.S. 89,
99 (1984)(holding that a state’s consent to suit must be
“unequivocally expressed”).
The courts are split on whether Congress has validly
abrogated state sovereign immunity by enacting § 106 of the Code.
See Mitchell v. Franchise Tax Bd. (In re Mitchell), 209 F.3d
1111, 1112 (9th Cir. 2000)(holding that § 106 does not validly
abrogate a state’s sovereign immunity); Sacred Heart Hosp. v.
Pennsylvania (In re Sacred Heart Hosp.), 133 F.3d 237, 245 (3d
-6-
Cir. 1998); Schlossberg v. State of Maryland, Comptroller of the
Treasury (In re Creative Goldsmiths), 119 F.3d 1140, 1146-47 (4th
Cir. 1997)(same); Peterson v. State of Florida, Dep’t of Revenue
(In re Peterson), 254 B.R. 740, 745 (Bankr. N.D. Ill.
2000)(same); Wilson v. South Carolina State Educ. Assistance
Auth. (In re Wilson), 258 B.R. 303, 310 (Bankr. S.D. Ga.
2001)(Dalis, C.J.)(holding that § 106 validly abrogates state
sovereign immunity as an exercise of Congress’s power under the
Privileges and Immunity Clause of the Fourteenth Amendment);
Hood v. Tennessee Student Assistance Corp. (In re Hood), 262 B.R.
412, 414 (B.A.P. 6th Cir. 2001)(holding that as a part of the
plan of the Constitutional Convention, the States ceded their
sovereign immunity to Congress).
However, Plaintiffs do not advance an abrogation argument.
Instead, Plaintiffs argue that the State of Florida waived its
immunity by its actions in offsetting Plaintiffs’ tax refund.
There is no suggestion that the State of Florida consented to
suit. Therefore, the narrow issue is whether the State of
Florida impliedly or constructively waived its sovereign
immunity.
Initially, the court notes that the parties do not dispute
that the Department of Revenue of the State of Florida is an
agency of the state for Eleventh Amendment purposes. In
Peterson, the court held that Florida’s Child Support Enforcement
Office of the Department of Revenue is “unquestionably an arm of
1 The court notes that Intra Coastal Transportation has been recognized as
overruled in Vieux Carre Property Owners, et al. v. Brown, 875 F.2d 453, 457
(5th Cir. 1989). Also, WJM has been abrogated by Reopell v. Massachusetts,
936 F.2d 12 (1st Cir. 1991).
-7-
the state for the purposes of the amendment.” Peterson, 254
B.R. at 743. The court also held that an adversary proceeding
seeking a turnover of funds from the Department of Revenue is a
“suit” for Eleventh Amendment purposes. Id. Accordingly, the
court finds that this case is a suit against a unit of the state
as defined in the Eleventh Amendment.
Plaintiffs rely on several circuit cases for the proposition
that the State of Florida constructively waived its immunity by
“entering into an area regulated by federal statute . . . .”
(Pls.’ Br. at pp. 6-7, Doc. #90)(citing Sullivan v. Town &
Country Home Nursing Services, Inc. (In re Town & Country Home
Nursing Services), 963 F.2d 1146 (9th Cir. 1992); WJM, Inc. v.
Mass. Dep’t of Public Welfare, 840 F.2d 996 (1st Cir. 1988);
Intra Coastal Transportation, Inc. v. Decatur County, 482 F.2d
361 (5th Cir. 1973).1
Town & Country, like the case before the court, involved the
offset of funds by the federal government on behalf of a unit of
the state. The debtor in Town & Country was entitled to receive
reimbursements from the federal government pursuant to the
Medicare Act, 42 U.S.C. §§ 1395-1395ccc. As a result of an
overpayment of allowed reimbursements to the debtor, the state
fiscal intermediary, through the Department of Health and Human
-8-
Services, offset the amount due against the debtors
reimbursements. Town & Country, 963 F.2d at 1147.
The Ninth Circuit held that the state fiscal intermediary
waived its sovereign immunity. Id. at 1153. Relying on Parden
v. Terminal Ry., 377 U.S. 184 (1964), the court noted that a
state “may waive its sovereign immunity by affirmatively engaging
in a federally regulated activity in which Congress clearly has
made waiver of immunity a necessary condition of state
participation.” Town & Country, 963 F.2d at 1153 n.3.
However, in College Savings Bank, the Supreme Court
expressly overruled Parden. 527 U.S. at 680. In College Savings
Bank, the court noted that it had begun to retreat from Parden as
early as 1973. Id. at 677 (citing Employees of Dep’t of Public
Health and Welfare of Mo. v. Department of Public Health and
Welfare of Mo., 411 U.S. 279 (1973)). In Employees, the majority
refused to find that the state of Missouri constructively waived
its sovereign immunity in a suit under the Fair Labor Standards
Act. 411 U.S. at 485-86. The Court reasoned that the statute
did not express “with clarity Congress’s intention to supersede
the States’ immunity from suits brought by individuals.” Id. at
285. Writing for the majority in College Savings Bank, Justice
Scalia pointed out that the absence of clarity in the statute was
the same reason that four of the Justices in Parden dissented.
527 U.S. at 677.
One year after Employees, the Court in Edelman observed that
2 See 26 U.S.C. § 6402(c) and 42 U.S.C. § 664. These two statues provide that
when a state agency notifies the U.S. Dep’t of Treasury of an individual’s
past-due child support obligation, the Dep’t of Treasury is required to offset
monies from such individual’s income tax refund and remit those funds to the
state agency.
-9-
“there is ‘no place’ for the doctrine of constructive waiver in
our sovereign immunity jurisprudence . . . .” Id. at 678 (citing
Edelman, 415 U.S. at 651). In comparing Parden-style waivers
with other constitutionally protected privileges, the Court in
Edelman noted that “[c]onstructive consent is not a doctrine
commonly associated with the surrender of constitutional rights.”
415 U.S. at 673. Therefore, in overruling Parden, the court held
that “Parden stands for an anomaly in the jurisprudence of
sovereign immunity, and indeed in the jurisprudence of
constitutional law.” College Savings Bank, 527 U.S. at 680.
The court finds that the Supreme Court’s rationale in
College Savings Bank is applicable to this case. Even if there
was a place for constructive Parden-style waivers of sovereign
immunity, the statutes at issue,2 do not express with clarity
that a state waives its sovereign immunity by its participation
in the federal regulated activity. Accordingly, the court finds
that the State of Florida did not waive its sovereign immunity by
participating in the offset program.
The Plaintiffs present another constructive waiver argument.
Plaintiffs maintain that seeking funds from the federal
government through the offset program constitutes a waiver of
-10-
sovereign immunity. For support, Plaintiffs rely on the case of
Hatmaker, et al. v. Georgia Dep’t of Transp., 973 F. Supp. 1047
(M.D. Ga. 1995).
In Hatmaker, the court held that the Georgia Dep’t of
Transp. waived its Eleventh Amendment immunity when it requested
and received federal funds under the Federal-Aid Highways Act.
973 F. Supp. at 1053. The court in Hatmaker relied on the case
of Named Individual Members of the San Antonio Conservation
Society v. Texas Highway Dep’t of Transp., 446 F.2d 1013, 1028
(5th Cir. 1971). However, in San Antonio Conservation Society,
the issue of “Eleventh Amendment immunity was neither raised nor
discussed . . .” therefore, that case is “unpersuasive and not
controlling.” Daye v. Pennsylvania, 344 F. Supp. 1337, 1346
(E.D. Pa. 1972). See also Road Review League v. Boyd, 270 F.
Supp. 650 (S.D.N.Y. 1967); DeLong Corp. v. Oregon State Highway
Comm’n, 233 F. Supp. 7 (D. Ore. 1964), aff’d 343 F.2d 911 (9th
Cir. 1965)(holding that the state does not waive its immunity
from suit by participating in the federal highway program and
seeking funds from that program).
Given the overwhelming authority contrary to Hatmaker and
the fact that the Supreme Court has disavowed constructive
waivers of state sovereign immunity, the court rejects the
reasoning in Hatmaker. Therefore, the court finds that the State
of Florida did not waive its sovereign immunity by requesting
federal funds from the federal government.
-11-
CONCLUSION
None of the actions taken by the State of Florida
constitutes a waiver of its Eleventh Amendment immunity. In the
absence of waiver of sovereign immunity, the court is without
jurisdiction to entertain a suit against the State of Florida.
Therefore, the court will grant the State of Florida’s motion to
dismiss.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this ____ day of January, 2002.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

AYERS AVIATION HOLDINGS, INC.

July 25, 2002

UNITED STATE BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
ALBANY DIVISION
IN RE: ::
CASE NO. 00-11881
AYERS AVIATION HOLDINGS, INC. ::
CHAPTER 11
Debtor. ::
FIRST NATIONAL BANK OF : ADVERSARY PROCEEDING
SOUTH GEORGIA, ::
NO. 01-1003
Plaintiff, ::
vs. ::
AYERS AVIATION HOLDINGS, INC., :
GATX CAPITAL CORPORATION, :
ZLATAVA DAVIDOVA, TRUSTEE OF :
LET, a.s. AND GENERAL ELECTRIC :
COMPANY, ::
Defendants. :
ORDER REGARDING THE CONTROLLING LAW AS TO CERTAIN ISSUES
On May 17, 2002, the court held a Final pre-Trial Conference
in the above captioned adversary proceeding. At the hearing, the
parties raised the issue of which law should govern the validity,
priority, and extent of the liens in the property central to this
adversary proceeding. The court agreed with the parties that it
should rule on this issue before the trial is conducted.
Therefore, in the court’s May 17, 2002 order approving the Final
Pre-Trial Order which also set the trial date for August 7-8,
-2-
2002, the court directed the parties to submit briefs on this
issue within 15 days. The order also allowed 10 days for
responsive briefs.
Plaintiff First National Bank of South Georgia (“Plaintiff”)
and Debtor/Defendant Ayers Aviation Holdings, Inc. (“Debtor”)
contend that the Georgia Uniform Commercial Code governs the
validity and priority of the interests in the subject property.
Initially, Defendant GATX Capital Corporation (“GATX”)
maintained the same position as Plaintiff and Debtor. In its
initial brief, GATX acknowledged the possible application of
three international conventions. However, GATX pointed out that
the Convention on International Civil Aviation, December 7, 1944,
61 Stat. 1180 and the Convention of International Recognition of
Rights, June 19, 1948, 4 U.S.T. 1830 did not apply because the
Czech Republic were not signatories to these conventions. GATX
further noted that although the Czech Republic is a signatory
state to the United Nations Convention on Contracts for the
International Sale of Goods, 15 U.S.C. App., Article 2 of that
convention excludes aircraft.
Zlatava Davidova, Trustee of LET, a.s. (“LET Trustee”)
contends that the law of the Czech Republic is the governing law.
Contrary to the assertion of GATX, LET Trustee points out that as
of August 24, 1998, the Czech Republic became a signatory state
to the Convention on the International Recognition of Rights in
-3-
Aircraft. (See Exh. “A”, LET Trustee’s Supp. Br.). In pertinent
part, that Convention provides that property rights in aircraft,
including a security interest, “shall be determined in accordance
with the law of the State where the aircraft was registered….”
Convention on the International Recognition of Rights in
Aircraft, Art. I, para. 1. Because no dispute exists that the
subject aircraft was registered in the Czech Republic, LET
Trustee contends that the law of the Czech Republic is the
controlling law.
General Electric Company (“General Electric”) agrees with
LET Trustee that the Convention on the International Recognition
of Rights in Aircraft is applicable. Therefore, General Electric
maintains that the law of the Czech Republic should govern this
case.
In response to LET Trustee’s brief, GATX agrees with LET
Trustee and now admits that the Convention on the International
Recognition of Rights in Aircraft is applicable. Further, GATX
admits that it did not record its interest in the subject
property in the Czech Republic. Accordingly, GATX concedes that
it has an unperfected interest in the subject property and
maintains that it should be dismissed from this adversary
proceeding.
The court has considered all the briefs and exhibits
submitted by the parties. The court finds that the law of the
-4-
Czech Republic is the controlling law regarding the validity,
priority, and extent of the liens in the subject property.
SO ORDERED this 25th day of July, 2002.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

PORSCHA CAMPBELL

April 29, 2010

IN THE UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
VALDOSTA DIVISION
IN RE: )
) CASE NO.: 09-71049- JTL
PORSCHA CAMPBELL, )
)
Debtor. ) CHAPTER 7
Memorandum Opinion
This matter comes before the court on unsecured creditor Clinton Timmons’
Motion to Reopen Case for the purpose of seeking limited relief from the permanent
discharge injunction pursuant to 11 U.S.C. §524 in order to seek a judgment of liability
against the debtor so that he may proceed against the debtor’s liability insurer. For the
reasons set forth below, this court GRANTS Mr. Timmons’ Motion to Reopen the Case.
Background
Porscha Campbell filed a Chapter 7 voluntary petition with this court on July 2,
2009. A discharge order was entered on September 29, 2009. A law suit was initiated
against the debtor on June 17, 2009 to recover damages incurred when the debtor’s
SIGNED this 29 day of April, 2010.
________________________________________
JOHN T. LANEY, III
________________________________C_H_IE_F_ U_N_I_TE_D_ S_T_A_T_E_S_ B_A_N_K_R_UP_T_C_Y_ J_U_D_G_E
vehicle struck an automobile that the plaintiff was driving. Permanent General Assurance
Corporation, debtor’s automobile insurer at the time of the accident, hired counsel to
represent the debtor in the state court claim. Mr. Timmons filed a “Petition to Lift
Permanent Stay” on January 25, 2010, and a “Motion to Reopen Bankruptcy Case” on
February 12, 2010. The debtor’s state court counsel filed an objection in the debtor’s
name. A hearing was held on the motions on March 31, 2010. The debtor’s insurance
counsel had not been served with the creditor’s petition; thus, the court allowed the
debtor’s attorney for the state court claim 15 days to file a letter brief, which was
submitted to the court on April 15, 2010. The debtor’s bankruptcy attorney stated in open
court that the debtor consented to the reopening of the case and the limited relief
requested because the debtor would incur no injury other than inconvenience if the relief
requested is granted.
Conclusions of Law
The Eleventh Circuit Court of Appeals has held that a creditor can seek relief
from the discharge injunction to pursue a judgment of liability against the debtor for the
sake of recovering against the debtor’s insurer. See In re Jet Florida Systems, Inc., 883
F.2d 970 (11th Cir. 1989) (A discharge will not act to enjoin a creditor from taking action
against another who also might be liable to the creditor). In In re Jet Florida Systems,
Inc., the creditor and former employee of Jet Florida System, Inc. asserted a defamation
claim and conceded that he could not proceed against the assets of the bankruptcy estate.
See 883 F.2d at 973. However, the creditor did contend, and the court agreed, that he
could proceed against the debtor to establish the debtor’s liability in order to recover from
the debtor’s insurer. Id. In determining whether the creditor should be permitted to
proceed with his claim, the court began its analysis with 11 U.S.C. §524(a), noting that
§524 explicitly renders judgments void only for the “personal liability of the debtor.” Id.
Because the statutory language, on its face, does not preclude the determination of the
debtor’s liability for the purpose of recovering from a third party, the court held that the
permanent injunction could be lifted. See id.
The Eleventh Circuit also relied upon 11 U.S.C. §524(e) for the proposition that a
creditor may seek relief from the permanent injunction in order to establish liability of the
debtor to recover from a third party. 11 U.S.C. §524(e) provides as follows:
Except as provided in subsection (a)(3) of this section, discharge of a debt of the
debtor does not affect the liability of any other entity on, or the property of any
other entity for, such debt.
The court also cites the following excerpt from Collier:
the provisions of 524(a) apply only with respect to the personal liability of the
debtor. When it is necessary to commence or continue a suit against a debtor in
order, for example, to establish liability of another, perhaps a surety, such suit
would not be barred. Section 524(e) was intended for the benefit of the debtor but
was not meant to affect the liability of third parties or to prevent establishing such
liability through whatever means required.
See 883 F.2d at 973 (citing 3 R. Babitt, A. Herzog, R. Mabey, H. Novikoff, & M.
Sheinfeld, Collier on Bankruptcy ¶ 524.01 at 524-16 (15th ed.1987) (alteration in
original)).
The court comes to the conclusion that the obligation of an insurer must certainly
fall within the cited parameters. See 883 F.2d at 973. The debtor also contends that Mr.
Timmons’ motion and petition are untimely filed pursuant to state law. However, the
cited state court cases offer no support. In Roy v. Garden Ridge, L.P., plaintiffs filed a
personal injury tort action against a corporation which later filed for protection under
Chapter 11 of the bankruptcy code. See 283 Ga. App. 74 (2006). Rather than seek relief
from the discharge injunction in the bankruptcy court, plaintiffs attempted to prosecute
their action in state court despite the injunction. See id. Accordingly, the Georgia Court
of Appeals correctly held that the bankruptcy injunction prevented prosecution of the
state court action and any challenge to the discharge injunction would have to be made in
the bankruptcy court. See id. In this case, the creditor plaintiff is following proper
procedure by seeking relief from the discharge injunction in the bankruptcy court;
accordingly, the court can find no parallel between the cases cited and the instant case.
Conclusion
This court finds that the cases cited in support of the allegation that Mr.
Timmons’ claim is untimely are not on point and lend no support to the debtor’s position.
The bankruptcy court is a court of equity, and; consequently, this court exercises its
discretion to grant the creditor’s motion and lift the permanent injunction for the limited
purpose of enabling the creditor to seek a liability judgment against the debtor as a
prerequisite to recover from the insurer. An order in accordance with this memorandum
opinion will be entered.

SUWANNEE SWIFTY STORES, INC.,

March 22, 2000

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
THOMASVILLE DIVISION
IN RE:
SUWANNEE SWIFTY STORES, INC., CASE NO. 96-60807
EIN: 58-0434460, CHAPTER 11
DEBTOR.
MEMORANDUM OPINION
On February 14 and 15, 2000, the court held a hearing on
Debtor’s objection to claim number 302 of McLane Company, Inc.
(McLane) and McLane’s response to the objection. At the
conclusion of the evidence and argument, counsel for McLane
asked for and was given an opportunity to submit a brief.
Debtor and the Official Committee of Unsecured Creditors filed
briefs in response. The court has considered all the briefs
filed, the evidence, the argument of counsel, and the
applicable statutory and case law. The court will sustain
Debtor’s objection based on the following findings of fact and
conclusions of law.
FACTS
Most of the relevant facts have been stipulated by the
parties in Document number 1548. In addition to those facts,
the court finds by a preponderance of the evidence that McLane
knew Debtor was not paying other suppliers’ bills as they
became due, at least as early as June 1996. The court finds
1
Section 546(c) of the Code provides:
(c) Except as provided in subsection (d) of this
section, the rights and powers of a trustee under
sections 544(a), 545, 547, and 549 of this title are
subject to any statutory or common-law right of a
seller of goods that has sold goods to the debtor, in
the ordinary course of such seller’s business, to
-2-
overwhelming evidence that McLane knew this by November 1996.
McLane was keeping a close watch on Debtor to make sure it paid
McLane within, or close to, contractual terms. The evidence
established that this close watch was based on McLane’s
knowledge that other suppliers were not being paid on time and
also that McLane’s older bills were not being paid.
The court also finds that McLane voted in favor of
Debtor’s plan. Document number 918 is McLane’s ballot
accepting the plan. The plan incorporates the disclosure
statement, which clearly says that there is no provision in the
plan to pay reclamation claims. The court finds that McLane
could have objected either to the disclosure statement or to
the plan incorporating the disclosure statement, but McLane did
neither. Instead, McLane voted in favor of the plan, which was
confirmed. See Doc. no. 993 (Order Confirming the Plan).
DISCUSSION
In order to withstand Debtor’s objection to its claim,
McLane has the burden of proof of establishing by a
preponderance of the evidence that it is entitled to
reclamation under § 546(c)1 of the Bankruptcy Code (“Code”).
reclaim such goods if the debtor has received such
goods while insolvent, but–
(1) such a seller may not reclaim any such goods
unless such seller demands in writing
reclamation of such goods–
(A) before 10 days after receipt of such
goods by the debtor; or
(B) if such 10-day period expires after the
commencement of the case, before 20 days
after receipt of such goods by the debtor;
and
(2) the court may deny reclamation to a seller
with such a right of reclamation that has made
such a demand only if the court–
(A) grants the claim of such a seller
priority as a claim of a kind specified in
section 503(b)of this title; or
(B) secures such claim by a lien.
11 U.S.C. § 546(c)(as amended 1994).
2
O.C.G.A. § 11-2-702 provides in part:
(2) Where the seller discovers that the buyer has
received goods on credit while insolvent he may
reclaim the goods upon demand made within ten days
after the receipt, but if misrepresentation of
solvency has been made to the particular seller in
writing within three months before delivery the tenday
limitation does not apply. Except as provided in
this subsection the seller may not base a right to
reclaim goods on the buyer’s fraudulent or innocent
misrepresentation of solvency or of intent to pay.
(3) The seller’s right to reclaim under subsection
(2) of this Code section is subject to the rights of
a buyer in ordinary course or other good faith
purchaser or lien creditor under this article (Code
Section 11-2-403). Successful reclamation of goods
-3-
McLane failed to carry its burden as to several aspects of its
case.
First, the court finds that Official Code of Georgia
Annotated (“O.C.G.A.”) § 11-2-7022 does require that a creditor
excludes all other remedies with respect to them.
O.C.G.A. § 11-2-702(2), (3) (1994). The Florida Statute
dealing with reclamation is substantively identical to the
Georgia statute except that it does not contain the words “or
lien creditor” in subsection (3). See FLA. STAT. ANN. § 672.702
(1993).
-4-
establish that it discovered a debtor’s insolvency within the
ten days following delivery of the goods. The language of the
statute is clear that lack of knowledge of insolvency is an
element of a reclamation claim under Georgia law. The seller
must discover that the buyer received goods while insolvent.
This necessarily means that the seller did not know the buyer
was insolvent when it shipped the goods. See In re Haugabook
Auto Co., Inc., 9 U.C.C. Rep. Serv. 1095 (M.D. Ga. 1971)
(Bootle, C.J.). In Haugabook Auto, the court found no error in
reading a reliance requirement into Ga. Code Ann. § 109A-2-702,
the precursor to O.C.G.A. § 11-2-702. The court stated:
It is a well settled principle of law that one
charging fraud against another must prove reliance on
the fraudulent act alleged to have been committed
before any recovery is authorized. The Comments to
the Official Text on the Uniform Commercial Code
(Comment 2) in referring to what is Ga. Code Ann. §
109A-2-702 indicates the close relationship of that
code section to the general fraud remedies long
recognized in law. . . . A seller who knows of the
buyer’s insolvency or knows that the buyer
misrepresented his solvency, and who nevertheless
engages in credit transactions with the buyer, is in
no position to complain.
Haugabook Auto, 9 U.C.C. Rep. Serv. at 1096.
In this case, the evidence established that McLane knew by
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June 1996 that Debtor was insolvent under the U.C.C. in the
sense that it was not paying its bills as they came due.
Therefore, McLane cannot satisfy the Georgia statutory test for
reclamation and is not entitled to reclaim under § 546(c) of
the Code.
Second, McLane failed to carry its burden to identify and
quantify what goods from the previous ten days’ deliveries were
still in Debtor’s stores on the date of demand. See Flav-ORich,
Inc. v. Rawson Food Serv., Inc. (In re Rawson Food Serv.,
Inc.), 846 F.2d 1343, 1344 (11th Cir. 1988) (“We conclude that
an implicit requirement of a § 546(c) reclamation claim is that
the debtor must possess the goods when the reclamation demand
is made and therefore that the seller must prove possession as
part of its prima facie case.”). It may be possible for a
creditor to carry its burden in this regard by proof of
industry standards for turns of particular items. See Rawson
Food Serv., 846 F.2d at 1350 n.11 (“There is support in the
cases that the court can look to evidence of the normal
turnover time of goods to determine whether the goods remained
in the debtor’s possession as of the reclamation demand. See
In re Landy Beef Co. Inc., 30 B.R. at 21.”).
However, that burden was not carried in this case. It is
certainly likely that a large amount of goods delivered within
the preceding ten days remained in the stores on the date of
demand. Unfortunately for McLane, under the evidence
-6-
presented, it is impossible to quantify that amount. McLane’s
controller of its Georgia division made an effort to take
industry data and apply it only to the Georgia stores in order
to come up with a percentage of goods remaining for all of the
Georgia and Florida stores. This simply left the quantity too
indefinite. Therefore, McLane also cannot satisfy this prong
of § 546(c) even if it could pass muster under the Georgia
statutory requirements for reclamation.
Third, the parties stipulated that NationsBank (now Bank
of America) had a blanket lien on Debtor’s inventory that
exceeded the value of its inventory at the date of demand
(which was the same day as the date of filing). However,
McLane could possibly prevail if it could require NationsBank
to marshal and look to other collateral for payment in full of
its secured claim. See In the Matter of Leeds Bldg. Prods.,
Inc., 141 B.R. 265, 270 (Bankr. N.D. Ga. 1992) (holding that a
seller may have a right to reclaim notwithstanding a secured
creditor with priority if the seller can show the right to
reclaim would have some value outside of bankruptcy).
McLane’s argument in this regard might be well taken if
McLane had filed an adversary proceeding joining NationsBank as
a party. Here, however, we merely have an objection to claim
involving no parties other than Debtor and McLane. Therefore,
the court cannot order NationsBank to marshal.
In this court’s opinion, it is a close call whether
-7-
McLane, as an unsecured creditor, can invoke marshaling against
a secured creditor. A recent decision, Galey & Lord Inc. v.
Arley Corp. (In re Arlco, Inc.), 239 B.R. 261 (Bankr. S.D.N.Y.
1999), holds that only a secured creditor can invoke marshaling
under circumstances very similar to the facts in this case.
However, Judge Cotton in In re Maddox, 84 B.R. 251, 258 (Bankr.
N.D. Ga. 1987), allowed a party who was not a creditor at all
but who had an interest in part of the debtor’s property to
utilize the doctrine. This court is inclined to follow the
reasoning in Maddox. However, the point is academic in this
case because NationsBank has not been joined in this action.
Finally, as discussed in the court’s fact findings, McLane
voted for Debtor’s plan which incorporated the disclosure
statement’s mandate that no reclamation claims were provided
for in the plan. McLane is now bound by this language in the
confirmed plan.
The Eleventh Circuit discussed the preclusive effect of an
order confirming a chapter 11 plan in Wallis v. Justice Oaks
II, Ltd. (In re Justice Oaks II, Ltd.), 898 F.2d 1544 (11th
Cir. 1990). The court stated:
Claim preclusion applies to an order or judgment when
four conditions are satisfied. First, the prior
judgment must be valid in that it was rendered by a
court of competent jurisdiction and in accordance
with the requirements of due process. Second, the
judgment must be final and on the merits. Third,
there must be identity of both parties or their
privies. Fourth, the later proceeding must involve
the same cause of action as involved in the earlier
-8-
proceeding.
Id. at 1550 (citations omitted).
All four elements are satisfied in this case. First,
there has been no challenge to the court’s jurisdiction or to
the procedure followed in confirming Debtor’s plan. Second, it
is well established that a bankruptcy court’s order of
confirmation is entitled to the same effect as any district
court final judgment on the merits. Id. Third, Debtor and
McLane were parties to the confirmation proceeding and McLane
had an opportunity to object to its treatment during that
proceeding. Fourth, McLane’s reclamation claim is based on the
same transaction that gave rise to its treatment in the plan.
Therefore, because the four requirements for claim preclusion
are met in this case, the confirmation order is a complete bar
to McLane’s reclamation claim. See Sanders v. GIAC Leasing
Corp. (In re Sanders), 81 B.R. 496, 498 (Bankr. W.D. Ark. 1987)
(“An order confirming a chapter 11 plan from which there is no
appeal is generally regarded as an order that is entitled to
full faith and credit by other courts and is res judicata as to
all questions pertaining to such plan which were raised or
could have been raised.”).
CONCLUSION
The facts and the law in this case do not allow for
McLane’s reclamation claim against Debtor. Accordingly,
McLane’s total claim of $807,466 (as stipulated at ¶58 of Doc.
-9-
no. 1548) will be allowed as unsecured. Debtor’s objection
will be sustained.
An order in accordance with this Memorandum Opinion will
be entered.
DATED this 22nd day of March 2000.
________________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

R-P PACKAGING,INC

March 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
R-P PACKAGING,INC. : CASE NO. 99-42537
d/b/a COLUMBUS PACKAGING, : CHAPTER 11
:
Debtor. ::
PLICON CORPORATION, : CASE NO. 00-41153
: CHAPTER 11
Debtor. ::
MEMORANDUM OPINION
On October 12, 2001, the court held a hearing on the
objection to claims and motion for determination of tax liability
of R-P Packaging, Inc. and Plicon Corporation (collectively,
“Debtors”) to the Muscogee County Tax Commissioner
(“Commissioner”). At the conclusion of the presentation of the
evidence, the court asked the parties to submit proposed findings
of fact and conclusions of law. The court has considered all the
briefs and proposed findings and conclusions filed by the
parties, the evidence, and the applicable statutory and case law.
The court will sustain Debtors’ objection to the extent that the
Commissioner’s claim is inconsistent with the following findings
of fact and conclusions of law.
PROCEDURAL HISTORY
On November 12, 1999, R-P Packaging, Inc. filed a voluntary
petition under Chapter 11 of the Bankruptcy Code (“Code”). On
1 Unless otherwise indicated, references to court documents are those filed
in R-P Packaging, Inc., Case No. 99-42537.
-2-
June 1, 2000, Plicon Corporation filed its Chapter 11 petition.
Debtors continued in the management and operation of their
businesses as debtors-in-possession pursuant to § 1107 and § 1108
of the Code. No order for joint administration of Debtors’ cases
has been entered. However, in accordance with the Joint Plan of
Liquidation which was confirmed on August 3, 2001, a single
unitary estate has been established. (Doc. 164)1.
During the course of Debtors’ operations, Debtors owned
certain personal property consisting of, among other things,
machinery, equipment, and inventory (“personal property”). The
personal property was used at Debtors place of business located
at 4949 Schatulga Road, Columbus, Muscogee County, Georgia.
On December 17, 1999, the Commissioner filed her initial
proof of claim in which she asserted a priority claim in the
amount of $481,625.99. (claim #28). The Commissioner amended her
claim several times and on March 29, 2000, she filed a final
amended claim in the amount of $588,700.99. (See claim #108;
Doc. #97, Exh. “A”). This claim consists of taxes which the
Commissioner alleges are due for the years of 1996 through 2000.
On June 30, 2000, the court entered an order authorizing the
sale of substantially all of Debtors’ personal property to
Plystar, Inc. (“Plystar”) for a purchase price of $1,785,000.00.
(Doc. #76). The order provided that the personal property would
-3-
be sold free and clear of all liens and encumbrances. The
Commissioner’s tax liens attached to the proceeds of the sale.
On March 19, 2001, Debtors filed their objection to the
Commissioner’s claim and a motion for determination of tax
liability pursuant to § 505 of the Code. Debtors contend that
the valuation of the personal property was too high and in excess
of its fair market value for the 1996 through 2000 tax years.
Debtors assert that the best evidence of fair market value is the
price that could be obtained at an arms length sale. Moreover,
Debtors argue that at least a portion of the personal property
may not have been subject to tax for the entire period in
question because Debtors were entitled to tax abatements.
On June 6, 2001, the court entered a consent order
authorizing Debtors to disburse $250,000.00 to the Commissioner.
(Doc. #120). This order provided that the disbursement was to be
applied to the Commissioner’s claim.
On October 11, 2001, the Commissioner filed a trial brief in
support of her position on Debtors’ objection and § 505 motion.
In her brief, the Commissioner disputes that Debtors were
entitled to any tax abatements. In addition, the Commissioner
asserts that the fair market value for ad valorem tax purposes is
generally ascertained by multiplying the cost of the property by
a depreciation factor.
On October 12, 2001, the court held a hearing on Debtors’
objection to the Commissioner’s claim and motion for
-4-
determination of tax liability. The following constitutes the
court’s Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
The parties have entered into a number of stipulations. As
of October 20, 2001, the parties agree that the Commissioner’s
records indicate that Debtors are indebted to the Commissioner
for accrued taxes, interest, and penalties in the amount of
$429,423.33, the unpaid portion of which continues to accrue
interest. This amount is inclusive of the $250,000.00 court
authorized disbursement. The parties also agree that the
Commissioner’s calculations are based on Debtors’ tax returns.
The parties also have stipulated that the millage rate for the
period in question is 0.041. Therefore, if the court were to
accept the appraisal value of Mr. Oliver Juhan, the parties agree
that the Commissioner’s records would accurately reflect Debtors’
tax liability. On the other hand, if the court were to accept
the appraisal value proposed by Mark Wilenkin, the parties agree
that Debtors’ total outstanding tax liability would be
$161,114.11. This amount is exclusive of any penalties and
interest.
The parties have further stipulated to the value of the
inventory. As a result, the value of the inventory for each year
in question is as follows: $46,952.00 in 1996; $28,954.00 in
-5-
1997; $21,624.00 in 1998; $15,468.00 in 1999; and $219,133.00 in
2000. Therefore, the sole issue before the court is the value of
the machinery and equipment (“Equipment”) excluding the
inventory.
At the hearing, Ms. Jane Worthington testified for the
Debtors. Since October 2000, Ms. Worthington has served as the
president of the Debtors. Prior to that time, Ms. Worthington
served as the director of human resources and the customer
service manager. To some extent, Ms. Worthington was involved in
the asset sale to Plystar. However, based on Ms. Worthington’s
testimony, the court finds that she has insufficient knowledge to
testify as to the value of the Equipment.
The court likewise finds Mr. Marel Stewart incompetent to
testify as an expert as to the value of the Equipment. Mr.
Stewart testified that he was employed by Debtors for over forty
years where he worked directly with the Equipment. Nevertheless,
his testimony failed to demonstrate a satisfactory knowledge as
to the valuation of the Equipment.
As to the testimony of Mr. Mark Wilenkin, the court finds
him competent to testify as an expert. Although Mr. Wilenkin
holds no license or professional designation, he has several
years of experience in buying, selling and appraising equipment
like that at issue in this case. In addition to conducting all
appraisals for his own company, Mr. Wilenkin performs evaluations
and appraisals for other companies and accountants.
2 Mr. Wilenkin defined a “bench-top” appraisal as one which is based solely
on a list and/or pictures of machinery or equipment.
-6-
However, the court does not find Mr. Wilenkin competent to
testify as to whether the specific pieces of equipment contained
in his appraisal were actually in Debtors’ possession at the
times in question. While Mr. Wilenkin did inspect the Equipment
on November 9, 2000, this was after the sale of the Equipment to
Plystar. Therefore, Mr. Wilenkin never inspected all of the
Equipment while it was in Debtors’ possession. According to his
testimony, Mr. Wilenkin’s “bench-top”2 appraisal was based on
lists of the Equipment supplied to him by Debtors’ counsel and
Norman Adler of Norman Levy Associates. (See also Wilenkin Dep.
at 11-12).
Nonetheless, Mr. Wilenkin held firm to his bench-top
appraisal and testified that the present value of the Equipment
was $1,998,380.00 as of February 1999. Mr. Wilenkin defined
present value as the value of the Equipment if sold in place to
a willing buyer by a willing seller. (See also Movant’s Exh.
“1″). Mr. Wilenkin chose the February 1999 date because it was
a reasonable mid-point for the period in question. Furthermore,
he testified that the value would not have substantially changed
during that period.
Mr. Oliver Juhan testified for the Commissioner. The court
finds Mr. Juhan competent to testify as an expert on the
Equipment. Mr. Juhan is the chief for the personal property
-7-
division of the Muscogee County Board of Tax Assessors (“Tax
Assessors”). He has been a member of the American Society of
Appraisers since 1984. From 1974 until the time at which Mr.
Juhan joined the Tax Assessors, Mr. Juhan had been an appraiser
for the Georgia Department of Revenue. Mr. Juhan testified that
since October 1997, he has visited the Debtors’ facility each
year. During these visits, he personally inspected the
Equipment.
Mr. Juhan testified that Georgia law requires taxpayers to
return their personal property for fair market value. Mr. Juhan
explained that taxpayers such as the Debtors are required to
return a Business Personal Property Report (“Return”). (See
e.g., Exh R-1). In the Return, taxpayers are required to include
the cost of the property with the applicable depreciation. From
the information contained in the Return, the Tax Assessors assess
the value. If no challenge or appeal is made by the taxpayer
within thirty (30) days, this amount constitutes the assessed
value which is then forwarded to the Commissioner for the
calculation of the amount of tax due.
During the 1996 through 2000 tax years, Mr. Juhan testified
that the Tax Assessors office used the depreciated cost method in
determining the value of Debtors’ Equipment. According to Mr.
Juhan, the depreciated cost method is the most fair and equitable
method for valuing commercial personal property. Although other
methods such as sales comparison and income approach are
-8-
available, Mr. Juhan testified that these methods would not
result in the best estimate of the fair market value. For
example, Mr. Juhan explained that his appraisal included the cost
and installation of the Equipment using non-union labor. The
sale of similar equipment in New York likely would be installed
with unionized labor. Therefore, a sales comparison in New York
would not be very comparable. Furthermore, Mr. Juhan testified
that the Georgia Department of Revenue uses the cost depreciation
method in determining the value of personal property like that in
question in this case.
Mr. Juhan acknowledged, however, that the depreciated cost
value does not always result in the best estimate of the fair
market value. In many cases, it is often necessary to consider
other relevant factors including, but not limited to obsolescence
and whether a ready market for the property exists. In the
instant case, Mr. Juhan testified that all relevant information
provided by Debtors was considered in determining the fair market
value of Debtors’ Equipment.
For the tax years in question, Mr. Juhan also testified that
the value of the Equipment was based on two tax accounts: account
number 00135201 (“201 account”) and account number P0420401 (“P
account”). Only a W & H Olympia 726 CL Press and a General 51″
Vacuum Metalizer were included in the P account. The remaining
Equipment at issue was included in the 201 account.
For the 1996 tax year, Mr. Juhan testified that the Tax
-9-
Assessors initially determined that Debtors’ Equipment had a fair
market value of $6,513,839.00. Primarily, this amount was based
on Debtors’ own tax return. In addition to depreciation, Mr.
Juhan testified that obsolescence factors were applied. Because
of idle equipment and capitalized labor, which presumably were
not considered, Debtors appealed the Tax Assessors’ valuation to
the Muscogee County Board of Equalization (“board of
equalization”). As a result, the fair market value of the
Equipment was reduced to $5,883,773.00. (See Exh. R-1). Mr.
Juhan indicated that this value pertained only to the Equipment
in the 201 account. Mr. Juhan explained that although a value of
$2,599,857.00 on the Equipment in the P account had been
assessed, the tax liability resulting from that value had been
paid by Debtors. Therefore, there is no issue regarding the
valuation of the Equipment in the P account for the 1996 tax
year. (See Doc. #97, Exh. “A”).
As to the 1997 tax year, the Tax Assessors valued Debtors’
Equipment at $4,753,029.00. According to Mr. Juhan, this amount
was exclusive of some idle machinery that was out of service.
Also, this amount did not include some machinery which Debtors
abandoned when they moved their plant to another location. For
these reasons, Mr. Juhan testified that a straight line
depreciation method would be fair and equitable as to that year’s
valuation. (See Exh. R-2).
However, on cross examination, Mr. Juhan testified that the
-10-
tax liability for the 1997 tax year was based on a $2,414,155.00
assessed value on the Equipment in the P account and a
$5,668,102.00 assessed value on the Equipment in the 201 account.
The sum total of the valuations on both tax accounts total
$8,082,257.00, an amount which differs from Mr. Juhan’s direct
examination testimony by $3,329,228.00. Remarkably, Mr. Juhan
provided no explanation for this rather large difference in the
valuations.
For the 1998 and 1999 tax years, Mr. Juhan testified that he
was personally involved in the valuation of Debtors’ Equipment.
After some adjustments to the 1998 valuation, the Tax Assessors
valued the Equipment at $5,073,181.00. (See Exh. R-3). A hearing
before the board of equalization was conducted. According to Mr.
Juhan, the board of equalization valued the Equipment in the P
account at $1,050,000.00. As to the Equipment in the 201
account, a new value of $2,320,256.00 was assessed. The Tax
Assessors appealed to the superior court, but this appeal was
interrupted by the filing of Debtor’s bankruptcy case.
For the 1999 tax year, some revaluations occurred. Mr.
Juhan testified that he discovered a laser device which had not
been previously reported. After the revaluations, the Tax
Assessors determined the total value of all equipment and
inventory to be $5,806,830.00. Mr. Juhan testified that Debtors
never challenged this assessed amount. (See Exh. R-5). Mr. Juhan
further testified that the P account Equipment was valued at
-11-
$1,864,623.00 and the 201 account Equipment was valued at
$4,812,177.00. The increased value in the 201 account was a
result of the newly discovered laser. Based on the account
information, the total assessed value of the Equipment excluding
the inventory was $6,676,800.00. However, similar to the 1997
valuations, Mr. Juhan provided no explanation for the discrepancy
between $5,806,830.00 and $6,676,800.00. Further, if the
$15,468.00 value of the inventory, an amount on which both
parties agree, is deducted from the $5,806,830.00 amount, a
greater discrepancy results.
For the 2000 tax year, the Tax Assessors valued all of
Debtors’ personal property at $4,862,172.00. Mr. Juhan testified
that this amount included the Equipment, fixtures and inventory.
Accordingly to Mr. Juhan, Debtors never challenged this amount.
Despite Mr. Juhan’s testimony, Debtors’ 201 account Return
provides that all personal property was valued at $4,022,636.00.
(See Exh. R-6). Mr. Juhan testified that no return was filed on
the P account for the 2000 tax year, therefore, the same value as
the prior year without any depreciation would be assessed.
Accordingly, $1,864,623.00 was assessed to the P account. As to
the Equipment in 201 account, $4,232,458.00 was assessed to that
account.
CONCLUSIONS OF LAW
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The authority for the court to determine tax liability is
found in § 505 of the Code. In pertinent part, § 505(a) of the
Code provides:
(a)(1) Except as provided in paragraph (2) of this
subsection, the court may determine the amount or legality
of any tax, any fine or penalty relating to a tax, or any
addition to tax, whether or not previously assessed, whether
or not paid, and whether or not contested before and
adjudicated by a judicial or administrative tribunal of
competent jurisdiction.
(2) The court may not so determine-
(A) the amount or legality of a tax, fine, penalty, or
addition to tax if such amount or legality was
contested before and adjudicated by a judicial or
administrative tribunal of competent jurisdiction
before the commencement of the case under this title;
. . .
11 U.S.C. § 505(a); see also In re Koger Properties, Inc., 172
B.R. 351, 352 (Bankr. M.D. Fla. 1994)(holding that except for the
limitation in § 505(a)(2) of the Code, “the bankruptcy court has
jurisdiction to determine the amount or legality of any tax, fine
or penalty for which the debtor is liable.”). Although the
parties have raised the issue of abstention, neither party has
addressed the jurisdictional issue which § 505(a)(2)(A) of the
Code presents. Thus, the court will first address jurisdiction
under this subsection.
Under § 505(a)(2)(A), the court is without jurisdiction to
determine the tax liability if such determination was
“adjudicated by a judicial or administrative tribunal” before the
case was filed. See In re Onondaga Plaza Maintenance Co., 206
B.R. 653, 656 (Bankr. N.D. N.Y. 1997)(holding that the court was
-13-
without authority pursuant to § 505(a)(2)(A) to determine the
debtors’ tax liability because the tax liability was contested
and adjudicated by the city’s assessment board of review before
the case was filed); In re Washington Mfg. Co., 120 B.R. 918,
919-20 (Bankr. M.D. Tenn. 1990)(no authority because the county
board of equalization denied debtors’ prepetition request for a
lower appraisal); In re Ishpeming Hotel Co., 70 B.R. 629, 632
(Bankr. W.D. Mich. 1986)(res judicata on tax liability issue
because the debtor contested the assessors’ valuations and
appeared before the municipal board of review prior to its
bankruptcy case).
In this case, the evidence demonstrates that the board of
equalization adjudicated the valuation of Debtors’ Equipment for
the 1996 and 1998 tax years. There is no direct evidence as to
whether the 1996 and 1998 determination by the board of
equalization occurred prepetition. However, given Mr. Juhan’s
testimony that a taxpayer has thirty (30) within which to appeal
to the board of equalization, the court must conclude that the
1996 determination occurred prepetition. Therefore, the court
finds that the court is without jurisdiction to determine
Debtors’ tax liability for the 1996 tax year.
As to the 1998 tax year, Mr. Juhan testified that the filing
of Debtors’ case interrupted the Tax Assessors’ appeal of the
valuation by the board of equalization. Because that
determination has been appealed, the court finds that the 1998
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tax liability has not been fully adjudicated as defined in §
505(a)(2)(A) of the Code. See Texas Comptroller of Public
Accounts v. Trans State Outdoor Advertising Co. (In re Trans
State Outdoor Advertising Co.), 140 F.3d 618, 621-22 (5th Cir.
1998)(holding that debtor’s tax liability could have been
determined by the bankruptcy court if debtor had filed its
petition before the decision of the Comptroller became final);
Lipetzky v. the Dep’t of Revenue of the State of Montana (In re
Lipetzky), 64 B.R. 431, 434 (Bankr. D. Mont. 1986)(holding that
the bankruptcy court has jurisdiction to determine debtor’s tax
liability because no final decision had been entered in the state
court appeal). Accordingly, the court has jurisdiction to review
the 1998 valuations and make a tax liability determination for
that year.
As to the abstention issue raised by the parties, the court
agrees with Debtors that abstention would not be appropriate.
Under § 505(a)(1) of the Code, the court may abstain from making
a determination of tax liability. Because § 505(a)(1) provides
that the court “may” determine tax liability, the exercise of
jurisdiction under this subsection is discretionary. However,
courts typically have analyzed several factors before determining
whether abstention is proper. See Thornton v. United States (In
re Thornton), No. 92-40405, 1995 WL 442192, at *6 (Bankr. M.D.
Ga. June 23, 1995)(Laney, J.); Gossman v. United States (In re
Gossman), 206 B.R. 264, 266 (Bankr. N.D. Ga.)(Murphy, J.). As
-15-
Debtors have pointed out, this court in Thornton looked at
factors such as the complexity of the tax issues, efficient and
orderly case administration, the court’s docket, and trial time.
Thornton at *7; see also Gossman at 266. In evaluating these
factors, courts primarily consider whether a bankruptcy purpose
would be served. See Gossman at 267.
In the instant case, the court agrees with Debtors’ analysis
of these factors. Accordingly, the court will not abstain from
exercising its jurisdiction under this subsection.
In determining the tax liability under § 505(a)(1), the
court must apply the substantive aspects of state law. See Blue
Cactus Post, L.C. v. Dallas County Appraisal District (In re Blue
Cactus Post), 229 B.R. 379, 386 (Bankr. N.D. Tex. 1999)(citing
Arkansas Corp. Comm’n v. Thompson, 313 U.S. 132, 142 (1941)).
The fact that a debtor/taxpayer did not comply with the
procedural requirements under state law in contesting a tax
assessment is irrelevant under § 505(a)(1) of the Code. See id.
at 386-87. Accordingly, the court will apply Georgia law.
Pursuant to O.C.G.A. § 48-5-6, taxpayers are required to
return their property at its fair market value for the purposes
of ad valorem taxation. Georgia law defines “fair market value”
as the amount “a knowledgeable buyer would pay for the property
and a willing seller would accept for the property at an arm’s
length, bona fide sale.” O.C.G.A. § 48-5-2(3). As to the
valuation of equipment and machinery in which no ready market
-16-
exists, “value may be determined by resorting to any reasonable,
relevant, and useful information available including, but limited
to, the original cost of the property, any depreciation or
obsolescence. . . .” Id.
In this case, the court finds that Mr. Wilenkin’s bench-top
appraisal was consistent with Georgia law. Pursuant to Mr.
Wilenkin’s testimony, he defined “present value,” the term used
in his appraisal, as the value of the Equipment if sold in place
to a willing buyer by a willing seller. Thus, “present value” is
sufficiently consistent with “fair market value” as defined in
O.C.G.A. § 48-5-2(3). Also, Mr. Wilenkin’s use of comparable
sales in arriving at his appraisal qualify as “reasonable,
relevant and useful information” as contemplated in O.C.G.A. §
48-5-2(3). However, the court notes that Mr. Wilenkin did not
personally appraise the Equipment at issue. Morever, he assigned
the same value to the Equipment for each year in question
contending that the value of the Equipment would not have
substantially changed during the period in question.
The court also finds that the Tax Assessors complied with
Georgia law in determining the value of Debtors’ Equipment. In
addition to straight line depreciation, the evidence demonstrates
that the Tax Assessors used cost and obsolescence factors when
applicable. See O.C.G.A. § 48-5-2(3). This is not to say, as
pointed out by Debtors, that the Tax Assessors enjoy a
presumption of correctness. See Macon-Bibb County Brd. of Tax
-17-
Assessors v. J.C. Penney Co., Inc., 239 Ga. App. 322, 324, 521
S.E.2d 234, 236 (1999). In contrast to Mr. Wilenkin’s appraisal,
the Tax Assessors personally inspected the Equipment and valued
the Equipment for each year in question. The court disagrees
with the Tax Assessors on the use of comparable sales. The Tax
Assessors should have considered comparable sales.
The primary difficulty, however, with the Tax Assessors’
valuation is the discrepancy in their own valuations for each
year in question. Given this discrepancy and the fact the Tax
Assessors failed to consider comparable sales factors, the court
will give some weight to the appraisal of Mr. Wilenkin.
For the 1997 tax year, the Tax Assessors assessed Debtors’
tax accounts at $8,082,257.00 but testified that they valued the
Equipment at $4,753,029.00. The court can make no conclusion
regarding this disparity. For each year in question, Mr.
Wilenkin appraised the Equipment at $1,998,380.00. In the prior
year, Debtors accepted $2,599,857.00 as the value for just two
pieces of Equipment. Accordingly, the court cannot accept Mr.
Wilenkin’s value but will give Debtors the benefit of the Tax
Assessors lowest valuation. Therefore, the court finds the value
of the Equipment for the 1997 tax year to be $4,753,029.00.
As to the 1998 tax year, the court accepts the valuation of
the Equipment as set forth by the board of equalization. This
gives some weight to Mr. Wilenkin’s appraisal which considered
comparable sales. As a result, the court finds that the value of
-18-
the Equipment for the 1998 tax year is $3,370,256.00.
For the 1999 tax year, Mr. Juhan testified that the assessed
value increased from the prior year because of a laser device he
discovered which was not reported in prior years. Mr. Wilenkin’s
appraisal mentions nothing about the laser. As a consequence,
the court will give Mr. Wilenkin’s appraisal no weight.
Nevertheless, because the Tax Assessors failed to consider any
comparable sales factors, the court again will give Debtors the
benefit of the Tax Assessors lowest appraisal which is
$5,806,830.00.
As to last year in question, the Tax Assessors have
testified to two different valuations. Further, the Tax
Assessors have presented Debtors 201 account Return for 2000
which shows yet a third valuation amount. (See Movant’s Exh. 6.)
The court finds this unremarkable. Because Mr. Wilenkin’s
appraisal did not include the laser, the court cannot accept his
appraisal. The evidence shows that Debtors did not challenge the
assessed value for the 2000 tax year. Therefore, the court will
accept the value as indicated in their 201 account Return for the
2000 tax year. Given the $4,022,636.00 value for all personal
property less the undisputed value of the inventory, the court
finds the value of the 201 account equipment to be $3,803,503.00.
The only testimony as to the value of the equipment in the P
account was $1,864,623.00. Accordingly, the total value for the
Equipment for the 2000 tax year is $5,668,126.00.
-19-
CONCLUSION
As to the 1996 tax year, § 505(a)(2) of the Code prohibits
the court from determining Debtors’ tax liability. For the
remaining years in question, the court will value the Equipment
as follows:
1997 $4,753,029.00
1998 $3,370,256.00
1999 $5,806,830.00
2000 $5,668,126.00
Therefore, the court will sustain Debtors’ objection to the
Commissioner’s claim to the extent that the Commissioner’s claim
is inconsistent with these values.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this _____ day of March, 2002.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

JERRY HAMPTON

January 2001

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
THOMASVILLE DIVISION
IN RE: : CASE NO. 99-60376
:
JERRY HAMPTON, :
SSN: 258-94-1125, : CHAPTER 12
:
Debtor. :
MEMORANDUM OPINION
On November 1, 2000, the court held a hearing on Trustee’s
objection to claim number 0013 of Lasseter Tractor Company, Inc.
(“Lasseter”) as a secured claim and Lasseter’s response to the
objection. At the conclusion of the hearing, the parties were
given an opportunity to submit letter briefs. Trustee filed a
letter brief. Lasseter and Debtor filed letter briefs in
response. After considering the parties’ briefs and the
applicable statutory and case law, the court will sustain
Trustee’s objection.
FACTS
On November 20, 1995, Debtor purchased a model 8200 John
Deere Tractor (“tractor”) from Lasseter at which time Debtor
entered into a security agreement with Deere & Company.
(“Deere”). On November 22, 1995, Deere filed a UCC-1 financing
statement in the Colquitt County Clerk’s office describing its
security interest in the tractor. (Exh. “A”).
On May 3, 1999, Deere filed a UCC-3. Presumably, Deere
1 Id. Deere’s representative, Roberta J. Petty, signed under
“Secured Parties” and Tina Arrington, a representative from Lasseter,
signed under “Signature of Debtor(s).”
2 The parties have stipulated that these documents were filed in the
Colquitt County Clerk’s office in April 2000, however, the court notes
that there is no “Filed” stamp from the Clerk’s office indicating the
date and time of the filing. The only date reference is the April 7,
2000 date in the affidavit. See Exh. “C”.
-2-
executed this filing attempting to assign its interest in the
tractor to Lasseter because the “Assignment” box was checked.
(Exh. “B”). However, the box and sentence indicating an
“Assignment” was crossed through and the “Termination” block was
checked. Id. Furthermore, the reference specifically describing
that an assignment to Lasseter was being made, was also crossed
through and initialed by Lee Ann P. Williams, an employee of
Lasseter. Id. Representatives from Lasseter and Deere signed
the UCC-3.1 The original UCC-1 filed on November 22, 1995 was
stamped “terminated 5-3-99.” (Exh. “A”).
On May 7, 1999, Debtor filed a voluntary petition under
Chapter 12 of the Bankruptcy Code. (“Code”). On September 8,
1999, Lasseter filed a proof of claim as secured in the amount of
$63,104.30 describing the tractor as its collateral. On January
31, 2000, the court confirmed Debtor’s Chapter 12 plan which
treated Lasseter as secured. (Doc. No. 78).
In April 2000, Lasseter filed an amended UCC-3. Attached to
the amended UCC-3, Lasseter submitted an affidavit indicating
that the May 3, 1999 termination was in error.2
On August 2, 2000, Trustee objected to the proof of claim as
-3-
being secured. Trustee maintains that at the time Debtor’s
petition was filed, no valid financing statement existed.
Therefore, Lasseter had an unperfected security interest in the
tractor. Trustee does not object to the allowance of the claim
as unsecured.
On September 26, 2000, Debtor filed his response to
Trustee’s objection. In both his response and letter brief,
Debtor agrees with Trustee and maintains that equity would be
better served if Lasseter’s claim was treated as unsecured.
On August 30, 2000, Lasseter filed its response to Trustee’s
objection. Lasseter asserts that the termination of the original
UCC-1 was done in error and executed without Lasseter’s
authority. In its brief, Lasseter maintains that it lacked
authority to execute a termination statement and further asserts
that equitable reformation is proper.
DISCUSSION
The issue before the court is whether Lasseter held a
perfected a security interest in the tractor at the time Debtor
filed his Chapter 12 petition. Because this issue has arisen in
the context of an Objection to Claim, Rule 3007 of the Federal
Rules of Bankruptcy Procedure governs. However, “[i]f an
objection to a claim is joined with a demand for relief of the
kind specified in Rule 7001, it becomes an adversary proceeding.”
FED. R. BANKR. P. 3007 (2000). Conceivably, Trustee’s Objection to
-4-
Claim seeks “to determine the validity, priority, or extent of
a lien . . . .” FED. R. BANKR. PROC. 7001(2)(2000).
Although the court finds that the Objection to Claim may not
be the proper procedure for presenting this issue, this is a
procedural defect and not a jurisdictional defect, which may be
waived. In re Felker, 181 B.R. 1017, 1020 (Bankr. M.D. Ga.
1995)(Walker, J.). “The failure of any party to raise this issue
either at the hearing or subsequently at the Court’s invitation
to brief the issues evidences such waiver by the parties.” Id.
(citing In re Duke, 153 B.R. 913, 914 (Bankr. N.D. Ala. 1993).
Because none of the parties in this case raised this issue either
at the hearing or in their letter briefs, the court finds that
all parties waived this procedural defect.
Even if there had been no waiver, the court nevertheless
finds that, given the facts of this case, an adversary proceeding
is not required. If a creditor fails to file documentation
supporting the existence of a security interest, an adversary
proceeding is not required “to reduce the claim to an unsecured
claim; a less formal objection to the claim is sufficient.” In re
Therneau, 214 B.R. 782, 785 (Bankr. E.D.N.C. 1997); See also In
re Merry-Go-Round Enterprises, Inc., 227 B.R. 775, 778 (Bankr. D.
M.D. 1998)(holding that an objection to secured status is not the
type of relief specified in Rule 7001(2)). In this case,
Lasseter did not file a UCC-1 with its proof of claim and Trustee
is seeking only to reduce the claim to an unsecured status.
-5-
Therefore, the court finds that the Objection to Claim is
sufficient.
A properly filed proof of claim is prima facie evidence of
the validity and amount of the claim. FED. R. BANKR. P. 3001(f)
(2000). Therefore, the party objecting to the claim has the
burden of overcoming this evidentiary effect. Cherry v. General
Motors Acceptance Corp. (In re Cherry), 116 B.R. 315, 317 (Bankr.
M.D. Ga. 1990)(Laney, J.). This burden is met when the objecting
party has presented “sufficient evidence to place the claimant’s
entitlement at issue[,]” at which time the burden then shifts to
the claimant. Id. (quoting In re Taylor, 99 B.R. 371, 373
(Bankr. S.D. Ohio 1989).
Trustee’s objection clearly raises the issue of Lasseter’s
entitlement as a secured creditor. The court finds that Lasseter
executed the May 3, 1999 termination in error and therefore, the
court agrees with the cases cited by the Trustee. See Crestar
Bank v. Neal (In re Kitchin Equipment Company of Virginia), 960
F.2d 1242 (4th Cir. 1992); In re Silvernail Mirror and Glass,
Inc., 142 B.R. 987 (Bankr. M.D. Fla. 1992). Although the
termination statement was filed in error and did not reflect the
intent of the parties, anyone who conducted a search of the
public records between May 3, 1999 and April 2000 would have
concluded that no security interest existed. Kitchin at 1249;
Silvernail at 989-90. The court finds that Lasseter’s security
interest was not perfected at the time of Debtor’s filing and was
3 Although no assignment was executed, the court finds that the May 3,
1999 UCC-3 was most likely an attempt by Deere to assign its interest
to Lasseter.
-6-
ineffective as against Trustee. Accordingly, the court finds
that Trustee has met its burden and thus the burden of persuasion
shifts to Lasseter. See In re Cherry, 116 B.R at 317.
Lasseter’s asserts that it did not have the authority to
terminate the UCC-1. Deere was the secured party which, at the
time the termination was made, had not assigned its interest to
Lasseter.3 Citing Eleventh Circuit authority, Lasseter maintains
that because no agency relationship existed between Lasseter and
Deere, Lasseter had no authority to execute a termination
statement on behalf of Deere, the secured party. Borg-Warner
Acceptance Corp. v. Davis, 804 F.2d 1580, 1583 (11th Cir. 1986).
Furthermore, Lasseter distinguishes Kitchin and Silvernail by
pointing to the fact that the erroneous termination in those
cases were performed by the secured parties themselves.
However, the court disagrees with Lasseter and finds Borg-
Warner to be inapplicable. In this case, unlike Borg-Warner, the
termination statement was signed by a representative of both
Lasseter and Deere. Deere’s employee, Roberta J. Petty, signed
as the secured party while Lasseter’s employee, Tina Arrington,
signed under the heading, “Signature(s) of Debtors(s).” Although
Ms. Arrington incorrectly signed as Debtor, she nevertheless
signed the UCC-3. (Exh. “B”). The fact that Debtor did not sign
-7-
is immaterial. There is no requirement that a debtor sign a UCC-
3 termination statement in order for it to be effective.
Moreover, Lee Ann P. Williams, another Lasseter employee, crossed
through the reference to the assignment and initialed the cross
through. Id. Because both parties signed the UCC-3, the court
finds that sufficient authority existed to execute the
termination statement. Accordingly, Lasseter has not met its
burden of persuasion.
In conclusion, the court finds that Lasseter’s security
interest in the tractor was unperfected at the time Debtor filed
his petition. Therefore, the court will sustain Trustee’s
objection to claim number 0013 as being secured and will allow
the claim as unsecured. Because Debtor’s Chapter 12 plan was
confirmed treating Lasseter as secured, the court will direct
Debtor to file a modification to his Chapter 12 plan.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this _____ day of January, 2001.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

RICHARD W. PASCHEN

August 2000

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: CASE NO. 99-42771-JTL
RICHARD W. PASCHEN CHAPTER 13
SSN: 267-33-7941
DOREEN A. PASCHEN
SSN: 263-67-3718,
DEBTORS.
MEMORANDUM OPINION
American General Finance (“American General”) objected to
confirmation of Debtors’ chapter 13 plan on the grounds of
valuation and lack of good faith. American General also
disagrees with Debtors’ treatment of its claim under §
1322(c)(2) of the Bankruptcy Code (“Code”). After a hearing on
June 22, 2000, the court took under advisement the issues
related to American General’s objection to confirmation. The
parties have submitted briefs, and American General has
stipulated as to how Debtors would testify. For the reasons
that follow, the court will rule in Debtors’ favor on the legal
issue regarding the treatment of American General’s claim under
§ 1322(c)(2) of the Code. The court will consider the other
grounds for objection at the continued confirmation hearing
scheduled for Friday, August 25, 2000 in the Bankruptcy
Courtroom, 901 Front Avenue, Suite 309, Columbus, Georgia.
DISCUSSION
The parties are in agreement that Debtors’ note with
-2-
American General is secured solely by real estate that is
Debtors’ principal residence, and the final payment on that
note is due before the final payment under their chapter 13
plan. Accordingly, the parties also agree that this situation
is covered by § 1322(c)(2) of the Code. Section 1322(c)(2)
provides:
(c)Notwithstanding subsection (b)(2) and applicable
nonbankruptcy law–
. . .
(2) in a case in which the last payment on
the original payment schedule for a claim
secured only by a security interest in real
property that is the debtor’s principal
residence is due before the date on which
the final payment under the plan is due,
the plan may provide for the payment of the
claim as modified pursuant to section
1325(a)(5) of this title.
11 U.S.C. § 1322(c)(2).
The parties disagree, however, as to the meaning of §
1322(c)(2). Debtor argues that § 1322(c)(2)creates an
exception to § 1322(b)(2) by allowing the bifurcation and
cramdown of the secured claims on certain short-term mortgages
as with any other secured claim not covered by § 1322(b)(2).
For support, Debtor relies on the vast majority of cases that
deal with this issue. See First Union Mortgage Corp. v.
Eubanks (In re Eubanks), 219 B.R. 468 (B.A.P. 6th Cir. 1998);
In re Sexton, 230 B.R. 346 (Bankr. E.D. Tenn. 1999); In re
Reeves, 221 B.R. 756 (Bankr. C.D. Ill. 1998); In re Mattson,
-3-
210 B.R. 157 (Bankr. D. Minn. 1997); In re Young, 199 B.R. 643
(Bankr. E.D. Tenn. 1996). American General argues that §
1322(c)(2)’s language, “payment of the claim as modified,”
means only the payment, and not the claim, can be modified. In
support of its position, American General relies on the Fourth
Circuit case of Witt v. United Companies Lending Corp. (In re
Witt), 113 F.3d 508 (4th Cir. 1997).
This court agrees with the reasoning of the majority line
of cases, as explained in Eubanks. In that case, the court
addressed and dismissed the rationale of Witt: “The cross
reference to § 1325(a)(5) in § 1322(c)(2) is an unequivocal
statement of congressional intent that Chapter 13 debtors are
empowered by § 1322(c)(2) to bifurcate the special real estate
secured claims that this new section excepts from the
modification protection in § 1322(b)(2).” Eubanks, 219 B.R. at
473. See also 8 Collier on Bankruptcy, ¶ 1322.16 (Matthew
Bender 15th Ed. Revised 2000) (“Section 1322(c)(2) thus
expressly provides that certain mortgages may be modified and
provided for under section 1325(a)(5).”)
Similarly, this court has rejected the idea that §
1322(c)(2) only allows debtors to modify payments rather than
claims: “To the contrary, the court agrees with cases finding
that the application of § 1322(c)(2), which references §
1325(a)(5), allows for modification of an oversecured short-
4-
term home mortgage claim including its interest rate.” In re
Leola Terrell, Case No. 99-70556-JTL (Bankr. M.D. Ga. Aug. 20,
1999) (holding that a market rate of interest is appropriate on
claims modified pursuant to § 1322(c)(2)).
This court’s reasoning in Terrell was not limited to
situations where the mortgage lender is oversecured. As the
court in Eubanks pointed out, the phrase “provide for payment
of the claim as modified pursuant to section 1325(a)(5)”
plainly contemplates that undersecured claims can be bifurcated
and dealt with as any other secured claim that is not secured
solely by a mortgage on the debtor’s principal residence.
Eubanks, 219 B.R. at 471-72. This means the claim can be
stripped down to the value of the collateral and paid at a
market rate of interest.
Therefore, the court will allow American General’s claim
to be modified pursuant to § 1322(c)(2) as discussed above.
The court will consider valuation and good faith at the
confirmation hearing now scheduled for Friday, August 25, 2000
at 9:00 A.M. in the United States Bankruptcy Courtroom, 901
Front Avenue, Suite 309, Columbus, Georgia.
DATED this ___ day of August 2000.
________________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE
-5-

DANNY LAWRENCE DUPREE

November 7, 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
CASE NO. 02-41586
DANNY LAWRENCE DUPREE ::
CHAPTER 13
Debtor. ::
ASHLEY COOPER MCKENNA AND :
EDYTHE DUPREE ::
Movants, ::
vs. ::
DANNY LAWRENCE DUPREE ::
Respondent. :
MEMORANDUM OPINION
On October 24, 2002, during the continuation of a
confirmation hearing, the court heard Ashley Cooper McKenna’s and
Edythe Dupree’s objections to Danny Lawrence Dupree’s proposed
Chapter 13 Plan. At the conclusion of the hearing, the court
took the matter under advisement and confirmation was continued
to a future date and time. After considering the evidence
presented at the confirmation hearing, the parties’ oral
arguments and stipulations, as well as applicable statutory and
case law, the court makes the following findings of fact and
conclusions of law.
FACTS
On June 5, 2000, the Superior Court of Muscogee County
(“Superior Court”) entered a final judgement in Danny Lawrence
-2-
Dupree (“Debtor”) and Mrs. Dupree’s divorce action. On June 26,
2000, Debtor filed a motion for a new trial with the Superior
Court. On August 14, 2000, a contempt action was filed against
Debtor by Mrs. Dupree. On September 22, 2000, the Superior Court
denied Debtor’s motion for a new trial. On October 19, 2000,
Debtor was found in contempt of court in the Superior Court,
ordered to pay a fine, and was incarcerated. Despite the
contempt order, Debtor was released without paying the fine.
According to Debtor, also on October 19, 2000, his
application for discretionary review of his denied motion for a
new trial was filed with the Supreme Court of Georgia. However,
at the October 24, 2002 confirmation hearing, Debtor offered into
evidence only a faxed copy of a docket sheet for the
discretionary application purportedly from the Supreme Court of
Georgia. Opposing counsel objected to the exhibit and the
objection was sustained. Debtor’s request was granted to hold
open the record until the Monday, October 28, 2002 to give him
the opportunity to submit a certified copy of the docket sheet,
as well as time to submit a letter brief on the issues before the
court. Debtor asked for and received one additional day,
extending the deadline to Tuesday, October 29, 2002. Debtor
failed to submit either a certified copy of the docket sheet from
the Supreme Court of Georgia or a letter brief.
In 2001, after falling behind in child support payments,
-3-
Debtor moved back in with Mrs. Dupree at her residence sometime
during late spring or early summer. Mrs. Dupree had inherited
the residence from her mother. Debtor paid no rent to Mrs.
Dupree but assisted with the upkeep on the house and the yard.
While it is disputed as to the level of assistance Debtor
provided to Mrs. Dupree, she did agree that Debtor did assist at
times with the house and yard work. This arrangement went on for
approximately seven months until December 2001.
Additionally, during this same time frame, Debtor began to
care for the Debtor and Mrs. Dupree’s minor child. Eventually,
the child was removed from daycare and Debtor was the primary
care giver for the child while Mrs. Dupree was at work. The
reason why the child was removed from daycare is in dispute.
However, both parties are in agreement that Mrs. Dupree did in
fact take the child out of daycare which saved Mrs. Dupree $85
per week in child care costs.
Ms. McKenna objected to confirmation of Debtor’s proposed
Chapter 13 plan. Ms. McKenna contends that she has a $250 nondischargeable
priority claim for attorney’s fees pursuant to the
contempt order in Superior Court. Ms. McKenna objects to the
proposed treatment of her claim in Debtor’s Chapter 13 plan.
Mrs. Dupree also objected to confirmation of Debtor’s
proposed Chapter 13 plan. Mrs. Dupree contends she has a $2,900
non-dischargeable priority claim for back child support, not
-4-
subject to the $1,500 off-set as proposed in the plan. Mrs.
Dupree objects to the proposed treatment of her claim in Debtor’s
Chapter 13 plan.
Regarding the attorney’s fees awarded in the contempt order,
Debtor asserts that pursuant to O.C.G.A. § 5-6-35(h) the Superior
Court lacked jurisdiction to enter and enforce the contempt order
because Debtor had filed his application for discretionary review
with the Supreme Court of Georgia. O.C.G.A. § 5-6-35(h).
Therefore, Debtor argues that Ms. McKenna’s claim is invalid.
Regarding the child support arrearage, at the confirmation
hearing, Debtor orally agreed that he owes Mrs. Dupree $2,900 in
back child support. However, Debtor alleges that he is entitled
to a set-off on the amount for child care services rendered to
Mrs. Dupree in the year 2001. Debtor contends that new case law
allows for equitable reduction of child support when both parents
have come to an agreement as to the reduction. Debtor contends
he and Mrs. Dupree came to an oral agreement that she would
reduce the child support arrearage in exchange for his child care
services. Additionally, he contends not only was the agreement
reached, it was fully executed. Debtor provided the child care
services which reduced Mrs. Dupree’s monthly expenses. Debtor
contends that Mrs. Dupree accepted and encouraged this
arrangement. In addition to the child care for their son, Debtor
also took care of the house, the yard, and helped with Mrs.
-5-
Dupree’s other two children. Debtor contends that both parties
agreed to and benefitted from the arrangement.
Ms. McKenna contends that the Superior Court did not lose
jurisdiction over Debtor and Mrs. Dupree’s divorce action merely
because Debtor filed an application for discretionary review with
the Supreme Court of Georgia. The application was for a
discretionary review, not an appeal as of right. Trial court
jurisdiction is not lost until the Supreme Court of Georgia
grants the discretionary appeal. Additionally, the record was
never sent up to the Supreme Court of Georgia. Therefore, the
Superior Court never lost jurisdiction over the Duprees’ divorce
case. Thus, the contempt order and attorney’s fees which were
awarded in association with that order are valid. Ms. McKenna
contends that she has an enforceable non-dischargeable priority
claim which is not properly dealt with in Debtor’s proposed
Chapter 13 plan.
Mrs. Dupree contends that even if courts allow parents to
come to an independent agreement regarding child support, there
was no agreement in this case. There was no agreement, oral or
written, that Mrs. Dupree would off-set what Debtor owed her in
back child support for the child care services Debtor rendered
while he was living at Mrs. Dupree’s home in 2001. Mrs. Dupree
did not want to take the child out of daycare but did so only
after Debtor failed to take the child to the daycare facility for
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a month or so. Additionally, Mrs. Dupree disputes how much
Debtor assisted with work around the house and the yard.
Therefore, absent an agreement, Debtor would not be entitled to
an off-set even if the law is as Debtor suggests. Mrs. Dupree
contends that she has an enforceable non-dischargeable priority
claim for $2,900 which is not properly dealt with in Debtor’s
proposed Chapter 13 plan.
CONCLUSIONS OF LAW
Debtor bears the burden to prove that his Chapter 13 plan is
in conformity with the statutory requirements for confirmation.
See generally In re Groves, 39 F.3d 212, 214 (8th Cir. 1994); In
re Hendricks, 250 B.R. 415, 420 (M.D. Fla. 2000). Ms. McKenna
and Mrs. Dupree made objections to the treatment of their claims
under Debtor’s proposed Chapter 13 plan. Debtor bears the burden
to overcome the objections. If Debtors fails to do so, he must
modify his Chapter 13 plan to provide for adequate treatment of
Ms. McKenna’s and Mrs. Dupree’s claims.
According to O.C.G.A. § 5-6-35(h), the filing of an
application for appeal acts “as a supersedas to the extent that
a notice of appeal acts as supersedas.” O.C.G.A. § 5-6-35(h). A
supersedas writ suspends the trial court’s power to execute a
judgment that has been appealed. BLACK’S LAW DICTIONARY 1437 (6th ed.
1990). Under Georgia law, the Superior Court had no power to
execute or enforce the contempt order against Debtor.
-7-
Typically, res judicata would prevent Debtor from attacking
a state court judgment in the bankruptcy court. However, under
Pepper v. Litton, 308 U.S. 295 (1939), inherent in the bankruptcy
court’s equitable powers is the ability to look into the validity
of any claim asserted against a debtor’s bankruptcy estate.
Pepper, 308 U.S. at 305. Further, if the bankruptcy court
determines that another court’s judgment is invalid, the judgment
claim may be disallowed. See id. This concept has been followed
in bankruptcy courts in other circuits, as well as in our own.
See In re Kovalchick, 175 B.R. 863, 872 (E.D. Pa. 1994)(despite
the doctrines of res judicata and collateral estoppel, a court
may not be bound by another court’s judgment if it was rendered
without proper jurisdiction); Reilly v. McCracken (In re
Brickyard, Inc.), 36 B.R. 569, 573 (S.D. Fla. 1983) (state court
judgment could be collaterally attacked because the state court
lacked jurisdiction to render the judgment).
Debtor did not submit to the court a certified copy of the
docket sheet from the Supreme Court of Georgia. In failing to do
so, Debtor cannot prove that the Superior Court lacked
jurisdiction to render the contempt order. Therefore, Ms.
McKenna’s claim for $250 is valid and non-dischargeable. The
claim must be treated as such in Debtor’s Chapter 13 plan.
Regarding the child support arrearage off-set, Debtor failed
to convince the court that he and Mrs. Dupree reached any
-8-
agreement, oral or otherwise, that Debtor’s child support
arrearage would be reduced while he stayed with Mrs. Dupree and
cared for their minor child. Further, even if Debtor had proved
such an agreement, he failed to show that this court has the
power to amend a child support arrearage claim. As stated above,
this court may have the equitable power to disallow a judgment
claim if lack of jurisdiction is shown. However, Debtor has
failed to prove that this court can go behind a valid state court
judgment regarding child support to modify a child support
arrearage. Therefore, Mrs. Dupree’s claim is valid and nondischargeable
for the full amount of $2,900. The claim must be
treated as such in Debtor’s Chapter 13 plan.
Conclusion
The court finds that Debtor failed to prove that Ms.
McKenna’s claim for attorney’s fees associated with the contempt
order is invalid. Therefore, Ms. McKenna’s objection to
confirmation of Debtor’s proposed Chapter 13 plan is sustained.
Debtor is directed to modify his Chapter 13 plan to give proper
treatment to Ms. McKenna’s claim in accordance with this
Memorandum Opinion within 20 days.
Further, the court finds there was no agreement reached
between Debtor and Mrs. Dupree to reduce the child support
arrearage. Even if such an agreement had been proved, the court
finds that Debtor has failed to meet his burden to prove that
-9-
this court has the power to modify a claim for child support
arrearage. Therefore, Mrs. Dupree’s objection to confirmation of
Debtor’s proposed Chapter 13 plan is sustained. Debtor is
directed to modify his Chapter 13 plan to give proper treatment
to Mrs. Dupree’s claim in accordance with this Memorandum Opinion
within 20 days.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this _____ day of November, 2002.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

LESTER BEN DASHER

October 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

THOMASVILLE DIVISION

IN RE: : CASE NO. 00-60397-JTL

:

LESTER BEN DASHER, :

SSN: 255-86-5206 ::

CHAPTER 13

BRENDA JOYCE DASHER, :

SSN: 252-94-9147 ::

Debtors. ::

WILLIAM H. WASDEN, ::

Movant, ::

vs. ::

LESTER BEN DASHER and :

BRENDA JOYCE DASHER, ::

Respondents. :

MEMORANDUM OPINION

On September 26, 2000, the court held a hearing on

confirmation of Debtors’ proposed plan and William H. Wasden’s

(“Movant”) objection to confirmation. At the conclusion of the

hearing, the court took the matter under advisement. After

considering the evidence and the applicable statutory and case

law, the court, for reasons indicated below, will overrule

Movant’s objection to confirmation.

FACTS

Movant agreed to sell a one acre tract of land to Debtors

for the sale price of $10,000.00. Debtors made a $1000.00 down

1 Debtors have agreed that they would pay Movant at the contract rate of

10% per annum.

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payment and, as evidenced by a deed to secure debt and a

promissory note, Movant financed the remaining $9000.00.

(Movant’s Exh. “A”). According to the terms of this agreement,

Debtors were to pay $100.00 per month commencing on January 1,

1998 until the maturity date of December 1, 1999, at which time

Debtors were to make a final “balloon” payment of $8785.85.

Debtors defaulted in making this final balloon payment.

On May 15, 2000, Debtors filed a voluntary petition under

Chapter 13 of the Bankruptcy Code. In Debtors’ Chapter 13 plan

(“Plan”), they proposed to pay Movant in full over the life of

the fifty-seven month Plan plus interest at a rate of 9% per

annum.1 On May 25, 2000, Movant filed his objection to

confirmation and on August 2, 2000, Movant filed a letter brief

(“Movant’s Br.”) in support of his objection.

DISCUSSION

Movant argues that Debtors’ attempt to modify his rights by

deferring the final balloon payment over the life of the Plan on

a note that matured prepetition, is prohibited under the Code.

See Nobleman v. American Savings Bank, 508 U.S. 324 (1993).

Movant agrees that § 1322(c)(2) permits the modification of

claims secured only by a security interest on Debtors’ principal

residence when the last payment on the original payment schedule

2 Section 1322(b)(2) provides, in pertinent part:

(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 . . .

11 U.S.C. § 1322(b)(2).

-3-

is due before the date on which the final payment under the Plan

is due. See 11 U.S.C. § 1322(c)(2).

However, Movant asserts that § 1322(c)(2), an “exception” to

§ 1322(b)(2),2 does not apply in this case and therefore, §

1322(b)(2) is the applicable law. Since there was only a balloon

payment due, Movant argues that § 1322(c)(2) does not contemplate

the present situation. Moreover, Movant is an individual

creditor who relied on the payment and modification would be

“grossly unfair” forcing him to make a loan that he could not

afford. See In re Lobue, 189 B.R. 216, 219 (Bankr. S.D. Fla.

1995)(Cristol, J., dictum).

Debtors argue that the plain language of § 1322(c)(2) is

clear. That subsection allows for the payment of the full amount

of a short term mortgage over the life of the plan provided that

Debtors pay the full amount of the allowed secured claim. The

fact that Movant is an individual creditor is irrelevant.

Debtors further argue that under § 1322(b)(3), a plan may

“provide for the curing or waiving of any default;” 11 U.S.C. §

1322(b)(3).

The issue before the court is whether a balloon payment that

3 All cases filed after October 22, 1994, are subject to the amendments

under this Act.

-4-

matured prepetition can be modified and paid out through the life

of the Plan. Before the Bankruptcy Reform Act of 19943 (“Reform

Act”), it was impermissible for Debtors to modify such claims.

See Nobleman, 508 U.S. at 332. However, the revised § 1322(c)(2)

under the Reform Act carved out an exception to § 1322(b)(2).

Although the Eleventh Circuit has not ruled on this issue,

bankruptcy courts within this circuit as well as courts in other

circuits have held that § 1322(c)(2) applies to balloon payments

that matured prepetition. See In re Eason, 207 B.R. 238 (N.D.

Ala. 1996); In re Miller, 191 B.R. 487 (Bankr. S.D. Fla. 1995);

In re Sarkese, 189 B.R. 531 (Bankr. M.D. Fla. 1995); In re Chang,

185 B.R. 50 (Bankr. N.D. Ill. 1995); In re Escue, 184 B.R. 287

(Bankr. M.D. Tenn. 1995);

The court in In re Escue ruled that § 1322(c)(2) was

specifically created to deal with short term or balloon payments

which matured prepetition. 184 B.R. at 292. Similarly, the

court in In re Chang held that § 1322(c)(2) permits a debtor to

cure a mortgage which ballooned prepetition over the life of the

plan. 185 B.R. at 53. In re Miller and In re Eason were cases

which involved individual creditors as opposed to mortgage

companies.

In Miller, the court held that chapter 13 debtors could

modify an individual creditor’s claim which fully matured

-5-

prepetition by paying in full over the life of the plan. 191

B.R. at 489. Although Miller did not involve a balloon payment,

the court relied on the plain language of § 1322(c)(2). Id. The

fact that the creditor was an individual appeared to be

inconsequential to the court.

Unlike Miller, Eason did involve a balloon payment but

because Eason was a pre-Reform Act case, the court held that the

debtor could not pay the final balloon payment through the

proposed plan. 207 B.R. at 239. The court did, however, address

the amendments to § 1322 in the Reform Act and stated, “Eason,

unfortunately, appears to be a victim of bad timing in the filing

of her petition; nevertheless, she is unable to receive the

benefit of § 1322(c) as amended.” Id. at 240. Impliedly, had

this been a post-Reform Act case, the court would have permitted

the payment of the final balloon payment through the plan. Like

Miller, the Eason court gave no particular attention to the fact

that the creditor was an individual.

The court agrees with the above line of cases that §

1322(c)(2) allows debtors to provide a creditor with payment of

a prepetition matured balloon over the life of the Plan. As

explained in Escue and Chang, § 1322(c)(2) is designed to deal

with short term mortgages and balloon payments which mature

prepetition. The court disagrees with Movant and dictum in Lobue

that a different outcome should result because Movant is an

individual creditor who relied on the balloon payment.

-6-

In Lobue, the court was concerned about an individual lender

forced to make a loan “which the lender possibly could not afford

to make.” 189 B.R. at 219. At the hearing, Movant testified

that he relied on the balloon payment to make some investments in

stock. Movant did not show that he relied on the balloon payment

for basic living expenses. Therefore, the court finds that

Movant did not demonstrate the kind of reliance about which the

court in Lobue was concerned.

The court finds that § 1322(c)(2) is applicable in this case

and Debtors may pay Movant with the balloon payment over the life

of the Plan. Therefore, the court will overrule Movant’s

objection to confirmation.

An order in accordance with this Memorandum Opinion will be

entered.

DATED this _____ day of October, 2000.

____________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

JACKIE G. WILLIAMS

December 8, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

VALDOSTA DIVISION

IN RE: ::

JACKIE G. WILLIAMS, : CASE NO. 03-70974

PATRICIA A. WILLIAMS, : CHAPTER 11

Debtors, ::

CIRCLE B ENTERPRISES, INC., : CASE NO. 03-71461

Debtor. : CHAPTER 11

::

SAMUEL P. SCOTT, :

Movant, ::

vs. ::

JACKIE G. WILLIAMS, :

PATRICIA A. WILLIAMS, :

Respondents, ::

CIRCLE B ENTERPRISES, INC., :

Respondent. :

MEMORANDUM OPINION

On November 24, 2003, the Court held the final day of a

multi-day hearing on two Motions of Samuel P. Scott (“Movant”)

for Relief from the Automatic Stay. The main issue was

whether Movant should be granted relief from the stay for

cause to pursue his state court action against Jackie and

Patricia Williams and Circle B Enterprises, Inc. (“Circle

B”)(collectively “Respondents”). At the conclusion of the

hearing, the Court took the matter under advisement. The

Court has considered the evidence, the parties’ briefs and

oral arguments, as well as applicable statutory and case law.

-2-

Under the test set out in In re South Oakes Furniture, Inc.,

167 B.R. 307 (Bankr. M.D. Ga. 1994)(J. Walker), the Court

finds that cause has been shown and Movant should be granted

relief from the stay. Id. at 309 (citing In re Pro Football

Weekly, Inc., 60 B.R. 824, 826 (N.D. Ill. 1986)).

THE PARTIES’ CONTENTIONS

Movant contends that relief should be granted because all

three prongs of the South Oaks Furniture test favor granting

the relief sought. Id. Movant urges that no great prejudice

will occur to Respondents’ and their bankruptcy estates if the

case is allowed to proceed in state court. Further, Movant

contends that the hardship to Movant of starting over again in

Bankruptcy Court would considerably outweigh any hardship

suffered by Respondents if the case proceeds in state court.

Finally, Movant argues based on the record that he has a

probability of prevailing on the merits of his case.

Respondents contend that the debtors and the two

bankruptcy estates will suffer great hardship if the case

continues in state court. Not only do Respondents contend

that the costs will be higher in Atlanta, Respondents allege

they will not receive fair treatment in Fulton County Superior

Court (“Superior Court”). Respondents cite the special

setting of the trial, which they contend took their litigation

attorney by surprise, as an example of the potential for

-3-

unfair treatment. Further, Respondents contend they were not

ready for trial because Movant had not returned Respondents’

business documents in time for Respondents’ expert witness to

review them adequately. Respondents contend that the hardship

to Movant if the matter is moved to the Bankruptcy Court will

not outweigh the burden on Respondents if the matter is left

in state court. Respondents argue that the Bankruptcy Court

would provide an efficient and orderly forum to litigate and

liquidate all claims against the bankruptcy estates, including

alleged additional lawsuits that may or may not have already

been filed against Respondents. Last, Respondents argue,

based on a number of legal arguments, that Movant does not

have a probability of prevailing on the merits.

FINDINGS OF FACT

Jackie and Patricia Williams have been involved with

companies doing business in the mobile home and/or

manufactured home industry since the late 1950’s. While the

specifics are disputed, a series of events took place during

the years 2000 and 2001 involving Jackie Williams and actions

he preformed as a principal in two companies named Sweetwater

and Apple Valley, as well as transfers that Jackie Williams

personally made to Patricia Williams. Movant was a minority

shareholder in Sweetwater. A legal merger of the Sweetwater

and Apple Valley entities never occurred. However, the

-4-

accounting of the two companies were combined under the name

Sweetwater at the end of 1999 and/or the beginning of 2000.

Subsequent to the accounting merger, all assets were

transferred out of Sweetwater and eventually ended up as

assets of Circle B, a corporation later formed by Jackie

Williams.

These events led to Movant filing suit against Jackie and

Patricia Williams in Superior Court, located in Atlanta,

Georgia. At a later date, Circle B was added as a defendant

to the action. Pre-trial activities were conducted for over

one and a half years in the state court action. Without

argument by Respondents’ litigation attorney, the matter was

specially set for trial in June 2003. Counsel for Movant has

agreed to seek a final pretrial order from the Superior Court

before proceeding to set the case for trial if this Court

grants his request for relief from the stay.

Jackie and Patricia Williams filed for relief under

Chapter 11 of the United States Bankruptcy Code (“Code”) on

June 17, 2003 in the Middle District of Georgia, Valdosta

Division. The filing of the petition instituted an automatic

stay, which prohibited the trial from proceeding in Superior

Court on the assigned date. Movant filed a motion for relief

from the stay in Jackie and Patricia Williams’ bankruptcy case

on July 24, 2003 and asked this Court to determine that the

-5-

automatic stay did not apply to Circle B. On September 12,

2003, the day Movant’s motion was set for hearing in this

Court, Circle B filed for relief under Chapter 11 of the Code

in the same district and division as Jackie and Patricia

Williams. The hearing was continued until a later date so

Movant could file a motion for relief from the stay in the

Circle B case, allowing for both motions to be heard at the

same time. The Court held the hearing over a number of days,

which concluded with closing arguments on November 24, 2003.

CONCLUSIONS OF LAW

As an initial matter, the party opposing a motion for

relief from the stay bears the burden of persuasion on all

issues except as to equity. See 11 U.S.C. § 362(g)(1993 &

Supp. 2002). Therefore, Respondents bear the burden to show

that relief should not be granted.

The Court agrees that the test to be applied here is as

articulated in South Oakes Furniture. South Oakes Furniture,

167 B.R. at 309. “The test developed by courts to determine

if it is appropriate to lift the automatic stay and allow the

continuation of [a] lawsuit pending in state court is whether:

a) Any ‘great prejudice’ to either the bankrupt estate or the

debtor will result from the continuations of a civil suit; b)

the hardship to the [non-debtor party] by maintenance of the

stay considerably outweighs the hardship to the debtor; and c)

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the creditor has a probability of prevailing on the merits of

his case.” Id.

Respondents have not presented evidence which would

persuade the Court to believe that the burden on Respondents

to continue in state court would outweigh the hardship to

Movant if he were required to start over again in Bankruptcy

Court. Except for the issue of dischargeability of a possible

judgement in favor of Movant, this is a complicated matter of

state law. The issue of dischargeability can be determined by

this Court at a later date once the claim is liquidated in the

state court proceeding. Adversary Proceedings are pending in

both Chapter 11 cases and this Court will determine the res

judicata effect of any findings in the state court action.

Both Movant and Respondents have already invested almost two

years of time on this matter in state court. Now that

Respondents have had time to prepare their expert witness, the

matter is poised for trial in Superior Court.

Last, under the third prong of the test set out in South

Oakes Furniture, Respondents have failed to refute the

evidence put on by Movant. Id. As the court in South Oakes

Furniture stated, the third prong does not require this Court

to determine that Movant will prevail on his claims. Id. at

310. It only requires that a “probability of success” has

been demonstrated. Id. Respondents do not dispute that

-7-

Sweetwater’s assets became Circle B’s assets through actions

taken by Jackie Williams and that certain transfers from

Jackie Williams to Patricia Williams did occur. The issue of

whether these transfers are enough for Movant to actually

prevail should not, on a motion for relief, be decided by this

Court. The issue should be left for the state court where

litigation has already started.

This Court does not find grounds to keep the automatic

stay in effect, which would require Movant to start over in

Bankruptcy Court with his lawsuit. Respondents have not met

their burden as spelled out in the Code and under the test in

South Oakes Furniture. See 11 U.S.C. § 362(g)(1993 & Supp.

2002); South Oakes Furniture, 167 B.R. at 309. Therefore, the

Court will grant Movant’s Motion for Relief from the Automatic

Stay in both cases. An order in accordance with this

Memorandum Opinion will be entered.

DATED this _____ day of December, 2003.

____________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

HELEN LOUISE SHEPPARD

January 6, 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: CASE NO. 99-41085-JTL

HELEN LOUISE SHEPPARD, CHAPTER 13

SSN: 257-21-5277,

DEBTOR.

HELEN LOUISE SHEPPARD,

MOVANT,

V.

PIGGLY WIGGLY,

RESPONDENT.

MEMORANDUM OPINION

On December 3, 1999, the court held a hearing on Debtor’s

motion for contempt against Piggly Wiggly (“Respondent”) for

violation of the automatic stay of § 362 of the Bankruptcy Code

(“Code”) based on Respondent’s having a warrant issued

postpetition for Debtor’s arrest as a consequence of Debtor’s

having written a bad check prepetition. No one appeared on

behalf of Respondent, and Debtor presented evidence in support

of her motion.

The applicable case law is Barnette v. Evans, 673 F.2d

1250 (11th Cir. 1982), and cases construing Barnette, such as

Tenpins Bowling, Ltd. v. Alderman (In the Matter of Tenpins

Bowling, Ltd.), 32 B.R. 474 (Bankr. M.D. Ga. 1983). Barnette

-2-

involved a debtor who, as in this case, had issued worthless

checks. Barnette basically established a two-prong test for

determining whether the court should enjoin a state criminal

prosecution of a debtor on the ground that the prosecution will

frustrate the bankruptcy judge’s jurisdiction to discharge

debt. First, a debtor must establish that the criminal

prosecution is brought in bad faith. Tenpins Bowling, Ltd., 32

B.R. at 480 (discussing the application of Barnette). Second,

a debtor must establish that it would be no defense to the

criminal prosecution that the prosecution was brought for the

purpose of collecting a debt. Id. In Barnette, under Alabama

law, the debtor could have defended the criminal prosecution by

showing that the prosecution for theft was really a subterfuge

for the collection of a debt. Barnette, 673 F.2d at 1252.

Applying this case law, and after considering the evidence

and argument of counsel, the court announced findings of fact

and conclusions of law from the bench. The court ruled that

Debtor had met her burden of proof with regard to the first

prong of the Barnette test by proving that Respondent acted in

bad faith in having a criminal warrant issued for Debtor’s

arrest postpetition. However, the court reserved ruling on the

second prong of the Barnette test, which is whether Debtor

could have asserted as a defense to the criminal action in

Georgia that the criminal action was brought as a subterfuge

for collecting the debt. Debtor’s counsel requested that the

-3-

court reserve ruling on this issue to allow him to supplement

his argument and evidence.

After the hearing, counsel submitted a brief along with

two exhibits in support of Debtor’s position. Exhibit “A” to

Debtor’s brief is an affidavit by the Solicitor General of the

State Court of Muscogee County, Georgia verifying that it would

be no defense to a deposit account fraud (bad check)

prosecution that the warrant was issued for the purpose of

collecting the money due. Exhibit “B” to Debtor’s brief is a

copy of the index to Chapter 3 of the Official Code of Georgia

Annotated, which shows that no defense listed relates to the

fact that a warrant in a deposit account fraud case was issued

only for the purpose of collecting the debt.

After considering counsel’s brief and the exhibits

thereto, the court finds that Debtor has met the second prong

of Barnette and will grant Debtor’s motion. The court finds

that Respondent did willfully violate the automatic stay of §

362 of the Code. The court will order Respondent to pay

damages in the amount of $750 attorney fees in addition to

$183.70 in actual damages. The court does not find that the

appropriate circumstances exist in this case to justify

punitive damages under § 362(h) of the Code.

An order in accordance with this Memorandum Opinion will

be entered.

DATED this 6th day of January 2000.

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_______________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

PEACH AUTO PAINTING & COLLISION, INC.

March 2001

1 This motion is actually captioned as “Motion for Reconsideration and/or

Rehearing.” However, given the substance of the motion, the court will

consider this motion as a request for an additional evidentiary hearing.

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: : CASE NO. 00-41598

:

PEACH AUTO PAINTING & : CHAPTER 11

COLLISION, INC. :

Debtor, :::

RONALD E. WAGES, :

Movant, ::

vs. ::

PEACH AUTO PAINTING & :

COLLISION, INC. :

Respondent. :

MEMORANDUM OPINION

On March 7, 2001, the court held a hearing on the motion of

Ronald E. Wages (“Movant”) to compel Debtor to surrender leased

premises. At the conclusion of the hearing, the parties were

given an opportunity to submit briefs. Movant filed a brief and

Debtor filed a letter brief in response. On March 16, 2001,

Movant filed an additional motion requesting an evidentiary

hearing to determine Debtor’s interest in the subject property.1

After considering the parties’ briefs and the applicable

statutory and case law, the court will deny Movant’s motion to

compel Debtor to surrender the leased premises. The court will

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also deny Movant’s request for an evidentiary hearing.

FACTS

On January 21, 1994, Movant entered into an agreement (“the

lease”) with Lenward C. Wilbanks, Jr. (“Wilbanks”) in which

Wilbanks leased from Movant, the property located at 3556

Lawrenceville Highway, Tucker, GA (“leased premises”). After

the lease was executed but prior to Debtor’s bankruptcy petition,

Wilbanks, who is the equity owner of Debtor, allowed Debtor to

use the premises as an automobile body paint and repair shop. On

July 25, 2000, Debtor filed a voluntary petition under Chapter 11

of the Bankruptcy Code. (“Code”).

On September 15, 2000, Debtor filed a motion to extend the

time to accept or reject the lease. (Doc.# 23). On September 18,

2000, the court entered an order extending the time to October

12, 2000. On October 12, 2000, the court entered an another

order extending the time to December 1, 2000. (Doc.# 38). This

latter extension expired and Debtor never moved to accept or

reject the lease.

On December 11, 2000, Movant filed a motion for relief from

the automatic stay based on alleged violations of lease

provisions resulting in the deterioration of the property. On

January 19, 2001, the court held a hearing on Movant’s motion

which was granted allowing Movant to pursue its remedies in state

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court. Soon thereafter, Movant filed a state court dispossessory

complaint against Debtor and Wilbanks. At the relief from stay

hearing, it was conceded that because Debtor did not assume the

lease or move to assume the lease before the last extension

expired, the lease was deemed rejected by operation of law.

Therefore, any rights that Debtor may have had in the lease, were

terminated at that time.

At the March 7, 2001 hearing, the parties confirmed these

facts established at the relief from stay hearing. Both parties

stipulated that Wilbanks was the holder of the leasehold because

there had been no written assignment of the lease and that

Debtor’s rights in the leasehold were terminated once the lease

was deemed rejected.

Movant asserts that the court should compel Debtor to

surrender the leased premises pursuant to § 365(d)(4) of the

Code. He maintains that Wilbanks assigned the lease to Debtor

therefore, resulting in a valid sublease. Movant also presents

an estoppel argument based on Movant’s acceptance of rent from

Debtor.

Debtor, however, asserts that its rights in the lease,

sublease or otherwise, were terminated when the lease was deemed

rejected. Debtor explains that it is occupying the leased

premises with the express permission of Wilbanks. Debtor argues

that its right to occupy this property is completely dependent

upon the rights of Wilbanks, which are being determined in the

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case currently pending in state court. Debtor further asserts

that it would be premature for the bankruptcy court to order

Debtor to surrender the leased premises before the state court

determines Wilbanks’ right to remain as a tenant.

DISCUSSION

Section 365(d)(4) of the Code provides:

[I]f the trustee [or debtor-in-possession] does not assume

or reject an unexpired lease of nonresidential real property

under which the debtor is the lessee within 60 days after

the date of the order for relief, or within such additional

time as the court, for cause, within such 60-day period,

fixes, then such lease is deemed rejected, and the trustee

shall immediately surrender such nonresidential real

property to the lessor.

11 U.S.C. § 365(d)(4).

Applying the above statutory provision to the facts of this case,

it is clear that Debtor’s interests in the lease were terminated

on December 1, 2000. Debtor did not move to accept or reject the

lease, nor did Debtor request additional time within which to

file such motion. Therefore, the court finds that on December 1,

2000, the lease was deemed rejected pursuant to § 365(d)(4).

The focus in this case, however, is whether the bankruptcy

court has the authority to order a debtor out of the leased

premises. Some courts have held that a deemed rejection under §

365(d)(4) “merely places the creditor [lessor] in a position to

pursue remedies under the state law. . . .” In re Adams, 65 B.R.

646, 649 (Bankr. E.D. Pa. 1986); See also In re Re-Trac, 59 B.R.

-5-

251 (Bankr. D. Minn. 1986). However, this court rejects that

view and adopts the “majority and far more persuasive view. . .”

that the bankruptcy court can issue such an order. Anderson v.

Elm Inn, Inc. (In re Elm Inn, Inc.), 942 F.2d 630, 634 (9th Cir.

1991); See also In re U.S. Fax, 114 B.R. 70 (Bankr. E.D. Pa.

1990)(rejecting In re Adams); In re Chris-Kay Foods East, Inc.,

118 B.R. 70 (Bankr. E.D. Mich. 1990); In re Damianopoulos, 93

B.R. 3, 6 (Bankr. N.D.N.Y. 1988)(holding that a deemed rejected

lease is no longer property of the estate).

The difficulty in this case is the fact that there is a

third party involved. If Wilbanks and his agreement with Movant

were not in the picture, this would be a straightforward

application of the above authority. Movant would be entitled to

an order requiring Debtor to surrender the leased premises.

However that is not the case – Debtor is occupying the premises

at the permission of Wilbanks – a third party who is rightfully

entitled to possess the premises.

Therefore, the court agrees with Debtor and finds that

Debtor’s right to possess the premises is dependent upon

Wilbanks’ right. If the state court finds that Wilbanks’ right

to possession should be terminated and Debtor then still remains

in possession, the Movant would be entitled to a surrender order

from the bankruptcy court. However, such an order would not be

needed because Debtor is a party to the state court dispossessory

action.

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As to Movant’s motion to request an additional evidentiary

hearing, Movant relies on In re Elm Inn for the proposition that

the court should conduct a hearing to determine Debtor’s interest

in the lease. Although the Ninth Circuit in In re Elm Inn did

remand for such purposes, there was a dispute in that case

whether the holder of the leasehold assigned its interests in the

lease to the debtor corporation. In this case, there is no such

dispute. The parties have stipulated that Wilbanks is the holder

of the leasehold and that Debtor is possessing the leased

premises with the permission of Wilbanks. Therefore, the court

finds that no dispute exists requiring the court to conduct such

a hearing.

Accordingly, the court will deny Movant’s motion to compel

Debtor to surrender the leased premises. The court will also

deny Movant’s request for an additional evidentiary hearing.

An order in accordance with this Memorandum Opinion will be

entered.

DATED this _____ day of March, 2001

____________________________

JOHN T. LANEY III

UNITED STATES BANKRUPTCY JUDGE

DAVID C. NIVENS

July 2001

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: : CASE NO. 00-42992

:

DAVID C. NIVENS : CHAPTER 13

SSN: 443-78-8111 ::

SHARON A. NIVENS :

SSN: 450-69-7303 ::

Debtors. :::

DAVID C. NIVENS and :

SHARON A. NIVENS ::

Movants, ::

vs. ::

LOANS FOR MILITARY ::

Respondent. :

MEMORANDUM OPINION

On June 5, 2001, the court held a hearing on Debtors’ motion

for contempt against Loans For Military (“Respondent”) for

failure to pay Debtors’ attorney’s fees and costs pursuant to a

prior order of the court. The court took under advisement the

issue of whether Debtors’ counsel’s recourse was filing a fi. fa.

rather than obtaining another contempt order. At the conclusion

of the hearing, Debtors’ counsel was given an opportunity to

submit a letter brief. After considering Debtors’ brief and the

applicable statutory and case law, the court will deny Debtors’

1 The language of the order regarding the attorney’s fees award read

“Movant’s attorney is awarded attorney’s fees and costs in the total

amount of $250.00, pursuant to 11 U.S.C. §§ 105(c), 362(h), to which

let judgment issue against Respondent(s).”

-2-

motion for contempt.

FACTS

In August 2000, Debtors obtained a personal unsecured loan

from Respondent in which monthly payments in the amount of

$245.46 were to be made. Debtors made these payments to

Respondent by way of an allotment which was deducted from the

husband debtor’s U.S. Army payroll. On December 26, 2000,

Debtors filed their voluntary petition under Chapter 13 of the

Bankruptcy Code (“Code”). On January 29, 2001, Debtors’ counsel

mailed Respondent a letter requesting that Respondent turn over

any payments received post-petition for payment on any

prepetition debt. (Doc.# 6, Exh. “A”).

On March 6, 2001, Debtors filed a motion for civil contempt.

On April 6, 2001, the court held a hearing on Debtors’ motion and

found Respondent in contempt. Respondent did not appear at this

hearing. The court ordered Respondent to turn over $981.84 to

Debtors. This amount represented four payments which Respondent

had received post-petition. The court also awarded Debtors

attorney’s fees and costs in the amount of $250.00. (Doc.# 8).1

On April 19, 2001 Debtors’ counsel received a check from

Respondent in the amount of $981.84. (Doc.# 9, Exh. “M-1″).

However, Respondent failed to remit the $250.00 attorney’s fees

-3-

award. In a phone conversation between Debtors’ counsel and

Respondent on April 17, 2001, Respondent indicated that it

contested the attorney’s fees award and would “forward it over to

their legal counsel.” (Doc.# 9, Exh. “M-2″).

On May 8, 2001, Debtors’ counsel filed a second motion for

contempt based on Respondent’s failure to pay the $250.00

attorney’s fees which was awarded in the court’s April 6, 2001

order. On June 6, 2001, the court held a hearing on Debtors’

motion. Like the prior hearing, Respondent did not appear at

this hearing. The court inquired into the issue of whether its

April 6, 2001 order was a money judgment in which Debtors’

counsel needed to file a fi fa or whether another contempt order

was proper. At the conclusion of the hearing, the court gave

Debtors’ counsel an opportunity to brief this issue.

DISCUSSION

The law is clear that a court may use the remedy of contempt

to enforce a prior judgment entered by that court. See Combs v.

Ryan’s Coal Co., 785 F.2d 970, 980 (11th Cir. 1986). “It is

equally clear that when a party fails to satisfy a court imposed

money judgment the appropriate remedy is a writ of execution, not

a finding of contempt.” Combs, 785 F.2d at 980 (citing FED. R.

CIV. P. 69(a) (“Rule 69(a)”) which provides, “[p]rocess to enforce

a judgment for the payment of money shall be a writ of execution,

-4-

unless the court directs otherwise.”). As to the “otherwise”

language, the court held that this clause is to be read narrowly.

Id. (citing 7 JAMES WM. MOORE ET AL., MOORE’S FEDERAL PRACTICE ¶ 69.02[2]

at 69-10 to -10.1 (2d ed. 1985) providing that “a federal court

should not . . . enforce a money judgment by contempt or methods

ther [sic] than a writ of execution, except in cases where

established principles so warrant.”).

In Combs, the order in question was a consent order.

However, this fact was inconsequential. The order provided for

the payment of money due and owing, the amount was not

contingent, and the obligation to pay was not conditioned on the

appellants’ purging themselves of contempt. Therefore, the court

held that “the consent decree [was] properly characterized as a

money judgment.” Id. Accordingly, the court held that the

consent decree was not enforceable by contempt. Id.

In the case before the court, the court finds that the April

6, 2001 order relating to the award of Debtors’ attorney’s fees

is in the nature of a money judgment. The order provided that

the amount of $250.00 was due and owing, an amount which was

neither contingent nor conditioned on Respondent’s purging itself

of contempt. Therefore, the award of attorney’s fees is not

enforceable by contempt.

2 See Gokey v. McIntosh (In re McIntosh), 137 B.R. 967 (D. Colo.

1992)(order compelling Plaintiff’s counsel to pay sanctions to Debtors’

counsel within 10 days); Waldschmidt v. Columbia Gulf Transmission Co.

(In re Fulghum), 20 B.R. 925 (Bankr. M.D. Tenn. 1982)(discovery order

compelling Defendant to pay attorney’s fees to trustee).

-5-

Unlike the cases2 cited by Debtors’ counsel, the language in

the order pertaining to the Debtors’ award of attorney’s fees

does not direct Respondent to pay Debtors’ counsel. Instead, the

order reads “[m]ovant’s attorney is awarded . . . $250.00 . . .

to which let judgment issue against Respondent(s). (emphasis

added). Accordingly, the court finds those cases inapplicable.

Debtors further argue that enforcement by contempt should be

allowed because “[r]espondent has no tangible money, property or

other assets subject to levy or execution . . . .” (Debtors’

Brief pp. 2 at (j)). The bankruptcy court for the Southern

District of Georgia has indirectly addressed this narrow issue.

See Eickhoff v. Eickhoff (In re Hickhoff), 258 B.R. 234 (Bankr.

S.D. Ga. 2000)(Davis, J.).

In Eickhoff, the debtor and his former spouse reached a

consent agreement regarding nondischargeability litigation costs

and attorney’s fees. The debtor’s former spouse moved for

contempt based on the debtor’s failure to pay the attorney’s

fees. Relying on Combs and Rule 69(a), the debtor argued that a

writ of execution was proper and that the remedy of contempt was

not available. The debtor’s spouse, however, contended that

there was an exception to Rule 69(a). Because all of the

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debtors’s assets could not reached by writ of execution, the

former spouse asserted that the remedy of contempt was available.

The fact that there may have been no assets subject to levy

or execution added nothing to the court analysis. Consequently,

the court denied the former spouse’s motion for contempt.

Eickhoff, 259 B.R. at 238. The court further explained: “It is

true Rule 69 severely limits the right of the Court to employ the

contempt power for the collection of a money judgment and that

the Combs decision reinforces that provision.” Id. at 236.

Similarly, the court finds Debtors’ argument to be without

merit. The fact that Respondent has no tangible property or

assets subject to levy or execution is no exception to the

Eleventh Circuit’s analysis of Rule 69(a).

Finally, Debtors’ argue that the remedy of contempt should

be allowed because the “prior contempt order that was disobeyed

was a non-final, interlocutory order. . . .” (Debtors’ Brief, pp.

2 at (l)). The court likewise finds this argument without merit.

In order for an order in bankruptcy to be final, it “must end the

litigation on the merits and leave nothing more for the court to

do but execute the judgment . . . for purposes of appeal.”

Wicheff v. Baumgart (In re Wicheff), 215 B.R. 839, 843 (B.A.P.

6th. Cir. 1998). A civil contempt order is final as long as a

finding of contempt is issued and a sanction is imposed. See id.

As to the order in question in this case, nothing about the

order was interlocutory or non-final. It resolved the issue on

-7-

the merits, a finding of contempt was issued and sanctions were

imposed. Accordingly, the court finds that its April 6, 2001

order was final and appealable.

In conclusion, the court finds that its April 6, 2001, order

awarding Debtors attorney’s fees and costs was a money judgment

which is not enforceable by contempt. The court further finds

that the April 6, 2001 order was a final order. Therefore, the

court will deny Debtors’ motion for contempt.

An order in accordance with this Memorandum Opinion will be

entered.

DATED this _____ day of July, 2001.

_________________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

ROHIT N. DESAI

July 25, 2002

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: ::

CASE NO. 02-10238

ROHIT N. DESAI ::

CHAPTER 11

Debtor. :::

SOUTHWEST GEORGIA BANK ::

Movant, ::

vs. ::

ROHIT N. DESAI ::

Respondent. :

MEMORANDUM OPINION

On April 24, 2002, the court held a hearing on the motion of

SouthWest Georgia Bank (“SWGA”) for relief from the automatic

stay and SWGA’s motion to dismiss the case. At the conclusion of

the hearing, the court took the matters under advisement. The

parties were given an opportunity to submit briefs. The court

has considered the evidence, the parties’ briefs and oral

arguments, and the statutory and case law. The court will deny

both motions.

FACTS

The pertinent facts are not disputed. On or about February

5, 1997, Rohit N. Desai (“Debtor”) executed a Security Deed and

Agreement and a UCC-1 financing statement in exchange for SWGA’s

1 Rohit N. Desai, Case No. 99-78033; Desai Enterprises Inc., Case No. 99-

78034.

-2-

loan to Debtor. (See Exhs. M-B & M-C). SWGA’s loan is secured by

Debtor’s real and personal property used in connection with

Debtor’s hotel operation which is located at 600 U.S. Highway 19

South in Camilla, Georgia. The hotel is operated by Desai

Enterprises, Inc. (“Desai Enterprises”).

Between 1998 and 1999, Debtor’s hotel operation began to

decline. This decline in business resulted in Debtor’s default

to, among others, the Small Business Administration (“SBA”) and

SWGA, the two largest secured creditors of Debtor’s hotel

operation. Debtor and Desai Enterprises’ attempts to negotiate

with SBA and SWGA were unsuccessful.

On or about December 6, 1999, Debtor and Desai Enterprises

filed voluntary petitions under Chapter 11 of the Bankruptcy Code

(“Code”) in the Bankruptcy Court for the Northern District of

Georgia.1 Although those cases were not consolidated, Debtor and

Desai Enterprises filed a Joint Chapter 11 Plan of Reorganization

(“plan”) on March 6, 2000. The proposed plan reflected SWGA’s

secured claim as an impaired claim on which settlement was being

negotiated. (See Exh. “A” of Exh. M-D).

On or about October 16, 2000, Debtor and Desai Enterprises

entered into a Commercial Installment Promissory Note and

Security Agreement with SWGA thereby restructuring the debt.

According to the terms of the restructured debt, Debtor and Desai

-3-

Enterprises were to pay to SWGA a principal amount of $883,153.38

at 10% per annum. The principal and interest was to be paid over

59 months in monthly installments of $8522.25. On October 16,

2005, a balloon payment equal to the amount of the remaining

unpaid principal and interest would be due. (See Exh. M-A).

On October 23, 2000, the terms of this restructured debt

agreement were incorporated into the plan by the plan’s Fifth

Amendment. (See Exh. “F” of Exh. M-D). Also incorporated into

the Fifth Amendment of the plan was the following language:

In addition, for a period of time from the Confirmation Date

through the fifth (5th) anniversary of the Confirmation Date,

the [Debtor and Desai Enterprises], separately or together,

do not oppose and consent to a lifting of the automatic stay

in any other bankruptcy or insolvency case or proceeding

affecting the collateral subject to [SWGA’s] Security Deeds

and other security documents. . .

. . . [Debtor and Desai Enterprises] agree that neither

[Debtor] nor [Desai Enterprises] shall commence, or cause or

assist in the commencing of, a proceeding under the

Bankruptcy Code within one hundred eighty (180) days from

the Confirmation Date.

(See id. at § 5.5(A)(5))

On November 9, 2000, the bankruptcy court confirmed the plan

by a consent order which was consented to by Debtor, Desai

Enterprises, SWGA, SBA, and the United States Trustee. (See id.).

On February 5, 2002, the bankruptcy court entered a Final Decree

in Debtor’s individual case. No evidence was presented as to

when a final decree was entered in Desai Enterprises’ case.

Debtor defaulted on his obligations under the confirmed plan

-4-

and SWGA commenced foreclosure proceedings. On February 5, 2002,

Debtor filed in this court the instant case under Chapter 11 of

the Code.

The parties stipulate that Debtor is currently indebted to

SWGA in an amount of $905,035.76. However, the issue before the

court is whether the above language in Debtor’s plan from his

prior case is enforceable against Debtor in his current case.

SWGA argues that the terms of the plan’s language in

Debtor’s prior case were negotiated and consented to by Debtor.

Because these terms specifically contemplated what would happen

in a future bankruptcy filing, SWGA contends that these terms

should be enforced in the instant case. SWGA further argues that

Debtor’s current case should be dismissed as a bad faith filing.

In addition to the terms of the plan, SWGA points out that Debtor

filed the current case the day before the foreclosure sale was to

take place. Also, this was the same day the final decree was

entered in his prior case.

Debtor, however, disagrees that the terms in the plan in his

prior case are enforceable in this case. Debtor concedes that

“prepetition waivers” such as those in his prior plan may be

enforced. Nevertheless, Debtor argues that such waivers cannot

be enforced per se; certain factors must be present in order for

them to be enforced. Moreover, prepetition waivers are

especially unenforceable when they affect third-party creditors

-5-

who were not party to the original agreement. In support of this

latter contention, Debtor cites Lewis Autry, a pro se creditor

who appeared at the hearing and opposed SWGA’s motions.

In responding to the court’s inquiry, Mr. Autry stated that

he held claims against Debtor based on some notes which he signed

with Debtor. Mr. Autry indicated that he signed one note for

approximately $45,000.00 whereby he was jointly liable for money

that was loaned to Debtor. On clarification from the court, Mr.

Autry agreed that he had a contingent claim against Debtor for

any loss the creditor on this note may incur. Presumably, this

creditor is Family Bank. (See Schedule “F”). Family Bank is

secured by a second lien on the real property used in Debtor’s

hotel operation. In addition, Mr. Autry stated he has an

unsecured claim against Debtor in the amount of approximately

$50,000.00 for a “couple of notes” Debtor signed.

Although Mr. Autry responded to the court questions when he

appeared, he never testified under oath nor did any party call

him as a witness. Therefore, this is not evidence. The only

evidence in the record regarding Mr. Autry’s claim is Debtor’s

plan from his prior case. (See Exh. M-D, § 3.6). The plan

provides that Mr. Autry is a Class 6 secured creditor holding a

claim of approximately $13,000.00. This claim is secured by

Debtor’s automobile. (See id.) Morever, Debtor’s schedules in

his present case show Mr. Autry as a secured creditor on the

-6-

automobile loan and as a co-debtor. (See Schedules “D” & “H”).

DISCUSSION

A number of courts have addressed the issue of the

enforceability of prepetition waivers. However, research has

produced no cases by the Eleventh Circuit or Middle District of

Georgia courts addressing this point. Accordingly, this is an

issue of first impression in this district.

While some courts have held that such waivers are valid,

other courts have held to the contrary. See In re Excelsior

Henderson Motorcycle Mfg. Co., 273 B.R. 920 (Bankr. S.D. Fla.

2002) (enforcing prepetition agreement); In re Shady Grove Tech

Ctr. Assoc. Ltd. P’ship, 216 B.R. 386 (Bankr. D. Md. 1998)

(setting forth several factors whether cause exists to warrant

relief from stay); In re Atrium High Point Ltd. P’ship, 189 B.R.

599 (Bankr. M.D.N.C. 1995)(holding that prepetition waivers are

enforceable in appropriate cases); In re Priscilla Cheeks, 167

B.R. 817 (Bankr. D.S.C. 1994)(enforcing prepetition forbearance

agreement); In re Jenkins Court Assoc. Ltd. P’ship, 181 B.R. 33

(Bankr. E.D. Pa. 1995)(holding that prepetition agreement would

not enforced without further development of the facts); In re Sky

Group Int’l, Inc., 108 B.R. 86 (Bankr. W.D. Pa. 1989)(holding

that prepetition waiver was not self-executing or per se

enforceable); In re Club Tower, L.P., 138 B.R. 307 (Bankr. N.D.

2 Like the courts in Atrium and Excelsior, the court finds this fact

significant. Each of these courts seem to distinguish the fact that the

prepetition waiver was agreed upon in the context of negotiating a plan

provision. “Enforcing the Debtor’s agreement under these conditions does not

violate public policy concerns. This is not a situation where a prohibition

to opposing a motion to relief was inserted in the original loan

documents….” Excelsior at 924 (citing Atrium at 607).

-7-

Ga. 1991)(holding that prepetition waivers are enforceable).

The court finds that the facts in the Excelsior and Atrium

cases are most analogous to the facts in the instant case. The

debtors in Excelsior and Atrium entered into prepetition

agreements as a result of a negotiated provision of a plan of

reorganization in a prior bankruptcy case.2

In Atrium, the debtor managed and leased commercial office

space in a two-story building. After several years of this

operation, the debtor encountered difficulty in servicing its

mortgage on the building. Although the debtor’s mortgage holder

allowed the debtor to modify its obligation several times, the

debtor nevertheless ended up in Chapter 11. As a part of the

plan in its Chapter 11 case, the debtor and its mortgage holder

entered into an agreement whereby the debtor would not oppose

relief from the stay to the mortgage holder in any subsequent

case that the debtor might file. See Atrium at 602-03.

Just as before, the debtor was unable to meet its expenses

and defaulted on its obligation to its mortgage holder. Soon

thereafter, the debtor filed a second Chapter 11 case. Based on

the plan provision in the prior case, the mortgage holder

-8-

promptly moved for relief from stay. However, the debtor opposed

the motion and presented affidavits of third-party creditors who

objected to the mortgage holder’s motion. The court noted that

all but one of these objecting third-party creditors assented to

the debtor’s plan in its prior case. See id. at 604, n.2.

After a thorough review of the authority on both sides of

the issue, the court held that “prepetition waivers are

enforceable in appropriate cases.” Id. at 607. First, the court

discounted the notion that prepetition waivers in single asset

cases are effectively a prohibition to filing bankruptcy. The

court explained that up until relief is granted to the creditor

who is a party to the prepetition agreement, the debtor has

received the protection of the stay. Moreover, the debtor

receives the benefit of the stay as to the other creditors, and

retains all the rights provided to a debtor in bankruptcy. See

id. at 607 (citing Club Tower, 138 B.R. at 311-12).

Second, the court addressed the bargain-for-exchange

principle involved in arriving at the agreement in the prior

case. The court noted that the debtor received a low interest

rate and extension in exchange for the debtor’s covenant not to

oppose relief in a subsequent case. See id.

Lastly, the court turned to the issue of objecting thirdparty

creditors and held that a debtor’s prepetition waiver of

relief from stay cannot bind third parties. See id. Therefore,

-9-

in the presence of objecting third parties, the court concluded

that it must consider all the factors as to whether sufficient

“cause” exists to warrant relief from stay. This includes the

circumstances under which the prepetition waiver arose, the

substance of the third-party objections and whether there is

equity in the collateral. Because there was equity in the

collateral, the court found that the objections of the thirdparty

creditors outweighed the prepetition waiver. Accordingly,

to the extent that the mortgage holder’s motion for relief was

based on the debtor’s prepetition waiver, the court denied relief

from stay. See id. at 608.

Similar to the debtor in Atrium, the debtor in Excelsior

experienced difficulty servicing its loan which resulted in the

debtor filing a Chapter 11 petition. Pursuant to the debtor’s

Chapter 11 plan, the debtor restructured debt to its secured

creditor. The debtor also agreed on a plan provision whereby the

debtor would not oppose relief from stay as to that secured

creditor in any subsequent bankruptcy case for three years. The

plan was confirmed by the bankruptcy court. See Excelsior at

921.

Approximately one year after the effective date of its plan,

the debtor defaulted under the terms of the restructured debt.

The secured creditor sought and obtained a judgment against the

debtor. On the day the public auction of the collateral was to

-10-

take place, the debtor filed a second Chapter 11 case. In

accordance with the plan provision in the debtor’s prior case,

the secured creditor moved for relief from stay. See id. at 922.

Relying on the holding in Atrium, the court in Excelsior

found that the debtor’s prepetition waiver of the automatic was

enforceable. See id. at 924. Accordingly, the court granted the

secured creditor’s motion for relief from stay. See id. at 924-

25. However, unlike Atruim, there were no third party creditors

objecting to relief from stay and there was no discussion of the

issue of equity.

The court finds that the reasoning from the court in Atrium

is sound. Although prepetition agreements waiving the protection

afforded by the automatic stay are enforceable, such waivers are

not per se enforceable, nor are they self-executing. See e.g.,

In re Sky Group, 108 B.R. at 86. The court further finds that in

deciding whether relief from stay should be granted based on such

waivers, the following factors should be considered: (1) the

sophistication of the party making the waiver; (2) the

consideration for the waiver, including the creditor’s risk and

the length of time the waiver covers; (3) whether other parties

are affected including unsecured creditors and junior

lienholders, and; (4) the feasibility of the debtor’s plan. See

Shady Grove at 390 (quoting from In re Merridale Gardens Ltd.

P’ship, No. 95-1-3091 (Bankr. D. Md. October 19, 1995) aff’d No.

-11-

S-95-3334 (D. Md. Feb. 28, 1996).

In the instant case, Debtor entered into an agreement in

which he would not oppose relief from stay in any subsequent case

that he might file. This agreement was negotiated in the context

of arriving at a consensual plan where both Debtor and SWGA were

represented by counsel. Therefore, the court finds that Debtor,

through counsel, was sufficiently sophisticated to enter into

this agreement.

As to the consideration for entering into the agreement, the

court finds that adequate consideration was exchanged on both

sides of the agreement. Debtor received a 5-year extension of

the maturity date of a loan in exchange for Debtor’s promise not

to oppose relief from stay in any subsequent case Debtor might

file within 5 years. Based on these conditions, SWGA agreed to

accept Debtor’s plan.

Given the current stage of Debtor’s case, the feasibility of

Debtor’s plan cannot be determined.

The court now turns to the factor of how granting relief

from stay based on Debtor’s waiver may affect other parties. At

the hearing, Mr. Autry, a pro se creditor appeared and objected

to relief from stay. As Debtor points out, Mr. Autry was not a

party to the consent order confirming Debtor’s plan which

contained the waiver. Therefore, based on the holding in Atrium,

Debtor argues that relief from stay based on Debtor’s waiver

-12-

should not be granted over Mr. Autry’s objection.

However, unlike the instant case, there were nine objecting

creditors in Atrium who submitted affidavits and the parties

stipulated to their admission. See Atrium at 608, n.6. As

demonstrated above, the only evidence in this case as to Mr.

Autry’s claim is that, in Debtor’s prior case, Mr. Autry held a

$13,000.00 claim secured by Debtor’s automobile. Based on this

evidence, Mr. Autry has no interest in the property on which SWGA

is seeking relief from stay. The court finds that granting

SWGA’s motion for relief from stay would have a minimal effect on

Mr. Autry’s claim. Therefore, in balancing Mr. Autry’s objection

with Debtor’s agreement to not oppose SWGA’s relief from stay,

the court must give Debtor’s waiver greater weight.

As to whether there is any equity in the property, SWGA has

the burden of proof on this issue. See 11 U.S.C. 362(g)(1). At

the hearing, Mr. Andy Webb, SWGA’s senior vice-president

testified there is no equity in the property. However, Mr. Webb

testified that he had no knowledge of the current value of the

property. Furthermore, he acknowledged that an appraisal done in

1997 indicated a value of $1.2 million.

Debtor testified that the current value of the property is

approximately $1.2 million. He based this value on an appraisal

done in Debtor’s prior case. Moreover, Debtor testified that he

received of an offer of $1.2 million to purchase the property.

-13-

This potential purchaser later agreed on a purchase price of $1.4

million, but the purchaser could not obtain financing. Debtor

further testified that he has made several improvements to the

property and the hotel’s occupancy rate has increased.

Based on this evidence, the court finds that SWGA has not

carried its burden of showing that there is no equity in the

property. Although some of the factors weigh in SWGA’s favor,

the court will not grant relief from stay at this time.

Therefore, the court will deny SWGA’s motion for relief from

stay. Pursuant to the court’s Interim Cash Collateral Order

entered on June 11, 2002, the court will direct Debtor to

continue making adequate protection payments to SWGA in the

amount of $7000.00 per month due on the last day of each month.

In accordance with the parties’ announcement at the Cash

Collateral hearing held on June 6, 2002, Debtor will be held in

strict compliance of making these payments.

As to SWGA’s motion to dismiss the case, the court will also

deny that motion. SWGA asserts that Debtor filed the instant

case in bad faith. However, the evidence fails to demonstrate

that Debtor has “no realistic possibility of an effective

reorganization . . . or that the [D]ebtor seeks merely to delay

or frustrate the legitimate efforts of secured creditors to

enforce their rights . . . .” Albany Partners Ltd. v. W.P.

Westbrook, Jr., et al., 749 F.2d 670, 674 (11th Cir. 1984). SWGA

-14-

relies on the case of Phoenix Piccadilly, Ltd. v. Life Insurance

Company of Virginia, 849 F.2d 1393 (11th Cir. 1988). In applying

the standard pronounced in Albany Partners, the court in Phoenix

set forth several factors in determining whether a petition is

filed in bad faith. See Phoenix at 1394-95. Based on the facts

of that case, the court found bad faith and therefore, affirmed

the dismissal of the case. See id. at 1395.

Although some of the factors espoused in Phoenix are

present, the evidence in the instant case “lacks the aggravating

elements which were present in Phoenix . . . .” In re Clinton

Fields, Inc., 168 B.R. 265, 271 (Bankr. M.D. Ga. 1994)(Walker,

J.)(distinguishing Phoenix). Moreover, a mechanical application

of these factors in the instant case does not result in a

determination of bad faith. See id. Unlike the debtor in

Phoenix, Debtor in the instant case attempted to negotiate with

SWGA after he experienced a downturn in the travel industry.

After these negotiations were unsuccessful, Debtor filed his

current petition. Merely because Debtor filed the current case

the day before the foreclosure sale was to take place does not

amount to a bad faith filing as defined in the Eleventh Circuit

cases.

SWGA further argues that Debtor’s case should be dismissed

because Debtor filed the current case while his prior case in the

bankruptcy court for the Northern District of Georgia was still

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pending. The court agrees that a debtor cannot have two

simultaneous Chapter 11 cases. However, given the fact that

Debtor filed his present case on the same day the final decree

was entered in his prior case, any overlap in the two cases is de

minimis. Therefore, the court rejects SWGA’s argument that the

timing of Debtor’s filing amounts to a bad faith filing.

Accordingly, the court finds that Debtor did not file the instant

case in bad faith.

An order in accordance with this Memorandum Opinion will be

entered this date.

DATED this 25th day of July, 2002.

____________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

JABARI B. COBB

June 17, 2002

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: ::

JABARI B. COBB : CASE NO. 02-40475

LEQUSIHA SERRENA COBB ::

CHAPTER 13

Debtors. ::

GE CAPITAL AUTO :

FINANCIAL SERVICES ::

Movant, ::

vs. ::

JABARI B. COBB :

LEQUSIHA SERRENA COBB ::

Respondents. :

ORDER

In accordance with the Memorandum Opinion issued this date,

the court grants GE Capital Auto Financial Services’ motion for

relief from the automatic stay.

ORDERED this 17th day of June, 2002.

____________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

SUWANNEE SWIFTY STORES, INC.

May 2001

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

THOMASVILLE DIVISION

IN RE: ::

SUWANNEE SWIFTY STORES, INC. : CASE NO. 96-60807

EIN: 58-0434460 ::

CHAPTER 11

Debtor, ::

ADVERSARY PROCEEDING

SUWANNEE SWIFTY STORES, INC., : NO. 98-6078

:

Plaintiff, ::

vs. ::

GEORGIA LOTTERY CORPORATION, ::

Defendant. :

MEMORANDUM OPINION

On September 21, 2000, the court held a hearing on cross

motions for summary judgment regarding Debtor’s complaint against

Georgia Lottery Corporation (“GLC”) to recover post-petition

transfers under § 549 and § 550 of the Bankruptcy Code (“Code”).

The parties filed briefs, reply briefs, affidavits, and a final

pretrial order. At the conclusion of the hearing, the court took

the motions for summary judgment under advisement. The court has

considered the evidence, affidavits, and the parties’ briefs and

oral arguments, as well as the applicable statutory and case law.

For reasons that follow, the court will grant GLC’s motion for

summary judgment and will deny Debtor’s motion for summary

judgment. Accordingly, the court will not allow Debtor to

recover the post-petition transfers.

-2-

FACTS

Debtor operated approximately 109 retail stores in South

Georgia and North Florida. Seventy of these stores were located

within the state of Georgia. On September 17, 1993, Debtor

entered into a Retailer Contract with GLC for the sale of On-Line

lottery tickets in connection with the State of Georgia’s

Lottery. On October 19, 1994, Debtor entered into another

Retailer Contract with GLC for the sale of Instant Game lottery

tickets (“Instant Tickets”). In addition to the terms of each

contract, the course of dealings between Debtor and GLC were

governed by the Georgia Lottery for Education Act (“Lottery

Act”). O.C.G.A. § 50-27-1 (1982 & Supp. 2000) et seq. Pursuant

to the Lottery Act, GLC may establish rules, policies, and

procedures regulating the conduct of lottery games. O.C.G.A. §

50-27-10.

On December 12, 1996, Debtor filed a voluntary petition

under Chapter 11 of the Bankruptcy Code. On December 11, 1998,

Debtor filed this adversary proceeding. Only the Instant Ticket

transactions are at issue in this proceeding. Therefore, the

procedure by which the Instant Tickets were provided to and sold

by Debtor is pertinent to the analysis.

Pursuant to GLC’s Policies and Procedures, Instant Tickets

are delivered to the retailer in packs which are assigned a bar

code so that the retailer can scan them for status purposes.

-3-

Upon shipment to the stores, but before they are delivered,

Instant Ticket packs maintain the status of “Issued.” An “Issued

Pack” is one which has been assigned and shipped to a specific

retailer. Once a pack has been delivered, the retailer is

required to scan the pack thereby changing the status from

“Issued” to “Confirmed.” Scanning is done with a bar code reader

at the retailer’s location which is connected on-line to GLC.

“Confirmation” of a pack is absolute proof that the retailer has

received the pack from GLC.

Prior to the sale of an individual Instant Ticket from a

“Confirmed” pack, the retailer is again required to change the

status of the pack from “Confirmed” to “Activated.” This is done

by scanning the pack a second time. An “Activated” pack

indicates to GLC that Instant Tickets are being sold from that

pack.

The status of an “Activated” pack changes to “Settled” on

the earlier of either (1) 21 days after “Activation”; or (2) the

date the retailer consciously makes a choice to “Settle” a pack,

whether the Instant Tickets have been sold or not. A “Settled”

pack enables GLC to bill (or “Settle”) the retailer’s account.

The Lottery Act and the Retailer Contract also require that

the retailer maintain a separate Trust Account at Bank of America

(“BOA”) to deposit proceeds from the sale of Lottery tickets.

O.C.G.A. § 50-27-2. On the Tuesday following any fiscal week,

which ran from Sunday through Saturday, GLC electronically sweeps

1 The Instant Total is the amount swept each week which represents the

amount “Settled” less Returns (tickets returned to GLC by Debtor), less

Validations (cash payments to winners), less Sales Commissions (Debtor’s

commission for selling tickets), less Cashing Commissions (Debtor’s 2%

commission for cashing winning tickets).

-4-

the Instant Total1 and On-line Total from the account. The

Lottery Act and regulations further require the retailer to

deposit proceeds into this Trust Account no later than the next

business day after the sale of the Instant Tickets.

However, Debtor did not deposit the proceeds from the sale

of Instant Tickets on a daily basis, a fact which is not in

dispute. Although Debtor maintained a separate Trust Account at

BOA located in Albany, Georgia, each of Debtor’s retail stores

maintained a separate “store account” in the community where the

store was located. Each store deposited all of its general

receipts as well as proceeds from lottery ticket sales into its

store account. On the day prior to GLC’s weekly sweep of the

Trust Account, GLC routinely advised Debtor, by facsimile, of the

amount that was going to be swept. Upon receipt of this weekly

facsimile from GLC, Debtor withdrew funds from other accounts and

deposited into the Trust Account the amount to be swept.

During the fiscal week covering the period that Debtor filed

its voluntary petition, commencing December 8, 1996 and ending on

December 14, 1996, (“Week I”), Debtor “settled” $201,600.00 in

Instant Ticket sales. During Week I, Debtor was credited with

$13,133.00 for Returns, $114,060.00 for Validations, $9,840.30

2 The Instant Total amount added to $96,578.74, the On-line Total for

that week, resulted in $158,864.24; the total amount to be swept on

that date. Also, on January 30, 1997, Thomas A. Schroeder, an in-house

attorney with GLC, transmitted a facsimile to Debtor’s Chief

Operating Officer, Wayne Boone, detailing Instant and On-line

transactions for Week I.

3 Of the $72,186.74, $29,711.34 was on account of Instant Tickets and

$42,475.40 was on account of On-line Tickets. (Pretrial Order, Exh.

“E”).

-5-

for Sales Commissions, and $2,281.20 for Cashing Commissions.

(“applicable credits”). Accordingly, the amount to be swept for

Instant Tickets was $62,285.50.2 This sweep failed because of

the lack of funds in the Trust Account. (Pretrial Order Exh.

“D”).

Because Debtor filed its voluntary petition on December 12,

1996, both Debtor and GLC agreed to pro-rate Instant and On-line

Ticket sales as of the close of business on December 11, 1996.

(Stipulation of Facts, Doc. No. 58). Of the $158,864.24 due to

GLC, $72,186.74 was due for the period of December 8, 1996

through December 11, 1996. Therefore, on December 18, 1996,

Debtor wire transferred to GLC $86,677.50 out of its general

operating account. This left a balance of $72,186.74.3

Between December 15, 1996 and December 21, 1996, (“Week

II”), Debtor settled $191,700.00 in Instant Tickets. After the

applicable credits were applied, a balance due of $61,902.48

resulted, which GLC swept from the Trust Account on December 24,

1996.

-6-

During the next fiscal week commencing on December 22, 1996

and ending on December 28, 1996, (“Week III”), Debtor settled

$193,800.00 in Instant Ticket Sales. The amount of $68,785.02

was the resulting balance due after applicable credits were

applied. On December 31, 1996, GLC swept this amount from the

Trust Account.

Between December 29, 1996 and January 1, 1997, (“Week IV”),

$107,100.00 in Instant Tickets were settled. After applicable

credits were applied, a balance of $43,904.22 resulted which was

swept from the Trust Account by GLC on January 7, 1997. Although

Week IV is not a full week, January 1, 1997 was the last day of

the 21-day period for which any Instant Ticket packs that were

activated pre-petition could have been settled. However, neither

party can point to any evidence indicating to what extent Instant

Tickets, which were activated pre-petition, were sold prepetition

or post-petition. (Pretrial Order, pp. 17).

On December 17, 1996, the court entered an order allowing

Debtor to use cash collateral to pay operating expenses, which

included disbursements to GLC. (Doc. No. 39). On January 6,

1997, the court entered a similar order Authorizing Continued Use

of Cash Collateral. (Doc. No. 100). This latter order expired

on January 23, 1997.

On December 24, 1996, after a preliminary hearing on

Debtor’s Motion to Assume Executory Contracts, the court entered

an order allowing Debtor to continue selling lottery tickets

-7-

under its contract with GLC. (Doc. No. 67). In this order, the

court found that Debtor owed GLC “approximately $73,000.00” for

pre-petition lottery sales. Id. Similarly, on March 3, 1997,

the court entered an Interim Order allowing Debtor to operate as

a lottery retailer. (Doc. No. 266). Furthermore, this order set

Plaintiff’s total pre-petition arrearage to GLC at $72,187.00.

Id.

On December 11, 1998 Debtor filed its complaint to recover

post-petition transfers. Debtor asserts that funds transferred

to GLC during Weeks I through IV were on account of pre-petition

Instant Ticket sales. Because Instant Tickets are not settled

until 21 days after they are activated, Debtor maintains that any

Instant Tickets settled during this time period were activated

(i.e., sold) pre-petition. Based on this, Debtor contends that

the pre-petition arrearage owed to GLC on account of Instant

Ticket sales is $562,787.06, not $29,711.34. Accordingly, Debtor

maintains that $533,075.72 was erroneously paid which is

recoverable as property of the estate.

GLC contends that the pre-petition arrearage amount of

$72,186.74, of which $29,711.34 was on account of Instant

Tickets, is the correct figure. GLC maintains that this prepetition

figure was determined by the court in its March 3, 1997

order. Moreover, all post-petition transfers were on account of

post-petition sales which were authorized by the court.

Furthermore, it is GLC’s position that all Instant Tickets and

-8-

the proceeds from the sale of Instant Tickets are property of a

trust and therefore, cannot be property of the estate. Debtor,

however, maintains that any trust character was destroyed due to

the commingling of the ticket sales proceeds with its stores’

general receipts.

DISCUSSION

In dealing with cross motions for summary judgment in a

contested matter, Federal Rule of Bankruptcy Procedure 9014

incorporates Federal Rule of Bankruptcy Procedure 7056, which in

turn incorporates Federal Rule of Civil Procedure 56. Summary

judgment is proper “if the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to judgment

as a matter of law.” FED R. CIV. P. 56(c). An issue is “material”

if it affects the outcome of the case under the applicable law.

Redwing Carriers, Inc. v. Saraland Apartments, 94 F.3d 1489, 1496

(11th Cir. 1996)(citing Anderson v. Liberty Lobby, Inc., 477 U.S.

242, 248 (1986)).

In this case, the applicable law is § 549 and § 550 of the

Code. Under those sections, only the transfer of property of the

estate may be avoided and recovered. Therefore, the central

issue to be determined by the court is whether the post-petition

transfers to GLC on December 18, 1996, December 24, 1996, January

-9-

7, 1997, and January 14, 1997, were subject to a trust, thus

excluding the transfers from the property of the estate. See

United States v. Whiting Pools, Inc., 462 U.S. 198, 205, n.10

(1983)(noting that property held in trust for a third party does

not become property of the estate).

In determining whether the transferred funds were subject to

a trust, the court must first determine whether a trust existed.

This inquiry requires looking to the language of the Lottery Act,

which provides in part:

All proceeds from the sale of lottery tickets or shares

shall constitute a trust fund until paid to the

corporation. . . . Proceeds shall include unsold

instant tickets received by a lottery retailer and cash

proceeds of the sale of any lottery products, net of

allowable sales commissions and credit for lottery

prizes.”

O.C.G.A. § 50-27-21(a).

The Lottery Act also requires retailers to deposit all lottery

proceeds in a separate trust account, which “[a]t the time of

such deposit, lottery proceeds shall be deemed to be the property

of the corporation.” O.C.G.A. § 50-27-21(b).

The court finds that O.C.G.A. § 50-27-21(a) creates a

statutory trust in favor of GLC. See Georgia Lottery Corporation

v. Daniel (In re Daniel), 225 B.R. 249, 251-52 (Bankr. N.D. Ga.

1998)(holding that § 50-27-21 sets forth all the elements of a

technical trust). As far as what constitutes property held in

trust for GLC, the plain language of O.C.G.A. § 50-27-21(a) is

clear. “All proceeds . . . shall constitute a trust . . . [and]

-10-

[p]roceeds shall include unsold instant tickets received by a

lottery retailer and cash proceeds . . . net allowable sales

commissions and credit[s]. . . .” O.C.G.A. § 50-27-21(a).

Because GLC’s Policies and Procedures define “Confirmed” Instant

Tickets as absolute proof that the retailer has received the

tickets, the courts finds that, in addition to tickets sold, all

tickets “Confirmed” constitute property held in trust. Next, the

court must determine whether the funds transferred to GLC during

Weeks I through IV were subject to the statutory trust.

Debtor argues that any trust character of the funds was

destroyed when Debtor commingled Instant Ticket sales proceeds

with Debtor’s general store account funds. Debtor further

asserts that the trust fails because there is no identifiable

trust res. Research has produced no cases on this precise

point. Therefore, this is an issue of first impression for the

court. However, the court agrees with GLC and finds that Begier

v. Internal Revenue Service is instructive. 496 U.S. 53 (1990).

In Begier, the United States Supreme Court analyzed an

avoidance action as to payments that were made to the Internal

Revenue Service (“IRS”) pursuant to a statutorily created trust

in the tax code. Affirming the Third Circuit, the Supreme Court

held that the funds paid to the IRS were not property of the

debtor; they were held in trust for the IRS. Id. at 55.

Accordingly, the Court held that the trustee could not recover

the funds. Id.

4 Pursuant to § 7501 of the Internal Revenue Code, excise taxes collected

from customers and income taxes withheld from another’s pay, “shall be held

to be a special fund in trust for the United States.” 26 U.S.C. § 7501.

Therefore, these taxes are often called “trust fund taxes.” See Slodov v.

United States, 436 U.S. 238 (1978).

-11-

At the onset, the court disagrees with Debtor that Begier is

inapplicable in this case. Admittedly, the court recognizes that

Begier involved a trust created by the tax code and the

Bankruptcy Code gives special attention to taxes. However, that

fact is inconsequential in this analysis. The central underlying

issue in Begier, whether such transfers were property of the

debtor, is directly applicable to this court’s determination of

whether Debtor’s transfers were property of the estate. See id.

at 65 (explaining that “‘property of the debtor’” is property

that would have been part of the estate had it not been

transferred before the commencement of the bankruptcy

proceedings.”). Moreover, the mere fact that Begier dealt with

alleged preferential pre-petition transfers under § 547 of the

Code and the present case deals with § 549 post-petition

transfers, has no bearing on the property of the estate analysis.

American International Airlines (“AIA”), the debtor in

Begier, fell behind in its pre-petition “trust fund taxes” to the

IRS.4 Pursuant to § 7512 of the Internal Revenue Code, the IRS

subsequently ordered AIA to deposit the trust fund taxes in a

separate account because of AIA’s default. AIA established the

account but instead of depositing into the separate account all

-12-

of the funds that it collected, AIA commingled some of the trust

fund taxes with general operating funds. Nonetheless, AIA

remained current to the IRS by making payments from both the

separate account and its general operating funds. Id. at 56.

Relying on the language of § 7501 of the Internal Revenue

Code, the Supreme Court held that the statutory trust extends to

“the amount of tax so collected or withheld.” Id. at 60. AIA

was required to withhold incomes taxes from its employees’ pay

and collect excise taxes from its customers for the benefit of

the IRS. Therefore, the Court held that a trust in the amount

withheld or collected was created at the moment AIA paid its

employees and at the moment customers paid AIA. Id. at 61. The

trustee argued that no trust was created because AIA never

segregated the funds into a separate account. However, the

Supreme Court rejected this argument and held that nothing in §

7501 indicates an intent of Congress that the IRS is “protected

only insofar as dictated by the debtor’s whim.” Id. If the

trustee’s proposition were true, the Court noted that an

“employer could avoid the creation of a trust simply by refusing

to segregate.” Id.

This conclusion, however, did not fully resolve the issue of

whether the funds transferred from AIA’s general operating fund

were trust property. Looking to the common law of trusts, the

Court explained that a trust is created in property which comes

into being only upon the identification of trust property or

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trust res. Id. However, the Court found the common law

definition to be “unhelpful” given the fact that a trust created

under § 7501 creates a trust in an abstract “amount” instead of

in particular property. Id. Therefore, the Court determined

that the IRS must “show some connection (‘reasonable assumption’)

between the § 7501 trust and assets sought to be applied to

debtor’s trust-fund tax obligations.” Id. at 65-66. In other

words, there must be some nexus between the trust and funds

transferred in order for the transferred funds to be excluded

from property of the estate. The Court concluded that the

voluntary payment of trust fund taxes, regardless of the source

of the funds, provides the necessary nexus. Id. at 66-67.

In the present case, Debtor argues that the “nexus” espoused

in Begier is a presumption which is rebuttable. See Wendy’s Food

Systems, Inc. v. State of Ohio Dep’t of Taxation (In re Wendy’s

Food System, 133 B.R. 917 (Bankr. S.D. Ohio 1991). However, a

bankruptcy court in this jurisdiction has held that a debtor’s

voluntary payment conclusively establishes the nexus set forth in

Begier. See Wasden v. Florida Dep’t of Revenue (In re Wellington

Foods, Inc.), 165 B.R. 719 (Bankr. S.D. Ga. 1994).

In In re Wendy’s Food Systems (“WFS”), the debtor, WFS, was

required to collect state sales taxes which were to be held in

trust pursuant to Ohio law. During the pre-petition preference

period, WFS made a voluntary payment to the taxing authority.

WFS sought to recover these payments. Because the taxes which

-14-

WFS collected were commingled with general operating funds, the

state taxing authority argued that Begier was applicable.

Construing Begier, the bankruptcy court held that the

“reasonable assumption” (or presumption) that a voluntary payment

provides the required nexus to the trust, may be rebutted with

contrary evidence. Wendy’s Food Systems, 133 B.R. at 920.

According to the court in Wendy’s Food Systems, the Supreme Court

in Begier rendered a narrow ruling specific to the facts of that

case. Id. at 921. The court explained that the voluntary

payment in Begier was presumed to provide the nexus to the trust

because there was a sufficient amount of funds in the commingled

account to satisfy the tax obligation. Id. However, in Wendy’s

Food Systems, WFS’s commingled account had a balance below the

amount which was transferred to the taxing authority. The court

held that this “distinction remove[d] the reasonableness from the

assumption created in Begier.” Id. The court read Begier as

requiring the commingled account to have a balance equal to or

greater than the amount transferred in order for a voluntary

payment to have a sufficient nexus to the trust. Moreover, to

the extent that the transferred amount is greater than the

commingled account balance, that amount is not property of the

trust therefore, rendering it avoidable by WFS. Id. at 921-22.

In the case before the court, Debtor argues that Wendy’s

Food Systems is applicable. Evidence presented demonstrates that

Debtor’s store accounts and concentration accounts had negative

5 See United States v. Daniel (In re R & T Roofing Structures & Commercial

Framing, Inc.), 887 F.2d 981 (9th Cir. 1989); In re Copeland

Enterprises, Inc.), 133 B.R. 837 (Bankr. W.D. Tex. 1991) aff’d, 991 F.2d

233 (5th Cir. 1993).

-15-

balances at all times relevant to the transfers. (GLC’s Br. Exh.

“G”). Relying on Wendy’s Food Systems, Debtor maintains that

this evidence rebuts the presumption that Debtor’s voluntary

payment to GLC was sufficiently connected to the trust.

The court in In re Wellington Foods, however, rejected the

holding in Wendy’s Food Systems that Begier was a narrow decision

limited to specific facts. 165 B.R. at 726. In Wellington

Foods, Chief Judge Davis recognized the holding of Wendy’s Food

Systems to be the common-law tracing doctrine known as the

“lowest intermediate balance.” Id. Although the Supreme Court

was not faced with an intervening balance issue in Begier, Judge

Davis held that Begier is not restricted to cases where the

debtor has sufficient funds in its accounts to cover trust fund

tax payments. Id. To Judge Davis, this point was clear given the

Supreme Court’s language that the voluntary payment could not be

avoided “regardless of the source of the funds.” Id. (citing

Begier, 496 U.S. at 66-67). Therefore, the court held that “the

conclusive presumption arises upon voluntary payment, regardless

of the source of the payment and regardless of any intervening

balance in the debtor’s aggregate operating accounts.” Id.

The court in Wellington Foods further supported its

conclusion by relying on two cases involving trust fund taxes.5

-16-

In each case, the court applied the “lowest intermediate balance”

test. However, the debtors in both of these cases did not make

a voluntary payment. As Judge Davis explained, the voluntary

payment “is a critical factual distinction [which goes to] . . .

the very heart of the Supreme Court’s opinion in Begier . . . .

Furthermore, the Supreme Court made a reference to In re R & T

Roofing and noted that case as being merely “related” to the

issue before the Court because it did not involve a voluntary

payment. Id. (citing Begier, 496 U.S. at 57, n.12).

Therefore, absent the act of making a voluntary payment, the

court held that there is no conclusive presumption of the

required nexus, thus the lowest intermediate balance rule is

applicable. Id. at 728. However, where a voluntary payment has

been made, “such payment will be conclusively presumed to be from

the corpus of the trust.” Id.

The court agrees with the reasoning in Wellington Foods and

likewise, finds that a voluntary payment conclusively presumes

that such payment is property of the trust. Accordingly, the

court rejects the reasoning in Wendy’s Food Systems that this

presumption is rebutted because the trust account balance fell

below the amount of the payment. As the Supreme Court in Begier

held, the trust is created in an “abstract amount” and

“regardless of the source of the funds.” Begier at 62, 66-67.

Moreover, the “conclusive presumption” of a voluntary

payment is consistent with the presumption applied in

6 Although constructive trusts are formed as an equitable remedy while

statutory trusts are creatures of statute, the court finds that this

distinction is immaterial in determining what constitutes trust property.

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constructive trust cases where the trustee commingles trust funds

with that of his own.6 See Bethlehem Steel Corp. v. Tidwell, 66

B.R. 932, 943 (M.D. Ga. 1986)(holding that “[w]hen a trustee

replenishes a commingled account which has fallen below the

amount held in trust, the trustee is presumed to return the

beneficiary’s money first. . . .”). Just as funds that replenish

a commingled account are presumed to be trust property (i.e.,

beneficiary’s property), funds that are voluntarily paid to the

trust beneficiary are likewise presumed to be trust property.

Applying the rule in Begier to the instant case, the court

finds that the funds which Debtor transferred post-petition to

GLC were property of the statutory trust. Although Debtor

transferred these funds from its commingled general operating

accounts, these payments were voluntary payments. Therefore,

pursuant to Begier and Wellington Foods, these payments are

conclusively presumed to be sufficiently connected to the trust.

No doubt exists that a voluntary payment was made for Week I;

once the sweep failed, Debtor wire transferred the funds directly

to GLC. During Weeks II, III, and IV, however, Debtor made

deposits in the trust account which was swept by GLC.

Nevertheless, the court finds that these transfers were

voluntary. Just because Debtor did not directly transfer the

-18-

funds to GLC, Debtor voluntarily deposited the funds in the Trust

Account in order for GLC to conduct the sweep.

Moreover, these facts are similar to Bethlehem Steel. The

commingled account in that case had very little funds which was

later replenished by the debtor with other funds. The court held

that the replenished funds were presumed to be property of the

trust. 66 B.R. at 942. Similarly, the Trust Account in the

instant case had no funds. Debtor deposited funds in order for

GLC to conduct the sweeps. Pursuant to the presumption of

Bethlehem Steel, the court finds that the deposits constitute

replenished funds which are property of the trust.

Based on the above findings, the $533,075.72 which Debtor

maintains was erroneously paid to GLC, are “proceeds” held in

trust for GLC. These funds are not property of the estate.

Accordingly, Debtor may not recover these funds under § 549 and

§ 550 of the Code. Therefore, the court will grant GLC’s motion

for summary judgment and will deny Debtor’s motion for summary

judgment.

GLC prayed for an award of attorney’s fees, but has cited no

authority in support of the same. Therefore, judgment will be

rendered in favor of GLC and against Debtor with costs of this

action.

An order in accordance with this Memorandum Opinion will be

entered.

DATED this ____ day of May, 2001.

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____________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

ROZIER, DERRYL FRANKLIN

September 2002

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: :

: CASE NO. 02-41915

ROZIER, DERRYL FRANKLIN, : CHAPTER 13

Debtor. :

:

ROZIER, DERRYL FRANKLIN, :

Movant, ::

vs. :

:

MOTORS ACCEPTANCE CORP., :

Respondent. :

::

MEMORANDUM OPINION

On August 26, 2002, the court held an emergency hearing

regarding a Motion for Contempt Against Motors Acceptance

Corporation (“Contempt Motion”) filed by Derryl Franklin Rozier

(“Debtor”). During oral argument, the following issue was raised:

Whether Debtor’s car, which had been repossessed prior to Debtor’s

filing of a Chapter 13 case, was property of the bankruptcy estate.

Shortly after this same issue was decided by the 11th Circuit Court

of Appeals in Hall v. Lewis (In re Lewis), 137 F.3d 1280 (11th Cir.

1998), pursuant to Alabama law, this court reached a different

result in American Honda Finance Corp. v. Littleton (In re

Littleton), 220 B.R. 710 (Bankr. M.D. Ga. 1998), which

distinguished Georgia law from Alabama law. In light of the recent

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case, Bell-Tel Federal Credit Union v. Kalter (In re Kalter), 292

F.3d 1350 (11th Cir. 2002), this court has been asked to reconsider

its In re Littleton decision. Respondent agreed to turn the

automobile over to Debtor but did not concede that it was legally

required to do so. The court took the matter under advisement.

The parties were given an opportunity to submit briefs in support

of their positions. The court has considered the parties’ briefs,

oral arguments, and the applicable statutory and case law. The

court will grant Debtor’s Motion for Contempt Against Motors

Acceptance Corporation.

FACTS

The facts are not in dispute here. On August 8, 2002, after

Debtor had defaulted on a loan for his automobile financed by

Charles Levy’s MotorMax, which later assigned its interest to

Motors Acceptance Corporation (“Respondent”), Debtor’s automobile

was repossessed by Respondent using the self-help procedure allowed

by Georgia law. On August 12, 2002 Debtor filed his Chapter 13

Bankruptcy action. Debtor, acting through counsel, attempted to

regain possession of the automobile, but Respondent refused to turn

over the automobile. Debtor then filed the Contempt Motion.

Debtor contends that the 11th Circuit Court of Appeals failed

to consider United States v. Whiting Pools, Inc., 462 U.S. 192

(1983), when the court rendered its decision in Kalter. In Whiting

-3-

Pools, the Court concluded that property taken in possession by a

creditor, but not disposed of, remains property of the estate.

Whiting Pools, 462 U.S. at 209. Additionally, this court followed

the reasoning of the Whiting Pools decision when it issued the

Littleton opinion, stating that “upon repossession Debtors retained

an interest in the title to the vehicle.” Littleton, 220 B.R. at

715. Further, Bankruptcy courts in other circuits have followed

Whiting Pools on this issue and one court even questioned the 11th

Circuit Court of Appeals’ decisions in Kalter and Lewis. See Pontes

v. Lapatin and Cunha (In re Pontes), 280 B.R. 20 (Bankr. D. R.I.

2002); Tidewater Finance Company v. Moffett (In re Moffett), 2002

WL 1726900, 2002 Bankr. LEXIS 760 (Bankr. E.D. Va. 2002).

Additionally, Georgia law can be distinguished from Alabama law and

Florida law because Georgia case law supports the contention that

Uniform Commercial Code (“U.C.C.”) provisions do not automatically

transfer title to a secured creditor upon repossession. Thus, in

Georgia, repossession is not the same as a change of ownership, nor

does repossession transfer all of a debtor’s interest in the

property to a secured creditor.

Respondent argues that this court should reconsider its

Littleton opinion, in light of the Kalter case. While Kalter is

based on Florida law, Georgia’s law is said to be substantially

similar to Florida law. Thus, the 11th Circuit Court of Appeals’

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reasoning in Kalter should apply to the issue before this court.

DISCUSSION

While this issue has already been decided by this court in

Littleton, the court did take the issue under advisement in light

of the 11th Circuit Court of Appeals’ recent decision in Kalter.

While what is property of the bankruptcy estate is a matter of

federal law, the nature of a debtor’s interests and rights in

property is determined by state law. See Littleton, 220 B.R. at 713

(quoting Lewis, 137 F.3d at 1283). To determine the answer to the

question, who owns the collateral once it is repossessed, the court

in Kalter first reviewed Florida’s version of the U.C.C. Kalter,

292 F.3d at 1353. Finding that there was no clear language as to

ownership status of repossessed property in Florida’s U.C.C.

provisions, the court looked for case law that might be instructive

on the issue. See id. at 1356. Finding none, the court looked to

Florida’s transfer of ownership by operation of law statute,

Florida Statute § 319.28, to determine the ownership issue. See id.

at 1357. The court found that this statute contained explicit

language which recognized the transfer of ownership at the time of

repossession. See id. at 1358.

A similar approach can be taken in this case. However, a

similar answer is not required. Upon reviewing Georgia’s version

of the U.C.C., it is substantially similar to Florida’s version,

-5-

in that it does not contain a clear answer to the issue of who owns

the collateral once it is repossessed. See O.C.G.A. § 11-9-101,

et seq. Taking the next step, however, Georgia case law does

provide the court with direction on this issue, as was pointed out

in Littleton. Littleton, 220 B.R. at 714. According to the court

in Jeweler’s Financial Services, Inc. v. Chapes, Ltd., 181 Ga. App.

872, 354 S.E.2d 200 (1987), the default provisions in Georgia’s

U.C.C. statute do not automatically transfer title to a secured

creditor upon debtor’s default. Id. at 872-873, 354 S.E.2d at 201.

Thus, this court’s reasoning in Littleton is still correct despite

the 11th Circuit Court of Appeals’ ruling in Kalter.

Additionally, Georgia’s transfer of vehicle by operation of

law statute substantially differs from the Florida statute of the

same name. Compare O.C.G.A. § 40-3-34 with FLA. STAT. § 319.28.

O.C.G.A. § 40-3-34(b) states “If the interest of the owner is

terminated, whether the vehicle is sold pursuant to a power

contained in a security agreement or by legal process at the

instance of the holder either of a security interest or a lien, the

transferee shall….” O.C.G.A. § 40-3-34(b). This provision

clearly recognizes that ownership is not terminated until the sale

of the collateral by the secured creditor or by legal process,

neither of which has happened in this case. Thus, the repossessed

automobile, which had not been sold by the creditor pre-petition,

-6-

is property of Debtor’s Chapter 13 bankruptcy estate.

The court finds Respondent in willful contempt of the

automatic stay by refusing to turn over the automobile postpetition

upon proof of insurance and presentation of a plan that

provided for payment to Respondent. The court does not find cause

for awarding punitive damages. However, Debtor’s attorney may file

an affidavit and proposed order for reasonable and necessary

attorney’s fees incurred after proof of insurance, presentation of

a plan and demand was made. Respondent may file, within 10 days

of service, a counter-affidavit and proposed order as a response

to Debtor’s request for attorney’s fees.

Debtor may continue to retain possession of the automobile so

long as the following conditions are met: Debtor is directed to

maintain insurance and proof of insurance pursuant to the

contractual agreement between the parties. Debtor agreed orally

to amend his plan to provide 12% interest on the secured debt.

Debtor is directed to make payments to the trustee as provided for

by the plan.

Debtor’s Motion for Contempt Against Motors Acceptance

Corporation is granted. An order in accordance with this

Memorandum Opinion will be entered.

DATED this _________ day of September, 2002

-7-

____________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

J. DAVID MARSHALL

May 2001

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: : CASE NO. 99-42516

:

J. DAVID MARSHALL : CHAPTER 13

:

Debtor. : ADVERSARY PROCEEDING

: NO. 00-4078

KRISTIN SMITH ::

Plaintiff/Trustee, ::

vs. ::

AMERICAN HONDA FINANCE :

CORPORATION ::

Defendant, ::

vs. ::

J. DAVID MARSHALL ::

Intervenor. :

MEMORANDUM OPINION

On December 13, 2000, the court held a hearing on cross

motions for summary judgment regarding Plaintiff/Trustee’s

(“Trustee”) complaint to avoid preferential transfer and motion

of American Honda Finance Corporation (“Defendant”) for relief

from stay. The parties filed briefs, response briefs, and

Defendant filed a supplemental brief. At the conclusion of the

hearing, the court took the matter under advisement and announced

that it would allow the parties to submit letter briefs

discussing the Alabama law pertaining to the release of a

-2-

security interest. After considering the parties’ briefs as well

as the applicable statutory and case law, the court will deny

Trustee’s motion for summary judgment, grant Defendant’s motion

for summary judgment, and conditionally deny Defendant’s motion

for relief from the stay.

FACTS

On February 24, 1998, Debtor entered into a retail

installment contract and security agreement with Defendant to

purchase a 1998 Honda Accord. (“Honda”). Defendant perfected its

security interest in the vehicle by applying for and receiving a

certificate of title from the Alabama Department of Revenue

(“DOR”) reflecting AHFC as lienholder.

Sometime prior to October 1, 1999, Defendant executed a lien

release on the certificate of title and mailed it to Debtor.

This was an apparent error by Defendant. The parties have

stipulated that at the time the lien release was signed on the

title and mailed to Debtor, the debt owed to Defendant had not

been satisfied. The parties have also stipulated that once

Debtor received the certificate of title from Defendant, Debtor

did not forward it to the DOR. Therefore, the DOR never issued

a new certificate of title indicating that the lien had been

released. After realizing its apparent error, Defendant applied

for a replacement title which was issued by the DOR on October 1,

1 On its face, the certificate of title read, “This is a replacement

certificate of title and may be subject to the rights of a person under

the original certificate/no transfer of ownership involved. . . .”

(Claim No. 0001).

-3-

1999.1

On November 10, 1999, Debtor filed his voluntary petition

under Chapter 13 of the Bankruptcy Code. In his schedules,

Debtor listed Defendant as an unsecured creditor holding a

$21,000.00 claim. (Doc. No. 9, Sch. F). However, on December 2,

1999, Defendant filed a proof of claim for the amount of

$21,721.94 which Defendant alleged as secured. On April 24,

2000, the court confirmed Debtor’s plan proposing a dividend of

$16,698.00 to general, unsecured creditors.

On July 20, 2000, Trustee filed the current adversary

proceeding. In her complaint, Trustee asserts that Defendant

released its lien on the Honda when it mailed the certificate of

title to Debtor at which time Defendant became unperfected.

Accordingly, Defendant’s application and receipt of the October

1, 1999 replacement certificate of title is an attempt at

perfection. Because this occurred within ninety days of Debtor’s

filing, Trustee maintains that a preferential transfer has taken

place which is subject to avoidance.

Relying on Alabama law and the language shown on the face of

the replacement title, Defendant asserts that its lien was never

released, thus the replacement title did not re-perfect the lien.

-4-

Defendant maintains that its security interest in the Honda was,

at all times, perfected because the public records with State of

Alabama never reflected otherwise. Defendant also answered with

a counterclaim for relief from the automatic stay. (Doc. No. 4).

DISCUSSION

In dealing with cross motions for summary judgment in a

contested matter, Federal Rule of Bankruptcy Procedure 9014

incorporates Federal Rule of Bankruptcy Procedure 7056, which in

turn incorporates Federal Rule of Civil Procedure 56. Summary

judgment is proper “if the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to judgment

as a matter of law.” FED R. CIV. P. 56(c). In their briefs, the

parties agree that the material facts are not in dispute.

The issue before the court is whether Trustee may avoid

Defendant’s security interest either as a voidable preference

under § 547(b) of the Code or by utilizing the “strong arm”

powers set out in § 544 of the Code. At the onset, the court

notes that the parties have stipulated that Defendant was

originally perfected. Therefore, regardless of whether § 547(b)

or § 544 is applied, the underlying issue is whether Defendant

effectuated a lien release by signing a release on the

2 Ala. Code § 32-8-64(a) provides, in pertinent part:

Upon the satisfaction of a security interest in a vehicle for

which the certificate of title is in possession of the lienholder,

he shall, within 10 days after demand execute a release of his

security interest, in the space provided . . . and mail or deliver

the certificate and release to the next leinholder named therein,

or, if none, to the owner. . . . The owner . . . shall promptly

cause the certificate and release to be mailed or delivered to the

department, which shall release leinholder’s rights on the

certificate or issue a new certificate.

-5-

certificate of title and mailing the title to Debtor who never

forwarded the title to the DOR. These facts present an issue of

first impression under Alabama law, and no cases on this precise

point have been found.

Section 32-8-64(a) of the Alabama Code governs the issue of

the release of a security interest in an automobile.2 After

conducting a plain reading of § 32-8-64(a), the court finds that

three steps must be completed in order for a lien release to be

effective: (1) execution of a release on the certificate; (2)

delivery of the certificate to the next lienholder or owner; and

(3) delivery of the certificate to the DOR by the next lienholder

or owner. Moreover, given the beginning language of the statute,

“[u]pon satisfaction of the security interest . . .,” the court

finds that the satisfaction of the lien is a prerequisite for a

release to be valid. See General Electric Capital Corp. v.

Spring Grove Transport, Inc. (In re Spring Grove Transport, Inc.,

202 B.R. 862, 866 (Bankr. E.D. Va. 1996)(distinguishing Ala. Code

§ 32-8-64(a) from Virginia law). Therefore, because the lien was

not satisfied and the final step of delivery to the DOR was not

-6-

completed, the court finds that Defendant did not effectively

release its security interest in the Honda.

This holding is consistent with the reasoning of the only

other case found interpreting this statute which is cited by the

parties. See Southtrust Bank, N.A. v. Toffel (In re Blackerby),

53 B.R. 649 (Bankr. N.D. Al. 1985). Decided on facts different

from the present case, the court in In re Blackerby held that a

bank did not effectively release its security interest simply by

mistakenly noting a release on the certificate of title. Id. at

653. The court reasoned that its holding was consistent with

“the purposes underlying the Alabama Uniform Certificate of Title

and Antitheft Act one of which is to provide a means for

interested parties to ascertain essential information concerning

title to vehicles.” Id. at 654. To this end, the court further

explained that even though the face of the title reflected a

release, the DOR’s records reflected the existence of a valid

lien. Likewise in the present case, the DOR’s records reflected,

at all times, a valid lien. Therefore, the court finds that AHFC

did not effectuate a release of its security interest.

The court notes that the Blackerby court stated that a lien

is effectively released once a release has been executed on the

title and mailed to the owner. Id. at 653-54. This

determination appears to indicate that the third step, mailing to

the DOR, is not required for a release. However, that

determination was not necessary to that court’s decision because

-7-

those facts were not before that court. Furthermore, as the

court in In re Spring Grove Transport pointed out, it was implied

in the determination made by the Blackerby court that the lien

had been satisfied. In re Spring Grove Transport, 202 B.R. at

866. Because Defendant’s lien was not satisfied in this case,

the determination made by the court in Blackerby is not

applicable.

As to the replacement certificate of title issued on October

1, 1999, the court finds that this is not relevant. Because

there was never a release of the security interest, Defendant was

never unperfected. Furthermore, the mandatory language on the

face of the replacement title further supports the conclusion

that in the absence of an effective lien release, the title is

“. . . subject to the rights of a person under the original

certificate.” Ala. Code § 32-8-43(a)(2000).

CONCLUSION

Defendant’s security interest in the Honda was perfected on

the date that Debtor filed his petition. Therefore, the court

finds that Trustee cannot avoid Defendant’s lien under her

“strong arm” powers in § 544(a)(1). Based on the facts in this

case and applicable Alabama law, there was no time at which a

hypothetical judgment lien creditor could have held an interest

superior to that of Defendant. Moreover, because there was no

-8-

transfer at all, Trustee has not met her burden of proving an

avoidable transfer under § 547(g). Therefore, Trustee cannot

avoid Defendant’s lien under § 544(a)(1) or (2). Accordingly,

the court will deny Trustee’s motion for summary judgment and

will grant Defendant’s motion for summary judgment.

Because Debtor’s Chapter 13 plan was confirmed treating

Defendant as unsecured, the court will direct Debtor within 20

days to file a modification to his Chapter 13 plan to deal with

the collateral of Defendant. If no such modification is timely

filed, relief from the automatic stay will be granted to

Defendant upon submission of an affidavit and proposed order.

An order in accordance with this Memorandum Opinion will be

entered.

DATED this _____ day of May, 2001.

____________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

SHANE’ LATRELL JACKSON

July 2001

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: : CASE NO: 01-40268

:

SHANE’ LATRELL JACKSON : CHAPTER 7

a/k/a SHANE’ LATRELL RAMBO :

SSN: 422-06-4872 ::

Debtor. ::

MEMORANDUM OPINION

On June 1, 2001, the court held a hearing on Trustee’s

objection to Debtor’s amended claim of exemptions. At the

conclusion of the hearing, the court took the matter under

advisement and gave the parties an opportunity to submit letter

briefs. Debtor filed a letter brief and also filed another

amended claim of exemptions. Trustee filed a letter brief in

response. After considering the parties’ briefs and the

applicable statutory and case law, the court will overrule

Trustee’s objection.

FACTS

On January 30, 2001, Debtor filed a voluntary petition under

Chapter 7 of the Bankruptcy Code (“Code”). In Debtor’s Schedule

C, she claimed a $1500.00 exemption in her federal income tax

refund. Debtor valued this tax refund at $1500.00. She also

claimed a $400.00 exemption in her state income tax refund which

she valued at $400.00. In Debtor’s Schedule B, she attested that

1 Although Trustee’s objection reads “asset is a tax return. . .,” the court

will assume that Trustee intended to allege that the asset is a tax

refund.

-2-

each refund was in the possession of the government.

On March 7, 2001, Trustee conducted a Meeting of Creditors

pursuant to § 341(a) of the Code. While Trustee was questioning

Debtor, it was revealed that Debtor had received a federal income

tax refund of $3801.00 instead of $1500.00 as her schedules

indicated. On March 28, 2001, Debtor amended her claim of

exemptions reflecting a $3000.00 claim of exemption in the

$3801.00 refund. Debtor relied on section 6-10-6 of the Alabama

Code as authority for the $3000.00 claim of exemption.

On March 26, 2001, Trustee filed his objection to Debtor’s

amended claim of exemptions. Specifically, Trustee alleges

“[t]he debtor failed to disclose an asset until questioned by the

Trustee. The asset is a tax return, which is property of the

estate.” (Trustee’s Objection, Doc. #6).1

At the June 1, 2001 hearing on Trustee’s objection, Debtor

testified that her father prepared her federal and state tax

returns. At the end of February 2001, Debtor filed these

returns. Debtor further testified that she received her refund

before the March 7, 2001 Meeting of Creditors. When questioned

about the whereabouts of the refunds, Debtor explained that she

used them to bring automobile and mortgage payments current.

However, on re-cross by Trustee, Debtor indicated that she did

-3-

not receive the refund until late March. Instead of receiving

the refund Debtor stated that she actually wrote post-dated

checks. Lastly, Debtor testified that a portion of her tax

refund was an Earned Income Credit (“EIC”). As to Debtor’s state

income tax refund, she indicated that she received only $300.00

instead of $400.00 as indicated in her schedules.

The parties agree that under Alabama law, the amount and

nature of Debtor’s amended claim of exemptions could be allowed.

However, the parties disagree as to whether Debtor’s claim should

be allowed given that she did not list the accurate amount of her

refund in her original schedules and did not come forward with

the correct information until the Meeting of Creditors. Trustee

asserts that the EIC and tax refunds must be disclosed in the

schedules filed with the original petition or they become

property of the estate. Trustee further argues that it is

inconsequential the information was disclosed at the Meeting of

Creditors when the Debtor failed to disclose such information in

her original schedules.

Debtor argues, however, that she did schedule an anticipated

tax refund in her original schedules. Debtor explains that she

scheduled an amount which she anticipated that she would receive.

Once the refund was received, Debtor revealed it at the Meeting

of Creditors. Therefore, Debtor asserts that there was no intent

to deceive or conceal the refund. Debtor concedes that her

testimony may have been inconsistent when she indicated that she

-4-

had received the refund when she actually had been writing postdated

checks. However, Debtor contends that this is immaterial

because there was no intent to conceal the refund.

Before ruling on this issue, Trustee requested that the

court consider the case of Brasher v. McGregor (In re Brasher),

253 B.R. 484 (M.D. Ala. 2000). The parties were given an

opportunity to respond. On June 15, 2001, Debtor responded by

filing another amended claim of exemptions claiming $1748.00, the

EIC portion of the $3801.00 refund, as exempt pursuant to Brasher

and ALA. CODE § 38-4-8. The amendment further claimed $1180.00 of

the $3801.00 refund as exempt pursuant to section 6-10-6 of the

Alabama Code. Furthermore, although Debtor testified she

received a $300.00 income tax refund from the state, the

amendment contained a $400.00 claim of exemptions as in her prior

schedules.

On June 29, 2001, Trustee filed his response maintaining

that Debtor’s failure to disclose the full amount of the tax

refund should result in his objection being sustained. Because

Debtor knew she would receive a $400.00 state tax refund, Trustee

asserts that Debtor likewise knew that her federal income tax

refund would be $3801.00 Relying on Sixth and Tenth Circuit

authority, Trustee furthers argues that EIC’s are, in fact,

property of the estate.

-5-

DISCUSSION

The primary issue before the court is whether Debtor’s

failure to schedule the correct amount of a tax refund in her

original schedules precludes her from obtaining an exemption in

that refund. Also before the court is the substantive issue of

whether Debtor can claim the EIC portion of her refund as exempt

under Alabama law. The court will address this latter issue

first.

Under section 38-4-8 of the Alabama Code, “[a]ll amounts

paid or payable as public assistance to needy persons shall be

exempt from any tax levied . . . and in the case of bankruptcy,

shall not pass to the trustee or other person acting on behalf of

the creditors of the recipient of public assistance.” As Trustee

has pointed out to the court, the Middle District of Alabama has

recently held that “public assistance” includes federal EICs.

See Brasher, 253 B.R. at 489.

In Brasher, the debtor filed her Chapter 7 petition in

January 1999. She did not list the EIC on her original

schedules. On August 3, 1999, the debtor amended her petition to

claim the EIC portion of her refund as exempt under ALA. CODE § 38-

4-8. The debtor claimed as exempt the remainder of her refund

pursuant to ALA. CODE § 6-10-6. The trustee objected to the

debtor’s claim of exemptions. The bankruptcy court sustained the

trustee’s objection. See In re Brasher, No. 99-405-WRS (Bankr.

-6-

M.D. Ala. Filed Sept. 28, 1999). However, the district court

reversed and remanded holding that the debtor was allowed to

claim the EIC as exempt pursuant to section 38-4-8. See Brasher,

253 B.R. at 489.

The court finds the Brasher decision to be directly on

point. An Alabama district court having determined that the EIC

falls within the exemption in section 38-4-8, the court finds

that Debtor’s claim of exemption in her EIC should be allowed.

The court notes that the Sixth Circuit and Tenth Circuit

cases cited by Trustee are inapplicable to the facts of this case

because neither case dealt with the issue of exemptions. See

Baer v. Jones, 224 F.3d 1193 (10th Cir. 2000); Johnston v.

Hazlett, 209 F.3d 611 (6th Cir. 2000). In Baer, the Tenth

Circuit affirmed the Bankruptcy Appellate Panel (“BAP”) and held

that a debtor’s EIC is property of the estate, as pro-rated to

the date that the bankruptcy petition was filed. See Baer at

1194. However, as the Tenth Circuit BAP noted, the exemption

issue was not before the court. See Baer v. Montgomery (In re

Montgomery), 291 B.R. 913, 915 n.4 (B.A.P. 10th Cir. 1998).

In Johnston, the Sixth Circuit similarly held that the

debtor’s EIC was property of the estate even though the debtor

filed bankruptcy prior to the end of year in which the EIC was

earned. See Johnston at 612. Likewise, the Sixth Circuit never

got to the issue of exemptions. Although the debtor claimed an

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exemption pursuant to Ohio Revised Code § 2329.66(A)(9)(e), the

bankruptcy court held and the Sixth Circuit BAP affirmed that the

exemption was not available because that statute was repealed on

July 15, 1995, two years after the debtor filed her petition.

See Johnston v. Hazlett (In re Johnston), 222 B.R. 552, 553

(B.A.P. 6th Cir. 1998).

The court now turns to the issue of whether Debtor’s claim

of exemption in her tax refund should be disallowed because she

did not schedule the correct amount in her original petition.

Pursuant to FED. R. BANKR. P. 1009(a), “[a] voluntary petition,

list, schedule, or statement may be amended by the debtor as a

matter of course at any time before the case is closed.” This

rule denies the court discretion to deny leave to amend unless

there is a showing of a debtor’s bad faith or prejudice to

creditors. See Doan v. Hudgins, 672 F.2d 831, 833 (11th Cir.

1982); Arnold v. Gill, 252 B.R. 778, 784 (B.A.P. 9th Cir. 2000).

Under the bad faith ground, a showing that the debtor has

attempted to hide assets is usually required. See Arnold, 252

B.R. at 785. In the case of an alleged concealment of a tax

refund, sufficient evidence must exist that the debtor

intentionally or fraudulently attempted to conceal the tax

refund. Doan at 833.

In Doan, the debtors indicated in their original petition

that they expected a tax refund but did not schedule or claim the

refund as exempt. The debtors again mentioned the expected

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refund at the meeting of creditors. When the debtors received

the tax refund, they spent the money. The debtors subsequently

moved to amend their schedules and claim the refund as exempt.

The bankruptcy court allowed the debtors to schedule the asset

but denied the motion to amend to claim the exemption. The

district court affirmed the bankruptcy court, however, the

Eleventh Circuit reversed and remanded with instructions granting

the debtors’ motion to amend to claim the tax refund as exempt.

Id. at 834.

The second ground for denying leave to amend schedules is

prejudice to creditors. Several courts have held that a simple

delay in filing an amendment where the case has not been closed

does not alone prejudice creditors. See Doan at 833; Arnold at

787 (citing Andermahr v. Barrus (In re Andermahr), 30 B.R. 532,

534 (B.A.P. 9th Cir. 1983). Creditors must “suffer an actual

economic loss” as a result of the debtor’s delay in claiming an

exemption. Arnold at 787. Plainly stated, evidence of prejudice

exists if the creditor would have acted differently had the

creditor known of the full extent of the claimed exemptions. Id.

(citing Grzesnikowski v. Shaffer (In re Shaffer), 92 B.R. 632,

635 (Bankr. E.D. Pa. 1988) which held that it would be

prejudicial to creditors to allow a debtor to amend its

exemptions if a distribution of assets had already been made

based on the exemptions previously claimed). Furthermore, as the

court in Arnold explained, no creditor in that case filed an

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objection to the amended claim of exemptions alleging any

prejudice. Id.

In the case before the court, the court finds that there is

no evidence of bad faith, i.e., no attempt by Debtor to

intentionally or fraudulently conceal her tax refund. Debtor

scheduled an anticipated tax refund in her original schedules and

claimed that amount exempt. The fact that Debtor scheduled an

amount less than she actually received does not demonstrate an

intent to conceal the entire refund. Debtor explained that she

scheduled only $1500.00 because that was the amount she had

received in the past. The court is satisfied with this

explanation.

The court also finds that Debtor’s inconsistent testimony is

immaterial to the bad faith issue. The fact that she wrote postdated

checks in anticipation of receiving the refund instead of

having actually received the refund as she initially testified

does not exhibit an intent to fraudulently conceal this asset.

The court likewise finds no evidence of prejudice to

creditors. Although Trustee did not raise this issue in his

objection, he argued that Debtor delayed in disclosing the full

amount of the refund until the meeting of creditors which should

result in Debtor’s claim of exemptions being denied. However, as

the courts in Doan and Arnold held, simple delay alone does not

demonstrate prejudice. Doan at 833; Arnold at 787. No creditors

suffered any actual economic loss as a result of Debtor’s delay.

2 This is because of the $3801.00 refund, Debtor claimed a total of only

$2928.00 leaving $873.00 available for the estate.

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In fact, as Debtor’s claim of exemptions currently exist, $873.00

should be available to the estate for administration that was not

available before Debtor’s amendment.2 Furthermore, no creditor

objected indicating that it would have acted differently had the

creditor known of the full extent of the claimed exemption.

Accordingly, the court finds that Debtor’s amended claim of

exemption in her tax refund does not prejudice any creditors.

As to Trustee’s argument in his June 29, 2001 response that

Debtor should have known the correct amount she would receive,

the court finds this argument without merit. See Andermahr, 30

B.R. at 533 (rejecting the trial court reasoning that “debtor

should have anticipated a possible refund and claimed it as

exempt.”) Debtor testified that her father prepared her returns

for the year in question and she based the $1500.00 amount on

what she received in prior years.

In conclusion, the court finds that Debtor’s $1748.00 claim

of exemption in the EIC portion of her tax refund is allowed

pursuant to ALA. CODE § 38-4-8. The court also finds that Debtor’s

$1180.00 claim of exemption in the non-EIC portion of her refund

is allowed pursuant to ALA. CODE § 6-10-6. Therefore, Trustee’s

objection is overruled. Because section 6-10-6 allows an

aggregate exemption of $3000.00 and Debtor testified that she

received a state income tax refund of $300.00, not $400.00 as

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indicated in her schedules, the court will allow Debtor to exempt

$300.00 in her state income tax refund.

An order in accordance with this Memorandum Opinion will be

entered.

DATED this _____ day of July, 2001.

____________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

DOUGLAS MCARTHUR BYRD, SR

June 2, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: ::

CASE NO. 00-41817

DOUGLAS MCARTHUR BYRD, SR., : CHAPTER 13

PATRICIA ROSE BYRD, :

Debtors. :

:

DOUGLAS MCARTHUR BYRD, SR., : ADVERSARY PROCEEDING

Plaintiff, : NO. 02-4006

:

vs. :

:

ATLANTA CASUALTY COMPANY, :

Defendant. :

:

ATLANTA CASUALTY COMPANY, :

Movant. ::

MEMORANDUM OPINION

On April 11, 2003, the Court held a hearing on a Motion for

Summary Judgment by Atlanta Casualty Company (“Defendant”). The

Court was asked to determine whether actions taken by and

statements made by Douglas McArthur Byrd, Sr. (“Plaintiff”) and

Patricia Rose Byrd violated provisions in Defendant’s automobile

insurance policy covering Plaintiff and Mrs. Byrd’s 1999 Chevrolet

S-10 Blazer (“1999 Blazer”), so that as a matter of law, Defendant

was not obligated to pay Plaintiff for the loss of the 1999 Blazer.

Throughout the hearing, a number of objections to Defendant’s

affidavits were made by Plaintiff’s counsel. At the conclusion of

the hearing, the Court took the matters under advisement. After

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considering the pleadings, affidavits, depositions, and answers to

interrogatories in the record, the parties’ arguments and briefs,

as well as the applicable statutory and case law, the Court makes

the following rulings of admissibility and conclusions of law.

ADMISSIBILITY OF AFFIDAVITS

Objection #1 – Affidavit of Mr. William P. Claxton

Plaintiff specifically objected to the portion of Mr.

Claxton’s affidavit where it is alleged that Mrs. Byrd called Mr.

Claxton’s firm and said that Plaintiff was not able to make to a

scheduled examination under oath (“EUO”) because he was out of

town. Plaintiff argues this does not indicate that Mr. Claxton

himself spoke with Mrs. Byrd to hear the statement she made on the

phone. Therefore, Mr. Claxton lacks specific knowledge of the

incident.

While Mr. Claxton made the argument in court that he spoke

directly to Mrs. Byrd that day, his affidavit is not worded that

way. Because this was a hearing on a motion for summary judgment,

the Court was not permitted to take any testimony at the hearing.

See FED. BANKR. R. 7056. Mr. Claxton’s statements in court cannot

be considered. Therefore, the Court sustains Plaintiff’s objection

to Mr. Claxton’s affidavit to the extent that it refers to Mrs.

Byrd’s alleged statement that Plaintiff was out of town on the day

in question.

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Objection #2 – Affidavit of Mr. Rodney Jones

Plaintiff objected to Mr. Jones’ affidavit based on the

argument that any information he obtained from GEICO would be

considered hearsay. Defendant did not make any argument against

this objection. Therefore, the Court sustains Plaintiff’s

objection to Mr. Jones’ affidavit to the extent that it contains

information received from GEICO.

Objection #3 – Affidavit of Camille Hernandez

Plaintiff objected to Ms. Hernandez’s affidavit under two

arguments. First, Plaintiff argued that Ms. Hernandez lacked

personal knowledge of the events that took place regarding a claim

Plaintiff made on his GEICO insurance in 1998. Second, even if Ms.

Hernandez had such personal knowledge, Plaintiff argued that her

affidavit should not be considered because Ms. Hernandez’s name was

not provided to Plaintiff during discovery as a possible witness.

Ms. Hernandez’s affidavit states that she was assigned to

investigate Plaintiff’s claim that his 1998 S-10 Chevrolet Blazer

(“1998 Blazer”) was stolen on May 11, 1998. Ms. Hernandez clearly

has personal knowledge of that particular claim process performed

by GEICO. However, Ms. Hernandez’s statement in paragraph three

of her affidavit that the 1998 Blazer was found after it had been

in an accident with the keys in the ignition and its engine running

was not proven to have been within Ms. Hernandez’s personal

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knowledge. Ms. Hernandez most likely got this information from the

police and it should be considered hearsay. Therefore, the Court

sustains Plaintiff’s objection to Ms. Hernandez’s affidavit to the

extent that it contains information regarding the circumstances

under which Plaintiff’s 1998 Blazer was found. This does not

prohibit the Court from considering Ms. Hernandez’s conclusion that

the vehicle was totaled. In her role as the GEICO employee

assigned to investigate Plaintiff’s claim, it would have likely

been within her purview to make this determination.

As to Plaintiff’s second argument, Plaintiff was unable to

cite any authority for the proposition that the appropriate

sanction for Defendant’s failure to provide Plaintiff with Ms.

Hernandez’s name prior to submitting her affidavit is to exclude

Ms. Hernandez’s affidavit from consideration on a motion for

summary judgment. Being given no authority, the Court overrules

Plaintiff’s objection, except as stated above.

Objection #4 – Police Reports

Plaintiff objected to the Court’s considering police reports

submitted Defendant using the argument that the police reports are

hearsay. Defendant argued that the police reports should be

considered by the Court under the business or public records

exception to the hearsay rule.

Police reports are often considered on motions for summary

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judgment. See Samuel v. Sun Life Assur. Co. of Can., 587 F.2d 203,

204 (5th Cir. 1979); Duffey v. Bryant, 950 F.Supp. 1168, 1171 (M.D.

Ga. 1997). Under Beech Aircraft Corp. v. Rainey, 488 U.S. 153

(1988), factual findings and matters observed by a public official,

such as a police officer, contained in public records, such as

police reports, can be allowed in as admissible evidence under the

public records exception to the hearsay rule. Beech Aircraft Corp.,

488 U.S. at 169-170; see also FED. R. EVID. § 803(8)(C); Miller v.

Field, 35 F.3d 1088, 1091 (6th Cir. 1994); Baker v. Elcona Homes

Corp., 588 F.2d 551, 556 (6th Cir. 1978); Russell, J., Bankruptcy

Evidence Manual, § 803.20 at 1051 (2003 Edition). However,

statements contained in police reports made by bystanders,

witnesses, and other pertinent individuals are not allowed in as

admissible evidence under the Federal Rules of Evidence § 805. FED.

R. EVID. § 805; see also Miller, 35 F.3d at 1091; Russell, supra.

Hearsay within hearsay subject to an exception is not admissible.

See id.

Therefore, the Court will consider the police reports as far

as they contain factual findings and matters observed by the police

officers involved in the multiple theft reports initiated by

Plaintiff concerning his 1998 Blazer and 1999 Blazer, as well as

the incident report for the 1999 Blazer. However, the Court will

not consider any statements contained within the police reports

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made by people other than the reporting officer, under the public

records exception, and Plaintiff, as admissions. Additionally, the

Court will not consider the police reports and records concerning

incidents unrelated to the theft reports initiated by Plaintiff and

the incident report for the 1999 Blazer because they are irrelevant

to the issue before the Court.

BACKGROUND INFORMATION

On a motion for summary judgment, the Court shall consider

affidavits, depositions, and answers to interrogatories, in

addition to the pleadings of the parties. See FED. BANKR. R. 7056.

Further, facts are to be viewed in the light most favorable to the

opposing party. See United States v. Diebold, Inc., 369 U.S. 654,

655 (1962). Therefore, the facts will be construed in the light

most favorable to Plaintiff.

Allegedly, on July 7, 1999, Plaintiff parked the 1999 Blazer

in front of his friend’s apartment complex. (See Def.’s Ex. M -

Pl.’s Rec. St., pg. 4; Def.’s Ex. D – Pl.’s EUO, pgs. 39-40; Def.’s

Ex. G – Pl.’s Dep., pgs. 8-9). Plaintiff and his friend supposedly

left town overnight. (See Def.’s Ex. M, pgs. 4-5; Def.’s Ex. D,

pgs. 41-44; Def.’s Ex. G, pg. 9). Plaintiff claims that when he

returned on July 8, 1999, the 1999 Blazer was gone. (See Def.’s Ex.

M, pg. 4; Def.’s Ex. D, pg. 51; Def.’s Ex. G, pg. 9). According

to Plaintiff, he checked with his wife to see if she had taken the

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truck before calling the police to report the truck as stolen. (See

Def.’s Ex. M, pg. 6; Def.’s Ex. D, pg. 51; Def.’s G, pgs. 9-10).

According the police report, Plaintiff’s report was given at

2:55 p.m. on July 8, 1999. (Def.’s Ex. A – Columbus Police Dep’t

Compl. No. 99016916). What the police officer that responded to

Plaintiff’s call did not know was that the 1999 Blazer had been

found at 6:30 a.m. on the same day. (See Def.’s Ex. B – Georgia

Unif. Motor Vehicle Accident Rep., Accident No. 4510). The 1999

Blazer had been involved in a one car accident near the

intersection of Morris Road and Shep Street in Columbus. (See id.).

According to the police report, it was found on its side, with the

motor running, and the key in the ignition. (Id.).

Plaintiff reported the theft loss to Defendant and the claims

process began. It was during this claims process that Plaintiff

gave some contradictory statements and Mrs. Byrd declined to speak

with Defendant because she claimed that the incident did not

concern her. In her deposition taken for this adversary

proceeding, Mrs. Byrd stated that she may have said something to

that effect to Defendant because she did not know anything about

the incident. (See Def.’s Ex. E – Mrs. Byrd’s Dep., pg. 9).

Additionally, Defendant alleges that Mrs. Byrd misrepresented

Plaintiff’s whereabouts on the day of a scheduled EUO. However,

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Defendant has failed to submit admissible evidence as to this

alleged statement.

After investigating the claim, Defendant declined to pay

Plaintiff for the theft loss on the 1999 Blazer. When Plaintiff

and Mrs. Byrd filed for bankruptcy in 2000, this adversary

proceeding was initiated to recover proceeds from Defendant.

Defendant contends, in its brief and oral argument, that

Plaintiff’s contradictory statements involved the following issues:

1) how many keys Plaintiff and Mrs. Byrd had for the truck; 2)

whether or not Plaintiff looked for the truck prior to calling the

police on July 8, 1999; 3) whether Plaintiff’s friend lived in a

house or an apartment complex; 4) what time Plaintiff left the

truck at his friend’s place on July 7, 1999; and 5) what other cars

Plaintiff and Mrs. Byrd owned and had insured.

Further, according to Detective Watson’s follow-up police

report dated July 9, 1999, which the Court considers admissible for

the limited purposes as stated above, Detective Watson told

Plaintiff over the phone that the 1999 Blazer had been recovered.

(See Def.’s Supp. of R. on Mot. for Summ. J., Columbus Police Dep’t

Compl. No. 99016916, pg. 2). However, according to the written

transcript of Plaintiff’s Recorded Statement, which was taken on

July 15, 1999, six days later, Plaintiff claimed that the 1999

Blazer had not been recovered to his knowledge. (See Def.’s Ex. M,

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pg. 6).

Defendant argues because Plaintiff gave contradictory

statements, which Defendant contends were material to their

investigation, Plaintiff violated the fraud and misrepresentation

clause and the cooperation clause of the insurance policy.

Therefore, as a matter of law, Defendant is not legally bound to

pay Plaintiff on his claim. Further, Defendant contends that even

if Plaintiff’s contradictory statements do not rise to the level

of materiality required under the insurance policy, that Mrs.

Byrd’s refusal to speak with Defendant about the incident violates

the cooperation clause of the insurance policy.

Plaintiff admits that he made the contradictory statements

contended by Defendant. However, Plaintiff argues that those

contradictory statements and Mrs. Byrd’s refusal to give a recorded

statement do not violate the insurance policy because they are not

material. Plaintiff did not respond to an inquiry by the Court

about the discrepancy between Detective Watson’s police report and

Plaintiff’s Recorded Statement.

CONCLUSIONS OF LAW

When substantive state law claims, such as those under

insurance policies, are pursued via adversary proceedings in

bankruptcy, the substantive law of that state is controlling. Erie

R. Co. v. Tompkins, 304 U.S. 64, 78 (1938). Therefore, in the

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instant case, Georgia law is controlling.

It is well settled in Georgia insurance law that the insured

must act in good faith to cooperate with the insurer and to give

complete and truthful disclosures as to the claim they are making

to the insurance company. See Hurston v. Georgia Farm Bureau Mut.

Ins. Co., 148 Ga. App. 324, 325, 250 S.E.2d 886, 888 (1978); Saint

Paul Fire & Marine Ins. Co. v. Gordon, 116 Ga. App. 658, 660, 158

S.E.2d 278, 279 (1967). However, non-cooperation or

incomplete/untruthful disclosures must be material. See H.Y. Akers

& Sons, Inc. v. Saint Louis Fire & Marine Ins. Co., 120 Ga. App.

800, 802, 172 S.E.2d 355, 358 (1969).

Many of the contradictory statements made by Plaintiff do not

raise to the level of materiality, as a matter of law. The

statements had more than one possible explanation and could not

have hindered Defendant’s claim investigation. However,

Plaintiff’s statement to Defendant that the 1999 Blazer had not

been recovered when six days earlier the police informed Plaintiff

that it had been located is material, as a matter of law. This

misrepresentation cannot be justified or explained by Plaintiff’s

faulty memory or a simple mistake. Plaintiff had a duty to be

honest and forth right with Defendant. Lying to Defendant about

the whereabouts of the vehicle clearly violates the fraud and

misrepresentation clause, as well as the cooperation clause, of the

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insurance contract.

The Court holds, as a matter of law, that Plaintiff’s

misrepresentation to Defendant regarding his knowledge of the

whereabouts of the 1999 Blazer during his Recorded Statement is

material. Therefore, Defendant can rightfully refuse Plaintiff’s

claim on this basis. Defendant is entitled to summary judgment,

as a matter of law.

Defendant’s Motion for Summary Judgment is granted. An order

in accordance with this Memorandum Opinion will be entered.

DATED this _________ day of June, 2003.

____________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

RICKY W. BRACEWELL

May 20, 2004

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

THOMASVILLE DIVISION

IN RE: ::

RICKY W. BRACEWELL, : CASE NO. 02-60546

Debtor. : CHAPTER 7

::

WALTER W. KELLEY, : CONTESTED MATTER

Movant, ::

vs. ::

RICKY W. BRACEWELL, :

Respondent ::

INTRODUCTION

On April 5, 2004, Chapter 7 Trustee Walter W. Kelley

(“Movant”) filed a Motion to Determine Whether Crop Disaster

Payment is Property of the Estate (“Motion”) in the above

captioned bankruptcy case of Ricky W. Bracewell

(“Respondent”), along with a Stipulation of Facts and a brief

memorandum in support his Motion. At the parties’ request, no

hearing was scheduled. Upon Respondent’s brief and Movant’s

reply brief being filed with the Court, the Court took the

matter under advisement. The Court has considered the

stipulated facts, the parties’ briefs, and the applicable

statutory and case law. Based on the reasons set forth in

this Memorandum Opinion, the Court finds in favor of Movant

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and holds that the disaster payment in dispute is property of

Respondent’s bankruptcy estate.

STIPULATED FACTS

According to the Stipulated Facts submitted by the

parties, Respondent planted approximately 223 acres of seed

wheat in November 2000. Respondent planted approximately 374

acres of seed cotton in May 2001. Respondent used regular

farming practices to grow the crops to harvest. During 2001,

Respondent’s crops were subjected to drought conditions and

Respondent harvested the crops at reduced yields. Due to

these low yields, Respondent was unable to pay for his farmrelated

debt incurred to produce the crop. Respondent filed

a Chapter 12 petition on May 29, 2002 and subsequently

converted his case to Chapter 7 on January 2, 2003.

The Agricultural Assistance Act of 2003 (“Act”) was signed

into law on February 20, 2003. The Act provided assistance to

farmers who suffered losses due to weather-related disasters

or other emergency conditions which affected their 2001 or

2002 crops. The farmers were allowed to select either the

2001 or 2002 crops as the basis for determining their disaster

payment. Respondent applied on January 30, 2004 for a

disaster payment for the losses he incurred on his 2001 crops.

In February 2004, Respondent received a disaster payment from

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the United States Department of Agriculture (“U.S.D.A.”) Farm

Service Agency (“F.S.A.”) in the amount of $41,566 for the

losses Respondent incurred on his 2001 crops.

THE PARTIES’ CONTENTIONS

Movant contends the disaster payment Respondent received

under the Act is property of Respondent’s bankruptcy estate

under 11 U.S.C. § 541(a)(6), as proceeds of the pre-petition

crops. Movant cites to numerous cases to support his

contention. See Farm Pro Serv., Inc. v. Brown (In re Farm Pro

Services, Inc.), 276 B.R. 620 (D. N.D. 2002); Lemos v. Rakozy

(In re Lemos), 243 B.R. 96 (Bankr. D. Idaho 1999); and White

v. U.S. (In re White), No. BRL88-00971C, 1989 WL 146417

(Bankr. N.D. Iowa 1989). Further, Movant argues that Drewes

v. Vote (In re Vote), 261 B.R. 439 (8th Cir. B.A.P.

2001)(“Drewes”), aff’d, Drewes v. Vote (In re Vote), 276 F.3d

1024 (8th Cir. 2002)(“Vote”), a case relied upon by

Respondent, applies only to issues arising under 11 U.S.C. §

541(a)(1), not 11 U.S.C. § 541(a)(6). 11 U.S.C. §§ 541(a)(1)

& (6)(1993 & Supp. 2003); Vote, 276 F.3d at 1027; Drewes, 261

B.R. at 441; see also Farm Pro, 276 B.R. at 624.

Movant distinguishes the present case from this Court’s

decision in In re Julian Thaggard, No. 01-60571-JTL, In re

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Paige Thaggard, No. 01-60575-JTL, and In re Winfred Jones, No.

01-70513-JTL, slip op. at 7-8 (Bankr. M.D. Ga. April 3,

2003)(Laney, J.)(collectively “Thaggard”). In Thaggard, this

Court ruled that peanut bases, assigned to the debtors by the

U.S.D.A. F.S.A. after they filed bankruptcy petitions, were

not property of the estate. Id. at 7-8. This Court based its

decision in Thaggard on payment-in-kind (“P.I.K.”) cases and

a 9th Circuit Court of Appeals decision about fishing rights

assigned to a debtor by the United States Department of

Commerce post-petition. Id. at 6-7 (citing Sliney v. Battley

(In re Schmitz), 270 F.3d 1254, 1255 (9th Cir.

2001)(“Schmitz”); Kingsley v. First Am. Bank of Casselton (In

re Kingsley), 865 F.2d 975, 976 (8th Cir. 1989); Schneider v.

Nazar (In re Schneider), 864 F.2d 683, 684 (10th Cir. 1988);

and In re Schmaling, 783 F.2d 680, 681 (7th Cir. 1986) as

support for its decision). However, Movant argues that this

Court was correct when it stated in Thaggard that there was

“little doubt” about disaster payments being property of the

bankruptcy estate, if tied to pre-petition crops. Id. at 5-6.

Movant argues that the enactment date of the Act is

irrelevant. Movant urges that, because the Act relates back

to pre-petition crops, the effective date of the Act should

also relate back. Further, Movant argues that allowing

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Respondent to use the enactment date of the Act as a brightline

test to cut off the bankruptcy estate’s interest in

proceeds of estate property produces an absurd result.

Finally, Movant argues that to exclude the disaster payment

from the bankruptcy estate would be unfair to the creditors.

Respondent contends the disaster payment he received under

the Act is not property of his bankruptcy estate because his

right to the disaster payment did not accrue until after he

had filed for bankruptcy protection and converted his case to

one under Chapter 7 of the United States Bankruptcy Code

(“Code”). Respondent distinguishes In re Norville, 248 B.R.

127 (Bankr. C.D. Ill. 2000) and White, because the debtors in

those cases were in Chapter 12, thus 11 U.S.C. § 1207 was

applicable. 11 U.S.C. § 1207 (1993 & Supp. 2003); Norville,

248 B.R. at 129; White, 1989 WL 146417 at 1. Respondent

distinguishes Boyett v. Moore (In re Boyett), 250 B.R. 817

(Bankr. S.D. Ga. 2000); Lesmeister v. Lesmeister (In re

Lesmeister), 242 B.R. 920 (Bankr. D.N.D. 1999) and Kelley v.

Ring (In re Ring), 169 B.R. 73 (Bankr. M.D. Ga. 1993)(Laney,

J.), cases cited by this Court in Thaggard, because the

disaster payment statutes were passed prior to the debtors’

filing bankruptcy petitions in each of those three cases.

Thaggard, slip op. at 5; Boyett, 250 B.R. at 818; Lesmeister,

-6-

242 B.R. at 922-923; Ring, 169 B.R. at 74.

Respondent distinguishes Lemos because the disaster

payment statute in that case was passed prior to the case

being converted from Chapter 12 to Chapter 7. Lemos, 243 B.R.

at 97. Additionally, Respondent argues that the Bankruptcy

Court decision in Battley v. Schmitz (In re Schmitz), 224 B.R.

117 (Bankr. D. Alaska 1998), supplemented by 232 B.R. 173

(Bankr. D. Alaska 1999), aff’d In re Schmitz, 246 B.R. 452

(9th Cir. B.A.P. 1999)(“Battley”), relied upon by the court in

Lemos, was later overturned by the United States Court of

Appeals for the 9th Circuit in Schmitz. Schmitz, 270 F.3d at

1258; Lemos, 243 B.R. at 99; Battley, 224 B.R. at 124.

Further, Respondent contends that Lemos was effectively

overturned by the decision in In re Stallings, 290 B.R. 777

(Bankr. D. Idaho 2003). Stallings, 290 B.R. at 781-782; Lemos,

243 B.R. at 101. The court in Stallings, upon reviewing its

own prior decision in Lemos, determined that the law had

changed since its Lemos decision. Id. The court came to the

conclusion, under 11 U.S.C. §§ 541(a)(1)&(6), that disaster

payments received from disaster payment statutes passed after

the filing of a bankruptcy petition were not property of the

estate. 11 U.S.C. §§ 541(a)(1)&(6)(1993 & Supp. 2003); see

Stallings, 290 B.R. at 781-784. The court reasoned that the

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9th Circuit in Schmitz impliedly disapproved of post-petition

government payments being classified as proceeds under 11

U.S.C. § 541(a)(6). 11 U.S.C. § 541(a)(6)(1993 & Supp. 2003);

Schmitz, 270 F.3d at 1256-1258; see Stallings, 290 B.R. at

783, n. 5. Respondent argues Stallings makes it clear that a

disaster payment statute must be passed pre-petition for a

Chapter 7 bankruptcy estate to have any interest in the

payment authorized by the statute, even as proceeds under 11

U.S.C. § 541(a)(6). Id.

Respondent argues Schmitz is in agreement with the 8th

Circuit Bankruptcy Appeals Panel (“B.A.P”) decision in Drewes,

which was affirmed by the 8th Circuit on appeal. Schmitz, 270

F.3d at 1258; Drewes, 261 B.R. at 441, 444; see Vote, 276 F.3d

at 1027. In Vote, the debtor filed a Chapter 7 bankruptcy

petition prior to the crop disaster statute being enacted by

Congress. Vote, 276 F.3d at 1026. While the 8th Circuit Court

of Appeals did not address 11 U.S.C. § 541(a)(6), the court

determined that, because the debtor did not have a right to

the disaster payment upon the filing of his case, the disaster

payment was not property of the estate under 11 U.S.C. §

541(a)(1). 11 U.S.C. §§ 541(a)(1)&(6)(1993 & Supp. 2003);

Vote, 276 F.3d at 1026-1027. Respondent urges that this is

consistent with the cases decided under 11 U.S.C. § 541(a)(6),

-8-

all of which involved disaster payment statutes that were

passed pre-petition. 11 U.S.C. §§ 541(a)(6)(1993 & Supp.

2003).

Respondent argues that the court in Farm Pro reached the

right result on the wrong grounds. Farm Pro, 276 B.R. at 623-

625. The court in Farm Pro ruled that the government payments

were property of the estate under 11 U.S.C. § 541(a)(6),

reasoning that the Vote decision was based on 11 U.S.C. §

541(a)(1), not (a)(6). 11 U.S.C. §§ 541(a)(1)&(6)(1993 & Supp.

2003); Farm Pro, 276 B.R. at 624. Respondent contends the

disaster payments in Farm Pro were property of the estate

because the disaster payment statute was passed while the

debtors were involved in a Chapter 12 bankruptcy proceeding,

thus 11 U.S.C. § 1207 was involved. 11 U.S.C. § 1207 (1993 &

Supp. 2003); Farm Pro, 276 B.R. at 622-623; see White, 1989 WL

14641 at 6.

Respondent argues that all of the decisions he cited can

be read to be consistent. First, Respondent urges that the

cases highlight a critical difference between a Chapter 7

liquidation case and a Chapter 12 case, where there is an ongoing

estate which can acquire property after the filing of

the petition. Second, Respondent argues that a portion of

this Court’s memorandum opinion in Thaggard, which Respondent

-9-

considers dicta but was relied upon by Movant, was incorrect.

Thaggard, slip op. at 5-6. Respondent cites to the following

passage in Thaggard as incorrect:

“Later cases have extended the ruling to situations where

the bill that provided the disaster relief was passed

after the case was filed. See Boyett v. [Moore] (In re

Boyett), 250 B.R. 817, 822 (Bankr. S.D. Ga. 2000)[(Dalis,

J.)]; and Lemos v. Rakozy (In re Lemos), 243 B.R. 96, 99-

100 (Bankr. D. Idaho 1999). Cases holding this include

Lemos, heavily relied upon by Trustee, and Boyett, cited

by some of the parties. See id. There appears to be

little doubt as to disaster payments because they are

related to a particular crop that would have been planted

before the case was filed. Those cases may be decided

under 11 U.S.C. § 541(a)(1) or (a)(6), but in either case

the result seems to be that disaster payments are

property of the estate.” Id.

Respondent urges that this is incorrect. Respondent

states that Lemos and Farm Pro are the only two decisions to

determine that disaster payments received from disaster

payment statutes enacted post-petition are property of the

estate. Farm Pro, 276 B.R. at 622-623; Lemos, 243 B.R. at 97.

Respondent maintains that these two decisions are no longer

good law. See Stallings, 290 B.R. at 780-784.

CONCLUSIONS OF LAW

Movant cites 11 U.S.C. § 541(a)(6) as authority for the

proposition that the disaster payment received by Respondent

is property of the estate. 11 U.S.C. §§ 541(a)(6)(1993 & Supp.

2003). Section 541(a)(1) defines property of the estate as

-10-

all legal or equitable interests of the debtor, wherever

located and by whomever held, as of the commencement of the

case, subject to certain exceptions that are not relevant

here. 11 U.S.C. § 541(a)(1)(1993 & Supp. 2003). Section

541(a)(6) extends the definition of property of the estate to

include proceeds, product, offspring, rents, or profits of or

from property of the estate, except for post-petition wages

earned by an individual debtor after the commencement of the

case. 11 U.S.C. § 541(a)(6)(1993 & Supp. 2003).

The disaster payment in this case can be specifically tied

to a pre-petition crop that had been harvested and sold by

Respondent pre-petition (“2001 crop”). The 2001 crop itself

cannot be property of the estate because it was not in

existence on the date Respondent filed his bankruptcy

petition. The crop that would be property of the estate would

have been any crops in the ground as of the petition date

(“2002 crop”). Therefore, the 2001 crop disaster payment

cannot be considered proceeds of estate property.

However, what is property of the estate is the right to

the 2001 crop disaster payment, however contingent it may have

been on the filing date. The right to the disaster payment

was a pre-petition inchoate right that vested or became choate

-11-

post-petition upon the enactment of the Act. Upon the

occurrence of the disaster, Respondent had the right to

collect disaster payments from the government, if such

legislation was passed. Further, it would be inequitable to

allow Respondent to retain the 2001 crop disaster payment.

Congress could not have intended to give Respondent a windfall

while avoiding paying the creditors whose extension of credit

funded the 2001 crop.

This case is distinguishable from Schmitz and Thaggard.

Schmitz, 270 F.3d at 1255-1256; Thaggard, slip op. at 2-3. In

Schmitz and Thaggard, the government assigned rights to the

debtors which would produce income for future activities. Id.

The rights had income generating potential, i.e. income from

selling the rights as in Schmitz and income for farming

peanuts as in Thaggard. Id. However, the income generating

potential was based on future post-petition activities, not

pre-petition activities, i.e. the owner of the rights had to

farm or fish in the future to receive the income. While the

rights were based on average yields from the debtors’ prepetition

activities, they were not rights to income for the

pre-petition activities.

In the present case before the Court, Respondent had the

-12-

right to the disaster payment based on his pre-petition

farming activity in 2001. The disaster payment received by

Respondent post-petition stemmed from an inchoate right he

acquired pre-petition. Therefore, the disaster payment is

property of the estate under 11 U.S.C. § 541(a)(1). 11 U.S.C.

§ 541(a)(1)(1993 & Supp. 2003). The Court finds in favor of

Movant. An order in accordance with this Memorandum Opinion

will be entered.

DATED this _________ day of May, 2004.

____________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY

JUDGE

JAMES RUSSELL SMITH, and KIMBERLY HELEN SMITH

May 16, 2006

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE MIDDLE DISTRICT OF GEORGIA

THOMASVILLE DIVISION

IN RE: :

:

JAMES RUSSELL SMITH, and : CASE NO. 05-60736 JTL

: CHAPTER 7

KIMBERLY HELEN SMITH :

:

Debtors. :

_______________________________________________________________

MEMORANDUM OPINION

This matter is before the Court on motion of Debtors to

avoid the judicial lien of Carolyn J. Smith (hereinafter,

“Creditor Smith”). Creditor Smith’s lien attached to Debtors’

property described as house and 8.34 acres located at 663

Whitfield Road, Moultrie, Georgia. On December 21, 2005, the

Court held a hearing on Debtors’ motion to avoid lien and the

response of Creditor Smith.

At the conclusion of the hearing, the Court took under

advisement the issue of whether Creditor Smith’s judgment lien

impaired Debtors’ homestead exemption so as to authorize

avoidance of the judicial lien under § 522(f)(1) of the United

States Bankruptcy Code (hereinafter, the “Code”). After

considering the briefs submitted by the respective parties,

arguments of counsel, and the pertinent statutory and case law,

the Court, for the reasons given below, holds that should Debtors

later amend their schedules to exempt a portion of the value of

the property to which the judicial lien in question attached and

2

that exemption is allowed, the judicial lien of Creditor Smith

will be avoided in its entirety in accordance with § 522(f) of

the Code.

PROCEDURAL HISTORY

Debtors James Russell Smith and Kimberly Helen Smith filed

for bankruptcy protection under Chapter 7 of the Code on August

1, 2005. On October 6, 2005, Debtors filed their Motion to Avoid

Judicial Lien of Carolyn J. Smith. Creditor Smith responded to

Debtors’ motion on October 18, 2005. On October 19, 2005,

Creditor Smith filed a motion for relief from automatic stay and

a notice of hearing setting the same motion down for hearing on

December 21, 2005 in Thomasville. On November 11, 2005, Creditor

Smith filed a notice of hearing setting Debtors’ Motion to Avoid

Lien and Creditor Smith’s objection for hearing also on December

21, 2005 in Thomasville.

On December 21, 2005, the Court held a hearing on the two

matters. The Court granted Creditor Smith’s Motion for Relief

from Automatic Stay and an order granting relief from automatic

stay as to real property located at “653 Whitefield Road,

Moultrie, Georgia” was signed on December 26, 2005.1 The Court

1 According to Debtors’ petition, Debtor husband’s street address is “663

Whitefield Road, Moultrie, Georgia” and Debtor wife’s street address is

“663 Whitfield Road, Moultrie, Georgia.” Schedule A filed with Debtors’

petition lists the only real property claimed by Debtors as located at “663

Whitfield Road, Moultrie, Georgia.” Further, Debtors’ amended Schedule D

filed on October 6, 2005 lists Carolyn J. Smith as the holder of a secured

claim pertaining to property at “663 Whitfield Road, Moultrie, Georgia.”

The street number “653” was used in Creditor Smith’s Motion for Relief from

3

took Debtors’ Motion to Avoid Judicial Lien and Creditor Smith’s

objection under advisement asking the parties to file briefs on

the matter. Both Debtors and Creditor Smith filed briefs with

the Court.

FINDINGS OF FACT

Debtors, in Schedule A, claim joint ownership in real

property located at 663 Whitfield Road, Moultrie, Georgia.2 This

real property is composed of a house and 8.34 acres of land. The

claimed current market value of Debtors’ interest in the property

without deductions for secured claims or exemptions is $187,455.3

Debtors’ real property is encumbered by the following liens in

order of stipulated priority: (1) a first mortgage held by Colony

Bank in the scheduled amount of $35,000.00; (2) the judicial lien

of Creditor Smith in the scheduled amount of $27,394.36; and (3)

a second mortgage held by Citifinancial in the scheduled amount

of $155,521.85.4

On March 3, 2005, Creditor Smith recorded a judicial lien

against Debtors’ real property located at 663 Whitfield Road,

Automatic Stay and in the order granting that motion. The Court will

assume that a scrivener’s error was made either by Debtors in preparing

their petition and schedules, or, most likely, by Creditor Smith in the

preparation of her motion for relief and the related order. The Court will

consider the error harmless as Debtors have claimed no other real property

in their schedules and as the error in no way affects the issue before the

Court today.

2 See Debtors’ Bankruptcy Petition, Schedule A (Aug. 1, 2005).

3 Id.; no additional evidence as to value of the property was submitted by

Creditor Smith.

4 The nature, priority, and amount of each secured claim was stipulated by

the parties at the hearing.

4

Moultrie, Georgia.5 Creditor Smith’s security interest in

Debtors’ real property arose by virtue of a writ of fieri facias

issued on that same date in the State Court of Colquitt County,

Georgia and against Debtor husband James Russell Smith only.

According to Debtors’ amended Schedule C filed October 6,

2005, Debtors have not scheduled a claim of exemption in the

abovementioned real property.

DISCUSSION AND CONCLUSIONS OF LAW

I. History, Background, and Rule of Law

The issue before the Court is whether the judicial lien of

Creditor Smith may be avoided in its entirety where the judicial

lien is subordinate to a consensual, non-avoidable first

mortgage lien, is senior to a consensual, non-avoidable second

mortgage lien, and there remains no equity in the property.

Section 522(f)(1)(A) of the Code grants courts the authority to

avoid judicial liens where those liens impair an exemption of

the debtor. Because Debtors’ case was filed after October 22,

1994 but before October 17, 20056, the provisions enacted by the

Bankruptcy Reform Act of 1994 (hereinafter, the “Reform Act”)

5 See Debtors’ Motion to Avoid Judicial Lien (Oct. 6, 2005); Creditor

Smith’s Response to Debtors’ Motion to Avoid Judicial Lien (Oct. 18,

2005).

6 Effective date of the Bankruptcy Abuse Prevention and Consumer Protection

Act of 2005 (hereinafter, “BAPCPA”). BAPCPA did not, however, alter the

pertinent parts of the provisions applicable to the issues before the Court

today.

5

are applicable. Section 522(f)(1)(A) provides in pertinent part

as follows:

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) a judicial lien . . . .7

When considering whether a lien may be avoided, the Court

must: first, ascertain the nature of the lien sought to be

avoided; second, identify the property to which that lien

attaches; and third, determine whether the lien “impairs an

exemption to which the debtor would have been entitled.”8

Congress aided courts in the application of § 522(f) by codifying

an arithmetic formula for determining whether a lien “shall be

considered to impair an exemption.” Section 522 (f)(2) provides

as follows:

(2)(A) For the purposes of this subsection,

a lien shall be considered to impair an

exemption to the extent that the sum of—

(i) the lien;

(ii) all other liens on the

property; and

(iii) the amount of the exemption

that the debtor could claim if

there were no liens on the

property; exceeds the value

that the debtor’s interest in

the property would have in the

absence of any liens.

7 11 U.S.C. § 522(f)(1)(A) (2005) (emphasis added).

8 Id.

6

(B) In the case of a property subject to

more than 1 lien, a lien that has been

avoided shall not be considered in making

the calculation under subparagraph (A) with

respect to other liens.9

Prior to the addition of this provision by the Reform Act in

1994, there was disagreement among the courts as to how §

522(f)(1) should be applied. The courts were split among those

adopting a more strict reading of the Section10 and those that

adopted a more broad reading, including this Court.11 The issue

before the addition of § 522(f)(2) was:

Does section 522(f) entitle the Debtor to

avoid all of [the creditor’s] lien, or only

that portion that actually interferes with

(i.e., is equal to) his . . . exemption?

Stated another way: Does section 522(f)

contemplate a “carve out” of that portion of

a lien necessary to accommodate a debtor’s

exemption and subordination of the remainder

of the lien, or does it contemplate complete

avoidance of the lien?12

This Court addressed this pre-Reform Act issue in the case

of Ward v. Federal Deposit Insurance Corp. (In re Ward).13 In

Ward, the debtor claimed no equity in certain properties claimed

as exempt over and above the consensual liens on the property and

9 11 U.S.C. § 522(f)(2) (2005).

10 The more strict, plain-meaning approach was referred to as the “carveout”

approach and was adopted in such cases as Wrenn v. American Cast Iron

Pipe Co. (In re Wrenn), 40 F.3d 1162 (11th Cir. 1994) and Hunter v. Dean

Witter Financial Services, Inc. (In re Hunter), 1994 WL 16005197 (Bankr.

S.D. Ga. Oct. 31, 1994).

11 See Ward v. Federal Deposit Insurance Corp. (In re Ward), 1995 WL 444250

(Bankr. M.D. Ga. Nov. 21, 1994) (Laney, J.).

12 In re Thomsen, 181 B.R. 1013 (Bankr. M.D. Ga. 1995) (Walker, J.) (citing

Hunter v. Dean Witter Financial Services, Inc. (In re Hunter), 1994 WL

16005197 (Bankr. S.D. Ga. October 31, 1994)).

7

the allowable exemption. The judgment creditor held a judicial

lien on debtor’s property totaling over $450,000. This Court

reasoned that the “concept of impairment should not be construed

restrictively but in a manner consistent with the ‘fresh start’

purpose of the Bankruptcy Code”14 and held that the judicial lien

was avoided in its entirety so as to allow the debtor to benefit

from the post-petition appreciation in value of the exempt

properties and any post-petition build up of equity that could be

paid upon a future sale of the properties.15 This Court

recognized in Ward that a judicial lien lacking supportive equity

would place a “cloud” on a debtor’s title or interest as well as

on a debtor’s right to use and enjoy exempt property in the

future. This result would be in direct conflict with the

exemption laws intended to effectuate the “fresh start” purpose

of the Bankruptcy Code.16

Shortly after Ward, the Eleventh Circuit Court of Appeals

chose not to adopt this more broad application of § 522(f) and,

instead, in the pre-Reform Act case of Wrenn v. American Cast

Iron Pipe Co.,17 adopted the reasoning and rule of the Ninth

Circuit set out in In re Chabot.18 The Eleventh Circuit held in

Wrenn that the plain meaning of the language in § 522 limited

13 1994 WL 16005197.

14 Id. at *9.

15 Id. at *1.

16 Id. at *9.

17 40 F.3d 1162 (11th Cir. 1994) (decided Dec. 22, 1994).

18 992 F.2d 891 (9th Cir. 1993).

8

lien avoidance to the value of any allowed exemptions. In other

words, the liens could only be partially avoided so as to “carve

out” that portion necessary to preserve the exemption of the

debtor.

As mentioned before, however, Congress intended to simplify

lien avoidance determination with the addition of § 522(f)(2) in

1994. Not only did Congress adopt the simple arithmetic formula

for determining impairment, but Congress also clearly stated in

its report on § 522(f) that the addition was intended to counter

several court decisions that had reached results not intended by

Congress when it drafted the Code.19 According to the legislative

history of § 522(f)(2), the arithmetic formula was intended by

Congress to be an adoption of the formula set out by the

Bankruptcy Court of the Eastern District of Pennsylvania in the

case of In re Brantz,20 which was favorably cited by the United

States Supreme Court in the case of Owen v. Owen.21

One of the decisions Congress indicated it intended to

overrule with the addition of § 522(f)(2) was In re Simonson,22

decided by the Third Circuit Court of Appeals in 1985. In

Simonson, the debtors’ residence was valued at approximately

$58,000. The property was encumbered by the following liens23 (in

19 See 140 Cong. Rec. H10752-01, H10769 (daily ed. Oct. 4, 1994).

20 106 B.R. 62 (Bankr. E.D. Pa. 1989).

21 500 U.S. 305 (1991).

22 Simonson v. First Bank of Greater Pittston (In re Simonson), 758 F.2d 103

(3rd Cir. 1985).

23 Approximate amounts given for simplification.

9

order of priority): (1) first mortgage–$25,000; (2) judicial

lien #1–$13,000; (3) judicial lien #2–$1,000; and (4) second

mortgage–$41,000.24 The debtors argued that the first mortgage

would be unavoidable and should be paid, but that the two

judicial liens should be avoided and the second and third

priority positions preserved for the benefit of the debtors’

exemption. Such treatment would leave approximately $20,000 in

value subject to the second mortgage. The debtor’s argument

rested heavily on § 522(i) of the Code, which permits the debtor

to “recover in the manner prescribed by, and subject to the

limitations of, § 550 of [the Code], . . . and may exempt any

property so recovered under [§ 522(b)].”25 Section 522(i)(2)

permits the preservation of the avoided lien for the benefit of

the debtor’s exemption “to the extent that the debtor may exempt

such property under subsection (g).”26

The Third Circuit interpreted § 522(i)(2) to mean that

preservation of avoided liens is available only where the

property would be exempt in the absence of the avoided lien. In

Simonson, no equity existed in the property above the unavoidable

liens, which the majority concluded prevented any claim of

exemption by the debtor. This reasoning led to the majority’s

conclusion that the debtor’s exemption was not impaired by the

24 Simonson, 758 F.2d at 105 (Becker, J., dissenting).

25 11 U.S.C. § 522(i) (2005).

26 11 U.S.C. § 522(i)(2) (2005).

10

judicial liens.27

The Third Circuit was not persuaded by the debtors’

arguments and held that considering the “unquestionably valid”

first and second unavoidable mortgages, the debtors had no equity

in their property, therefore, the liens were unavoidable because

there was no interest of the debtors that could be impaired by

the two judicial liens. The legislative history to § 522(f)

states clearly that the Third Circuit reached the wrong result

and that the position of the dissent in Simonson “is adopted.”28

The dissent in Simonson notes that the majority’s conclusion

was based on a plausible reading of the opaque § 522(f), but that

a conclusion more consistent with the congressional policy

underlying the provision existed.29 The dissent stated that the

intent of Congress in enacting the § 522(f) lien avoidance

provision was to “provide debtors in a Chapter 7 proceeding with

a ‘fresh start,’ including some equity in a residence, upon the

conclusion of the bankruptcy proceedings.”30 The dissent

concluded that “a judicial lien ‘impairs’ an exemption with

respect to overencumbered property to the extent that the

judicial lien, according to its amount and priority position,

27 Simonson, 758 F.2d at 106 (Becker, J., dissenting). See 4 COLLIER ON

BANKRUPTCY ¶ 522.11, at 522-83 (Alan N. Resnick & Henry J. Sommer eds., 15th

ed., rev. 2006).

28 See 140 Cong. Rec. H10752-01, H10769 (daily ed. Oct. 4, 1994).

29 Simonson, 758 F.2d at 107 (Becker, J., dissenting).

30 Id. at 107 (Becker, J., dissenting).

11

attaches to a portion of the value of the property.”31 The

dissent reasoned that the majority failed to recognize the

difference between a debtor’s “interest in property” and a

debtor’s “equity in property.”32 The dissent posited that it is

best to consider “interest of the debtor in property” for

purposes of § 522(f) to encompass more than simply the equity in

the property.

By enacting § 522(f), Congress created an exception to the

general rule that where property is overencumbered, the estate at

the commencement of the case will contain no value; therefore,

the debtor will not be able to acquire any portion of the

property for the benefit of his exemption.33 Section 522(f) also

creates an exception to the general rule that unsecured creditors

bear the burden of debtor exemptions.34 In essence, § 522(f)

allows the debtor to create equity in exempt property by avoiding

certain judicial liens.

The dissent in Simonson, also addressed the debtor’s ability

to preserve the position of avoided judicial liens for the future

benefit of the debtor’s exemption.35 The dissent stated that a

debtor’s right to preserve the avoided liens for the benefit of

an exemption stems from § 522(i), which provides:

(i)(1) If the debtor avoids a transfer or

31 Id.

32 Id. at 108 (Becker, J., dissenting).

33 Id.

34 Id.

35 Id. at 111 (Becker, J., dissenting).

12

recovers a set-off under subsection (f) or

(h) of [section 522], the debtor may recover

in the manner prescribed by, and subject to

the limitations of, section 550 of this

title, the same as if the trustee had

avoided such transfer, and may exempt any

property so recovered under subsection (b)

of this section.

(2) Notwithstanding section 551 of this

title, a transfer avoided under . . .

subsection (f) of this section . . . may be

preserved for the benefit of the debtor to

the extent that the debtor may exempt such

property under . . . paragraph (1) of this

subsection.36

The dissent in Simonson concluded that a debtor could

recover an avoided transfer under § 522(i)(1) and that §

522(i)(2) permitted a debtor to preserve the avoided transfer to

the benefit of his exemption.37 The dissent stated, “section

522(i)(2) permits the interest of the debtor’s exemption to

‘stand in the shoes’ of the avoided judicial liens.”38 Such a

holding would, in the dissent’s view, prevent a “junior

encumbrancer from receiving a windfall merely because the debtor

chose to avoid the superior judicial lien.”39

II. Application

As stated above, a three step analysis is involved in

determining whether a judicial lien should be avoided under §

522(f): first, ascertain the nature of the lien sought to be

36 11 U.S.C. § 522(i) (2005) (emphasis added).

37 Simonson, 758 F.2d at 112 (Becker, J., dissenting).

38 Id.

13

avoided; second, identify the property to which that lien

attaches; and third, determine whether the lien “impairs an

exemption to which the debtor would have been entitled.”40 The

discussion above develops and explains what constitutes

impairment of an exemption.

Section 522(f)(1) provides that judicial liens may be

avoided where the general requirements of § 522(f) are satisfied.

Section 101(36) defines the term “judicial lien” as a “lien

obtained by judgment, levy, sequestration, or other legal or

equitable process or proceeding.”41 The parties have stipulated

that Creditor Smith’s lien arose by way of a judgment against

Debtor husband James Russell Smith. Creditor Smith’s lien is,

therefore, a judgment lien for purposes of § 522(f)(1).

Section 522(f)(1)(A)(i) excludes application of the Section to

judicial liens securing alimony, maintenance, or support

obligations and § 522(f)(2)(C) excludes judicial liens arising

out of a mortgage foreclosure. There is no evidence that the

judicial lien of Creditor Smith either secures any alimony,

maintenance, or support obligation, or arises out of a mortgage

foreclosure. Therefore, § 522(f)(1) is available to consider

whether the judicial lien of Creditor Smith is avoidable.

Regarding the property to which the judicial lien attached,

it was stipulated by the parties that the lien of Creditor Smith

39 Id.

40 11 U.S.C. § 522(f)(1)(A) (2005) (emphasis added).

14

attached to the real property located at 663 Whitfield Road,

Moultrie, Georgia via writ of fieri facias issued March 3, 2005.

The writ of fieri facias was issued in the State Court of

Colquitt County, Georgia and against Debtor husband James Russell

Smith only. Debtors claim in their schedules, and counsel for

Debtors stated at the hearing, that the property is jointly

owned.

The issue now is whether Creditor Smith’s judicial lien

“impairs an exemption to which the debtor would have been

entitled.”42 The nature and extent of a debtor’s entitlement to

an exemption in their real property is purely a question of

Georgia law.43 Once a debtor’s exemption is established, the

issue of impairment and avoidance becomes a question of federal

law.44 Section 44-13-100 of the Official Code of Georgia

Annotated (hereinafter, the “O.C.G.A.”) provides Georgia’s

“Exemptions for purposes of bankruptcy and intestate insolvent

estates.” O.C.G.A. §§ 44-13-100(a)(1) and (a)(6) provide:

(a) In lieu of the exemption provided in

Code Section 44-13-1, any debtor who is a

natural person may exempt, pursuant to this

article, for purposes of bankruptcy, the

following property:

(1) The debtor’s aggregate interest, not

to exceed $ 10,000.00 in value, in real

property or personal property that the

debtor or a dependent of the debtor uses

41 11 U.S.C. § 101(36) (2005).

42 11 U.S.C. § 522(f)(1) (2005).

43 Hunter, 1994 WL 16005197 at *13.

44 Id.

15

as a residence, in a cooperative that

owns property that the debtor or a

dependent of the debtor uses as a

residence, or in a burial plot for the

debtor or a dependent of the debtor. In

the event title to property used for the

exemption provided under this paragraph

is in one of two spouses who is a

debtor, the amount of the exemption

hereunder shall be $ 20,000.00; . . .

(6) The debtor’s aggregate interest, not

to exceed $ 600.00 in value plus any

unused amount of the exemption, not to

exceed $ 5,000.00, provided under

paragraph (1) of this subsection, in any

property; . . . 45

Debtors’ amended Schedule C, filed October 6, 2005, does not

claim an exemption in the real property under either O.C.G.A. §

44-13-100(a)(1) or (a)(6). It would be improper for the Court to

attempt to calculate the exemption Debtors may be entitled to

receive. Debtors, if they wish to exempt a portion of the value

of the real property listed in their schedules, should follow the

proper procedure for amending their schedules and notice all

appropriate parties giving an opportunity for objection. The

Court assumes that Debtors did not claim an exemption in the real

property because they claimed no equity in the real property.

Because Debtors claimed no exemption in their real property, the

Court’s inquiry must be: If Debtors were entitled to an exemption

in their real property, would the judicial lien of Creditor Smith

be avoidable under § 522(f)?

45 O.C.G.A. § 44-13-100(a)(1), (6) (2002).

16

Although the Court is forced to deal with a hypothetical

exemption, the arithmetic formula set forth in § 522(f)(2)(A) can

still be applied. That Section provides that a debtor’s

exemption is impaired IF THE SUM of (i) the lien under

consideration (i.e., Creditor Smith’s judicial lien); (ii) all

other liens on the property (i.e., the first and second

mortgages); and (iii) the amount of the exemption Debtors could

claim if there were no liens on the property — EXCEEDS the value

of Debtor’s interest in the property in the absence of any

liens.46 The lien under consideration is the judicial lien of

Creditor Smith valued at $27,394.36. The other liens on the

property are the first mortgage of Colony Bank in the amount of

$35,000.00 and the second mortgage of Citifinancial in the amount

of $155,521.85. The total of the judicial lien and the two

consensual, unavoidable mortgages is $217,916.21.47 This figure

must now be compared with “the value that the debtor’s interest

in the property would have in the absence of any liens.”48

Debtors valued their real property at $187,455.0049; at the

hearing, Creditor Smith offered no evidence to the contrary. In

her brief in opposition, however, Creditor Smith requested an

opportunity to present evidence on the value of Debtors’ property

“in the event [] Debtors attempt to reopen their bankruptcy case

46 11 U.S.C. § 522(f)(2)(A) (2005).

47 $27,394.36 + $35,000.00 + $155,521.85 = $217,916.21.

48 11 U.S.C. § 522(f)(2)(A)(iii) (2005).

49 Debtors’ Bankruptcy Petition, Schedule A (Aug. 1, 2005).

17

to assert [a] claimed exemption . . . .”50 The appropriate time

for Creditor Smith to have offered evidence of value was at the

December 21, 2005 hearing where value, obviously implicated by §

522(f), was at issue. Evidenced by the statement in her brief

that “The fair market value of the real property is an important

issue to begin the analysis set out by the cases cited herein,”51

Creditor Smith herself recognized that the value of Debtors’ real

property was at issue in determining whether her lien should be

avoided under § 522(f). Accordingly, the Court hereby denies

Creditor Smith’s request to reopen evidence on the issue of

valuation of Debtors’ real property and will consider only that

evidence of value presented at the hearing, i.e., Debtors’

scheduled value, for purposes of determining whether Creditor

Smith’s judicial lien is avoidable.

This is a joint case with both the husband and wife

participating as Debtors. Debtors valued their real property at

$187,455.00 in their schedules and claimed that the property was

jointly owned. The judgment giving rise to Creditor Smith’s

judicial lien was against Debtor husband James Russell Smith

only. At the hearing, it was stated by counsel for Debtors that

Debtors owned the real property jointly. In Creditor Smith’s

brief in opposition, however, she stated that “the property is

owned solely by [] [D]ebtor James Russell Smith with [] co-

50 Creditor Smith’s Brief in Opposition of Debtors’ Motion to Avoid Judicial

Lien, at 3 (Jan. 9, 2006).

18

[D]ebtor Kimberly Helen Smith having no legal interest in said

property.”52 This fact is of no consequence to today’s inquiry as

regards “the value that the debtor’s interest in the property

would have in the absence of any liens.”53 No matter whether the

property is jointly owned by Debtors or whether one of Debtors

owns the property individually, the value of the property for

purposes of determining whether a lien is avoided under § 522(f)

in a joint case would be the same. The same is true regardless

of which of the two Debtors the judgment giving rise to the

judicial lien was against. Notwithstanding, which Debtor has

legal title to the property may be at issue in determining the

amount of an exemption available, if any is claimed in the

future. Debtors’ interest in the property for purposes of

applying § 522(f0(2)(A) is $187,455.

In this case, the sum of Creditor Smith’s judicial lien and

the two mortgages on the property exceeds Debtors’ interest in

the property, absent any liens, by $30,461.21. The sum of the

liens exceeds Debtors’ interest in the real property even without

the addition of the possible, albeit unclaimed, exemption in the

real property. It is apparent, therefore, that in accordance

with the arithmetic formula of § 522(f)(2)(A), an exemption in

the real property, if later claimed by Debtors and deemed

allowed, would in fact be impaired by the judicial lien of

51 Id.

52 Id. at 1-2.

19

Creditor Smith. Where a qualifying judicial lien impairs an

exemption of a debtor, then the judicial lien is avoidable in its

entirety under § 522(f)(1). It is certainly the case in this

situation that no non-exempt, unsecured value remains in the real

property to allow Creditor Smith’s lien to survive. Because of

the second priority of Creditor Smith’s judicial lien, Debtors’

“exemption actually will benefit from the avoiding of the

judicial lien.”54

In her brief, Creditor Smith argues that the cases of Lehman

v. VisionSpan, Inc. (In re Lehman)55 and In re Taras56 provide how

§ 522(f)(2)(A) should be applied. In Lehman, the Eleventh

Circuit Court of Appeals endorsed an interpretation of §

522(f)(2)(A) that departed from the literal reading of the

Section and substituted the “total value of the real property” in

place of the “value of the debtor’s interest” as the Section

calls for in the calculus it sets forth. The Eleventh Circuit

affirmed this interpretation by the bankruptcy court to prevent

the debtor husband in his individual case from sheltering his

equity in the jointly owned real property at issue. Had the

court applied § 522(f)(2)(A) literally and used the value of the

debtor’s one-half undivided interest in the formula, the judicial

lien at issue would have been fully avoided and the debtor would

53 11 U.S.C. § 522(f)(2)(A)(iii) (2005).

54 Simonson, 758 F.2d at 111 (Becker, J., dissenting).

55 205 F.3d 1255 (11th Cir. 2000).

56 304 B.R 912 (Bankr. N.D. Ga. 2004).

20

have retained his entire equity of $30,000. The Eleventh Circuit

held that this would be an absurd result and applied §

522(f)(2)(A) as the bankruptcy court below had applied it.

The case at bar is distinguishable from Lehman in two

critical respects. First, this is a joint case; therefore, the

“value that the debtor’s interest in the property would have had

in the absence of any liens” would be the combined interest of

both Debtors in this case. As mentioned above, it is unclear

from the evidence before the Court and the pleadings, whether

only Debtor husband owns the property or whether the property is

jointly owned. Either way, the value of the interest, as stated

above, would be the same. This would be the case even if §

522(f)(2)(A) was applied as it was in Lehman.

The second distinction is that there is no equity in the

property that could be shielded by a mis-application of §

522(f)(2)(A). When the two unavoidable mortgages on the property

are compared with the value of the property, there is no equity

to be claimed, by either Debtor. Applying § 522(f)(2)(A)

literally, as this Court has done above, would not, therefore,

yield an absurd result in this case.

The second case cited by Creditor Smith, In re Taras,

involves three liens, similar to the instant case, but like In re

Lehman, jointly owned real property is at issue in an individual

21

debtor’s case. The court in Taras concluded that Lehman and the

Eighth Circuit Court of Appeals case of Kolich v. Antioch (In re

Kolich)57 both applied in part.58 The court subtracted the first

priority mortgage from the value of the property and then divided

by two, like in Lehman, to arrive at the debtor’s one-half

undivided interest. The court then applied § 522(f)(2)(A),

adding the second priority judicial lien, the debtor’s half of a

third priority IRS lien, and the debtor’s maximum exemption in

the real property. The result exceeded the debtor’s undivided

one-half interest in the real property by $169,591. The court,

therefore, avoided the judicial lien in its entirety holding that

it impaired the exemption to which the debtor was entitled in the

absence of any liens.59

Again, like in Lehman, the case at bar differs from Taras in

that this is a joint case. The value of the property for

purposes of § 522(f)(2)(A) is the entire value of the property,

regardless of whether Debtor husband owns the property

individually or whether Debtors jointly own the property.

Section 522(f)(2)(A) should, therefore, be applied literally as

outlined above.

CONCLUSION

In accordance with the foregoing discussion, the Court holds

57 328 F.3d 406 (8th Cir. 2003).

58 Taras, 304 B.R. at 915.

22

that the judicial lien of Creditor Smith will impair any

exemptions later claimed by Debtors, if any, and is, therefore,

avoidable in its entirety in accordance with § 522(f)(1) of the

Code should any exemptions in Debtors’ real property be claimed

and allowed. Further, the Court holds that should Debtors later

claim exemptions in their real property so as to trigger the

avoidance of Creditor Smith’s judicial lien, the avoided judicial

lien in its second priority status, shall be preserved for the

benefit of Debtors’ exemption in accordance with § 522(i) and

consistent with the dissenting opinion in In re Simonson.

59 Id.

DATED this 16th day of May, 2006.

/s/ John T. Laney, III

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

MIDDLE DISTRICT OF GEORGIA

ANTHONY LEPHILLIPS MURRAY, and GAIL YVETTE MURRAY

July 28, 2006

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: :

:

ANTHONY LEPHILLIPS MURRAY, and : CASE NO. 05-48017 JTL

:

GAIL YVETTE MURRAY : CHAPTER 13

:

Debtors. :

______________________________________________________________________________

MEMORANDUM OPINION

On Debtors’ Motion to Abrogate, the Court now reconsiders the Administrative Order of

January 3, 2005, which outlines the procedure for payment of attorneys fees in Chapter 13 cases.

FACTS

Debtors filed their Chapter 13 bankruptcy petition on November 15, 2005, after the October

17, 2005 effective date of most the provisions of the Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005 (hereinafter, “BAPCPA”). On March 28, 2006, Debtors filed a Motion to

2

Abrogate the January 3, 2005 Administrative Order Regarding Attorneys Fees (hereinafter,

“Administrative Order” or “Order”). The Administrative Order establishes procedures for the

payment of debtors’ attorneys fees in Chapter 13 cases wherein it is provided, among other things,

that no separate fee application or hearing is required where the debtor and attorney agree that the

fee for representation will be less than $1,501.00. The procedure for payment under the Order is set

forth as follows:

(a) upon confirmation of the plan and the first distribution, the

Chapter 13 Trustee (hereinafter, “Trustee”) is to disburse to the

debtor’s attorney the lesser of $900.00 or six (6) times the

monthly plan payment (excluding current house payments in

the plan), less any pre-petition attorneys fees received, after

deduction of any unpaid filing fees and payment of the

Trustee’s fees and expenses;

(b) the remaining balance is to be paid by the Trustee to the

attorney in amounts not to exceed the lesser of $100.00 or 40%

(percent) of the monthly plan payment (excluding current house

payments in the plan), beginning the month following the first

distribution under the plan (see (a)) and continuing monthly

thereafter until paid;

(c) where no plan is confirmed and the case is dismissed or

converted to Chapter 7, Trustee is authorized to disburse to the

attorney up to $500.00, less any sums previously received after

deduction of any unpaid filing fees and payment of Trustee’s

fees and expenses.1

Debtors, in their motion and rebuttal brief, contend that the procedure established by the

Court for the payment of attorneys fees in Chapter 13 cases is violative of 11 U.S.C. § 1326(b),

which requires that before or at the same time payments are made to creditors, unpaid claims arising

under § 507(a)(2) must be paid. Section 507(a)(2) grants second priority to administrative expenses

1 See Administrative Order (Jan. 3, 2005).

3

described in § 503(b), which include attorneys fees. Debtors argue that “Section 1326(b)(1) plainly

means that at any given time after confirmation of a Chapter 13 [plan] if there is any unpaid allowed

administrative expenses, including any unpaid allowed claim for attorney[s] fees owing to a debtor’s

attorney, no payment may be made to any other creditor under the plan unless the unpaid

administrative expenses are paid in full either first or at the same time.”2

Debtors argue that the issue to be considered by the Court is under what Code section

debtors’ attorneys fees are to be paid in Chapter 13 cases. According to Debtors, revisions to the

Code, specifically revisions to § 330, create doubt regarding the Court’s decision in In re Moore3

where it was held that fees paid to debtors’ attorneys upon confirmation of a Chapter 13 plan are

interim compensation. The holding in Moore established § 331 as the basis for payment of debtors’

attorneys fees upon confirmation in Chapter 13 cases in this district. Debtors direct the Court to

several cases that hold compensation awarded upon confirmation to debtors’ attorneys under

Chapter 13 is awarded under § 330.4

In accordance with the Court’s order of March 31, 2006, the two Chapter 13 Trustees in the

district, Ms. Kristin Hurst (hereinafter, “Trustee Hurst”) and Ms. Camille Hope (hereinafter,

“Trustee Hope”), submitted briefs in response to Debtors’ motion.

Trustee Hope noted that the purpose of the Administrative Order is to provide a simplified

method for payment of debtors’ attorneys fees in Chapter 13 that would not unduly delay payment to

secured creditors, particularly creditors secured by rapidly depreciating assets.5 Trustee Hope stated

2 Debtors’ Motion to Abrogate at 1-2.

3 36 B.R. 323 (Bankr. M.D. Ga. 1984) (Hershner, J.).

4 Debtors’ Motion to Abrogate at 2-3.

5 Trustee Hope’s Response Brief at 1.

4

that the administrative order strikes a balance between the need to pay administrative fees and the

need to protect creditors.6 Regarding Debtors’ argument that § 1326(b)(1) requires the payment of

debtors’ attorneys fees in Chapter 13 cases ahead of, or at the same time as, payments made to

secured creditors, Trustee Hope emphasized that “all attorney fee awards made as part of the order

of confirmation in [the district] are interim fee awards made pursuant to § 331.”7 Therefore, reasons

Trustee Hope, debtors’ attorneys need not be paid ahead of the other creditors.8

Trustee Hope notes the split of authority among the few courts that have considered the issue

of payment of attorneys fees in Chapter 13 cases. She cites the case of In re Balderas9 as an

example of those cases accepting procedures consistent with those in this district. The court in

Balderas held that when § 1326(b)(1) and § 1322(a)(2), with its requirement that the Chapter 13 plan

provide for full payment of priority claims, are read together, it is clear that the courts have

discretion to order that fees be paid over time.10 Trustee Hope stresses that the procedure set forth in

the Administrative Order is equitable for both attorneys and secured creditors in that it allows

attorneys an immediate payment of at least some fees and allows the secured creditors to receive at

least some payment within six months of the filing.11 She also notes that the procedure for payment

grants the attorney a vested interest in proposing a feasible plan, since without success of the plan,

attorneys will not receive their full fee.12

6 Id.

7 Id. at 2.

8 Id.

9 328 B.R. 707 (Bankr. W.D. Tex. 2005).

10 Id. at 717-18.

11 Trustee Hope’s Response Brief at 3.

12 Id.

5

Although Trustee Hope opposes abrogation of the Administrative Order, she states that she

does not oppose a review of the Order or its modification.13 Trustee Hope suggests that the Court

could modify the Order to “increase or eliminate the cap and increase the amount of the initial

payment . . . .” 14 She also suggests that the monthly payments following the initial disbursement to

the attorneys could be increased.15

Like Trustee Hope, Trustee Hurst states that the procedure set forth in the Administrative

Order strikes a fair balance between insuring that competent attorneys continue to practice in the

area of bankruptcy and protecting the interests of creditors.16 Concluding likewise, after a detailed

discussion of the pertinent case and statutory law and consideration of the impact of BAPCPA,

Trustee Hurst stated that the Administrative Order should not be abrogated, but that it should be

amended to increase the amount of attorneys fees that may be awarded in a Chapter 13 case as

interim compensation without a separate fee application. Trustee Hurst notes that with the passage

of BAPCPA, the responsibilities of debtors’ attorneys have increased. Among many other duties

required by BAPCPA, attorneys must now: insure that their clients receive credit counseling prior to

filing; acquire and forward pay advices and tax returns; acquire and forward information regarding

domestic support obligations; complete statements of current monthly income; and calculate

commitment periods and disposable income.17

Trustee Hurst suggests that the Administrative Order be amended to provide the following:

(a) the sum of $2,500.00 be awarded to debtors’ attorneys without a separate fee application and

13 Id. at 5.

14 Id.

15 Id.

16 Trustee Hurst’s Response Brief at 1, 4.

6

hearing; (b) the lesser of $1,500.00 or six (6) times the monthly plan payment (excluding current

house payments in the plan) be initially disbursed to the attorney upon confirmation; and (c) the

lesser of $125.00 or 40% (percent) of the monthly plan payment (excluding current house payments

in the plan) be paid thereafter on a monthly basis until the attorneys fees are paid in full.18

Regarding supplemental fee applications submitted post-confirmation, Trustee Hurst also

recommends that the Court approve an hourly rate of $175.00 per hour for attorneys with significant

bankruptcy experience.19 Trustee Hurst notes that the United States Bankruptcy Courts for the

Northern and Southern Districts of Georgia have enacted general orders pertaining to payment of

debtors’ attorneys fees for all Chapter 13 cases filed after October 17, 2005. In the Northern

District, the order provides that a fee of $2,500.00 does not require a separate fee application. In the

Southern District, the order provides that a fee of $2,500.00 is deemed automatically approved by

the court in the absence of an objection.

DISCUSSION AND CONCLUSIONS OF LAW

Despite Debtors’ thorough discussion and argument regarding the legality of the Court’s

Administrative Order, Debtors state in the conclusion to their rebuttal brief, that they recognize the

need for a method of balancing the interests of debtors’ attorneys with the interests of creditors

secured by rapidly depreciating assets. Without fully abandoning their legal arguments discussed

above, Debtors assert that there is “agreement with both Trustees that the Administrative Order

17 Id. at 5.

18 See Id.

19 Id. at 5.

7

should be modified rather than abrogated . . . .”20 Like the Trustees, Debtors propose that the

Administrative Order be amended to allow the following: (a) an increase in attorneys fees up to the

sum of $2,500.00 without a separate fee application and hearing; (b) an increase to $1,500.00 of the

initial disbursement to debtors’ attorneys upon confirmation and prior to disbursements to other

creditors other than for continuing payments on mortgages; and (c) a continued monthly payment

thereafter, not to exceed the lesser of $125.00 or 40% (percent) of the monthly plan payment, until

the balance owed to debtors’ attorneys is paid in full.21 Debtors also state that attorneys should also

be able to apply for the reimbursement of photocopying, mailing, and other expenses.22

In light of Debtors’ agreement with the Trustees as to the proper way to proceed regarding

payment of debtors’ attorneys fees in Chapter 13 cases, the Court is not required to reconsider its

opinion in In re Moore23 or dedicate further discussion to the legal issues raised by Debtors in

opposition to the standing Administrative Order. The Court recognizes, from its experience since

the enactment of BAPCPA and from fee requests submitted by debtors’ attorneys in the various

divisions of the district, that the responsibilities, time requirements, and the expertise required of

attorneys practicing in the area of bankruptcy have increased. For this reason, the Court concurs

with the suggestions of Trustee Hope, Trustee Hurst, Debtors, and Debtors’ counsel, that it is

appropriate and reasonable to amend the Court’s Administrative Order of January 3, 2005.

As such, the Court hereby DENIES Debtors’ Motion to Abrogate and instead holds that its

Administrative Order of January 3, 2005 shall be amended to reflect the following changes:

20 Debtors’ Rebuttal Brief at 4.

21 Id.

22 Id.

23 36 B.R. 323.

8

Effective as to cases filed on or after August 1, 2006, an attorney for a Chapter 13 debtor or joint

debtors (for purposes of the following paragraphs (a) through (c), “Debtor”) need not file an initial

fee application if the fee sought to be paid per case is $2,500.00 or less; provided, however, that:

(a) Upon confirmation of Debtor’s Chapter 13 plan and in the first distribution

thereunder, the Chapter 13 Trustee (hereinafter, “Trustee”) shall be authorized to

disburse to Debtor’s attorney an amount not to exceed the lesser of $1,500.00 or six

(6) times the monthly plan payment (excluding any current house payment in the

plan), less any attorneys fees paid prior to filing; such disbursement to be made from

proceeds available and paid to Trustee by Debtor, or on Debtor’s behalf, after the

deduction of any unpaid filing fees and payment of Trustee’s fees and expenses;

(b) Trustee is authorized to disburse the balance of any such attorneys fees under

Debtor’s plan in an amount not to exceed the lesser of $125.00 or 40% (percent) of

the monthly plan payment (excluding any current house payment in the plan),

beginning in the month following the first plan distribution set forth in (a) and

continuing monthly thereafter until paid; and

(c) If no plan is confirmed and the Chapter 13 case is dismissed or converted to Chapter

7, unless otherwise ordered, Trustee is authorized to disburse to Debtor’s attorney

compensation not to exceed the sum of $700.00, less any sums previously received

by Debtor’s attorney, after deduction of any unpaid filing fees and payments of

Trustee’s fees and expenses.

The remaining provisions of the Administrative Order will survive the modification. In addition, the

Court, consistent with its past practice and in line with the Eleventh Circuit Court of Appeals

9

holding in In re Hillsborough Holdings Corp.24 and the Court’s holding in In re Glasstream Boats,

Inc.,25 will allow debtors’ attorneys the opportunity to apply for the reimbursement of photocopying,

mailing, and other expenses that are generally billed separately from an attorney’s hourly rate in

non-bankruptcy cases.26

The Court believes that the new $2,500.00 fee to be allowed to debtors’ attorneys without

separate application or hearing is well justified and is comparable with compensation allowed by

other districts in the state and around the nation. It is appropriate that the initial disbursement to be

paid by the Trustee on that fee be increased by the same proportion that the fee itself is increased.

In reaching its conclusion, the Court has carefully considered the interests of all the parties

affected by a Chapter 13 bankruptcy filing, debtors, creditors, and attorneys alike. The Court is

convinced that its holding and modification of the Administrative Order will strike the much-needed

balance between debtors’ interests in proposing and completing a successful Chapter 13 plan,

secured creditors’ interests in recoupment despite oftentimes rapidly depreciating collateral, and

bankruptcy attorneys’ interests in being fairly compensated for the vital service they provide to

debtors.

A modified administrative order will be simultaneously issued reflecting the holding of the

Court as outlined above.

24 127 F.3d 1398 (11th Cir. 1997).

25 146 B.R. 784 (Bankr. M.D. Ga. 1992) (Laney, J.).

26See Hillsborough Holdings, 127 F.3d at 1402-03.

JOHN PAUL JONES, JR

April 23, 2004

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

JOHN PAUL JONES, JR., :

:

Debtor : Case No. 01-55087 RFH

:

UNITED STATES OF AMERICA, :

:

Plaintiff :

:

vs. :

:

JOHN PAUL JONES, Jr., :

:

Defendant : Adversary Proceeding

: No. 02-5025

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: Ms. Valerie K. Mann

Environmental Enforcement Section

Environment and Natural Resources Division

United States Department of Justice

Post Office Box 7611

Washington, DC 20044-7611

Mr. Bernard Snell

United States Attorney’s Office

Post Office Box 1702

Macon, Georgia 31202

For Defendant: Mr. Robert K. Lovett

2

Post Office Box 185

Macon, Georgia 31202

Mr. Matthew M. Myers

Post Office Box 185

Macon, Georgia 31202

1 The United States of America filed this adversary proceeding on behalf of the

United States Coast Guard and the United States Environmental Protection Agency.

2 The Clean Water Act is also known as the Federal Water Pollution Control

Act Amendments of 1972 (“FWPCA”). See, e.g., Loggerhead Turtle v. County

Council of Volusia County, Florida, 307 F.3d 1318, 1325 (11th Cir. 2002).

3

MEMORANDUM OPINION

The United States of America, Plaintiff,1 filed a motion for summary judgment

on December 15, 2003. John Paul Jones, Jr., Defendant, filed a response on

January 16, 2004. The Court, having considered the record and the arguments of

counsel, now publishes this memorandum opinion.

Plaintiff contends that, as a matter of law, certain civil penalties imposed under

the Clean Water Act2 are nondischargeable under section 523(a)(7) of the Bankruptcy

Code.

The following facts are not in dispute: Defendant is the majority shareholder in

Bay Street Corporation. GC Quality Lubricants is a subsidiary of Bay Street.

Defendant is the president of GC Quality Lubricants. Georgia-Carolina Oil Company

is also a subsidiary of Bay Street. Georgia-Carolina Oil Company owns an oil

processing facility. The Court will refer to Bay Street, GC Quality Lubricants, and

Georgia-Carolina Oil Company collectively as the “oil companies.”

Plaintiff initiated a cleanup of oil pollution at the oil processing facility.

3 United States v. Jones, 267 F. Supp. 2d 1349 (M.D. Ga. 2003).

4 18A C. Wright, A. Miller, & E. Cooper, Federal Practice and Procedure §

4432, p 57 (2002). Contra Metromedia Co. v Fugazy, 983 F.2d 350, 366 (2nd. Cir.

1992), cert denied, 508 U.S. 952, 113 S.Ct. 2445, 124 L. Ed. 2d 662 (1993) (“The

mere fact that the damages awarded to the plaintiff have not been yet calculated,

though normally precluding an immediate appeal, does not prevent use of a final

ruling on liability as collateral estoppel.”).

4

Plaintiff contends the costs for the cleanup totaled almost $2.6 million.

Plaintiff filed a civil action in federal district court seeking: (1) reimbursement

of the cleanup costs of $2.6 million under the Oil Pollution Act, 33 U.S.C.A. § 2702;

(2) civil penalties for the discharge of oil into a navigable water under the Clean

Water Act, 33 U.S.C.A. § 1321(b)(7)(A); and (3) civil penalties for the failure to have

a Spill Prevention Control and Countermeasures plan to prevent and control oil

pollution under the Clean Water Act, 33 U.S.C.A. § 1321(b)(7)(C) and (j). The

district court entered an order on June 4, 2003, which held that Defendant, as an

individual, and the oil companies are liable for cleanup costs under the Oil Pollution

Act and are also liable for civil penalties under the Clean Water Act. The district

court has not determined the amount of the cleanup costs and civil penalties.3

An order that establishes liability but leaves open the question of damages

ordinarily is not a final order for purposes of preclusion.4 In the pending motion for

summary judgment, neither Plaintiff nor Defendant argues that this Court should delay

ruling on the issue presented until the district court determines the amount of cleanup

costs and civil penalties. The Court is persuaded that the issue presented is legal in

5

nature as opposed to being a factual dispute. The Court is persuaded that the issue

presented is appropriate for summary judgment because the Court will rule only on the

issue of whether the civil penalties are dischargeable under the Bankruptcy Code.

Defendant filed a petition under Chapter 7 of the Bankruptcy Code on

November 9, 2001. Plaintiff filed on February 4, 2002, an adversary proceeding

contending that Defendant’s obligations for civil penalties are nondischargeable in

bankruptcy. Plaintiff does not contend that Defendant’s obligations for cleanup costs

are nondischargeable.

Section 523(a)(7) of the Bankruptcy Code provides:

§523. Exceptions to discharge.

(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—

. . .

(7) to the extent such debt is for a fine, penalty, or

forfeiture payable to and for the benefit of a

governmental unit, and is not compensation for

actual pecuniary loss, other than a tax penalty—

(A) relating to a tax of a kind not specified

in paragraph (1) of this subsection; or

(B) imposed with respect to a transaction or

event that occurred before three years before

the date of the filing of the petition;

11 U.S.C.A. § 523(a)(7) (West1993).

Defendant does not contend that the civil penalties at issue are tax penalties.

Defendant does not dispute that the civil penalties are penalties payable to and for the

6

benefit of a governmental unit. Defendant contends that the civil penalties are

“compensation for actual pecuniary loss” and therefore are not excepted from

discharge under section 523(a)(7).

“As for the reference to ‘compensation for actual pecuniary loss,’ the Senate

Report indicates that the main purpose of this language was to prevent § 523(a)(7)

from being applied to tax penalties. S. Rep No. 95-989, supra, at 79.” Kelly v.

Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L. Ed. 2d 216, 229 n 13 (1986).

“The term ‘actual pecuniary loss’ clearly connotes measurable damages from

particular instances of wrongdoing. . . . Moreover, it has been held that even if a

penalty is based in part on measurable pecuniary loss, it will not be deemed

compensation for such loss under 523(a)(7) if its primary purpose is penal.” Kish v.

Farmer, (In re Kish), 238 B.R. 271, 285 (Bankr. D.N.J. 1999).

The Clean Water Act provides in part:

§ 1321. Oil and hazardous substance liability

. . .

(b) Congressional declaration of policy against

discharges of oil or hazardous substances; designation

of hazardous substances; study of higher standard of

care incentives and report to Congress; liability;

penalties; civil actions; penalty limitations, separate

offenses, jurisdiction, mitigation and damages and

costs; recovery of removal costs; alternative remedies

and withholding clearance of vessels

. . .

7

(7) Civil penalty action

(A) Discharge, generally

Any person who is the owner, operator, or

person in charge of any vessel, onshore

facility, or offshore facility from which oil

or a hazardous substance is discharged in

violation of paragraph (3), shall be subject to

a civil penalty in an amount up to $25,000

per day of violation or an amount up to

$1,000 per barrel of oil or unit of reportable

quantity of hazardous substances discharged.

. . .

(C) Failure to comply with regulation

Any person who fails or refuses to comply

with any regulation issued under subsection

(j) of this section shall be subject to a civil

penalty in an amount up to $25,000 per day

of violation.

33 U.S.C.A. § 1321(b)(7)(A), (C) (West 2001).

Subsection 1321(j) requires in part that an oil facility have a Spill Prevention

Control and Countermeasure plan to prevent oil pollution from occurring.

“Civil liability under the CWA [Clean Water Act] is strict.”

United States v. Jones, 267 F. Supp.2d 1349, 1361 (2003). “[O]nce a violation has

been established, some form of penalty is required. . . . Civil penalties are to be

assessed. . . . as a matter of law.” Atlantic States Legal Foundation, Inc. v. Tyson

Foods, 897 F.2d 1128, 1142 (11th Cir. 1990).

8

The Clean Water Act provides that the district court shall consider certain

factors in determining the amount of the civil penalties. The civil penalties are

deposited into the Oil Spill Liability Trust Fund. The Clean Water Act provides in

part:

(8) Determination of amount

In determining the amount of a civil penalty under

paragraphs (6) and (7), the Administrator, Secretary, or the

court, as the case may be, shall consider the seriousness of

the violation or violations, the economic benefit to the

violator, if any, resulting from the violation, the degree of

culpability involved, any other penalty for the same

incident, any history of prior violations, the nature, extent,

and degree of success of any efforts of the violator to

minimize or mitigate the effects of the discharge, the

economic impact of the penalty on the violator, and any

other matters as justice may require.

33 U.S.C.A. § 1321(b)(8) (West 2001).

(s) Oil Spill Liability Trust Fund

The Oil Spill Liability Trust Fund established under

section 9509 of Title 26 shall be available to carry out

subsections (b), (c), (d), (j), and (l) of this section as those

subsections apply to discharges, and substantial threats of

discharges of oil. Any amounts received by the United

States under this section shall be deposited in the Oil Spill

Liability Trust Fund.

33 U.S.C.A. § 1321(s) (West 2001).

The Oil Spill Liability Trust Fund is financed in part from penalties assessed

under § 1321(b). The Trust Fund is used in part to compensate the government for

cleanup costs. Berman Enterprises, Inc. v. Jorling, 793 F. Supp. 408, 416 (E.D.N.Y.

1992); aff’d 3 F.3d 602 (2nd Cir. 1993), cert denied 510 U.S. 1073, 145 S.Ct. 883,

5 986 F.2d 138 (6th Cir. 1993).

9

127 L.Ed.2d 78 (1994).

In determining whether a civil penalty is compensation for actual pecuniary

loss, courts consider: (1) whether calculation of the penalty bears any relationship to

the costs incurred by the government; (2) whether the penalty collected must be used

to mitigate the particular damage caused by the violation; and (3) whether the

government suffered any actual pecuniary loss. Arizona v. Ott, (In re Ott), 218 B.R.

118, 122-23 (Bankr. W.D. Wash. 1998); Commonwealth of Kentucky, Natural

Resources and Environmental Protection Cabinet v. Seals, 161 B.R. 615, 620-21

(W.D. Vir. 1993); United States v. Lueking, 125 B.R. 513, 516 (E.D. Tenn. 1990).

See also, United States Dept. of Energy v. Seneca Oil Co., (In re Seneca Oil Co.) 906

F.2d 1445, 1455-56 (10th Cir. 1990).

In United States v. WRW Corp.,5 civil penalties totaling $90,350 were assessed

against the corporation’s principals for serious violations of safety standards under the

Federal Mine Safety and Health Act. The principals served prison sentences and paid

criminal fines. The Sixth Circuit Court of Appeals held that the civil penalties were

nondischargeable under section 523(a)(7) and stated in part:

The defendants argue that the imposition of a civil penalty

promotes the aims of retribution and deterrence, given the various

factors used to determine the amount of the civil penalty.

However, even though the application of these factors to a given

case may result in a penalty which is punitive, we conclude that

imposing a civil penalty for health and safety violations which

6 59 B.R. 209 (Bankr. D.N.H. 1986).

10

varies in amount based upon the severity of the violation and the

operator’s attempts to come into immediate compliance may as

readily be ascribed to the remedial purpose of promoting mine

safety.

986 F.2d at 141-42.

The Government argues that the factors to be considered in

assessing penalties under 30 U.S.C. § 820(i) [Federal Mine

Safety and Health Act] do not relate to any party’s pecuniary loss

but rather indicate that the penalty is not compensation for actual

pecuniary loss, a fact on which the district court relied. . . . In

this case, the Government argues that the debt has a remedial,

compensatory purpose because it results in rough repayment to

the Government of prosecutorial and investigative expenses, but

is not compensation for actual pecuniary loss because the size of

the penalty is not derived from a showing of actual loss. Instead,

the penalty amount is based upon factors which focus on the

Act’s primary remedial purpose of promoting mine safety. There

was no actual pecuniary loss to the Government in this case in the

traditional sense, but only prosecutorial and investigative

expenses.

We conclude that the penalty at issue is not compensation for

actual pecuniary loss even though it is rationally related to the

goal of making the Government whole by roughly compensating

it for prosecutorial and investigative expenses. Concededly, this

is a fine distinction. Had the size of the penalty been calculated

according to proof of actual pecuniary loss, it would not be

excepted from discharge under § 523(a)(7).

986 F.2d at 145 (emphasis original).

In New Hampshire v. Tinkham, (In re Tinkham),6 Tinkham dumped chemical

wastes into the ground and ground waters. Tinkham was ordered to pay cleanup costs,

criminal fines, and civil penalties. The bankruptcy court held that the criminal fines

7 481 U.S. 412, 107 S.Ct. 1831, 95 L.Ed.2d 365 (1987).

11

and civil penalties were nondischargeable, and stated in part:

With regard to the civil penalty of $670,000 imposed under the

state court civil judgment, Tinkham again argues that that

obligation is dischargeable here. As to this civil penalty,

Tinkham’s contention seems to be that the penalty was in reality

a compensation for actual pecuniary loss within the meaning of §

523(a)(7). However, the record establishes that the jury in the

civil action imposed the civil penalty under the enabling statute,

RSA 149:19, which provides a maximum civil penalty of $10,000

per day for each day of violation for the discharge of waste

without a required permit. The jury’s civil verdict against

Tinkham imposed a fine of $10,000 per day for 67 days of

violation, totaling the $670,000 civil penalty in question. The

jury by another special verdict granted judgment for the actual

damages suffered by the State in terms of “amount of expenses

that the State has incurred to date. . . .[and]. . . . the amount of

expenses that the state will probably incur in the future” to a total

amount of $11,357,000. It is obvious therefore that the additional

$670,000 civil penalty was in fact a true “penalty” in the sense of

“punishment” and not an attempt [to] reimburse a governmental

unit for actual pecuniary loss. The court therefore in its order

will likewise determine that the civil penalty in the amount of

$670,000 is nondischargeable pursuant to Bankruptcy Code §

523(a)(7).

59 B.R. at 213 (emphasis original).

In Tull v. United States,7 Tull, a real estate developer, dumped fill material into

wetlands adjacent to navigable waters. The federal government sought, in part, civil

penalties under the Clean Water Act, 33 U.S.C. § 1319(d). Tull demanded a jury trial

both on liability and the amount of civil penalties. The United States Supreme Court

held that Tull was entitled to a jury trial on liability but not on the amount of civil

8 429 F. Supp. 830 (E.D. Pa. 1977), aff’d 573 F.2d 1303 (3rd Cir. 1978).

12

penalties. The Supreme Court stated in part:

Subsection (d) does not direct that the “civil penalty” imposed be

calculated solely on the basis of equitable determinations, such as

the profits gained from violations of the statute, but simply

imposes a maximum penalty of $10,000 per day of violation.

The legislative history of the Act reveals that Congress wanted

the district court to consider the need for retribution and

deterrence, in addition to restitution, when it imposed civil

penalties. . . . A court can require retribution for wrongful

conduct based on the seriousness of the violations, the number of

prior violations, and the lack of good-faith efforts to comply with

the relevant requirements. It may also seek to deter future

violations by basing the penalty on its economic impact.

Subsection 1319(d)’s authorization of punishment to further

retribution and deterrence clearly evidences that this subsection

reflects more than a concern to provide equitable relief. . . .

107 S.Ct. at 1838.

The Government contends, however, that a suit enforcing civil

penalties under the Clean Water Act is similar to an action for

disgorgement of improper profits, traditionally considered an

equitable remedy. It bases this characterization upon evidence

that the District Court determined the amount of the penalties by

multiplying the number of lots sold by petitioner by the profit

earned per lot. An action for disgorgement of improper profits is,

however, a poor analogy. Such an action is a remedy only for

restitution–a more limited form of penalty than a civil fine.

Restitution is limited to “restoring the status quo and ordering the

return of that which rightfully belongs to the purchaser or

tenant.” As the above discussion indicates, however, §

1319(d)’s concerns are by no means limited to restoration of the

status quo.

107 S.Ct. at 1839.

In United States v. Atlantic Richfield Co.,8 an “accidental or faultless” oil spill

13

occurred. The facility owner promptly reported and cleaned up the spill. The Coast

Guard assessed a civil penalty under the Clean Water Act, 33 U.S.C.A.

§ 1321(b)(6). The facility owner objected to the civil penalty. The district court

enforced the penalty assessed by the Coast Guard and stated in part:

These cases raise issues concerning the proper construction and

the constitutionality of the “civil penalty” provision of the oil and

hazardous substance sections of the Federal Water Pollution

Control Act Amendments of 1972 (FWPCA), § 1321(b)(6) of 33

U.S.C. §§ 1251 et seq. (Supp. 1976). The constructional issues

boil down to whether Congress intended to impose the civil

penalty on persons who spill oil accidentally, report such spills to

the appropriate authorities, and clean it up at their own expense . .

. .

429 F. Supp at 832.

Congress, in the apparently plain language of § 1321(b)(3) and

(6), mandated that the Coast Guard assess a “civil” penalty

against any person who owns or operates a vessel or facility from

which oil has been discharged in harmful quantities into the

navigable waters. Congress created no exceptions or defenses to

a (b)(6) suit other than denial that the elements of a violation had

been proved. . . .

429 F. Supp at 835.

We find that defendants’ argument makes most sense when

translated into simple economic terms. A rational owner of an oil

facility, recognizing his potential liabilities for clean ups under §

1321 (and for damages under common law damage remedies

which § 1321 leaves untouched), will attempt to minimize the

costs of spills. To accomplish this he will calculate the marginal

costs of preventing spills and of potential liabilities. He will

thereupon engage in prevention to the point where the marginal

14

cost of prevention equals his marginal liability for spills.

Because that point defines reasonable spill prevention, a

reasonable person will spend money for just that much

prevention and no more. To spend less would be negligent. See

United States v. Carroll Towing Co., 159 F.2d 169 (2d Cir.

1947); Posner, Economic Analysis of Law (1972). To spend

more would be wasteful or inefficient. See Ackerman, Economic

Foundations of Property Law, at xi-xiv (1975) (brief definition

and analysis of efficiency).

On this basis we can make some sense of defendants’ argument

that (b)(6) serves no regulatory purpose when applied to

“faultless” spillers. But defendants move from the claim that

they were “faultless” to the claim that no regulatory purpose

would be served by imposing a (b)(6) penalty, an argument we

reject because it proceeds from a faulty premise. While it is true

that the stipulated facts about the spills themselves would not be

sufficient to support an action in negligence, this is not such an

action, but rather an action to enforce a penalty.

The elements of this statutory action are only that defendant

violated (b)(3) and that the Coast Guard following the

appropriate procedure assessed the (b)(6) penalty. The statute

does not make “fault” an element of the cause of the action, but

rather a factor in the administrative penalty setting procedure.

This is proper because there is no principle of law which requires

that civil regulability through imposition of penalty be predicated

upon a finding of fault. Moreover, a number of factors support

civil regulability here in the absence of fault. First, as we explain

more fully in our discussion of the Constitutional issues, infra,

the principal goal of (b)(6) is to deter spills. Second, the

Congressional purpose here was to impose a standard of conduct

higher than that related just to economic efficiency.

Additionally, the Congress obviously believed:

(a) that no clean up effort could be complete because, after

discharge, it is impossible to guarantee against residual harm

from quantities of oil too small or too well dispersed to be

detectable; and (b) that even the transitory pollution of waters

was deleterious to the environment.

9 277 F.3d 568 (1st Cir. 2002).

15

429 F. Supp at 835.

In the view of the foregoing analysis we must reject

defendant’s contention that, as applied to accidental, reporting,

self-cleaners, (b)(6) is really criminal rather than civil because,

(1) the statutory language is not ambiguous; and (2) even where

defendants are not at fault, the penalty does not act only as a

punishment but serves the ends of civil regulation.

429 F. Supp at 836.

Defendant relies upon Whitehouse v. LaRoche.9 In that case, the State of

Rhode Island filed a complaint in federal district court contending that LaRoche had

violated the Clean Water Act and state water pollution acts. Certain creditors filed an

involuntary Chapter 11 bankruptcy proceeding against LaRoche. In the district court

action, the district court entered a consent decree in which LaRoche agreed to

reimburse the state for any “shortfall amount” for the costs of a new water treatment

facility.

The state, in the bankruptcy proceeding, contended that LaRoche’s obligation

was nondischargeable under section 523(a)(7). The First Circuit Court of Appeals

held that LaRoche’s obligation under the consent decree was enforceable and

dispositive of the nondischargeable issue. The circuit court stated in part:

16

Although Bankruptcy Code § 523(a)(7) applies to both civil

and criminal penalties, in order to qualify for a dischargeability

exception under subsections 523(a)(7), normally the particular

penalty must serve some “punitive” or “rehabilitative”

governmental aim, rather than a purely compensatory purpose.

Appellants contend that these civil penalties, imposed pursuant

to Rhode Island law, see R.I. Gen. Laws § 46-12-13, were

designed to deter and remediate environmental contamination, a

particularly important governmental function implemented under

the States’s police and regulatory powers. Moreover, appellants

argue, LaRoche potentially was exposed to fines up to $25,000

per day, a sum which bears neither any obvious nor essential

correlation to the amount needed to compensate the State for its

actual response costs.

On the other hand, there can be no question but that the

consent decree itself explicitly equates the amount of these civil

penalties with the “shortfall amount,” which in turn plainly was

designed to reimburse the State for the actual losses, neither

more nor less. Appellants respond, however, that their decision

to calculate the punitive fines under that convenient methodology

cannot deprive these civil penalties of their “punitive” nature.

We need not resolve these issues, however, since the

CWA/RIWPCA consent decree itself disposes of the

contention that appellants’ claim is excepted from discharge

under Bankruptcy Code § 523(a)(7).

277 F.3d at 573-74 (emphasis original).

Turning to the case at bar, in the district court action, Plaintiff seeks civil

penalties under two subsections of the Clean Water Act. First, the district court has

determined that Defendant failed to have a Spill Prevention Control and

Countermeasures plan to prevent and control oil pollution.

“The regulations impose a duty to have a SPCC plan whether there is an oil

10 The civil penalty is increased to $27,500 per day for violations after January

30, 1997, but before August 1, 2002. Jones, 267 F. Supp. 2d at 1362.

11 33 U.S.C.A. § 1321(b)(7)(A). The civil penalty is increased to $27,500 per

day for violations after January 30, 1997, but before August 19, 2002. Jones, 267 F.

Supp. 2d at 1361.

12 33 U.S.C.A. § 1321(b)(8) (West 2001)(the district court is also to consider

“any other matters as justice may require.”).

17

spill or not. The point of the SPCC is to be prophylactic – to prevent oil discharges to

navigable waters.” Pepperell Assoc. v. United States Environmental Protection

Agency, 246 F.3d 15, 24 (1st. Cir. 2001).

The Clean Water Act provides that Defendant shall be subject to a civil penalty

up to $25,000 per day for violation of the SPCC regulation.10 Defendant is subject to

this penalty even though no oil spill occurs and even though the government may

incur no clean up cost. The penalty collected is not required to be used to mitigate the

damages of a particular violation. The Court is persuaded that the civil penalty for

failing to have a SPCC plan is not compensation for actual pecuniary loss.

Second, the district court determined that Defendant is responsible for the

discharge of oil into a navigable water. The Clean Water Act provides that Defendant

shall be subject to a civil penalty up to $25,000 per day for the violation.11 The Clean

Water Act lists seven non-exclusive factors the district court shall consider in

determining the amount of the civil penalty. The cost of clean up is not a listed

factor.12 Plaintiff is seeking reimbursement of the cleanup costs under the Oil

Pollution Act, 33 U.S.C.A. 2702. The penalty collected is not required to be used to

18

mitigate the damages of a particular violation. The Court is persuaded that the civil

penalty for violation of the Clean Water Act by discharging oil into a navigable water

is not compensation for actual pecuniary loss.

Thus, the Court is persuaded that the civil penalties under both subsections of

the Clean Water Act are nondischargeable in bankruptcy.

Defendant also contends that he “is entitled to apportionment of the penalty

amongst all responsible parties pursuant to the “Gore Factors” found in BMW of

North America, Inc. v. Gore, 517 U.S. 559, 116 S.Ct. 1589 (S.Ct. 1996).”

Defendant’s Response To Plaintiff’s Motion For Summary Judgment That Jones’s

Clean Water Act Penalty Debt Is Not Dischargeable, p.2 (filed Jan. 16, 2004) Docket

No. 21.

The Court is persuaded that the issue of apportionment of the civil penalties is

for the district court. The only issue that this Court is ruling upon is the issue of

dischargeability.

An order in accordance with this memorandum opinion shall be entered this

date.

DATED this 23rd day of April, 2004.

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

19

LOUISE JACKSON

August 23, 2006

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

LOUISE JACKSON, ::

Debtor : Case No. 05-53649 RFH

:

BEATRICE HALL, ::

Plaintiff ::

vs. ::

LOUISE JACKSON, ::

Defendant : Adversary Proceeding

: No. 05-5170

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: Mr. Terry J. Marlowe

Post Office Box 227

Albany, Georgia 31702-0227

Mr. T. Lee Bishop, Jr.

Post Office Box 1791

Albany, Georgia 31702-1791

For Defendant: Mr. Jason M. Orenstein

Post Office Box 4086

Macon, Georgia 31208-4086

2

MEMORANDUM OPINION

Beatrice Hall, Plaintiff, filed on December 12, 2005, a Complaint For

Exception To Discharge Under Section 523. Louise Jackson, Defendant, filed a

response and asserted a counterclaim on January 6, 2006. Plaintiff did not file a

response to the counterclaim. Defendant asks the Court to rule on her counterclaim if

the Court determines that her obligation to Plaintiff is dischargeable in bankruptcy.

Plaintiff’s complaint came on for trial on May 31, 2006. The Court, having

considered the evidence presented and the arguments of counsel, now publishes this

memorandum opinion.

FINDINGS OF FACT

Plaintiff and Defendant are sisters. Plaintiff is fifty-one years old and has lived

in Detroit, Michigan her entire life. Plaintiff has been totally disabled since 1994.

Defendant is fifty-three years old. Defendant was living in Detroit in 2002.

Plaintiff made a loan to Defendant. Defendant repaid the loan in 2002 by selling her

residence in Detroit.

Defendant moved to Macon County, Georgia on September 28, 2002.

Defendant’s daughter was incarcerated in Georgia. Defendant was the guardian of her

daughter’s two minor children. Defendant also wanted to live near her elderly mother

3

who was living in Macon County.

After moving to Georgia, Defendant worked at the Crisp County Hospital for

thirteen months. Defendant was fired in late 2003. Defendant needed financial help.

Plaintiff started allowing Defendant to use Plaintiff’s credit cards in November of

2003. Plaintiff and Defendant refer to this as the “loans.” The loans continued until

January of 2005.

Defendant, after being fired by the Crisp County Hospital, worked at the

Sumter Regional Hospital on weekends for one year. Defendant also worked parttime,

Monday through Friday, at the Macon County High School. Defendant’s

monthly “bring home” pay was $800 from her employment at the high school.

Defendant’s residence was a double-wide mobile home on a small parcel of

land in Macon County. Defendant also owned two small parcels of land adjacent to

her residence. Each of the three parcels was encumbered by loans from third parties.

Plaintiff and Defendant disagree as to how Defendant was to repay Plaintiff’s

loans. Plaintiff testified that Defendant promised to obtain a home equity loan or sell

her residence in Macon County. Defendant testified that she never told Plaintiff that

she would sell her residence. Defendant testified that she agreed to (1) purchase a life

insurance policy and list Plaintiff as the beneficiary; and (2) obtain a home equity loan

on her residence after Defendant had worked at the Macon County High School for

two years. Defendant did take out a term life insurance policy with a $100,000 death

4

benefit and listed Plaintiff as the beneficiary. Defendant was not able to obtain an

equity loan on her residence. Defendant applied to four lenders for a home equity

loan. Her applications were turned down.

Defendant testified that she tried without success to sell the two parcels of land

adjacent to her residence. Defendant placed advertisements in the newspaper but did

not list the parcels with a realtor.

Defendant sent a number of letters thanking Plaintiff for her help, asking

Plaintiff for more help, and promising to repay Plaintiff. The letters were sent via

faxsmile between May 19, 2004 and January 22, 2005. Plaintiff’s Exhibits 2,3,5,6,7,8.

Plaintiff testified that she received a “lot” of telephone calls from Defendant in which

Defendant promised to obtain a home equity loan.

Defendant used Plaintiff’s credit cards to make Defendant’s house payments,

car payments, and to pay living expenses. Defendant made some balance transfers

between credit cards. Defendant made some charges on the credit cards at liquor

stores.

Defendant used one of Plaintiff’s credit cards to pay off the debt on

Defendant’s car, a 2000 Oldsmobile Alero. The payoff was $6,000. Defendant gave

the car to her daughter. Defendant then purchased for her own use a 2003 Chevrolet

Cavalier for $16,000. Defendant made a $500 down payment and financed the

balance through a finance company. Plaintiff testified that Defendant used her credit

5

card for the down payment.

Defendant sent Plaintiff a letter on October 10, 2004. Defendant stated that she

had quit her job at the hospital because of her health. Defendant asked Plaintiff for

financial help. Defendant stated that she would repay Plaintiff “someway, somehow.”

Plaintiff’s Exhibit 6. Plaintiff testified that after receiving the letter she was

concerned that Defendant could not repay the loans because Defendant was not

working. Plaintiff, however, continued to make loans to Defendant.

Defendant sent Plaintiff a letter dated November 11, 2004 requesting a loan of

$1,200 until Defendant received her income tax refund. Defendant, in the letter,

stated that she needed the loan to make her house and car payments, and to pay her

house insurance and her “light” bill. Plaintiff’s Exhibit 7. Plaintiff made the $1,200

loan to Defendant. Defendant did not repay the loan when she received her income

tax refund.

Defendant sent Plaintiff a letter on January 22, 2005. Defendant asked Plaintiff

to “Please call one of these debt solution service[s] and put these 3 credit cards on it

because that’s the only way I can make these payments on time. I’m very willing to

pay them. I just don’t make enough money.” Plaintiff’s Exhibit 8. When Plaintiff

called the “services,” she was told that debt consolidation was “next to bankruptcy.”

In January of 2005, Plaintiff stopped allowing Defendant to use her credit cards.

Defendant testified that Plaintiff stopped talking to her. Plaintiff has been making the

6

payments on her credit cards since January or February of 2005. The credit card

obligations include the charges that Defendant made on Plaintiff’s credit cards.

Plaintiff allowed Defendant to use some seventeen of Plaintiff’s credit cards.

Defendant used Plaintiff’s credit cards from November of 2003 until January of 2005.

Defendant does not dispute that her obligation to Plaintiff totals some $53,000.

Plaintiff filed a lawsuit in July of 2005 in state court seeking to recover the

funds that Defendant charged on Plaintiff’s credit cards. Defendant filed a petition

under Chapter 7 of the Bankruptcy Code on September 9, 2005. Defendant

surrendered her residence and the two adjacent parcels in her bankruptcy case.

On October 30, 2005 Defendant moved from Georgia to Detroit. Defendant

testified that she moved because she could make more money in Detroit. Defendant’s

mother had died in September of 2005. Defendant’s daughter had been released from

prison and was living in Detroit. Defendant is currently living in Detroit.

Plaintiff testified that she would not have made the loans except for

Defendant’s promise that she would obtain a home equity loan or sell her residence.

Plaintiff testified that she allowed Defendant to use the credit cards to make her house

payments because Defendant’s residence was the way that Plaintiff was to be repaid.

Plaintiff testified that she continued to allow Defendant to use her credit cards because

Plaintiff was “too far in to stop.”

Plaintiff and Defendant have seven other sisters. Defendant testified that

At the trial of this adversary 1 proceeding, Plaintiff did not pursue her contention

that Defendant’s obligations arose through larceny or a willful and malicious injury.

7

Plaintiff was the only sister who would help her. Defendant made her last payment on

Plaintiff’s credit cards in March 2005. The evidence does not show how many prior

payments Defendant made on Plaintiff’s credit cards.

CONCLUSIONS OF LAW

Plaintiff contends that Defendant’s obligation is non-dischargeable under

Section 523(a)(2)(A) of the Bankruptcy Code.1 This section provides:

§ 523. Exceptions to discharge

(a) A discharge under section 727, 1141, 1228(a),

1228(b), or1328(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.A. § 523(a)(2)(A) (West 2004).

“For purposes of §523(a)(2)(A) [of the Bankruptcy Code], a creditor must

69 B.2 R. 743 (Bankr. N.D. Ind. 1986).

8

prove that (1) the debtor made a false representation with intent to deceive the

creditor, (2) the creditor relied on the representation, (3) that his reliance was

[justifiable], and (4) that the creditor sustained loss as a result of the representation.”

St. Laurent v. Ambrose, (In re St. Laurent), 991 F.2d 672, 676 (11th Cir. 1993); see

Field v. Mans, 516 U.S. 59, 116 S. Ct. 437, 133 L. Ed. 2d 351 (1995) (justifiable

reliance required under section 523(a)(2)(A)).

“In order to preclude the discharge of a particular debt because of a debtor’s

false representation, . . . [t]he debtor must be guilty of positive fraud, or fraud in fact,

involving moral turpitude or intentional wrong, and not implied fraud, or fraud in law,

which may exist without the imputation of bad faith or immortality.” Schweig v.

Hunter, (In re Hunter), 780 F.2d 1577, 1579 (11th Cir. 1986).

In Sears Roebuck & Co. v. Faulk, (In re Faulk),2 the bankruptcy court stated:

“Actual” fraud precluding discharge consists of any

deceit, artifice, trick or design, involving the direct and

active operations of the mind used to circumvent or cheat

another; something said, done or omitted with the design

of perpetrating what is known to be a cheat or deception.

However, fraud may consist of silence, concealment or

intentional non-disclosure of a material fact, as well as

affirmative misrepresentation of a material fact.

A “false pretense” involves implied misrepresentation or

conduct intended to create and foster a false impression, as

distinguished from a “false representation” which is an

9

express misrepresentation.

69 B.R. at 750.

See also 4 Collier on Bankruptcy ¶ 523.08[1][d], [e] (15th ed. rev. 2006).

“Because a debtor is unlikely to testify directly that his intent was fraudulent,

the courts may deduce fraudulent intent from all the facts and circumstances of a

case.” Devers v. Bank of Sheridan, Montana, (In re Devers), 759 F.2d 751, 754 (9th

Cir. 1985).

Collier on Bankruptcy states:

The failure to perform a mere promise is not sufficient to

make a debt nondischargeable, even is there is no excuse

for the subsequent breach. A debtor’s statement of future

intention is not necessarily a misrepresentation if

intervening events cause the debtor’s future actions to

deviate from previously expressed intentions.

A misrepresentation by a debtor of his or her intention to

perform contractual duties, however, may be a false

representation under section 523(a)(2)(A). Thus, section

523(a)(2)(A) may make a creditor’s claim

nondischargeable if the debtor had no intention of

performing any of the obligations under the contract. This

intent may be inferred from the fact that the debtor failed

to take any steps to perform under the contract.

. . .

The debtor’s insolvency or inability to pay does not by

itself provide a sufficient basis for inferring the debtor’s

intent. A debtor’s honest belief that a debt would be

repaid in the future, even if in hindsight found to have

been very unrealistic, negates any fraudulent intent.

Defendant has a different 3 recollection of her promise. The Court is persuaded

that Plaintiff’s testimony more accurately states the terms of Defendant’s promise.

10

4 Collier on Bankruptcy ¶ 523.08 [1][d] (15th ed. rev. 2006).

Plaintiff has the burden of proving all facts essential to support her objection to

dischargeability by a preponderance of the evidence. Gorgan v. Garner, 498 U.S. 279,

111 S. Ct. 654, 112 L. Ed.2d 755 (1991).

Turning to the case at bar, Plaintiff testified that Defendant promised to repay

the loans at issue by obtaining a home equity loan or by selling her residence in

Macon County.3 The Court is persuaded that Plaintiff relied on this promise made by

Defendant and that Plaintiff’s reliance was justifiable. Defendant had repaid a prior

loan in 2002 by selling her residence in Detroit. The Court though is not persuaded

that Defendant had sufficient equity in her residence in Macon County to honor her

promise. Plaintiff presented no evidence on Defendant’s income or expenses except

that Defendant’s monthly “bring home” pay was $800 from her employment at the

Macon County High School. The evidence does not show the value of or the debt on

Defendant’s residence or the two adjacent parcels of land. There is no evidence that

Defendant represented to Plaintiff that Defendant had any equity in her residence.

Defendant applied to four lenders for a home equity loan. Defendant’s applications

were turned down. Defendant attempted without success to sell the two parcels of

11

land adjacent to her residence. Defendant surrendered her residence and the adjacent

parcels in her bankruptcy case.

The evidence shows that Defendant was, on a regular basis, pleading for

financial help from Plaintiff. The Court can only conclude that Plaintiff knew that

Defendant was in severe financial distress. Plaintiff continued to make loans to

Defendant.

Defendant was able to obtain financing to purchase a car, the 2003 Chevrolet

Cavalier. Plaintiff contends that Defendant should have been able to obtain a home

equity loan. As the Court has noted, Plaintiff has not shown that Defendant had any

equity in her residence to borrow against.

The Court is persuaded that Defendant simply did not have the financial

resources to honor her promise to obtain a home equity loan or sell her residence. As

stated by Collier on Bankruptcy, the failure to perform a mere promise is not sufficient

to make a debt nondischargeable. The Court is persuaded that Defendant honestly

intended to repay Plaintiff’s loans. The Court from the evidence presented at trial

finds no fraudulent intent on the part of Defendant. The Court is persuaded that

Defendant’s obligation is dischargeable under section 523(a)(2)(A).

Defendant, in her counterclaim, asks the Court for an award of attorney fees

under Section 523(d) of the Bankruptcy Code. This section provides:

(d) If a creditor requests a determination of

dischargeability of a consumer debt under subsection

12

(a)(2) of this section, and such debt is discharged, the

court shall grant judgment in favor of the debtor for the

costs of, and a reasonable attorney’s fee for, the

proceeding if the court finds that the position of the

creditor was not substantially justified, except that the

court shall not award such costs and fees if special

circumstances would make the award unjust.

11 U.S.C.A. §523(d) (West 2004).

The Court is persuaded that an award of attorney fees is not appropriate.

Plaintiff was justified in bringing her adversary proceeding even though she did not

prevail on the merits.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 23rd day of August 2006.

/s/ Robert F. Hershner, Jr.

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

BRETT M. HARKINS

December 22, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

BRETT M. HARKINS, ::

Debtor : Case No. 02-55794 RFH

:

CHEVY CHASE BANK, FSB, ::

Plaintiff ::

vs. ::

BRETT M. HARKINS, ::

Defendant : Adversary Proceeding

: No. 03-5046

:

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: Mr. Emmett L. Goodman, Jr.

544 Mulberry Street, Suite 800

Macon, Georgia 31201-2776

For Defendant: Mr. Kirby R. Moore

201 2nd Street, Suite 640

Macon, Georgia 31201

1 Defendant contends that the customers either decided to purchase different

automobiles, obtained financing elsewhere, or did not complete the purchases.

2

MEMORANDUM OPINION

Chevy Chase Bank, FSB, Plaintiff, filed on August 12, 2003, a motion

for summary judgment. Brett M. Harkins, Defendant, filed a response on

September 15, 2003. The Court, having considered the record, the affidavits, and the

arguments of counsel, now publishes this memorandum opinion.

Defendant was the president of and operated an automobile dealership known

as Brett Harkins, Inc., d/b/a Brett Harkins Chevrolet (hereafter “Harkins Chevrolet”.)

Harkins Chevrolet sold automobiles to the public. Some customers financed their

purchases by signing retail installment contracts in favor of Harkins Chevrolet.

Plaintiff and Harkins Chevrolet entered into a Retail Sales Financing Agreement.

Plaintiff agreed to purchase from Harkins Chevrolet certain retail installment contracts

arising from the sales of new and used automobiles.

Harkins Chevrolet, in February of 2001, represented that it had sold certain

automobiles. Harkins Chevrolet received $47,302.90 from Plaintiff. Harkins

Chevrolet was unable to provide Plaintiff with the retail installment contracts and

supporting loan documents.1 Harkins Chevrolet failed to return the $47,302.90 to

Plaintiff.

3

Plaintiff filed on April 11, 2001, a complaint in state court to recover the

$47,302.90 plus attorney’s fees and interest. The complaint names Defendant and

Harkins Chevrolet as defendants. Count One of the complaint alleges a breach of

contract. Count Two alleges that Defendant and Harkins Chevrolet committed fraud

and made false representations. Defendant and Harkins Chevrolet filed a response on

June 8, 2001.

Plaintiff, in the state court action, served a request for admissions and a request

for production of documents. Defendant and Harkins Chevrolet filed a response to

Plaintiff’s request for admissions. Defendant and Harkins Chevrolet failed to respond

to Plaintiff’s request for production of documents. Plaintiff filed on September 4,

2001, a motion for sanctions for failure to make discovery. The motion came on for

hearing before the state court on October 12, 2001. Counsel for Plaintiff and counsel

for Defendant and Harkins Chevrolet were present. The state court entered an order

striking Defendant’s and Harkins Chevrolet’s response to the complaint. The state

court on October 16, 2001 entered a judgment by default in favor of Plaintiff. The

order was prepared by Plaintiff’s counsel. The order states that John P. Harrington,

counsel for Defendant and Harkins Chevrolet, represented to the state court that he

had made numerous attempts to contact his clients concerning Plaintiff’s request for

the production of documents. The order states that Mr. Harrington represented that

his clients had been non-responsive and had begun to refuse to return counsel’s

4

telephone calls. The order states that Mr. Harrington represented that he had advised

his clients of the legal significance of a failure to respond to discovery. The state

court found “that there has been a complete and total failure on the part of the

defendants to respond to plaintiff’s lawful and properly served First Request for

Production of Documents. . . .” The state court stated that “by reason of defendants’

default, [the court] hereby affirmatively finds that the actions of [the defendants]

constituted a fraud on the plaintiff, as specifically alleged, in Count Two of plaintiff’s

Complaint.” The state court entered judgment, jointly and severally, against

Defendant and Harkins Chevrolet in the amount of $47,302.90 plus attorney’s fees

and interest. A writ of fieri facias for $47,302.90 plus attorney’s fees and interest was

issued on October 18, 2001.

Defendant filed a petition under Chapter 7 of the Bankruptcy Code on

December 18, 2002. Plaintiff filed on March 24, 2003, an adversary proceeding

contending that Defendant’s obligation is nondischargeable under subsections 523

(a)(2)(A), (4), and (6) of the Bankruptcy Code. Defendant filed a response on April

23, 2003.

Plaintiff filed a motion for summary judgment on August 12, 2003. Plaintiff

contends that under collateral estoppel principles, the state court’s order affirmatively

finding that Defendant had committed fraud may be used to establish conclusively the

elements of fraud in this adversary proceeding. Defendant filed a response on

2 62 F. 3d 1319 (11th Cir. 1995).

5

September 15, 2003.

Defendant submits the affidavit of his counsel in the state court action, John P.

Harrington. Mr. Harrington states that, at the state court hearing, no evidence was

presented by Plaintiff’s counsel concerning the allegations set forth in Plaintiff’s

complaint. Mr. Harrington states that he represented to the state court that he was

having difficulty contacting his client because Defendant was no longer at his former

business location. Mr. Harrington represented to the state court that Defendant had

been responsive to him because there were several pending lawsuits against Defendant

and Harkins Chevrolet. Mr. Harrington states that he advised Defendant to file

bankruptcy and abandon his defenses in the state court action because there was no

need to incur additional expenses when filing bankruptcy was inevitable.

Defendant, in his affidavit, states that he was unable to produce the requested

discovery documents because he no longer had physical control of or access to his

former business location (Harkins Chevrolet) and its business records. Defendant

states that his counsel, Mr. Harrington, advised him to file for bankruptcy relief which

would terminate the state court action. Defendant states that he contacted an attorney

who began preparing his bankruptcy petition.

In Bush v. Balfour Beatty Bahamas, Limited (In re Bush),2 the Eleventh Circuit

Court of Appeals held that a default judgment based upon allegations of fraud may be

6

used to establish conclusively the elements of fraud in a bankruptcy dischargeability

proceeding and prevent the discharge of the judgment debt. In footnote number 8, the

circuit court stated:

We note that whether to allow issue preclusion is within

the sound discretion of the trial court. Parklane Hosiery

Company, Inc. v. Shore, 439 U.S. 322, 331, 99 S.Ct. 645, 651-52,

58 L.Ed.2d 552 (1979). The presence of mitigating factors in

another case might cause a court to exercise discretion to deny

preclusion to a default judgment even if the doctrine’s formal

elements are otherwise met. In some cases, the amount of money

at stake or the inconvenience of the forum might disincline a

defendant to offer a defense. In the case of such an “ordinary”

default, a subsequent court might decline to allow preclusion.

. . .

62 F.3d at 1325, n 8.

The Court is not persuaded that collateral estoppel should apply to the state

court default judgment to establish Defendant’s alleged fraud. The Court is not

persuaded that Defendant “engaged in dilatory and deliberately obstructive conduct”

in the state court proceedings. Bush, 62 F.3d at 1324. Defendant was acting on the

advice of counsel who advised that filing bankruptcy was inevitable. Defendant

responded to Plaintiff’s request for admission. Defendant states that he was unable to

produce the documents requested by Plaintiff because he no longer had physical

control of or access to his former business location and its business records.

The Court further notes that Plaintiff’s counsel prepared the order signed by the

state court judge that struck Defendant’s response in the state court action and

3 The hearing before the state court judge was on October 12, 2001 and the

order prepared by Plaintiff’s counsel was signed by the state court judge on October

16, 2001.

7

awarded Plaintiff a default judgment.3 When the Court considers the affidavit of Mr.

Harrington, Defendant’s counsel in the state court action, the Court can only conclude

that collateral estoppel should not apply to give issue preclusion to the state court

judgment.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 22nd day of December 2003.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

JOHN B. GROT

December 17, 2001

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

In the Matter of: : Chapter 7

:

JOHN B. GROT, :

:

Debtor : Case No. 98-41493 RFH

:

:

WALTER W. KELLEY, Trustee for :

PASCOE BUILDING SYSTEMS, :

INC., :

:

Plaintiff :

:

:

vs. :

:

:

JOHN B. GROT, :

: Adversary Proceeding

Defendant : No. 98-4082

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

2

COUNSEL:

For Plaintiff: THOMAS D. LOVETT

Post Office Box 1164

Valdosta, Georgia 31603

For Defendant: WARD STONE, JR.

Charter Medical Building, Suite 1111

577 Mulberry Street

Macon, Georgia 31201

1 See In re Pascoe Building Systems, Inc., Case No. 97-41881 RFH (petition

filed Sept. 4, 1997).

2 The Court entered an order on October 20, 1998, authorizing the Official

Creditors’ Committee to file this adversary proceeding on behalf of Pascoe Building

Systems, Inc.

3

MEMORANDUM OPINION

John B. Grot, Defendant, filed on July 16, 2001, Defendant’s Motion

for Partial Summary Judgment. Walter W. Kelley, Trustee for Pascoe Building

Systems, Inc., Plaintiff, filed a response on August 8, 2001. The Court, having

considered the record and the arguments of counsel, now publishes this memorandum

opinion.

Defendant was the president and CEO of Pascoe Building Systems, Inc.

Pascoe filed a petition for relief under Chapter 11 of the Bankruptcy Code on

September 4, 1997.1 Defendant filed, as an individual debtor, a petition for relief

under Chapter 7 of the Bankruptcy Code on July 13, 1998.

Pascoe’s Official Creditors’ Committee filed on December 21, 1998, a

complaint to deny Defendant’s discharge and to determine that Defendant’s

obligations to Pascoe are nondischargeable in bankruptcy.2 The complaint is 40

pages in length, has 205 numbered paragraphs, and contains 20 counts. The

complaint contends that Defendant should be denied a discharge under section

3 11 U.S.C.A. § 727(a)(2), (3), (4), (5), (6), (7) (West 1993).

4 11 U.S.C.A. § 523(a)(2)(A), (4), (6) (West 1993).

4

727(a)(2), (3), (4), (5), (6), and (7) of the Bankruptcy Code.3 The complaint also

contends that Defendant’s obligations to Pascoe are nondischargeable under section

523(a)(2)(A), (4), and (6) of the Bankruptcy Code.4

The complaint contends, in essence, that Defendant destroyed Pascoe’s

business records, misappropriated Pascoe’s assets for Defendant’s personal

advantage, made false oaths or accounts in Pascoe’s bankruptcy case, and caused

Pascoe to file false bankruptcy schedules and statements. The complaint also

contends that Defendant made false oaths or accounts in his bankruptcy case, that

Defendant failed to produce his financial records, and that Defendant has hindered

the Chapter 7 trustee.

The Court entered an order on March 23, 1999, converting Pascoe’s

Chapter 11 case to a Chapter 7 case. Walter W. Kelley was appointed to be the

Chapter 7 Trustee of Pascoe’s bankruptcy estate. The Court entered an order on

March 13, 2000, substituting Mr. Kelley in the place of Pascoe’s Official Creditors’

Committee as the plaintiff in this adversary proceeding.

The Court entered an order on December 4, 2000, providing that

discovery in this adversary proceeding was to be completed by February 19, 2001.

The Court held a final pretrial hearing on May 29, 2001. The Court entered a pretrial

5 Defendant, in paragraph 2(b) of the pretrial order, reserved the right to file

this motion for summary judgment. Defendant’s counsel advised the Court at the

pretrial hearing that Defendant would file its motion for summary judgment by July

16, 2001.

6 Defendant relies on Bryant v. Dupree, 252 F.3d 1161, 1163 (11th Cir. 2001)

(amendment to complaint need not be allowed where there has been undue delay or

bad faith, where amendment would cause undue prejudice, or where amendment

would be futile).

7 Fed. R. Civ. P. 8 and 9. These rules apply in adversary proceedings. Fed. R.

Bankr. P. 7008 and 7009.

5

order on May 29, 2001.5

Defendant, in his motion for partial summary judgment, contends that

Plaintiff has attempted to amend his complaint through the pretrial order. Defendant

also contends that an amendment to the complaint at this late date would cause undue

delay and undue prejudice and would not relate back to the filing of the complaint.6

Defendant contends that the pretrial order asserts new causes of action under section

523(a)(4) and (6) which were not asserted in the complaint. Defendant also contends

that Plaintiff failed to plead with particularity certain acts of fraud.

Federal Rules of Civil Procedure 8 and 97 provide, in part, as follows:

Rule 8. General Rules of Pleading

(a) Claims for Relief. A pleading which sets forth a claim for

relief, whether an original claim, counterclaim, cross-claim, or

third-party claim, shall contain . . . (2) a short and plain

statement of the claim showing that the pleader is entitled to

relief, and (3) a demand for judgment for the relief the pleader

seeks. Relief in the alternative or of several different types may

be demanded.

6

. . . .

(e) Pleading to be Concise and Direct; Consistency.

(1) Each averment of a pleading shall be simple,

concise, and direct. No technical forms of pleading or

motions are required.

. . . .

(f) Construction of Pleadings. All pleadings shall be so

construed as to do substantial justice.

Fed. R. Civ. P. 8(a), (e)(1), (f).

Rule 9. Pleading Special Matters

. . . .

(b) Fraud, Mistake, Condition of the Mind. 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.

Fed. R. Civ. P. 9(b).

Wright and Miller in their treatise on federal procedure state:

§ 1215. Statement of the Claim— In General

The test of a complaint’s sufficiency is whether the complaint

is detailed and informative enough to enable the defendant to

respond. According to Rule 8(a)(2), the heart of an affirmative

federal pleading need consist only of “a short and plain

statement of the claim showing that the pleader is entitled to

relief.” All that is necessary is that the claim for relief be stated

with brevity, conciseness, and clarity. This portion of Rule 8

indicates the objective of the rules [is] to avoid technicalities and

to require that the pleading discharge the function of giving the

7

opposing party fair notice of the nature and basis or grounds of

the claim and a general indication of the type of litigation

involved; the discovery process bears the burden of filling in the

details.

5 A. Wright & A. Miller Federal Practice and Procedure § 1215 (2d 1990 & Supp.

2001).

“Unlike pleadings, usually based on information and belief, the pre-trial

order defining the issues is the result of discovery in which . . . both parties hereto

know the testimony of the other’s witnesses.” Case v. Abrams, 352 F.2d 193, 195

(10th Cir. 1965).

The pretrial order controls the subsequent course of the action unless

modified by a subsequent order. Fed. R. Bankr. P. 7016; Fed. R. Civ. P. 16(e).

The Court has carefully compared Plaintiff’s averments in the

complaint with Plaintiff’s averments in the pretrial order. The Court is persuaded

that, with one exception, the averments satisfy the requirement that Defendant had

“fair notice of the nature and basis or grounds of the claim and a general indication of

the type of litigation involved.” The Court also is persuaded that the averments of

fraud are stated with particularity.

The pretrial order, in the first paragraph of section 5 on pages 2 and 3,

contends, in part, that Defendant caused Pascoe to fail to fund its employee health

insurance plan and employee pension plan. Plaintiff contends that this failure either

was a fraud or defalcation committed by Defendant while acting in a fiduciary

8

capacity or was a willful injury to Pascoe’s estate. The Court does not find any

reference to this averment in the complaint. The Court is persuaded that Defendant’s

motion for partial summary judgment should be sustained as to this contention, which

is set forth in the first paragraph of section 5 on pages 2 and 3 of the pretrial order.

An order in accordance with this memorandum opinion will be entered

this date.

DATED the 17th day of December, 2001.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

KENNETH WAYNE GRANGER

July 30, 2008

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

KENNETH WAYNE GRANGER :

f/d/b/a COMMUNITY HOME :

MORTGAGE, INC., :

f/d/b/a/ COMMUNITY INSURANCE & :

FINANCIAL SERVICES, INC., :

f/d/b/a MORNINGSTAR HOLDINGS, LLC,:

f/d/b/a/ MANUFIRST INVESTMENTS, :

LLC, :

:

Debtor : Case No. 06-52502 RFH

:

DR. THOMAS SHELTON AND :

DR. LOUIS SHELTON, ::

Plaintiffs ::

vs. ::

KENNETH WAYNE GRANGER, et al., ::

Adversary Proceeding

Defendant : No. 07-5037

BEFORE

ROBERT F. HERSHNER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

Plaintiffs: Ward Stone, Jr.

Christopher W. Terry

Fickling & Company Building

Suite 800, 577 Mulberry Street

Macon, Georgia 31201

Defendant: Jason M. Orenstein

Post Office Box 4086

Macon, Georgia 31208-4086

1 CHM’s 2003 tax return shows that it was incorporated on April 18, 1995.

2

MEMORANDUM OPINION

Louis Shelton and Thomas Shelton, Plaintiffs, filed with the Court on April 30,

2007, a Complaint To Determine Dischargeability of Debt. Kenneth Wayne Granger,

Defendant, filed a response on May 7, 2007. Defendant filed a supplemental response

on June 11, 2007. A trial on Plaintiffs’ complaint was held on February 26 and 27,

2008. The Court, having considered the evidence presented and the arguments of

counsel, now publishes this memorandum opinion.

FINDINGS OF FACT

Louis Shelton and Thomas Shelton (the “Sheltons”) are 42 year-old brothers.

The Sheltons are dentists who returned to Perry, Georgia in 1994 to establish their

dental practice, Perry Dental Associates. Bristol Shelton is Thomas Shelton’s wife.

Bristol Shelton handles her family’s finances and reviews the dental practice’s

finances.

Defendant is 43 years old and has lived in Perry, Georgia since 1993. In April

1994 Defendant formed Community Home Mortgage, Inc. (“CHM”).1 CHM was a

Subchapter S corporation. Defendant initially was the sole shareholder of CHM.

Defendant was the president of and managed the day-to-day operations of CHM.

Defendant’s mother, Anna Franklin, was the bookkeeper of CHM.

During its early years, CHM was in the business of originating residential

3

mortgages, refinancing existing mortgages, and making home equity loans

(collectively the “mortgages”). The mortgages were underwritten by third parties such

as Wells Fargo. CHM later expanded into the business of selling and financing the

purchase of manufactured homes.

Louis Shelton first met Defendant in 1994 at church. From time to time, they

discussed church matters.

Around 2000 the underwriting guidelines for mortgages on manufactured

homes changed. Defendant needed another investor to help with CHM’s cash flow

and operating expenses.

Dr. Dudley B. Christie, Jr. is an optometrist and a “businessman.” In 2000

Dr. Christie purchased one-half of Defendant’s shares of CHM’s stock. The purchase

price was $280,000. Dr. Christie intended for his purchase to be a short-term

investment. Defendant retained the remaining shares of CHM’s stock. Defendant

continued to manage the day-to-day operations of CHM.

William Edgar Barfield, CPA, has been Dr. Christie’s accountant since the

early 1980s. After becoming a shareholder in CHM, Dr. Christie requested that CHM

use Mr. Barfield as its accountant. Mr. Barfield was CHM’s accountant from 2001

until March 2004. Mr. Barfield prepared tax returns and financial statements using

information provided by CHM. The financial statements prepared by

2 A compilation is a presentation in proper form of financial information provided by the

client. The accountant does not audit or verify the accuracy of information provided by the

client. Black’s Law Dictionary 302 (8th ed. 2004).

3 All amounts have been “rounded down” to a whole dollar.

4 Ms. Young is an employee of Mr. Barfield.

4

Mr. Barfield were “compilation reports.”2 Mr. Barfield never audited CHM’s

financial records.

In 2001 Mr. Barfield discovered some accounting irregularities. CHM was

making payments on loans which were not listed in its financial records.

Mr. Barfield later discovered that CHM was “booking” as income the proceeds from

loans obtained by CHM. This “covered up” a loss and made CHM’s income and

equity appear higher on its financial statements. Defendant told Mr. Barfield that a

prior accountant had told him to do this. Mr. Barfield explained that this practice was

not proper under generally accepted accounting practices (“GAAP”). Mr. Barfield

testified that Defendant did not resist changing CHM’s financial practices and that

CHM’s financial records were “cleaned up.”

Mr. Barfield prepared a financial statement for CHM as of June 30, 2003. The

financial statement shows CHM’s total assets as $521,6613 and paid in capital as

$583,496.

In late 2003 Defendant asked Mr. Barfield to make financial recommendations

for CHM. Mr. Barfield referred Defendant to Jan Young4 who in turn referred

5 The promissory note was due and payable the same date that it was executed.

5

Defendant to Katrina O. Benton, a CPA who practices in Atlanta, Georgia.

Defendant met with Ms. Benton on December 12, 2003. Defendant asked her

to “review everything.” Ms. Benton gave Defendant a list of recommendations.

In response to Ms. Benton’s recommendations, Defendant and Dr. Christie, as

individuals, executed a promissory note dated December 20, 2003, in favor of CHM

(hereafter the “promissory note”). The principal, $375,000, plus interest was due and

payable on December 20, 2003.5 Defendant and Dr. Christie never funded their loan

to Defendant. CHM then executed a promissory note dated December 20, 2003, in

favor of Defendant and Dr. Christie (hereafter the “reverse note”). The principal

amount of the reverse note, $375,000, plus interest, was due and payable on December

20, 2006. CHM never funded its loan to Defendant and Dr. Christie. Mr. Barfield

testified that it is “unusual for a company with no money to make a loan like this.”

The net effect of the promissory note and the reverse note was a “wash.” No funds

changed hands between CHM, Defendant, and Dr. Christie. Mr. Barfield testified that

a $375,000 loan from CHM to Defendant and Dr. Christie would have been a material

alteration and would have had a negative impact on CHM’s financial statements.

Defendant met with Mr. Barfield on January 9, 2004. They discussed a number

of financial matters. They discussed the “idea” of a shareholder investing more

money in CHM and then immediately borrowing money from CHM. Mr. Barfield

6 Attached to Plaintiff’s Exhibit 26 is a copy of the reverse note rather than a copy of the

promissory note. Neither the Sheltons nor Defendant discuss this exhibit in their post-trial

briefs.

7 Defendant and a third party may also have received some of the profit.

6

testified that he never knew about the reverse note that CHM had executed in

December 2003. Mr. Barfield sent Defendant a letter dated January 14, 2004, in

response to their meeting. In the letter, Mr. Barfield stated that an additional $750,000

of paid in capital would increase the net worth of CHM. Neither the promissory note

nor the reverse note is mentioned in Mr. Barfield’s letter. The Court, having

considered the testimony presented and Mr. Barfield’s letter, is persuaded that

Mr. Barfield did not know about the reverse note.

On February 24, 2004, Defendant sent Ms. Young an e-mail that stated in part:

“I just had the signed note, corporate resolution and affidavit sent to your office in

regards to the loan made from me and Dr. Christie to Community Home Mortgage.

Please take these documents and try to prepare a year-end financial statement for my

review as soon as possible.” Defendant sent Ms. Young a copy of the corporate

resolution authorizing CHM to borrow $375,0000 from Defendant and Dr. Christie.6

Mr. Barfield terminated his services as CHM’s accountant as of March 5, 2004.

Mr. Barfield testified that CHM had sold certain property and distributed to

Dr. Christie “a profit where a profit did not exist.”7 CHM failed to satisfy a loan on

the property. Defendant told Mr. Barfield that “Everybody feels good when you

8 All financial statements prepared by Mr. Baxter were compilation reports. Mr. Baxter

testified that he had a copy of CHM’s 2003 tax return when he prepared the April 30, 2004,

financial statement.

9 “N/R – Granger & Christie” represents the promissory note that Defendant and

Dr. Christie executed in favor of CHM.

7

distribute a profit so I did.” Mr. Barfield testified that this “was in my line of thought

a deliberate attempt to mislead [Dr. Christie].” When questioned why he believed

this, Mr. Barfield testified “That’s what Mr. Granger [Defendant] told me.”

Mr. Barfield did not want to be associated with Defendant. Mr. Barfield continued to

serve as Dr. Christie’s accountant in non-CHM matters.

Mr. Barfield did agree to prepare CHM’s 2003 tax return which Defendant, as

CHM’s president, signed on April 2, 2004. The tax return, on page 4, shows CHM’s

total assets as of December 31, 2003, as $365,750 and “additional paid in capital” as

$586,241. The promissory note and the reverse note which are dated December 20,

2003, are not shown on page 4, “Balance Sheet Per Books.”

In March 2004 CHM retained Cary Baxter, CPA, as its accountant.

Mr. Baxter prepared a financial statement as of April 30, 2004, for CHM.8 The

promissory note of $375,000 is shown under current assets as “N/R – Granger &

Christie.”9 Total assets are shown as $734,598. The reverse note of $375,000 is not

shown as a liability. Paid in capital is shown as $961,241. Mr. Baxter testified that he

never knew about the reverse note. Mr. Baxter testified that the reverse note would

have “negated” the $375,000 increase in current assets caused by the promissory note.

10 CHM’s financial statement shows that it earned net income of $110,331 during the

6-month period ending June 30, 2004. Plaintiff’s Exhibit 3.

8

A comparison of CHM’s 2003 tax return with its April 30, 2004, financial

statement shows that CHM’s total assets increased by $368,848 and that its paid in

capital increased by $375,000. The Court is persuaded that the increases are due to

the $375,000 promissory note.

Mr. Baxter prepared a financial statement as of June 30, 2004, that shows the

promissory note as a current asset. The reverse note is not shown as a liability.

Defendant prepared a personal financial statement dated July 31, 2004. The

financial statement shows Defendant’s net worth as $1,919,902. Neither the

promissory note nor the reverse note is shown on Defendant’s financial statement.

Dr. Christie decided to terminate his investment in CHM. Dr. Christie always

intended for his involvement to be a short-term investment. Dr. Christie wanted to

sell his shares of CHM’s stock and use the funds to help his son’s real estate interests.

Dr. Christie testified that there was no connection between his desire to sell his stock

and any financial irregularities at CHM.

Defendant sent Louis Shelton an e-mail dated August 27, 2004, stating that

there was an opportunity to invest in CHM and obtain a 50% ownership interest. In

the e-mail, Defendant stated that CHM’s financial statement dated June 30, 2004,

showed total assets of $753,812, current liabilities of $419,923, long term liabilities of

$164,340, equity of $169,548, and net income of $110,331.10 Defendant stated that

9

the investment required was $597,000 and that the entire investment would be

returned before any net profit distribution. Defendant stated that the return of the

initial investment was estimated at 12 months. Defendant stated that the $597,000

could be paid as a cash investment or through a bank loan obtained by the investor.

CHM would service the debt on the bank loan until the obligation was paid in full.

Louis Shelton testified that the “numbers looked good, good equity and income.”

In his e-mail, Defendant stated that the investment required was $597,000.

Defendant testified that $280,000 was needed to purchase Dr. Christie’s shares of

CHM’s stock and that the remainder, $317,000, was to be working capital for CHM.

Defendant sent Louis Shelton another e-mail dated August 27, 2004, that stated

in part: “It is a low risk, good, solid investment with high and fast return on

investment (ROI).” Louis Shelton sent Defendant an e-mail dated August 27, 2004,

stating that he was interested but needed to talk with Defendant.

The next day, Louis Shelton told Thomas Shelton about the opportunity to

invest in CHM. Louis Shelton showed Thomas Shelton the e-mails that Defendant

had sent. The Sheltons have limited experience in investing and business matters

other than operating their dental practice. Thomas Shelton’s wife, Bristol Shelton, is

more knowledgeable in business and financial matters. The Sheltons look to Bristol

Shelton in financial matters. Bristol Shelton testified that she understood the

difference between an accounting compilation and an audit.

10

Louis Shelton and Bristol Shelton understood that Defendant was a good

businessman who was involved in church and community affairs. Thomas Shelton

and Bristol Shelton had obtained their home mortgage through CHM.

Most of Defendant’s communications were with Louis Shelton who in turn

shared the information with Thomas Shelton. Louis Shelton told Defendant that he

was not able to invest the $597,000 that Defendant had requested in his first e-mail.

Defendant “dropped” his request for the $317,000 which was to be working capital for

CHM.

Defendant testified that he told Louis Shelton that CHM was a “highly risky

business adventure,” that CHM was in working-capital distress, to please take his

time, and to talk to his wife and to Thomas Shelton. Louis Shelton denies that

Defendant stated that CHM was in distress or that it was a “highly risky business

venture.” The Court, having considered the evidence and the testimony presented, is

persuaded that Defendant represented that CHM was a solid low risk investment. The

Court is persuaded that Defendant told Louis Shelton that CHM was a successful

business, that its financial condition was “very good,” that it would be profitable

“going forward,” and that its future was “very good.”

Defendant met with the Sheltons on several occasions to discuss the CHM

investment opportunity. Defendant also met at least once with Thomas Shelton and

Bristol Shelton. The Sheltons and Bristol Shelton reviewed and discussed the

11 Plaintiff’s Exhibits 1 and 40.

12 Plaintiff’s Exhibit 3. Bristol Shelton testified that she did not see this exhibit.

13 The Sheltons do not question Defendant’s religious beliefs. They testified, however,

that they relied in part upon Defendant’s religious representations in deciding to invest in

CHM.

11

financial information on CHM that was provided by Defendant. The financial

information on CHM showed a business similar in size to the Sheltons’ dental

practice. The Sheltons relied upon Defendant’s representations that CHM was doing

well and that CHM was a low risk opportunity. The Sheltons understood that CHM

was a conservative investment. The Sheltons relied upon Defendant’s religious

representations to confirm his integrity.

The Court, from the testimony and evidence presented at trial, is persuaded that

the Sheltons, in deciding to invest in CHM, also relied upon Defendant’s e-mails

dated August 27, 2004,11 and CHM’s financial statement as of June 30, 2004.12

Although the Sheltons would be purchasing Dr. Christie’s shares of CHM’s

stock, the Sheltons never talked to Dr. Christie. All information concerning CHM

came from Defendant.

The Sheltons decided to invest in CHM. Defendant sent Louis Shelton an

e-mail dated September 8, 2004, in which Defendant makes numerous references to

his religious beliefs.13

The Sheltons knew that Mr. Barfield had been CHM’s accountant. The

Sheltons knew that Mr. Baxter was CHM’s current accountant. Mr. Baxter testified

Although Dr. Christie does not remember receiving 14 any funds, the evidence shows that

Dr. Christie received a check in the amount of $105,203.09. The remaining $174,796.91 was

paid to Capital City Bank to repay a loan owed by Dr. Christie.

12

that if he had known about any irregularities at CHM, that he would have told Thomas

Shelton. The Sheltons did not talk to Mr. Barfield, Mr. Baxter, or Dr. Christie about

the CHM investment opportunity. The Sheltons did not seek advice from any other

accountant. The Sheltons did not request a financial audit of CHM.

On September 16, 2004, Dr. Christie sold his shares of CHM’s stock to the

Sheltons for $280,000.14 The Sheltons each paid $140,000 and each acquired 25% of

the shares of CHM’s stock. The Sheltons obtained some of the funds they used to

purchase Dr. Christie’s shares by taking out personal loans with Capital City Bank.

Defendant continued to be the president of and was responsible for the day-to-day

operations of CHM. The Sheltons and Defendant had very few formal shareholder

meetings.

Around September or October 2004, CHM entered the sub-prime mortgage

business. CHM began originating mortgages for customers who had “credit issues.”

About two weeks after the Sheltons purchased Dr. Christie’s shares, Defendant

sent Louis Shelton an e-mail dated September 30, 2004. Defendant outlined CHM’s

cash flow problems. In his e-mail Defendant stated “There is no reserve account at

this time.” Defendant stated that he had delayed giving out CHM’s payroll.

Defendant stated “The sub-prime program is bringing in much business. It will take

15 Defendant testified that two of the properties were in fact owned by him and his wife.

13

us approximately 30 days before we recognize [any] increase [in] revenue and cashflow

from this new sub-prime business.” Defendant’s e-mail contained several

religious references.

Defendant sent Louis Shelton an e-mail dated October 1, 2004. Defendant

stated that he had not yet handled the payroll issues and that he was leaving the next

day for Africa for 13 days. Defendant stated that CHM needed $44,700 for payroll

and other expenses. Defendant stated “All will be good. No reason to panic or

worry.”

Mr. Baxter prepared a financial statement on CHM as of December 31, 2004,

that shows the promissory note of $375,000 as a current asset. The reverse note is not

shown as a liability.

Louis Shelton testified that from time to time, Defendant would approach him

and request money, stating that this was a “downtime,” that CHM needed to make

payroll, and that loan closings were coming in. Louis Shelton contributed $60,593.76

in 2005 to help CHM meet its obligations. Thomas Shelton contributed $10,179.59 in

2005.

CHM was obligated on a number of loans which were owed to several lenders.

Defendant told the Sheltons that the loans were secured by some 16 properties owned

by CHM.15 The monthly payments on the loans totaled $13,000. Defendant

14

recommended that the loans be consolidated into a single loan with a monthly payment

of about $9,600. Defendant stated that the properties generated monthly income of

$12,000 which was sufficient to service the monthly payments on the proposed loan.

Louis Shelton testified that he relied upon Defendant’s representations and had no

reason to doubt him. Thomas Shelton testified that he relied upon Defendant’s

representation that the income stream was sufficient to make the monthly payments on

the proposed loan. Louis Shelton and Bristol Shelton testified that, based upon the

representations made by Defendant, consolidation of the loans was a “no brainer.”

Defendant provided Capital City Bank with financial information on CHM for the

proposed loan.

The “consolidation loan” closed on March 9, 2005. CHM executed a

promissory note dated March 9, 2005, in favor of Capital City Bank. The principal,

$1,041,356, plus interest, was to be repaid by making thirty-four monthly payments of

$9,569 and a final payment of $927,314 on February 9, 2008. The obligation was

secured by mortgages on properties owned by CHM. Defendant had provided financial

information on CHM to Capital City Bank. At the closing, Gene Perkins, a loan officer

for Capital City Bank, stated that CHM’s “numbers looked strong.” Louis Shelton

testified that although he did not rely upon Mr. Perkins, that Mr. Perkins’s statement

made him feel good. The Sheltons and Defendant executed personal guarantees of the

obligation. Some $963,912 of the loan proceeds were used to pay off CHM’s

16 Only 14 properties are listed on the settlement statement.

17 Schedule K-1 is used to report a shareholder’s share of a Subchapter S corporation’s

income, deductions, and credits.

15

obligations on the properties that collateralized the new loan from Capital City Bank.16

CHM received $63,502 at closing. Closing costs totaled $13,941.

Mr. Baxter prepared CHM’s 2004 tax return and a Schedule K-1 for each of

CHM’s shareholders.17 In April 2005 Defendant gave K-1s to the Sheltons for the

2004 tax year. The K-1s show that the Sheltons’ share of ordinary business income

was $7,738 each. Bristol Shelton asked Defendant why the Sheltons had “earned” this

amount since they had been shareholders for only four months in the 2004 tax year.

Bristol Shelton asked Defendant for a distribution check for Thomas Shelton’s share.

The Sheltons never received the distribution checks.

Around April 25, 2005, Defendant gave the Sheltons amended K-1s showing an

ordinary business income loss of $1,995 each. The Sheltons and Bristol Shelton

testified that this was the first time that they believed that CHM was having financial

problems. Thomas Shelton testified that the amended K-1 was a “red flag.”

Mr. Baxter testified that after he had prepared the original K-1s, that he learned from

Defendant that CHM had “booked” some $125,000 of loans as fee income. Mr. Baxter

amended CHM’s tax return. This changed CHM’s profit to a loss. Mr. Baxter also

amended the K-1s. Mr. Baxter testified that he told Defendant that the financial

information given to Capital City Bank for the “consolidation loan” was not correct

16

and that the bank should be informed.

CHM’s finances did not improve. Defendant sent Louis Shelton a number of

e-mails in May and June 2005 stating that CHM was behind on its payroll and on its

payments to the IRS, Capital City Bank, and other creditors. In his e-mail dated May

10, 2005, Defendant stated, “We desperately need operating capital” and “we need

approximately $50,000 immediately to cover expenses due.”

Other problems arose some three months after the closing on the consolidation

loan. Defendant told Louis Shelton that CHM’s properties were not “completely fixed”

and were not generating sufficient revenue to service the debt. The properties were

generating only about $5,000 of income per month. The monthly payment on the

consolidated loans was $9,569. Defendant asked Louis Shelton to pay the deficiency.

CHM closed its doors on November 29, 2005. CHM was unable to service its

debt to Capital City Bank. The Sheltons and Defendant had personally guaranteed the

obligation. The Sheltons began making the monthly payments to Capital City Bank.

The Sheltons and Defendant sold some of the properties pledged to Capital City Bank in

order to reduce the debt. A deficiency of some $290,000 remained. The Sheltons have

each paid principal and interest of $135,361.42 to Capital City Bank under their

personal guarantees.

The Sheltons each contributed some $19,580 in 2006 and $860 in 2007 to help

satisfy CHM’s obligations.

18 The evidence does not show the principal amount of the obligation.

17

The Sheltons formed CHM Acquisition Co., Inc. to take over and liquidate

CHM’s remaining properties. CHM Acquisition Co., Inc. obtained a loan on May 16,

2006, from the Bank of Perry.18 The Sheltons personally guaranteed the obligation.

CHM Acquisition Co., Inc. used the loan proceeds to pay off the remainder of the

obligation that CHM owed to Capital City Bank (the “consolidation loan”). Defendant

has no ownership interest in CHM Acquisition Co., Inc.

On May 16, 2006, Capital City Bank transferred and assigned to CHM

Acquisition Co., Inc. the promissory note dated March 9, 2005 (the consolidation loan)

that CHM had executed in favor of Capital City Bank. Capital City Bank transferred

and assigned five deeds to secure debt and three assignments of rents that CHM had

executed in favor of the bank. Capital City Bank also transferred and assigned the

personal guarantee executed by Defendant.

All of the properties owned by CHM have been liquidated or foreclosed on. The

Sheltons are making the monthly payments on the loan that CHM Acquisition Co., Inc.

obtained from the Bank of Perry. The Sheltons have each paid $21,155.58 to the Bank

of Perry.

Defendant testified that he, his wife, and his mother-in-law have surrendered,

liquidated, or applied some $920,000 of their personal assets in winding up the affairs

of CHM.

19 There is a three cent error in Plaintiff’s Exhibit 37.

18

Defendant filed a petition for relief under Chapter 7 of the Bankruptcy Code on

December 9, 2006.

The Sheltons testified that they suffered the following damages as a result of

their investments in CHM:

Louis Shelton Thomas Shelton

Initial investment in CHM

(Purchase of Dr. Christie’s

shares of stock) $ 140,000.00 $ 140,000.00

Additional contributions

2005 60,593.76 10,179.59

2006 19,580.71 19,580.69

2007 860.22 860.22

81,034.69 30,620.50

Capital City Bank loan

deficiency

Principal 119,197.83 119,197.83

Interest as of 2/1/2008 16,163.59 16,163.59

135,361.42 135,361.42

Bank of Perry loan 21,155.58 21,155.58

Legal fees

2005 3,496.14 3,496.14

2006 13,736.29 13,736.30

2007 13,617.28 13,617.25

30,849.71 30,849.69

Total Damages $ 408,401.40 $ 357,987.1919

19

CONCLUSIONS OF LAW

In this adversary proceeding, the Sheltons contend that Defendant, through fraud

and false financial statements, induced them to invest in CHM. The Sheltons contend

that they suffered damages due to Defendant’s fraud. The Sheltons seek to liquidate

their claims against Defendant. The Sheltons seek money judgments for the damages

and attorney fees incurred as a result of Defendant’s alleged fraud. The Sheltons also

contend that their claims are nondischargeable in bankruptcy under section 523(a)(2) of

the Bankruptcy Code.

The Sheltons have the burden of proving all facts essential to support their

objection to dischargeability by a preponderance of the evidence. Grogan v. Garner,

498 U.S. 279, 112 L. Ed.2d 755, 111 S. Ct. 654 (1991).

“The validity of a creditor’s claim [against a bankrupt debtor] is determined by

rules of state law. Since 1970, however, the issue of nondischargeability has been a

matter of federal law governed by the terms of the Bankruptcy Code.” Grogan v.

Garner, 111 S. Ct. at 657-58.

Exceptions to dischargeability are to be construed strictly. Schweig v. Hunter (In

re Hunter), 780 F.2d 1577, 1579 (11th Cir. 1986). “The exceptions to discharge were

not intended and must not be allowed to swallow the general rule favoring discharge.”

Murphy & Robinson Investment Co. v. Cross (In re Cross), 666 F.2d 873, 880 (5th Cir.

Unit B 1982).

20

The Sheltons and Defendant agree that Georgia law determines the validity of

the Sheltons’ claims against Defendant.

“The five elements of fraud and deceit in Georgia are: (1) false representation

made by the defendant; (2) scienter; (3) an intention to induce the plaintiff to act or

refrain from acting in reliance by the plaintiff; (4) justifiable reliance by the plaintiff;

(5) damage to the plaintiff.” City Dodge, Inc. v. Gardner, 232 Ga. 766, 208 S.E. 2d

794, 797 n.1 (1974).

Scienter means that the defendant had knowledge that his representation was

false. Dasher v. Davis, 274 Ga. App. 788, 618 S.E. 2d 728, 730 (2005); Argentum

International, LLC v. Woods, 280 Ga. App. 440, 634 S.E.2d 195, 200 (2006).

“Generally, scienter is a jury question.” Allstate Ins. Co. v. Sutton, 290 Ga App. 154,

658 S.E. 2d 909, 916 (2008) cert. denied. “[P]roof of scienter usually can only be

accomplished by circumstantial evidence.” Federal Ins. Co. v. Westside Supply Co.,

264 Ga. App. 240, 590 S.E.2d 224, 231 (2003).

The Sheltons must prove the same essential elements to show fraud under

Georgia law and under section 523(a)(2)(A) of the Bankruptcy Code. Jackson v.

Hensley, (In re Hensley), Ch. 7, Case No. 95-51784, Adv. No. 95-5068 (Bankr. M.D.

Ga., Oct. 4, 1996) (Hershner, J.).

The Sheltons contend that under Georgia law they have claims against Defendant

for their initial investments of $280,000, their subsequent contributions to CHM, their

21

personal guarantees of CHM’s debt of $1.041 million to Capital City Bank, their

personal guarantees of CHM Acquisition Co., Inc.’s debt to the Bank of Perry, and the

attorney fees they have incurred.

The Sheltons contend that their claims against Defendant are nondischargeable

under section 523(a)(2) of the Bankruptcy Code. Section 523(a)(2)(A) provides:

§ 523. Exceptions to discharge

(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—

. . .

(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.A. §523(a)(2)(A) (West 2004).

Under §523(a)(2)(A) “A creditor must prove that: (1) the debtor made a false

representation to deceive the creditor, (2) the creditor relied on the misrepresentation,

(3) the reliance was justified, and (4) the creditor sustained a loss as a result of the

misrepresentation.” Securities and Exchange Commission v. Bilzerian (In re Bilzerian),

153 F.3d 1278, 1281 (11th Cir. 1998). “This court has taken an expansive view of

‘debts obtained from fraud’ because the malefic debtor may not hoist the Bankruptcy

20 69 B.R. 743 (Bankr. N.D. Ind. 1986).

22

Code as protection from the full consequences of fraudulent conduct.” Id. at 1282.

“In order to preclude the discharge of a particular debt because of a debtor’s false

representation, . . . [t]he debtor must be guilty of positive fraud, or fraud in fact,

involving moral turpitude or intentional wrong, and not implied fraud, or fraud in law,

which may exist without the imputation of bad faith or immorality.” Schweig v. Hunter

(In re Hunter), 780 F.2d at 1579.

In Sears Roebuck & Co. v. Faulk (In re Faulk),20 the bankruptcy court stated:

“Actual” fraud precluding discharge consists of any deceit,

artifice, trick or design, involving the direct and active

operations of the mind used to circumvent or cheat another;

something said, done or omitted with the design of

perpetrating what is known to be a cheat or deception.

However, fraud may consist of silence, concealment, or

intentional non-disclosure of a material fact, as well as

affirmative misrepresentation of a material fact.

A “false pretense” involves implied misrepresentation or

conduct intended to create and foster a false impression, as

distinguished from a “false representation” which is an

express misrepresentation.

69 B.R. at 750.

See 4 Collier on Bankruptcy ¶ 523.08[1][d], [e] (15th ed. rev. 2008).

“The [justifiable reliance] inquiry will thus focus on whether the falsity of the

representation was or should have been readily apparent to the individual to whom it

was made. This is a less exacting standard than “reasonable” reliance, which would

23

focus on whether reliance would have been reasonable to the hypothetical average

person.” Collier on Bankruptcy ¶ 523.08[1][d].

“Because a debtor is unlikely to testify directly that his intent was fraudulent, the

courts may deduce fraudulent intent from all the facts and circumstances of a case.”

Devers v. Bank of Sheridan, Montana (In re Devers), 759 F.2d 751, 754 (9th Cir. 1985).

Section 523(a)(2)(A) prevents the discharge of all liability arising from fraud,

including an award of treble damages and attorney’s fees and costs associated with

establishing the fraud. Cohen v. de la Cruz, 523 U.S. 213, 118 S. Ct. 1212, 140 L.Ed.

2d 341 (1998).

The debtor does not have to directly benefit from the fraudulently obtained

funds. Section 523(a)(2)(A) applies when the debtor receives some benefit from the

funds obtained by his fraud, even though the debtor did not directly receive the funds.

This includes a creditor’s infusion of capital into a business in which the debtor has an

interest. HSSM #7 Limited Partnership v. Bilzerian (In re Bilzerian) 100 F.3d 886 (11th

Cir. 1996) cert. denied 523 U.S. 1093, 118 S. Ct. 1559, 140 L.Ed. 2d 791 (1998). See

Southern Concrete Construction Co. v. Lennard (In re Lennard) 245 B.R. 428, 431

(Bankr. M.D. Ga. 1999) (Laney, J.) (an officer, director, or shareholder who obtains

money or property for the corporation through fraud will not be shielded by the

corporate form under section 523(a)(2)(A)).

The Court is persuaded that Defendant knowingly made false representations that

24

induced the Sheltons to invest in CHM. In his e-mails dated August 27, 2004,

Defendant stated that CHM was a low risk, good, solid investment with high and fast

return on investment. Defendant stated that the required investment could be returned

in an estimated 12 months. Defendant stated that CHM had total assets of $753,812 and

equity of $169,548. Defendant knew that these sums were not correct and overstated

CHM’s assets and equity.

Defendant has been in the mortgage business since 1994. Defendant deals with

financial information on a regular basis. Defendant understood the importance of

presenting accurate and truthful financial information.

Dr. Christie decided to terminate his investment in CHM. Defendant initially

told Louis Shelton that an investment of $597,000 was required, which Defendant

testified included $317,000 as working capital for CHM. Defendant knew that CHM

needed an infusion of working capital. After Louis Shelton stated that he was not able

to make the “required” investment, Defendant dropped his request for the $317,000.

Just two weeks after the Sheltons purchased Dr. Christie’s shares of CHM’s stock,

Defendant sent Louis Shelton e-mails dated September 30, 2004, and October 1, 2004,

outlining CHM’s cash flow and payroll problems. The Court is persuaded that

Defendant knew that CHM was not a low risk, good, solid investment opportunity. The

Court is persuaded that Defendant induced the Sheltons to purchase Dr. Christie’s

interest so that Defendant would then have someone to fund CHM’s cash flow, payroll,

25

and operating expenses. Although Defendant did not directly receive the funds from the

purchase of Dr. Christie’s share of stock, this was the means by which Defendant

induced the Sheltons to become involved in CHM.

Some six months later, Defendant recommended that CHM obtain a $1.041

million consolidation loan from Capital City Bank. Defendant stated that the properties

that would serve as collateral generated sufficient income to service the debt. The

Sheltons relied upon Defendant’s representations. The Sheltons executed personal

guarantees of the consolidation loan. Shortly thereafter, Defendant told Louis Shelton

that the properties were not completely fixed and were not generating sufficient income

to service the debt. Defendant asked Louis Shelton to pay the deficiency. The Court is

persuaded that Defendant knew that the properties were not completely fixed and would

not generate sufficient income to service the debt. The Court is persuaded that

Defendant, through fraudulent representations, persuaded the Sheltons to agree for

CHM to obtain the consolidation loan and for the Sheltons to personally guarantee the

loan.

Defendant contends that the Sheltons’ reliance was not justifiable. Defendant

notes that the Sheltons did not talk to Dr. Christie, Mr. Barfield, Mr. Baxter, or any

other accountant about the CHM investment opportunity. The Sheltons have limited

experience in investing and business matters other than operating their dental practice.

The Sheltons purchased Dr. Christie’s shares of stock in September 2004. At

26

that time, Louis Shelton had known Defendant for some ten years. They attended the

same church. Louis Shelton and Bristol Shelton understood that Defendant was a good

businessman who was involved in church and community affairs. Thomas Shelton and

Bristol Shelton had taken out their home mortgage through CHM. Defendant had been

in the mortgage business in Perry, Georgia for some ten years. The financial

information that Defendant provided on CHM showed a business similar in size to the

Sheltons’ dental practice. Defendant made strong representations concerning his

religious beliefs. The Sheltons relied in part upon these representations in deciding to

invest in CHM. The Court is persuaded that the Sheltons’ reliance was justifiable. The

Court is persuaded that Louis Shelton and Thomas Shelton should each recover his

initial investment of $140,000 and the $135,361.42 that they each paid under their

personal guarantees of the consolidation loan to Capital City Bank.

Louis Shelton contributed $81,034.69 in 2005, 2006, and 2007 to help CHM

meet its obligations. Thomas Shelton contributed $30,620.50. The Sheltons relied on

Defendant’s representations in making these contributions. The Court is persuaded that

the Sheltons should recover the amount of their contributions from Defendant.

In 2006, the Sheltons formed CHM Acquisition Co., Inc. to take over and

liquidate CHM’s remaining properties. The Sheltons personally guaranteed a loan from

the Bank of Perry to CHM Acquisition Co., Inc. The loan proceeds were used to pay

off the remainder of the consolidation loan obligations that CHM owed to Capital City

In their post-trial brief, the Sheltons contend 21 that they incurred additional attorney fees

of $22,037.42 between January 22 and March 18, 2008. The Sheltons submit an unverifed

“Recap of Client Ledger.” The Court is not persuaded that the Sheltons have adequately

demonstrated their entitlement to recover these attorney fees.

27

Bank. The Sheltons and Defendant had personally guaranteed the consolidation loan.

The Sheltons are making the monthly payments to the Bank of Perry. In the Court’s

view, the Sheltons are doing the best they can to deal with the situation caused by

Defendant’s fraud. The Court is persuaded that Louis Shelton and Thomas Shelton

should each recover the $21,155.58 that he has paid to the Bank of Perry.

Louis Shelton has incurred attorney fees totaling $30,849.71 in dealing with

Defendant’s fraud. Thomas Shelton has incurred $30,849.69 in attorney fees. Under

Georgia law “a favorable verdict on a fraud claim can support the award of punitive

damages and attorney fees.” Southern Prestige Homes, Inc. v. Moscoso, 243 Ga. App.

412, 532 S.E.2d 122, 127 (2000). Attorney fees associated with establishing fraud are

nondischargeable in bankruptcy. Cohen v. de la Cruz, 523 U.S. at 223. Defendant

knowingly made false representations to the Sheltons. The Court is persuaded that the

Sheltons are entitled to recover their attorney fees.21

The Sheltons also contend that Defendant persuaded them to invest in CHM by

publishing false financial statements. Section 523(a)(2)(B) of the Bankruptcy Code

provides as follows:

§ 523. Exceptions to discharge

(a) A discharge under section 727, 1141, 1228(a),

28

1228(b), or 1328(b) of this title does not discharge an

individual debtor from any debt—

. . .

(2) for money, property, services, or an

extension, renewal, or refinancing of credit, to

the extent obtained by—

. . .

(B) use of a statement in writing—

(I) that is materially false;

(ii) respecting the debtor’s or an

insiders’ financial condition;

(iii) on which the creditor to

whom the debtor is liable for

such money, property, services,

or credit reasonably relied; and

(iv) that the debtor caused to be

made or published with intent to

deceive; or

11 U.S.C.A. §523(a)(2)(B) (West 2004).

“A statement is materially false for the purposes of section 523(a)(2)(B) if it

paints a substantially untruthful picture of financial conditions by misrepresenting

information of the type that would normally affect the decision to grant credit.” Collier

on Bankruptcy ¶ 523.08 [2][b]; see also Insurance Company of North America v. Cohn

(In re Cohn), 54 F.3d 1108, 1114 (3rd Cir. 1995).

“Materially is determined in part by the size of the discrepancy.” Enterprise

29

National Bank of Atlanta v. Jones (In re Jones), 197 B.R. 949, 960 (Bankr. M.D. Ga.

1996) (Walker, J.).

Collier of Bankruptcy states:

The determination of the reasonableness of a creditor’s

reliance on a debtor’s false statement in writing is judged in

light of the totality of the circumstances, taking into

consideration:

• whether there had been previous business

dealings between the debtor and the creditor;

• whether there were any warnings that would

have alerted a reasonably prudent person to

the debtor’s misrepresentations;

• whether minimal investigation would have

uncovered the inaccuracies in the debtor’s

financial statement; and

• the creditor’s standard practices in evaluating

creditworthiness and the standards or customs

of the creditor’s creditworthiness.

Collier on Bankruptcy ¶ 523.08 [2][d]. See also First National Bank of Olathe,

Kansas v. Pontow, 111 F.3d 604, 610 (8th Cir. 1997); Insurance Company of North

America v. Cohn (In re Cohn), 54 F.3d at 1117-18; Coston v. Bank of Malvern (In re

Coston), 991 F.2d 257, 261 (5th Cir. 1993).

“Reasonable reliance connotes the use of the standard of [an] ordinary and

average person.” City Bank & Trust Co. v. Vann (In re Vann), 67 F.3d 277, 280 (11th

Cir. 1995). Reasonable reliance is a factual determination made on a case-by-case

22 11 U.S.C.A. § 101(31)(a)(iv) (West Supp. 2008) (insider includes, if the debtor is an

individual, a corporation of which the debtor is a director, officer, or person in control).

30

basis. A creditor’s duty to investigate a financial statement is often triggered by “red

flags.” In re Jones, 197 B.R. at 961-62.

Defendant was an officer of and controlled the day-to-day operations of CHM.

Defendant was an “insider” of CHM.22 Defendant gave CHM’s financial statement

dated June 30, 2004, to the Sheltons. In his e-mail dated August 27, 2004, to Louis

Shelton, Defendant repeated the amounts from the financial statement. Defendant

adopted and used CHM’s financial statement in persuading the Sheltons to invest in

CHM. See Collier of Bankruptcy ¶ 523.08 [2][a].

CHM’s financial statement painted a materially false picture of CHM’s finances.

The financial statement did not show the reverse note of $375,000. Defendant deals

with financial information on a regular basis. The Court is persuaded that Defendant

knew that the financial statement was materially false.

The Court is persuaded that the Sheltons reasonably relied upon the financial

statement. The financial statement was prepared by a CPA. Louis Shelton had known

Defendant for 10 years. They attended the same church. Louis Shelton and Bristol

Shelton understood that Defendant was a good businessman who was involved in

church and community activities. Thomas Shelton and Bristol Shelton had taken out

their home loan mortgage through CHM. The financial information on CHM showed a

business similar in size to the Sheltons’ dental practice.

31

Defendant contends that the Sheltons should have contacted Mr. Barfield or

Mr. Baxter. But neither Mr. Barfield nor Mr. Baxter knew about the reverse note.

At the trial of this adversary proceeding, the Sheltons’ counsel announced that

the Sheltons were not pursuing the cause of action asserted in Count II of their

complaint.

The Court is persuaded that Louis Shelton is entitled to recover $408,401.40

from Defendant and that said amount is nondischargeable in bankruptcy. The Court is

persuaded that Thomas Shelton is entitled to recover $357,987.19 from Defendant and

that said amount is nondischargeable in bankruptcy.

An order in accordance with this memorandum opinion will be entered this date.

DATED this 30th day of July 2008.

/s/ Robert F. Hershner, Jr.

ROBERT F. HERSHNER, JR.

United States Bankruptcy Judge

JANET CARTER GORDON

June 13, 2001

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

JANET CARTER GORDON, ::

Debtor : Case No. 00-52694 RFH

::

AGRIBANK, FCB, as Assignee of :

American Express Centurion :

Bank c/o AgSmart, ::

Plaintiff :::

vs. :::

JANET CARTER GORDON, ::

Adversary Proceeding

Defendant : No. 00-5145

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: JOHN T. McGOLDRICK, JR.

MICHAEL N. WHITE

Post Office Box 1606

Macon, Georgia 31202-1606

For Defendant: WESLEY J. BOYER

355 Cotton Avenue

Macon, Georgia 31201

2

MEMORANDUM OPINION

AGRIBANK, FCB, Plaintiff, filed a Complaint For

Determination of Dischargeability of Debt on October 16, 2000.

Janet Carter Gordon, Defendant, filed a response on November 9,

2000. A trial was held March 28, 2001. The Court, having

considered the evidence presented and the arguments of counsel,

now publishes this memorandum opinion.

FINDINGS OF FACT

Defendant and George T. Gordon were married in 1973.

Mr. Gordon began farming in 1973. Defendant helped with chores

on the farm. The Gordons have farmed the same land since 1973.

After several years of marriage, Defendant obtained a college

degree and became a full-time teacher. She has continued to

help with chores on the farm.

In 1997, Mr. Gordon filed a bankruptcy petition as a

“family farmer” under Chapter 12 of the Bankruptcy Code. In

1998, Mr. Gordon needed additional funds to continue farming.

Mr. Gordon, on February 25, 1998, was socializing at a farm

supply store in Rochelle, Georgia. The store is part of a

national chain known as Terra International, Inc. Richard

Rhodes was the general manager of the store. Mr. Rhodes told

1 AgSmart loans are originated by American Express

Centurion Bank. Defendant’s AgSmart loans have been assigned

to Plaintiff. The Court, for convenience, will refer only to

Plaintiff.

3

Mr. Gordon about a new financing program for farmers called

AgSmart. Mr. Rhodes represented that AgSmart was a simple loan

process that operated similar to a credit card account.

Plaintiff is a Farm Credit Bank and is part of the

national farm credit system. Plaintiff developed the AgSmart

program to provide operating loans to qualified farmers.1

AgSmart loans do not exceed $100,000. The AgSmart loan process

is designed to advise an applicant within a couple of hours

whether his or her loan will be approved. Terra International

became a “Dealer” in the AgSmart program in December of 1997.

Terra International’s employees are trained to process loan

applications and loan documents.

In their conversation, Mr. Gordon observed to

Mr. Rhodes that it would not do any good for him to fill out an

application because he was in Chapter 12 bankruptcy.

Mr. Rhodes suggested to Mr. Gordon that he could apply for the

loan in his wife’s name. Defendant was teaching school that

day. Mr. Gordon telephoned Defendant and told her about

AgSmart. Defendant told her husband to apply for the loan.

Defendant authorized her husband to sign her name on the loan

application. Defendant understood that her financial

information would be reviewed. Defendant testified that she

4

gave no instructions to her husband as to what information to

put on the loan application. Defendant testified that she and

her husband had been married for twenty-seven years and that

she had no reason to suspect that her husband would misstate

any information.

Mr. Gordon and Mr. Rhodes completed an AgSmart

Operating Loan Application, which was dated February 25, 1998.

The applicant is shown as Janet C. Gordon. Mr. Gordon signed

Defendant’s name on the loan application. All the information

on the application, except for Defendant’s street address, was

handwritten by Mr. Rhodes. The application provided in

relevant part, as follows:

Section I: Applicant Classification (Answer as

appropriate.)

Q Agricultural

? Farmer/rancher

Q Part Time

Year began farming 1977

. . . .

Section IV: Income/Revenue (Please complete all

blanks in this section.)

Gross Agricultural and/or Business

income/revenue $234,000 (most recent full year)

. . . .

Total Assets $620,000

Total Liabilities $118,000

5

Section V: Loan Specifics

Total Loan Amount: $70,000

From this Dealer: Loan Purpose(s) Amount for

Each Purpose

Chemicals &

Fertilizers $70,000

. . . .

Collateral: Crops Maturity: Number of months

until loan is due . . . 12 . . . .

. . . .

Applicant Signature: Janet C. Gordon

Date: 2-25-98

Plaintiff had no prior business dealings with

Defendant. Plaintiff did not contact Defendant to verify any

information on the application. Defendant did not see the

2 Mr. Gordon was shown as the proprietor of the farm on

the Gordons’ joint federal income tax return for 1997.

6

completed loan application. Defendant did not personally

provide any of the information on the application.

Defendant concedes that her gross agricultural income

and total assets were misstated. The loan application shows

Defendant’s gross agricultural income as $234,000. Mr. Gordon

testified that he came up with that amount “off the top of his

head.” Defendant’s salary from teaching in 1997 was $26,404.

The Gordons’ farm, in 1997, had gross income of $75,309 and,

after expenses, had a net loss of $16,328.2

The loan application shows the value of Defendant’s

total assets as $620,000. Mr. Gordon testified that he told

Mr. Rhodes that the assets included farm equipment that

belonged to him and his mother. Mr. Gordon told Mr. Rhodes

that Defendant had access to the equipment. Mr. Gordon

testified that Mr. Rhodes acted like that did not matter as

long as Defendant had good credit. Defendant testified that

her assets probably were worth $120,000. Mr. Gordon testified

that the amount shown on the loan application for Defendant’s

liabilities, $118,000, was correct.

3 See In re LLL Farms, 111 B.R. 1016, 1019 (Bankr. M.D.

Ga. 1990) (three sisters were “family farmers” even though

majority of their income came from outside jobs).

7

The loan application shows that Defendant began

farming in 1977. Plaintiff, however, argues that Defendant was

not a farmer. Defendant testified that she is a farmer and a

full-time teacher. Defendant has helped with chores on the

farm since 1973.3 Mr. Gordon does most of the actual farming.

Defendant concedes that certain financial information on her

application was misstated. The Court is persuaded that it need

not decide whether Defendant was a farmer.

Mr. Gordon and Mr. Rhodes blame each other for the

misstatements on Defendant’s loan application. Mr. Gordon

testified that he was asked questions by Mr. Rhodes who in turn

wrote the information on the application. Mr. Gordon concedes

that he did not object to any of the information that

Mr. Rhodes wrote on the application. The Court, from the

testimony and the evidence presented, is persuaded that

Mr. Gordon was eager to obtain a loan and that Mr. Rhodes was

eager to have the loan approved so that his business could sell

farm supplies to the Gordons. The Court is persuaded that the

loan application was a joint effort of Mr. Gordon and

Mr. Rhodes. The Court is persuaded that Mr. Gordon and

Mr. Rhodes share responsibility for the misstatements.

Mr. Rhodes sent by facsimile Defendant’s loan

8

application to Plaintiff. Plaintiff notified Mr. Rhodes within

about twenty minutes that Defendant’s loan was approved.

Plaintiff processed Defendant’s loan application

using a scorecard system. The system is a computerized method

of processing loan applications that does not involve any

subjective intervention. Information from the loan application

and the applicant’s credit report are “plugged into” a scoring

model. Loan decisions are based solely on the information on

the loan application and on the credit report. The loan

application provides fifty-four percent of the score and the

credit report provides forty-six percent. Loan applications

with a score of 200 or higher are approved. Applications with

a score of less than 200 are not approved unless the local

dealer guarantees the loan.

Gary Grosdidier is a credit manager for Plaintiff.

Mr. Grosdidier testified that Plaintiff, between 1995 and 2000,

made 95,000 loans totaling $3.7 billion using the score card

system. Mr. Grosdidier testified that only $12 million of

those loans have been “charged off.” Mr. Grosdidier testified

that 99.7 percent of the loans have been successful.

Mr. Grosdidier testified that about thirty-six percent of all

AgSmart loan applications are approved using the scorecard

system. Mr. Grosdidier testified that in 1998 forty percent of

the loan applications submitted by Terra International, Inc.

were approved.

9

Defendant’s loan application received a score of 220.

Mr. Grosdidear testified that Defendant’s application would

have received a score of less than 200 and would not have been

approved if Defendant had shown (1) that she had been farming

for only one year, (2) no farm income, or (3) total assets of

only $214,000.

Some two weeks after Defendant’s loan was approved,

Plaintiff sent certain loan documents to the farm supply store

in Rochelle. Defendant authorized Mr. Gordon to sign her name

to a promissory note, security agreement, and UCC-1 financing

statement. Defendant gave Plaintiff a security interest in her

crops. Plaintiff filed the financing statement on March 31,

1998.

Several months later, Mr. Rhodes advised Mr. Gordon

that he would need additional funds to purchase farm supplies.

Mr. Rhodes prepared a second AgSmart Operating Loan Application

dated June 29, 1998. Mr. Rhodes copied Defendant’s financial

information from the first loan application. Mr. Gordon

testified that Mr. Rhodes did not ask any questions when the

second application was prepared. The second application

requested $30,000 to purchase chemicals. Defendant authorized

Mr. Gordon to sign her name to the application. Mr. Rhodes

sent to Plaintiff via facsimile the application. Defendant’s

application received a score of 200 on Plaintiff’s scorecard

system. Plaintiff notified Mr. Rhodes within a few minutes

4 11 U.S.C.A. § 523(a)(2)(B) (West 1993).

10

that Defendant’s loan application was approved.

Plaintiff sent certain loan documents to the farm

supply store. Defendant authorized Mr. Gordon to sign her name

to a promissory note, security agreement, and financing

statement. Defendant again gave Plaintiff a security interest

in her crops. Plaintiff recorded the financing statement on

July 27, 1998.

Defendant intended to repay the AgSmart loans from

the proceeds of her 1998 cotton crop. Defendant’s crop failed

because of poor weather conditions. Defendant was unable to

repay her obligations to Plaintiff. Defendant filed a petition

under Chapter 7 of the Bankruptcy Code on July 21, 2000.

CONCLUSIONS OF LAW

Plaintiff contends that Defendant’s obligations are

nondischargeable under section 523(a)(2)(B) of the Bankruptcy

Code.4 This section provides as follows:

§ 523. Exceptions to discharge

(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—

. . . .

11

(2) for money, property, services, or

an extension, renewal, or refinancing of

credit, to the extent obtained by—

. . . .

(B) use of a statement in writing—

(i) that is materially false;

(ii) respecting the debtor’s or

an insider’s financial condition;

(iii) on which the creditor to

whom the debtor is liable for

such money, property, services,

or credit reasonably relied; and

(iv) that the debtor caused to

be made or published with intent

to deceive; or

11 U.S.C.A. § 523(a)(2)(B) (West 1993).

Plaintiff has the burden of proving all facts

essential to support the objection to dischargeability by a

preponderance of the evidence. Grogan v. Garner, 498 U.S. 279,

112 L. Ed. 2d 755, 111 S. Ct. 654 (1991).

First, the Court is persuaded that the AgSmart loan

application is a statement in writing respecting Defendant’s

financial condition. Defendant told her husband to apply for

the loan. Defendant authorized her husband to sign her name to

the loan application. Defendant understood that her financial

information would be reviewed.

Second, the Court is persuaded that the loan

application is materially false. “A statement is materially

12

false for purposes of section 523(a)(2)(B) if it paints a

substantially untruthful picture of financial conditions by

misrepresenting information of the type that would normally

affect the decision to grant credit.” 4 Collier on Bankruptcy

¶ 523.08[2][b] (15th ed. rev. 2001); see also Insurance Company

of North America v. Cohn (In re Cohn), 54 F.3d 1108, 1114 (3rd

Cir. 1995).

“Materiality is determined in part by the size of the

discrepancy.” Enterprise National Bank of Atlanta v. Jones (In

re Jones), 197 B.R. 949, 960 (Bankr. M.D. Ga. 1996) (Walker,

J.).

The Court is persuaded that Defendant’s loan

application contained material misrepresentations. The loan

application shows Defendant’s gross agricultural income as

$234,000 and the value of her total assets as $620,000. In

1997, Defendant’s salary from teaching was $26,404 and the

gross income from the Gordons’ farm was $75,309. Thus,

Defendant’s income was less than one-half the stated amount

even if the farm income is included. The value of Defendant’s

assets was $120,000. Defendant would not have qualified for

the AgSmart loan if her true financial condition had been shown

on the application.

Third, the Court is persuaded that Plaintiff

reasonably relied upon Defendant’s financial information in

approving her loan application. Collier on Bankruptcy states:

13

The determination of the reasonableness of a

creditor’s reliance on a debtor’s false

statement in writing is judged in light of the

totality of the circumstances, taking into

consideration:

• whether there had been previous

business dealings between the debtor

and the creditor;

5 256 B.R. 292 (Bankr. E.D. Ark. 2000).

6 The Court notes that the creditor in In re Webb is the

same creditor in the adversary proceeding at bar.

14

• whether there were any warnings that

would have alerted a reasonably

prudent person to the debtor’s

misrepresentations;

• whether minimal investigation would

have uncovered the inaccuracies in the

debtor’s financial statement; and

• the creditor’s standard practices in

evaluating creditworthiness and the

standards or customs of the creditor’s

industry in evaluating

creditworthiness.

4 Collier on Bankruptcy ¶ 523.08[2][d] (15th ed. rev. 2001).

See also First National Bank of Olathe, Kansas v. Pontow, 111

F.3d 604, 610 (8th Cir. 1997); Insurance Company of North

America v. Cohn (In re Cohn), 54 F.3d 1108, 1117-18 (3rd Cir.

1995); Coston v. Bank of Malvern (In re Coston), 991 F.2d 257,

261 (5th Cir. 1993).

“Reasonable reliance connotes the use of the standard

of [an] ordinary and average person.” City Bank & Trust Co. v.

Vann (In re Vann), 67 F.3d 277, 280 (11th Cir. 1995).

Reasonable reliance is a factual determination made on a caseby-

case basis. A creditor’s duty to investigate a financial

statement is often triggered by “red flags.” In re Jones, 197

B.R. at 961-62.

In Agribank, FCB v. Webb (In re Webb),5 a farmer

applied for an AgSmart loan. The creditor6 processed the loan

15

application using its computerized scoring system. The

creditor accepted as true the financial information on the loan

application. The farmer defaulted on the loan. The bankruptcy

court held that the creditor had reasonably relied upon a

materially false financial statement. The bankruptcy court

stated, in part:

Agribank reasonably relied upon the information

contained in the application because, in

approving the loan, it complied with its

regular, procedures and obtained what was

represented to be current financial information,

in writing.

In applying this objective element, Insurance

Company of North America v. Cohn (In re Cohn),

54 F.3d 1108, 1117 (3d Cir. 1995), the context

of the application process and the type of loan

may also be examined. This situation is unlike

that of a credit card issuer randomly approving

credit based solely upon review of credit

reports. It is also not similar to the

situation in which a complex loan agreement is

made based upon lengthy, but clearly incomplete

and contradictory financial information, cf.

Guess v. Keim (In re Keim), 236 B.R. 400 (8th

Cir. BAP 1999). Rather, Agribank was issuing a

loan to an individual farmer for the purpose

providing credit at a farm supply cooperative.

The context is limited, the loan funds

essentially restricted to the business use, and

the transactions are in the ordinary course of

small farming operations. Thus, the Court does

not find it unreasonable that the lender, in

this particular context, required only basic

asset and liability information, and adhered to

its policy of accepting the farmer applicant’s

statements as true. Agribank demonstrated that

it actually and reasonably relied upon the

information submitted to it by the debtor.

256 B.R. at 296-97.

Turning to the case at bar, Plaintiff had no previous

7 39 F.3d 301 (11th Cir. 1994).

16

business dealings with Defendant. Plaintiff did not verify the

information on Defendant’s loan application. Plaintiff did

obtain a credit report on Defendant. Defendant’s loan

application and credit report were not “stale.” Plaintiff’s

decision to approve Defendant’s loan was based solely on the

information on Defendant’s loan application and credit report.

Plaintiff processed Defendant’s loan application using a

computerized scorecard system that has proven to be extremely

successful in predicting the performance of loans. The Court

is persuaded that Plaintiff reasonably relied upon Defendant’s

loan application.

Finally, Plaintiff must show that Defendant caused

her financial information to be made or published with an

intent to deceive. Plaintiff must show that Defendant’s

financial information “was either knowingly false or made so

recklessly as to warrant a finding that [Defendant] acted

fraudulently.” 4 Collier on Bankruptcy ¶ 523.08[2][e][ii]

(15th ed. rev. 2001).

In Equitable Bank v. Miller (In re Miller),7 the

Eleventh Circuit Court of Appeals stated:

Whether a debtor in bankruptcy acted with the

requisite “intent to deceive” under

§ 523(a)(2)(B) is an issue of fact, and the

bankruptcy court’s findings as to this issue are

reviewed by both the district and appellate

courts under the clearly erroneous standard.

17

See Matter of Martin, 963 F.2d 809, 814 (5th

Cir. 1992); In re Liming, 797 F.2d 895, 897

(10th Cir. 1986); In re Long, 774 F.2d 875, 877-

78 (8th Cir. 1985); see also Birmingham Trust,

755 F.2d at 1477 (applying clearly erroneous

standard to bankruptcy court’s finding of

“reckless disregard of truth” under §

523(a)(2)(A)). “Because a determination

concerning fraudulent intent depends largely

upon an assessment of the credibility and

demeanor of the debtor, deference to the

bankruptcy court’s factual findings is

particularly appropriate.” In re Burgess, 955

F.2d 134, 137 (1st Cir. 1992) (citing Williamson

v. Fireman’s Fund Ins. Co., 828 F.2d 249, 252

(4th Cir. 1987)); see also Martin, 963 F.2d at

814; see generally Bankruptcy rule 8013.

. . . .

A bankruptcy court may look to the totality

of the circumstances, including the recklessness

of a debtor’s behavior, to infer whether a

debtor submitted a statement with intent to

deceive. “Reckless disregard for the truth or

falsity of a statement combined with the sheer

magnitude of the resultant misrepresentation may

combine to produce the inferrence [sic] of

intent [to deceive].” In re Albanese, 96 B.R.

376, 380 (Bankr. M.D. Fla. 1989) (citations

omitted); see also Florida Nat’l Bank v. Gordon,

91 B.R. 135, 138 (Bankr. N.D. Fla. 1988);

Brigadier Homes v. Hert, 81 B.R. 638, 641

(Bankr. N.D. Fla. 1987); Matter of Archer, 55

B.R. 174, 179-80 (Bankr. M.D. Ga. 1985).

39 F.3d at 304-05.

“While it may not be prudent to rely so heavily upon

the honesty of another individual to manage and operate one’s

investments, mere neglect will not trigger nondischargeability.

Such a remedy should not apply to the “careless or

presumptuous” debtor, but rather should attach to those debtors

who act with “dishonest intent.” [In re Miller, 39 F.3d] at

8 55 B.R. 174 (Bankr. M.D. Ga. 1985).

18

305.” In re Jones, 197 B.R. at 963 (Walker, J.).

Plaintiff relies on Massey-Ferguson Credit Corp. v.

Archer (In re Archer).8 In that case, a farmer-defendant

signed a blank credit application to purchase farm equipment.

The defendant did not give any financial information to

Mr. Davis, the local farm equipment dealer. Mr. Davis later

put false financial information on the defendant’s credit

application. Mr. Davis then assigned the loan to the creditor.

The defendant was unable to repay the loan and filed for

bankruptcy relief. This Court held that the defendant’s

obligation was nondischargeable. This Court stated, in part,

as follows:

In this case, Defendant, who had considerable

experience in purchasing and financing farm

equipment, did not read any of the applications

before signing them, and he signed them knowing

they were entirely blank. Defendant gave the

signed applications to Mr. Davis to fill out,

with the knowledge that Plaintiff would rely on

the information contained in the applications

when determining whether to extend Defendant

financing. Defendant gave the applications to

Mr. Davis in spite of the fact that he did not

remember when, if ever, he had given Mr. Davis

information about his financial affairs.

Without such information, Defendant had no

reasonable grounds to believe that Mr. Davis

would accurately and truthfully fill out the

applications. Defendant also made no effort to

see what financial information Mr. Davis

provided in the applications. See David v.

Annapolis Banking & Trust Co., 209 F.2d 343, 344

(4th Cir. 1953). If Defendant had reviewed the

applications, Defendant would have discovered

19

the false information. The Court cannot allow

Defendant to avoid responsibility for the

natural consequences of his reckless conduct on

the basis that Mr. Davis, not Defendant,

actually supplied the false information.

Because of his reckless indifference, Defendant

effectively allowed Mr. Davis to provide the

false information upon which Plaintiff

subsequently relied. The Court, therefore,

concludes that Defendant acted with such

reckless indifference to and disregard for the

accuracy of the information contained in his

applications that the Court finds that Defendant

had intent to deceive within the meaning of

section 523(a)(2)(B). See Brooklin Trust Co. v.

Rosenthal (In re Rosenthal), 29 B.R. 495, 497

(Bankr. S.D. Fla. 1983); Merrill, Lynch, Pierce,

Fenner & Smith, Inc. v. Kimberly (In re

Kimberly), 13 B.R. 145, 146, 4 Collier Bankr.

Cas.2d 1445, 1446 (Bankr. S.D. Fla. 1981).

55 B.R. 179-80.

Turning to the case at bar, the Court is not

persuaded that Defendant had an intent to deceive as that term

is used in section 523(a)(2)(B). Defendant authorized her

husband to sign her name on two loan applications. Defendant

did not see the completed loan applications. Defendant did not

personally provide any of the information on the applications.

Defendant has been married to her husband for twentyseven

years. The Court is persuaded that Defendant reasonably

believed that her husband knew her financial condition and that

he would truthfully report that information on the loan

applications. The Court is not persuaded that Defendant had

any reason to question her husband’s honesty. The Court can

only conclude that Defendant’s husband and Mr. Rhodes were the

20

individuals who acted with reckless indifference in filling out

21

the loan applications. The Court finds no basis to impute

their conduct to Defendant.

An order in accordance with this memorandum opinion

will be entered this date.

DATED the 13th day of June, 2001.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

ROBERT TODD GILBERT

March 30, 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

ROBERT TODD GILBERT, :

:

Debtor : Case No. 99-52633 RFH

:

:

KAREN GILBERT, :

:

Plaintiff :

:

:

vs. :

:

:

ROBERT TODD GILBERT, :

: Adversary Proceeding

Defendant : No. 99-5129

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: FRED H. HODGES, JR.

401 Cherry Street, Suite 602

Macon, Georgia 31201

For Defendant: DANNY L. AKIN

Post Office Box 1773

Macon, Georgia 31202-1773

2

MEMORANDUM OPINION

Karen Gilbert, Plaintiff, filed on October 12, 1999

a Complaint to Determine Discharge of Debt. Robert Todd

Gilbert, Defendant, filed a response on October 27, 1999. A

trial was held on February 22, 2000. The Court, having

considered the evidence presented and the arguments of

counsel, now publishes this memorandum opinion.

FINDINGS OF FACT

Plaintiff and Defendant were married in 1981.

Plaintiff and Defendant were divorced in September of 1998.

Plaintiff and Defendant were both represented by counsel in

the divorce proceeding. Plaintiff and Defendant personally

negotiated most of the terms of their Settlement Agreement.

Plaintiff’s gross monthly income was $3,806.

Defendant’s gross monthly income was $5,083. Plaintiff

received custody of their two minor children. Defendant was

to pay monthly child support of $1,200. This represented 23.6

percent of Defendant’s gross income. The state child support

guidelines called for Defendant to pay between 23 and 28

percent of his gross income. In setting the child support

award, the state court noted the existence of a special

3

circumstance, namely, an unusually high debt structure.

Plaintiff received possession of the marital

residence and was responsible for the taxes, insurance,

maintenance, and mortgages on the residence. Plaintiff was

required to refinance the mortgages and place the new

indebtedness in her name. Plaintiff was required to pay

$10,000 to Defendant’s mother upon the refinance. Plaintiff

must pay Defendant’s mother $15,000 if the marital residence

is sold. This amount, $25,000, represents funds that

Defendant’s mother had loaned to Plaintiff and Defendant.

Plaintiff and Defendant were to receive their

respective vehicles, bank accounts, and personal property.

The Settlement Agreement, in Item 11-Debts, states

that Plaintiff and Defendant each were to pay $37.00 per month

towards a NationsBank overdraft obligation of $3,040.55.

Plaintiff was to be responsible for obligations owed to First

Card Mastercard, Sears, and Parisian. Defendant was to be

responsible for obligations owed to NationsBank VISA,

Household Finance Corporation, MBNA VISA, VISA Gold, and

certain medical bills.

Plaintiff did not request or receive an award

designated as alimony, maintenance, or support. Plaintiff

testified that alimony was not discussed.

Defendant testified that he was unable to meet his

financial obligations at the time of the divorce. Defendant

1 11 U.S.C.A. § 523(a)(5)(B) (West 1993).

4

testified that he was able to pay his child support

obligations because he paid other bills late.

Defendant filed a petition under Chapter 7 of the

Bankruptcy Code on July 15, 1999. Household Finance

Corporation, MBNA VISA and NationsBank VISA have called upon

Plaintiff to pay the obligations that Defendant was to pay

under the Settlement Agreement.

CONCLUSIONS OF LAW

Plaintiff contends that Defendant’s obligation to

pay Household Finance Corporation, MBNA VISA, and NationsBank

VISA is in the nature of alimony, maintenance, or support.

Plaintiff contends that Defendant’s obligation is

nondischargeable under section 523(a)(5)(B) of the Bankruptcy

Code.1 This section provides as follows:

§ 523. Exceptions to discharge

(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

2 754 F.2d 902 (11th Cir. 1985).

5

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–

. . . .

(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;

11 U.S.C.A. § 523(a)(5)(B) (West 1993).

Plaintiff has the burden of proving all facts

necessary to support her objection to dischargeability by a

preponderance of the evidence. Grogan v. Garner, 498 U.S.

279, 112 L. Ed. 755, 111 S. Ct. 654 (1991).

In Harrell v. Sharp (In re Harrell),2 the Eleventh

Circuit Court of Appeals stated:

The language used by Congress in

§ 523(a)(5) requires bankruptcy courts to

determine nothing more than whether the

support label accurately reflects that the

obligation at issue is “actually in the

nature of alimony, maintenance, or

support.” The statutory language suggests

a simple inquiry as to whether the

obligation can legitimately be

characterized as support, that is, whether

it is in the nature of support. The

language does not suggest a precise

inquiry into financial circumstances to

determine precise levels of need or

support; nor does the statutory language

6

contemplate an ongoing assessment of need

as circumstances change.

. . . .

Considerations of comity reinforce our

interpretation. Debtor’s attempt to

expand the dischargeability issue into an

assessment of the ongoing financial

circumstances of the parties to a marital

dispute would of necessity embroil federal

courts in domestic relations matters which

should properly be reserved to the state

courts.

We conclude that Congress intended that

bankruptcy courts make only a simple

inquiry into whether or not the obligation

at issue is in the nature of support.

This inquiry will usually take the form of

deciding whether the obligation was in the

nature of support as opposed to being in

the nature of a property settlement.

Thus, there will be no necessity for a

precise investigation of the spouse’s

circumstances to determine the appropriate

level of need or support. It will not be

relevant that the circumstances of the

parties may have changed, e.g., the

spouse’s need may have been reduced at the

time the Chapter VII petition is filed.

Thus, limited to its proper role, the

bankruptcy court will not duplicate the

functions of state domestic relations

courts, and its rulings will impinge on

state domestic relations issues in the

most limited manner possible.

754 F.2d at 906-07.

“[W]hether a particular debt is a support obligation

or part of a property settlement is a question of federal

bankruptcy law, not state law.” In re Harrell, 754 F.2d at

905.

“[J]oint [marital] obligations assumed by the debtor

7

as a part of a separation or divorce settlement must be

‘actually in the nature of’ alimony or support in order to be

excepted from discharge.” Long v. Calhoun (In re Calhoun),

715 F.2d 1103, 1107 (6th Cir. 1983). See also Gibson v.

Gibson (In re Gibson), 219 B.R. 195, 199 (Bankr. 6th Cir.

1998).

“The determinative issue is generally whether or not

the parties intended the assumption of the debts to be in lieu

of alimony or support payments or rather just a means of

dividing property upon divorce.” Rooker v. Cooley (In re

Rooker), Ch. 7 Case No. 85-30375, Adv. No. 86-3001 (Bankr.

M.D. Ga. July 7, 1986). See also Frey v. Frey (In re Frey),

212 B.R. 728, 736 (Bankr. N.D.N.Y. 1996) (assumption of credit

card debt was a dischargeable property settlement); Smith v.

Edwards (In re Smith), 207 B.R. 289, 291-92 (Bankr. M.D. Fla.

1997) (assumption of credit card debt was not in the nature of

support); Rooker v. Rooker (In re Rooker), 116 B.R. 415, 417

(Bankr. M.D. Pa. 1990) (obligation in a divorce decree that

divides the marital debt is dischargeable).

Turning to the case at bar, the issue before the

Court is whether Defendant’s obligation is, under federal

bankruptcy law, actually in the nature of alimony,

maintenance, or support. The obligation at issue is contained

in Item 11-Debts of the Settlement Agreement. The obligation

requires, in relevant part, that Defendant pay the joint

8

marital obligations owed to Household Finance Corporation,

MBNA VISA, and NationsBank VISA.

The evidence presented shows that, at the time of

their divorce, Plaintiff’s gross monthly income was $3,806 and

that Defendant’s was $5,083. Plaintiff received custody of

their two minor children. Defendant was to pay monthly child

support of $1,200. After payment of the child support,

Plaintiff’s and Defendant’s incomes were nearly equal.

Plaintiff received possession of the marital

residence and was responsible for the mortgage, taxes,

insurance, and maintenance. Plaintiff and Defendant received

their respective vehicles, bank accounts, and personal

property.

Plaintiff and Defendant never discussed an award of

alimony. Defendant was unable to meet his financial

obligations at the time of the divorce. The Court is

persuaded that Defendant was not financially able to pay

alimony.

Plaintiff and Defendant, under the terms of the

Settlement Agreement, each were responsible for certain credit

card obligations. The Court is persuaded that Plaintiff and

Defendant simply were dividing the marital obligations rather

than providing alimony or support. Since the obligation at

issue is not in the nature of support, it is dischargeable in

bankruptcy.

9

An order in accordance with this memorandum opinion

will be entered this date.

DATED the 30th day of March 2000.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

JENNIFER L. FOWLER

April 1, 2004

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

JENNIFER L. FOWLER, :

:

Debtor : Case No. 03-54812 RFH

:

RETAILERS NATIONAL BANK, :

:

Plaintiff :

:

vs. :

:

JENNIFER L. FOWLER, :

:

Defendant : Adversary Proceeding

: No. 04-5009

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: Mr. Rob Rickman

271 Roswell Street

Marietta, Georgia 30060

For Defendant: Mr. John K. James

1109 Russell Parkway, Suite #2

Warner Robins, Georgia 31088

1 11. U.S.C.A. § 341(a) (West 1993).

2

MEMORANDUM OPINION

Jennifer L. Fowler, Defendant, filed on February 3, 2004, a Motion for Summary

Judgment. Retailers National Bank, Plaintiff, filed a response on March 9, 2004. The

Court, having considered the record and the arguments presented by counsel, now

publishes this memorandum opinion.

Defendant filed a voluntary petition under Chapter 7 of the Bankruptcy Code on

October 15, 2003. The first meeting of creditors under § 341(a) of the Bankruptcy

Code,1 was scheduled for and held on November 19, 2003. On January 20, 2004,

Plaintiff filed a complaint objecting to the dischargeability of certain obligations. The

Court issued a summons on January 23, 2004. The summons and complaint were served

on Defendant and her attorney on January 27, 2004. Defendant filed on February 3,

2004, an answer, a Motion for Summary Judgment, and a Statement of Uncontested

Facts. Plaintiff filed a response to Defendant’s motion on March 9, 2004.

Plaintiff’s complaint contends that Defendant’s obligations are nondischargeable

pursuant to § 523(a)(2) of the Bankruptcy Code. In her Motion for Summary Judgment,

Defendant contends that Plaintiff’s complaint was not timely filed and should be

dismissed. In her Statement of Uncontested Facts, Defendant contends that the final

2 The Court notes that the summons in this adversary proceeding was issued on

January 23, 2004.

3 11 U.S.C.A. § 523(c) (West 1993 & Supp. 2003).

4 FED. R. BANKR. P. 4007(c).

(c) Time for filing complaint under § 523(c) in a chapter 7

liquidation, chapter 11 reorganization, or chapter 12 family

farmer’s debt adjustment case; notice of time fixed A complaint to

determine the dischargeability of a debt under § 523(c) shall be filed no

later than 60 days after the first date set for the meeting of creditors

under § 341(a). The court shall give all creditors no less than 30 days’

notice of the time so fixed in the manner provided in Rule 2002. On

motion of a party in interest, after hearing on notice, the court may for

cause extend the time fixed under this subdivision. The motion shall be

filed before the time has expired.

3

date to file a complaint under § 523(a)(2) was January 20, 2004. Defendant contends

that Plaintiff filed its complaint on January 23, 2004.2

Section 523(c) of the Bankruptcy Code3 provides in part that the debtor shall be

discharged from a debt of the kind specified in § 523(a)(2) unless the court determines

that the debt is nondischargeable under § 523(a)(2).

Rule 4007(c) of the Federal Rules of Bankruptcy Procedure (hereinafter

“Bankruptcy Rules”) provides in part that a complaint filed under § 523(c) in a Chapter

7 case shall be filed no later than sixty days after the first date set for the meeting of

creditors under § 341(a).4 In computing the sixty-day time period, Bankruptcy Rule

9006(a) provides in part: (1) the day which the designated period of time begins to run

(i.e., the first date set for the meeting of creditors) shall not be included; (2) the last

day of the period shall be included unless it is a Saturday, a Sunday, a or legal holiday;

5 FED R. BANKR. P. 9006(a).

(a) Computation In computing any period of time prescribed or allowed

by these rules . . . the day of the act, event, or default from which the

designated period of time begins to run shall not be included. The last

day of the period so computed shall be included, unless it is a Saturday, a

Sunday, or a legal holiday . . . As used in this rule and in Rule 5001(c),

“legal holiday” includes . . . [the] Birthday of Martin Luther King, Jr. . . .

4

and (3) the Birthday of Martin Luther King, Jr., is a legal holiday.5

In the case at bar, the first meeting of creditors was scheduled for and held on

November 19, 2003. Applying Bankruptcy Rule 9006(a), the sixty-day time period for

filing a complaint under § 523(a)(2) began to run on November 20, 2003. The sixtieth

and final day for Plaintiff to file a complaint was Sunday, January 18, 2004. Bankruptcy

Rule 9006(a) provides that if the final day of the designated period falls on a Saturday,

Sunday, or legal holiday, that day shall not be included in the computation. January 18,

2004 was a Sunday. The following day, Monday, January 19, 2004, was a legal holiday,

the Birthday of Martin Luther King, Jr. Thus, the final date for Plaintiff to file a timely

complaint under § 523(a)(2) was Tuesday, January 20, 2004.

The official date stamp located in the top right corner of Plaintiff’s complaint

shows that the complaint was filed with the Court on January 20, 2004. Therefore,

Plaintiff’s complaint was timely filed within the time period provided by Bankruptcy

Rule 4007(c). The Court is persuaded that Defendant’s Motion for Summary Judgment

must be denied.

An order in accordance with this memorandum opinion shall be entered this date.

5

DATED this 1st day of April, 2004.

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

MORGAN PHILLIP DRIGGERS, JR and BARBARA ANN DRIGGERS

August 31, 2004

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 7

:

MORGAN PHILLIP DRIGGERS, JR., :

and BARBARA ANN DRIGGERS, :

:

Debtors : Case No. 04-30321 RFH

:

:

COMMERCE DRYWALL, INC., :

:

Plaintiff :

:

vs. :

:

MORGAN PHILLIP DRIGGERS, JR., :

aka LOGANVILLE DRYWALL, INC. :

and BARBARA ANN DRIGGERS fka :

BARBARA M. LOVELACE, :

:

Defendants : Adversary Proceeding

: No. 04-3024

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

APPEARANCE:

Defendants: James R. Argo, Jr.

260 Constitution Blvd.

Lawrenceville, Georgia 30045

MEMORANDUM OPINION

1 The Court sent a letter dated July 29, 2004, advising Plaintiff that its response

should be received within twenty days.

2

Morgan Phillip Driggers, Jr., aka Loganville Drywall, Inc., and Barbara Ann

Driggers, fka Barbara M. Loveless, Defendants, filed a Motion to Dismiss on July 26,

2004. Commerce Drywall, Inc., Plaintiff, did not file a response.1 The Court, having

considered the Motion to Dismiss and the record, now publishes this memorandum

opinion.

On May 5, 2004, Penni Ganyard filed on Plaintiff’s behalf this adversary

proceeding. Plaintiff is a corporation. Ms. Ganyard is not a licensed attorney. The

Chief Deputy Clerk of this Court sent a letter dated May 11, 2004, advising Ms.

Ganyard that a corporation must be represented by an attorney in federal court.

Defendants filed on June 4, 2004, a response to Plaintiff’s complaint.

A pretrial conference was held on July 22, 2004. No one made an appearance on

behalf of Plaintiff. Defendants, in their Motion to Dismiss, urge the Court to dismiss

this adversary proceeding because Plaintiff’s complaint was not filed by an attorney.

“The capacity of a corporation to sue or be sued shall be determined by the law

under which it was organized. “ Fed. R. Civ. P. 17(b). See Fed. R. Bankr. P. 7017 (Rule

17 applies in adversary proceedings.)

“In [Georgia], only a licensed attorney is authorized to represent a corporation in

a proceeding in a court of record, including any proceeding that may be transferred to a

2 A United States Bankruptcy Court is a court of record.

3

court of record from a court not of record.” Eckles v. Atlanta Technology Group, Inc.,

267 Ga. 801, 485 S.E. 2d 22, 26 (1997).2

The Georgia Court of Appeals has held that an answer to a complaint filed by a

non-attorney on behalf of an individual defendant does not constitute an answer to the

complaint or an appearance by the defendant. Mine Chen v. Alexander Terry Assoc.

Inc., 228 Ga. App. 345, 491 S.E. 2d 834, 835 (1997).

“[A] corporation may appear in the federal courts only through licensed

counsel.” Rowland vs. California Men’s Colony, 506 U.S. 194, 202, 113 S. Ct. 716,

721, 121 L. Ed. 2d 656 (1993).

See United States v. High Country Broadcasting Co., 3 F. 3d 1244, 1245 (9th

Cir. 1983), cert. denied 513 U.S. 826, 115 S. Ct. 93, 103 L. Ed 2d 44 (1984))

(perfectly appropriate to enter default judgment when corporation fails to obey court

order to retain counsel); K.M.A., Inc. vs. General Motors Acceptance Corp., (In re

K.M.A., Inc.) 652 F. 2d 398 (5th Cir. Unit B, 1981) (corporation’s notice of appeal

would be dismissed unless attorney files an appearance on behalf of corporation within

thirty days).

Turning to the case at bar, Plaintiff’s complaint was not filed by a licensed

attorney. Plaintiff did not appear at the pretrial conference. Plaintiff did not respond to

Defendants’ Motion to Dismiss. The Court is persuaded that Defendants’ motion

4

should be granted.

An order in accordance with this memorandum opinion shall be entered this date.

DATED this 31st day of August, 2004.

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

ROBIN JONES DANIEL

February 26, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

ROBIN JONES DANIEL, ::

Debtor : Case No. 01-54502 RFH

::

KEVIN HESTER, ::

Plaintiff :::

vs. :::

ROBIN JONES DANIEL, ::

Adversary Proceeding

Defendant : No. 02-5013

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: Kirby R. Moore, LLC

201 Second Street, Suite 640

Macon, Georgia 31201

For Defendant: Jason M. Orenstein

Post Office Box 4086

Macon, Georgia 31208-4086

2

MEMORANDUM OPINION

Kevin Hester, Plaintiff, filed on January 14, 2002, an Objection to the

Dischargeability of Debt Pursuant to 11 U.S.C. § 523. Robin Jones Daniel,

Defendant, filed a response and a counterclaim on February 7, 2002. Plaintiff filed a

response to the counterclaim on February 19, 2002. This adversary proceeding came

on for trial on October 29, 2002. The Court, having considered the evidence

presented and the arguments of counsel, now publishes this memorandum opinion.

FINDINGS OF FACT

Defendant is a high school graduate who attended college for one year.

Defendant is twenty-eight years old. Defendant has been married three times.

Defendant’s first husband, John Herring, is the father of Defendant’s

only child. Defendant was given custody of her son who is now eight years old.

Defendant and Mr. Herring were divorced in August of 1995. Mr. Herring was

ordered to pay monthly child support of $290. Mr. Herring increased his monthly

payments to $500 in June of 2002. Defendant testified that Mr. Herring knew that

Defendant was having a hard time and wanted to provide for his son. Defendant

testified that because of the payment increase, she agreed for Mr. Herring to claim

their son as a dependent on his tax returns every other year. Mr. Herring has

1 See Dept. of Human Resources v. Mitchell, 232 Ga. App. 215, 501 S.E.2d

508, 509 (1988), cert. denied, (“right of a child to support belongs to the child and

cannot be waived by a parent”); Stewart v. Stewart, 160 Ga. App. 463, 287 S.E.2d

378, 379 (1981) (“child support is the right of the child and not of its custodian”).

3

married and has a one-year-old son. Defendant believes that Mr. Herring’s annual

income is between $45,000 and $50,000. Defendant testified that she has not sought

a court order increasing the child support because Mr. Herring is supportive and

Defendant “does not want to rock the boat.” Defendant testified that she talked with

an attorney in August of 2001 about seeking an increase in child support and was told

it was not worth her time. Defendant acknowledges that the right to child support

belongs to the child rather than to the custodial parent.1

Plaintiff is Defendant’s second husband. Defendant was employed at

some six different jobs during the marriage. Defendant’s annual income during the

marriage was between $18,000 and $25,000. Plaintiff and Defendant were married

on March 21, 1998. Plaintiff and Defendant separated on November 17, 2000.

Their divorce decree was entered on February 6, 2001. The divorce decree adopted

by reference a settlement agreement, which had been signed by Plaintiff and

Defendant. Plaintiff’s attorney prepared the agreement. Defendant was not

represented by counsel. The agreement provides that Plaintiff would receive the

marital residence and would be solely responsible for the mortgage. Defendant

received certain marital furniture, which had been purchased from Rooms To Go.

The agreement provides, in part, as follows:

2 Defendant testified that she made four or five payments.

4

4.

With respect to the debts of the parties, the Defendant

agrees to pay to the Plaintiff the sum of $200.00 per

month for a period of 153 months, beginning January 1,

2001 and continuing on the first of each month for an

additional 152 months, or until earlier paid in full by the

Defendant, for [a] total principal indebtedness in the

amount of $17,303.24. Said indebtedness to bear interest

at the rate of 9.99% per annum. The indebtedness

covered by this paragraph represents one-half of the

parties credit card debt and the indebtedness currently

owed for a furniture payment at Rooms To Go. It is the

intent of this paragraph that the Defendant be required to

assume and pay said indebtedness to the Plaintiff and the

Plaintiff shall be responsible for the payment of the

indebtedness to the appropriate creditors. The debts

included under this paragraph are not joint debts and the

Plaintiff is the sole obligor with respect to the creditors.

The Defendant expressly waives her right to discharge the

debt to the Plaintiff as set forth herein under any of the

United States Bankruptcy laws and the Defendant

expressly agrees to not list or include the indebtedness to

the Plaintiff as set forth herein on any Chapter 7 or

Chapter 13 Bankruptcy that she may file, it being the

express intent of the parties that said indebtedness not be

dischargeable under the Bankruptcy laws of the United

States.

Thus, Defendant agreed to assume one-half of the credit card debt and

the obligation owed to Rooms To Go. Defendant agreed to make 153 monthly

payments of $200 to Plaintiff who would, in turn, pay the creditors. Plaintiff testified

that Defendant made only three payments totaling $1,500.2 Defendant has sold the

Rooms To Go furniture. Defendant did not pay any of the proceeds to Plaintiff.

5

Defendant’s third marriage was to Gene Daniel. The marriage lasted

six months. Defendant filed for divorce in October of 2001 and the divorce was final

in August of 2002. Defendant received nothing from the divorce. Defendant and Mr.

Daniel assumed their respective obligations.

Defendant met William David Hicks about one year ago. They became

romantically involved in May of 2002. Defendant and Mr. Hicks have discussed “a

future together.” Defendant, however, told Mr. Hicks that she was not ready for

marriage, and their marital plans are on hold. Defendant lost her job and moved into

Mr. Hicks’ residence in August of 2002. Mr. Hicks, his twenty-one-year-old son,

Defendant, and Defendant’s eight-year-old son live in the residence.

Mr. Hicks is a warehouse manager. His annual gross income is

$45,000, and his weekly net pay is $674.

Defendant “signs over” to Mr. Hicks the $500 child support check that

Defendant receives from her first husband, Mr. Herring. Mr. Hicks pays

Defendant’s car loan of $250. Mr. Hicks uses the remaining $250 to pay household

expenses. Defendant’s car will be paid off in July 2003. Defendant’s car is a 1994

Honda Civic with 135,000 miles. Defendant pays her car insurance, which is $110

per month.

Defendant has been employed at some ten different jobs during the past

ten years. Her longest employment was two years with an office supply company.

She also has worked for a bank, an insurance company, and as a make-up

6

consultant. Defendant testified that her gross annual income has been as follows:

$20,000 in 1999; $23,000 in 2000; and $16,000 in 2001. Defendant, during those

years, received annual child support of $3,480. Defendant has no health insurance.

Defendant describes her health as “fair.” Defendant has had a large number of NSF

and overdraft checks. At one time, she was paying monthly NSF charges of $109.

Defendant’s current income is $500 in monthly child support and $120

per week as a part-time make-up consultant.

Defendant testified that she has worked “off and on” as a make-up

consultant for about ten years. Defendant does not have a cosmetologist license and,

thus, must work for a cosmetic company. Defendant testified that she will start

cosmetology school next week. She will attend school full time for at least a year.

She will pay for her education, which will cost $8,000, by obtaining a Pell grant and

student loans. Defendant will have to repay the student loans, which will total some

$4,000. Defendant testified that she can earn “a lot more” as a licensed

cosmetologist.

Plaintiff is twenty-nine years old and has worked for an insurance

company for six and one-half years. Plaintiff has a college degree. Plaintiff testified

that his current monthly net pay is $2,003.64 and that his monthly expenses total

$2,111. Plaintiff testified that he is trying to sell the former marital residence for

$58,000, but would probably accept an offer for the mortgage, which is some

$48,000. Plaintiff testified that the market for the residence is not good. If Plaintiff

3 Plaintiff’s monthly expenses for the residence are: mortgage – $435; pest

control – $21; water – $20.

4 11 U.S.C.A. § 523(a)(15) (West Supp. 2002). Plaintiff’s counsel announced

at trial that Plaintiff was not pursuing his contention that Defendant’s obligations were

nondischargeable under section 523(a)(5).

7

sells the residence, his monthly expenses would decrease by $476.3

Plaintiff has lived with his parents since he and Defendant were

divorced. Plaintiff testified that he cannot afford to move out. Plaintiff testified that a

personal bankruptcy filing may adversely impact upon his job.

Defendant filed a petition under Chapter 7 of the Bankruptcy Code on

October 9, 2001. Defendant’s current obligations to Plaintiff under paragraph 4 of

the settlement agreement total $18,900, plus 9.99 percent interest.

CONCLUSIONS OF LAW

Plaintiff contends that Defendant’s obligations under paragraph 4 of the

settlement agreement are nondischargeable under section 523(a)(15) of the

Bankruptcy Code.4 Defendant, in her counterclaim, contends that the obligations are

dischargeable. The obligations at issue require Defendant to pay Plaintiff $200 per

month for 153 months, plus 9.99 percent interest.

Section 523(a)(15) provides:

§ 523. Exceptions to discharge

5 Ch. 7 Case No. 99-52131 RFH, Adv. No. 99-5114, 2000 WL 33740254

(Bankr. M.D. Ga. June 1, 2000).

8

(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—

. . . .

(15) not of the kind described in paragraph (5)

that is incurred by the debtor in the course of a

divorce or separation or in connection with a

separation agreement, divorce decree or other

order of a court of record, a determination made in

accordance with State or territorial law by a

governmental 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;

11 U.S.C.A. § 523(a)(15) (West Supp. 2002).

In Whitehead v. Whitehead (In re Whitehead),5 this Court stated, in

part:

Simply stated, section 523(a)(15) provides that certain

otherwise dischargeable debts incurred in the course of a

9

divorce or separation are nondischargeable unless the

debtor does not have the ability to pay the debts or unless

discharging the debts would result in a benefit to the

debtor that outweighs the detrimental consequences to the

spouse, former spouse, or child of the debtor.

Most courts hold that a former spouse must prove that

the debts were incurred in connection with a divorce or

separation. The burden then shifts to the debtor to prove

that the debtor does not have the ability to pay the debts

or that discharging the debts would result in a benefit to

the debtor that outweighs the detrimental consequences to

the former spouse.

Most courts hold that the financial circumstances of a

debtor’s new spouse or live-in companion should be

considered.

The fact that a live-in companion may not have a legal

duty to continue to provide support to the debtor’s

household is a factor to be considered. In re Halpen, 213

B.R. at 285; see also In re Crosswhite, 148 F.3d at 890

(dissent) (“girlfriend could be gone on a moment’s notice

with no purse strings attached”).

In In re Konick, the Bankruptcy Appellate Panel for the

First Circuit stated:

A view of the case law shows that courts

uniformly take into account the debtor’s current

financial condition, i.e., at the time of trial, when

determining whether a claim should be discharged

under § 523(a)(15). See, e.g., Jodoin v. Samayoa

(In re Jodoin), 209 B.R. 132, 142 (9th Cir. BAP

1997); In re Brasslett, 233 B.R. at 183; In re

Dressler, 194 B.R. at 300-01; Gantz v. Gantz (In

re Gantz), 192 B.R. 932, 934-35 (Bankr. N.D. Ill.

1996); In re Hesson, 190 B.R. at 238. In addition,

courts may consider the debtor’s future earning

capabilities and long-term financial prospects,

particularly where the claim is to be paid

10

incrementally over a period of time. See, e.g.,

Wolfe v. McCartin (In re McCartin), 204 B.R.

647, 654 (Bankr. D. Mass. 1996)[;] Johnston v.

Henson (In re Henson), 197 B.R. 299, 303-04

(Bankr. E.D. Ark. 1996); In re Straub, 192 B.R. at

528. “‘A court may look to a debtor’s prior

employment, future employment opportunities,

and health status to determine the future earning

potential of the Debtor.’” In re Brasslett, 233 B.R.

at 184 (quoting Hart v. Molino (In re Molino), 225

B.R. 904, 908 (6th Cir. BAP 1998)).

236 B.R. at 529.

See also Findley v. Findley (In re Findley), 245 B.R.

526, 532 (Bankr. N.D. Ohio 2000) (“each party’s

projected income should be measured by his or her

realistic earning potential, not by lifestyle or other choices

which restrict income”); Migneault v. Migneault, 243

B.R. 585, 589 (D.N.H. 1999) (debtor’s earning capacity

should be considered in evaluating ability to pay); In re

Smither, 194 B.R. at 107-08 (court should consider

present income and future earning potential); In re

Huddelston, 194 B.R. at 687-88 (prospect for change

must be considered); Straub v. Straub (In re Straub), 192

B.R. 522, 528-29 (Bankr. D.N.D. 1996) (future ability to

pay debt should be considered); see generally In re

Crosswhite, 148 F.3d at 889 (court should consider

totality of circumstances when balancing the equities

under section 523(a)(15)(B)); In re Gamble, 143 F.3d at

226 (totality of circumstances applies under section

523(a)(15)(B)).

The Court is not persuaded that Defendant has the ability to pay the

obligations at issue. Defendant’s current monthly income, including child support, is

$980. Defendant’s expenses include a car payment ($250) and car insurance ($120).

Defendant and her son depend upon a friend, Mr. Hicks, for a place to live.

11

Mr. Hicks does not have a legal duty to continue to help Defendant and her son. The

Court notes that Defendant is twenty-eight years old and has been married three

times. Defendant has been employed at ten different jobs during the past ten years.

Thus, Defendant has not had a stable, long-term employment history. It is true that

Defendant plans to attend cosmetology school full time for the next year. This has

the potential to substantially increase her income. Still, Defendant must complete

cosmetology school, which is not a certainty. If she completes the school, she will

have a student loan to repay. Defendant has an eight-year-old son who she must

raise. Plaintiff has worked hard to satisfy his marital obligations under the separation

agreement. The Court notes that Plaintiff’s monthly expenses will decrease by $476

when he sells the former marital residence. When the Court considers Defendant’s

employment history, her income, and her family responsibilities, the Court is not

persuaded that she has the ability to repay the obligations owed Plaintiff.

Plaintiff argues that Defendant could, and in fact should, seek a court

order increasing the child support for Defendant’s son. The right to child support,

however, belongs to the child rather than to the custodial parent.

Plaintiff also argues that in the settlement agreement, Defendant

expressly waived her right to discharge in bankruptcy the obligations at issue. The

agreement provides that Defendant expressly agreed not to list her obligations to

Plaintiff on any bankruptcy petition, it being the express intent of Plaintiff and

Defendant that the obligations not be dischargeable in bankruptcy. The agreement

6 80 B.R. 581 (Bankr. M.D. Ga. 1987).

12

also provides that Defendant expressly waived her right to discharge her obligations

to Plaintiff.

The Federal Rules of Bankruptcy Procedure provide that a debtor shall

file with the petition a verified list containing the names and addresses of each

creditor unless the petition is accompanied by a schedule of liabilities. Fed. R. Bankr.

P. 1007(a)(1), 1008. Thus, federal bankruptcy law required that Defendant list her

obligations to Plaintiff. Defendant’s agreement not to list her obligations to Plaintiff

was contrary to the commands of federal bankruptcy law. The Court is persuaded

that Defendant’s agreement not to list her obligations is not enforceable.

“The courts have uniformly held that a waiver of the right to file a

bankruptcy case is unenforceable. Further, courts have not permitted pre-petition

waivers of protection afforded by a bankruptcy case to be self-executing.” In re

Shady Grove Tech Center Associates Limited Partnership, 216 B.R. 386, 389 (Bankr.

D. Md. 1998), opinion supplemented, 227 B.R. 422 (Bankr. M.D. Md. 1998).

In Doug Howle’s Paces Ferry Dodge, Inc. v. Ethridge (In re Ethridge),6

the plaintiff filed a civil action against the defendant. This Court stated, in part:

The civil action was settled by a consent judgment

entered on October 25, 1984. In the judgment,

Defendant agreed to pay Plaintiff $98,601.44 principal,

$3480 interest, and $6900 attorney’s fees. Defendant

further agreed that the consent judgment would be

considered an agreement under section 524(c) of the

13

Bankruptcy Code, that he would not seek to discharge the

judgment under any provision of the Bankruptcy Code,

and that the judgment would not be dischargeable in

bankruptcy. Defendant testified that he was aware of the

contents of the consent judgment and that he was

represented by counsel when he signed the consent

judgment.

. . . .

CONCLUSIONS OF LAW

Plaintiff has conceded that this Court has exclusive

jurisdiction regarding the dischargeability of a debt and,

therefore, is not bound by the section of the judgment

which states that the debt is nondischargeable in

bankruptcy. Plaintiff contends, however, that a legally

binding contract was created when Defendant agreed to

forego his legal right to attempt to discharge the debt.

Plaintiff requests that the Court enforce this contract.

The Court will first examine the validity of this waiver

agreement.

A contractual waiver of the dischargeability of a

particular debt should be governed by the requirements of

section 524(c) and (d) which control the validity of

reaffirmation agreements. . . .

. . . [The requirements of section 524 are] clearly not

met by the consent judgment, therefore the judgment is

unenforceable as a reaffirmation agreement.

The Court has determined that section 524 does not

prevent the discharge of Plaintiff’s claim. Plaintiff,

however, contends that a party may agree to forego a

legal right, that such an agreement creates a binding

contract, and that this Court should enforce the contract.

If the Court were to adopt Plaintiff’s analysis, then

creditors would essentially have the power to nullify the

fresh start provided by the Bankruptcy Code. One of the

central purposes of the Bankruptcy Code is to give

14

debtors “‘. . . new opportunity in life and clear field for

future effort, unhampered by pressure and

discouragement of pre-existing debt. . . .’” Plaintiff’s

argument is contrary to the spirit of the Bankruptcy Code.

The Court concludes, therefore, that the provisions of the

consent judgment which pertain to the waiver of

Defendant’s right to a discharge are void. . . .

. . . .

In In re Halpern, the Eleventh Circuit Court of Appeals

affirmed the ruling of the district court and the

bankruptcy court when it concluded that the bankruptcy

court had properly utilized issue preclusion to reach

conclusions regarding the facts underlying a

determination of the dischargeability of a debt evidenced

by a state court consent judgment. The consent judgment

in In re Halpern stated that the consent judgment would

constitute a final adjudication of the findings of fact. The

consent judgment also stated that the judgment would

collaterally estop the debtor from denying any of the

factual or legal issues established in the judgment and that

the debtor received consideration for agreeing to allow

the judgment to act as a final adjudication. 810 F.2d at

1064-65. The Eleventh Circuit held that issue preclusion

was proper since the consent judgment contained very

detailed factual findings and there was no evidence that

the debtor had signed the consent judgment under duress

or coercion. Id. at 1065. The Court of Appeals noted,

however, that the consent judgment only had a preclusive

effect regarding the findings of fact and that the

bankruptcy court must make an independent decision

concerning the dischargeability of the debt. Id. at 1063-

64.

The consent judgment presently before the Court does

not contain any findings of fact, nor does the consent

judgment provide that it is to have any collateral estoppel

effect. The present adversary proceeding is, therefore,

distinguishable from In re Halpern. Thus, the Court must

make independent findings regarding the factual basis

7 226 B.R. 647 (B.A.P. 9th Cir. 1998).

15

underlying the initial incurring of the debt evidenced by

the consent judgment.

80 B.R. at 585-87.

In Hayhoe v. Cole (In re Cole)7 Hayhoe (“Appellant”) filed a complaint

in state court for nonpayment on a promissory note. Appellant and Cole

(“Appellee”) later agreed to a Stipulated Judgment which provided that Appellant

have a judgment for $298,000. The Bankruptcy Appellate Panel for the Ninth Circuit

stated, in part:

The Stipulated Judgment also provided that: (1)

Appellant agreed not to list the Debt in any bankruptcy

petition or request that the Debt be discharged; . . .

226 B.R. at 650.

The bankruptcy court held that the Stipulated Judgment

was “nothing but an attempt to waive the bankruptcy

discharge prospectively, and [was] therefore . . .

[un]enforceable.” No appellate court has expressly ruled

on the validity of prepetition waivers of the bankruptcy

discharge. . . . In a footnote, the court stated in dictum

that, “[f]or public policy reasons, a debtor may not

contract away the right to a discharge in bankruptcy.

However, a debtor may stipulate to the underlying facts

that the bankruptcy court must examine to determine

whether a debt is dischargeable.” Because the stipulated

facts in the judgment established all of the elements of the

§ 523(a)(4) cause of action, the court held that collateral

estoppel applied. The court did not rely on the purported

waiver of discharge for its affirmance.

226 B.R. at 651.

16

Appellant has not cited a single case that recognizes the

validity of prepetition waivers of discharge resulting from

state court litigation. We have only found three cases

where courts have held that waivers of discharge in

bankruptcy proceedings did not have to comply with the

reaffirmation requirements of § 524.

However, these cases are distinguishable from the

situation here. In all three cases, the settlement occurred

in nondischargeability litigation in the bankruptcy court

and not litigation in state court. . . . Consequently, a state

court stipulated judgment where the debtor waives his

right to discharge is unenforceable as against public

policy. However, a stipulation in a related bankruptcy

case that a debt is nondischargeable is enforceable and

res judicata.

226 B.R. at 652-53.

For the foregoing reasons, we conclude that a

prepetition waiver of the dischargeability of a debt

undermines the purpose of the Code to give an honest but

unfortunate debtor a fresh start. The bankruptcy court

correctly held that the prospective waiver of the

dischargeability of the Debt was unenforceable.

226 B.R. at 654.

We have already concluded that the portion of the

Stipulated Judgment that purported to waive Appellee’s

right to obtain a discharge of the Debt was unenforceable

as against public policy. However, if the parties stipulated

to the underlying facts that support a finding of

nondischargeability, the Stipulated Judgment would then

be entitled to collateral estoppel application.

226 B.R. at 655.

Turning to the case at bar, the settlement agreement contains no

findings of fact that would make Defendant’s obligation nondischargeable under

8 See 11 U.S.C.A. § 523(c)(1) (West 1993).

9 31 F.3d at 1050 (10th Cir. 1994).

17

section 523(a)(15). The Court notes that under section 523(a)(15), the court

considers the financial conditions of the parties at the time of the dischargeability

hearing rather than at the time of the state court divorce. The Court also notes that

Defendant was not represented by counsel when she was divorced from Plaintiff.

The Court further notes that a bankruptcy court has exclusive jurisdiction to

determine the dischargeability of an obligation under section 523(a)(15).8

Plaintiff relies upon Laing v. Johnson (In re Laing).9 In that case, the

debtor stipulated in his Chapter 11 plan that a certain obligation was not

dischargeable and waived discharge of the obligation in any future bankruptcy. The

Chapter 11 plan was confirmed. The bankruptcy court entered an order declaring

that the obligation was nondischargeable. The Chapter 11 case was converted to a

Chapter 7 case.

The debtor later filed a separate Chapter 7 petition. The bankruptcy

court held that the obligation was nondischargeable because the confirmed Chapter

11 plan precluded relitigation of the obligation’s dischargeability. The district court

affirmed. The Tenth Circuit Court of Appeals also affirmed and stated:

Laing’s earlier confirmed Chapter 11 plan binds him as

a final judgment on the merits. . . .

Since the same parties are involved here, Laing may not

argue in this case that his debt is dischargeable if the issue

18

“[was] or could have been raised in the prior action.”

Laing did not actually argue and present evidence

regarding the dischargeability of his debt in the earlier

Chapter 11 confirmation hearing. The parties merely

agreed that the debt was nondischargeable, and the court

so ordered. Nevertheless, Laing could have objected and

avoided the binding effect of that declaration. . . .

Not only could Laing have raised the issue, but the

parties actually did. The final judgment expressly

declared the debt nondischargeable. Although by

agreement rather than litigation, that order has “the same

effect as a district court’s judgment on the merits.” The

plan’s stipulation, along with the order declaring the debt

nondischargeable, binds Laing “[r]egardless of whether

that provision is inconsistent with the bankruptcy laws”

because “it is nonetheless included in the Plan, which was

confirmed by the bankruptcy court without objection and

was not appealed.”

31 F.3d at 1051-52.

Plaintiff argues that under Laing, parties can agree that an obligation

will be nondischargeable in bankruptcy. The Court notes, however, that the

agreement in Laing was part of a confirmed Chapter 11 plan and that the bankruptcy

court had entered an order declaring the obligation to be nondischargeable. In the

case at bar, the issue of whether Defendant’s obligations to Plaintiff are dischargeable

was never ruled upon in a prior bankruptcy case. The Court is not persuaded that the

waiver of discharge in the settlement agreement is dispositive of Defendant’s

obligations under section 523(a)(15).

An order in accordance with this memorandum opinion will be entered

19

this date.

DATED the 26th day of February, 2003.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

DENNIS J. COOPER and WENDALYN R. COOPER

February 14, 2002

1 The pleadings have not been amended to reflect the correct spelling and

name of this defendant, which is Educational Credit Management Corporation.

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

DENNIS J. COOPER and :

WENDALYN R. COOPER, ::

Debtors : Case No. 98-54012 RFH

________________________________ ::

WENDALYN R. COOPER, ::

Plaintiff ::

vs. ::

EDCATIONAL CREDIT,1 :

: Adversary Proceeding

Defendant : No. 01-5044

________________________________ ::

WENDALYN R. COOPER, :: Plaintiff ::

vs. ::

U.S. DEPARTMENT OF :

EDUCATION, ::

Adversary Proceeding

Defendant : No. 01-5055

2

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Wendalyn R. Cooper: FRANKLIN D. HAYES

Post Office Box 2377

Douglas, Georgia 31533

For Educational Credit THOMAS W. JOYCE

Management Corporation: Post Office Box 6437

Macon, Georgia 31208-6437

For United States Department BERNARD SNELL

of Education: Post Office Box 1702

Macon, Georgia 31202

2 Mercer University is a private university located in Macon, Georgia.

3

MEMORANDUM OPINION

Wendalyn R. Cooper, Plaintiff, filed on April 5, 2001, a complaint to

determine the dischargeability of debt. Educational Credit Management Corporation,

Defendant, filed a response on April 24, 2001.

Plaintiff filed on May 11, 2001, a second complaint to determine the

dischargeability of debt. The U.S. Department of Education, Defendant, filed a

response on June 18, 2001.

A joint trial on Plaintiff’s complaints was held on December 10, 2001.

The Court, having considered the evidence presented and the arguments of counsel,

now publishes this memorandum opinion.

FINDINGS OF FACT

Plaintiff attended Mercer University2 from September of 1991 until

May of 1995. Plaintiff received a bachelor’s degree in education. Plaintiff financed

her education by obtaining a number of student loans.

Plaintiff has been employed as a teacher in Georgia’s public schools

since she graduated from Mercer University. Plaintiff’s income from teaching has

3 The term of Plaintiff’s employment contracts began in July or August and

ended in May or June.

4 Plaintiff testified that her salary for the current school term is $36,000 to

$37,000. Plaintiff would receive about an additional $2,000 if she teaches during the

summer of 2002.

4

been as follows:

School System School Term3 Annual Salary

Coffee County 1995-96 $22,055

Coffee County 1996-97 24,056

Coffee County 1997-98 26,236

Coffee County 1998-99 28,612

Coffee County 1999-2000 30,921

Ben Hill County 2000-01 32,695

Camden County 2001-02 37,0004

Plaintiff taught summer school each year except during the summer of

2001. Plaintiff received additional income of some $2,000 to $2,500 each year for

teaching summer school.

Plaintiff testified that teachers receive “step” raises each year for the

first five years. Then teachers receive step raises every two years. After fifteen

years, teachers receive no further step raises. Plaintiff testified that she is in step

eight and will receive a step raise every two years until her fifteenth year of teaching.

Plaintiff testified that her salary will “max out” at about $40,000 after she has taught

for fifteen years. Plaintiff’s salary would increase if she obtains a master’s degree.

Plaintiff filed joint tax returns with her former husband, Dennis J.

Cooper. Plaintiff and Mr. Cooper reported their adjusted gross income on their

5 Plaintiff’s 1997 tax return is not in evidence.

5

federal income tax returns as follows:

Year Adjusted Gross Income

1996 $66,448

19975 ———-

1998 76,892

1999 75,749

Plaintiff requested and received a forbearance of her student loans from

January 21, 1997, until November 21, 1997. Plaintiff’s request for a further

forbearance was denied on March 31, 1998.

Plaintiff and Mr. Cooper filed a joint petition under Chapter 13 of the

Bankruptcy Code on September 18, 1998. The Court entered an order on May 3,

1999, confirming the Chapter 13 plan of Plaintiff and Mr. Cooper. The Chapter 13

case of Plaintiff and Mr. Cooper was converted to a Chapter 7 case on February 9,

2001. The Court entered an order on June 1, 2001, discharging Plaintiff and

Mr. Cooper from their dischargeable obligations.

Plaintiff and Mr. Cooper had marital problems and divorced. Plaintiff

testified that after the divorce, her three children lived with her in Fitzgerald,

Georgia. Mr. Cooper was obligated to pay child support of $333 per month for each

child.

6

Plaintiff’s children are now sixteen, seventeen, and nineteen years old.

Plaintiff testified that only the sixteen-year-old child currently lives with her.

Plaintiff currently receives child support of $333 per month.

Plaintiff’s seventeen-year-old child lives with his father, Mr. Cooper, in

Fitzgerald. Plaintiff’s nineteen-year-old child does not live with either Plaintiff or

Mr. Cooper.

Plaintiff married Rodney Cordell on September 8, 2001. Plaintiff and

her sixteen-year-old child moved to Mr. Cordell’s residence in Fernandina, Florida.

Plaintiff commutes about eighty miles per day to teach in Kingsland, Camden

County, Georgia.

Plaintiff testified that her car has high mileage (90,000 miles) and will

need to be replaced when it is “paid off” in May of 2003. Plaintiff’s car payments

are $350 per month. Plaintiff testified that her sixteen-year-old child may move to

his father’s residence in Fitzgerald in the summer of 2002. Plaintiff testified that she

will no longer receive child support if her child moves to Fitzgerald.

Plaintiff testified that teachers earn less in Florida than in Georgia.

Plaintiff testified that she would make about $31,000 if she taught school in Florida.

Plaintiff testified that her husband, Mr. Cordell, has serious health

problems. He suffers from diabetes, kidney failure, and liver disease and needs a

6 The record reflects that Plaintiff made some payments on her student loans

through her Chapter 13 plan.

7

liver transplant. Mr. Cordell will be unable to work for an indefinite period of time.

Plaintiff knew of Mr. Cordell’s health problems when they married.

Plaintiff testified that her current monthly income is $3,105 from

teaching and that she receives a monthly child support payment of $333. Plaintiff’s

net monthly income, including child support, is $2,473. Plaintiff’s monthly expenses

total $2,389.

Plaintiff’s student loans first became due less than seven years prior to

Plaintiff’s filing for bankruptcy relief. Plaintiff testified that she never made any

payments on her student loans.6 Plaintiff’s student loan obligations to Educational

Credit total $57,730.73. Plaintiff’s student loan obligations to the U.S. Department

of Education total $7,670.67.

Both Defendants offer a number of repayment plans. Educational

Credit offers payment plans with monthly payments ranging from $285.83 to

$668.51. The U.S. Department of Education offers payment plans with monthly

payments ranging from $46.50 to $88.72.

Plaintiff is forty years old and in good health. Plaintiff has a

hysterectomy operation scheduled for June of 2002.

CONCLUSIONS OF LAW

7 11 U.S.C.A. § 523(a)(8)(B) (West 1993). Section 523(a)(8) was amended

effective October 7, 1998, to eliminate the “seven year” exception to

nondischargeability. Plaintiff concedes that the seven-year exception is not

applicable in the case at bar.

8

Plaintiff contends that repayment of her student loans would be an

“undue hardship.” Plaintiff relies upon section 523(a)(8)(B) of the Bankruptcy

Code,7 which, when Plaintiff filed for bankruptcy relief, provided as follows:

§ 523. Exceptions to discharge

(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–

. . . .

(8) for an educational benefit overpayment or loan

made, insured or guaranteed by a governmental unit, or

made under any program funded in whole or in part by a

governmental unit or nonprofit institution, or for an

obligation to repay funds received as an educational

benefit, scholarship or stipend, unless—

. . . .

(B) excepting such debt from discharge under

this paragraph will impose an undue hardship on

the debtor and the debtor’s dependents;

11 U.S.C.A. § 523(a)(8) (West 1993) (amended effective Oct. 7, 1998).

9

Plaintiff has the burden of proving that repayment of her student loans

would be an undue hardship. Rifino v. United States of America (In re Rifino), 245

F.3d 1083, 1087-88 (9th Cir. 2001); Andersen v. UNIPAC-NEBHELP (In re

Andersen), 179 F.3d 1253, 1256 (10th Cir. 1999); United Student Aid Funds, Inc. v.

Paolini (In re Paolini), 124 F.3d 199 (table), 1997 WL 476515 (6th Cir. 1997);

Pennsylvania Higher Education Assistance Agency v. Faish (In re Faish), 72 F.3d

298, 301 (3rd Cir.), cert. denied, 518 U.S. 1009, 116 S. Ct. 2532, 135 L. Ed. 2d 1055

(1996); In re Roberson, 999 F.2d 1132, 1137 (7th Cir. 1993).

Collier on Bankruptcy states:

[2]— Discharge Based on Undue Hardship; § 523(a)(8).

. . . .

There has been a wide range of judicial reaction to the

undue hardship claims of debtors. The most widely used

test for evaluating the dischargeability of a student loan

under section 523(a)(8) states that the debt is

dischargeable if three conditions are met:

• the debtor cannot maintain, based on current

income and expenses, a “minimal” standard of

living if forced to repay the loans;

• there are indications that the state of affairs is

likely to persist for a significant portion of the

repayment period; and

• the debtor made good faith efforts to repay the

loans.

10

The good faith inquiry is guided by the understanding

that “undue hardship” encompasses a notion that the

debtor’s bad financial condition and default should not

have been caused by the debtor’s own willfulness or

negligence, but rather by factors beyond the debtor’s

control. Therefore, if the debtor has not made payments

on the loans because, through no fault of the debtor, he or

she has never had the ability to pay, the good faith effort

test is met.

Despite the courts’ best efforts to formulate objective

criteria for evaluating undue hardship, the application of

the articulated standards necessarily requires each court

to apply its own intuitive sense of what is a “minimal”

standard of living and what is “good faith.” At bottom,

the Bankruptcy Code requires bankruptcy courts to decide

how much personal sacrifice society expects from

individuals who accepted the benefits of guaranteed

student loans but who have not obtained the financial

rewards they had expected to receive as a result of their

educational expenditures.

4 Collier on Bankruptcy ¶ 523.14[2] (15th ed rev. 2001).

Turning to the case at bar, the evidence shows that Plaintiff’s current

budget is tight. Her net monthly income, including child support, is $2,473. Her

monthly expenses total $2,389. The minimum monthly payments to Educational

Credit ($285.83) and the U.S. Department of Education ($46.50) would total

$332.33. The Court is persuaded that it would be difficult for Plaintiff to make the

minimum payments.

The evidence shows, however, that Plaintiff’s state of affairs is likely to

improve during the repayment period. Plaintiff will continue to receive biannual step

raises until she has taught for fifteen years. Her car will be paid off in May of 2003.

11

Plaintiff’s sixteen-year-old child may move to his father’s residence in the summer of

2002. Although Plaintiff would no longer receive $333 of child support, the Court

notes that Plaintiff’s expenses may decrease by a greater amount.

The Court also is not persuaded that Plaintiff has satisfied the “good

faith inquiry.” The evidence shows that Plaintiff was thirty years old, married, and

had three children when she enrolled at Mercer University. The Court is persuaded

that Plaintiff was a mature adult when she incurred her student loans. Plaintiff knew,

or should have known, that she would incur substantial debt by attending a private

university. Plaintiff knew, or should have known, the salary for public school

teachers. Plaintiff knew about her current husband’s health problems when they

married in September of 2001. Simply stated, Plaintiff has not shown any

unexpected or unusual circumstances except for her divorce. Plaintiff is in good

health, and her salary has increased by $15,000 during the past six years. Plaintiff

will receive several more biannual step raises. Plaintiff’s family income, while

married to Mr. Cooper, was $66,448 in 1996 and $76,892 in 1998. Plaintiff,

however, never made any payments on her student loans.

Plaintiff has not carried her burden of proof to demonstrate that

repayment of her student loans would be an undue hardship on her and her

dependents.

An order in accordance with the memorandum opinion will be entered

this date.

12

DATED the 14th day of February, 2002.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

AMBER L. BARNETT

October 29, 2009

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

AMBER L. BARNETT, ::

Debtor : Case No. 04-55186 RFH

:

SUGAR HILL FARM, INC. AND :

KYLE SPENCER, INDIVIDUALLY, :

AND D/B/A SUGAR HILL FARM, :

:

Plaintiffs ::

v. ::

AMBER L. BARNETT, : Adversary Proceeding

: No. 09-5031

Defendant :

BEFORE

ROBERT F. HERSHNER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

Plaintiffs: Eugene S. Hatcher

Kim H. Stroup

Anderson, Walker and Reichert, LLP

P.O. Box 6497

Macon, GA 31208-6497

Defendant: Don E. Snow

P.O. Box 12

Thomaston, GA 30286

2

MEMORANDUM OPINION

Sugar Hill Farm, Inc. and Kyle Spencer, individually and d/b/a Sugar Hill

Farm, Plaintiffs, filed with the Court on June 23, 2009, a motion for summary

judgment. Amber L. Barnett, Defendant, filed a response on July 13, 2009. The

Court, having considered the record and the arguments of counsel, now publishes this

memorandum opinion.

“A motion for summary judgment should be granted when ‘the pleadings,

depositions, answers to interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any material fact and that

the moving party is entitled to judgment as a matter of law.’ Fed.R.Civ.P 56(c).

‘[T]he plain language of Rule 56(c) mandates the entry of summary judgement . . .

against a party who fails to make a showing sufficient to establish the existence of an

element essential to that party’s case, and on which that party will bear the burden of

proof at trial.’ Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.

2d 265 (1986); see also Morisky v. Broward County, 80 F.3d 445, 447 (11th

Cir.1996). On a summary judgement motion, the record and all reasonable inferences

that can be drawn from it must be viewed in the light most favorable to the nonmoving

party. See Cast Steel, 348 F.3d at 1301.” Midrash Sephardi, Inc. v. Town of

Surfside, 366 F.3d 1214, 1223 (11th Cir. 2004), cert denied 543 U.S. 1146, 125 S.Ct.

1295, 161 L. Ed. 2d 106 (2005).

1 In the record, this is sometimes referred to as criminal damage to property.

2 Transcript of Sentencing Hearing, (June 14, 2006), pp. 40-42. Adversary Pro. Doc.

No. 14-2.

3

Plaintiffs own a farm in Lamar County, Georgia. Several hundred deer

carcasses were dumped onto Plaintiffs’ farm.

Defendant’s father was an employee of Plaintiffs’ farm. Defendant’s mother

owned a deer processing business.

In December 2005 Defendant and her parents were indicted for the unlawful

dumping and for damages to Plaintiffs’ farm. In June 2006 Defendant plead guilty to

unlawful dumping and criminal trespass.1 Both counts were misdemeanors.

Defendant was sentenced under the state’s “first offender statute.” The Superior

Court of Lamar County (hereafter the “state court”) ordered Defendant, on each count,

to pay a fine of $250 plus surcharges and to serve 12 months on probation. Defendant

was ordered to pay the costs to clean up Plaintiffs’ farm. This obligation was part of

Defendant’s probation.2 Defendant’s parents also plead guilty to unlawful dumping

and criminal trespass and were ordered to pay the cost to clean up Plaintiffs’ farm.

In August 2006 the state court entered the following order:

ORDER OF RESTITUTION

This Court conducted a sentencing hearing on the above

unlawful dumping case on June 14, 2006. As part of the sentence

the Court directed that all the above defendants [Defendant and

her parents] would be jointly and severally liable for the clean up

of Mr. Kyle Spencers [sic] property as a result of the illegal

See Fed. R. Bank. P. 1019(2) (3 conversion from Chapter 13 to Chapter 7 commences

new time period for filing dischargeability complaint).

4

dumping. This Court and the parties agreed that Mr. Spencer

would be allowed to obtain estimates of the Cost [sic]of the clean

up. This Court has considered the States [sic] petition and directs

that one Hundred and Twelve Thousand Four Hundred and Fifty

Dollars ($112,450.00) restitution be made part of the sentence.

All defendants [Defendant and her parents] are jointly and

severally liable.

So Ordered, this the 25th day of August 2006.

Defendant paid her fines and surcharges as ordered by the state court.

Defendant served 24 months on probation without further incident. The restitution of

$112,450 has not been paid.

Defendant filed a petition under Chapter 13 of the Bankruptcy Code on

November 9, 2004. Defendant’s Chapter 13 case was converted to a case under

Chapter 7 of the Bankruptcy Code on January 15, 2009. Plaintiffs filed on March 27,

2009, a complaint to determine dischargeability of debt.3 Plaintiffs, with leave of

Court, filed an amendment to their complaint on June 9, 2009. Plaintiffs contend that

Defendant’s obligation for restitution is non-dischargeable under section 523(a)(6)

and (7) of the Bankruptcy Code.

In their motion for summary judgment, Plaintiffs contend they are entitled to

judgment as a matter of law based upon the criminal proceedings in state court.

Defendant contends that under the state’s first offender statute she has been

4 O.C.G.A. §§ 42-8-60, -62 (Supp. 2009). But see O.C.G.A. §§ 17-14-2, -3 (2008).

5 479 U.S. 36, 107 S.Ct. 353, 93 L. Ed. 2d 216 (1986).

5

completely exonerated of any criminal purpose and she is not considered to have a

criminal conviction.4 In her affidavit, Defendant states “I never personally committed

any harm to the Plaintiff or Plaintiff’s property and I specifically deny willful and

malicious injury to Plaintiff or Plaintiff’s property.”

Section 523(a)(6) and (7) of the Bankruptcy Code provides in part:

§ 523. Exceptions to discharge

(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——

. . .

(6) for wilful and malicious injury by the debtor to another

entity or to the property of another entity;

(7) to the extent such debt is for a fine, penalty, or

forfeiture payable to and for the benefit of a governmental

unit, and is not compensation for actual pecuniary loss, . . .

11 U.S.C.A. § 523(a)(6), (7) (West 2004).

In Kelly v. Robinson,5 the United States Supreme Court stated:

Congress included two qualifying phrases [in § 523(a)(7)];

the fines must be both “to and for the benefit of a

governmental unit,” and “not compensation for actual

pecuniary loss.” . . . Unlike traditional fines, restitution is

forwarded to the victim, and may be calculated by

6 446 F.3d 1206 (11th. Cir.) cert. denied 549 U.S. 885, 127 S.Ct. 248, 166 L.Ed. 149

(2006).

6

reference to the amount of harm the offender has caused.

In our view, neither of the qualifying clauses of

§ 523(a)(7) allows the discharge of a criminal judgment

that takes the form of restitution.

479 U.S. at 51-52.

In Colton v. Verola, (In re Verola)6 the state court ordered the debtor, as a

condition of probation, to pay $2.5 million in restitution to the Department of

Correction which was to forward the funds to the victims of the debtor’s fraud. The

debtor argued that the restitution was not “payable to and for the benefit of a

government unit” and was thus dischargeable under § 523(a)(7). The Eleventh Circuit

Court of Appeals disagreed and stated:

In Kelly [v. Robinson], the Supreme Court “h[e]ld that

§ 523(a)(7) preserves from discharge any condition a state

criminal court imposes as part of a criminal sentence.”

Kelly, 479 U.S. at 50, 107 S.Ct. at 361. More specifically,

the Court “conclude[d] that restitution orders imposed in

[criminal] proceedings operate ‘for the benefit of the State.

Similarly, they are not assessed ‘for . . . compensation’ of

the victim.” Id. at 53, 107 S.Ct. at 363 (omission in

original). Thus, the Court found that restitution

obligations imposed by states as part of criminal sentences

were not dischargable in a Chapter 7 proceeding.

[The debtor’s] restitution obligation is exactly that.

446. F.3d at 1207.

7

The Eleventh Circuit also stated:

Because the Supreme Court’s holding in Kelly, that

§ 523(a)(7) makes all state-imposed criminal restitution

obligations non-dischargeable, is still the law of the land,

we AFFIRM.

446 F.3d at 1209-10.

See In re Thompson, 418 F.3d 362 (3rd. Cir. 2005).

This Court is bound by the Eleventh Circuit’s decision in In re Verola which

held that all state-imposed criminal restitution obligations are non-dischargeable in

bankruptcy. In the case at bar, the state court ordered Defendant to pay restitution as

part of her criminal sentence and as part of her probation. The Court is persuaded that

Defendant’s obligation to pay restitution is non-dischargeable under § 523(a)(7). The

Court is persuaded that Plaintiffs’ motion for summary must be granted. The Court

need not address Plaintiffs’ contention that Defendant’s obligation is also

nondischargeable under § 523(a)(6).

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 29th day of October, 2009.

Robert F. Hershner, Jr.

ROBERT F. HERSHNER, JR.

United States Bankruptcy Judge

8

TIMOTHY HOLLAND BARNES and LORI ANN-MARIE BARNES

November 8, 2004

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 7

:

TIMOTHY HOLLAND BARNES, :

and LORI ANN-MARIE BARNES, ::

Debtors : Case No. 03-31752 RFH

:

PENNSYLVANIA MUTUAL :

CASUALTY INSURANCE :

COMPANY, ::

Plaintiff ::

vs. ::

TIMOTHY HOLLAND BARNES, :

and LORI ANN-MARIE BARNES, ::

Defendants : Adversary Proceeding

: No. 03-3071

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: Ms. Anne L. Blitch

Mr. Anthony L. Sanacory

Mr. Neil P. Olack

1180 West Peachtree Street

Suite 700

Atlanta, Georgia 30309

Mr. Neil P. Olack

Post Office Box 427

Jackson, Mississippi 39205

Mr. Gary W. Wilson

Mr. Salil P. Patel

One Liberty Place

Suite 4200

Philadelphia, Pennsylvania 19103

For Defendants: Mr. Jerry C. Carter, Jr.

736 Green Street

Gainesville, Georgia 30501

3

MEMORANDUM OPINION

Pennsylvania National [sic] Mutual Casualty Insurance Company, Plaintiff,

filed a motion for summary judgment on August 20, 2004. Timothy Holland Barnes

and Lori Ann-Marie Barnes, Defendants, filed a response on September 13, 2004.

The Court, having considered the record and the arguments of counsel, now publishes

this memorandum opinion.

“A motion for summary judgment should be granted when ‘the pleadings,

depositions, answers to interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any material fact and that

the moving party is entitled to judgment as a matter of law.’ Fed.R.Civ.P 56(c).

‘[T]he plain language of Rule 56(c) mandates the entry of summary judgement. . .

against a party who fails to make a showing sufficient to establish the existence of an

element essential to that party’s case, and on which that party will bear the burden of

proof at trial.’ Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91

L.Ed.2d 265 (1986); see also Morisky v. Broward County, 80 F.3d 445, 447 (11th

Cir.1996). On a summary judgement motion, the record and all reasonable inferences

that can be drawn from it must be viewed in the light most favorable to the nonmoving

party. See Cast Steel, 348 F.3d at 1301.” Midrash Sephardi, Inc. v. Town of

Surfside, 366 F.3d 1214, 1223 (11th Cir. 2004).

Defendants are the parents of Abigail Hope Barnes (“Ms. Barnes”). Ms.

4

Barnes was injured at birth by medical malpractice. Ms. Barnes, as a result of her

injury, has cerebral palsy and requires full-time care. Ms. Barnes received personal

injury settlements for her injury. First Citizens Bank was appointed guardian of the

funds in the Estate of Abigail Hope Barnes (the “Barnes Estate”).

In February 1999, guardianship was transferred to Defendants for the purpose

of administering the funds in the Barnes Estate. Defendants were required to provide

a guardian bond to ensure their faithful performance. Defendants obtained a bond for

$450,000 from Plaintiff. Defendants executed a General Agreement of Indemnity

dated February 3, 1999. Defendants were obligated to indemnify Plaintiff against any

loss if the bond was executed upon. Defendants were the principals and Plaintiff was

the surety under the bond.

In July 1999, Defendants used some of the funds in the Barnes Estate to

purchase real property. Defendants operated a hardware store known as Barnes

Hardware, Lawn and Feed, Inc. on the real property. Timothy Barnes had prior

experience in that type of business. The purpose of operating Barnes Hardware was

to enable Ms. Barnes to have contact with people in the community and to give Ms.

Barnes “something for the future.” Barnes Hardware was successful until a Wal-Mart

was built nearby.

In January 2001, the Clerk of Superior Court, Onslow County, North Carolina,

held a hearing inquiring into Defendants’ management of the Barnes Estate. The style

of the hearing shows that it was conducted “In the General Court of Justice, Superior

1 The record does not disclose who Attorney Fisher represented.

5

Court Division, Before the Clerk.” The clerk, an assistant clerk, Defendants, and

Attorney Fisher1 attended the hearing. The assistant clerk conducted the hearing.

Defendant Lori Barnes testified at the hearing. The assistant clerk determined that

Defendants had failed entirely to comply with their fiduciary responsibilities.

Defendants contend that they were not given an opportunity to explain their use of

funds. An order was entered removing Defendants as guardians. The order was

signed by the assistant clerk. Kevin McConnell, Public Guardian for Onslow County,

was appointed successor guardian. Defendants relied upon advice from their counsel

in not appealing their removal.

In April 2001, Mr. McConnell demanded that Plaintiff honor its guardian bond.

Plaintiff paid $375,000 to the Barnes Estate to satisfy the demand. Mr. McConnell, as

successor guardian, assigned and transferred to Plaintiff any claims or causes of action

which he may have against Defendants.

Barnes Hardware closed in June 2001. Defendants and Ms. Barnes moved to

Georgia in September 2001. Defendants contend that, as guardians, they always acted

in Ms. Barnes’s best interests.

Plaintiff demanded that Defendants honor their indemnity agreement. Plaintiff

and Defendants executed on December 12, 2001, a Confession of Judgment, which

2 The judgment was later reduced to $375,000.

3 A nondischargeable debt arising from fraud or defalcation does not become a

dischargeable debt because the parties subsequently enter into a settlement

agreement. Greenberg v. Schools, 711 F.2d 152, 153 (11th Cir. 1983).

6

authorized the state court to enter judgment in favor of Plaintiff for $432,230.282 plus

attorney fees of $17,427.20. Defendants executed the Confession of Judgment on

advise of their counsel.3

Defendants filed a petition under Chapter 7 of the Bankruptcy Code on August

19, 2003. Plaintiff filed this adversary proceeding on December 23, 2003. Plaintiff

contends that Defendants’ obligations are nondischargeable under section 523 (a)(4)

of the Bankruptcy Code.

Section 523(a)(4) provides:

§ 523. Exceptions to discharge

(a) A discharge under section 727, 1141, 1228(a), or 1228(b), or

1328(b) of this title does not discharge an individual debtor from any

debt—

. . .

(4) for fraud or defalcation while acting in a fiduciary

capacity, embezzlement, or larceny;

11 U.S.C.A. § 523(a)(4) (West 1993).

Plaintiff has the burden of proving all facts essential to support its objection to

dischargeability by a preponderance of the evidence. Grogan v. Garner, 498 U.S.

7

279, 112 L. Ed. 2d 755, 111 S. Ct. 654 (1991).

Exceptions to dischargeability are to be construed strictly. Schweig v. Hunter

(In re Hunter), 780 F.2d 1577, 1579 (11th Cir. 1986). “The exceptions to discharge

were not intended and must not be allowed to swallow the general rule favoring

discharge.” Murphy & Robinson Investment Co. v. Cross (In re Cross), 666 F.2d 873,

880 (5th Cir. Unit B 1982).

Plaintiff contends that Defendants’ obligations arose from defalcations while

acting in a fiduciary capacity. First, Plaintiff must show that Defendants were acting

in a fiduciary capacity. Collier on Bankruptcy states:

(c)—The Meaning of “While Acting in a Fiduciary Capacity”:

§523(a)(11); § 523(e).

. . .

For purposes of section 523(a)(4), the definition of

“fiduciary” is narrowly construed, meaning that the

applicable state law that creates a fiduciary relationship

must clearly outline the fiduciary duties and identify the

trust property; if state law does not clearly and expressly

impose trust-like obligations on a party, the court will not

assume that such duties exist and will not find that there

was a fiduciary relationship.

. . .

Certain relationships are generally recognized as

involving fiduciary obligations within the meaning of

section 523(a)(4). [G]uardians . . . have been held to be

acting in a fiduciary capacity within the meaning of this

provision.

4 4 F.3d 950 (11th Cir. 1993).

8

4 Collier on Bankruptcy ¶ 523.10 [1][c] (15th ed. rev. 2004).

Under North Carolina law, a guardianship is a trust relationship. The guardian

acts in a fiduciary capacity and is charged with the duty of unbending loyalty. In re

Armfield, 113 N.C. App. 467, 439 S.E. 2d 216, 220 (1994). The guardian is always

under a fiduciary obligation to manage the estate reasonably, prudently, and in the

ward’s best interest. In re Caddell, 140 N.C. App. 767, 538 S.E. 2d 626, 628 (2000).

North Carolina law imposes specific statutory powers and duties upon

guardians in administering a ward’s estate. N.C. Gen. Stat. § 35A – 1252, – 1253.

The clerk of superior court has a statutory duty to remove a guardian or take other

action to protect the ward’s interest if the guardian wastes, converts, mismanages, or

neglects the ward’s estate, or if the guardian is unsuitable to continue to serve for any

reason. N.C. Gen. Stat. § 35A-1290(b), – 1203(b); § 7A – 103 (14).

Defendants do not dispute that they were fiduciaries of the Barnes Estate. The

Court is persuaded that Defendants were acting in a fiduciary capacity.

Next, Plaintiff must show that Defendants committed a defalcation. In Quaif v.

Johnson4, the Eleventh Circuit Court of Appeals stated:

“Defalcation” refers to a failure to produce funds entrusted

to a fiduciary. However, the precise meaning of

“defalcation” for purposes of § 523(a)(4) has never been

entirely clear. An early, and perhaps the best, analysis of

this question is that of Judge Learned Hand in Central

9

Hanover Bank & Trust Co. v. Herbst, 93 F.2d 510 (2nd

Cir.1937). Judge Hand concluded that while a purely

innocent mistake by the fiduciary may be dischargeable, a

“defalcation” for purposes of this statute does not have to

rise to the level of “fraud,” “embezzlement,” or even

“misappropriation.” Some cases have read the term even

more broadly, stating that even a purely innocent party can

be deemed to have committed a defalcation for purposes

of § 523(a)(4).

4 F.3d at 995.

Collier on Bankruptcy states in part:

[b]—“Defalcation” for Purposes of the Fiduciary Debt Exception;

Burden of Proof.

. . .

Since debts arising from breaches of ordinary care are

normally dischargeable in bankruptcy, and exceptions to

discharge are strictly construed in favor of the debtor,

some degree of culpability is required to make a debt

nondischargeable as a defalcation under section 523(a)(4).

However, when a debtor has been acting as a trustee or

other fiduciary, the debtor is responsible for knowledge of

the fiduciary responsibilities and may not cite mere

ignorance as a defense to an objection to dischargeability

asserted under section 523(a)(4).

4 Collier on Bankruptcy, ¶ 523.10 [1] [b] (15th ed. rev. 2004).

The order removing Defendants as guardians was entered by the assistant clerk

of superior court. Defendants contend that the order is not entitled to res judicata

because it was entered by an assistant clerk rather than by a judge.

“The Clerk of Superior Court has original jurisdiction over matters involving

5 136 N.C. App. 500, 524 S.E. 2d 812 (2000).

6 North Carolina law provides that the clerk of superior court has jurisdiction over

the administration of decedents’ estates. N.C. Gen. Stat. § 28A-2-1.

10

the management by a guardian of her ward’s estate.” In re Caddell, 538 S.E. 2d at

627-28. See N.C. Gen Stat. § 35A – 1203.

The clerk has authority to remove a guardian for cause and to appoint a

successor guardian. N.C. Gen. Stat. § 35A – 1203(a), (b); § 7A – 103(14). “An

assistant clerk is authorized to perform all the duties and functions of the office of the

clerk of superior court, and any act of an assistant clerk is entitled to the same faith

and credit as that of the clerk.” N.C. Gen. Stat. § 7A – 102(b).

Plaintiff relies upon Wilson v. Watson.5 In that case, Wilson filed a motion to

compel an accounting by Watson, the attorney-in-fact of their deceased mother’s

estate. The motion was filed with the clerk of superior court.6 The clerk entered an

order denying Wilson’s request. Wilson did not appeal the order. Wilson then filed a

complaint in superior court to compel an accounting. The parties and subject matter

in the superior court case were identical to those in the action before the clerk.

Watson argued that the complaint filed in superior court was barred by collateral

estoppel and res judicata. The North Carolina Court of Appeals agreed. The court

first held that the clerk had jurisdiction to enter the order denying Wilson’s motion to

compel an accounting. The court then held that res judicata barred the complaint filed

in the superior court because it sought the same relief as the action before the clerk.

7 271 N.C. 345, 156 S.E. 2d 693 (1967).

8 72 N.C. App. 1, 323 S.E. 2d 410 (1984).

11

The Court has also considered two other North Carolina cases. In In re Estate

of Lowther,7 Mary Lowther represented to the clerk of superior court that she was the

widow of Isham Lowther. The clerk appointed Mary Lowther to be the administratrix

of the Isham Lowther Estate. The children of Isham Lowther filed a motion with the

clerk to remove Mary Lowther as administratrix. The clerk held a hearing and

determined that Mary Lowther had never married Isham Lowther. The clerk removed

Mary Lowther as administratrix and directed her to provide an accounting. Mary

Lowther appealed to the judge of superior court. The judge vacated the clerk’s order

and set for trial by jury the issue of whether Mary Lowther was the widow of Isham

Lowther.

The North Carolina Supreme Court reversed. The court held that when a party

takes exception to specific findings of fact by the clerk, the trial judge will review the

findings and submit the issues to a jury if he deems it advisable. However, if a party

makes a general exception to the clerk’s order and does not take exception to specific

findings of fact, the trial judge simply determines whether the facts found by the clerk

support the conclusion of law. The court noted that even in the later situation, the

clerk’s findings of fact are not res judicata in any other proceeding between the

parties.

In Shelton v. Fairley,8 the beneficiaries of the Thomas M. Shelton Estate filed a

12

motion seeking the removal of the executor. The executor, with court approval,

resigned. The court entered an order reducing the executor’s commissions and

attorney fees from $580,000 to $300,000.

The beneficiaries then filed an action for damages, for an accounting, to

surcharge the executor for falsifying accounts, and for breach of fiduciary duty. The

executor asserted the defenses of res judicata and collateral estoppel.

The North Carolina Court of Appeals stated, in part:

The second issue concerns the defense of re judicata and collateral

estoppel raised by [the executor]. [The executor] contend[s] that this

action for damages is barred by the earlier proceeding to remove the

executor and revoke his letters of administration pursuant to

N.C.Gen.Stat. 28-32 [the probate code]. We hold that orders entered in

a proceeding under N.C.Gen.Stat. 28-32, in which an executor must

show cause why he should not be removed, do not constitute re judicata

as to a later civil action for damages between the parties or collaterally

estop the bringing of such an action.

. . . .

Reasoning as above, courts have carved out exceptions of the doctrine

of res judicata based upon policy reasons. Our Supreme Court has

recognized an exception in instances where a statutory proceeding to

remove an executor may be followed by a later civil action.

323 S.E. 2d at 414.

Turning to the case at bar, the assistant clerk of superior court determined that

Defendants had failed to comply with their fiduciary responsibilities and removed

them as guardians. Plaintiff contends that order is decisive in this “later civil action”

on the issue of defalcation. The Court is not persuaded that the order entered by the

13

assistant clerk removing Defendants as guardians is entitled to res judicata in this

nondischargeable action. The assistant clerk did not consider whether Defendants

committed a defalcation.

Defendants contend that they always acted in Ms. Barnes’ best interests. The

“precise meaning of ‘defalcation’ for purposes of § 523(a)(4) has never been entirely

clear.” Quaif, 4 F.3d at 995. The Court is persuaded that genuine issues of material

facts remain as to whether Defendants committed a defalcation.

Finally, Plaintiff must show that it is a proper party to bring this

nondischargeability action. Defendants executed a General Agreement of Indemnity

in favor of Plaintiff. Defendants were obligated to indemnify Plaintiff against any

loss if the guardian bond was executed upon. Defendants were the principals and

Plaintiff was the surety under the bond.

North Carolina law provides that a surety who pays his principal’s bond may

avail himself of any remedy which the creditor might have had against the principal.

N. C. Gen. Stat. § 26 – 3.1.

Plaintiff was called upon to honor its bond. Mr. McConnell, as successor

guardian, assigned and transferred to Plaintiff all claims and causes of action which he

may have against Defendants. Plaintiff is subrogated to any rights that Mr.

McConnell might have asserted against Defendants. This includes the right to

contend that Defendants’ obligations are nondischargeable under section 523(a)(4).

See Cincinnati Insurance Co. v. Nelson, (In re Nelson), 2002 WL 32667216 (Bankr.

14

D. Kan., Feb. 26, 2002); Western Surety Co. v. Daly, (In re Daly), 247 B.R. 369, 377-

79 (Bankr. S.D.N.Y. 2000); Peerless Insurance v. Swanson, (In re Swanson), 231 B.R.

145, 149 (Bankr. D.N.H. 1999); Utica Mutual Insurance Co. v. Johnson, (In re

Johnson), 203 B.R. 1017, 1020-21 (Bank. S.D. Ga. 1997); Ohio Casualty Insurance

Co. v. Hryhorchuk, (In re Hryhorchuk), 211 B.R. 647, 650-52 (Bankr. W.D. Tenn.

1997); Cincinnati Insurance Co. v. Butts, (In re Butts), 142 B.R. 1011 (Bankr. M.D.

Fla. 1992); Reliance Insurance Co. v. Wilson, (In re Wilson), 127 B.R. 440 (Bankr.

E.D. Mo. 1991); Ohio Casualty Insurance Co. v. Kern, (In re Kern), 98 B.R. 321

(Bankr. S.D. Ohio 1989); Western Surety Co. v. Meek, (In re Meek), 25 B.R. 58, 60

(Bankr. D. Or. 1982); Aetna Insurance v. Byrd, (In re Byrd), 15 B.R. 154 (Bankr.

E.D. Va. 1981).

Turning to the case at bar, the Court is persuaded that Defendants were

fiduciaries and that Plaintiff is a proper party to bring this nondischargeability action.

The Court is persuaded that Plaintiff is entitled to partial summary judgment on these

issues. The Court is persuaded that there remain genuine issues of material facts as to

whether Defendants committed a defalcation because re judicata does not apply to

that issue.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 8th day of November, 2004.

15

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

JAMES ROBERT LARY

Aug. 3, 2005

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

JAMES ROBERT LARY, ::

Debtor : Case No. 04-54138 RFH

:

JOY R. WEBSTER, TRUSTEE, ::

Plaintiff ::

vs. ::

BETTY L. CAPE and J. COLEMAN :

TIDWELL, Trustee, ::

Defendants : Adversary Proceeding

: No. 04-5181

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: Robert M. Matson

Post Office Box 1773

Macon, Georgia 31202

For Debtor: Margrett A. Skinner

544 Mulberry Street

Suite 204

Macon, Georgia 31201

For Betty L. Cape: Robert P. Westin

Post Office Box 328

Gordon, Georgia 31031

For J. Coleman Tidwell, Trustee: Ed. S. Sell, III

Post Office Box 229

Macon, Georgia 31202-0229

1 Plaintiff contends that the property at issue should be property of Debtor’s

bankruptcy estate. Mr. Tidwell contends that the property at issue should be

2

MEMORANDUM OPINION

Betty L. Cape, Defendant, filed on May 20, 2005, a Motion to Set Aside the

Default Judgment. Defendant’s motion came on for hearing on June 7, 2005. The

Court, having considered the record and the arguments of counsel, now publishes this

memorandum opinion.

Defendant filed on June 24, 2003, a petition under Chapter 7 of the Bankruptcy

Code. J. Coleman Tidwell (“Mr. Tidwell”) was the Chapter 7 trustee of Defendant’s

bankruptcy estate. The Court entered a final decree and closed Defendant’s

bankruptcy case in September 2003. Mr. Tidwell discovered that Defendant may

have failed to list certain property in her bankruptcy schedules. Defendant’s

bankruptcy case was reopened in March 2004. Mr. Tidwell was reappointed to be the

trustee.

James Robert Lary, Debtor, is Defendant’s brother. Debtor filed on

September 13, 2004, a petition under Chapter 7 of the Bankruptcy Code. Joy R.

Webster, Plaintiff, is the Chapter 7 trustee of Debtor’s bankruptcy estate.

Plaintiff filed on December 23, 2004, an adversary proceeding to avoid as

fraudulent a prepetition transfer of property from Debtor to Defendant. Defendant

and Mr. Tidwell are named as the defendants.1 Defendant filed an answer on January

property of Defendant’s bankruptcy estate.

2 Fed. R. Bank. P. 7012(a) (answer to cross-claim must be served within twenty

days).

3 A judge is authorized to sign orders at any time and place. 9 Collier on

Bankruptcy, ¶ 5001.01, p. 5001-3 (15th ed. rev. 2005).

3

5, 2005. Mr. Tidwell filed on January 7, 2005, an answer and asserted a cross-claim

against Defendant. Defendant did not serve a timely answer to the cross-claim.2

Mr. Tidwell filed on May 10, 2005, a request for entry of default on his crossclaim.

The Clerk of this Court made an Entry of Default on May 11, 2005.

Mr. Tidwell filed on May 12, 2005, a motion for entry of judgment by default.

The Court signed a judgment by default on Sunday, May 15, 2005.3 The judgment

was entered on the Court’s docket on Monday, May 16, 2005.

Defendant filed on May 20, 2005, a motion to set aside the judgment by default

and an answer to the cross-claim. At the hearing on June 7, 2005, Defendant’s

counsel offered no reason or excuse for failing to serve a timely answer to the crossclaim.

A judgment by default may be set aside for mistake, inadvertence or excusable

neglect. Fed. R. Bank. P. 7055, 9024, Fed. R. Civ. P. 55(c), 60(b)(1).

“In order to establish mistake, inadvertence, or excusable neglect, the

defaulting party must show that: (1) it has a meritorious defense that might have

4 Rule 55 applies in adversary proceedings. Fed R. Bankr. P. 7055.

4

affected the outcome; (2) granting the motion would not result in prejudice to the nondefaulting

party; and (3) a good reason existed for failing to reply to the complaint.”

Florida Physician’s Insurance Co. v. Ehlers, 8 F.3d 780, 783 (11th Cir. 1993).

Defendant’s counsel offers no reason or excuse for not timely serving an

answer to the cross-claim. The Court is not persuaded that Defendant has shown

mistake, inadvertence or excusable neglect. See Gibbs v. Air Canada, 810 F.2d 1529,

1537 (11th Cir. 1987) (failure to establish minimum procedural safeguards to ensure

that answer is filed does not constitute excusable neglect).

Defendant also argues that she did not have the three days notice required by

Rule 55(b)(2),4 which provides in part:

Rule 55. Default

. . .

(b) Judgment. Judgement by default may be entered as

follows:

. . .

(2) By the Court. In all other cases the party

entitled to a judgment by default shall apply to the

court therefor: . . . If the party against whom

judgment by default is sought has appeared in the

action, the party (or, if appearing by representative,

the party’s representative) shall be served with

written notice of the application for judgment at

least 3 days prior to the hearing on such

5

application. . . .

Fed. R. Civ. P. 55(b)(2).

Defendant “appeared” in this adversary proceeding by serving an answer to the

complaint and by participating in discovery.

“An appearance also entitles the defaulting party to three days’ notice of the

application for a judgement.” 10A C. Wright, A. Miller and M. Kane, Federal

Practice and Procedure, § 2686, p 41 (1998).

“A failure to give the three-day required notice generally is considered a

serious procedural error that justifies the reversal or the setting aside of a default

judgment.” Federal Practice and Procedure § 2687, p 53.

Mr. Tidwell served his motion for entry of judgment by default on May 12,

2005. The Court signed the default judgment on Sunday, May 15, 2005. The Court is

not persuaded that Defendant had the three days notice to which Defendant was

entitled. The Court is persuaded that Defendant is entitled to relief from the judgment

by default.

Defendant also argues that the relief sought in the cross-claim is different from

the relief granted in the judgment by default. Mr. Tidwell, in his cross-claim,

requested the following relief:

WHEREFORE, the Trustee [Mr. Tidwell] prays for the following

relief:

. . .

(b) In the event that the Court determines that the transfer

5 This adversary proceeding is scheduled for trial on August 16, 2005.

6

of Property from James Robert Lary, III [Debtor] to Cape

[Defendant] as alleged in the petition should be set aside

for the reasons set forth therein, that this Court order Cape

[Defendant] to turn over to the Trustee [Mr. Tidwell] her

one-half undivided interest in the Property. . . .

Mr. Tidwell’s counsel prepared the judgment by default that was signed by the

Court. The judgment by default provides in part:

NOW, THEREFORE, IT IS CONSIDERED,

ORDERED AND ADJUDGED that the Trustee [Mr.

Tidwell] shall recover from Cape [Defendant] a one-half

undivided interest in the property at 1220 Newberg

Avenue, and Cape [Defendant] is hereby ordered to turn

over said property so it can become property of Cape’s

[Defendant’s] bankruptcy estate.

“A judgment by default shall not be different in kind from or exceed in amount

that prayed for in the demand for judgment.” Fed. R. Civ. P. 54(c); Fed. R. Bankr. P.

7054(a).

“A judgment in a default case that awards relief that either is more than or

different in kind from that requested originally is null and void and defendant may

attack it collaterally in another proceeding.” Federal Practice and Procedure § 2663,

pp 167-69.

The relief sought in the cross-claim was contingent upon the Court determining

that the transfer from Debtor to Defendant should be set aside.5 The relief granted in

the judgment by default, which was prepared by Mr. Tidwell’s counsel, is different in

7

kind and exceeds the relief originally sought by Mr. Tidwell.

The Court is persuaded that Defendant is entitled to relief from the judgment

by default and that Defendant’s answer to the cross-claim should be allowed.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 3rd day of August 2005.

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

THOMASTON MILLS, INC

May 31, 2002

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 11

:

THOMASTON MILLS, INC., :

a Georgia Corporation, ::

Debtor : Case No. 01-52544 RFH

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Thomaston Mills, Inc.: BRAD A. BALDWIN

Jones, Day, Reavis & Pogue

3500 SunTrust Plaza

303 Peachtree Street, N.E.

Atlanta, Georgia 30308

For Foothill Capital Corporation: JESSEE H. AUSTIN, III

Paul, Hastings, Janofsky & Walker

600 Peachtree Street, N.E., Suite 2400

Atlanta, Georgia 30308

MARK A. KELLEY

Kitchens, Kelley, Gaynes

Eleven Piedmont Center, Suite 900

3495 Piedmont Road, N.E.

Atlanta, Georgia 30305

2

For Official Committee of RICHARD B. HERZOG, JR.

Unsecured Creditors: Nelson, Mullins, Riley & Scarborough

First Union Plaza, Suite 1400

999 Peachtree Street, N.E.

Atlanta, Georgia 30309

For Back Bay Funding, LLC: DONALD ROTHMAN

Riemer & Braunstein

3 Center Plaza

Boston, Massachusetts 02108

For SunTrust Lenders: MARK M. MALONEY

King & Spalding

191 Peachtree Street, N.E.

Atlanta, Georgia 30303-1763

1 The Foothill Lenders are Foothill Capital Corporation, General Electric

Capital Corporation, and Back Bay Capital Funding LLC.

2 The SunTrust Lenders are SunTrust Bank, Atlanta; Wachovia Bank, N.A.;

and Bank of America, N.A.

3

MEMORANDUM OPINION

The Foothill Lenders1(“Foothill”) filed on December 17, 2001, its

limited objections to motions by Thomaston Mills, Inc., Debtor, for authorization to

sell certain real property. Foothill’s objections came on for a hearing on February 6,

2002. The Court, having considered the record and the arguments of counsel, now

publishes this memorandum opinion.

Debtor is a Georgia corporation with headquarters in Thomaston,

Georgia. Debtor was in the business of manufacturing and marketing textile products

until it ceased operations in late 2001.

Debtor, prior to filing for bankruptcy relief, primarily financed its

operations through loans from Foothill and the SunTrust Lenders (“SunTrust”).2

Foothill and SunTrust entered into an Intercreditor Agreement dated July 27, 1999.

The fourth paragraph of the Intercreditor Agreement provides, in part, as follows:

WHEREAS, Agents [Foothill and SunTrust] desire to

enter into this Intercreditor Agreement to (i) confirm the

relative priority of the security interests of each Creditor

(as defined below), or any of them, in the assets and

properties of Debtors, (ii) provide for the orderly sharing

among Creditors, in accordance with such priorities, of

4

proceeds of such assets and properties upon any

foreclosure thereon or other disposition thereof, and (iii)

provide for such further covenants and agreements as are

set forth herein;

The Intercreditor Agreement provides that SunTrust acknowledges that

Foothill has first priority liens on Debtor’s personal property and second priority

liens on Debtor’s real property. Foothill acknowledges that SunTrust has first

priority liens on Debtor’s real property and second priority liens on Debtor’s personal

property.

Debtor, through its president and CEO, signed an Acknowledgment of

the Intercreditor Agreement.

Debtor had financial problems and filed a petition under Chapter 11 of

the Bankruptcy Code on June 19, 2001. Debtor began winding down its operations

and liquidating its assets. Debtor will not reorganize as a going concern.

Debtor filed on October 24, 2001, a motion for court approval of an

agreement it had reached with SunTrust. SunTrust asserted a secured claim against

Debtor for about $5.68 million. Debtor believed that it had significant surcharge

claims against the real property which secured SunTrust’s claim. Debtor and

SunTrust reached an agreement whereby Debtor would pay $4.17 million to SunTrust

upon liquidation of five parcels of real property. SunTrust would assign the balance

of its unpaid claim ($1.51 million) and its first priority liens on three other parcels of

3 See Goger v. Merchants Bank of Atlanta (In re Feifer Industries, Inc.), 155

B.R. 256 (Bankr. N.D. Ga. 1993) (bankruptcy trustee, through a court approved

compromise and settlement, can acquire and preserve a senior lien for the benefit of

the estate).

4 The certificate of service shows that the motion was served on the Foothill

Lenders.

5 Simply stated, SunTrust would receive $4.17 million upon the liquidation of

five parcels of real estate. Debtor would, through the assignment, have a secured

claim of $1.51 million secured by the remaining three parcels of real property.

6 Foothill held the first priority liens on Debtor’s personal property. The

priority of Foothill’s lien on the personal property is not in dispute.

5

real property to Debtor for the benefit of Debtor’s estate.3 Debtor would forego any

11 U.S.C. § 506(c) surcharges against SunTrust’s interest in the real property. No

objection to the motion was filed.4 The Court entered an order on November 20,

2001, approving Debtor’s motion. Thus, under the agreement, SunTrust assigned to

Debtor its claim of $1.51 million and its first priority liens and security interest on the

three parcels of real property.5

The Court entered on November 28, 2001, a final cash collateral order

authorizing Debtor to use certain cash collateral of Foothill. Foothill consented to the

order.

Debtor filed on November 27 and 28, 2001, motions to sell the three

parcels of real property and certain personal property6 free and clear of all liens,

claims, and encumbrances. Debtor proposed to use the sale proceeds to pay the

secured claims owed to SunTrust (or its assignee) and Foothill, according to the

7 Foothill’s counsel, at the hearing on February 6, 2002, stated that Foothill

does not contest the assignment from SunTrust to Debtor. Foothill does contest the

relative priority of the liens held by Foothill and Debtor.

8 Wachovia Bank, N.A. also was a party to the Intercreditor Agreement.

6

priority of their liens. SunTrust, prior to the assignment to Debtor, held first priority

liens and Foothill held second priority liens on the real property. Foothill filed on

December 17, 2001, limited objections to Debtor’s motions to sell. Foothill contends

that once the secured claim of SunTrust was satisfied, it had first priority liens on the

three parcels of real property and that it should receive the sales proceeds.7 The

Court, after a hearing, entered orders on December 18, 2001, authorizing the sales,

but reserved ruling on whether Debtor or Foothill is entitled to the sales proceeds.

A hearing on Foothill’s limited objections was held on February 6,

2002. Debtor’s counsel advises that the liquidation of Debtor’s remaining assets will

not satisfy in full Foothill’s claims. Foothill contends that the liens that Debtor holds

through the assignment from SunTrust are subordinate to Foothill’s liens. The Court

will consider, in turn, each of Foothill’s arguments.

Intercreditor Agreement

The Intercreditor Agreement was entered into by Foothill and

SunTrust.8 Debtor signed an Acknowledgment to the Intercreditor Agreement, which

provides, in part, as follows:

(i) although it [Debtor] may sign this Acknowledgment it

[Debtor] is not a party to the foregoing Intercreditor

7

Agreement and does not and will not receive any right,

benefit, priority or interest under or because of the

existence of the foregoing Intercreditor Agreement,

Foothill contends that under this provision:

The Foothill Lenders assert that upon the assignment by

the SunTrust Agent of a portion of its remaining claims

against the Debtor, under the terms of the Intercreditor

Agreement, the Foothill Lenders are entitled to payment

of the Sale Proceeds by application of the unambiguous

terms of the Intercreditor Agreement. Pursuant to the

terms of the Intercreditor Agreement, and the

Acknowledgment attached thereto, it is clear that the

Debtor cannot “receive any right, benefit[,] priority or

interest under or because of the existence of the foregoing

Intercreditor Agreement”. As a result, even though the

Debtor may receive by way of assignment the SunTrust

Agent’s claims and interest, it cannot receive these claims

and interest such that the Debtor can retain those funds

prior to payment of any remaining claims and interest of

the Foothill Lenders. The Debtor has agreed that the Sale

Proceeds, which are proceeds of the Foothill Lenders’

collateral, are to be paid to the Foothill Lenders before

the Debtor may take any payment thereof. The Debtor is,

by its express assent to and acknowledgment of the terms

and conditions of the Intercreditor Agreement, estopped

from receiving any sale proceeds of the Foothill Lenders’

collateral unless and until the claims of the Foothill

Lenders have been paid in full.

Foothill’s supplemental brief, p. 10-11, Docket No. 250 (filed Feb. 6, 2002).

The Court is not persuaded by Foothill’s argument. In the Court’s

view, the Acknowledgment simply provides that Debtor was not a party to the

Intercreditor Agreement and that Debtor would not receive any right, benefit,

priority, or interest under or because of the Intercreditor Agreement.

9 Foothill admits that Debtor properly obtained court approval of the

settlement agreement between Debtor and SunTrust.

10 The cash collateral primarily was personal property in which Foothill held

first priority liens.

8

Debtor does not assert any interest in the real property or the sales

proceeds under or because of the Acknowledgment of the Intercreditor Agreement.

Rather, Debtor contends that its interest arises under the court authorized settlement

agreement with SunTrust.9

Replacement Liens

The Court entered a final cash collateral order on November 28, 2001.

Foothill consented to the order. The order authorized Debtor to use certain cash

collateral that is subject to Foothill’s first priority liens.10 The cash collateral order

provides, in part, as follows:

11. In addition to the existing rights and interests of the

Foothill Lenders in the Cash Collateral and for the

purpose of attempting to provide adequate protection for

the interests of the Agent, the Co-Agents and the Foothill

Lenders, the Agent, on behalf of itself, the Co-Agents and

the Foothill Lenders, is hereby granted, as security for the

amount of Cash Collateral used by the Debtor, a valid,

perfected and enforceable security interest (the

“Replacement Liens”) equivalent to a lien granted under

the Section 364(c) of the Bankruptcy Code in and upon

all of the assets of the Debtor in existence prior to the

Petition Date and created after the Petition Date,

including without limitation, all of the Debtor’s accounts,

contract rights, inventory, machinery and equipment,

general intangibles, real property, and such other

collateral in which the Agent on behalf of itself, the Co9

Agents and the Foothill Lenders had an interest prior to

the initiation of this Chapter 11 case (but not including

claims or causes of action arising solely under the

Bankruptcy Code, including under Section 544, 547, 548

and 553) and whether such property was owned on the

Petition Date or thereafter created, acquired or arising,

and all improvements, additions and extensions thereto,

all replacement thereof, all books and records with

respect thereto and all products and proceeds of the

foregoing, specifically including any proceeds of the

foregoing deposited into bank accounts opened by the

Debtor after the Petition Date and the accounts

themselves, which Replacement Liens shall be subject

only to (a) Professional Fee Carve Out and a Stay Bonus

Carve Out (as such terms are defined below), and (b) the

security interests of the Agent on behalf of itself, the Co-

Agents and the Foothill Lenders in the same order of

priority, but subject to the Intercreditor Agreement and

any properly perfected senior liens as such interests

existed on the Petition Date. (Emphasis added).

Final cash collateral order, p. 6-7, Docket No. 213 (entered on Nov. 28, 2001).

Section 11 of the cash collateral order provides that Foothill would

have replacement liens on all prepetition and postpetition assets of Debtor. Section

11, however, provides that the replacement liens do not attach to claims or causes of

action arising solely under the Bankruptcy Code. Section 11 also provides that the

replacement liens are subject to any prepetition senior liens.

The sales proceeds at issue arose from the sale of Debtor’s real

property. SunTrust assigned its first priority liens to Debtor in exchange for Debtor’s

agreeing to waive all potential section 506(c) surcharges against SunTrust’s interest

in the real property. Section 506(c) surcharges arise solely under the Bankruptcy

11 See 11 U.S.C.A. § 507(b) (West 1993).

10

Code. The cash collateral order provides that Foothill’s replacement liens are subject

to prepetition senior liens. SunTrust assigned to Debtor its properly perfected first

priority liens that existed when Debtor filed for bankruptcy. The Court can only

conclude that Foothill’s replacement liens do not attach to the sales proceeds.

Administrative Superpriority Claim

Foothill asserts that the cash collateral order gave it an administrative

superpriority claim.11 Section 13 of the cash collateral order provides as follows:

13. In addition to the Replacement Liens granted to the

Agent on behalf of itself, the Co-Agents and the Foothill

Lenders pursuant to this Final Order, the Agent on behalf

of itself, the Co-Agents and the Foothill Lenders is

hereby granted an administrative claim under Sections

503(b)(1), 507(a), and 507(b) of the Bankruptcy Code

(the “507(b) Claims”) for the amount by which adequate

protection afforded herein for the Debtor’s use of Cash

Collateral proves to be inadequate. Such 507(b) Claims

shall be allowed and have priority as is otherwise

provided for by the Bankruptcy Code, subject to any

party-in-interest’s rights to contest or otherwise object to

any allowance of such 507(b) claims.

Final cash collateral order, p. 7-8, Docket No. 213 (entered on Nov. 28, 2001).

Foothill contends that it has an administrative superpriority claim on

the sales proceeds because it will not be paid in full. Debtor notes that the Court has

not determined that Foothill is not adequately protected. Debtor contends, therefore,

that this issue is not ripe for determination. If Foothill has a valid administrative

11

superpriority claim, that claim should be asserted when the first distribution is to be

made in Debtor’s bankruptcy case. The Court then will be able to determine if the

adequate protection provided Foothill was inadequate.

Cash Collateral Order

Foothill contends that the cash collateral order requires Debtor to pay

to Foothill any excess sales proceeds from the liquidation of Foothill’s collateral.

Foothill contends that the sales proceeds at issue are not needed by Debtor since all

expenses incurred during the bankruptcy case have been paid from Foothill’s cash

collateral. Foothill relies upon section 6 of the cash collateral order, which provides

as follows:

6. The Foothill Lenders have consented to the Debtor’s

continued use of a limited amount of Cash Collateral for a

specified time on the express terms and conditions set

forth in this Final Order, provided that any Cash

Collateral received on account or from the Foothill

Collateral in excess of that needed to conduct the

Debtor’s business as set forth in the Budget attached

hereto as Exhibit “A”, is to be immediately paid to and

retained by the Agent for the benefit of the Foothill

Lenders and applied to the obligations owed to the Agent,

the Co-Agents and the Foothill Lenders pursuant to the

terms of the Prepetition Loan Agreement. The Debtor

reserves the right on behalf of itself and its estate to

request a reallocation of any payments or amounts

applied to the Foothill Lenders’ claims if it is determined

that such claims are undersecured.

Final cash collateral order, p. 4, Docket No. 213 (entered on Nov. 28, 2001).

SunTrust assigned to Debtor’s bankruptcy estate its claim of $1.51

12

million along with its security interests and first priority liens. Assignment is defined

in Black’s Law Dictionary as follows:

Assignment. The act of transferring to another all or part

of one’s property, interest, or rights. A transfer or making

over to another of the whole of any property, real or

personal, in possession or in action, or of any estate or

right therein. It includes transfers of all kinds of property,

including negotiable instruments. The transfer by a party

of all of its rights to some kind of property, usually

intangible property such as rights in a lease, mortgage,

agreement of sale or a partnership.

Black’s Law Dictionary 119 (6th ed. 1990).

SunTrust held the first priority liens on Debtor’s real property.

SunTrust assigned its first priority liens to Debtor. Thus, Debtor’s bankruptcy estate

holds the $1.51 million with the same rights and interests as held by SunTrust. The

Court is persuaded that Debtor holds, for the benefit of its estate, the first priority

liens and rights in the $1.51 million.

Debtor’s motion for court approval of the settlement with SunTrust was

served on Foothill. Foothill did not object to the terms stated in the motion.

Paragraph 12 of the motion provides, in part: “The Debtor shall be able to collect the

Assigned Claim for the benefit of the estate through the liquidation of the remaining

Real Property . . . .”

In the Court’s view, Foothill understood that Debtor would collect the

$1.51 million at issue for the benefit of the estate. Except for the assignment,

SunTrust would hold the first priority liens on the $1.51 million. Foothill would

13

receive nothing. The Court is persuaded that Foothill cannot improve its position

against the clear language of the settlement agreement. The Court is persuaded that

Foothill would receive a windfall at the expense of the bankruptcy estate. The Court

can only conclude that the $1.51 million at issue is not the cash collateral of Foothill.

An order in accordance with this memorandum opinion will be entered

this date.

DATED the 31st day of May, 2002.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

PHILLIP L. WEST and TINA M. WEST

October 2, 2006

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 7

:

PHILLIP L. WEST and :

TINA M. WEST, ::

Debtors : Case No. 05-32033 RFH

:

PHILLIP L. WEST and :

TINA M. WEST, ::

Movants ::

vs. ::

MUTUAL SAVINGS :

CREDIT UNION, :

Respondent ::

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Movants: Stephen L. Noel

124 S. Broad Street

Monroe, Georgia 30655

For Respondent: Virginia B. Bogue

Suite 600 Marquis Two Tower

285 Peachtree Center Avenue NE

Atlanta, Georgia 30303-1229

See Mutual Savings Credit Union 1 v. West, (In re West), Ch. 7, Case No. 05-

32033 RFH, Adv. No. 06-3009 (Bankr. M.D. Ga., filed March 24, 2006).

2 Fed. R. Bank. P. 2004.

2

MEMORANDUM OPINION

Phillip L. West and Tina M. West, Movants, filed on May 24, 2006, a Motion

To Convert. Mutual Savings Credit Union, Respondent, filed an objection on May 25,

2006. Movants’ motion was discussed at a hearing on an adversary proceeding on

May 25, 2006.1 Movant and Respondents have filed briefs on the issues presented in

the motion. The Court, having considered the record and the arguments of counsel,

now publishes this memorandum opinion.

Movants filed on October 14, 2005, a petition under Chapter 7 of the

Bankruptcy Code. Respondent conducted a Rule 2004 examination2 of Movants.

Movants filed on February 22, 2006, amendments to their statement of financial

affairs and their bankruptcy schedules. Respondent contends that the original

statement of financial affairs and bankruptcy schedules failed to list significant assets

and understated Movants’ income.

Respondent filed on March 24, 2006, an adversary proceeding contending that

obligations owed by Movants to Respondent are not dischargeable under Section

523(a) of the Bankruptcy Code. Respondent also contends that Movants’ discharge in

Respondent contends that Movants failed 3 to keep records of their financial

affairs, failed to disclose and account for certain assets, made false oaths, and

transferred property with intent to hinder, delay, or defraud creditors.

3

bankruptcy should be denied under Section 727(a) of the Bankruptcy Code.3

Movants filed on May 23, 2006, a second amendment to their bankruptcy

schedules. Respondent contends the amendment contains information that conflicts

with Movants’ income tax returns and testimony at their Rule 2004 examination.

Movants filed on May 24, 2006, a motion to convert their Chapter 7 case to a

case under Chapter 13 of the Bankruptcy Code. Respondent filed an objection.

Respondent contends that Movants have shown a lack of good faith and a lack of

candor by filing inaccurate bankruptcy schedules and an inaccurate statement of

financial affairs.

Section 706(a) of the Bankruptcy Code provides:

§ 706. Conversion

(a) The debtor may convert a case under this chapter to a

case under chapter 11, 12, or 13 of this title at any time, if

the case has not been converted under section 1112, 1208,

or 1307 of this title. Any waiver of the right to convert a

case under this subsection is unenforceable.

11 U.S.C.A. § 706(a) (West 2004).

The legislative history of section 706(a) provides in part:

Subsection (a) of this section gives the debtor the one-time

4

absolute right of conversion of a liquidation case to a

reorganization or individual repayment plan case. If the

case has already once been converted from chapter 11 or

13 to chapter 7, then the debtor does not have that right.

The policy of the provision is that the debtor should

always be given the opportunity to repay his debts, and a

waiver of the right to convert a case is unenforceable.

(HR Rept. No. 595, 95th Cong.,1st Sess. 380 (1997))

Courts disagree as to whether a debtor has an absolute right to convert a

Chapter 7 case to a case under Chapter 11, 12 or 13. The United States Supreme

Court has granted certiorari to consider that issue. See Marrama v. Citizens Bank of

Massachusetts, 126 S.Ct. 2859, 165 L.Ed 2d 894 (June 12, 2006.)

Section 706(a) is similar to Section 1208(b) of the Bankruptcy Code. Section

1208(b) provides:

§ 1208. Conversion or dismissal

. . .

(b) On request of the debtor at any time, if the case

has not been converted under section 706 or 1112

of this title, the court shall dismiss a case under this

chapter. Any waiver of the right to dismiss under

this subsection is unenforceable.

11 U.S.C.A. § 1208(b) (West 2004).

4 992 F.2d 311 (11th Cir. 1993).

5

In Cotton v. Bank South, N.A., (In re Cotton),4 the Chapter 12 debtor entered

into a settlement agreement with Bank South. The debtor filed a request for voluntary

dismissal of his Chapter 12 case before the bankruptcy court held a hearing on

whether to approve the settlement agreement. The bankruptcy court stayed the

debtor’s request for voluntary dismissal until it could decide whether the parties had

reached a binding settlement. The Eleventh Circuit Court of Appeals held that the

debtor had a right to immediate dismissal of his Chapter 12 case under section

1208(b). The Eleventh Circuit stated in part:

Chapter 12 of the Bankruptcy Code provides that a debtor

may file a voluntary petition to go through bankruptcy. 11

U.S.C. § 1208(b) provides that such a case shall be

dismissed upon request “at any time” if it has not been

converted: “On request of the debtor at any time, if the

case has not been converted under section 706 or 1112 of

this title, the court shall dismiss a case under this chapter.

Any waiver of the right to dismiss under this subsection is

unenforceable.” Debtor Thomas E. Cotton’s case had not

been converted when he filed a proper request for

dismissal under this provision. He was entitled by the

clear language of this section to have his case dismissed.

992 F.2d at 312.

In the case at bar, Movants’ Chapter 7 case has not been converted from a case

under Chapter 11, 12, or 13. Section 706(a) provides that Movants have a right to

convert their Chapter 7 case to a Chapter 13 case. When a statute is clear, that is the

See Boca Ciega Hotel, 5 Inc. v. Bouchard Transportation Co., 51 F.3d 235, 238

(11th Cir. 1995) (plain meaning of an unambiguous statute almost always ends

court’s inquiry except in rare and exceptional circumstances where overwhelming

extrinsic evidence demonstrates a contrary legislative intent.)

6

end of the court’s inquiry.5 The Court is persuaded that Movants’ motion to convert

their Chapter 7 case to a Chapter 13 case should be granted.

The Court notes that some of the issues raised in the adversary proceeding filed

by Respondent can properly be raised in Movant’s Chapter 13 case at the confirmation

hearing. Confirmation of Movant’s Chapter 13 plan requires that Movant’s Chapter

13 plan be proposed in good faith. 11 U.S.C.A. §1325(a)(3) (West 2004).

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 2nd day of October, 2006.

/s/ Robert F. Hershner, Jr.

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

TERRANCE J. ZICH

March 31, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

TERRANCE J. ZICH :

KATHY E. ZICH, ::

Debtors : Case No. 00-50707 RFH

________________________________ :

TERRANCE J. ZICH :

KATHY E. ZICH, ::

Debtors ::

vs. ::

WHEELER WOLF ATTORNEYS, ::

Respondent :

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Debtors A. G. Knowles

544 Mulberry Street, Suite 201

Macon, Georgia 31201

For Respondent Steven L. Latham

Post Office Box 2056

Bismarck, North Dakota 58502-2056

For the Chapter 13 Trustee Laura D. Wilson

Office of the Chapter 13 Trustee

Post Office Box 954

Macon, Georgia 31202

1 The notice to creditors is titled Notice of Chapter 13 Bankruptcy Case,

Meeting of Creditors, & Deadlines. See Official Bankr. Form B9I.

2 Fed. R. Bankr. P. 3002 (unsecured creditor must file proof of claim for the

claim to be allowed no later than ninety days after first date set for meeting of

creditors).

2

MEMORANDUM OPINION

Terrance J. Zich and Kathy E. Zich, Debtors, filed on August 23, 2002,

an Objection to Claim. Wheeler Wolf Attorneys, Respondent, filed a response on

August 30, 2002. A hearing was held on January 6, 2003. The Court, having

considered the record and the arguments of counsel, now publishes this

memorandum opinion.

Debtors filed a joint petition under Chapter 13 of the Bankruptcy Code

on February 25, 2000. Debtors scheduled as unsecured and nonpriority an obligation

owed to Respondent for $10,270. Debtors’ proposed Chapter 13 plan and a “notice

to creditors”1 were served on Respondent on March 1, 2000. The notice to creditors

states that the deadline (the “bar date”) for filing a proof of claim was June 26,

2000.2 The notice to creditors further states: “To be paid you must file a Proof of

Claim even if your claim is listed in the schedules filed by the debtor.” Respondent

did not timely file a proof of claim.

The Court entered an order on September 18, 2000, confirming

Debtors’ Chapter 13 plan. The confirmed plan “classified” and provided that

3 Respondent contends that it was advised by the Chapter 13 Trustee’s office

to file a proof of claim.

4 Fed. R. Bankr. P. 3002(a), (c). This rule provides, in part, as follows:

Rule 3002. Filing Proof of Claim or Interest

(continued…)

3

Respondent’s unsecured claim would “be paid 100%.” Respondent received a

number of distributions from the Chapter 13 Trustee.

Respondent sent letters dated April 25, 2002, to the Chapter 13 Trustee

and to the Clerk of this Court. Respondent inquired as to the status of Debtors’

Chapter 13 case.

The Clerk of this Court sent Respondent a letter dated May 8, 2002.

The Clerk explained, in part, that Debtors had defaulted on their plan payments and

provided other information concerning Debtors’ case.

Respondent filed a proof of claim on May 3, 2002.3 Respondent

asserts an unsecured, nonpriority claim for $10,270.22. Debtors filed on August 23,

2002, an objection to Respondent’s claim. Debtors urge the Court to disallow

Respondent’s claim because the claim was filed after the bar date.

An unsecured creditor must file a proof of claim for the claim to be

allowed. The proof of claim, to be timely filed in a Chapter 13 case, must be filed,

with certain exceptions, no later than ninety days after the first date set for the

meeting of creditors.4 A court may enlarge the time for filing a proof of claim only to

4(…continued)

(a) Necessity for filing

An unsecured creditor or an equity security holder must file a

proof of claim or interest for the claim or interest to be allowed,

except as provided in Rules 1019(3), 3003, 3004, and 3005.

. . . .

(c) Time for filing

In a chapter 7 liquidation, chapter 12 family farmer’s debt

adjustment, or chapter 13 individual’s debt adjustment case, a

proof of claim is timely filed if it is filed not later than 90 days

after the first date set for the meeting of creditors called under

§ 341(a) of the Code, except as follows:

. . . .

5 See Fed. R. Bankr. P. 9006(b)(3). This rule provides as follows:

Rule 9006. Time

. . . .

(b) Enlargement

. . . .

(3) Enlargement limited

The court may enlarge the time for taking action under

Rules 1006(b)(2), 1017(e), 3002(c), 4003(b), 4004(a),

4007(c), 8002, and 9033, only to the extent and under the

conditions stated in those rules.

4

the extent and under the conditions stated in Rule 3002(c).5

The bar date for filing a proof of claim in a Chapter 13 case cannot be

6 Respondent does not contend that any of the exceptions set forth in Rule

3002(c) have been met.

5

extended because of excusable neglect or through the court’s general equity powers.

The court cannot allow an untimely proof of claim in a Chapter 13 case unless one of

the exceptions set forth in Rule 3002(c) is met.6 In re Jones, 154 B.R. 816 (Bankr.

M.D. Ga. 1993); 9 Collier on Bankruptcy ¶ 3002.03[1] p. 3002-11 (15th ed. rev.

2003).

Simply stated, in a Chapter 13 case, a claim is disallowed unless a proof

of claim is timely filed. In re Andrew, 162 B.R. 46, 49 (Bankr. M.D. Ga. 1993).

Respondent asserts several grounds in arguing that it should continue to

receive distributions from the Chapter 13 Trustee. First, Respondent argues that

Debtors defaulted on their postconfirmation payments to the Chapter 13 Trustee.

The Chapter 13 Trustee filed a motion to dismiss Debtors’ Chapter 13 case and a

motion to convert the Chapter 13 case to a Chapter 7 case. Debtors agreed to a strict

compliance order, thereby resolving the motion to dismiss and motion to convert.

Respondent argues that it continued to receive distributions from the Chapter 13

Trustee through August of 2002.

The Court notes that these events occurred after the bar date and

cannot excuse Respondent’s failure to timely file a proof of claim. The law is clear

that a claim is disallowed unless a timely proof of claim is filed.

Next, Respondent argues that Debtors’ confirmed Chapter 13 plan

7 11 U.S.C.A. § 1327(a) (West 1993). This section provides as follows:

§ 1327. Effect of confirmation

(a) The provisions of a confirmed plan bind the debtor and

each creditor, whether or not the claim of such creditor is

provided for by the plan, and whether or not such creditor has

objected to, has accepted, or has rejected the plan.

8 Fed. R. Bankr. P. 3021. This section provides, in part, as follows:

Rule 3021. Distribution Under Plan

Except as provided in Rule 3020(e), after a plan is confirmed,

distribution shall be made to creditors whose claims have been

allowed, . . .

Distribution in Chapter 13 cases is further governed by 11 U.S.C.A. § 1326 (West

1993).

6

expressly provides that the obligation at issue would “be paid 100%.” The provisions

of a confirmed Chapter 13 plan bind the debtor and the creditor.7 However, after

confirmation of a Chapter 13 plan, distribution is only made to creditors whose claims

have been “allowed.”8 Courts have held that, absent a timely proof of claim, a

creditor is not entitled to receive a distribution even though the confirmed plan

provides for payments on the claim. In re Greenig, 152 F.3d 631 (7th Cir. 1998)

(Chapter 12 case); In re Baldridge, 232 B.R. 394 (Bankr. N.D. Ind. 1999); Walters v.

Sherwood Municipal Court (In re Walters), 219 B.R. 520, 523 n.1 (Bankr. W.D.

Ark. 1998); Keith M. Lundin, 4 Chapter 13 Bankruptcy 3D Edition ¶ 288.1, p. 288-7,

-8 (3d ed. 2000 & Supp. 2002) (“[n]o matter how specific the plan provision for

9 11 U.S.C.A. § 1328(a)(2) (West Supp. 2002).

10 Fed. R. Bankr. P. 7001(6).

7

payment of a creditor, only allowed claims can be paid through the plan”).

The Court also notes the statement in the notice to creditors that

provides, “To be paid you must file a Proof of Claim even if your claim is listed in the

schedules filed by the debtor.” Thus, Respondent was given specific notice by the

Court of the requirement for Respondent to file a proof of claim.

Finally, Respondent argues that its claim arises from representing

Debtors in child support, custody, and visitation litigation. Some of Debtors’

obligations may be nondischargeable in bankruptcy.9 But, disallowance of a claim

and nondischargeability are separate issues. Cruz v. Educational Credit Management

Corp. (In re Cruz), 277 B.R. 793 (Bankr. M.D. Ga. 2000); In re Walters, 219 B.R. at

523 n.1. Nondischargeability actions must be brought through an adversary

proceeding.10

The Court is persuaded that Respondent’s claim must be disallowed

because it was filed after the bar date.

8

An order in accordance with this memorandum opinion will be entered

this date.

DATED the 31st day of March, 2003.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

WESTEK GEORGIA, LLC

December 1, 2004

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 11

:

WESTEK GEORGIA, LLC, ::

Debtor : Case No. 03-55298 RFH

:

WESTEK GEORGIA, LLC, ::

Plaintiff ::

vs. ::

ALAN R. OGLESBEE, :

ROBERT E. JOHNSON, and :

GREGORY W. PHILLIPS, ::

Defendants : Adversary Proceeding

: No. 04-5058

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Westek Georgia, LLC: Ms. Karen Fagin White

Mr. Bruce Z. Walker

Ms. Kelly S. Scarbrough

3350 Riverwood Parkway, Suite 1600

Atlanta, Georgia 30339

For Alan R. Oglesbee, Mr. Hubert C. Lovein, Jr.

Robert E. Johnson, and Ms. Cater C. Thompson

Gregory W. Phillips: Post Office Box 6437

Macon, Georgia 31208-6437

2

MEMORANDUM OPINION

Alan R. Oglesbee, Robert E. Johnson, and Gregory W. Phillips, Defendants,

filed on May 19, 2004, a Motion to Dismiss Plaintiff’s Complaint to Subordinate All

Claims. Westek Georgia, LLC, Plaintiff, filed a response on June 25, 2004.

Defendants’ motion came on for hearing on September 7, 2004. The Court, having

considered the record and the arguments of counsel, now publishes this memorandum

opinion.

The Court, in considering the motion to dismiss, will accept as true the well

plead facts in Plaintiff’s complaint. Defendants bear a “very high burden” of

showing that Plaintiff cannot conceivably prove any set of facts that would entitle it

to relief. Dudley v. Citicorp Mortgage, Inc., (In re Dudley), Ch. 7 Case No. 02-

51225 RFH, Adv. No. 02-5087 (Bankr. M.D. Ga., Jan. 10, 2003).

Defendants were officers, directors, shareholders, and employees of a tire

cordage business known as Westek, Inc. Plaintiff agreed to purchase substantially all

of the assets of Westek, Inc. The assets included real property, machinery, and

equipment. Plaintiff and Westek, Inc. entered into an Asset Purchase Agreement

dated October 30, 2002. Defendants negotiated the sale on behalf of Westek, Inc.

As an essential part of the sale, Plaintiff and Defendants executed a

3

Noncompetition Agreement dated November 11, 2002. The Noncompetition

Agreement provides, in part, that Defendants would not disclose certain confidential

information or work in a competitive business for a period of five years. The

Noncompetition Agreement was the primary vehicle for payment of cash to

Defendants as consideration for the sale. Plaintiff was to make quarterly payments to

Defendants through October 10, 2008. The payments would total $1,080,000. As

security for the obligation, Plaintiff executed a deed to secure debt on the real

property in favor of Defendants. Plaintiff also executed a security agreement on the

machinery and equipment in favor of Defendants.

Plaintiff’s business was not successful. Plaintiff contends that Defendants

fraudulently misrepresented the financial obligations of Westek, Inc.

Plaintiff filed on October 24, 2003, a complaint against Defendants and

Westek, Inc. in the Superior Court of Upson County, Georgia. Plaintiff asserts

claims for fraud, breach of contract, and indemnification. Defendants filed a

response, a counterclaim, and a third party complaint. The state court action will

determine the mutual claims and obligations between Plaintiff and Defendants. The

state court action is currently pending.

Defendants and other creditors filed on November 12, 2003, an involuntary

petition under Chapter 7 of the Bankruptcy Code against Plaintiff. Plaintiff, on

January 14, 2004, exercised its right to convert the Chapter 7 case to a Chapter 11

case. Plaintiff is the debtor-in-possession in the Chapter 11 case. Defendants filed

1 911 F.2d 1553 (11th Cir. 1990).

4

proofs of claim asserting secured claims that total almost $1.13 million.

Plaintiff filed this adversary proceeding on April 15, 2004. Plaintiff contends

that Defendants’ claims should be subordinated to all unsecured claims for purposes

of distribution. Plaintiff also contends that Defendants’ deed to secure debt and

security agreement should “in effect be voided.”

Section 510(c) of the Bankruptcy Code provides:

§ 510. Subordination

. . .

(c) Notwithstanding subsections (a) and (b) of this

section, after notice and a hearing, the court may—

(1) under principles of equitable subordination,

subordinate for purposes of distribution all or part

of an allowed claim to all or part of another

allowed claim or all or part of an allowed interest

to all or part of another allowed interest; or

(2) order that any lien securing such a

subordinated claim be transferred to the estate.

11 U.S.C.A. § 510(c) (West 2004).

In Allied Eastern States Maintenance Corp. v. Miller, (In re Lemco Gypsum,

Inc.),1 the Eleventh Circuit Court of Appeals stated, in part:

Title 11 U.S.C.A. § 510(c) adopts the long-standing

judicially developed doctrine of equitable subordination under

which a bankruptcy court has power to subordinate claims

against the debtor’s estate to claims it finds ethically superior

5

under the circumstances. Proper exercise of the equitable

subordination power can take place only where three elements

are established:

(1) The claimant must have engaged in some type of

inequitable conduct,

(2) The misconduct must have resulted in injury to the

creditors or conferred an unfair advantage on the

claimant,

(3) Subordination of the claim must not be inconsistent

with the provisions of the Bankruptcy Act.

The inequitable conduct need not be related to the acquisition or

assertion of the claim. The claim can be subordinated only to

the extent necessary to offset the harm suffered by the bankrupt

and its creditors on account of that conduct.

911 F.2d at 1556.

Collier on Bankruptcy states, in part:

Secured as well as unsecured claims may be subordinated. All

or part of a claim may be subordinated. A claim may be

subordinated to all or part of another allowed claim. Thus,

depending on the circumstances, a subordinated claim may be

regulated to the bottom rung of claims or may be simply allowed

after rather than ahead of the claim of a party who has in some

way been injured by the conduct of the holder of the

subordinated claim.

4 Collier on Bankruptcy, ¶ 510.05, p. 510-16, -17 (15th ed. rev. 2004).

Equitable subordination is not concerned with whether Defendants have a

valid counterclaim or right of set off. 1 Ginsberg & Martin on Bankruptcy,

§ 10.11[A][3] (2003 Supp.)

“Subordination and disallowance [of a claim] are two distinct theories within

the bankruptcy process because the former addresses the question of priority and

2 Motion to Dismiss Plaintiff’s Complaint to Subordinate All Claims, p. 3 – 4

(filed May 19, 2004).

6

participation, while the latter results in the complete exclusion from participation.

Subordination is an appropriate remedy for the Court in the exercise of its equitable

powers, but disallowance is not.” In re Huckabee Auto Co., 33 B.R. 132, 139-40

(Bankr. M.D. Ga. 1981).

In their motion to dismiss,2 Defendants contend, in part:

12.

[Defendants] move to dismiss Plaintiff’s Complaint to

Subordinate their claim on the grounds that the Superior Court

Action is a prior pending Action involving the same claims as

the instant preceding. The Superior Court Action will determine

the mutual claims and amounts owing as between the [Plaintiff]

and [Defendants]. The Superior Court will determine whether

[Defendants have] breached [their] contracts with [Plaintiff] and

whether [Defendants have] fraudulently concealed and

misrepresented the liabilities of Westek, Inc. The same acts of

inequitable conduct that allegedly give rise to Plaintiff’s claim

for equitable subordination are the basis for Plaintiff’s Superior

Court Action. The evidence necessary to sustain the complaint

for equitable subordination is exactly the same evidence

necessary to sustain the Superior Court Action.

13.

[Plaintiff] is attempting to prosecute the same cause of Action in

two different courts. In the Superior Court Action, [Plaintiff] is

attempting to defeat its liability to [Defendants] by alleging

fraud and inequitable conduct. However, if it loses the Superior

Court Action, it hopes to achieve the same result by alleging the

exact same fraud and inequitable conduct as grounds for

subordinating [Defendants] claims. Although [Plaintiff] alleges

different legal theories, the underlying facts are the same.

Defendants rely upon the “prior pending action doctrine.” Under that doctrine

3 11 U.S.C.A. § 502(a) (West 2004).

7

a subsequent action can be dismissed provided that: (1) an identity of issues exists

with the prior pending action, and (2) the controlling issues in the subsequent action

will be determined in the prior pending action. 5C Charles A. Wright & Arthur R.

Miller, Federal Practice and Procedure, §1360, p. 89 (3rd ed. 2004). See also

Community Savings Bank v. Canter, (In re Canter), 1 B.R. 172, 175 (Bankr. D.

Mass. 1979).

Dismissal should not be granted if the controversy in the subsequent action

could not or will not necessarily be determined in the prior action. See Federal

Practice and Procedure, § 1360 at n. 36.

Turning to the case at bar, Plaintiff has not filed an objection to Defendants’

proofs of claim. Defendants’ claims are deemed allowed in the amount of almost

$1.13 million.3 In this adversary proceeding, the Court is not asked to disallow

Defendants’ claims or to determine whether Defendants have a valid counterclaim

against Plaintiff. The only issue before the Court is whether Defendants’ allowed

claims should be subordinated. See In re Huckabee Auto Co., 33 B.R. at 140.

The state court has no jurisdiction to subordinate Defendants’ allowed claims

under section 510(c) of the Bankruptcy Code. This Court has sole jurisdiction to

determine how much, if any, of Defendants’ claims should be subordinated. This

Court may also determine that Defendants’ claims should be subordinated to some

8

but not all unsecured claims.

The issue of subordination will not be decided in the state court action. The

Court is persuaded that Defendants’ motion to dismiss must be denied.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 1st day of December, 2004.

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

THOMASTON MILLS, INC

December 5, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 11

:

THOMASTON MILLS, INC. ::

Debtor : Case No. 01-52544 RFH

::

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Charles C. Crumley: Mr. Timothy J. Tracey

999 Peachtree Street, N.E.

First Union Plaza, Suite 1400

Atlanta, Georgia 30309

Mr. Richard B. Herzog, Jr.

999 Peachtree Street, N.E.

First Union Plaza, Suite 1400

Atlanta, Georgia 30309

For Respondents: Mr. Don E. Snow

Post Office Box 12

Thomaston, Georgia 30286

1 Respondents are thirty-eight former employees of Debtor. Respondents are

named in the three responses.

2 See Section 1 of the severance plan, a copy of which is attached to the

stipulation of facts as Exhibit A.

2

MEMORANDUM OPINION

Charles C. Crumley, Chapter 11 Trustee (hereafter “Trustee”), filed on June 9,

2003, an Eighth Omnibus Objections to Allowance of Claims. Respondents filed

responses on July 1, 8, and 9, 2003.1 Trustee filed replies to Respondents’ responses

on August 20, 2003. Trustee’s objection came on for a hearing on August 25, 2003.

The Court, having considered the objection, the responses, the stipulation of facts,

and the arguments of counsel, now publishes this memorandum opinion.

Thomaston Mills, Inc., Debtor, was a textile manufacturer. Debtor operated a

number of textile mills. Debtor established a severance plan for its “exempt salaried

employees.” The effective date of the severance plan was November 1, 2000. The

purpose of the severance plan was to provide severance benefits to exempt salaried

employees whose employment may be involuntarily terminated due to permanent

layoff, unsatisfactory job performance, or following a “change in control.”2

Debtor was having financial problems when the severance plan was

established. Respondents argue that Debtor established the severance plan in order to

3 Debtor’s Board of Directors also terminated Debtor’s retirement, dental,

disability, and life insurance plans.

4 See Exhibits B and C which are attached to the stipulation of facts.

5 The Court notes that two of the Respondents may have been terminated prior

to June 14, 2001.

3

retain its key employees.

Debtor continued to have financial problems. Debtor’s Board of Directors

voted on June 14, 2001, to terminate the severance plan effective that date.3 Debtor,

on June 14, 2001, sent a notice advising all of its employees that Debtor was

permanently closing its textile mills. The notice advised that the severance plan was

terminated effective June 14, 2001. The notice also advised that most of Debtor’s

employees would be terminated on June 16, 2001.4 Respondents were terminated

after June 14, 2001.5

Debtor filed a petition under Chapter 11 of the Bankruptcy Code on June 19,

2001. Debtor has liquidated most of its assets and will not reorganize as a going

concern. The Court entered an order on March 18, 2002, approving the appointment

of Charles C. Crumley as Chapter 11 Trustee.

Respondents have each filed a proof of claim asserting a claim for severance

pay under the severance plan. Trustee filed an objection to the proofs of claim.

Trustee contends that the claims are for severance pay accruing after the severance

plan was terminated. Trustee contends that Respondents’ claims should be

disallowed.

6 See Sections 3.4.5 and 8.1 of the severance plan.

4

The severance plan provides that Debtor may, prior to a change in control,

permanently suspend severance benefits or terminate the severance plan.6 Trustee

and Respondents disagree on whether the vote by Debtor’s Board of Directors to

terminate the severance plan was effective. Trustee and Respondents have asked the

Court to decide this threshold legal issue before the factual merits of each claim by

Respondents is presented.

The severance plan provides in part as follows:

THE SEVERANCE PLAN

FOR THE EXEMPT SALARIED EMPLOYEES OF

THOMASTON MILLS, INC.

SECTION 1

Introduction

1.1. Purpose. Thomaston Mills, Inc. (the

“Company”) has established the Severance Plan for the

Exempt Salaried Employees of Thomaston Mills, Inc.

(the “Plan”). The purpose of the Plan is to provide

severance benefits to exempt salaried employees of the

Company whose employment is involuntarily terminated

by the Company due to a Permanent Layoff,

unsatisfactory job performance (as determined by the

Company in its sole discretion) or following a Change in

Control (“Employees”). . . .

1.2. Effective Date Plan Year. The “effective

date” of the Plan is November 1, 2000.

5

. . .

SECTION 2

Participation

2.1. Participation in the Plan is limited to those

Employees whose employment is involuntarily

terminated due to a Permanent Layoff, unsatisfactory job

performance or following a Change in Control. . . . No

severance benefits are contingent on an Employee’s

retirement. Severance payments are not to be viewed as

automatic and are not compensation for past services, but

instead are intended only as prospective payments that

will be offered in exchange for a written release from the

Employee.

SECTION 3

Severance Benefits

3.1. Eligibility for Severance Benefits

. . .

4. No severance benefit will be paid to an

Employee who terminates employment with the

Company until the Employee and the Company

have executed a General Release and Separation

Agreement (“General Release”) providing for the

release of all of the Employee’s then existing

rights and legal claims against the Company and

any applicable revocation period has expired

without the Employees having revoked the General

Release.

. . .

3.3. Manner and Timing of Payment

6

Severance benefits will normally be paid in a lump

sum after the effective date of a Company-approved

release.

. . .

3.4. Forfeiture of Severance Benefits

. . .

5. The Company may, prior to a Change

in Control, permanently suspend benefits under

severance packages in pay status (1) in the event of

the Company’s insolvency, liquidation, or

bankruptcy reorganization or (2) in the event the

cost of providing such benefits would lead to the

Company’s insolvency, liquidation, or bankruptcy

reorganization.

. . .

SECTION 4

Definitions

4.1. Change in Control

“Change in Control” means the occurrence during

the term of any of the following events:

1. The Company is merged, consolidated

or reorganized into or with another corporation or

other legal person, and as a result of such merger,

consolidation or reorganization less than a majority

of the combined voting power of the thenoutstanding

securities entitled to vote generally in

the election of directors (“Voting Stock”) of such

corporation or person immediately after such

transaction is held in the aggregate by the holders

7

of Voting Stock of the Company immediately prior

to such transaction;

2. The Company sells or otherwise transfers all

or substantially all of its assets to another

corporation or other legal person, and as a result of

such sale or transfer less than a majority of the

combined voting power of the then-outstanding

Voting Stock of such corporation or person

immediately after such sale or transfer is held in

the aggregate by the holders of Voting Stock of the

Company immediately prior to such sale or

transfer;

3. There is a report on Schedule 13D or

Schedule 14D-1 (or any successor schedule, form

or report), each as promulgated pursuant to the

Securities Exchange Act of 1934 (“Exchange

Act”), disclosing that any person (as the term

“person” is used in Section 13(d)(3) or Section

14(d)(2) of the Exchange Act) (a “Person”) has

become the beneficial owner (as the term

“beneficial owner” is defined under Rule 13d-3 or

an successor rule or regulation promulgated under

the Exchange Act) of securities representing 20%

or more of the combined voting power of the thenoutstanding

Voting Stock of the Company;

4. The Company files a report or proxy

statement with the Securities and Exchange

Commission pursuant to the Exchange Act

disclosing in response to Form 8-K or Schedule

14A (or any successor schedule, form or report or

item therein) that a Change in Control of the

Company has occurred or will occur in the future

pursuant to any then-existing contract or

transaction; or

5. If, during any period of two consecutive

years, individuals who at the beginning of any

such period constitute the Directors of the

8

Company cease for any reason to constitute at least

a majority thereof, provided, however, that for

purposes of this paragraph 5 each Director who is

first elected, or first nominated for election by the

Company’s stockholders, by a vote of at least twothirds

of the Directors of the Company (or a

committee thereof) then still in office who were

Directors of the Company at beginning of any such

period will be deemed to have been a Director of

the Company at the beginning of such period, but

excluding for this purpose, any such Director

whose initial assumption of office occurs as a

result of an actual or threatened election contest

(within the meaning of Rule 14a-1 of the Exchange

Act) with respect to the election or removal of

Directors or other actual or threatened solicitation

of proxies or consents by or on behalf of a Person

other than the Board.

Notwithstanding the provisions of the foregoing

paragraphs 3 or 4, solely because (a) the Company, (b)

the Company or (c) any Company-sponsored employee

stock ownership plan or any other employee benefit plan

of the Company or any Subsidiary either files or becomes

obligated to file a report or a proxy statement under or in

response to Schedule 13D, Schedule 14D-1, Form 8-K or

Schedule 14A (or any successor schedule, form or report

or item therein) under the Exchange Act disclosing

beneficial ownership by its shares of Voting Stock,

whether in excess of 20% or otherwise, or because the

company reports that a Change in Control of the

Company has occurred or will occur in the future by

reason of such beneficial ownership.

. . .

SECTION 7

Miscellaneous

9

. . .

7.3. Employment Rights. The Plan does not

constitute a contract of employment and participation in

the Plan will not give a participant the right to be rehired

or retained in the employ of the Company, nor will

participation in the plan give any Employee any right or

claim to any benefit under the Plan, unless such right or

claim has specifically accrued under the terms of the Plan.

. . .

7.6 Action by the Company. Unless otherwise

provided herein, any action required of or permitted by

the Company under the Plan shall be by resolution of its

Board of Directors.

7.7. Controlling Laws. The substantive law of

Georgia will be controlling except as it may be preempted

by the Employee Retirement Income Security Act of

1974.

. . .

SECTION 8

Amendment and Termination

8.1. Amendment and Termination. The

Company reserves the right to amend the Plan from time

to time or to terminate the Plan at any time in its sole

discretion. Notwithstanding the above, during the oneyear

period following a Change in Control no amendment

will be made to the Plan that would reduce or eliminate

benefits payable under the terms of the Plan immediately

prior to the date of the Change in Control. The Plan

cannot be terminated during the one-year period

following a Change in Control.

The severance plan provides that Debtor’s Board of Directors may, prior to a

10

change in control, permanently suspend severance benefits or terminate the severance

plan. Debtor’s Board of Directors voted to terminate the severance plan on June 14,

2001. Respondents argue that a change in control occurred prior to June 14, 2001,

because certain banks were telling Debtor’s Board of Director’s “what to do.”

The severance plan, in Section 4.1, states that a change in control means the

occurrence of any of the following events: (1) Debtor is merged, consolidated, or

reorganized into or with another corporation or other legal person and, as a result of

that action, Debtor’s outstanding securities no longer have the majority voting power

in the new corporation; (2) Debtor sells or transfers all or substantially all of its assets

to another corporation or other legal person, and as a result of the sale or transfer,

Debtor’s outstanding securities no longer have the majority voting power in the new

corporation; (3) a Schedule 13D or 14D-1 report is filed pursuant to the Securities

Exchange Act; (4) a Form 8-K or Schedule 14A report is filed with the Securities and

Exchange Commission, or (5) a majority of the directors on Debtor’s Board of

Directors change during a two year period.

The severance plan provides that a change in control means the occurrence of

any of the five defined events. There is no evidence that events (3), (4), or (5)

occurred. There is no evidence that, prior to June 14, 2001, Debtor was merged,

consolidated or reorganized into another organization. There is no evidence that

Debtor sold or transferred all or substantially all of its assets. Nor is there any

evidence that Debtor’s outstanding securities did not continue to have the majority

7 235 Ga. App. 492, 509 S.E.2d 342 (1988).

11

voting power. The Court can only conclude that no event occurred which resulted in

a change in control.

Next, Respondents argue that the last sentence in Section 8.1 of the separation

plan is an “incorrect statement of the intent of the parties.” The sentence says, “The

[Severance] Plan cannot be terminated during the one-year period following a

Change in Control.” (emphasis added). Respondents argue that the sentence should

say: “The [Severance] Plan cannot be terminated during the one-year period prior to a

Change in Control.” (emphasis added).

In Boland v. Georgia Eye Institute, Inc.7 the Georgia Court of Appeals stated

in part:

“The cardinal rule of contract construction is to ascertain the

intention of the parties. OCGA § 13-2-3. Contract construction

is a three-step process. . . . First, if no ambiguity appears, the

trial court enforces the contract according to its terms

irrespective of all technical or arbitrary rules of construction.

That is, where the terms of a written contract are clear and

unambiguous, the court will look to the contract alone to find the

intention of the parties. Secondly, if ambiguity does appear, the

existence or non-existence of an ambiguity is itself a question of

law for the court. Finally, a jury question arises only when there

appears to be an ambiguity in the contact which cannot be

negated by the court’s application of the statutory rules of

construction. . . . [A] contract should be construed by examining

the agreement in its entirety, and not merely by examining

isolated clauses and provisions thereof.” (Citations and

punctuation omitted.) Duffett v. E. & W. Properties, 208

Ga.App. 484, 486(2), 430 S.E.2d 858 (1993).

12

509 S.E.2d at 344.

The Court is persuaded that the sentence at issue is clear and unambiguous.

The sentence is consistent with Section 1.1 which provides, in part, that the purpose

of the severance plan is to provide severance benefits to an employee who is

involuntarily terminated following a change in control. See also Section 2.1

(participation in the severance plan is limited, in part, to employees whose

employment is terminated following a change in control).

Next, Respondents argue that Debtor did not act in good faith in terminating

the severance plan on the eve of bankruptcy as the business was going under.

Respondents argue that they stayed with a struggling business in reliance upon the

severance plan. Respondents rely upon Boland v. Georgia Eye Institute, Inc., 235

Ga. App. 492, 509 S.E.2d 342, 345 (1998). (“In Georgia, every contract includes the

implied duty of good faith.”)

“As a matter of law, this contract also imposed upon each party a duty of good

faith and fair dealing in the performance and completion of their respective duties and

obligations. ‘Good faith’ is a shorthand way of saying substantial compliance with

the spirit, and not merely the letter, of a contract.” Fisher v. Toombs County Nursing

Home, 223 Ga. App. 842, 479 S.E. 2d 180, 184 (1996).

There “can be no breach of an implied convent of good faith where a party to a

contract has done what the provisions of the contract expressly give him the right to

do. The same rule must apply when good faith is expressly covenanted.” Marathon

13

U.S. Realties, Inc. v. Kalb, 244 Ga. 390, 260 S.E. 2d. 85, 87 (1979). See also Walker

v. Gwinnett Hospital System, Inc., 2003 WL 22145837 (Ga. App. Sept. 18, 2003).

The severance plan expressly states that Debtor may, “at any time in its sole

discretion,” terminate the severance plan prior to a change in control. The Court is

persuaded that Debtor was simply exercising its rights under the terms of the

severance plan.

Finally, Respondents argue that their rights to severance pay vested prior to

termination of the severance plan. Respondents argue that they stayed with a

struggling business in reliance upon the severance plan. Respondents argue that

Debtor established the severance plan in order to retain its key employees during a

period of financial problems.

Trustee argues that under Section 3.1.4., no rights vested under the severance

plan until an employee was terminated and signed a general release in favor of

Debtor. Trustee argues that Respondents have not signed general releases. Trustee

argues that, under Section 2.1, severance benefits are not compensation for past

services, but are prospective payments offered in exchange for a written general

release.

Blacks Law Dictionary defines severance pay as follows:

severance pay. Money (apart from back wages or salary) paid by an

employer to a dismissed employee. ! Such a payment is often made in

exchange for a release of claims that the employee might have against

the employer. — Also termed separation pay; dismissal compensation.

14

BLACK’S LAW DICTIONARY 1379 (7th ed. 1999).

“In the absence of a binding contract which provides for severance pay, no

right to severance pay exists.” Hosea v. Sohio Petroleum Co., 140 Ga. App. 177, 230

S.E.2d 138, 139 (1976).

Debtor’s Board of Directors terminated the severance plan before

Respondents’ employment was terminated. The Court can only conclude that

Respondents had no vested interests under the severance plan before it was

terminated by Debtor’s Board of Directors.

Accordingly the Court must conclude that Debtor’s severance plan was

terminated on June14, 2001.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 5th day of December 2003.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

KENNETH R. STEMBRIDGE

October 5, 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

KENNETH R. STEMBRIDGE, ::

Debtor : Case No. 00-51228 RFH

:

STA-RITE INDUSTRIES, INC., :

ITS SUCCESSORS IN INTEREST :

OR ASSIGNS, ::

Movant ::

vs. ::

KENNETH R. STEMBRIDGE, ::

Respondent :

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Movant: MOLLY L. McCOLLUM

560 First Street

Macon, Georgia 31201

For Respondent: WILLIAM D. NESMITH, III

Post Office Box 488

Americus, Georgia 31709

The Chapter 13 Trustee: CAMILLE HOPE

Post Office Box 954

Macon, Georgia 31202

1 This notice is required by the federal and local rules

of bankruptcy procedure. Fed. R. Bankr. P. 3007; M.D. Ga. LBR

3007-1(d).

2

MEMORANDUM OPINION

Sta-Rite Industries, Inc., Its Successors in

Interest or Assigns, Movant, filed on August 28, 2000, its

Motion to Set Aside Order Sustaining Objection to Claim of

Sta-Rite Industries. A hearing was held on September 18,

2000. The Court, having considered the arguments of counsel

and the applicable law, now publishes this memorandum opinion.

Kenneth R. Stembridge, Respondent, filed on April 3,

2000, a petition under Chapter 13 of the Bankruptcy Code.

Movant filed on April 17, 2000, a proof of claim asserting an

unsecured claim of $106,883.06. Movant’s proof of claim

provided, in part, as follows:

Name and Address Where Notices Should be Sent

STA-RITE INDUSTRIES, INC.

175 WRIGHT STREET

DELAVAN, WI 53115

ATTN: CREDIT DEPARTMENT

Telephone No. 262-728-7368

Respondent served by mail his Objection to Proof of

Claim on June 9, 2000, at the address provided in Movant’s

proof of claim. Respondent filed his objection with the Court

on June 12, 2000. Respondent filed with the Court on June 16,

2000, an undated “notice”1 advising that Movant’s response to

2 Respondent’s notice advised that Movant’s response was

due 27 days after Respondent served its objection. Movant was

entitled to at least 30 days to respond. Fed. R. Bankr. P.

3007; M.D. Ga. LBR 3007-1(a)and (d).

3 See Fed. R. Bankr. P. 3008; 9024.

3

the objection must be filed on or before July 6, 2000.2 The

record does not show whether the notice was served on Movant.

Movant did not file a response to Respondent’s

objection. The Court entered an order on July 28, 2000,

disallowing Movant’s claim due to Movant’s failure to respond.

Movant filed on August 28, 2000, a motion to set

aside the Court’s order disallowing its claim.3 Movant

contends that Respondent failed to properly serve his

objection and that Movant did not receive the objection.

The Court notes that the notice prepared by

Respondent was undated, provided an erroneous response date,

and has no certificate of service. The Court questions

whether Movant was obligated to respond to Respondent’s

notice. Having made that observation, the Court will now

4 An objection to claim becomes an adversary proceeding

if a demand for relief under Rule 7001 is joined with the

objection.

4

decide whether Respondent properly served his objection on

Movant.

Rule 3007 of the Federal Rules of Bankruptcy

Procedure provides as follows:

Rule 3007. Objections to Claims

An objection to the allowance of a claim

shall be in writing and filed. A copy of the

objection with notice of the hearing thereon

shall be mailed or otherwise delivered to the

claimant, the debtor or debtor in possession

and the trustee at least 30 days prior to the

hearing. If an objection to a claim is joined

with a demand for relief of the kind specified

in Rule 7001, it becomes an adversary

proceeding.

Fed. R. Bankr. P. 3007.

An objection to the allowance of a claim is a

contested matter governed by Rule 9014.4 Fed. R. Bankr. P.

3007 (Advisory Committee Note); Fed. R. Bankr. P. 9014

(Advisory Committee Note); Fairchild v. Internal Revenue

Service of United States (In re Fairchild), 969 F.2d 866, 868

(10th Cir. 1992).

Most courts that have considered the issue have held

that Rule 9014 requires that an objection to claim must be

served in the manner provided by Rule 7004 for service of a

summons and complaint. See Boykin v. Marriott International,

Inc. (In re Boykin), 246 B.R. 825 (Bankr. E.D. Va. 2000);

5

United States v. Levoy (In re Levoy), 182 B.R. 827 (9th BAP

1995); In re Schweitzer, 145 B.R. 292 (Bankr. E.D. Ark. 1992);

United States v. Oxylance Corp., 115 B.R. 380 (N.D. Ga. 1990);

In re Morrell, 69 B.R. 147 (N.D. Cal. 1986).

Rule 7004 provides, in part, that service upon a

corporation may be made by mailing a copy of the summons and

complaint to the attention of an officer, a managing or

general agent, or any agent authorized by appointment or by

law to receive service of process, for the corporation. Fed.

R. Bankr. P. 7004(b)(3), (7), (8). See also Fed. R. Civ. P.

4(h)(1); O.C.G.A. 9-11-4(e) (Supp. 2000). “Service on a

corporate employee is not sufficient.” In re Boykin, 246 B.R.

at 828.

It is undisputed that Respondent did not mail his

objection to the attention of an officer or an agent of

Movant. The Court can only conclude that Movant was not

properly served with Respondent’s objection and that Movant

was not obligated to file a response.

5 Movant is now represented by other counsel.

6

Respondent’s counsel states that he may have talked

with Movant’s counsel5 concerning Respondent’s objection to

claim. Actual knowledge of litigation, however, is generally

insufficient to satisfy the requirements for valid service of

process. See Mid-Continent Wood Products, Inc. v. Harris, 936

F.2d 297, 301 (7th Cir. 1991); Way v. Mueller Brass Co., 840

F.2d 303, 306 (5th Cir. 1988); Sieg v. Karnes, 693 F.2d 803,

807 (8th Cir. 1982); Martin v. New York State Dept. of Mental

Hygiene, 588 F.2d 371, 373 (2d Cir. 1978).

Rule 2002(g) of the Federal Rules of Bankruptcy

Procedure provides that certain notices shall be mailed to the

creditor’s address stated in a duly filed proof of claim.

Rule 2002(g), however, does not apply to an objection to claim

which must be served as required by Rules 9014 and 7004. In

re Boykin, 246 B.R. at 828-29.

Movant, by filing a proof of claim, subjected itself

to the Court’s equitable power to disallow its claim.

Granfinanciera v. Nordberg, 492 U.S. 33, 109 S. Ct. 2782,

2798-2799 and n. 14, 106 L. Ed. 2d 26 (1989); Langenkamp v.

Culp, 498 U.S. 42, 111 S. Ct. 330, 331, 112 L. Ed. 2d 343

(1990). But an order sustaining an objection and disallowing

a claim is void where there has been defective service. See

In re Levoy, 182 B.R. at 833.

7

An order in accordance with this memorandum opinion

will be entered this date.

DATED the 5th day of October, 2000.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

KENNETH R. STEMBRIDGE, ::

Debtor : Case No. 00-51228 RFH

:

STA-RITE INDUSTRIES, INC., :

ITS SUCCESSORS IN INTEREST :

OR ASSIGNS, ::

Movant ::

vs. ::

KENNETH R. STEMBRIDGE, ::

Respondent :

ORDER

In accordance with the memorandum opinion entered

this date; it is

ORDERED that the Motion to Set Aside Order

Sustaining Objection to Claim of Sta-Rite Industries filed on

the 28th day of August, 2000, by Sta-Rite Industries, Inc.,

Its Successors in Interest or Assigns, Movant, hereby is

granted; and it is further

2

ORDERED that the Order Sustaining Debtor’s Objection

of Claim of Sta-Rite Industries entered by this Court on the

28th day of July, 2000, hereby is vacated and set aside; and

it is further

ORDERED that the Court directs Kenneth R.

Stembridge, Respondent, to properly serve his Objection to

Proof of Claim on Movant.

SO ORDERED this 5th day of October, 2000.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

CERTIFICATE OF SERVICE

I, Carolyn Hubbard, certify that a copy of the

attached and foregoing was mailed to the following:

Ms. Molly L. McCollum

Attorney at Law

560 First Street

Macon, GA 31201

Mr. William D. NeSmith, III

Attorney at Law

Post Office Box 488

Americus, GA 31709

Ms. Camille Hope

Chapter 13 Trustee

Post Office Box 954

Macon, GA 31202

This 5th day of October, 2000.

__________________________

Carolyn Hubbard

Deputy Clerk

United States Bankruptcy Court

JENNIFER JOHNSON

August 26, 2005

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 13

:

JENNIFER JOHNSON, ::

Debtor : Case No. 02-30457 RFH

:

JENNIFER JOHNSON, ::

Movant ::

vs. ::

CENTURY BANK & TRUST, ::

Respondent ::

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Movant: Ernest V. Harris

Post Office Box 1586

Athens, Georgia 30603

For Respondent: John T. McGoldrick, Jr.

Post Office Box 1606

Macon, Georgia 31202

The Chapter 13 Trustee: Tony D. Coy

Post Office Box 954

Macon, Georgia 31202

1 Movant also filed on April 12, 2005, a Motion to Obtain Secured Credit and a

Motion for Post-Confirmation Modification of Plan. The Court has entered orders

granting these motions.

2

MEMORANDUM OPINION

Jennifer Johnson, Movant, filed on April 12, 2005, an Objection to Claim and

Motion for Sanctions.1 Century Bank & Trust, Respondent, filed a response on May

6, 2005. Movant’s objection and motion came on for hearing on May 18, 2005. The

Court, having considered the evidence presented and the arguments of counsel, now

publishes this memorandum opinion.

Movant executed a promissory note dated May 14, 2001, in favor of

Respondent. The principal amount of the obligation was $262,620. Movant was to

repay the principal plus interest at 9.25 percent per annum by making a single

payment of $268,693.09 on August 12, 2001. The promissory note provided for a five

percent late charge if “any periodic payment” was not made within fifteen days after

its due date. Movant’s obligation was secured by a deed to secure debt on Lot 2,

Granite Cove Subdivision, Greene County, Georgia (hereafter the “Granite Cove

obligation”).

Three months later Movant executed a promissory note dated August 12, 2001,

in favor of Respondent. The principal amount of the obligation was $35,894.49.

Movant was to repay the principal plus interest at 8.75 percent per annum on February

3

10, 2002. The promissory note provided for a default rate of interest of 16 percent if

the obligation was not timely paid in full. Movant’s obligation was secured by a

second priority deed to secure debt on Lot 51, Reynolds Plantation, Greene County,

Georgia (hereafter the “Reynolds Plantation obligation”). Chevy Chase Bank, FSB,

holds the first priority deed to secure debt. Movant’s residence is located on the

Reynolds Plantation property. The Reynolds Plantation property also secured, by

cross-collateralization, the Granite Cove obligation.

Movant had financial problems and filed a petition under Chapter 13 of the

Bankruptcy Code on March 25, 2002. The Court entered an order on August 26,

2002, confirming Movant’s Chapter 13 plan. The confirmed plan provided that

Movant was to pay the Reynolds Plantation obligation in full, plus interest at 8.75

percent, by making fifty-five monthly payments of $846 through her Chapter 13 plan.

The confirmed plan listed the amount of the Reynolds Plantation obligation as

$38,197. The confirmed plan also provided that Movant was to sell the Granite Cove

property. Respondent was to receive the net proceeds of the sale at closing.

Respondent filed a proof of claim asserting a secured claim of $38,197 on the

Reynolds Plantation obligation. Respondent did not file a proof of claim on the

Granite Cove obligation.

A buyer was found for the Granite Cove property. The closing occurred on

January 30, 2003. Respondent received the net proceeds of $251,732.40.

Respondent contends that, at the time of the closing, Movant owed

2 This amount included principal and interest of $302,771.31; a late charge of

$13,439.65; actual attorney fees of $1,546.00; appraisal fee of $300.00; and

insurance premiums of $1,700.40.

3 $911.47 minus $846 = $65.47.

4

$319,757.362 on the Granite Cove obligation. Respondent contends that, after

applying the net proceeds, there was a deficiency of $68,024.96 on the Granite Cove

obligation. Movant’s confirmed Chapter 13 plan made no provision for dealing with a

deficiency.

Respondent’s president, E. David McMillian, attended the closing on the

Granite Cove property. Immediately after the closing, Mr. McMillian had Movant

sign a promissory note in favor of Respondent. The principal amount of the

obligation was $109,132.81. The interest rate was 8.00 percent per annum. The

$109,132.81 amount calculated by Respondent includes the deficiency on the Granite

Cove obligation of $68,024.96, the balance on the Reynolds Plantation obligation of

$40,552.85 and administrative fees and recording fees of $555. Movant was to repay

the obligation by making fifty-nine monthly payments of $911.47 and by making a

balloon payment of $97,184.17 on January 28, 2008. Respondent was receiving $846

per month through Movant’s Chapter 13 plan. Therefore, Respondent only required

Movant to pay $65.47 per month directly to Respondent.3 The promissory note

provided that the obligation was secured by a deed to secure debt on the Reynolds

4 Movant’s contends that she owes $65,749.21 on the Granite Cove deficiency and

$22,879.64 on the Reynolds Plantation obligation.

5

Plantation property. Movant’s bankruptcy counsel was not present at the closing and

was not aware that Movant had executed the new promissory note.

Movant received a payment coupon book and made several monthly payments

of $65.47 to Respondent. Movant and her husband separated in March 2004. They

later divorced. Movant testified that she cannot make her Chapter 13 plan payments

and meet her other financial obligations.

Bank South agreed to refinance Movant’s residence, the Reynolds Plantation

property. Movant filed on April 12, 2005, a Motion to Obtain Secured Credit and a

Motion for Post-Confirmation Modification of Plan. The Court has entered orders

granting these motions. Movant proposes to use the refinancing proceeds to pay in

full the obligations secured by the Reynolds Plantation property. Movant and

Respondent disagree on the amount that Movant owes to Respondent.

Respondent contends that Movant owes $105,898.97. Movant contends that

she owes $88,628.85.4 Respondent seeks to recover $17,270.12 more than the amount

Movant contends that she owes. The amount in dispute includes a late charge of

$13,439.65 on the Granite Cove obligation and “default interest”of 16 percent on the

Reynolds Plantation obligation.

Late Charge

5 Movant paid part of the obligation when the Granite Cove property was sold on

January 30, 2003.

6 $268,693.09 x 5% = $13,434.65. The Court notes a difference of $5.00 in the

amount that Respondent seeks.

6

The Granite Cove obligation provided for a five percent late charge if “any

periodic payment” was not made within fifteen days after its due date. Movant was to

repay the obligation by making a single payment of $268,693.09 on August 12, 2001.

Movant failed to make this payment.5 Respondent contends that it is entitled to a late

charge of $13,439.65.6 Mr. McMillian testified that Respondent decided to collect the

late charge postconfirmation when it appeared that Movant would be able to sell the

Granite Cove property. Movant contends that a single payment for the full amount of

the obligation is not a “periodic payment.”

Section 3 (A) of the Granite Cove promissory note provides:

3. Payments

(A) Periodic Payments

I will pay principal and interest by making periodic

payments when scheduled:

G I will make ……………. payments of $ …………… each

on the ………….. of each ………. beginning on ……….. .

I will make payments as follows:

ONE PAYMENT OF 268,693.09 DUE ON

AUGUST 12, 2001

G In addition to the payments described above, I will pay

a “Balloon Payment” of $ ……….. on ………. . The Note

Holder will deliver or mail to me notice prior to maturity

XX

7

that the Balloon Payment is due. This notice will state

the Balloon Payment amount and the date that it is due.

(emphasis added).

“In construing a contract words generally bear their usual and common

significance. If the terms used are clear and unambiguous they are to be taken and

understood in their plain, ordinary, and popular sense. Dictionaries supply the plain,

ordinary and popular sense.” Henderson v. Henderson, 152 Ga. App. 846, 264 S.E.

2d 299, 301 (1979). See Market Place Shopping Center v. Basic Business

Alternatives, Inc., 213 Ga. App. 722, 445 S.E. 2d 824, 825-26 (1994).

Black’s Law Dictionary defines lump-sum payment and periodic payment as

follows:

lump-sum payment. A payment of a large amount all at once, as

opposed to smaller payments over time. Cf. Periodic payment.

periodic payment. One of a series of payments made over time instead

of a one-time payment for the full amount. Cf. lump-sum payment.

Black’s Law Dictionary 1165 (8th ed 2004).

The Court is persuaded that the usual and common understanding of “periodic

payment” does not include the making of a single payment for the full amount.

Respondent urges the Court to look to the promissory note for the meaning of

“periodic payment.” The heading of Section 3(A) is “Periodic Payments.”

Respondent contends that a single payment called for under this heading is a periodic

payment.

8

Under Georgia law, the goal in construing a contract is to ascertain the intent of

the parties. In doing so, the court must consider the contract as a whole. SGE

Mortgage Funding Corp. v. Accent Mortgage Services, Inc., (In re SGE Mortgage

Funding Corp.), 298 B.R. 854, 860 (Bankr. M.D. Ga. 2003) (Laney, J.)

When “construction of a contract is doubtful, it is to be construed most

strongly against the party who prepared it.” Kennedy v. Brand Banking Co., 245 Ga.

496, 266 S.E. 2d 154, 157 (1980).

Respondent prepared the promissory note which called for Movant to make a

single payment of the full amount. The promissory note states that Respondent was

entitled to a late charge if Movant missed a periodic payment. Periodic payment

means one of a series of payments made over time instead of a single payment for the

full amount. Since the promissory note did not provide for periodic payments,

Movant could not have missed a periodic payment. The Court is not persuaded that

Respondent is entitled to a late charge.

Default Rate of Interest

Respondent contends that it is entitled to “default interest” of 16 percent on the

Reynolds Plantation obligation. Respondent seeks in excess of $3,000 in default

interest. At the hearing on May 18, 2005, neither Respondent’s president nor its

counsel could explain how Respondent calculated the default interest.

The provisions of a confirmed Chapter 13 plan are binding on the debtor and

7 Section 1327(a) provides:

§ 1327. Effect of confirmation

(a) The provisions of a confirmed plan bind the debtor and each creditor,

whether or not the claim of such creditor is provided for by the plan, and

whether or not such creditor has objected to, has accepted, or has rejected

the plan.

11 U.S.C.A. § 1327(a) (West 2004).

8 11 U.S.C.A § 362 (West 2004).

9

the creditors. 11 U.S.C.A. § 1327(a) (West 2004).7 Respondent filed a proof of claim

on the Reynolds Plantation obligation in the amount of $38,197. This is the same

amount that is to be paid in full through Movant’s confirmed Chapter 13 plan. The

interest rate is set forth in the Chapter 13 plan. The Court is persuaded that

Respondent is bound by the provisions of Movant’s confirmed Chapter 13 plan. The

Court is not persuaded that Respondent is entitled to a default rate of interest.

Automatic Stay Violation

Movant contends that Respondent violated the automatic stay of the

Bankruptcy Code8 by having Movant sign a new promissory note immediately after

the closing on the Granite Cove property. The new promissory note included the

balance owed on the Reynolds Plantation obligation. The Reynolds Plantation

obligation is being paid through Movant’s confirmed Chapter 13 plan. Respondent

has not received any payments on the Reynolds Plantation obligation outside of the

10

Chapter 13 plan.

The new promissory note also included the balance owed on the Granite Cove

obligation. Movant’s confirmed Chapter 13 plan made no provision for dealing with

this obligation. The Granite Cove obligation was cross-collateralized by the Reynolds

Plantation property.

Movant’s bankruptcy counsel was not present at the closing on the Granite

Cove property. Movant did not advise her bankruptcy counsel that she had executed

the new promissory note.

The Court is not persuaded that Respondent willfully violated the automatic

stay or the provisions of the confirmed Chapter 13 plan. The confirmed plan made no

provision for dealing with the deficiency on the Granite Cove obligation, which was

cross-collateralized by the Reynolds Plantation property. Respondent has not

received any payments outside of the Chapter 13 plan on the Reynolds Plantation

obligation. The Court is not persuaded that Movant is entitled to any damages.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 26th day of August, 2005.

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

11

WILLIAM K. HOLMES

July 1, 2005

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 11

:

WILLIAM K. HOLMES, ::

Debtor : Case No. 02-52793 RFH

:

WILLIAM K. HOLMES, ::

Movant ::

vs. ::

CITIGROUP INVESTMENTS :

AGRIFINANCE, AS SUCCESSOR :

IN INTEREST TO THE TRAVELERS :

INSURANCE COMPANY, ::

Respondent :

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Movant: Joseph J. Burton, Jr.

Two Ravinia Drive

Suite 1750

Atlanta, Georgia 30346

For Respondent: T. Baron Gibson, II

Post Office Box 1606

Macon, Georgia 31202-1606

Michael N. White

Post Office Box 1606

Macon, Georgia 31202-1606

1 The promissory note for Loan No. 206582 for $2,000,000 is attached to

Respondent’s proof of claim. The Court will assume that the promissory note for the

$300,000 obligation is identical.

2

MEMORANDUM OPINION

William K. Holmes, Movant, filed on January 24, 2005, his Motion Under

Section 506(b) For Determination of Secured Status and Objection to Claim of

Citigroup Investment AgriFinance as Successor in Interest to The Travelers Insurance

Company for Default Interest and Other Charges. Movant’s motion came on for

hearing on March 8, 2005. The Court, having considered the record, the stipulation of

facts, and the arguments of counsel, now publishes this memorandum opinion.

Movant executed two promissory notes dated November 26, 1996, in favor of

The Travelers Insurance Company. The principal amount of the obligations totaled

$2,300,000. The promissory notes1 provide for, in relevant part, (1) an 18 percent per

annum default rate of interest; (2) prepayment premiums should Movant prepay the

obligations; and (3) payment of reasonable attorney’s fees, costs, and expenses if the

obligations are referred to an attorney for collection. The promissory notes are to be

governed and construed according to Georgia law. The promissory notes provide that

the loans were exclusively for commercial or business purposes.

Movant’s obligations were secured by two deeds to secure debt. Citigroup

Investments AgriFinance, Respondent, is the successor-in-interest to The Travelers

2 Respondent’s proof of claim was filed on October 22, 2002. Some of the

additional interest, fees, and charges that Respondent seeks are for the period after

Respondent filed its proof of claim.

3

Insurance Company.

Movant filed a petition under Chapter 11 of the Bankruptcy Code on July 31,

2002. Movant is the Chapter 11 debtor-in-possession. Movant’s proposed Chapter 11

plan of reorganization is pending before the Court.

The Court entered an order on September 13, 2004, approving the sale of

Movant’s principal asset, some 6,708 acres of real property. The gross sales price

was $13,250,000.

Respondent’s deeds to secure debt were first priority liens on 3,814.5 acres of

Movant’s real property. The value of Respondent’s collateral was $7,534,604.20.

Respondent filed a proof of claim asserting a secured claim for $1,619,296.41.

Respondent’s claim, at all relevant times, was oversecured. On October 5, 2004,

Respondent was paid the full outstanding principal balance of its claim,

$1,450,000.00

Respondent contends that it is also entitled to the following as part of its

oversecured claim:2

Amount

(1) Pre-Default Interest at 6.03% $ 223,342.39

(2) Post-Default Interest at 18% $ 399,960.06

3 Debtor’s Memorandum of Law in Support of its Motion Under Section 506 (b)

for Determination of Secured Status and Objection to Claim of Citigroup Investment

Agrifinance as Successor in Interest to the Travelers Insurance Company for Default

Interest and Other Charges, p. 5-6, (filed April 1, 2005), Docket No. 234. (hereafter

“Debtor’s Memorandum of Law”).

4 These dates represent the approximate dates from the filing of Movant’s

bankruptcy petition until the date Movant’s motion came on for hearing.

4

(3) Pre-Payment Premium $ 135,675.00

(4) Attorney Fees $ 8,715.69

(5) Interest on Attorney Fees $ 2,541.76

$ 770,234.90

Movant concedes that Respondent is entitled to pre-default interest of

$223,342.39 and attorney fees of $8,715.69.3

Movant’s counsel is holding in a special reserve account some $1,000,000 for

payment of the balance of Respondent’s claim and the claims of other creditors.

Unpaid junior priority creditors include the Internal Revenue Service which filed an

amended claim for $10,558,072.20, and the Georgia Department of Revenue which

filed a claim for $2,981,433.21. Movant’s estate is insolvent and all creditors will not

be paid in full.

The stipulation of facts state that Respondent’s prime rate of interest from July

1, 2002, until March 21, 2005,4 fluctuated from 4.75 percent to 5.50 percent.

Stipulation No. 8.

Section 506(b) of the Bankruptcy Code provides:

5

§ 506. Determination of secured status

. . .

(b) To the extent that an allowed claim is secured by

property the value of which, after any recovery under

subsection (c) of this section, 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 for under the agreement under

which such claim arose.

11 U.S.C.A. § 506(b)(West 2004).

“Recovery of postpetition interest [under 506(b)] is unqualified. Recovery of

fees, costs, and charges, however, is allowable only if they are reasonable and

provided for in the agreement under which the claim arose.” United States v. Ron

Pair Enterprises, Inc., 489 U.S. 235, 109 S. Ct. 1026, 1030, 103 L.Ed.2d 290 (1989).

Collier on Bankruptcy states in part:

¶ 506.04 Entitlement to Postpetition Interest, Costs and Fees; § 506(b).

. . .

[2]—Entitlement to Postpetition Interest.

. . .

[b]—Determining Applicable Interest Rate.

. . .

[ii]—Supplemental Interest Charges.

In addition to specifying a basic interest

rate, a financial contract may also make

provision for the payment of a variety of

6

other kinds of obligations, including (i)

default rates of interest, (ii) interest on

interest, (iii) late charges, (iii) prepayment

charges, and the like. Most courts have

allowed, or at least recognized a

presumption of allowability for, default rates

of interest, provided that the rate is not

unenforceable under applicable

nonbankruptcy law. In general, just as there

is no express mechanism in section 506(b)

for adjusting basic interest rates, courts

should be reluctant to infer a mechanism for

disallowing default rates of interest under

federal law. Rather, the allowability of the

rate should turn instead on applicable

nonbankruptcy law.

In addition, some courts have concluded

that a default rate of interest may be denied

as an unreasonable “charge,” rather than as

part of the creditor’s allowable interest

entitlement. In general, a default rate of

interest is properly a form of interest.

Recharacterization of the rate as a “charge”

or a “penalty” should also turn in most

instances on applicable nonbankruptcy law.

Courts have also allowed the

compounding of interest—so-called

“interest-on-interest”—if provided for in the

underlying contract and under applicable

nonbankruptcy law. Similarly, courts have

allowed prepayment charges as a form of

interest, as well as late charges that serve the

function of additional interest. However, as

with any other form of interest, these

obligations should not be allowed to the

extent that they are invalid under relevant

nonbankruptcy law. Moreover, if an

obligation denoted as a form of

supplemental interest does not serve the

5 230 B.R. 213 (Bankr. M.D. Ga. 1998) (Laney, J.).

7

function of providing additional interest and

may be recharacterized as a “charge” under

applicable nonbankruptcy law, it may be

reviewed for reasonableness under federal

law as a “charge” under applicable

nonbankruptcy law, it may be reviewed for

reasonableness under federal law as a

“charge” under the last clause of section

506(b).

. . .

[5]—Effect on Junior Secured Creditor; Adequate

Protection; Relief From Stay.

In general, a senior secured creditor is entitled to recover

postpetition interest, fees, costs and charges even if the

allowance of these expenses is to the detriment of a junior

secured creditor (e.g., by reducing the value of the junior

creditor’s interest).

4 Collier on Bankruptcy, ¶ 506.04 [2] [b] [ii], [5] (15th ed rev. 2005).

Post-Default Interest at 18 Percent

The promissory notes provide for post-default interest “at the rate of 18% per

annum or the maximum rate permitted by applicable law, whichever is less (hereafter

the ‘Default Rate’).” Promissory Note dated Nov. 26, 1996 for Loan No. 206582,

para. 1 (e).

In Orix Credit Alliance, Inc. v. CIT Group/Equipment Financing, Inc. (In re

Hughes),5 this Court held that a creditor is entitled to postpetition interest if its claim

8

is oversecured and the agreement provides for the interest. When a creditor is

oversecured, the estate need not be solvent for the creditor to be entitled to

postpetition interest. This Court held that the oversecured creditor was entitled to the

24 percent default rate of interest as provided in the agreement. 230 B.R. at 230.

The Court is persuaded that Respondent is entitled to the 18 per cent default

rate of interest as provided in the promissory notes.

Pre-Payment Premium

The promissory notes provide for Movant to pay a prepayment premium

if the obligations are paid before maturity. Respondent contends that Movant owes a

prepayment premium of $135,675. This amount is 9.36 percent of the payment made

to satisfy the outstanding principal balance of Respondent’s claim, $1,450,000.

A prepayment premium is a “charge” and must be “reasonable” to be allowable

under section 506(b). In re AE Hotel Venture, 321 B.R. 209, 217 (Bankr. N.D. Ill.

2005); Foothill Capital Corp. v. Official Unsecured Creditors’ Committee of Midcom

Communications, Inc., 246 B.R. 296, 306 (E.D. Mich. 2000); Continental Securities

Corp. v. Shenandoah Nursing Home Partnership, 193 B.R. 769, 775 (W.D. Va.) aff’d

104 F.3d 359 (4th Cir. 1996).

Some courts, in determining whether a prepayment premium is reasonable,

limit the recovery to actual costs, charges, and fees incurred by the creditor because of

the prepayment. Other courts allow the creditor to recover the difference between the

market rate of interest on the prepayment date and the contract rate for the remaining

9

term of the loan. Finally, some courts view a prepayment premium as liquidated

damages. These courts consider whether the charge is so large as to be a penalty

rather than damages. Noonan v. Fremont Financial, (In re Lappin Electric Co.), 245

B.R. 326, 330 (Bankr. E.D. Wisc. 2000); In re AE Hotel Venture, 321 B.R. at 217 n

10.

Respondent has the ultimate burden to show that the prepayment premium is

reasonable. In re Schwegmann Giant Super Markets, 287 B.R. 649, 654 (E.D. La.

2002).

The promissory notes provide two methods to calculate the prepayment

premium. Both methods require complex calculations which are difficult to perform.

Respondent offers no evidence that the prepayment premium charged under either

method is reasonable. The Court is not persuaded that Respondent has carried its

burden of proof to show that it is entitled to the prepayment premium.

Interest on Attorney Fees

“This issue turns on whether the loan instruments authorize interest on

attorney’s fees under the circumstances of this case.” Equitable Life Assurance

Society v. Sublett, (In re Sublett) 895 F.2d 1381, 1387 (11th Cir. 1990).

The promissory notes provide for Movant to pay reasonable attorney’s fees,

costs, and expenses incurred by Respondent if the obligations are referred to an

attorney for collection. The promissory notes do not provide for interest on attorney

fees. Respondent did not address this issue in its brief. The Court is not persuaded

10

that Respondent is entitled to interest on its attorney fees.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 1st day of July 2005.

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

HARVEY L. HALL

September 24, 2009

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

HARVEY L. HALL, ::

Debtor : Case No. 03-54624 RFH

:

BEFORE

ROBERT F. HERSHNER, JR.

UNITED STATES BANKRUPTCY JUDGE

APPEARANCES:

Movant: Thomas C. James, III

Walter E. Jones

231 Riverside Drive, Suite 100

P.O. Box 4283

Macon, GA 31208 – 4283

Respondent: Ward Stone, Jr.

Austin E. Carter

Suite 800, Fickling & Co. Building

577 Mulberry St.

Macon, GA 31201

Debtor: Pro Se

1 Harvey L. Hall is also known as Bo Hall.

2

MEMORANDUM OPINION

Scott T. McArdle, Movant, filed with the Court on October 10, 2008, a

Potential Administrative Fee Claimant Scott T. McArdle’s Motion To Stay Case

Closing And Distributions To Creditors Pending Determination Of Claim. Movant

filed an amendment to his motion on October 27, 2008. Movant filed on

November 25, 2008, a Potential Administrative Fee Claimant Scott T. McArdle’s

Motion To Disgorge All Attorneys Fees, Costs, And Expenses Paid To Attorney

James E. Carter. James E. Carter, Respondent, filed a response on January 20, 2009.

Movant’s motions came on for a hearing on January 21, 2009. The Court, having

considered the motions, the response, the evidence presented, and the arguments of

counsel, now publishes this memorandum opinion.

Harvey L. Hall, Debtor,1 is the Chapter 7 debtor in this bankruptcy case. Justin

Hall was the Debtor’s son. In December 2002 Justin Hall underwent bariatric surgery

in the Coliseum Hospital in Macon, Georgia. Shortly after the surgery, Justin Hall

died. Debtor is the heir to and the administrator of his son’s estate.

Movant is an attorney licensed to practice law in Alabama and Mississippi.

Movant resides in Montgomery, Alabama. Personal injury claims make up about 85%

of Movant’s practice. Debtor was referred to Movant by a mutual friend. After

talking with Debtor and after obtaining information concerning the death of Debtor’s

2 Transcript of Hearing (“Tr.”) pp. 27-28; 66-67.

3 Reed is sometimes spelled Reid.

4 Tr. pp. 69-70; 92.

3

son, Movant agreed to represent Debtor in pursuing medical malpractice claims.

Movant testified that he did a “thorough work-up” and a pre-analysis of Debtor’s

claims.2 Movant and Debtor signed a contingent fee agreement dated January 8, 2003.

Movant was to receive 45%, plus expenses, of any recovery. Debtor resided in and

signed the agreement in Georgia. Movant signed the agreement in Alabama. Movant

does not keep time records in contingent fee cases.

The alleged medical malpractice occurred in Georgia. Movant is not licensed

to practice law in Georgia. Movant was working on an unrelated personal injury case

(the “Reed v. Ford Motor Company case”)3 with Respondent, who resides in and is

licenced to practice law in Georgia. Respondent was lead counsel and Movant was

co-counsel in the Reed case. During a meeting in the Reed case, Movant talked with

Respondent about Debtor’s claims. Movant gave Respondent a package of

information.4 Respondent agreed to represent Debtor. Respondent and Debtor signed

a contingent fee agreement. Respondent was to receive 45%, plus expenses, of any

recovery. Respondent signed the agreement on January 20, 2003. Debtor signed the

agreement on January 22, 2003.

Debtor understood he had two attorneys, Movant and Respondent, and the

5 Tr. pp. 73-74.

6 Tr. pp. 72-73.

7 Although Respondent and Movant did not sign a written fee sharing agreement,

there is no dispute that they agreed to share any recovery.

8 Tr. p. 73.

9 Tr. p. 30.

4

combined amount of their contingent fees would be 45% of any recovery.5 Debtor

understood that Respondent was his “primary lawyer.”6

In April 2003 Respondent and Movant agreed to share any recovery on

Debtor’s claims on a 60% – 40% basis.7 This was the same fee sharing agreement

Respondent and Movant had in the Reed case. Although Debtor was not immediately

aware of the fee sharing agreement, he testified that he had no objection to the

agreement.8 Movant testified his 40% share of the contingent fee was not a “referral

fee” and he expected to be actively involved in pursing Debtor’s claims. Movant

testified he and Respondent had a “lot of discussions” concerning the selection of

medical experts. Respondent wanted to have the experts “in line” before the

malpractice actions were filed.9

On September 5, 2003, Respondent, on behalf of Debtor, filed two medical

malpractice actions in the State Court of Bibb County, Georgia. The Coliseum

Hospital was the defendant in one action. Justin Hall’s doctor was the defendant in

10 The Court reaches this conclusion by noting that in May 2007 Movant sought to be

admitted pro hac vice in the malpractice actions.

11 Tr. pp. 61-62.

12 Mr. Gay was not present at the hearing on Movant’s motions.

13 Tr. p. 78.

14 11 U.S.C.A. § 341(a) (West 2004).

5

the other action. Movant was not listed as co-counsel in the malpractice actions.10

Movant testified that, after the malpractice actions were filed, he served Debtor

diligently, he communicated with Debtor on a regular basis, he spent countless hours

explaining the law to Debtor, and he explained the reasons Respondent may not be

returning Debtor’s telephone calls.11

On October 6, 2003, Debtor filed in this Court a petition under Chapter 7 of the

Bankruptcy Code. Debtor was represented by Charles E. Gay who is a local

bankruptcy attorney.12 Debtor did not consult with Movant or Respondent before he

filed for bankruptcy relief.13 Debtor listed his malpractice actions in Schedule B

(personal property) and in Schedule C (property claimed as exempt). In Schedule I

(current income of debtor) Debtor listed Respondent as his attorney in the malpractice

actions. Movant was not listed in Debtor’s bankruptcy schedules or statement of

financial affairs. J. Coleman Tidwell (hereafter “Trustee”) was appointed to be the

Chapter 7 trustee of Debtor’s estate. Debtor told Trustee about his malpractice

actions at the “meeting of creditors.”14 Debtor testified that Trustee did not ask for the

15 Tr. pp. 80-81.

16 11 U.S.C.A. § 365(a), (d)(1) (West 2004 & Supp. 2009).

17 Tr. p. 31; 42; 57-58.

6

name of his attorney or the court where the malpractice actions were pending.15

Debtor did not list his contingent fee agreements with Movant and Respondent

as executory contracts in Schedule G of his bankruptcy petition. Trustee did not seek

approval from the Court to accept or reject the agreements as executory contracts.16

Some six or seven months later, Debtor told Respondent that he had filed for

bankruptcy relief. Neither Debtor or Respondent told Movant about the bankruptcy

case. Debtor testified that he was “ashamed of it.” Movant testified that he did not

know about Debtor’s bankruptcy until May or July 2007.17

The Court entered an order on January 30, 2004, granting Debtor a discharge

under Chapter 7 of the Bankruptcy Code.

Trustee, as the representative of the bankruptcy estate, succeeded to Debtor’s

interest in the malpractice actions. Trustee asked Respondent to represent him in

prosecuting the malpractice actions. On March 19, 2004, Trustee filed an application

to employ Respondent pursuant to 11 U.S.C. § 327(e) for the specified purpose of

prosecuting the malpractice actions. Respondent agreed to represent Trustee on a

contingent fee basis of 45% plus expenses. The Court entered an order on March 26,

2004, approving Respondent’s employment. Respondent understood that he

18 Tr. p. 96.

19 Tr. p. 99.

7

represented Trustee on behalf of the bankruptcy estate. Respondent understood that

he no longer had a contractual obligation to split any contingent fees with Movant.

Respondent testified that Movant wasn’t doing anything in the malpractice actions.18

Respondent understood that Debtor told Movant that Respondent was representing

Trustee in the malpractice actions.19 Movant testified that he did not know until May

or July 2007 that Respondent had been appointed to represent Trustee.

During the next four years, Respondent prosecuted the malpractice actions on

behalf of Trustee. Respondent did not tell Debtor that he no longer represented

Debtor in the malpractice actions.

Debtor continued to contact Movant and Respondent to inquire about the

malpractice actions. The parties hotly dispute whether Debtor had difficulty

contacting Respondent. Debtor testified that he had difficulty contacting Respondent.

Debtor understood that Respondent was his “primary lawyer.” Respondent testified

that he returned Debtor’s telephone calls but Debtor’s telephone would sometimes be

disconnected. Movant served as an “intermediary” between Debtor and Respondent.

Movant testified that he communicated with Debtor on a regular basis and that he

received hundreds of telephone calls from Debtor. On a number of occasions Movant

contacted Respondent to inquire about the malpractice actions. Movant then relayed

20 Tr. pp. 77-78.

21 Tr. p. 92.

22 Tr. p. 95.

23 Tr. p. 92.

24 Tr. p. 102.

25 Tr. pp. 54-55.

8

the information to Debtor. Debtor testified that Respondent would “jump on me for

calling Mr. Ardle [Movant].” Debtor testified that Respondent told him not to call

Movant anymore.20 Debtor, however, continued to call Movant.

When asked what contributions Movant made to the prosecution of the

malpractice actions, Respondent testified “Other than calling and saying Bo [Debtor]

was calling upset or other than sending me an occasional letter, he [Movant] did

absolutely nothing.”21 Respondent testified “As near as I could see, he [Movant] was

holding Mr. Hall’s [Debtor’s] hand from time to time, but that was it.”22

Respondent was lead counsel and Movant was co-counsel in the Reed v. Ford

Motor Company case. Respondent was terminated by his clients in the Reed case and

a new lead counsel was employed. The termination occurred after Respondent had

filed Debtor’s malpractice actions in state court23 and after Respondent had been

employed to represent Trustee in the malpractice actions.24 When the Reed case

settled, Movant received a fee25 and Respondent received reimbursement of some of

26 Tr. pp. 55; 91.

27 Tr. p. 92-93.

28 Tr. p. 100.

29 Tr. p. 101.

30 Tr. p. 102.

9

his expenses.26

Respondent testified “The Reed case left my office and as far as I was

concerned, you know, if Bo [Debtor] wanted to call Mr. McArdle [Movant] and ask

him questions, that was one thing, but as far as I was concerned, mine and Scott

McArdle’s [Movant’s] relationship was terminated.”27

Respondent testified “I considered that I had no further obligation to Scott

McArdle [Movant].”28 Respondent testified “It [his termination in Reed] ruined the

basis for a 60/40 division with Mr. McArdle [Movant], absolutely. . . . The basis of

any 40/60 [sic] deal was off, yes.”29 Respondent testified that he did not tell Movant

that he would not honor their fee sharing agreement.30

Respondent testified:

“I don’t know what Mr. McArdle [Movant] was doing. I

think Mr. McArdle [Movant] was anticipating, perhaps,

that he was going to sit there and do nothing and get a 40

percent fee, but that wasn’t going to happen. . . . And the

reason I didn’t stir up anything, Mr. Hall is on medication.

Mr. Hall has memory problems. Mr. Hall has emotional

problems and I wasn’t about to stir a pot that was going to

sidetrack this case.” Tr. p. 98.

31 Tr. pp. 40-41; 59.

32 Tr. p. 41.

33 Tr. p. 31.

10

Movant sent Respondent a letter dated May 24, 2007, stating he and Debtor

were disturbed about the lack of progress in the malpractice actions. Movant

proposed that Respondent either have Movant admitted pro hoc vice in the

malpractice actions or that Respondent immediately withdraw from his representation

of Debtor so substitute counsel could be employed. Movant testified that Respondent

agreed to have him admitted pro hoc vice.31

Movant sent Respondent a letter dated July 19, 2007, stating he had not

received the documents to be admitted pro hoc vice. Movant stated that unless he

received the documents by August 1, 2007, he would presume that Respondent no

longer desired to be Debtor’s counsel. Movant testified that Respondent did not

respond to his letter.32

Movant testified he first learned that Debtor had filed for bankruptcy relief

“around the time of my letters” to Respondent. Movant called Respondent and stated

he expected that Debtor would look to him for advice as to whether the malpractice

actions should be settled or should go to trial.33 Movant testified that he told

Respondent:

“I don’t see how I’m going to be able to advise him

[Debtor] and, therefore, if I was to continue to remain in

34 Tr. pp. 42-43.

35 The malpractice action against Justin Hall’s doctor is still pending in state court.

36 Tr. pp. 76; 94.

37 Tr. pp. 76-77.

11

the dark.” And Mr. Carter [Respondent], at that point,

expressed to me that, “Well, it really doesn’t matter what

you or Bo [Debtor] say, because the bankruptcy trustee is

in charge,” at which point I expressed surprise. I asked

him [Respondent] whether he had applied to have us hired

and he said, “Yeah, we’ve done that. We’ve taken care of

that, but it really doesn’t matter. The bankruptcy trustee’s

going to say what happens.” Tr. p. 32.

Movant testified “I asked him [Respondent] specifically whether he had taken

the steps necessary to employ us and he [Respondent] said, ‘Absolutely, we wouldn’t

have the case if we didn’t.’”34

On November 1, 2007, Trustee filed with the Court an application to employ

Ed S. Sell, III and his law firm to assist Trustee in resolving the malpractice actions.

The Court entered an order on November 2, 2007, approving the employment.

The malpractice action against the Coliseum Hospital was submitted to

mediation in May 2008.35 Debtor, Trustee, Respondent, and Ed S. Sell, III were

present at the mediation.36 Debtor thought he was being represented by Respondent.37

Trustee and the Coliseum Hospital reached a confidential settlement. On May 28,

2008, the Court ordered all documents pertaining to the terms and conditions of the

settlement to be placed under seal. On June 8, 2008, the Court entered an order

38 Docket No. 52. This document is part of the record that is open to the public.

39 Docket Nos. 41, 52. These documents are part of the record that is open to the public.

40 Tr. pp. 41-42; 84.

12

approving the settlement. The settlement was sufficient to pay in full all unsecured

claims that were filed, administrative claims, Respondent’s contingent fee, and to

return a surplus of $394,618.99 to Debtor. 38 Trustee told Debtor that he would

receive his share of the settlement funds in 30 to 90 days. Trustee paid Respondent

his contingent fee of $340,000 and expenses of $35,000.39

On October 3, 2008, Debtor called Movant and said “I’m just calling to see

where my money is.”40 Debtor told Movant the malpractice case had settled in May

2008. Movant testified he was surprised because he was not aware of the mediation

or the settlement. Movant sent Respondent a letter dated October 3, 2008, via

facsimile and mail, asking what was going on.

Respondent sent Movant a handwritten letter dated October 3, 2008, stating the

malpractice action against the Coliseum Hospital had settled for a confidential amount

and the bankruptcy trustee (Trustee) was the client. Respondent stated Debtor was

awaiting approval of the closing of the bankruptcy estate (before receiving his share of

the settlement funds). Respondent stated that if Movant wanted to take over the

malpractice action against Justin Hall’s doctor, Movant should pay Respondent for his

expenses and then Movant “can have it all.”

41 The record shows that Respondent has not withdrawn as attorney for either Debtor or

Trustee.

42 Tr. pp. 64-65; 68.

13

Respondent sent Movant a letter dated October 6, 2008, that stated the

settlement (with the Coliseum Hospital) was under a “strict confidentiality

agreement.” Respondent stated the bankruptcy estate’s assets included the

malpractice actions and Trustee had hired Respondent to prosecute the actions.

Respondent stated the bankruptcy court had approved the settlement (between Trustee

and the Coliseum Hospital). Respondent stated his fee ($340,000) had been paid after

being approved by the bankruptcy court. Respondent stated “Scott [Movant], I just

don’t see how I can proceed to represent Mr. Hall [Debtor] any further and for this

reason, I intend to withdraw. . . . I will cooperate with the attorney whom Mr. Hall

[Debtor] obtains to go forward with this case, but Mr. Hall’s [Debtor’s] conduct last

week requires me to withdraw as his counsel.”41

Movant called Trustee on October 6, 2008. Movant told Trustee that he had

been working in the malpractice actions. Movant testified that Trustee “didn’t know

me” and offered no assistance. Movant does not have a signed agreement to represent

Trustee in the malpractice actions.42

Movant sent a letter dated October 6, 2008, to the Clerk of this Court. Movant

alleged that Respondent had breached their attorney fee agreement and asked that

Debtor’s bankruptcy case be held open to allow Movant to “make an appropriate

43 Tr. pp. 74-75.

14

filing.” Movant retained local counsel who filed the motions presently before the

Court.

Debtor testified that Respondent never told him that Respondent was

representing Trustee rather than Debtor in the malpractice actions.43

Conclusions of Law

Movant filed a motion on October 10, 2008, which he amended on October 27,

2008, asking the Court to stay the closing of Debtor’s case to allow him an

opportunity to assert a claim. Movant’s claim is now before the Court. The Court is

persuaded that Movant has received the relief requested and that the motion filed on

October 10, 2008, and the amended motion filed on October 27, 2008, are moot.

Movant filed on November 25, 2008, his Potential Administrative Fee

Claimant Scott T. McArdle’s Motion to Disgorge All Attorneys Fees, Costs, And

Expenses Paid To Attorney James E. Carter. Movant contends Respondent violated

Bankruptcy Rules 2014(a) and 2016(a) by failing to disclose his connection with a

creditor (Movant) and his fee sharing agreement with Movant. Movant contends

Respondent should disgorge all compensation ($340,000) and expenses ($35,000) that

the Court awarded. Movant asks the Court to unseal Respondent’s application for

compensation so Movant can confirm his suspicion that Respondent violated certain

provisions of the Bankruptcy Code and Rules.

44 Movant’s post-hearing brief p. 15 (Feb. 10, 2009), Docket No. 70; Tr. p. 13.

15

Movant contends he rendered legal services in the malpractice action against

the Coliseum Hospital. Movant contends he is entitled to 40% of the compensation

the Court awarded to Respondent. Movant contends that Respondent should disgorge

his compensation of $340,000. Movant seeks to be compensated from the disgorged

funds. Movant does not seek any compensation from the funds that have been paid to

Debtor, Trustee, or creditors.44 In his post-hearing brief, Movant asks that he be

appointed nunc pro tunc as special counsel in the malpractice action.

Respondent denies he violated the Bankruptcy Code or Rules. Respondent

contends Movant does not have standing to bring his motion to disgorge because he is

not a creditor of Debtor’s estate. Respondent contends his fee sharing agreement with

Movant was terminated and that he has no obligation to share fees with Movant.

Respondent asks the Court to deny any relief to Movant.

When Debtor filed for bankruptcy relief, an estate was created which included

all legal or equitable interests of Debtor in property as of the commencement of the

case. 11 U.S.C.A. § 541(a) (West 2004). Debtor’s malpractice actions against the

Coliseum Hospital and his son’s doctor became property of the estate. Trustee

succeeded to Debtor’s interest. Trustee did not pursue the malpractice actions as the

agent of Debtor, rather Trustee pursued the actions as Debtor’s successor in interest.

Only Trustee, not Debtor, had the power to settle the malpractice action against the

45 901 F.2d 979 (11th Cir. 1990).

16

Coliseum Hospital. In re Williams, 197 B.R. 398, 402 (Bankr. M.D. Ga. 1996)

(Hershner, C. J.)

Movant’s Standing

Respondent contends that Movant does not have standing to bring his motion to

disgorge. In E.F. Hutton & Co. v. Hadley,45 the Eleventh Circuit Court of Appeals

held that the bankruptcy trustee did not have standing to bring certain actions. The

Eleventh Circuit held that a standing issue is resolved without considering the

likelihood of success on the merits. 901 F.2d at 983. The Eleventh Circuit stated:

In order to analyze standing, the Supreme Court has

formulated a two-component framework, consisting of

“irreducible” constitutional requirements and prudential

considerations. Satisfaction of the constitutional requisites

for standing necessitates the demonstration of three

factors. First, the party asserting standing must have

suffered actual injury or show the imminence of such

injury. Abstract harm is insufficient; the litigant must

establish “actual or threatened injury.” Second, the injury

must be fairly traceable to the alleged unlawful conduct.

Third, a demonstration must be made that the requested

relief likely will redress the injury. When standing has

been contested, it is the burden of the party claiming

standing, “to plead and prove injury in fact, causation, and

redressability.”

After satisfying these constitutional requirements, a

party claiming standing also must demonstrate that

prudential considerations do not restrain the trial court

from hearing the case. The Court recognizes three

46 291 B.R. 603 (D. Del. 2003) aff’d. 128 Fed. Appx. 839 (3rd. Cir. 2005).

17

considerations which discourage judicial action despite a

party’s satisfaction of the constitutional prerequisites for

standing: (1) assertion of a third party’s rights, (2)

allegation of a generalized grievance rather than an injury

particular to the litigant, and (3) assertion of an injury

outside the zone of interests of the statute or constitutional

provision. The party alleging standing must surmount all

of these prudential concerns.

901 F.2d at 984-85.

In PHP Liquidating, LLC v. Robbins,46 the district court stated:

Whether an action accrues to a creditor individually,

such that a creditor has standing, or generally, such that a

trustee has standing, requires the court to look “to the

injury for which relief is sought and consider whether it is

peculiar and personal to the [creditor] or general and

common to the . . . creditors.” “A cause of action is

‘personal’ if the claimant [or creditor] himself is harmed

and no other claimant or creditor has an interest in the

cause.” A cause of action is general if the injury is

common to all creditors.

291 B.R. at 610.

Movant contends that he is a prepetition creditor of the bankruptcy estate under

Georgia’s attorney lien statute. O.C.G.A. § 15-19-14 (2008). Movant contends that

he is a postpetition administrative expense claimant because he rendered legal services

that benefitted the bankruptcy estate. Movant contends Respondent should disgorge

his compensation because he violated the Bankruptcy Rules. Movant seeks to be

18

compensated from the disgorged funds.

A standing issue is resolved without considering the likelihood of success on

the merits. Movant contends he suffered actual injury because he has not been

compensated for his legal services. If Movant prevails, he may be entitled to

compensation which would benefit Movant personally. Movant has a financial stake

in the outcome of this litigation. Movant contends that Respondent falsely represented

that both of them had been employed by Trustee to prosecute the malpractice actions.

Movant contends he should be compensated from funds that the Court awarded to

Respondent. The Court is persuaded that Movant has standing to pursue his claim for

compensation.

Trustee’s Rejection of the Contingent Fee Agreements

“[A]n attorney’s contingent fee contract is [an] executory [contract] if further

legal services must be performed by the attorney before the matter may be brought to a

conclusion.” Tonry v. Hebert, (In re Tonry), 724 F.2d 467, 468 (5th Cir. 1984).

Debtor entered into contingent fee agreements with Movant and Respondent.

The contingency was a recovery in the malpractice actions. The contingency did not

occur before Debtor filed for bankruptcy relief. Trustee did not seek approval from

the Court to accept or reject the contingent fee agreements. The agreements are

deemed rejected. 11 U.S.C.A. § 365(a), (d)(1)(West 2004 & Supp. 2009) (in a

Chapter 7 case executory contracts are deemed rejected after 60 days if trustee does

47 The Court questions but need not decide whether the attorney lien statute applies to

Movant, an out of state attorney who was not admitted pro hac vice. See Martin & Martin v.

Jones, 541 So. 2d 1 (Ala. 1989).

48 The action at issue is Debtor’s malpractice action against the Coliseum Hospital.

19

not assume or reject). The rejection constitutes a breach of the agreements

immediately before the date of the bankruptcy filing. § 365(g)(1). The rejection gives

rise to a claim for damages which is treated as a prepetition claim. § 502(g)(1). State

law determines the amount of the damages. Medical Malpractice Insurance Assoc. v.

Hirsch, (In re Lavigne), 114 F.3d 379, 387 (2nd. Cir. 1997).

Rejection does not terminate, cancel, or rescind an executory contract.

Rejection frees the bankruptcy estate from the obligation to perform but it has

absolutely no effect upon the contract’s continued existence. Thompkins v. Lil’ Joe

Records, Inc., 476 F.3d 1294, 1306 (11th Cir.) cert. denied 128 S.Ct. 613, 169 L.Ed 2d

393 (2007); 3 Collier on Bankruptcy ¶ 365.09 [3] (15th ed. rev. 2009). Rejection,

however, may excuse or release the non-breaching party from any further performance

obligation. 476 F.3d at 1308.

Movant’s Prepetition Claim

The deemed rejection of the contingent fee agreement between Movant and

Debtor gives rise to a prepetition claim for damages as determined by state law.

Movant contends that he is a prepetition creditor under Georgia’s attorney lien

statute.47 Georgia law provides for a statutory attorney’s lien in actions48 for the

The contingency in the fee agreement, 49 recovery on the malpractice action, did not

occur before Debtor filed for bankruptcy relief.

20

recovery of money. O.C.G.A. § 15-19-14(b)(2008 ). The lien arises when the action

is filed. Howe & Assoc., P.C. v. Daniels, 280 Ga. 803, 631 S.E. 2d 356, 357 (2006).

It is clear that there had been no recovery in the malpractice actions when

Movant’s contingent fee agreement was deemed rejected. Movant is not entitled to a

fee under the contingent fee agreement. Rather Movant’s attorney fee, if any, is under

the equitable remedy of quantum meruit. Ellerin & Assoc., P.C. v. Brawley, 263 Ga.

App. 860, 589 S.E. 2d 626 (2003).

An attorney who is discharged is not entitled to collect a contingent fee if the

discharge occurs before the contingency specified in the fee agreement.49 Absent

express provisions addressing fees in the event of discharge, the attorney is limited to

the equitable remedy of quantum meruit under which the attorney can recover the

reasonable value of services rendered. The discharged attorney can pursue a quantum

meruit claim against his former client or against his former co-counsel who continued

to represent the client until the conclusion of the case. Kirschner & Venken, P.C. v.

Taylor & Martino, P.C., 277 Ga. App. 512, 627 S.E. 2d 112 (2006).

Under quantum meruit, attorney fees are valued in light of the amount of work

done and by the results obtained. The court must determine whether the client

received any benefit from the services and the value of the services rendered. Value is

determined in terms of value to the client. Lewis v. Smith, 274 Ga. App. 528, 618 S.

50 Movant’s contingent fee agreement does not have a provision addressing fees in the

event of discharge.

21

E. 2d 32, 35-36 (2005) cert. denied; Ellerin & Assoc. v. Brawley, 589 S.E.2d at 629.

A quantum meruit claim requires proof as to the reasonable value of the

attorney’s services. Sosebee v. McCrimmon, 228 Ga. App. 705, 492 S.E.2d 584, 587

(1997); See William H. Stoll, LLC v. Scarber, 287 Ga. App. 672, 652 S.E. 2d 834,

836 (2007).

The deemed rejection of the contingent fee agreement between Movant and

Debtor gives rise to a quantum meruit claim for the value of Movant’s prepetition

services.50 Proof of value is required. The Court, from the evidence presented, is

unable to determine the value, if any, of Movant’s services. Movant did not keep time

records. Movant has not suggested a reasonable hourly rate or a reasonable value of

his services. Movant has not provided any means for the Court to determine the

reasonable value of his services. The Court must have some proof as to value. The

Court is unable to award any attorney fees for Movant’s prepetition services.

Movant’s Post-Petition Administrative Expense Claim

The Court approved Respondent’s employment as attorney for Trustee in

prosecuting the malpractice action against the Coliseum Hospital. The Court awarded

compensation of $340,000 for services Respondent rendered to Trustee. Movant

contends that he is entitled to 40% of that compensation pursuant to the fee sharing

51 493 F.3d 1313 (11th Cir. 2007).

22

agreement between Movant and Respondent. Movant asks the Court to approve his

employment nunc pro tunc in the malpractice action. In Miller Buckfire & Co., LLC

v. Citation Corp., (In re Citation Corp.),51 the Eleventh Circuit stated:

Sections 328 and 330 provide two separate mechanisms

for the estate to employ a professional.

Section 328 allows the trustee, with the bankruptcy

court’s approval, to employ a professional under § 327 “on

any reasonable terms and conditions of employment,

including on a retainer, on an hourly basis, or on a fixed

percentage fee basis, or on a contingent fee basis.” 11

U.S.C. § 328(a). Even if the trustee and the bankruptcy

court pre-approve a professional’s compensation pursuant

to § 328, the bankruptcy court “may allow compensation

different from the compensation provided under such

terms and conditions after the conclusion of such

employment, if such terms and conditions prove to have

been improvident in light of developments not capable of

being anticipated at the time of the fixing of such terms

and conditions.” Id.

Absent pre-approval under § 328, the bankruptcy court

awards a professional “reasonable compensation for

actual, necessary services rendered” by the professional

based on “the nature, the extent, and the value of such

services,” and considering the time spent on such services,

and the cost of comparable services. 11 U.S.C. § 330(a).

493 F.3d at 1318-19.

The Court, from the evidence presented, is unable to find that Movant’s

services benefitted Trustee or the bankruptcy estate. Movant, on a number of

52 See In re Foster, 247 B.R. 731 (Bankr. S.D. Ohio 2000).

23

postpetition occasions, contacted Respondent to inquire about the status of the

malpractice cases. Movant then relayed the information to Debtor. In the Court’s

view, Movant was inquiring as to what Respondent was doing to prosecute the

malpractice cases. Although Movant’s inquiries may have been comforting to Debtor,

Movant has not demonstrated how his services benefitted Trustee or the bankruptcy

estate. Movant did not conduct or participate in any postpetition discovery. Movant

did not file any pleadings or motions in the malpractice action against the Coliseum

Hospital. Movant’s services did not represent any significant part of the effort

required to prosecute the malpractice action.52

The Court is not persuaded that Movant is entitled to an award of compensation

under either 11 U.S.C.A. § 328(a) or § 330(a). The Court therefore need not address

Movant’s request to be appointed nunc pro tunc.

Movant’s Claim For Breach of Contract

Movant contends Respondent breached their prepetition fee agreement to share

any recovery on the malpractice actions on a 60% – 40% basis. Respondent contends

the fee sharing agreement was terminated because the subject of the agreement, the

contingent fee agreements that Respondent and Movant entered into with Debtor, are

deemed rejected under § 365(d)(1). Respondent also contends the fee sharing

agreement is unenforceable under Rule 1.5(e) of the Georgia Rules of Professional

24

Conduct.

In the Court’s view, the breach of contract dispute between Movant and

Respondent does not impact Debtor’s bankruptcy estate. Movant seeks 40% of the

funds that the Court awarded Respondent. If Movant is successful, he can collect his

compensation from Respondent. Movant does not seek any compensation from the

funds that have been paid to Debtor, Trustee, or creditors. Movant has not shown that

the outcome of the contract dispute impacts the rights, liabilities, or handling and

administration of the bankruptcy estate. The dispute is a disagreement between

former co-counsel. The dispute involves state contract law, state bar rules, and the

attorney-client relationship. The Court is persuaded the contract dispute is a matter

between Movant and Respondent that should be resolved in state court.

Disgorgement of Compensation

Movant contends that Respondent violated Bankruptcy Rules 2014(a) and

2016(a) by failing to disclose his connection with a creditor (Movant) and his fee

sharing agreement with Movant. Movant contends that Respondent should disgorge

all compensation ($340,000) that the Court awarded. Neither Trustee nor Debtor have

moved the Court to require Respondent to disgorge his compensation.

Trustee’s application for approval to employ Respondent stated that it was “for

a specified purpose pursuant to 11 U.S.C. [§] 327(e), to act on behalf of the Trustee in

pursuing a wrongful death of a child claim.”

25

Section 327(e) of the Bankruptcy Code provides:

§ 327. Employment of professional persons

. . .

(e) The trustee, with the court’s approval, may employ, for a

specified special purpose, other than to represent the trustee in

conducting the case, an attorney that has represented the debtor,

if in the best interest of the estate, and if such attorney does not

represent or hold any interest adverse to the debtor or to the estate

with respect to the matter on which such attorney is to be

employed.

11 U.S.C.A. § 327(e) (West 2004).

Bankruptcy Rule 2014(a) provides that an application for employment shall be

accompanied by a verified statement setting forth the attorney’s connections with

certain entities. Bankruptcy Rule 2014(a) provides in part:

Rule 2014. Employment of Professional Persons

(a) Application for an order of employment

. . .

The application [for employment] shall be accompanied by a

verified statement of the person to be employed setting forth the

person’s connections with the debtor, creditors, any other party in

interest, their respective attorneys and accountants, the United

States trustee, or any person employed in the office of the United

States trustee.

Fed. R. Bankr. P. 2014(a).

Respondent executed an “Affidavit of Proposed Attorney” dated March 15,

2004, stating in part that he had no connection with the entities named in Bankruptcy

26

Rule 2014(a), except that he had represented Debtor in a wrongful death claim prior to

the bankruptcy filing.

After an attorney has rendered services, the attorney may apply for

compensation. The attorney is required to file an application which discloses whether

he or she has an agreement or understanding to share compensation with any other

entity. Bankruptcy Rule 2016(a) provides in part:

Rule 2016. Compensation for Services Rendered and

Reimbursement of Expenses

(a) Application for compensation or reimbursement

An entity seeking interim or final compensation for services, or

reimbursement of necessary expenses, from the estate shall file

an application setting forth a detailed statement of (1) the

services rendered, time expended and expenses incurred, and (2)

the amounts requested. An application for compensation shall

include a statement as to . . . whether an agreement or

understanding exists between the applicant and any other entity

for the sharing of compensation received or to be received for

services rendered in or in connection with the case, and the

particulars of any sharing of compensation or agreement or

understanding therefor, except that details of any agreement by

the application for the sharing of compensation as a member or

regular associate of a firm of lawyers or accountants shall not be

required.

Fed. R. Bankr. P. 2016(a)

An attorney has an affirmative duty to disclose fully and completely any fee

agreements and payments. Disgorgement of fees may be proper even though the

failure to disclose resulted from negligence or inadvertence. Henderson v. Kisseberth,

(In re Kisseberth), 273 F.3d 714, 720-21 (6th Cir. 2001). See Mapother & Mapother,

27

P.S.C. v. Cooper, (In re Downs), 103 F.3d 473, 479 (6th. Cir. 1996).

The Court is persuaded that Movant’s motion to disgorge is a fee sharing

dispute between Movant and Respondent. All of Debtor’s unsecured creditors that

filed claims have been paid in full. Neither Debtor nor Trustee have moved the Court

to require Respondent to disgorge his compensation. No one, including Movant,

contends that the amount of the settlement with the Coliseum Hospital was less than

reasonable. The Court has determined that Movant is not entitled to any prepetition or

postpetition compensation from the bankruptcy estate.

Respondent testified that his relationship with Movant terminated and that he

had no further obligation to Movant when Respondent was terminated as lead counsel

in the Reed case. Respondent understood that his relationship with Movant had

ended. The Court is not persuaded that Movant violated the disclosure requirements

of Bankruptcy Rules 2014(a) and 2016(a).

The Court is persuaded that the dispute between Movant and Respondent

should be resolved in state court. The Court is also persuaded that Movant’s request

to unseal Respondent’s application for compensation should be denied.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 24th day of September, 2009.

/s/ Robert F. Hershner, Jr.

_________________________

ROBERT F. HERSHNER, JR.

United States Bankruptcy Judge

SHARON L. DURHAM

January 21, 2005

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

SHARON L. DURHAM, ::

Debtor : Case No. 02-54569 RFH

:

AMERICREDIT FINANCIAL :

SERVICES, ::

Movant ::

vs. ::

SHARON DURHAM, Debtor, :

and CAMILLE HOPE, Trustee, ::

Respondents :

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Debtor: Mr. Robert M. Matson

Post Office Box 1773

Macon, Georgia 31202

For Movant: Mr. Philip L. Rubin

Attorney at Law

3423 Piedmont Road

Suite 500

Atlanta, Georgia 30305

The Chapter 13 Trustee: Ms. Camille Hope

Post Office Box 954

Macon, Georgia 31202

1 See Adams v. Segars, (In re Segars), Ch. 7 Case No. 89-30334, Adv. No. 89-

3032 (Bankr. M.D. Ga., Nov. 20, 1989) (Hershner, C.J.) (mailing is not the

equivalent of filing.); United States v. Lombardo, 241 U.S. 73, 76, 36 S. Ct. 508,

509, 60 L.Ed 897 (1916) (filing is not complete until the document is delivered

to and received by the proper official; filing means to deliver).

2

MEMORANDUM OPINION

Americredit Financial Services, Movant, filed on June 28, 2004, its Motion to

Allow Late Proof of Claim Pursuant to 11 U.S.C. § 502(j). Sharon Durham, Debtor,

filed an amended response on July 29, 2004. The motion and the amended response

came on for hearing on October 18, 2004. The Court, having considered the

evidence presented and the arguments of counsel, now publishes this memorandum

opinion.

Debtor purchased a 2001 Chevrolet Blazer (hereafter the “vehicle”) from an

automobile dealer on August 12, 2002. Movant financed the purchase and was

granted a security interest in the vehicle. The automobile dealer failed to timely

submit the title documents to the Georgia Department of Motor Vehicles to perfect

Movant’s security interest.

Debtor, after purchasing the vehicle, was injured and had financial problems.

Debtor filed a petition under Chapter 13 of the Bankruptcy Code on October 7, 2002.

The last date for creditors to file timely proofs of claim was February 3, 2003.

Movant contends that it sent to the Court via United States mail a proof of claim on

December 24, 2002. The Court has no record of receiving the proof of claim.1

2 The proof of claim was filed after the bar date. It was therefore not timely filed.

3

The Court entered an order confirming Debtor’s Chapter 13 plan on March

18, 2003. Movant became aware that its proof of claim had not been received by the

Court. Movant filed a proof of claim on June 13, 2003, asserting a secured claim for

$15,040.07.2 Movant asserted that its claim was secured by Debtor’s vehicle.

The Chapter 13 Trustee filed on September 5, 2003, a complaint to avoid as a

preferential transfer the untimely perfection of Movant’s security interest in Debtor’s

vehicle. Movant filed on September 26, 2003, a response to Trustee’s complaint.

Movant and Trustee reached an agreement. The Court entered a consent order on

October 10, 2003. The consent order provides in part that: (1) Movant’s security

interest in the vehicle would be avoided; (2) Movant’s claim would be designated as

an unsecured claim; (3) upon completion of Debtor’s Chapter 13 plan, Movant would

release its security interest and return the title to Debtor; and (4) Trustee would file a

motion to modify Debtor’s Chapter 13 plan to provide for payment of a dividend to

unsecured creditors in an amount equal to the value of the vehicle, plus interest.

Trustee filed on October 21, 2003, a motion to modify Debtor’s Chapter 13

plan as provided in the consent order. Debtor filed on October 28, 2003, an

objection to Movant’s claim. Debtor contented that Movant’s claim should be

3 Bankruptcy Rule 3008 provides:

Rule 3008. Reconsideration of Claims

A party in interest may move for reconsideration of an order allowing

or disallowing a claim against the estate. The court after a hearing on notice

shall enter an appropriate order.

Fed. R. Bank. P. 3008.

4

disallowed because it was filed after the bar date. Movant filed a response to

Debtor’s objection on November 20, 2003. Movant filed on December 15, 2003, a

withdrawal of its response. The Court entered an order on December 18, 2003,

disallowing the claim filed by Movant. On June 28, 2004, Movant filed its Motion to

Allow Late Proof of Claim Pursuant to 11 U.S.C. § 502 (j). Movant asks the Court

to reconsider the order disallowing its claim.

Debtor has possession of the vehicle. Debtor is disabled and receives workers

compensation benefits. Debtor will complete her Chapter 13 plan payments in about

five months.

Movant has the burden of proving that reconsideration of its claim is

appropriate. In re Rayborn, 307 B.R. 710, 720 (Bankr. S.D. Ala. 2002).

Bankruptcy Rule 3008 provides in part that, after a hearing on notice, a court

shall issue an appropriate order on a motion to reconsider an order disallowing a

claim. Fed. R. Bank. P. 3008.3 The motion to reconsider must be made within the

time provided by Rule 60(b) unless the order disallowing the claim was “entered

4 Bankruptcy Rule 9024 provides in part:

Rule 9024. Relief from Judgment or Order

Rule 60 F.R.Civ.P. applies in cases under the Code except that (1) a

motion . . . for the reconsideration of an order allowing or disallowing a

claim against the estate entered without a contest is not subject to the one year

limitation prescribed in Rule 60(b) . . . .

Fed. R. Bank. P. 9024.

5

without a contest.” Fed. R. Bank. P. 9024.4 See 9 Collier on Bankruptcy ¶

3008.01[3], p. 3008-4 (15th ed. rev. 2004). Movant’s motion to reconsider was filed

about six months after the order disallowing its claim was entered. The Court will

assume without deciding that Movant’s motion was filed within the time

requirements of Rule 9024.

In a Chapter 13 case, a creditor must file a timely proof of claim for the claim

to be allowed. Only a creditor whose claim has been allowed receives a distribution

through a Chapter 13 plan. Zich v. Wheeler Wolf Attorneys, (In re Zich), 291 B.R.

883, 886 (Bankr. M.D. Ga. 2003).

“The bar date for filing a proof of claim in a Chapter 13 case cannot be

extended because of excusable neglect or through the court’s general equity powers.

The court cannot allow an untimely proof of claim in a Chapter 13 case unless one of

the exceptions set forth in Rule 3002(c) is met.” Id. at 885.

Movant did not file a proof of claim prior to the bar date. Thus, Movant’s

6

claim, to be allowed, must come within one of the exceptions set forth in Bankruptcy

Rule 3002(c).

Movant relies upon Bankruptcy Rule 3002(c)(3) which provides:

Rule 3002. Filing Proof of Claim or Interest

. . .

(c) Time for Filing

In a Chapter 7 liquidation, chapter 12 family farmer’s

debt adjustment, or chapter 13 individual’s debt

adjustment case, a proof of claim is timely filed if it is

filed not later than 90 days after the first date set for the

meeting of creditors called under § 341(a) of the Code,

except as follows:

. . .

(3) An unsecured claim which arises in favor of an

entity or becomes allowable as a result of a

judgment may be filed within 30 days after the

judgment becomes final if the judgment is for the

recovery of money or property from that entity or

denies or avoids the entity’s interest in property.

If the judgment imposes a liability which is not

satisfied, or a duty which is not performed within

such period or such further time as the court may

permit, the claim shall not be allowed.

Fed. R. Bank. P. 3002(c)(3).

Under Bankruptcy Rule 3002(c)(3) a creditor whose security interest is

avoided may file an unsecured claim within thirty days after the judgment becomes

final. Movant did not file a proof of claim within thirty days after the consent order

5 Section 502(j) provides:

§ 502. Allowance of claims or interests

. . .

(j) A claim that has been allowed or disallowed may be reconsidered

for cause. A reconsidered claim may be allowed or disallowed

according to the equities of the case. Reconsideration of a claim under

this subsection does not affect the validity of any payment or transfer

from the estate made to a holder of an allowed claim on account of

such allowed claim that is not reconsidered, but if a reconsidered claim

7

became final. Movant had filed an untimely secured claim some four months prior to

the consent order.

“If the creditor has already timely filed a claim, Rule 3002(c)(3) does not

require that a new claim be filed after entry of a judgment regarding the creditor.”

9 Collier on Bankruptcy ¶ 3002.03[4] n.34 (15th ed. rev. 2004) (emphasis original).

See Prestige Limited Partnership-Concord v. East Bay Car Wash Partners, (In re

Prestige Limited Partnership-Concord), 234 F.3d 1108, 1118 (9th Cir. 2000) (proof

of claim for unsecured debt filed prior to judgment becoming final satisfies Rule

3002(c)(3)).

In the case at bar, Movant did not file a timely proof of claim prior to the

consent order becoming final. Movant did not file a proof of claim within thirty days

after entry of the consent order. The Court is not persuaded that Movant’s untimely

proof of claim comes with the exceptions of Rule 3002(c)(3).

Movant also relies upon section 502(j) of the Bankruptcy Code5 which

is allowed and is of the same class as such holder’s claim, such holder

may not receive any additional payment or transfer from the estate on

account of such holder’s allowed claim until the holder of such

reconsidered and allowed claim receives payment on account of such

claim proportionate in value to that already received by such other

holder. This subsection does not alter or modify the trustee’s right to

recover from a creditor any excess payment or transfer made to such

creditor.

11 U.S.C.A. § 502(j) (West 2004).

8

provides in part that a claim that has been allowed or disallowed may be reconsidered

for cause. A reconsidered claim may be allowed or disallowed according to the

equities of the case.

“Reconsideration under 502(j) is a two-step process. A court must first decide

whether ‘cause’ for reconsideration has been shown. Then, the court decides

whether the ‘equities of the case’ dictate allowance or disallowance of the claim.”

In re Rayborn, 307 B.R. at 720.

“[The] reconsideration of a claim cannot upset proper distributions already

made to holders of other allowed claims. Reconsideration resulting in a higher

allowed claim should have the effect of suspending distributions to other like claims

until the reconsidered claim catches up.” 4 Collier on Bankruptcy, ¶ 502.11[2], p.

502-76 (15th ed rev.2004).

Courts generally consider the following factors when asked to reconsider an

order disallowing a claim: (1) the length of the delay; (2) whether the delay would

6 Movant has filed a complaint in state court against the automobile dealer that

failed to timely perfect the security interest. See Debtor’s Exhibit G.

9

prejudice the debtor or creditors; (3) the reason for the delay, (4) the effect on

efficient court administration; (5) the creditor’s good faith; and (6) whether the

creditor has a meritorious claim. Kirwan v. Vanderwerf, (In re Kirwan), 164 F. 3d

1175, 1177-78 (8th Cir. 1999); Smith v. Fairbanks Capital Corp., (In re Smith), 299

B.R. 687, 691-92 (Bankr. S.D. Ga. 2003) (Walker, J.); In re Van Dyke, 286 B.R.

858, 860-61 (Bankr. C.D. Ill. 2001); In re Schaffer, 173 B.R. 393, 394-95 (Bankr.

N.D. Ill. 1994).

Turning to the case at bar, the Court is not persuaded that “the equities of the

case” favor the allowance of Movant’s claim. Movant’s security interest in the

vehicle was not timely perfected.6 Movant failed to timely file a proof of claim.

Movant made a decision to withdraw its response to Debtor’s objection. Movant did

not appeal the order disallowing its claim. Movant did not move the Court to

reconsider the disallowance of its claim until six months later. This “series of

mistakes. . . converged to create an unfortunate predicament for [Movant]” In re

Rayborn, 307 B.R. at 726.

Debtor has complied with the provisions of her Chapter 13 plan. Debtor’s

Chapter 13 plan was modified to provide for payment of a dividend to unsecured

creditors in an amount equal to the value of the vehicle, plus interest. Debtor will

10

complete her Chapter 13 plan in about five months. Distributions to unsecured

creditors are almost complete. If Movant’s claim is allowed Debtor would be forced

to stay in bankruptcy for a longer time. This would not be fair or equitable because

Movant’s actions have caused its predicament.

An order in accordance with this memorandum opinion shall be entered this

date.

DATED this 21st day of January, 2005.

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

KENDRIX T. DAVIS

September 12, 2007

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

KENDRIX T. DAVIS, ::

Debtor : Case No. 07-50761 RFH

::

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Kendrix T. Davis: Ms. Lisa Williams

Mr. Robert O. House

433 Cherry Street

Suite A

Macon, Georgia 31201

For GMAC: Ms. Lisa Ritchey Craig

171 17th Street, NW

Suite 975

Atlanta, Georgia 30363

For Chapter 13 Trustee: Ms. Laura D. Wilson

P.O. Box 954

Macon, Georgia 31202

1 11 U.S.C.A. § 1323(a) (West 2004) (debtor may modify Chapter 13 plan at any time

before confirmation).

2 GMAC’s objection was filed in opposition to Debtor’s original proposed Chapter 13

plan. GMAC opposes Debtor’s modified proposed Chapter 13 plan on the same grounds.

2

MEMORANDUM OPINION

Kendrix T. Davis, Debtor, filed on July 19, 2007, his modified proposed

Chapter 13 plan.1 GMAC filed an Objection To Confirmation.2 Debtor’s proposed

Chapter 13 plan came on for a hearing on confirmation on August 15, 2007. The

Court, having considered the evidence presented and the arguments of counsel, now

publishes this memorandum opinion.

The material facts are not in dispute. On February 26, 2005, Debtor purchased

a new 2005 Chevrolet Trail Blazer (the “truck”) from Youmans Chevrolet Company.

Debtor financed the purchase by entering into a Retail Installment Sale Contract (the

“contract”) that Youmans Chevrolet immediately assigned to GMAC. GMAC holds a

purchase money security interest in Debtor’s truck. Debtor purchased the truck for his

personal use. Under the contract, Debtor was to pay the amount financed, $39,079.49

plus interest of 4.9 %, by making seventy-two monthly payments of $628.83

beginning on April 13, 2005.

Debtor defaulted on his monthly payments to GMAC. Debtor filed a petition

under Chapter 13 of the Bankruptcy Code on April 4, 2007. The current balance of

3

Debtor’s obligation to GMAC is $30,627.44. Debtor offers to pay this amount plus

interest of 4.9 % through his proposed Chapter 13 plan. GMAC contends that it is

entitled to receive interest on its claim at the prime rate, which the parties stipulate is

8.25 %.

Debtor has steady employment and is in good health. Debtor’s truck is in good

condition, is well maintained, and is insured. The Chapter 13 Trustee reports that

Debtor’s proposed plan is feasible. Trustee has no objection to confirmation of the

proposed plan.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

(“BAPCPA”) became effective, in relevant part, on October 17, 2005. Debtor’s

bankruptcy petition was filed on April 4, 2007, and is governed by BAPCPA.

Debtor purchased his truck less than 910 days before he filed for bankruptcy

relief. Under BAPCPA, Debtor’s proposed Chapter 13 plan must pay the full amount

of GMAC’s claim even if the value of the truck is less than the claim. GMAC’s claim

is known as a “910 claim.” 11 U.S.C.A. § 1325(a) (West Supp. 2007) (unnumbered

paragraph after subsection (9)); In re Ross, 355 B.R. 53, 59 (Bankr. W. D. Tenn.

2006).

Section 1325(a)(5) of the Bankruptcy Code provides three alternatives for

dealing with an allowed secured claim that is provided for by the Chapter 13 plan.

3 11 U.S.C.A. § 1325(a)(5)(A) (West 2004).

4 11 U.S.C.A. § 1325(a)(5)(B) (West Supp. 2007).

5 11 U.S.C.A. § 1325(a)(5)(C) (West 2004).

4

First, the creditor can accept the Chapter 13 plan.3 Second, the Chapter 13 plan can

provide that the creditor retain the lien securing its claim and the debtor can pay the

claim by making periodic payments.4 Finally, the debtor can surrender the property

securing the claim to the creditor.5

GMAC has not accepted the proposed Chapter 13 plan. Debtor has not

surrendered his truck to GMAC. Thus, Debtor’s Chapter 13 plan must provide that

GMAC retain its lien and Debtor must make periodic payments on GMAC’s claim.

Section 1325(a)(5)(B) provides in part:

§ 1325. Confirmation of plan

(a) Except as provided in subsection (b), the court shall

confirm a plan if—

. . .

(5) with respect to each allowed secured claim

provided for by the plan—

. . .

(B)(i) the plan provides that—

(I) the holder of such claim retain the

lien securing such claim . . . [and]

5

(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;

11 U.S.C.A. § 1325(a)(5)(B) (West Supp. 2007).

This section is commonly known as the “cram down option” because it may be

enforced over a claim holder’s objection. Till v. SCS Credit Corp., 541 U.S. 465, 124

S.Ct 1951, 1955, 158 L.Ed 2d 787 (2004).

“Cram down” refers to confirmation of a Chapter 13 plan over the objection of

the holder of a claim. “Strip down” refers to the bifurcation of a claim into its secured

and unsecured components under 11 U.S.C. § 506. The secured claim is said to be

“stripped down” to the value of the collateral. In re Pryor, 341 B.R. 648, 651 (Bankr.

C.D. Ill. 2006); In re Wright, 338 B.R. 917, 919 (Bankr, M.D. Ala. 2006).

GMAC’s “910 claim” can be crammed down but cannot be stripped down

through Debtor’s Chapter 13 plan. In re Wright, 338 B.R. at 919-20.

There is no dispute that GMAC’s claim is an “allowed secured claim provided

for by the plan” and that GMAC will retain its lien on Debtor’s truck.

Chapter 13 “Plans that invoke the cram down power often provide for

installment payments over a period of years rather than a single payment. In such

circumstances, the amount of each installment must be calibrated to ensure that, over

time, the creditor receives disbursements whose total present value equals or exceeds

6

that of the allowed claim.” Till, 124 S.Ct. at 1955-56. This is referred to as payment

of “present value.” Id. at 1956, n. 4. Rake v. Wade, 508 U.S. 464, 113 S.Ct. 2187,

2190-91, 124 L.Ed. 2d 424 (1993).

“[A]lthough §1325(a)(5)(B) entitles the creditor to property whose present

value objectively equals or exceeds the value of the collateral, it does not require that

the terms of the cram down loan match the terms to which the debtor and creditor

agreed prebankruptcy. . . .” Till, 124 S.Ct. at 1959. The terms of the parties’ original

contract are irrelevant. Id. at 1961.

In Till, The Supreme Court stated:

For one thing, the cram down provision applies not only to

subprime loans but also to prime loans negotiated prior to

the change in the circumstances (job loss, for example)

that rendered the debtor insolvent. Relatedly, the

provision also applies in instances in which national or

local economic conditions drastically improved or

declined afer the original loan was issued but before the

debtor filed for bankruptcy. In either case, there is every

reason to think that a properly risk-adjusted prime rate will

provide a better estimate of the creditor’s current costs and

exposure than a contract rate set in different times.

124 S.Ct at 1964.

Cram down requires compensation for the time value of money and risk of

default. 124 S.Ct. at 1960.

In Till, The Supreme Court held that a formula approach based upon the

national prime rate plus an adjustment for risk should be used for cram down under

6 GMAC does not seek any adjustment to the prime rate for risk of default.

7 Debtor was obligated to pay interest of 4.9% under the Retail Installment Sale Contract.

7

section 1325(a)(5)(B). This is known as the prime-plus or formula rate. 124 S.Ct. at

1961-62, 1964.

This Court has held that Till applies to bankruptcy cases filed under BAPCPA.

Triad Financial Corp. v. Brown, (In re Brown), 346 B.R. 246 (Bankr. M.D. Ga. 2006)

(Hershner, J.).

In the case at bar, the parties stipulate that the prime rate is 8.25%.6 Debtor,

through his proposed Chapter 13 plan, offers to pay GMAC’s claim plus interest of

4.9%.7 Debtor argues that to pay more than the contract rate (4.9%) would be a

windfall to GMAC. Debtor argues that GMAC should not receive better treatment

through his Chapter 13 plan than GMAC would receive if Debtor strictly performed

under the contract. Debtor argues that payment of GMAC’s claim plus the contract

rate would give GMAC the “benefit of its bargain.” The Chapter 13 Trustee supports

Debtor’s arguments.

“The issue before the Court is whether the ‘formula approach’ for determining

interest rates as set forth in Till . . . applies to a creditor whose claim is treated as

fully secured where the contract rate of interest is below prime.” In re Soards, 344

B.R. 829, 830 (Bankr. W.D. Ky. 2006).

Courts that have considered this issue hold that Till applies even though the

8 Each of the Chapter 13 cases, except for In re Pryor, was filed after the enactment of

BAPCPA.

9 341 B.R. 648 (Bankr. C.D. Ill. 2006).

8

contract rate is less than the prime rate.8 Daimler Chrysler Services North America

LLC v. Taranto, 365 B.R. 85 (B.A.P. 6th Cir. 2007) (Till applies where proposed plan

offers to pay claim in full in a shorter time period than originally contemplated under

contract); In re Grunau, 355 B.R. 334, 336-37 (Bankr. M.D. Fla. 2006) (contract rate

of 0% irrelevant, plan must pay Till rate); In re Ross, 355 B.R. 53 (Bankr. W. D.

Tenn. 2006) (must pay Till rate, contract rate was 0%); In re Brill, 350 B.R. 853, 855-

56 (Bankr. E. D. Wis. 2006) (must pay Till rate; contract rate of 0% was determined

by market factors that no longer apply); In re Soards, 344 B.R. 829, 832 (Bank. W.D.

Ky. 2006) (Till’s prime rate (7.2%) applies even though contract rate is below prime

(3.9%)); In re Scruggs, 342 B.R. 571 (Bankr. E.D. Ark. 2006) (plan must pay Till’s

prime rate (8%) rather than contract rate (0%)); In re Pryor, 341 B.R. 648, 651-52

(Bankr C.D. Ill. 2006) (plan must pay Till’s prime plus rate rather than contract rate of

4.9%); In re Yelverton, 2007 WL 1521595 (Bankr. M.D. Ala. May 21, 2007) (Till

requires prime rate of 8.25% plus risk adjustment rather than contract rate of 7.2%.).

In In re Pryor,9 the Bankruptcy Court for the Central District of Illinois stated:

In this Court’s view, the Supreme Court’s ruling in Till

is clear that the prime rate as adjusted for risk applies in all

cases involving cram down in a Chapter 13 plan, including

those cases involving a below market contract rate of

interest, whether the creditor’s claim is oversecured or

10 Debtor cannot “strip down” GMAC’s claim because the truck was purchased less than

910 days prior to the date Debtor filed for bankruptcy relief. 11 U.S.C.A. § 1325(a)

(unnumbered paragraph after subsection (9)).

9

undersecured. . . .

. . .

Although Till interpreted 11 U.S.C.§ 1325(a)(5)(B)(ii) in

a case involving the strip down of a secured claim, the

statute itself is broader and applies to all cram down cases.

Hence, the decision in Till is not confined merely to those

cases where the value of the collateral is less than the

creditor’s claim. Rather, Till applies in all chapter 13

cases which are being confirmed over the objection of a

secured creditor irrespective of the value of its collateral in

relation to the amount of its claim.

341 B.R. at 651.

“Although the Court [in Till] was dealing specifically with a ‘strip-down’ case,

it is widely understood that its decision applies to all cramdown cases under Section

1325(a)(5)(B).” In re Grunau, 355 B.R. at 336.

In the case at bar, Debtor’s Chapter 13 plan proposes to cram down the claim

secured by his truck over the objection of the holder of the claim, GMAC.10 Debtor

offers to pay the claim plus interest of 4.9%. The Court is persuaded that Debtor must

pay the full amount of GMAC’s claim plus interest as required by Till. GMAC has

agreed to accept the prime rate (8.25%) with no upward adjustment for risk. Debtor’s

proposed Chapter 13 plan fails to pay the Till rate.

10

The Court is persuaded that GMAC’s Objection To Confirmation should be

sustained.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 12th day of September, 2007.

/s/ Robert F. Hershner, Jr.

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

DAVID L. ARRINGTON

April 18, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

DAVID L. ARRINGTON, ::

Debtor : Case No. 02-51468 RFH

::

J. COLEMAN TIDWELL, :

CHAPTER 7 TRUSTEE, ::

Trustee :::

and ::

DAVID L. ARRINGTON, ::

Debtor ::

vs. :::

A&M CHECK CASHING, INC. :

and INGLESIDE FLORIST, ::

Respondents :

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

2

COUNSEL:

For Trustee Ed S. Sell, III

Post Office Box 229

Macon, Georgia 31202-0229

For Debtor F. Kennedy Hall

Post Office Box 5088

Macon, Georgia 31208-5088

Neal Weinberg

Post Office Drawer 1073

Macon, Georgia 31202-1073

For A&M Check Cashing, Inc. Robert A. Fricks

Post Office Box 4086

Macon, Georgia 31208-4086

For Ingleside Florist Jason M. Orenstein

Post Office Box 4086

Macon, Georgia 31208-4086

For United States Trustee Mark Roadarmel

433 Cherry Street, Suite 510

Macon, Georgia 31201-7910

1 Debtor’s sister and other entities also owned interests in the realty.

2 11 U.S.C.A. § 303(b)(1) (West 1993).

3

MEMORANDUM OPINION

J. Coleman Tidwell, Chapter 7 Trustee, Trustee, filed objections to the

allowance of certain claims on October 24, 2002. A&M Check Cashing, Inc. and

Ingleside Florist (collectively “Respondents”) filed responses on November 29, 2002.

David L. Arrington, Debtor, filed objections to Respondents’ claims on December 26,

2002, and January 21, 2003. The objections to claims came on for hearing on

January 22, 2003, and February 25, 2003. The Court, having considered the record

and the arguments of counsel, now publishes this memorandum opinion.

Debtor owned an interest in certain commercial real property (the

“realty”).1 There was a pending contract to sell the realty for more than $1 million.

Respondents believed that Debtor’s share of the net proceeds would total some

$300,000. Respondents and a third creditor, Snead & Associates, were concerned

that Debtor would sell the realty, but would not use the proceeds to satisfy his

obligations.

Respondents and Snead & Associates filed on April 4, 2002, an

involuntary petition under Chapter 7 of the Bankruptcy Code against Debtor.2 The

Court entered an order scheduling an expedited hearing for the appointment of an

3 Debtor filed a motion to dismiss the involuntary petition, a motion to continue

the hearing set for April 11, 2002, and a motion to require Respondents to post bond.

4 11 U.S.C.A. § 303(h) (West 1993).

5 Transcript of Hearing at 5-7.

6 Id. at 6.

4

interim trustee. The hearing was set for April 11, 2002. Debtor filed on April 11,

2002, a number of motions in response to the involuntary petition.3

An amendment to the involuntary petition was filed on April 11, 2002.

The amendment adds Larry A. Williams and Pete Welborne as petitioning creditors.

Debtor reached an agreement with Respondents and the other

petitioning creditors. The terms of the settlement agreement were announced in open

court on April 11, 2002. Debtor consented to the entry of an order for relief under

Chapter 7 of the Bankruptcy Code.4 Debtor agreed to withdraw his motions.

Respondents and the other petitioning creditors agreed to file their proofs of claim

within ten days.5 Mark Roadarmel, Assistant United States Trustee, announced that

he would expedite the appointment of a Chapter 7 trustee so that the trustee could

review the pending sale of Debtor’s realty.6 The settlement agreement announced in

open court did not address the consequences of any party’s failure to perform under

the terms of the agreement.

Debtor, on April 11, 2002, withdrew his motions filed in response to

the involuntary petition. The Court entered on April 11, 2002, an order for relief

7 See Fed. R. Bankr. P. 3002(c)(5). The notice was sent after Trustee

determined that assets may exist to pay claims.

8 A&M Check Cashing, Inc. filed on May 1, 2002, a proof of claim for

$50,722.82. Ingleside Florist filed on June 18, 2002, a proof of claim for $9,192.00.

9 Trustee filed objections to the claims filed by Mr. Williams and

Mr. Welborne. Trustee announced that these creditors have agreed to accept 85% of

their claim amount.

5

under 11 U.S.C.A. § 303. J. Coleman Tidwell was appointed to be the Chapter 7

Trustee.

Respondents and the other petitioning creditors failed to file proofs of

claim within ten days (that is, by April 21, 2002). Respondents’ counsel concedes

that he simply neglected to file the proofs of claim.

The Clerk of Court sent a notice dated April 19, 2002, advising that

creditors must file proofs of claim on or before July 18, 2002, (“the bar date”).7

Respondents,8 Mr. Williams, Mr. Welborne,9 and a number of other creditors filed

proofs of claim prior to the bar date. Snead & Associates did not file a proof of

claim.

Debtor filed his bankruptcy schedules on April 26, 2002. Debtor listed

as disputed his obligations to Respondents. Debtor noted on an attachment to

Schedule F that the claims of Respondents and the other petitioning creditors “are

barred by failure to comply with the agreement. The claims were not filed within

[ten] days.”

The Court entered an order on July 19, 2002, granting Debtor a

10 Trustee and Debtor also dispute the merits of Respondents’ claims. Trustee

advises that an evidentiary hearing would be needed to consider the merits of the

claims.

11 807 F.2d 901 (11th Cir. 1987).

6

discharge from all dischargeable obligations. Trustee has liquidated Debtor’s

commercial realty. The assets of the bankruptcy estate may be sufficient to pay all

claims in full and return a dividend to Debtor.

Trustee and Debtor argue that Respondents’ claims should be

disallowed because the claims were not filed within ten days.10 Debtor argues that he

relied upon the ten-day commitment in agreeing to dismiss his motions.

In Schwartz v. Florida Board of Regents,11 the Eleventh Circuit Court

of Appeals stated, in part, as follows:

The construction of the settlement agreement is a

question of law subject to de novo review by this court.

A settlement agreement is a contract and, as such, its

construction and enforcement are governed by principles

of Florida’s general contract law. Words in a contract

are to be given their plain and ordinary meaning, and it is

not for the court to add or subtract any language from the

face of a clearly worded agreement. Nor is the court to

add to a settlement terms that were not contemplated by

the parties. The court’s role is to determine the intention

of the parties from the language of the agreement, the

apparent objects to be accomplished, other provisions in

the agreement that cast light on the question, and the

circumstances prevailing at the time of the agreement.

807 F.2d at 905.

“An agreement to settle a legal dispute is a contract. . . . The

7

enforceability of settlement agreements is governed by familiar principles of contract

law. A settlement contract may not be unilaterally rescinded. Upon breach by one

party, the other party may obtain damages or specific performance as appropriate.”

Village of Kaktovik v. Watt, 689 F.2d 222, 230 (D.C. Cir. 1982).

“Where the parties, acting in good faith, settle a controversy, the courts

will enforce the compromise without regard to what the result might, or would have

been, had the parties chosen to litigate rather than settle.” J. Kahn & Co. v. Clark,

178 F.2d 111, 114 (5th Cir. 1949).

“[T]he fact that the [settlement] agreement is not in writing does not

render it unenforceable.” Hensley v. Alcon Laboratories, Inc., 277 F.3d 535, 540

(4th Cir. 2002).

Georgia law may provide the remedy for Respondents’ breach of the

settlement agreement. Resnick v. Uccello Immobilien GMBH, Inc., 227 F.3d 1347,

1350 n.4 (11th Cir. 2000) (“Because this settlement agreement is between two

private parties, federal common law does not apply.”) (state contract law applies

even though settlement agreement arose under the American with Disabilities Act);

Hayes v. National Service Industries, 196 F.3d 1252 (11th Cir. 1999) (applying

Georgia law to construction and enforceability of settlement agreement arising under

federal employment discrimination claim).

Under both federal law and state law, the usual remedy for breach of a

settlement agreement is monetary damages or specific performance. See Penobscot

8

Indian Nation v. Key Bank of Maine, 112 F.3d 538, 558 n.28 (1st Cir.), cert. denied,

522 U.S. 913, 118 S. Ct. 297, 139 L. Ed. 2d 229 (1997); TNT Marketing, Inc. v.

Agresti, 796 F.2d 276, 278 (9th Cir. 1986); Hayes, 196 F.3d at 1351-52 (vacating

liquidated damages award that was grossly disproportionate to damages reasonably

expected to flow from breach of settlement agreement); Paul Dean Corp. v. Kilgore,

252 Ga. App. 587, 556 S.E.2d 228, 234 (2001) (punitive damages not recoverable for

breach of settlement agreement even if breaching party acted in bad faith).

The usual remedy for breach of contract is monetary damages. See

United States v. Winstar Corp., 518 U.S. 839, 116 S. Ct. 2432, 2460, 135 L. Ed. 2d

964 (1996) (“damages are always the default remedy for breach of contract”).

A settlement agreement is a contract under Georgia law. Gray v.

Higgins, 205 Ga. App. 52, 421 S.E.2d 341, 344 (1992); Hall v. Coram Healthcare

Corp., 157 F.3d 1286, 1289 (11th Cir. 1998), cert. denied, 526 U.S. 1114, 119 S. Ct.

1760, 143 L. Ed. 2d 791 (1999); Wong v. Bailey, 752 F.2d 619, 621 (11th Cir.

1985).

It is undisputed that Respondents breached the settlement agreement by

failing to file their claims within ten days. The issue presented is the proper remedy

for Respondents’ breach.

The settlement agreement does not address the remedy for a breach of

the agreement. The Court can only conclude that the usual remedy for a breach

should apply. The Court is persuaded that an award of monetary damages is the

12 Respondents suggest that Debtor could be allowed to contest the involuntary

petition.

9

appropriate remedy for Respondents’ breach. The Court notes that specific

performance is not possible because the ten-day period has long since expired.

Recission of the settlement agreement is not possible.12 Trustee has substantially

administered Debtor’s bankruptcy estate.

Debtor argues that the remedy for Respondents’ breach should be

disallowance of Respondents’ claims. The Court notes that neither law nor equity

favors forfeitures. See Hendrix v. W. R. Altman Lumber Co., 145 F.2d 501, 504 (5th

Cir. 1944); Ory v. Tate, 211 Ga. 256, 85 S.E.2d 36, 39 (1954); APAC – Georgia, Inc.

v. Dept. of Transportation, 221 Ga. App. 604, 472 S.E.2d 97, 99 (1996), cert. denied,

(all ambiguities in a contract are resolved against existence of a forfeiture).

“[Debtor] cannot be placed in a better position than he would have

been in if the contract had not been breached.” Gainesville Glass Co. v. Don

Hammond, Inc., 157 Ga. App. 640, 278 S.E.2d 182, 186 (1981).

If Respondents had filed their claims within ten days, the claims would

have been allowed unless Debtor successfully contested the merits of the claims.

Forfeiture would put Debtor in a better position than if Respondents had timely filed

their claims.

Respondents argue that the consequences of not filing their claims

within ten days should be the subordination of their claims to other claims filed before

10

the bar date. See 11 U.S.C.A. § 726(a)(3) (West 1993) (allowed unsecured claim

proof of which is tardily filed receives distribution after timely filed claims and before

distribution to debtor). The Court is not persuaded by Respondents’ argument.

Respondents breached the settlement agreement and the remedy is damages caused

by the breach.

Debtor hotly contests the merits of Respondents’ claims. Debtor

argues that he could have successfully controverted the involuntary petition.

Respondents, on the other hand, argue that the involuntary petition was a “slam

dunk.” Respondents suggest certain misconduct by Debtor prior to the involuntary

petition.

These arguments, however, are not relevant to the remedy for

Respondents’ breach of the settlement agreement. See J. Kahn & Co., 178 F.2d at

114. The issue is what damages, if any, Debtor suffered because Respondents did

not file their claims within ten days.

Debtor bears the burden of proving his damages. The Court, from the

record and arguments of counsel, cannot determine the amount of damages, if any,

that Debtor may have suffered.

Trustee advises that an evidentiary hearing would be needed to consider

the merits of Respondents’ claims. Debtor should present evidence of his damages at

that hearing.

An order in accordance with this memorandum opinion will be entered

11

this date.

DATED the 18th day of April, 2003.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

BOBBY E. WILLIAMSON and WENDY S. WILLIAMSON

May 30, 2008

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 13

:

BOBBY E. WILLIAMSON and :

WENDY S. WILLIAMSON, ::

Debtors : Case No. 01-30762 RFH

:

BOBBY E. WILLIAMSON and :

WENDY S. WILLIAMSON, ::

Plaintiffs ::

v. ::

WASHINGTON MUTUAL : Adversary Proceeding

HOME LOANS, INC., : No. 07-3034

:

Defendant :

BEFORE

ROBERT F. HERSHNER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

Plaintiffs: Barry Gordon Irwin

Post Office Box 140

Hull, Georgia 30646-0140

Defendant: Thomas F. Bohan

Post Office Box 26937

Macon, Georgia 31221

Chapter 13 Trustee: Tony D. Coy

Post Office Box 954

Macon, Georgia 31202

1 The Bank of Danielsville is now known as Century South Bank of Danielsville. The

Court will refer to the bank as the “Bank of Danielsville.”

2 The security instruments at issue are “deeds to secure debt.” Since Plaintiffs and

Defendant refer to the security instruments as mortgages, the Court, to avoid confusion, will

also refer to the security instruments as mortgages.

2

MEMORANDUM OPINION

Bobby E. Williamson and Wendy S. Williamson, Plaintiffs, filed with the

Court on July 24, 2007, their Complaint For Declaratory Judgement, For Order

Compelling Filing Of Deed In Accordance With Confirmed And Completed Chapter

13 Plan, For Damages, And For All Fees And Costs Associated With This Action.

Washington Mutual Home Loans, Inc., Defendant, filed a response on September 6,

2007. Plaintiffs’ complaint came on for trial on April 24, 2008. The Court, having

considered the evidence presented, the arguments of counsel, and the record in

Plaintiffs’ bankruptcy case, now publishes this memorandum opinion.

FINDINGS OF FACT

In 1999, Plaintiffs purchased an unimproved 11.38 acre parcel of land

(hereafter the “realty”). The Bank of Danielsville1 financed the purchase. Plaintiffs

executed a mortgage2 dated May 3, 1999, in favor of the bank pledging the realty as

security for their obligation. The mortgage shows the amount of indebtedness to be

$46,779.10. During all relevant time, Plaintiffs have not owned any other realty.

In January 2000, Plaintiffs purchased a new double-wide mobile home. The

3 A Certificate of Title is used to perfect a security interest on certain personal property.

4 Mr. Williamson testified that Plaintiffs were trying to get electrical service “hooked

up” in April 2000.

5 It is unclear whether Ms. Williamson was obligated on the loans.

6 Part of the proceeds from the loan from Taylor Bean apparently was used to satisfy the

mortgage on the realty in favor of the Bank of Danielsville.

7 Ms. Williamson testified that Plaintiffs now make their insurance payments to a third

party.

3

Bank of Danielsville financed the purchase. Plaintiffs granted the bank a security

interest on their mobile home. The bank’s security interest is shown on a Certificate

of Title.3 Plaintiffs moved the mobile home onto the realty. Mr. Williamson testified

that the monthly payments on the obligation were about $700. The mobile home has

been Plaintiffs’ principal residence since April 2000.4

Mr. Williamson had a number of other loans at the Bank of Danielsville.5

Some of the loans were taken out to make improvements to the realty, including

drilling a well and installing a septic tank. Mr. Williamson wanted to consolidate his

loans into a single loan. The Bank of Danielsville referred him to Taylor, Bean, &

Whitaker Mortgage Corporation (hereafter “Taylor Bean”). In April 2000, Taylor

Bean made a loan to Mr. Williamson.6 Mr. Williamson was to repay the principal,

$104,000, plus interest by making monthly payments of some $1,100 for 15 years.

Ms. Williamson testified that insurance on the mobile home was included in the

monthly payments to Defendant.7 Mr. Williamson executed a mortgage dated

8 The three prior loans are identifiable solely by their loan numbers.

9 Attached to the Bank of Danielsville’s proof of claim is a copy of a mortgage on the

realty which is signed by Plaintiffs and dated May 22, 2000. The copy is not notarized, is

not signed by an official witness, and has no recording information. A handwritten note

on the promissory note dated May 22, 2000 suggests that this mortgage was “not finalized.”

4

April 27, 2000, in favor of Taylor Bean pledging the realty as security for his

obligation. Ms. Williamson did not execute the mortgage nor is her name shown on

the mortgage. Taylor Bean assigned the loan and the mortgage to Defendant.

Plaintiffs obtained a loan dated May 22, 2000, from the Bank of Danielsville.

The loan is a “renewal” of three prior loans.8 Plaintiffs were to pay the principal,

$22,099.30, plus interest by making 35 monthly payments of $400 and by making a

balloon payment for the unpaid balance in April 2003. This obligation was secured by

Plaintiffs’ mobile home and by an automobile and a pickup truck owned by

Mr. Williamson.9

Mr. Williamson now owed an obligation to Defendant which was secured by a

mortgage on the realty. The monthly payments on this obligation were about $1,100.

Plaintiffs owed an obligation to the Bank of Danielville which was secured by their

mobile home and by an automobile and a pickup truck owned by Mr. Williamson.

The payments on this obligation were $400 per month plus a balloon payment at

maturity.

Plaintiffs had financial problems and filed a petition under Chapter 13 of the

10 This is known as making payments “outside the plan.”

11 11 U.S.C.A. § 1323(a), (b) (West 2004) (debtor may modify proposed Chapter 13 plan

prior to confirmation; the plan as modified becomes the plan).

5

Bankruptcy Code on June 7, 2001. Plaintiffs offered to cure the arrearage on the

mortgage executed by Mr. Williamson by making payments to Defendant through

their proposed Chapter 13 plan. Plaintiffs offered to make the regular monthly

payments on the mortgage directly to Defendant.10 Plaintiffs in fact continued, for

several months, to make their regular monthly payments directly to Defendant. The

proposed Chapter 13 plan provides in part “Confirmation of this plan will extinguish

the second lien on [Plaintiffs’] residence held by [the Bank of Danielsville] due to the

lack of value to support the claimed lien.”

On August 9, 2001, Defendant filed a proof of claim asserting a secured claim

of $104,677.61. A copy of the mortgage executed by Mr. Williamson is attached to

Defendant’s proof of claim. Neither Plaintiffs nor the Chapter 13 trustee asserted an

objection to the proof of claim.

Plaintiffs filed on December 28, 2001, a proposed modified Chapter 13 Plan

“prior to confirmation.”11 Although served with the proposed plan, Defendant did not

assert an objection. The Court entered an order on March 6, 2002, confirming

Plaintiffs’ modified Chapter 13 plan which provides in relevant part:

Chapter 13 Plan

. . .

6

(2) From the payments so received, the trustee shall make disbursements as follows:

. . .

(c) After the above-listed payments, payments to secured creditors whose claims

are duly proven as allowed as follows:

NAME OF CREDITOR AMOUNT DUE VALUE COLLATERAL INTEREST PAYMENT

AMOUNT

Washington Mutual $104,677.61 $22,008.00 11 acres of land 9.5% $704.98/mo.

. . .

[Bank of Danielsville] $20,274.43 $25,000.00 double-wide mobile home

“ $1,600.00 1991 GMC Sierra pickup

“ $1,845.00 1994 Plymouth Acclaim auto

Total value loan #56556 “ $28,445.00 [total] 9.5% $590.35/mo.

Through their Chapter 13 plan, Plaintiffs sought to split or bifurcate the

obligation owed to Defendant of $104,677.61 into a secured part ($22,008) and an

unsecured part ($82,669.61). Plaintiffs were to pay the secured part ($22,008) plus

interest through their Chapter13 plan. No payments were to be made on the unsecured

part. After their plan was confirmed, Plaintiffs made no further monthly payments

directly to Defendant. The confirmed Chapter 13 plan does not state that Defendant’s

mortgage was to be satisfied or extinguished upon completion of the plan. Plaintiffs

were to pay in full their obligation of $20,274.43 plus interest to the Bank of

Danielsville which was secured by their mobile home and by Mr. Williamson’s

automobile and pickup truck.

Plaintiffs completed their Chapter 13 plan payments in 2005. On March 29,

2005, the Bank of Danielsville released its security interest on Plaintiffs’ mobile home.

7

On June 28, 2005, the Court entered an order granting Plaintiffs a Chapter 13

discharge, a final decree was entered, and Plaintiffs’ Chapter 13 case was closed.

Plaintiffs asked Defendant to release its mortgage on the realty. Defendant

refused. The Court entered an order on March 1, 2007, reopening Plaintiffs’ Chapter

13 case. Plaintiffs filed this adversary proceeding on July 24, 2007.

CONCLUSIONS OF LAW

In this adversary proceeding, Plaintiffs contend that the mortgage in favor of

Defendant was satisfied upon the completion of their Chapter 13 plan. Plaintiffs

demand that Defendant release its mortgage. Defendant contends that its claim is

secured solely by real property that is Plaintiffs’ principal residence and that its

mortgage “survived” the completion of Plaintiffs’ Chapter 13 plan.

Section 1322(b)(2) of the Bankruptcy Code provides:

§ 1322. Contents of plan

. . .

(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

12 11 U.S.C.A. § 1327(a) (West 2004) (provisions of confirmed Chapter 13 plan bind

debtor and each creditor, whether or not creditor’s claim is provided for by plan and whether

or not creditor has objected to, accepted, or rejected the plan).

13 295 B.R. 686 (Bankr. M. D. Ga. 2003).

14 McCorkle was the successor in interest to Homes of American, Inc.

8

unsecured claims, or leave unaffected the

rights of holders of any class of claims;

11 U.S.C.A. § 1322(b)(2) (West 2004)

If Defendant’s secured claim is protected by §1322(b)(2), then Plaintiffs cannot

satisfy the mortgage simply by paying the alleged value of the realty ($22,008).

Rather, Plaintiffs must pay the full amount of Defendant’s claim ($104,677.61). It is

undisputed that Plaintiffs have not paid the full amount of Defendant’s claim.

Plaintiffs contend that Defendant is bound by the provisions of their confirmed

Chapter 13 plan.12 Plaintiffs contend that the mortgage was satisfied upon the

completion of their Chapter 13 plan. Plaintiffs’ confirmed Chapter 13 plan does not

provide that the mortgage was to be satisfied or that Defendant was to release the

mortgage.

In McCorkle v. Scott, (In re Scott),13 a mortgage in favor of McCorkle14 was

secured by the debtors’ principal residence. The debtors’ confirmed Chapter 13 plan

provided that the debt to McCorkle’s predecessor (hereafter “McCorkle”) was

disputed, that no payment was to be made to McCorkle, and that McCorkle’s mortgage

was to be satisfied of record upon completion of the plan. McCorkle did not object to

15 Universal American Mortgage Co. v. Bateman, (In re Bateman), 331 F.3d 821 (11th

Cir. 2003).

9

confirmation of the debtors’ Chapter 13 plan. The debtors received their Chapter 13

discharge and their case was closed. The debtors and McCorkle disagreed as to

whether McCorkle’s mortgage survived the confirmation of the debtors’ Chapter 13

plan and the debtors’ subsequent discharge in bankruptcy. This Court, relying on a

binding decision by the Eleventh Circuit Court of Appeals,15 held that although

McCorkle was bound by the terms of the confirmed plan, that McCorkle’s secured

claim survived the confirmed Chapter 13 plan and that McCorkle retains his rights

under the mortgage until his secured claim is satisfied in full.

Turning to the case at bar, the Court is persuaded that if Defendant’s claim is

secured solely by real property that is Plaintiffs’ principal residence, then Defendant’s

mortgage survived confirmation of Plaintiffs’ Chapter 13 plan and Plaintiffs’

subsequent discharge.

It is undisputed that Defendant’s claim is secured by the realty and that the

mobile home is located on the realty. Plaintiffs have resided in the mobile home since

April 2000. Plaintiffs and Defendant hotly dispute whether the mobile home is part of

the realty or whether the mobile home is personal property. If the mobile home is part

of the realty, then Defendant’s claim is protected by §1322(b)(2). If the mobile home

is not part of the realty, then Defendant’s claim is secured by “raw land” and is not

16 837 F.2d 455 (11th Cir. 1988).

10

protected by §1322(b)(2).

In determining whether the mobile home is real or personal property, the Court

must look to applicable state law, which in this case is Georgia law. Kennedy v. Lane

Foods, Inc., (In re Kennedy), 192 B.R. 282, 287 (Bankr. M.D. Ga. 1996).

A claim secured by “raw land” is not protected by §1322(b)(2) even though a

mobile home which was financed by a third party is placed upon the land. Beacham v.

Somma Investments, Inc., (In re Beacham), 2006 WL 565929 (Bankr. M.D. Ga., Feb.

17, 2006); In re Shelnutt, Ch. 13, Case No. 94-30602 (Bankr. M.D. Ga., May 12,

1995).

The date for determining whether Defendant’s claim is secured by Plaintiffs’

principal residence, and thus protected by §1322(b)(2), is the date that Taylor Bean

made the loan to Mr. Williamson. That date is April 27, 2000. USDA v. Jackson,

2005 WL 1563529 (M.D. Ga., July 1, 2005).

In Walker v. Washington, (In re Washington),16 the Eleventh Circuit considered

whether a double-wide mobile home had become part of the realty upon which it was

placed. The circuit court stated:

Under Georgia law, a mobile home is initially considered

a vehicle which must be given a certificate of title. Ga.

Code Ann. § 40-3-20 (1982). In order to perfect a security

interest in a vehicle, the lienor’s interest must be noted on

the title. Ga. Code Ann. § 40-3-50(b) (1982). Georgia law

11

also provides, however, that an object which is intended to

remain permanently in place, even if it is not actually

attached to the underlying land, is a fixture which

constitutes a part of the realty. Ga. Code Ann. § 44-1-6(a)

(1982). Therefore, a mobile home may lose its character as

a vehicle and become part of the land on which it is placed.

1969 Op. Att’y. Gen. No. 69-316. If such a transformation

occurs, then a security interest in the home may be

perfected under Georgia real estate law. Id.

Georgia courts have used three factors in analyzing

whether an object is personalty or realty. Homac, Inc. v.

Fort Wayne Mortgage, Co., 577 F. Supp. 1065, 1069 (N.D.

Ga. 1983). First, the Court looks to the degree to which the

object has become integrated with or attached to the land.

Under Georgia law, if an article cannot be removed from

the land without suffering “essential injury,” it is

considered a fixture. Id., citing Wade v. Johnston, 25 Ga.

331, 336 (1858).

Second, a court must consider the intention of the parties

with regard to the status of the object. In re Janmar, Inc., 4

B.R. 4, 9 (N.D. Ga. 1979). An item will remain personalty

if the parties so contract, even if the item is permanently

affixed to realty.

Third, the court determines whether there is unity of title

between the personalty and the realty at the time the object

allegedly became part of the land:

When the ownership of the land is in one person and

the thing affixed to it is in another, and in its nature

it is capable of severance without injury to the

former, the fixture can not, in contemplation of law,

become a part of the land, but must necessarily

remain distinct property to be used and dealt with as

personal estate.

Homac, 577 F. Supp. at 1070, citing Holland Furnace

17 O.C.G.A. § 8-2-181 (2004) (amended 2006).

12

Co. v. Lowe, 172 Ga. 815, 159 S.E. 277 (1931).

837 F.2d at 456-57.

Varying weight may be given to the three factors according to the circumstances

of the case. The trier of fact looks to the intent of the parties vested with ownership and

their use of the article in question to determine whether or not it becomes a permanent

part of the realty. Manderson & Assoc., Inc. v. Gore, 193 Ga. App. 723, 389 S.E.2d

251, 260 (1989) cert. denied.

Plaintiffs argue that Georgia Code § 8-2-18117 overrules In re Washington.

From May 31, 2003, until July 1, 2006, § 8-2-181 provided in part that a mobile home

or a manufactured home shall constitute personal property until it is converted to real

property (1) by being permanently affixed on real property and (2) by the owners of the

home and all security interest holders executing and filing a Certificate of Permanent

Location in the appropriate public records. It is undisputed that no certificate on

Plaintiffs’ mobile home was executed or filed. Section 8-2-181 became effective on

May 31, 2003. Taylor Bean made the loan at issue to Mr. Williamson in April 2000.

The date of the loan is the critical date in determining whether Defendant’s claim is

protected by §1322(b)(2). The Court is persuaded that § 8-2-181 does not determine

whether Plaintiffs’ mobile home is part of the realty for purposes of §1322(b)(2).

18 The tongue is used to tow the mobile home.

19 Mr. Williamson testified that the county requires a one-inch gap so that the mobile

home can “flex.”

13

The Court will now apply the three factors listed in In re Washington to the facts

presented.

(1) The degree to which the mobile home is integrated with or attached to the

realty.

Under Georgia law, if a mobile home cannot be removed from the realty without

suffering essential injury, then the mobile home has become a fixture upon the realty.

On April 27, 2000, Mr. Williamson executed a mortgage pledging the realty as security

for the obligation now owned by Defendant. The mobile home has been Plaintiffs’

principal residence since April 2000.

By April 27, 2000, the mobile home had been moved onto the realty, the

tongue18 was removed and placed under the mobile home, and the wheels and axles

were removed. The mobile home was sitting on concrete blocks. Electric service was

being “hooked up.” The Court is persuaded that Plaintiffs were residing in the mobile

home around the end of April 2000. About 1 ½ years later, skirting consisting of

stacked concrete blocks was placed around the bottom four sides of the mobile home.

There is a one-inch gap between the top of the blocks and the bottom of the mobile

home.19 Plaintiffs testified that the mobile home could easily be moved from the realty

20 Manderson & Assoc., Inc., 389 S.E. 2d at 260.

21 Ms. Williamson testified that Plaintiffs now make their insurance payments to a third

party.

14

in April 2000.

(2) The intention of the parties

The intention of the parties is the primary factor in determining whether a

mobile home has become a permanent part of the realty.20 Plaintiffs testified that they

did not intend for the mobile home to become part of the realty. Plaintiffs testified that

the mobile home can be moved without damage to the realty.

Ms. Williamson testified that insurance on the mobile home was included in the

monthly mortgage payments to Defendant.21 This shows that Plaintiffs and Defendant

understood that the mortgage was secured by the mobile home.

Plaintiffs’ initial proposed Chapter 13 plan provided that confirmation would

extinguish the second lien on their residence which was held by the Bank of

Danielsville. This shows that Plaintiffs understood that Defendant held a first priority

mortgage on their mobile home.

Mr. Williamson testified that Plaintiffs decided about one and one-half years

ago to move to another location because of concerns about their neighborhood.

Mr. Williamson testified that the mobile home could be moved or could be sold along

with the realty, depending on what the purchaser wants.

22 The building may be a dog house or a cover for the well.

15

Since purchasing their mobile home, Plaintiffs have made a number of

improvements to and around the mobile home. Within the past two years, a new front

porch and a new rear screen porch were built onto the mobile home. Stucco was

applied to the concrete blocks which skirt the bottom four sides of the mobile home.

The realty has been landscaped and a gold fish pond has been installed. Photographs

show that the mobile home and surrounding area are well maintained and surrounded

by shrubs, hardwood trees, and a painted wood rail fence. The yard is well maintained.

Near the mobile home is an aluminum carport. A small stucco building is located near

the mobile home.22 Plaintiffs’ clearly take pride in the mobile home which has been

their residence for eight years.

The Court, sitting as the trier of fact in this trial, can only conclude from the

evidence that Plaintiffs intended the article in question, the mobile home, to be part of

the realty. Plaintiffs’ improvements and upkeep of the mobile home demonstrate that

they have always intended for it to be their permanent residence.

(3) Whether there was unity of title between the mobile home and the realty

at the time the mobile home allegedly became part of the realty.

Plaintiffs purchased the mobile home in January 2000. Plaintiffs are shown as

the “owners” on the Certificate of Title. In April 2000, Defendant’s predecessor,

Taylor Bean, made a loan to Mr. Williamson. Mr. Williamson executed a mortgage

16

pledging the realty as security for his obligation. Ms. Williamson did not execute the

mortgage and her name is not shown on the mortgage. Still there was unity of title

because Mr. Williamson had an interest in both the realty and the mobile home.

The Court is persuaded that Plaintiffs’ mobile home was part of the realty in

April 2000 for purposes of §1322(b)(2). The Court is persuaded that Defendant’s

claim is protected by §1322(b)(2) and that Defendant’s mortgage survived the

confirmation of Plaintiffs’ Chapter 13 plan and their subsequent discharge in

bankruptcy.

An order in accordance with this memorandum opinion will be entered this date.

DATED this 30th day of May, 2008.

/s/ Robert F. Hershner, Jr.

ROBERT F. HERSHNER, JR.

United States Bankruptcy Judge

SANDRA D. WHITLOCK

April 28, 2004

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 13

:

SANDRA D. WHITLOCK, :

:

Debtor : Case No. 03-31112 RFH

:

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Debtor: Mr. Ernest V. Harris

Post Office Box 1586

Athens, Georgia 30603

For James E. Dollar, individually Mr. Stephen L. Noel

and as Executor of the Estate of 124 South Broad Street

James Nimrod Dollar, and Monroe, Georgia 30655

Bobby Dollar:

For Chapter 13 Trustee: Mr. Tony Coy

Office of the Chapter 13 Trustee

Post Office Box 954

Macon, Georgia 31202

MEMORANDUM OPINION

1 The Objectors are James E. Dollar and Bobby Dollar as individuals and James

E. Dollar in his capacity as Executor of the Estate of James Nimrod Dollar.

2

Sandra D. Whitlock, Debtor, filed on June 26, 2003, a petition under Chapter 13

of the Bankruptcy Code. Debtor also filed her proposed Chapter 13 Plan on June 26,

2003. On October 6, 2003, James E. Dollar and Bobby Dollar, Objectors,1 filed an

objection to confirmation of Debtor’s Chapter 13 Plan.

A hearing on confirmation of Debtor’s Chapter 13 Plan was held on February

26, 2004. At the hearing, Debtor, on the record, modified her Chapter 13 Plan to

provide that the term of her plan would be increased to four years. Objectors object to

confirmation of the modified plan. The Court, having considered the evidence

presented and the arguments of counsel, now publishes this memorandum opinion.

Debtor and Objectors are sister and brothers. Their father, James Nimrod

Dollar, died on June 14, 1997. In their father’s will, Debtor was named as executrix of

his estate. Letters testamentary were issued on August 5, 1997, to Debtor by the

Probate Court of Gwinnet County, Georgia. Debtor was immediately sworn in as

executrix. Debtor later breached her fiduciary duty and was removed as executrix by the

Probate Court by order entered on August 14, 1998. Debtor’s older brother, James E.

Dollar, was appointed as successor executor by the Probate Court. James E. Dollar

testified that his father’s estate “is still open”.

Objectors filed a complaint for damages against Debtor in the Superior Court of

2 The Superior Court determined that: (1) Debtor sold to herself real estate of

her father’s estate against the advice of her own counsel; (2) Debtor continued to write

checks to herself from the estate’s account after she was removed as executrix; (3)

Debtor received more than her share of her father’s estate; and (4) Debtor refused to

relinquish the estate’s records to the successor executor.

3 11 U.S.C.A. § 522(f) (West Supp. 2003).

3

Walton County, Georgia. Objectors sought to recover damages they suffered because

of Debtor’s improper handling of their father’s estate. The Superior Court, after a

bench trial, entered a judgment dated May 23, 2003, against Debtor. Objectors were

awarded actual damages, punitive damages, and attorney’s fees.2 Debtor made no

payments on these obligations before she filed for bankruptcy relief.

Debtor filed her Chapter 13 case on June 26, 2003. Debtor listed on Schedule D

Objectors’ judicial lien as a secured claim. The Court entered an order on October 30,

2003, avoiding Objectors’ judicial lien to the extent it impaired Debtor’s exemptions.3

Debtor’s schedules do not list any nonexempt property. Debtor proposes to pay

approximately 6 percent of her obligations to Objectors through her modified Chapter

13 Plan.

The Court notes that Debtor’s obligations to Objectors may be nondischargeable

in a Chapter 7 bankruptcy case. 11 U.S.C.A. § 523(a)(2),(4), and (6) (West 1993). The

law is clear, however, that Debtor’s obligations are dischargeable under the

superdischarge provisions of Section 1328(a) of the Bankruptcy Code upon completion

of her Chapter 13 plan. A leading Chapter 13 treatise states in part:

Other than alimony and support . . . student loans . . . drunken

4 495 U.S. 552, 110 S. Ct. 2126, 109 L. Ed. 2d. 558 (1990).

4

driving . . . and restitution or a criminal fine . . . the long list of

exceptions to discharge in § 523(a), applicable in Chapter 7,

Chapter 12 and individual Chapter 11 cases, is not applicable in

Chapter 13 at completion of all payments. In particular, claims for

fraud, misrepresentation, willful and malicious misconduct and

defalcation in a fiduciary capacity—the so-called “fraud

exceptions” to discharge given special treatment in

§ 523(c)—are dischargeable after completion of payments in a

Chapter 13 case.

4 K. Lundin, Chapter 13 Bankruptcy, 3d Ed., § 344.1, p. 344-4, (2000 & Supp. 2002).

In Pennsylvania Dept. of Public Welfare v. Davenport,4 the United States

Supreme Court stated:

Accordingly, Congress secured a broader discharge for debtors

under Chapter 13 than Chapter 7 by extending to Chapter 13

proceedings some, but not all, of § 523(a)’s exceptions to

discharge. See 5 Collier on Bankruptcy ¶ 1328.01[1][c] (15th ed.

1986) (“[T]he dischargeability of debts in chapter 13 that are not

dischargeable in chapter 7 represents a policy judgment that [it] is

preferable for debtors to attempt to pay such debts to the best of

their abilities over three years rather than for those debtors to have

those debts hanging over their heads indefinitely, perhaps for the

rest of their lives”) (footnote omitted).

495 U.S. at 563.

Thus, Debtors obligations to Objectors are dischargeable in bankruptcy upon the

completion of Debtor’s Chapter 13 plan.

The Court now turns to decide whether Debtor’s modified Chapter 13 plan is

confirmable. Section 1325(a) of the Bankruptcy Code provides that the Court shall

confirm a plan if certain requirements are satisfied. Objectors contend that Debtor’s

5 11 U.S.C.A. § 1325(b) (West 1993 & Supp. 2003).

§ 1325. Confirmation of 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 contributions”

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

. . . .

5

Chapter 13 plan does not meet the disposable income test of Section 1325(b) of the

Bankruptcy Code.5 Disposable income means income which is not reasonably

necessary to be expended for the maintenance or support of the debtor or a dependant of

the debtor. 11 U.S.C.A. § 1325(b)(2)(A) (West 1993 & Supp. 2003). Collier on

Bankruptcy states:

6 Debtor’s total monthly take-home pay was calculated by multiplying Debtor’s

weekly total take-home-pay ($587) by fifty-two (weeks) and dividing by twelve

(months).

6

When an objection to confirmation is filed pursuant to

section 1325(b)(1) and the plan does not satisfy the full

payment test of subsection 1325(b)(1)(A), subsection

1325(b)(1)(B) requires the court to determine whether the

debtor has committed to the plan all of the debtor’s

projected disposable income for a three-year period

beginning on the date the first plan payment is due.

8 Collier on Bankruptcy ¶ 1325.08 [4][a] (15th ed. rev. 2003).

The evidence shows that Debtor is employed full-time as a bookkeeper at

Southeastern Hydraulics, Inc. Debtor’s take-home pay is $486 per week. Debtor also

works part-time at Big Lot Stores, Inc., and has take-home pay of $101 per week.

Debtor’s total monthly take-home pay is $2,543.6 Debtor’s weekly income at her

confirmation hearing was about $33 less than when she filed her Chapter 13 case.

Debtor’s Schedule J shows monthly living expenses totaling $2,292. Debtor’s

thirty-one-year-old daughter has no income and lives with Debtor. Debtor’s budget is

very conservative showing nothing for medical and dental expenses, home maintenance,

recreation, or entertainment. The Court is persuaded that Debtor’s monthly living

expenses of $2,292 are reasonably necessary for her maintenance or support. The

Court is persuaded that Debtor, during the four year term of her Chapter 13 plan, will

have expenses not contemplated in her budget.

Debtor filed her Chapter 13 plan to save her residence and to deal with other

7 11 U.S.C.A. § 1325(a)(3) (West 1993) (court shall confirm a plan if the plan

has been proposed in good faith and not by any means forbidden by law).

8 702 F. 2d 885 (11th Cir. 1983).

7

obligations. Debtor’s monthly take-home pay exceeds her expenses by $251. Debtor’s

modified Chapter 13 plan proposes to pay $125 per month to the Chapter 13 trustee.

The term of the proposed plan is four years. Debtor is current on her Chapter 13 plan

payments.

The Court is persuaded that Debtor’s proposed Chapter 13 plan payment of $125

per month is payment of her disposable income. The Court is persuaded that the

additional $126 will be needed to pay unbudgeted and reasonably necessary expenses

for her maintenance or support. The Court notes that section 1325(b)(1)(B) only

requires payment of disposable income for three years. Debtor’s Chapter 13 plan

provides for payment for four years. Thus, Debtor’s Chapter 13 plan is for a longer

term than required by the disposable income test.

Objectors also contend that Debtor’s Chapter 13 plan is not proposed in good

faith,7 and is in fact proposed in bad faith. Objectors however, do not assert that

Debtor’s Chapter 13 plan should be dismissed as a bad faith filing. In Kitchens v.

Georgia Railroad Bank and Trust Co., (In re Kitchens),8 the Eleventh Circuit Court of

Appeals set forth the factors this Court must consider in deciding good faith. The

circuit court stated:

Five circuit court opinions, all announced in 1982, while

not completely uniform, adopt a middle road between the

8

“best interests” and “best efforts” tests. By this middle

road, the facts of each bankruptcy case must be individually

examined in light of various criteria to determine whether

the chapter 13 plan at issue was proposed in good faith. In

re Estus, 695 F.2d 311 (8th Cir. 1982); Deans v.

O’Donnell, 692 F.2d 968 (4th Cir. 1982); Barnes v.

Whelan, 689 F.2d 198 (D.C. Cir. 1982); In re Goeb, 675

F.2d 1886 (9th Cir. 1982); In re Rimgale, 669 F.2d 426

(7th Cir. 1982).

The courts in all these opinions refuse to adopt a per se

rule that a debtor’s failure to make substantial repayments

demonstrates lack of good faith:

Congress has nowhere in the statute provided a

definition of the term “good faith.” The legislative history

is similarly silent on the point. . . .

. . . [H]ad Congress intended that such repayment be a

condition precedent to confirmation of all Chapter 13 plans

it could have explicitly so stated. . . . Congress did in fact

explicitly set a minimum repayment level for unsecured

creditors in sec. 1825[ (a)(4) ], but that limit is not one

requiring substantial repayment in every plan. . . .

Deans v. O’Donnell, 692 F.2d at 969-71. See In re Goeb,

675 F.2d at 1388.

In three of these opinions, circuit courts found the

general parameters of the meaning of “good faith” in a

widely accepted definition of the term as it was employed

in chapter 11 of the old Bankruptcy Act:

A comprehensive definition of good faith is not

practical. Broadly speaking, the basic inquiry should

be whether or not under the circumstances of the

case there has been an abuse of the provisions,

purpose or spirit of [the chapter] in the proposal.

9 Collier on Bankruptcy ¶ 920 at 319 (14th ed. 1978);

cited in In re Estus, 695 F.2d at 316; Deans v. O’Donnell,

9

692 F.2d at 972; In re Rimgale, 669 F.2d at 431. . . .

The courts have elaborated upon this basic inquiry noted

by Collier. In compiling factors to be considered by

bankruptcy courts in their determinations of debtors’ good

faith, the Eighth Circuit added to a list already provided by

the district court in the present case. The district court had

correctly declared that a bankruptcy court must consider

but not be limited to the following:

(1) the amount of the debtor’s income from all

sources;

(2) the living expenses of the debtor and his

dependants;

(3) the amount of attorney’s fees;

(4) the probable or expected duration of the debtor’s

Chapter 13 plan;

(5) the motivations of the debtor and his sincerity in

seeking relief under the provisions of Chapter 13;

(6) the debtor’s degree of effort;

(7) the debtor’s ability to earn and the likelihood of

fluctuation in his earnings;

(8) special circumstances such as inordinate medical

expense;

(9) the frequency with which the debtor has sought

relief under the Bankruptcy Reform Act and its

predecessors;

(10) the circumstances under which the debtor has

contracted his debts and his demonstrated bona

fides, or lack of same, in dealing with his creditors;

(11) the burden which the plan’s administration

would place on the trustee.

12 B.R. at 659. The Eighth Circuit court amplified the tenth

factor, stating that the bankruptcy court should consider the extent

to which the claims are modified and the extent of preferential

treatment among classes of creditors. In re Estus, 695 F.2d at

317. All but one of the circuits note that substantiality of the

repayment to the unsecured creditors should be one of the factors

considered. In re Estus, 695 F.2d at 317; Deans v. O’Donnell,

10

692 F.2d at 972; in re Goeb, 675 F.2d at 1890; In re Rimgale, 669

F.2d at 432.

Like the court in In re Estus, we do wish to note that other

factors or exceptional circumstances may support a finding of

good faith, even though a debtor has proposed no or only nominal

repayment to unsecured creditors.

. . .

The Eighth Circuit court also added to the list consideration of the type

of debt to be discharged and whether such debt would be nondischargeable

under chapter 7. . . . This is yet another factor to which bankruptcy courts

should be alert.

702 F.2d at 888-89.

The Court will now apply the Kitchens factors to the facts in the case at bar.

1. Amount Of Debtor’s Income From All Sources.

Debtor has a full-time job and a part-time job. Her total monthly take-home pay

is $2,543. Debtor’s monthly living expenses are $2,292. Thus Debtor has excess

income of $251. Debtor proposes to pay $125 of her excess income into her Chapter

13 plan. Debtor’s budget is very conservative showing nothing for medical and dental

expenses, home maintenance, recreation, or entertainment. The Court is persuaded that

Debtor, during the four year term of her Chapter 13 plan, will have expenses not

contemplated in her budget. The Court is persuaded that Debtor’s monthly Chapter 13

plan payment of $125 is payment of her disposable income. The additional $126 will

be needed to pay unbudgeted and reasonably necessary expenses for her maintenance or

support.

11

2. Living Expenses

Debtor’s living expenses set forth in her budget are very conservative. Debtor

will have to sacrifice in order to pay her living expenses and make her plan payments. 3.

Amount Of Attorney’s Fees

Debtor’s attorney has agreed to represent Debtor for $1,250. This is $100 more

than the regularly awarded fee of $1,150 for a Chapter 13 case by this Court. Debtor’s

attorney has expended much more attorney time than would be needed in a routine case.

The Court is persuaded that the attorney’s fee is reasonable for the attorney services

rendered in Debtor’s case.

4. Probable Or Expected Duration Of Debtor’s Chapter 13 Plan

The maximum term for a Chapter 13 plan is five years. 11 U.S.C.A. § 1322(d)

(West Supp. 2003). The term of Debtor’s plan is four years. This is one year longer

than the required three years for the disposable income test.

5. Motivation and Sincerity of Debtor in Filing Chapter 13 Case

Debtor filed for Chapter 13 relief to save her residence. Debtor’s daughter lives

with her in the residence. One of the primary reasons why Congress created Chapter 13

of the Bankruptcy Code was to afford debtors an opportunity to save their residences.

Debtor filed her Chapter 13 case just one month after Objectors obtained their state

court judgment. Debtor made no payments on this obligation before she filed for

bankruptcy relief.

6. Degree Of Debtor’s Effort

12

Debtor is working two jobs. Her budget shows no luxury expenses and contains

only expenses needed for her maintenance or support. Debtor will have to sacrifice in

order to pay her living expenses and make her plan payments for four years.

7. Debtor’s Ability To Earn

Debtor is working two jobs. There is no evidence that Debtor’s employment will

change or that her income will increase.

8. Special Circumstances Such As Incidental Medical Expense

Debtor’s Chapter 13 filing is an attempt by her to save her residence.

9. Prior Bankruptcy Filings

This is the first case filed by Debtor under the Bankruptcy Code.

10. Circumstances Under Which Debtor Contracted Her Debts And Her Demonstrated

Bona Fides, Or Lack Of Same, In Dealing With Her Creditors

There is no question that Debtor breached her fiduciary duty when she was

serving as executrix of her father’s estate. She received more than her share of her

father’s estate. Objectors received less than their shares. The Superior Court awarded

Objectors actual damages, punitive damages, and attorney’s fees.

Collier on Bankruptcy states:

Only if there has been a showing of serious debtor misconduct or abuse

should a chapter 13 plan be found lacking in good faith. In examining

whether there has been a serious abuse of the Code, however, many courts

have continued to use the fact-sensitive “all of the circumstances” type of

analysis developed by the appellate courts prior to the 1984 amendments.

Thus, for example, while it is not automatically bad faith to seek

discharge in chapter 13 debts which were not discharged in a prior chapter

9 237 F.3d 1168 (10th Cir. 2001).

10 In re Davis, Ch. 13, Case No. 98-52127 (Bankr., Oct. 16, 1998)(Hershner, J.).

13

7 case, in particular cases additional circumstances may warrant a finding

that the plan is not filed in good faith.

8 Collier on Bankruptcy ¶ 1325.04 [1] (15th ed. rev. 2003).

In Mason v. Young, (In re Young),9 the Tenth Circuit Court of Appeals stated:

The policy of allowing a fresh start does not license debtors to lightly rid

themselves of the burden of their indebtedness without an honest attempt

at repayment. Yet neither does that policy compel debtors, in Dickensian

fashion, to labor for the rest of their lives under the crushing weight of

gigantic debt; under our law, the world is not to be made a debtor’s prison

by a lifelong sentence of penury.

237 F.3d at 1178.

11. Burden Which The Plan’s Administration Would Place On Trustee

There is no showing that administration of Debtor’s Chapter 13 plan would place

a burden on the Chapter 13 trustee.

The facts and legal issues in the case at bar are similar to those in In re Davis.10

In that case the Chapter 7 debtor obtained a power of attorney to handle the financial

affairs of her incompetent father. The debtor began using her father’s funds and “good

name” for her personal benefit. The debtor admitted that she “did wrong”. The debtor’s

total obligations to her father probably exceeded $100,000. The debtor filed for

bankruptcy relief almost immediately after her sister was appointed legal guardian for

11 785 F. 2d 936 (11th Cir.), cert. dismissed, 478 U.S. 1028, 106 S. Ct. 3343,

92 L. Ed. 2d 763 (1986).

14

their father.

The debtor, through her Chapter 13 plan, proposed to cure an arrearage on her

residence and to pay a maximum dividend of twenty percent to unsecured creditors,

including the obligations to her father. The debtor proposed to pay all of her disposable

income into her Chapter 13 plan. The plan’s term was five years which is the maximum

allowed by the Bankruptcy Code. The Court confirmed the debtor’s Chapter 13 plan,

noting that the payments fairly reflected the debtor’s ability to pay and would impose a

hardship over the term of the plan.

The Chapter 13 trustee contended that confirmation would allow the debtor to

carry out her scheme to defraud her father. The Court noted that the debtor testified

under oath that she wrongfully took funds from her father when he was incompetent.

The Court noted that the debtor’s bankruptcy would not stay the commencement or

continuation of a criminal action or proceeding against the debtor and that a debt for

restitution included in a criminal sentence would be nondischargeable under Chapter 13.

In Shell Oil v. Waldron (In re Waldron),11 the Eleventh Circuit Court of Appeals

stated:

The Bankruptcy Code expressly provides that a bankruptcy court

may not confirm a Chapter 13 plan unless “the plan has been

proposed in good faith and not by any means forbidden by law.” 11

U.S.C. §1325(a)(3) (1982). Indeed, “the ‘good faith’ requirement

of § 1325(a) is the only safety valve available through which plans

15

attempting to twist the law to malevolent ends may be cast out.

The good faith test should be used accordingly.” In re Leal, 7

Bankr. 245, 248 (Bankr. D. Colo. 1980).

785 F. 2d at 939.

The circuit court also stated:

We hold that with section 1325(a)(3) Congress intended to

provide bankruptcy courts with a discretionary means to preserve

the bankruptcy process for its intended purpose. Accordingly,

whenever a Chapter 13 petition appears to be tainted with a

questionable purpose, it is incumbent upon the bankruptcy courts

to examine and question the debtor’s motives. If the court

discovers unmistakable manifestations of bad faith, as we do here,

confirmation must be denied.

Unmistakable manifestations of bad faith need not be based upon

a finding of actual fraud, requiring proof of malice, scienter or an

intent to defraud. We simply require that the bankruptcy courts

preserve the integrity of the bankruptcy process by refusing to

condone its abuse.

The cornerstone of the bankruptcy courts has always been the

doing of equity. The protections and forgiveness inherent in the

bankruptcy laws surely require conduct consistent with the

concepts of basic honesty. Good faith or basic honesty is the very

antithesis of attempting to circumvent a legal obligation through a

technicality of the law.

785 F. 2d at 941.

Turning to the case at bar, the Court does not condone Debtor’s conduct that

resulted in the entry of a judgment against her by the state court. Debtor clearly made

serious errors while serving as executrix of her father’s estate. Still, the Court is not

persuaded that her conduct was so abusive that confirmation of her Chapter 13 plan

16

should be denied. The Court, from the evidence presented, does not find that Debtor

had an evil intent to harm Objectors.

Objectors also argue that Debtor failed to disclose all her assets. Debtor owned

a cemetery lot that was not listed in her bankruptcy schedules. Debtor testified that she

forgot she owned the cemetery lot. The cemetery lot has now been disclosed to the

Chapter 13 trustee. The Court is persuaded that Debtor honestly forgot about the

cemetery lot. Since it has now been disclosed, Debtor’s oversight should not bar

confirmation.

The Chapter 13 trustee originally objected to confirmation of Debtor’s Chapter

13 plan. The Chapter 13 trustee withdrew her objection when Debtor extended the term

of her Chapter 13 plan from three years to four years. The Chapter 13 trustee now

recommends confirmation of Debtor’s modified Chapter 13 plan.

The Court is mindful of the strained feelings between the Objectors and Debtor.

Still the Court is persuaded that Debtor is proposing her Chapter 13 plan in good faith

to save her residence, and to deal with her obligations as permitted by the Bankruptcy

Code.

An order in accordance with this memorandum opinion will be entered this date.

DATED this 28th day of April, 2004.

____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

17

STEVEN PEARSON

December 5, 2008

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 13

:

STEVEN PEARSON :

DEANNA L. PEARSON, ::

Debtors : Case No. 08-30768 RFH

:

BEFORE

ROBERT F. HERSHNER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Debtors: William Rhymer

P.O. Box 81028

Conyers, Georgia 30013

The Chapter 13 Trustee: Tony D. Coy

P.O. Box 954

Macon, Georgia 31202

Counsel stipulated that the Court 1 could consider the entire record in Debtors’s

bankruptcy case in deciding the issues presented.

2 This is known as a 100% plan or a 100% case.

3 Debtors do not list any unsecured priority claims in their bankruptcy schedules.

4 Payments made by the Chapter 13 trustee on unsecured claims are called distributions.

5Accelerate means to pay more than the periodic payment required by the contractual

obligation.

2

MEMORANDUM OPINION

Camille Hope, the Chapter 13 Trustee (“Trustee”), filed with the Court on

September 8, 2008, an Objection To Confirmation. Trustee’s objection came on for a

hearing on September 17, 2008. The Court, having considered the objection, the

record in Debtors’s bankruptcy case,1 and the arguments of counsel, now publishes

this memorandum opinion.

Steven Pearson and Deanna L. Pearson, Debtors, filed with the Court on July 1,

2008, a petition under Chapter 13 of the Bankruptcy Code. In their bankruptcy

schedules, Debtors list unsecured nonpriority claims that total $21,582. Debtors filed

on July 16, 2008, a proposed Chapter 13 plan. Debtors propose to pay in full all

unsecured claims through their Chapter 13 plan.2 Debtors propose to pay in full the

secured claims and priority claims3 before any distributions4 are made on the

unsecured claims. Debtors propose to “accelerate”5 the payments on their secured

claims. Debtors propose to pay the secured claims about $100 more per month than

the monthly payments required under the terms of their contractual obligations. The

6 See Trustee’s Report on the proposed plan.

7 11 U.S.C.A. § 1322(d) (West Supp. 2008).

8 11 U.S.C.A. § 707(b) (West Supp. 2008).

9 This is known as a “no asset Chapter 7 case.”

3

term of the proposed plan exceeds the maximum of 5 years6 allowed by the

Bankruptcy Code.7 Debtors’s proposed plan will be modified after the Court rules on

the issues presented in Trustee’s objection so as not to exceed the 5 year limit.

Debtors’s residence is encumbered by a first mortgage in favor of Countrywide

and by a second mortgage in favor of Citifinancial. Debtors propose, through their

Chapter 13 plan, to cure the arrearage of $3,500 owed to Countrywide and the

arrearage of $426 owed to Citfinancial. Debtors propose to make their regular

monthly mortgage payments directly to Countrywide ($1,088) and to Citifinancial

($213).

Debtors have passed the “means test”8 and could have filed a Chapter 7 case

rather than this Chapter 13 case. If Debtors had filed a Chapter 7 case, no

distributions would be made on unsecured claims.9

Trustee objects to confirmation of Debtors’s proposed Chapter 13 plan.

Trustee contends that, as a matter of law, a Chapter 13 plan is not proposed in good

faith if the plan (1) proposes to delay distributions on unsecured claims in order to

accelerate the payments on secured claims, or (2) proposes to pay in full the secured

4

claims before any distributions are made on unsecured claims. Trustee questions

whether Debtors’s proposed plan satisfies the “disposable income test” because

Debtors propose to pay more each month to secured claims than Debtors are

contractually obligated to pay.

Trustee contends that the periodic payments on secured claims should be in the

amounts called for in the contracts. Trustee contends that any remaining funds should

be paid on the unsecured claims. Trustee’s general practice is to make monthly

payments simultaneously on secured claims and unsecured claims.

Debtors contend that their Chapter 13 plan is proposed in good faith because

they could have filed a Chapter 7 case in which unsecured creditors would have

received no distributions. Debtors assert that their proposed Chapter 13 plan provides

that unsecured claims will be paid in full. Debtors assert that unsecured creditors are

better off with the proposed plan than if Debtors had filed a Chapter 7 case. Debtors

contend that they could have filed a Chapter 7 case and then “doubled up” on their

monthly payments to secured creditors because they would no longer be obligated to

the unsecured creditors.

Section 1325(a) of the Bankruptcy Code provides that the Court shall confirm a

Chapter 13 plan if certain requirements are satisfied. Section 1325(a)(3) provides:

§ 1325. Confirmation of plan

(a) Except as provided in subsection (b), the court

shall confirm a plan if—

10 702 F.2d 885 (11th Cir. 1983).

5

. . .

(3) the plan has been proposed in good

faith and not by any means forbidden by

law;

11 U.S.C.A. § 1325(a)(3) (West 2004).

In Kitchens v. Georgia Railroad Bank and Trust Co. (In re Kitchens),10 the

Eleventh Circuit Court of Appeals stated that in determining whether a Chapter 13

plan is proposed in good faith, a bankruptcy court must consider the following nonexclusive

factors:

(1) the amount of the debtor’s income from all sources;

(2) the living expenses of the debtor and his dependents;

(3) the amount of the attorney’s fees;

(4) the probable or expected duration of the debtor’s

Chapter 13 plan;

(5) the motivations of the debtor and his sincerity in

seeking relief under the provisions of Chapter 13;

(6) the debtor’s degree of effort;

(7) the debtor’s ability to earn and the likelihood of

fluctuation in his earnings;

(8) special circumstances such as inordinate medical

expense;

(9) the frequency with which the debtor has sought relief

under the Bankruptcy Reform Act and its predecessors;

(10) the circumstances under which the debtor has

contracted his debts and his demonstrated bona fides, or

lack of same, in dealings with his creditors;

(11) the burden which the plan’s administration would

place on the trustee.

6

702 F.2d at 888-89.

The Eleventh Circuit also stated:

The Eighth Circuit court amplified the tenth factor,

stating that the bankruptcy court should consider the

extent to which claims are modified and the extent of

preferential treatment among classes of creditors. All but

one of the circuits note that substantiality of the repayment

to the unsecured creditors should be one of the factors

considered.

Like the court in In re Estus, we do wish to note that

other factors or exceptional circumstances may support a

finding of good faith, even though a debtor has proposed

no or only a nominal repayment to unsecured creditors.

. . .

The Eighth Circuit court also added to the list

consideration of the type of debt to be discharged and

whether such debt would be nondischargeable under

chapter 7. . . . This is yet another factor to which

bankruptcy courts should be alert.

Another factor noted by the Eight Circuit court is the

accuracy of the plan’s statements of debts and expenses

and whether any inaccuracies are an attempt to mislead the

court. . . . The factors we have explicitly mentioned are

not intended to comprise an exhaustive list, but they

should aid bankruptcy courts as they determine whether

debtors have proposed chapter 13 plans in good faith.

702 F.2d at 889.

11 785 F.2d 936 (11th Cir.), cert. dismissed 478 U.S. 1028, 106 S. Ct. 3343, 92 L.Ed. 2d

763 (1986).

7

In Shell Oil Co. v. Waldron (In re Waldron)11 the Eleventh Circuit stated:

We hold that with section 1325(a)(3) Congress intended

to provide bankruptcy courts with a discretionary means to

preserve the bankruptcy process for its intended purpose.

Accordingly, whenever a Chapter 13 petition appears to be

tainted with a questionable purpose, it is incumbent upon

the bankruptcy courts to examine and question the

debtor’s motives. If the court discovers unmistakable

manifestations of bad faith, as we do here, confirmation

must be denied.

Unmistakable manifestations of bad faith need not be

based upon a finding of actual fraud, requiring proof of

malice, scienter or an intent to defraud. We simply require

that the bankruptcy courts preserve the integrity of the

bankruptcy process by refusing to condone its abuse.

The cornerstone of the bankruptcy courts has always

been the doing of equity. The protections and forgiveness

inherent in the bankruptcy laws surely require conduct

consistent with the concepts of basic honesty. Good faith

or basic honesty is the very antithesis of attempting to

circumvent a legal obligation through a technicality of the

law.

785 F.2d at 941.

“A bankruptcy court’s determination whether a chapter 13 plan has been

proposed in good faith is a finding of fact reviewable under the clearly erroneous

standard.” Jim Walter Homes, Inc. v. Saylors (In re Saylors), 869 F.2d 1434, 1438

(11th. Cir. 1989).

8

“[T]he good faith requirement remains the fulcrum in assuring that a debtor

receives a ‘fresh start’ but not a ‘head start’ under the Bankruptcy Code.” In re

Stewart, 109 B.R. 998, 1006 (D. Kan. 1990).

Good faith is determined by examining the totality of the circumstances. In re

Sellers, 285 B.R. 769, 773 (Bankr. S.D. Ga. 2001).

The debtor has the ultimate burden of proving that the proposed Chapter 13

plan is confirmable. Allen v. Smith (In re Allen), Ch. 13, Case No. 98-41229 RFH

(Bankr. M.D. Ga., May 18, 1999).

The good faith inquiry “requires the Court to consider the totality of the

circumstances to determine whether a debtor has abused the provisions, purpose, or

spirit of Chapter 13 in his plan proposal.” In re York, 282 B.R. 519, 524 (Bankr.

M.D. Ga. 2002) (Walker, J.).

The Court will now apply the Kitchens factors to Debtors’s proposed Chapter

13 plan. On Schedules I and J of their bankruptcy petition, Debtors state that their

combined average monthly income, after certain deductions, is $4,287 and list their

expenses as $3,407. Trustee does not contend that Debtors’s expenses are excessive.

Debtors’s net monthly income is $880. Debtors propose to pay all but $68 of their net

monthly income into their Chapter 13 plan. The term of the proposed plan will be

modified after the Court rules on the issues presented in this memorandum opinion.

The amount of attorney’s fees for Debtors’s counsel will be determined at the final

9

hearing on confirmation.

Debtors’s Statement of Financial Affairs shows that their incomes were stable

in 2006, 2007 and 2008 (to date of filing). There is no evidence that Debtors’s

incomes are likely to change or that Debtors have any special circumstances such as

inordinate medical expenses. Debtors have not filed any other bankruptcy case during

the previous 8 years. There is no evidence that any of Debtors’s obligations are nondischargeable

in bankruptcy, except possibly for a student loan of $10,531. Except for

the student loan, each of Debtors’s unsecured obligations is less than $1,500. Debtors

have a seven-year old motorcycle, a six-year old truck, and a six-year old van. The

truck and van are pledged as collateral for loans. Debtors have three minor children.

On Schedule A, Debtors list the value of their residence as $147,000. The

mortgage obligations total $146,649 with monthly payments totaling $1,301. Trustee

does not contend that Debtors’s mortgage obligations are excessive. Trustee does not

question the accuracy of Debtors’s bankruptcy schedules. Trustee states that the

administration of Debtors’s proposed Chapter 13 plan would not be a burden.

Simply stated, there is nothing unusual or exceptional about Debtors’s

circumstances. Debtors propose to pay the secured claims in full before paying any

distributions on unsecured claims. This procedure is permitted in some jurisdictions.

See Keith M. Lundin, 3 Chapter 13 Bankruptcy, 3D Edition, § 204.2 Order of

Payments to Creditors, p. 204-20 (2000 & Supp. 2004) (“In some jurisdictions, the

12 264 B.R. 723 (Bankr. W.D. Okla. 2001).

10

standing Chapter 13 trustee routinely pays . . . unsecured claims after all other claims

(other than long-term debts) have been paid in full.”); p. 204-21 (“In a few

jurisdictions, courts require that unsecured claim holders receive some payments

coincidental with commencement of payments to other claim holders.”).

Trustee contends that Debtors’s proposed Chapter 13 plan is unfair to

unsecured creditors. Trustee urges the Court to rule “as a matter of law” that a

Chapter 13 plan is not proposed in good faith if the plan proposes to accelerate the

payments on secured claims or proposes to pay in full the secured claims before

distributions are made on unsecured claims. In the Court’s view, good faith is a

finding of fact which must be determined on a case-by-case basis by examining the

totality of the circumstances and applying the Kitchens factors.

In In re Crussen,12 the Chapter 13 debtor proposed to accelerate the payment of

the second mortgage on his residence. The debtor proposed to pay an extra $650 per

month on the second mortgage and thereby pay in full the second mortgage in 36

months while paying a dividend of 44% on unsecured claims. The bankruptcy court

stated in part:

Based upon the facts of this case, the Court is of the

opinion that Trustee’s objections [to confirmation] are

meritorious. There is no evidence before the Court that

the prepayment of the second mortgage is reasonably

necessary for the support of Debtor’s family. Prepayment

13 270 B.R. 258 (Bankr. E.D. Tenn. 2001).

11

of the second mortgage will indeed operate to benefit the

Debtor rather than the unsecured creditors. On these facts,

it is unfair to separately classify the second mortgage to

facilitate such prepayment, and there are no special

circumstances warranting preferring Debtor over the

unsecured creditors. Finally, Debtor is not sincerely

making his best effort to pay his debts, but rather wants to

benefit himself through the plan.

264 B.R. at 726.

In In re Elrod,13 the Chapter 13 debtors proposed to pay $25 more per month

than required by the second mortgage on their residence. The mortgage holder agreed

to rewrite the loan and significantly lower the interest rate. The Chapter 13 trustee

contended that the $25 per month should go to the unsecured creditors rather than

being used to increase the debtors’ equity in their mortgaged residence. Unsecured

claims totaled about $30,000. The trustee’s only evidence of bad faith was the slight

reduction in the percentage paid on unsecured claims as a result of paying $25 more

per month on the second mortgage. The bankruptcy court stated:

The plan proposes payment of 25% on unsecured claims,

which would be about $7,500. The trustee is complaining

that the debtors should pay another 5%, specifically the

$1,500 they propose to pay Citifinancial ($25 per month

for 60 months). The percentage to be paid on unsecured

claims is only one factor among many when the court must

decide whether a plan was proposed in good faith. The

14 292 B.R. 138 (Bankr. E.D. Tex. 2002).

12

proposed payments to Citifinancial will cause a slight

reduction in the percentage that the debtors might pay to

unsecured creditors based on a 60 month plan. This slight

reduction is not sufficient evidence by itself to show lack

of good faith by the debtors.

Furthermore, the evidence the court has taken from the

schedules does not support the trustee’s argument that the

plan was not proposed in good faith. There is nothing in

the schedules to support a finding of bad faith.

Citifinancial’s acceptance of the proposed plan amounts

to a refinancing of the mortgage. It will benefit the

debtors greatly by reducing the total amount they must pay

to retire the mortgage. The trustee wants the debtors to

give this up so that unsecured creditors will receive the

additional sum of $25 per month. The proposed plan, far

from being in bad faith, represents an unusually good

financial rehabilitation of the debtors at very little cost to

the unsecured creditors. The court will enter an order

denying the trustee’s objection and confirming the plan.

270 B.R. at 262-63.

In In re Liles,14 the mortgage on the Chapter 13 debtors’s mobile home

required monthly payments of $408. The debtors proposed to pay $979 per month

thereby satisfying the mortgage over the life of their Chapter 13 plan. The debtors

argued that the accelerated payment was not an abuse of the spirit of the Bankruptcy

Code because there were no allegations of malfeasance or hiding of assets. The

bankruptcy court denied confirmation of the proposed Chapter 13 plan and stated:

13

According to the Debtors’ Schedules, introduced as

Defendant’s Exhibit “A”, unsecured nonpriority debt was

scheduled in the amount of $34,590.00 and unsecured

priority debt was scheduled in the amount of $5,061.00.

The Standing Chapter 13 Trustee agues that the Debtors’

budget as reflected on Schedule J demonstrates $1,350.00

surplus monthly. Given said surplus (less the Trustee’s

fee), if the Debtors pay Greenpoint according to the terms

of their contract over the life of the 36 month Plan, in

excess of $30,500 in disposable income will be available

to pay creditors other than Greenpoint Credit. There is a

difference of approximately $17,000 less available to pay

to the aforementioned creditors under the Debtors’

proposed plan. Thus, the Debtors are not prepaying their

account with Greenpoint, rather their unsecured creditors

are funding the accelerated pay off of this asset for these

debtors. This the Court will not condone.

292 B.R. at 140-41.

See also In re Pope, 215 B.R. 92 (Bankr. S.D. Ga. 1997) (Walker, J.) (plan that

proposed to pay $842 per month on mobile home obligation when contract payment

was $283 was not proposed in good faith); In re Walsh, 224 B.R. 231, 236 (Bankr.

M.D. Ga. 1988) (Walker, J.) (debtor is not free to allocate net income to payment of

any secured claim he chooses; debtor is limited to disbursements on secured claims

which are reasonably necessary for maintenance and support of debtor and

dependents).

Turning to the case at bar, Debtors propose to accelerate the payments on

secured claims and to pay in full the secured claims before any distribution is paid on

unsecured claims. This proposal benefits Debtors because secured creditors are

15 11 U.S.C.A. § 1325(a)(5)(B) (ii) (West Supp. 2008).

16 11 U.S.C.A. § 1307(a) (West 2004) (debtor may convert a Chapter 13 case to a Chapter

7 case at any time; any waiver of this right is unenforceable).

17 “Strip down” means that a claim will be bifurcated into its secured and unsecured

components.

14

entitled to receive interest until their claims are paid in full.15 Secured creditors are

put in a better position than if Debtors had not filed for bankruptcy relief because their

claims will be paid faster.

Debtors state that they want to pay secured claims as fast as possible “in case

something tragic happens down the road.” Trustee contends that Debtors’s proposal is

unfair because unsecured creditors will be denied the “use” of their distributions until

after the secured claims are paid in full. Trustee contends that Debtors may decide to,

or circumstances may force them to, convert their Chapter 13 case to a Chapter 7

case16 after the secured claims are paid and before dividends are paid or completed on

the unsecured claims.

Debtors assert that unsecured creditors are better off with the proposed plan

than if Debtors had filed a Chapter 7 case. A Chapter 13 case offers certain benefits

that are not available in a Chapter 7 case or outside of bankruptcy. Debtors, through

their Chapter 13 plan, propose to deaccelerate the default on and cure the arrearage on

the mortgages on their residence. Without the benefits of a Chapter 13 case, Debtors

could lose their residence. In addition, Debtors’s propose to “strip down”17 a claim

15

secured by their 2002 Chrysler van. This would not be possible outside of the Chapter

13 case.

Debtors seek the benefits and protections offered by a Chapter 13 case.

Chapter 13 requires that the plan be proposed in good faith. As stated in Kitchens, the

Court should consider the extent of preferential treatment among classes of creditors.

Debtors are clearly preferring their secured creditors over their unsecured creditors.

Debtors could decide to convert their Chapter 13 case to a Chapter 7 case after paying

off their secured creditors but before completing their payments on unsecured claims,

thereby leaving their unsecured creditors unpaid.

Debtors have shown no unusual or exceptional circumstances that warrant

preferring the secured creditors over the unsecured creditors. There is no evidence

that the accelerated payment of secured claims is reasonably necessary for the support

of Debtors or their dependants. The accelerated payment benefits Debtors to the

unfair detriment of their unsecured creditors. It gives Debtors a “head start” rather

than a “fresh start.” The Court is persuaded that Debtors are not sincerely making

their best efforts to pay their debts and that the Chapter 13 plan is not proposed in

good faith.

Trustee also questions whether Debtors’s proposed Chapter 13 plan satisfies

18 11 U.S.C.A. § 1325(b)(1) (West 2004 & Supp. 2008) (if trustee or an allowed

unsecured claim holder objects, plan must provide (1) for full payment of unsecured claims

or (2) for payment of all disposable income into plan during applicable commitment period).

16

the “disposable income test.”18 The Court, having determined that Debtors’s Chapter

13 plan is not proposed in good faith, need not consider whether the plan satisfies the

disposable income test.

The Court is persuaded that it must sustain Trustee’s Objection To

Confirmation.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 5th day of December 2008.

/s/ Robert F. Hershner, Jr.

________________________

ROBERT F. HERSHNER, JR.

United States Bankruptcy Judge

ALICE R. McCOLUMN

February 12, 2001

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

ALICE R. McCOLUMN, ::

Debtor : Case No. 99-54106 RFH

::

ALICE R. McCOLUMN, ::

Movant :::

vs. :::

CITY OF MACON, ::

Respondent :

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Movant: ROBERT M. MATSON

Post Office Box 1773

Macon, Georgia 31202-1773

For Defendant: THOMAS W. JOYCE

Post Office Box 6437

Macon, Georgia 31208-6437

The Chapter 13 Trustee: CAMILLE HOPE

Post Office Box 954

Macon, Georgia 31202

1 This Chapter 13 plan was a modification before

confirmation of Movant’s original Chapter 13 plan. 11

U.S.C.A. § 1323 (West 1993).

2 Counsel for Movant and Respondent circulated a proposed

consent order which was not presented to the Court.

2

MEMORANDUM OPINION

Alice R. McColumn, Movant, filed on August 11, 2000,

a motion to modify her Chapter 13 plan after confirmation.

The City of Macon, Respondent, filed an objection on August

21, 2000. A hearing was held on October 23, 2000. The Court,

having considered the evidence presented and the arguments of

counsel, now publishes this memorandum opinion.

Movant’s residence is encumbered by four liens.

Associates Financial Services holds the first and fourth

liens. Respondent holds the second and third liens.

Movant filed a petition under Chapter 13 of the

Bankruptcy Code on October 25, 1999. Movant filed on February

14, 2000, a proposed Chapter 13 plan.1 Respondent filed an

objection to confirmation on March 1, 2000. Movant and

Respondent reached an agreement on the treatment of

Respondent’s liens.2

The Court entered an order on April 17, 2000,

confirming Movant’s Chapter 13 plan. The confirmed plan

treats Respondent’s liens as secured claims. The confirmed

plan provides that Movant would act as her own disbursing

3 Movant was acting as her own disbursing agent for

payments on the first lien held by Associates Financial

Services.

4 11 U.S.C.A. § 1327(a) (West 1993). This section

provides as follows:

§ 1327. Effect of confirmation

(a) The provisions of a confirmed plan bind the

debtor and each creditor, whether or not the claim

of such creditor is provided for by the plan, and

whether or not such creditor has objected to, has

accepted, or has rejected the plan.

11 U.S.C.A. § 1327(a) (West 1993).

3

agent for payments on Respondent’s second lien. The confirmed

plan provides that Movant would make payments on Respondent’s

third lien through her Chapter 13 plan.

Movant became delinquent on her payments on the

first lien held by Associates Financial Services.3 Movant

filed on August 11, 2000, a motion to modify her Chapter 13

plan after confirmation. Movant proposes, in relevant part,

to modify her confirmed Chapter 13 plan to treat Respondent’s

liens as wholly unsecured claims. The modified plan proposes

no payments on unsecured claims, including the liens held by

Respondent. Respondent contends that res judicata and section

1327(a) of the Bankruptcy Code4 prevent the proposed

modification.

Movant testified that her monthly income has

decreased by $300. Movant testified that her utility expenses

have increased. Respondent concedes that there is no equity

5 The Eleventh Circuit Court of Appeals has held that a

wholly unsecured lien on a residence is not entitled to the

anti-modification protection of section 1322(b)(2) of the

Bankruptcy Code. Thus, a Chapter 13 plan may “strip off” a

wholly unsecured lien on a residence. Tanner v. FirstPlus

Financial, Inc. (In re Tanner), 217 F.3d 1357 (11th Cir.

2000); see also American General Finance, Inc. v. Dickerson

(In re Dickerson), 222 F.3d 924 (11th Cir. 2000).

6 11 U.S.C.A. § 1329(a), (b) (West 1993).

4

in Movant’s residence for its liens.5 The current balance

owed on Respondent’s second and third liens is $15,000 and

$8,000 respectively.

Section 1329(a) and (b) of the Bankruptcy Code6

provides that a confirmed Chapter 13 plan may be modified.

Section 1329(a) and (b) provides as follows:

§ 1329. Modification of 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 reduce the amount

of payments on claims of a particular

class provided for by the plan;

(2) extend or reduce the time for

such payments; or

(3) alter the amount of the

distribution to a creditor whose

claim is provided for by the plan to

the extent necessary to take account

of any payment of such claim other

than under the plan.

7 247 B.R. 898 (Bankr. M.D. Ga. 2000).

5

(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.

(2) The plan as modified becomes the

plan unless, after notice and a hearing,

such modification is disapproved.

11 U.S.C.A. § 1329(a), (b) (West 1993).

Movant relies upon Day v. Systems & Services

Technologies, Inc. (In re Day).7 In that case, the confirmed

Chapter 13 plan provided that the creditor’s claim was fully

secured by a lien on the debtor’s truck. The debtor later

learned that she would be transferred overseas. This Court

allowed the debtor to modify her confirmed Chapter 13 plan by

surrendering her truck to the secured creditor and then

reclassifying the unpaid balance of the claim as unsecured.

In the case at bar, Movant does not purpose to

surrender the collateral, namely, her residence. Movant’s

confirmed Chapter 13 plan provided that Respondent’s liens

would be treated as secured claims. The Court is not

persuaded that Movant’s loss of income changes the nature of

Respondent’s secured claims as established by the order of

confirmation.

An order in accordance with this memorandum opinion

will be entered this date.

6

DATED the 12th day of February, 2001.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

ALICE R. McCOLUMN, ::

Debtor : Case No. 99-54106 RFH

::

ALICE R. McCOLUMN, ::

Movant :::

vs. :::

CITY OF MACON, ::

Respondent :

ORDER

In accordance with the memorandum opinion entered

this date; it is

ORDERED that the Objection to Confirmation of

Debtor’s Modified Chapter 13 Plan filed on the 21st day of

August, 2000, by the City of Macon, Respondent, hereby is

sustained; and it is further

ORDERED that the Motion for Amendment and

Modification of Plan After Confirmation filed on the 11th day

of August, 2000, by Alice R. McColumn, Movant, hereby is

denied.

2

SO ORDERED this 12th day of February, 2001.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

CERTIFICATE OF SERVICE

I, Carolyn Hubbard, certify that a copy of the

attached and foregoing was mailed to the following:

Mr. Robert M. Matson

Attorney at Law

Post Office Box 1773

Macon, GA 31202-1773

Mr. Thomas W. Joyce

Attorney at Law

Post Office Box 6437

Macon, GA 31208-6437

Ms. Camille Hope

Chapter 13 Trustee

Post Office Box 954

Macon, GA 31202

This 12th day of February, 2001.

__________________________

Carolyn Hubbard

Deputy Clerk

United States Bankruptcy Court

CATHY SMITH JACKSON

December 3, 2004

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

CATHY SMITH JACKSON, ::

Debtor : Case No. 03-53485 RFH

:

CATHY SMITH JACKSON, ::

Plaintiff ::

vs. ::

UNITED STATES DEPARTMENT OF :

AGRICULTURE, RURAL :

DEVELOPMENT, ::

Defendant : Adversary Proceeding

: No. 04-5055

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: Ms. Cassandra A. Ford

Post Office Box 1071

Milledgeville, Georgia 31059

For Defendant: Mr. Bernard Snell

Post Office Box 1702

Macon, Georgia 31202

2

MEMORANDUM OPINION

The United States Department of Agriculture, Rural Development, Defendant,

filed a motion for summary judgment on July 14, 2004. Cathy Smith Jackson,

Plaintiff, filed a response on August 4, 2004. The Court, having considered the record

and the arguments of counsel, now publishes this memorandum opinion.

“A motion for summary judgment should be granted when ‘the pleadings,

depositions, answers to interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any material fact and that

the moving party is entitled to judgment as a matter of law.’ Fed.R.Civ.P 56(c).

‘[T]he plain language of Rule 56(c) mandates the entry of summary judgement . . .

against a party who fails to make a showing sufficient to establish the existence of an

element essential to that party’s case, and on which that party will bear the burden of

proof at trial.’ Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.

2d 265 (1986); see also Morisky v. Broward County, 80 F.3d 445, 447 (11th

Cir.1996). On a summary judgement motion, the record and all reasonable inferences

that can be drawn from it must be viewed in the light most favorable to the nonmoving

party. See Cast Steel, 348 F.3d at 1301.” Midrash Sephardi, Inc. v. Town of

Surfside, 366 F.3d 1214, 1223 (11th Cir. 2004), cert filed.

Plaintiff applied to Defendant for a loan to purchase a residence. Plaintiff

submitted an Application For Rural Housing Loans which is dated January 12, 1983.

1 Fed. R. Bank. P. 7001(2).

3

In her application, Plaintiff stated that she was living with her aunt. Plaintiff also

stated:

I will be the only occupant of this house.

I need a place to live and I need to borrow the amount of the home.

Defendant loaned Plaintiff the funds to purchase the residence. Plaintiff

executed a promissory note and a deed to secure debt giving Defendant a lien against

the residence.

Plaintiff holds record title to the residence. Plaintiff does not currently reside

in the residence. Plaintiff’s stepfather has resided in the residence for a number of

years.

Plaintiff filed a petition under Chapter 13 of the Bankruptcy Code on August 4,

2003. Defendant filed a proof of claim asserting a secured claim for $32,888.58.

Defendant’s deed to secure debt is the only lien against the residence. Defendant’s

claim is secured solely by the residence.

Plaintiff filed on April 9, 2004, a Complaint to Determine Extent of Secured

Claim. Plaintiff asks the Court to determine the extent of Defendant’s secured claim

on the residence.1 Plaintiff and Defendant agree that the value of the residence is at

least $9,000. Plaintiff offers to pay Defendant the sum of $9,000 through her

proposed Chapter 13 plan. Plaintiff proposes to treat the remainder of Defendant’s

claim as unsecured. Defendant contends that this modification of its claim is

2 The 1984 Amendments to section 1322(b)(2) added “or leave unaffected the

rights of the holders of any class of claims” following “unsecured claims.”

4

prohibited by section 1322(b)(2) of the Bankruptcy Code.

Section 1322(b)(2) provides:

§ 1322. Contents of plan

(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;

11 U.S.C.A. § 1322(b)(2) (West 2004).

Section 1322(b)(2) protects from modification both fully secured and partially

secured home mortgages. See American General Finance, Inc. v. Dickerson, (In re

Dickerson), 222 F.3d. 924, 926 (11th. Cir. 2000), cert denied 532 U.S. 972, 121 S. Ct.

1604, 149 L. Ed. 2d 470 (2001); Western Interstate Bancorp v. Edwards, (In re

Edwards), 245 B.R. 917, 919 (Bankr. S.D. Ga. 2000).

Defendant’s security interest in the residence was created in 1983. The

relevant part of section 1322(b)(2) has not changed since the Bankruptcy Reform Act

of 1978 became effective on October 1, 1979.2 See Grubbs v. Houston First

American Savings Assoc., 730 F.2d 236, 240 (5th Cir. 1984); Foster v. Heitkamp, (In

re Foster), 670 F.2d 478, 482 n.2 (5th Cir. 1982).

3 Plaintiff’s Response to Defendant’s Statement of Undisputed Material Facts,

para. 6 , Docket No. 11 (filed Aug. 4, 2004).

5

Plaintiff cannot modify Defendant’s secured claim if the claim is secured by

“the debtor’s principal residence.” Plaintiff asserts that the residence is not her

“principal residence.”3 Plaintiff, on her loan application, represented that she needed

a place to live and that she would occupy the residence. The Court is persuaded that

the residence was Plaintiff’s principal residence when Defendant’s security interest

was created in 1983. The Court is persuaded that the residence was not Plaintiff’s

principal residence when she filed for bankruptcy relief in 2003.

Keith M. Lundin, in his treatise on Chapter 13 bankruptcy, states in part:

§ 121.2 Timing Issues: Prepetition Changes in Collateral or Use

The courts do not agree on the rules for determining

whether the protection from modification in § 1322(b)(2) is

available when the extent of the collateral or the debtor’s use of

the collateral changes between the time of the loan and the

Chapter 13 petition. . . .

The words in § 1322(b)(2) are straightforward enough: the

protection from modification is only available to a claim secured

by a security interest in “real property that is the debtor’s

principal residence.” Use of the present tense “is” suggests that

the current function of the property is determinative. A majority

of the reported decisions have concluded that entitlement to the

protection from modification in § 1322(b)(2) is determined based

on circumstances at the petition.

For example, in In re Lebrun, at the time of the loan, the

real estate collateral was used by the debtor as a principal

residence. At the date of the petition, the property was “used to

generate rental income for the debtor.” Applying the date of

petition rule, the court concluded that § 1322(b)(2) did not

protect the mortgage from modification. Similarly, in In re

6

Boisvert, at the time of the loan, the creditor was secured by a

home mortgage and by two other parcels of real property. The

creditor was protected from modification by § 1322(b)(2)

because the two other properties were sold and the mortgages

released prior to the petition. As explained by another court: [In

re Wetherbee, 164 B.R. 212, 215 (Bankr. D. N.H. 1994).]

A “claim” in bankruptcy arises at the date of the

filing of the petition. . . .[O]nly if a claim is secured

by the debtor’s principal residence at the time of

the

bankruptcy petition is the debtor prohibited from

modifying the creditor’s interest under the plain

language of 11 U.S.C. § 1322(b)(2).

A fair number of courts simply disagree and hold that the

status of collateral at the time of the loan transaction controls

whether the claim is protected from modification by

§ 1322(b)(2). In In re Smart, a single family residence that was

the debtor’s principal residence at the time of the original

mortgage was leased to unrelated third parties at the Chapter 13

petition. Looking to the time of the loan, the court concluded the

claim was protected from modification by § 1322(b)(2) based on

this logic:

[T]his Court believes that the critical phrase, “real

property that is the debtor’s principal residence,” is

intended to modify its more immediate antecedent term,

“security interest” . . . . [T]he subject clause is susceptible

of at least two credible interpretations. First, it can be

read, as the Debtors suggest, to refer to a home’s status as

a principal residence at the present time. . . . Second, it

can be read, as urged by the [mortgage holder] to refer to

the home’s status at the time that the security interest was

created. . . . Congress left an ambiguity in the statute

which compels recourse to its legislative history. . . . [T]he

legislative history of Section 1322(b)(2) indicated that

favorable statutory treatment of homestead mortgagees

was intended to encourage and sustain a flow of

affordable capital into the home lending market. . . . In

construing Section 1322(b)(2) so as to give maximum

effect to the intentions of Congress, this Court allies itself

4 220 B.R. 716 (Bankr. S.D. Ga. 1998).

5 Judge Walker is also a sitting judge for the United States Bankruptcy for the

Middle District of Georgia.

7

philosophically with those Courts which approach post-

Nobleman modification issues from the perspective of the

circumstances existing at the time of the subject credit

transaction, not the serendipitous or manipulated facts

existing on the date of the filing of the petition.

2 Keith M. Lundin, Chapter 13 Bankruptcy, 3D Ed., § 121.2 (2000 & 2004 Supp).

In In re Howard,4 Judge Walker5 stated, “The critical date for deciding whether

a creditor qualifies for section 1322(b)(2) protection is the date that the petition is

filed.” 220 B.R. at 718.

The Court agrees with Judge Walker and the other courts that hold that the date

the petition is filed is the critical date for deciding whether a creditor qualifies for

section 1322(b)(2) protection. See In re Leigh, 307 B.R. 324, 331 (Bankr. D. Mass.

2004); In re Lebrun, 185 B.R. 665, 666 (Bankr. D. Mass. 1995); In re Wetherbee, 164

B.R. 212, 215 (Bankr. D. N. H. 1994); In re Boisvert, 156 B.R. 357, 359 (Bankr. D.

Mass. 1993); In re Churchill, 150 B.R. 288, 289 (Bankr. D. Me. 1993); In re

Amerson, 143 B.R. 413, 416 (Bankr. S.D. Miss. 1992).

The Court is not persuaded that the residence at issue is Plaintiff’s principal

residence. The Court is not persuaded that Defendant’s claim is protected from

modification by section 1322(b)(2). The Court is persuaded that Defendant’s motion

8

for summary judgment must be denied.

An order in accordance with this memorandum opinion shall be entered this

date.

DATED this 3rd day of December, 2004.

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

SCHNEIDER YVETTE GREEN

April 7, 2004

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

SCHNEIDER YVETTE GREEN, :

:

Debtor : Case No. 00-50470 RFH

:

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Debtor: Mr. Jason M. Orenstein

Post Office Box 4086

Macon, Georgia 31208

For Jeffrey A. Martin d/b/a

Martin Financial: Mr. Douglas R. Ballard, Jr.

40 Macon Street

Suite A

McDonough, Georgia 30253

For Chapter 13 Trustee: Mr. Tony Coy

Post Office Box 954

Macon, Georgia 31202

MEMORANDUM OPINION

1 Objector had a contractual obligation to purchase Debtor’s obligation from

Litchfield Financial.

2

Schneider Yvette Green, Debtor, filed on January 27, 2004, her Motion to

Modify Chapter 13 Plan After Confirmation. On February 13, 2004, Jeffrey A. Martin

d/b/a Martin Financial (hereafter “Objector”), filed an objection to Debtor’s motion to

modify. A hearing on Debtor’s motion to modify and the objection was held on March

29, 2004. The Court, having considered the evidence presented and the arguments of

counsel, now publishes this memorandum opinion.

Debtor signed a promissory note and a deed to secure debt in favor of Georgia

Land & Lumber Mortgage Corporation. Georgia Land & Lumber assigned Debtor’s

obligation to Litchfield Financial Corporation.

Debtor filed for Chapter 13 relief on February 7, 2000. Debtor’s Schedule D

listed Litchfield Financial as a secured creditor. Debtor’s Chapter 13 plan was

confirmed by the Court on June 27, 2000. The confirmed plan provided that Litchfield

Financial would be paid $75.00 per month over the five year term of Debtor’s plan.

Litchfield Financial did not file a proof of claim and was paid nothing through Debtor’s

Chapter 13 plan.

Litchfield Financial assigned Debtor’s obligation to Objector on July 19, 2001.1

From the evidence presented, the Court is persuaded that Objector had no knowledge of

Debtor’s Chapter 13 case while it was pending.

Debtor successfully completed her Chapter 13 plan. The Chapter 13 Trustee

2 11 U.S.C.A. § 1329(a) (West 1993).

§ 1329. Modification of 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 reduce the amount of payments on claims of a

particular class provided for by the plan;

3

filed on April 30, 2003, her Final Report and Account. The final report shows that all

allowed claims were paid in full and that unsecured creditors received a 100 percent

dividend. The final report shows that Debtor received a refund of $177.84.

On May 8, 2003, the Court entered an Order Discharging Debtor After

Completion of Chapter 13 Plan. On June 4, 2003, the Court entered a Final Decree

discharging the Chapter 13 Trustee and closing the case. The Final Decree provides in

part “The debtor(s) has complied with the provisions of the confirmed plan and has

completed all payments to be made thereunder.”

On December 4, 2003, Debtor filed her Motion to Reopen Chapter [13] Case.

A hearing on the motion to reopen was held on January 21, 2004. The Court entered an

order on January 22, 2004, reopening Debtor’s Chapter 13 case.

Debtor now seeks to modify her Chapter 13 plan to make certain monthly

payments to Objector. Objector objects to the treatment proposed by Debtor’s

modification and urges the Court to dismiss Debtor’s reopened Chapter 13 case.

Section 1329(a) of the Bankruptcy Code2 provides in part that a Chapter 13 plan

(2) extend or reduce the time for such payments; or

(3) alter the amount of the distribution to a creditor whose claim

is provided for by the plan to the extent necessary to take account

of any payment of such claim other than under the plan.

4

may be modified “At any time after confirmation of the plan but before the completion

of payments under such plan. . . .”

Black’s Law Dictionary defines the term “modify” as follows: “To alter; to

change in incidental or subordinate features; enlarge, extend; amend; limit; reduce.

Such alteration or change may be characterized, in quantitative sense, as either an

increase or decrease.” Black’s Law Dictionary 1004 (6th ed. 1990).

The record shows that Debtor has completed all payments under her Chapter 13

plan. This was judicially recorded by the Court in its Final Decree dated June 4, 2003.

Therefore, the Court must conclude that even though Debtor’s Chapter 13 case has been

reopened, there is no pending Chapter 13 plan to modify.

The Court also notes that there is no Chapter 13 trustee in Debtor’s reopened

Chapter 13 case. Federal Rule of Bankruptcy Procedure 5010 provides that a trustee

shall not be appointed in a reopened Chapter 13 case unless the court determines that a

trustee is needed to protect the interests of the creditors and the debtor or to insure

efficient administration of the case. The Court is not persuaded that a trustee is

necessary in Debtor’s reopened Chapter 13 case.

The Court is persuaded that Objector’s objection must be sustained. The Court

5

is persuaded that Debtor’s motion to modify must be denied and that Debtor’s reopened

Chapter 13 case must be dismissed.

An order in accordance with this memorandum opinion will be entered this date.

DATED this 7th day of April, 2004.

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

RACHELLE L. DAY

April 24, 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

RACHELLE L. DAY, :

:

Debtor : Case No. 97-54023 RFH

:

:

RACHELLE L. DAY, :

:

Movant :

:

:

vs. :

:

:

SYSTEMS & SERVICES :

TECHNOLOGIES, INC., :

:

Respondent :

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Movant: JOHN K. JAMES

1109 Russell Parkway, Suite #2

Warner Robins, Georgia 31088

For Respondent: BARBARA A. WRIGHT

544 Mulberry Street, Suite 800

Macon, Georgia 31201-2776

For Chapter 13 Trustee: LAURA D. WILSON

Post Office Box 954

Macon, Georgia 31202

2

MEMORANDUM OPINION

Rachelle L. Day, Movant, filed on November 1, 1999 a

Motion for Modification of Plan After Confirmation. Systems &

Services Technologies, Inc., Respondent, filed a response on

November 17, 1999. A hearing on Movant’s motion was held on

February 14, 2000. The Court, having considered the evidence

presented and the arguments of counsel, now publishes this

memorandum opinion.

Movant purchased a 1995 Dodge Dakota truck.

Respondent financed the purchase and holds a lien on the

truck.

Movant suffered financial problems and filed a

petition under Chapter 13 of the Bankruptcy Code on September

4, 1997. The Court entered an order on December 15, 1997

confirming Movant’s Chapter 13 plan. Respondent is Movant’s

sole secured creditor. The confirmed Chapter 13 plan provides

for monthly payments of $291 on Respondent’s secured claim of

$12,600.

Movant, a member of the United States Air Force, was

advised in late 1999 that she will be transferred overseas in

mid-2000. Movant will not take her truck overseas.

Movant filed on November 1, 1999 a motion to modify

1 Neither Movant nor Respondent know whether the truck

has been liquidated.

2 11 U.S.C.A. § 1329(a), (b) (West 1993).

3

her Chapter 13 plan after confirmation. Movant proposes to

surrender her truck to Respondent and then reclassify the

unpaid balance of Respondent’s claim as unsecured. No

dividend will be paid on unsecured claims.

The Standing Chapter 13 Trustee urges the Court to

approve Movant’s proposed modification. Respondent objects to

Movant’s proposed modification. Respondent contends that the

balance of its claim must be treated as secured and may not be

changed to unsecured.

Movant surrendered her truck in late November 1999.

At that time, the truck’s NADA trade-in value was $8,225 and

the retail value was $10,325. Movant testified that her truck

was worth $9,000. The truck has some damage to the rear

bumper that Movant testified would cost $200 to repair.

Movant is current on her Chapter 13 payments. The

current balance owed on Respondent’s secured claim is about

$7,000. The liquidation of Movant’s truck may satisfy in full

Respondent’s claim.1

Section 1329(a) and (b) of the Bankruptcy Code2

provides as follows:

§ 1329. Modification of plan after

confirmation

3 One article suggests that the unpaid balance should be

an administrative expense claim. See J. Walker & J. Stroud

Post-Confirmation Modifications of Chapter 13 Plans: Treatment

of Secured Claims Upon Surrender of Depreciating Collateral

(presented at the 1999 National Conference of Chapter Thirteen

Trustees Conference in New York City).

4

(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 reduce the amount

of payments on claims of a particular

class provided for by the plan;

(2) extend or reduce the time for

such payments; or

(3) alter the amount of the

distribution to a creditor whose

claim is provided for by the plan to

the extent necessary to take account

of any payment of such claim other

than under the plan.

(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.

(2) The plan as modified becomes the

plan unless, after notice and a hearing,

such modification is disapproved.

11 U.S.C.A. § 1329(a), (b) (West 1993).

The courts are divided on whether a debtor may

modify a confirmed Chapter 13 plan to surrender collateral to

the secured creditor and then reclassify the unpaid balance of

the claim as unsecured.3

5

This Court has held that a Chapter 13 “debtor may,

under appropriate circumstances, modify a confirmed plan to

surrender collateral to a secured creditor and to classify any

resulting deficiency claim as unsecured.” In re Smith, Case

No. 88-10722 (Bankr. M.D. Ga. Dec. 26, 1990) (Laney, J.).

A number of other courts also have allowed the

modification.

Judge Keith M. Lundin, in his treatise, Chapter 13

Bankruptcy, states:

§ 6.54 To Surrender Property or Modify

the Treatment of Secured Claims

. . . .

. . . .

Section 1329 should permit

modification of a confirmed plan to

surrender collateral to a secured

claim holder in the typical Chapter

13 case. . . .

. . . .

Section 1329(a)(1) permits a

Chapter 13 debtor to “increase or

reduce the amount of payments on

claims of a particular class provided

for by the plan.” Section 1329(a)(2)

permits modification of a confirmed

plan to “extend or reduce the time”

for payments on claims of a

particular class provided for by the

plan. If the original Chapter 13

plan provided for payment of a

secured claim in any of the ways

mentioned above, then a modified plan

that surrenders the collateral and

changes the payments to the claim

6

holder falls squarely within

§ 1329(a)(1) and (a)(2).

At confirmation of a modified plan

that proposes to surrender collateral

to a secured claim holder, § 506(a)

would have its normal application to

require splitting the allowable claim

into its secured and unsecured

components based upon the value of

the collateral securing the claim.

. . .

. . . Of course, § 1327(a) binds

the debtor and all creditors to the

provisions of the confirmed plan.

However, the effect of confirmation

under § 1327 is subject to the

possibility that a confirmed plan

will be modified under § 1329.

Absent court disapproval, the

modified plan becomes the plan under

§ 1329(b)(2). Section 1329(b)(1)

describes the Code sections that

apply at confirmation of a modified

plan. Nowhere did Congress except

the surrender of collateral from the

powers available at modification of a

Chapter 13 plan. To preclude a

Chapter 13 debtor from modifying a

plan after confirmation to reflect

that a creditor repossessed its

collateral and is thus no longer the

holder of an allowable secured claim

is to turn the Code on its head.

Keith M. Lundin, 2 Chapter 13 Bankruptcy § 6.54 (2d ed. 1997).

Collier on Bankruptcy states:

Of course, a postconfirmation modification

that changes the rights of the holder of

an allowed secured claim provided for by

the modified plan must either be accepted

by the holder, relinquish the collateral

to the holder, or contain a cram down

provision meeting the requirements of

section 1325(a)(5)(B).

4 95 B.R. 75 (Bankr. M.D. Tenn. 1989) (Lundin, J.)

7

8 Collier on Bankruptcy ¶ 1329.05[3] p. 1329-10 (15th ed. rev.

1999).

In In re Jock4 the Bankruptcy Court for the Middle

District of Tennessee stated:

The question presented is whether a

Chapter 13 debtor can modify a confirmed

plan to surrender a car to a secured claim

holder and pay any deficiency as an

unsecured claim. The debtor can amend to

surrender the car. The debtor can pay the

deficiency as an unsecured claim.

. . . .

The debtor’s proposed modification

would “increase or reduce the amount of

payments on claims of a particular class

provided for by the plan,” within the

meaning of § 1329(a)(1). It has long been

recognized in this district that each

secured claim is separately classified in

a Chapter 13 case. . . .

The debtor’s proposed modification

changes the “amount of payments” to the

sum of the payments made to the bank plus

the value of the surrendered car. . . .

11 U.S.C.S. §§ 1329(b) and (c)fix the

statutory limits on modifications of

Chapter 13 plans after confirmation. The

mandatory and permissive provisions of a

Chapter 13 plan found in 11 U.S.C.S.

§§ 1322(a) and(b) (1987) and the

confirmation requirements of 11 U.S.C.S.

§ 1325(a) (1987) “apply to any

modification under subsection (a) of this

section.” 11 U.S.C.S. § 1329(b)(1). A

Chapter 13 debtor can use the permitted

plan provisions described in § 1322(b),

subject to the confirmation requirements

of § 1325(a), to modify a confirmed

8

Chapter 13 plan under § 1329(a).

Section 1322(b)(8) permits a Chapter 13

debtor to “provide for the payment of all

or part of a claim against the debtor from

property of the estate or property of the

debtor.” 11 U.S.C.S. § 1322(b)(8).

Section 1325(a)(5)(C) permits a Chapter 13

debtor to satisfy an “allowed secured

claim provided for by the plan” by

surrendering the property securing the

claim. 11 U.S.C.S. § 1325(a)(5)(C). This

Chapter 13 debtor could have satisfied the

secured claim of Boatmen’s by surrendering

the car to the bank at confirmation of the

original plan in February of 1988. The

incorporation of §§ 1322(b)(8) and

1325(a)(5)(C) into the standards for postconfirmation

modification in § 1329

empower this Chapter 13 debtor to modify

the confirmed plan to surrender the car in

satisfaction of Boatmen’s secured claim.

Boatmen’s argues that 11 U.S.C.S.

§ 1327 (1987) prohibits the debtor to

modify its treatment after the original

confirmation order became final. . . .

Section 1327(a) is not a limit on

permitted modification of a confirmed

Chapter 13 plan; rather, it is a statutory

description of the effect of a confirmed

plan or of a confirmed modified plan. A

confirmed Chapter 13 plan binds the debtor

(and all creditors), 11 U.S.C.S.

§ 1327(a), but a confirmed plan “may be

modified . . . at any time after

confirmation of the plan but before the

completion of payments under the

plan. . . .” 11 U.S.C.S. § 1329(a). The

confirmed plan binds the debtor unless and

until it is modified, and then the

modified plan “becomes the plan,” 11

U.S.C.S. § 1329(b)(2), and the modified

plan has the effects described in § 1327.

Sections 1322(a), (b), 1323(c) and 1325(a)

are the appropriate sources of the limits

on modification under § 1329. See 11

9

U.S.C.S. § 1329(b).

. . . .

The Bankruptcy Code protects the

secured claim holder from abusive

depreciation between confirmation and

modification by applying the “good faith”

test at confirmation of a modified Chapter

13 plan. 11 U.S.C.S. § 1329(b)(1). Had

evidence been introduced at the hearing on

confirmation of the modified plan that the

debtor abused the car after February 1988,

the proposed modification might be

portrayed as a bad faith effort by the

debtor to shift the loss caused by the

debtor’s misconduct to the secured claim

holder. There is no such evidence.

Section 1325(a)(5) protects the present

value of the allowed secured claim at the

effective date of the original plan. The

creditor who bargains for a stream of

payments through a Chapter 13 plan that is

not sufficient to protect the creditor

from loss in value of its underlying

collateral has failed to assert its rights

at confirmation.

That the debtor could convert this

Chapter 13 case to Chapter 7, surrender

the car to Boatmen’s and (probably)

discharge the deficiency is further

evidence that Congress contemplated

modification of a Chapter 13 plan to

permit the surrender of collateral to the

holder of an allowed secured claim. See

11 U.S.C.S. § 1307 (1987) (conversion of

Chapter 13 cases); 11 U.S.C.S. § 348

(Supp. 1988) (effect of conversion); 11

U.S.C.S. § 554 (Supp. 1988) (abandonment

of property of the estate).

95 B.R. at 76-78.

See In re Waller, 224 B.R. 876 (Bankr. W.D. Tenn.

1998) (creditor repossessed and sold debtor’s car; debtor may

5 237 B.R. 856 (Bankr. M.D. Fla. 1999).

10

modify confirmed plan to reclassify as unsecured any

deficiency accruing to secured creditor after automatic stay

was lifted); In re Anderson, 153 B.R. 527, 528 (Bankr. M.D.

Tenn. 1993) (creditor repossessed and sold debtor’s car;

“modification of a secured claim in a Chapter 13 case complies

with § 1329(a)(1) because each secured claim consists of its

own ‘particular class’”); In re Rimmer, 143 B.R. 871 (Bankr.

W.D. Tenn. 1992) (secured claim is subject to postconfirmation

modification; debtor may reclassify deficiency on surrendered

car as an unsecured claim); In re Stone, 91 B.R. 423, 425

(Bankr. N.D. Ohio 1988) (modification can reclassify a secured

claim as unsecured when a deficiency results from sale of

collateral).

A number of courts have not allowed the

modification.

In In re Meeks5 the Bankruptcy Court for the Middle

District of Florida stated:

Section 1329 Does Not Permit the

Modification of a Secured Claim. The next

issue then is whether the Debtors’

proposed modification qualifies as one of

the three modifications permitted by

§ 1329. In this case, the Debtors wish to

surrender the vehicle to GMAC and then

reclassify GMAC’s remaining secured claim

as unsecured. The Debtors have argued

that § 1329(a)(1)’s provision allowing a

debtor to “increase or reduce the amount

of payments on claims of a particular

11

class” permits the Debtors here to modify

their Plan by decreasing the payments to

GMAC and reclassifying GMAC’s claim as

unsecured.

Certainly § 1329 permits the Debtors to

increase or decrease the monthly payments

they make to GMAC; however, nothing in the

express language of § 1329(a) permits

debtors to reclassify GMAC’s secured

claim. Nevertheless, a minority of

bankruptcy courts have allowed these types

of modifications. With little legal

analysis these courts reason that because

§ 1329(a)(1) allows debtors to modify

payments on claims, debtors, in turn, also

can modify the amount of those claims.

Several other courts have rejected this

conclusion finding that § 1329(a) does not

expressly allow debtors to reclassify a

previously secured claim as unsecured.

Nowhere in § 1329(a) does the statute

permit a debtor to modify the amount of an

allowed secured claim. Likewise,

§ 1329(a) does not allow a debtor to

reclassify an allowed secured claim as an

unsecured claim. The claim amount is

fixed at the confirmation hearing, and no

provision in § 1329 allows for the later

modification or reexamination of the claim

amount.

Further, the Bankruptcy Code provides

secured creditors with certain protections

when a debtor decides to retain the

property securing their lien. . . . [W]hen

the debtor chooses to retain instead of

surrender the property, the value of a

secured claim is adjudicated by the order

of confirmation and fixed as of the

effective date of the plan. As such, the

confirmation of the plan is res judicata

as to the amount of any allowed secured

claim thereunder. Section 1329(a) does

not expressly alter this result.

The better and more consistent

12

interpretation of § 1329(a)(1) permits

debtors to alter the amount of their

payment on a claim to accelerate or reduce

the rate at which a claim is paid.

However, the modification of payment

amounts cannot alter the allowed amount of

the secured claim or eliminate the

requirement in § 1325(a)(5) that the claim

be paid in full. Furthermore, § 1329(a)

specifically excludes secured creditors

from the list of parties who may move to

modify a confirmed chapter 13 plan. A

secured creditor cannot seek to modify a

confirmed plan in any way. To allow the

debtor to modify the amount of a secured

claim while prohibiting a secured creditor

from making the same request is

inequitable and supports the conclusion

that Congress did not intend for debtors

to modify the amount of secured claims

under § 1329(a).

In response, the Debtors argue that

they are entitled to reclassify GMAC’s

claim pursuant to § 1329(a)(3)’s provision

providing that a distribution required

under a confirmed plan may be modified to

allow payment from a source other than

monetary payments under the plan.

Certainly, under § 1329(a)(3), the Debtors

may surrender their vehicle and receive

credit against GMAC’s claim in the amount

which GMAC received when the vehicle was

sold. In this case, GMAC’s claim is

reduced to $2,165.28 after such credits

are given.

. . . .

The fact that the debtor can return

collateral post confirmation and receive a

credit against future plan payments as

contemplated by § 1329(a)(3) has no

connection to the subsequent

reclassification of the remaining amount

due as an unsecured claim. . . .

237 B.R. at 860-61.

13

See Chrysler Financial Corp. v. Nolan, 234 B.R. 390

(M.D. Tenn. 1999) (§ 1329 does not allow deficiency to be

reclassified as an unsecured claim); In re Coleman, 231 B.R.

397, 399 (Bankr. S.D. Ga. 1999) (an allowed secured claim is

fixed in amount and status and must be paid in full; change in

amount of payment may only accelerate or slow the rate of

payment, not alter the amount of the claim); In Dunlap, 215

B.R. 867 (Bankr. E.D. Ark. 1997) (modification cannot

reclassify deficiency from secured claim to unsecured claim);

In re Holt, 136 B.R. 260, 261 (Bankr. N. Idaho 1992) (Ҥ

1329(a)(1) ought to be limited to adjustments in amounts of

payments under the plan as opposed to material changes in the

treatment of secured creditors”); Sharpe v. Ford Motor Credit

Co. (In re Sharpe), 122 B.R. 708, 710 (E.D. Tenn. 1991) (§

1329(a)(1) “does not permit individualized treatment of class

members or the reclassification of a single creditor from a

secured to an unsecured status”); In re Abercrombie, 39 B.R.

178 (Bankr. N.D. Ga. 1984) (creditor repossessed and sold car;

reclassification of the deficiency from a secured claim to an

unsecured claim would violate res judicata principles); In re

Johnson, 25 B.R. 178 (Bankr. N.D. Ga. 1982) (modified plan

must allow deficiency to be paid as a secured claim).

Turning to the case at bar, the Court is persuaded

that Movant may modify her confirmed Chapter 13 plan to

surrender the truck to Respondent and that she may then

14

reclassify the unpaid balance of the claim as unsecured. The

Court is persuaded by the reasoning of Judge Lundin in his

treatise and by his reasoning in In re Jock. Judge Lundin

sets forth the better reasoned conclusion. Surely Congress

intended such a result when it provided that Chapter 13 plans

could extend for up to five years. The requirements for

postconfirmation modifications, which include a good faith

requirement, have the needed protection to ensure that secured

claimants are adequately protected.

15

The Court is persuaded that it should grant Movant’s

motion to modify. Movant has substantially reduced

Respondent’s secured claim through her Chapter 13 plan

payments. The liquidation of Movant’s truck may satisfy in

full the remainder of Respondent’s claim. The Court can find

no bad faith by Movant.

An order in accordance with this memorandum opinion

will be entered this date.

DATED the 24th day of April 2000.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

WILLIAM S. CHRISTIAN and PATSY B. CHRISTIAN

May 8, 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

WILLIAM S. CHRISTIAN and :

PATSY B. CHRISTIAN, :

:

Debtors : Case No. 99-50632 RFH

:

:

WILLIAM S. CHRISTIAN and :

PATSY B. CHRISTIAN, :

:

:

Movants :

:

:

vs. :

:

:

FORD MOTOR CREDIT COMPANY, :

:

Respondent :

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

2

COUNSEL:

For Movants: JOHN K. JAMES

1109 Russell Parkway, Suite #2

Warner Robins, Georgia 31088

For Respondent: MOLLY L. MCCOLLUM

560 First Street

Macon, Georgia 31201

STEPHEN H. BLOCK

2270 Resurgens Plaza

945 East Paces Ferry Road

Atlanta, Georgia 30326

For Chapter 13 Trustee: LAURA D. WILSON

Post Office Box 954

Macon, Georgia 31202

1 This amount included a “cost reduction payment” of

$4,050, the first month’s lease payment of $468.30 and certain

taxes and fees.

3

MEMORANDUM OPINION

William S. Christian and Patsy B. Christian,

Movants, filed on December 20, 1999 a Motion for Modification

of Plan After Confirmation. Ford Motor Credit Company,

Respondent, filed an objection on December 27, 1999. A

hearing was held on February 14, 2000. The Court, having

considered the evidence presented and the arguments of

counsel, now publishes this memorandum opinion.

Mr. Christian was in the business of operating a

backhoe service. Mr. Christian leased from Respondent a new

1999 Ford F-350 truck. The truck was used in Mr. Christian’s

business. Mr. Christian signed a Motor Vehicle Lease

Agreement in August 1998. The term of the lease is three

years. Monthly lease payments are $468.30. The value of the

truck at the beginning of the lease was $31,000.

Mr. Christian made an initial payment of $4,782.30.1 The

residual value of the truck at the end of the lease was agreed

to be $19,374.30. The allowed mileage over the three-year

term of the lease was 36,189 miles. The lease provides, in

part, as follows:

Early Termination. You may have to pay a

substantial charge if You end this lease

4

early. The charge may be up to several

thousand dollars. The actual charge will

depend on when the lease is terminated.

The earlier You end the lease, the greater

this charge is likely to be.

Movants suffered financial problems and filed a

joint petition under Chapter 13 of the Bankruptcy Code on

February 16, 1999. The Court entered an order on July 7,

1999, confirming Movants’ Chapter 13 plan. The confirmed plan

provides that Movants will make their monthly lease payments

to Respondent outside of their Chapter 13 plan.

Mr. Christian later suffered serious health problems

and will be unable to return to work. Movants filed a motion

to modify their Chapter 13 plan after confirmation. Movants

propose to surrender the truck to Respondent and to reject the

balance of the lease. Movants propose to classify any

deficiency under the lease as an unsecured claim.

The Chapter 13 Trustee urges the Court to approve

Movants’ proposed modification. Respondent objects to the

proposed modification.

The Court entered an order on December 22, 1999,

allowing Respondent to take possession of and liquidate the

truck. Mr. Christian surrendered the truck in January 2000.

Movants were current on their lease payments when the truck

was surrendered.

Mr. Christian’s truck, at surrender, was in good

condition with about 26,000 miles. Mrs. Christian testified

2 Mr. Christian was unable to attend the hearing because

of his health problems.

3 11 U.S.C.A. § 365(g)(1) (West 1993).

5

that the NADA trade-in value of the truck was $26,500 and the

retail value was $28,925. Mrs. Christian testified that these

would be fair values for the truck.2

Section 365(g)(1) of the Bankruptcy Code3 provides

that the rejection of an unexpired lease that has not been

assumed constitutes a breach of the lease immediately before

the date of the filing of the bankruptcy petition. This

section provides as follows:

§ 365. Executory contracts and unexpired

leases

. . . .

(g) Except as provided in

subsections (h)(2) and (i)(2) of this

section, the rejection of an

executory contract or unexpired lease

of the debtor constitutes a breach of

such contract or lease—

(1) if such contract or lease

has not been assumed under this

section or under a plan

confirmed under chapter 9, 11,

12, or 13 of this title,

immediately before the date of

the filing of the petition; or

11 U.S.C.A. § 365(g)(1) (West 1993).

The Court is not persuaded that the lease on

Mr. Christian’s truck was assumed by Movants. Movants did not

move the Court to approve an assumption of the lease. See 11

6

U.S.C.A. § 365(a) (West 1993) (except as otherwise provided

“the trustee, subject to the court’s approval, may assume or

reject any executory contract or unexpired lease of the

debtor”); Fed. R. Bankr. P. 6006(a); 9014 (proceeding to

assume or reject an unexpired lease, other than as part of a

plan, is a contested matter which shall be made by motion).

See generally In re Brewer, 233 B.R. 825, 828 (Bankr. E.D.

Ark. 1999) (chapter 13 debtor, as well as the trustee,

entitled to assume or reject unexpired lease).

The Court is not persuaded that Movants assumed the

lease in their confirmed Chapter 13 plan. Movants confirmed

plan simply provides that their lease payments would be made

outside of their Chapter 13 plan. See generally 3 Collier on

Bankruptcy ¶ 365.04[2][d] (15th ed. rev. 2000) (“If the debtor

fails either to assume or reject [an unexpired lease] by

separate order or in its plan, it appears that the [lease]

would continue in existence”).

Movants, in their motion to modify their confirmed

Chapter 13 plan, propose to reject the lease on

Mr. Christian’s truck. Respondent’s damages “stemming from

rejection are treated as general unsecured claims.” NLRB v.

Bildisco and Bildisco, 465 U.S. 513, 540, 104 S. Ct. 1188,

1204 n.8, 79 L. Ed. 2d 482 (1984) (dissent); see also In re

Scott, 209 B.R. 777, 784-85 (Bankr. S.D. Ga. 1997) (Walker,

J.); 3 Collier on Bankruptcy ¶ 365.09[1] (15th ed. rev. 2000).

7

The Court is persuaded that it should grant Movants’

motion to modify their confirmed Chapter 13 plan.

An order in accordance with this memorandum opinion

will be entered this date.

DATED the 8th day of May, 2000.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

ROBERT M. BROWN

June 30, 2006

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

ROBERT M. BROWN, ::

Debtor : Case No. 06-50193 RFH

:

TRIAD FINANCIAL CORP., ::

Movant ::

vs. ::

ROBERT M. BROWN, Debtor; :

and CAMILLE HOPE, Trustee, :

:

Respondents :

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

Movant: Mr. Robert A. Fricks

239-B Smithsville Church Road

Warner Robins, Georgia 31088

Robert M. Brown: Mr. John K. James

1109 Russell Parkway, Suite 2

Warner Robins, Georgia 31088

Chapter 13 Trustee: Mr. Tony D. Coy

Post Office Box 954

Macon, Georgia 31202

2

MEMORANDUM OPINION

Triad Financial Corporation, Movant, filed on March 31, 2006, its Objection to

Confirmation of Chapter 13 Plan. Robert M. Brown, Respondent, filed a response on

May 22, 2006. Movant’s objection came on for a hearing on May 22, 2006. The

Court, having considered the record, the stipulation of facts, and the arguments of

counsel, now publishes this memorandum opinion.

The material facts are not in dispute. Respondent purchased a 2005 Pontiac

Grand Prix (the “vehicle”) on July 28, 2005. Respondent signed a Retail Installment

Contract and Security Agreement in favor of the auto dealership. Respondent was to

pay the amount financed, $21,499.93, by making seventy-two monthly payments. The

annual percentage rate was 19.10 percent. The auto dealership assigned the Retail

Installment Contract and Security Agreement to Movant.

Respondent filed a petition under Chapter 13 of the Bankruptcy Code on

February 10, 2006. Respondent filed his proposed Chapter 13 plan on February 10,

2006. Respondent, in his proposed Chapter 13 plan, proposes to pay Movant as a

secured creditor, $14,388 plus 7 percent interest by making monthly payments through

his Chapter 13 plan. Respondent proposes to pay unsecured obligations, including the

remainder of his obligation to Movant, in full without interest.

Respondent’s vehicle is insured and Movant is listed as the loss payee.

Respondent purchased the vehicle for his personal use. The vehicle was purchased

Movant’s cl 1 aim is deemed allowed because no objection has been filed to its

proof of claim. 11 U.S.C.A. § 502(a) (West 2004).

2 The last paragraph of section 1325(a) is sometimes referred to as the

unnumbered paragraph or the hanging paragraph.

3

197 days before Respondent filed for bankruptcy relief. Movant’s interest in the

vehicle is secured by a perfected lien on the certificate of title.

Movant filed on March 7, 2006, a proof of claim asserting a secured claim in

the amount of $22,227.73. No objection to Movant’s claim has been filed. Movant

contends that it should be paid the full amount of its claim plus interest at the contract

rate of 19.10 percent. At the hearing on May 22, 2006, Respondent offered to pay

Movant the amount of its claim without interest. Movant did not accept Respondent’s

offer.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

(“BAPCPA”) became effective, in relevant part, on October 17, 2005. Respondent’s

bankruptcy petition was filed on February 10, 2006, and is governed by BAPCPA.

Section 1325(a)(5) of the Bankruptcy Code, as amended by BAPCPA, provides

in relevant part that the court shall confirm a proposed Chapter 13 plan if the plan

provides that the holder of each allowed1 secured claim will receive periodic payments

which equal the present value of the secured claim. The last paragraph of section

1325(a)2 provides in relevant part that for purposes of paragraph (5), section 506 of

3 Section 1325(a) provides in part:

§ 1325. Confirmation of plan

(a) Except as provided in subsection (b), the court shall confirm a plan

if—

. . .

(5) with respect to each allowed secured claim provided for by the

plan—

. . .

(B)

. . .

(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; and

(iii) if—

(I) property to be distributed pursuant to this subsection is in

the form of periodic payments, such payments shall be in equal

monthly amounts;

. . .

For purposes of paragraph (5), section 506 shall not apply to a claim

described in that paragraph if the creditor has a purchase money security

interest securing the debt that is the subject of the claim, the debt was

incurred within the 910-day preceding the date of the filing of the

petition, and the collateral for that debt consists of a motor vehicle (as

defined in section 30102 of title 49) acquired for the personal use of the

debtor, or if collateral for that debt consists of any other thing of value,

if the debt was incurred during the 1-year period preceding that filing;

11 U.S.C.A. § 1325(a)(5)(B)(ii),(iii) (West 2004 & Supp 2006).

4

the Bankruptcy Code shall not apply to a claim that is secured by a purchase money

security interest in a motor vehicle on a debt incurred within 910 days preceding the

bankruptcy filing if the vehicle was acquired for the personal use of the debtor.3

Prior to BAPCPA’s amendment of section 1325(a), a debtor could bifurcate an

Ch. 13, Case No. 05-48017 JTL 4 (Bankr. M.D. Ga., June 6, 2006). A copy of

In re Murray is attached to this memorandum opinion.

5

undersecured claim into a secured claim and an unsecured claim. The last paragraph

of section 1325(a), as amended by BAPCPA, prevents bifurcation of certain

undersecured claims.

Respondent, through his proposed Chapter 13 plan, proposed to bifurcate

Movant’s claim. The undisputed facts show that Movant’s claim comes within the

statutory provisions of the last paragraph of section 1325(a) and is protected from

bifurcation. Respondent basically conceded this issue at the hearing on May 22, 2006.

The Court is persuaded that Respondent cannot bifurcate Movant’s claim. The Court

is persuaded that Respondent must pay the allowed amount of Movant’s claim if

Respondent wants to retain the vehicle.

Respondent also contends that a claim that is within the statutory provisions of

the last paragraph of section 1325(a) is not a “secured claim” for purposes of section

1325(a)(5). In In re Murray,4 Judge Laney held that a claim protected by the last

paragraph of section 1325(a) is a secured claim for purposes of section 1325(a)(5) and

cannot be bifurcated. Judge Laney held that the creditor holding the claim is entitled

to receive periodic payments which equal the present value of the secured claim.

Judge Laney also held that the applicable interest rate for present value purposes is the

interest rate mandated by the United States Supreme Court in Till v. SCS Credit Corp.,

6

541 U.S. 465, 124 S. Ct. 1951, 158 L.Ed. 2d 787 (2004) (prime rate plus an

adjustment for risk).

The Court is persuaded that In re Murray is a correct statement of the law and

that this Court should follow In re Murray. The Court is persuaded that Movant’s

objection to confirmation of Respondent’s Chapter 13 plan should be sustained.

An order in accordance with this memorandum opinion shall be entered this

date.

DATED this 30th day of June 2006.

/s/ Robert F. Hershner, Jr.

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: :

:

ANTHONY LEPHILLIPS MURRAY, and : CASE NO. 05-48017 JTL

: CHAPTER 13

GAIL YVETTE MURRAY :

:

Debtors. :

_______________________________________________________________

MEMORANDUM OPINION

This matter came before the Court for hearing on April 4,

2006, for confirmation of Debtors’ Chapter 13 plan and the

Objection to Confirmation filed by creditor Nuvell Financial

Services Corp. (hereinafter, “Nuvell”) on January 11, 2006. At

the conclusion of the hearing, the Court took the issue of

confirmation under advisement, particularly, to consider the

meaning of the “hanging paragraph” of revised 11 U.S.C. §

SO ORDERED.

SIGNED this 06 day of June, 2006.

________________________________________

JOHN T. LANEY, III

__________________________________U_N_IT_E_D_ S_T_A_T_E_S _B_A_N_KR_U_P_T_C_Y_ J_U_D_G_E__

2

1325(a)1 added by the Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005 (hereinafter, “BAPCPA”), and to determine

whether Debtors’ treatment of Nuvell’s secured claim in Debtors’

Chapter 13 Plan would be consistent with the provisions of the

“hanging paragraph.”

Based upon a review of the briefs submitted by the parties

following the hearing, arguments of counsel, and the pertinent

statutory and case law, the Court, for the reasons given below,

holds that the treatment of Nuvell’s secured claim in Debtors’

Chapter 13 Plan is violative of § 1325(a)(*) and that Nuvell’s

objection is hereby SUSTAINED.

FINDINGS OF FACT

On August 1, 2004, Debtors Anthony and Gail Murray purchased

a 2003 Oldsmobile Alero automobile (hereinafter, the “vehicle”)

from Bill Heard Chevrolet Co. (hereinafter, “Bill Heard”)

pursuant to the terms of a retail installment contract

(hereinafter, the “Contract”). Bill Heard assigned its interest

in the Contract to Nuvell. The vehicle was acquired for the

“personal, family or household”2 use of Debtors. As evidenced by

the Contract, the purchase of the vehicle included a $700 payment

for a service contract, a documentary fee of $344, and a

government certificate of title fee of $18. The vehicle is

1 Hereinafter, for ease of identification, the hanging paragraph of § 1325(a)

will be referred to as “§ 1325(a)(*).”

2 See Retail Installment Contract at 1, attached to Brief for Debtors.

3

subject to a secured claim held by Nuvell. A Georgia Certificate

of Title was issued on September 2, 2004, indicating Nuvell holds

a first priority purchase-money security interest in the vehicle.

Debtors filed their petition for Chapter 13 protection on

November 15, 2005.3 Debtors purchased the vehicle within 910

days prior to filing their petition for bankruptcy. Nuvell filed

a proof of claim on November 28, 2005 contending that the net

amount due to Nuvell, as of the petition date, was $10,498.63.

No objection to Nuvell’s proof of claim was filed.

The scheduled value of the vehicle as of the date of

Debtors’ petition was $8,612.00. On December 19, 2005, Debtors

proposed a Chapter 13 plan providing that the secured claim of

Nuvell should be paid to the extent of $8,612.00 plus interest at

8% (percent) per annum, thus attempting to “cram down” the value

of Nuvell’s secured claim. On January 11, 2006, Nuvell objected

to the confirmation of Debtors’ proposed plan on the basis that

Nuvell’s claim qualified under § 1325(a)(*) and could no longer

be crammed down under § 506.

DISCUSSION AND CONCLUSIONS OF LAW

The issue before the Court is whether Debtors can “cramdown”

the lien of a secured creditor considering the terms of §

1325(a)(*) where the collateral is a motor vehicle, the motor

vehicle was purchased by Debtors for personal use within 910 days

3 Debtors filed their petition after October 17, 2005, the effective date of

4

of the filing of Debtors’ petition, and the purchase price for

the motor vehicle included the purchase of a service contract and

a documentary fee. To also be considered by the Court, is the

applicable post-petition interest rate to be applied to the

repayment of secured claims qualifying under § 1325(a)(*).

I. Qualification under BAPCPA § 1325(a)(*)

Although the ultimate issue of this inquiry is the meaning

the Court will give to § 1325(a)(*), that issue cannot and should

not be reached until it is determined that the claim of Nuvell

qualifies for treatment under § 1325(a)(*). In order for a claim

to qualify for treatment under § 1325(a)(*) the three following

requirements must be met: (1) The creditor must have a purchasemoney

security interest; (2) The purchase-money security interest

must be in a motor vehicle acquired for the debtor’s personal

use; and (3) The debt secured by the motor vehicle must have been

incurred within 910 days of the filing of the debtor’s Chapter 13

petition.4

Although requirements (2) and (3) are clearly met, Debtors

argue that Nuvell’s claim does not qualify for treatment under §

1325(a)(*) because Nuvell does not hold a purchase-money security

interest. Specifically, Debtors contend that because the debt

was incurred not only for the purchase of the vehicle, but also

for the purchase of an extended service contract and a

the BAPCPA provisions germane to the issue before the Court.

4 11 U.S.C. § 1325(a)(*) (2005).

5

documentary fee, the security interest of Nuvell is not a

purchase-money security interest.5

The issue of whether the simultaneous purchase of an

extended service contract and a motor vehicle prevents the

purchase-money creditor from taking a purchase-money security

interest in the motor vehicle was considered in the case of In re

Johnson.6 Like Debtors in the case at bar, the debtors in

Johnson argued that a purchase-money security interest does not

exist because the creditor is secured by more than the motor

vehicle, therefore, § 1325(a)(*) does not apply.7

The court in Johnson was not persuaded by the debtors’

argument and stated that there is no requirement in § 1325(a)(*)

that a creditor be secured only by a motor vehicle.8 The court

went on to say that the latter portion of § 1325(a)(*) states

that the Section also applies to any other collateral purchased

one year before bankruptcy,9 which was, in fact, the case in

Johnson. The facts of this case do not, however, yield themselves

to the application or use of the latter portion of § 1325(a)(*).10

The Court concludes, in agreement with the reasoning and

holding in Johnson, that the simultaneous purchase of a motor

5 Brief of Debtors at 14-20.

6 337 B.R. 269 (Bankr. M.D.N.C. 2006).

7 Brief of Debtors at 14-20. See Johnson, 337 B.R. at 272-73.

8 Johnson, 337 B.R. at 272-73.

9 Id.

10 Debtors signed the installment contract purchasing the vehicle on August 1,

2004, but did not file their Chapter 13 bankruptcy petition until November 15,

6

vehicle and an extended service contract, with the inclusion of a

documentary fee, does not prevent a creditor from taking a

purchase-money security interest in the motor vehicle. Debtors

have provided no authority in support of an alternate conclusion

other than the clearly distinguishable case of In re Horn,11 which

involved a multiple transaction scenario.12 Nuvell’s claim,

therefore, qualifies for treatment under § 1325(a)(*).

II. The Meaning of BAPCPA § 1325(a)(*)

The requirements for confirmation of a Chapter 13 plan are

set forth in § 1325 of the Code. Subsection (a)(5) provides for

the required treatment of “allowed secured claims.”13 With the

enactment of BAPCPA on October 17, 2005, § 1325(a)(5) is now

qualified by an unnumbered, hanging paragraph located at the end

of subsection (a), § 1325(a)(*). Section 1325(a)(*) provides:

For purposes of paragraph (5), section 506

shall not apply to a claim described in that

paragraph if the creditor has a purchase

money security interest securing the debt

that is the subject of the claim, the debt

was incurred within the 910-day preceding

the date of the filing of the petition, and

the collateral for that debt consists of a

motor vehicle (as defined in section 30102

of title 49) acquired for the personal use

2005; a period longer than one year after the purchase had elapsed.

11 338 B.R. 110 (Bankr. M.D. Ala. 2006).

12 The court in Horn held that § 1325(a)(*) simply prevented bifurcation under

§ 506. The court, however, ruled that the objecting creditor’s claim was not

a purchase-money security interest because the debtor did not incur the entire

debt as all or part of the purchase price of the vehicle. Instead, the court

noted, the debt was comprised of purchase-money for a vehicle along with four

subsequent cash advances. Horn, 338 B.R. at 113-14. The situation in Horn is

clearly distinguishable from the facts in the case at bar.

13 11 U.S.C. § 1325 (2005) (the subject matter of the Section was not changed

with the enactment of BAPCPA).

7

of the debtor, or if collateral for that

debt consists of any other thing of value,

if the debt was incurred during the 1-year

period preceding that filing . . . .14

Section 506, as referenced in § 1325(a)(*), allows for the

bifurcation of an under-secured creditor’s claim into a secured

and unsecured portion, with the result that a creditor’s claim is

allowed as secured only to the extent of the value of the

collateral securing its debt. This process of bifurcation is

referred to as “cram-down.”

Prior to the enactment of BAPCPA and § 1325(a)(*), Chapter

13 debtors would, pursuant to § 1322(b)(2), modify the rights of

a secured creditor through the cram-down procedure provided for

in § 506(a)(1). The portion of the creditor’s claim allowed as

secured would be paid with interest, whereas the unsecured

portion of the claim would be paid pro-rata with all other

general unsecured claims. The Court must now determine the

meaning of § 1325(a)(*) and that new section’s effect on the

cram-down procedures so often employed by debtors.

Debtors in this case argue that the language of § 1325(a)(*)

that “section 506 shall not apply” means that claims qualifying

under § 1325(a)(*) are not “allowed secured claims” as

contemplated by § 1325(a)(5). If the claims are not “allowed

secured claims,” then they do not fall within the purview of §

1325(a)(5)(B)(ii) and that section’s requirement that each

14 11 U.S.C. § 1325(a)(*) (2005).

8

allowed secured claim be paid according to its present value.15

Since the effective date of BAPCPA in October of 2005,

several courts across the nation have considered the meaning of §

1325(a)(*). All of the courts but one have held that §

1325(a)(*) “means only that the claims [the Section] describes

cannot be bifurcated into secured and unsecured portions under

§506(a).”16 This Court agrees with the majority.

In particular, the Court agrees with the reasoning and

conclusion set forth in In re Brown.17 There, the court

considered arguments similar to the arguments now before this

Court. The several debtors in Brown all purchased vehicles for

personal use within 910 days before filing a Chapter 13 petition.

Creditors with liens on those vehicles filed proofs of claim

stating that the debts for the vehicles were 100% (percent)

secured. No objections were made to the proofs of claim, nor was

it argued that the vehicles were not purchased for personal use.

The debtors’ proposed plans that estimated the claims, listing

15 See Brief of Debtors at 6-7.

16 See In re Brown, 339 B.R. 818, 820 (Bankr. S.D. Ga. 2006) (Dalis, J.). See

also Johnson, 337 B.R. at 273 (Bankr. M.D.N.C. 2006) (holding that §

1325(a)(*) prevents purchase-money security loans on vehicles purchased for

the personal use of the debtor within 910 days of the filing of the petition

from being stripped down in a Chapter 13 plan); Horn, 338 B.R. at 113 (holding

that § 1325(a)(*) prevents bifurcation under § 506 of claims meeting the three

requirements of § 1325(a)(*)); In re Montoya, 341 B.R. 41, 44 (Bankr. D. Utah

2006) (holding that the beginning phrase of § 1325(a)(*), “For purposes of

paragraph (5),” requires that the court consider § 1325(a)(5) when

contemplating confirmation; thus, a claim qualifying under § 1325(a)(*) is

still an “allowed secured claim” and § 1325(a)(*) only prevents bifurcation

under § 506). But see In re Carver, 338 B.R. 521 (Bankr. S.D. Ga. 2006)

(Walker, J.) (holding that a 910-day vehicle claim is neither an unsecured

claim nor an allowed secured claim and that § 1325(a)(5) is not applicable to

910-day vehicle claims).

9

them as “fully secured allowed claims,” and proposed repayment at

0% (percent) interest. The 910-day creditors objected to

confirmation of the debtors’ Chapter 13 plans, arguing that the

creditors holding allowed secured claims should be paid the

present value of their claims in accordance with § 1325(a)(5).

The court in Brown was not persuaded by the debtors’

argument that § 1325(a)(*) prohibited application of § 506 and in

so doing prevented 910-day claims under § 1325(a)(*) from being

considered “allowed secured claims.” The court did not agree

with the debtors that § 1325(a)(5)(B)(ii)’s requirement that

“allowed secured claims” be paid on the basis of the claim’s

present value did not apply to claims qualifying under §

1325(a)(*).18

The court in Brown stated, and this Court agrees, that if a

debtor contends that without the operation of § 506 an “allowed

secured claim” cannot exist, then that debtor “misunderstands the

purpose and operation of § 506.”19 The discussion of this issue

in Brown begins with a citation to the United States Supreme

Court case of Dewsnup v. Timm20 where the Supreme Court agreed

with the argument that:

the words “allowed secured claim” in §

506(d) need not be read as an indivisible

term of art defined by reference to §

17 339 B.R. 818.

18 Id. at 820.

19 Id. at 821.

20 502 U.S. 410 (1992).

10

506(a), which by its terms is not a

definitional provision. Rather, the words

should be read term-by-term to refer to any

claim that is, first, allowed, and, second,

secured.21

The court in Brown stated that “the relationship between § 506(a)

and ‘allowed secured claim’ in § 506(d), [established in

Dewsnup], also applies to the relationship between § 506(a) and

‘allowed secured claim’ in § 1325(a)(5) permitting bifurcation of

an allowed claim under § 506(a) into secured and unsecured

portions in contravention of nonbankruptcy law, nothing more.”22

The Court agrees with Brown that it is unnecessary and

inappropriate to “contort” § 506(a) into a definitional provision

where other sections of the Code address whether a claim is

“allowed” and/or “secured.”23

As stated both in Brown and by counsel in briefs, § 502(a)

determines whether a claim is deemed “allowed.”24 Section 502(a)

provides in relevant part: “(a) A claim or interest, proof of

which is filed under section 501 of this title, is deemed

allowed, unless a party in interest, including a creditor of a

general partner in a partnership that is a debtor in a case under

chapter 7 of this title, objects.”25 As in Brown, no objections

21 Id. at 415 (emphasis added) (construing the relationship between § 506(a)

and the phrase “allowed secured claim” in § 506(d), the Supreme Court agreed

with this argument of the respondent and the United States stating that it was

sensical).

22 Brown, 339 B.R. at 821.

23 Id.

24 Id. See Brief of Debtors at 4-5; Brief of Creditor at 5-6.

25 11 U.S.C. § 502(a) (2005).

11

have been filed in this case to the Nuvell proof of claim. In

accordance with § 502(a), therefore, the 910-day claim of Nuvell

is deemed “allowed.”

The Court must look to § 101(37) to determine whether a debt

is “secured” by a lien.26 Section 101(37) provides: “The term

‘lien’ means charge against or interest in property to secure

payment of a debt or performance of an obligation.”27 Like in

Brown, there is no argument that Nuvell does not hold a valid

lien against Debtors’ vehicle that secures payment of the

underlying debt. As such, the claim of Nuvell is “secured.”

In Brown, the court held that because the 910-day claims

were deemed “allowed” under § 502(a) and “secured” under §

101(37), the claims were “allowed secured claims” and §

1325(a)(5) would apply to require payment of those claims on the

basis of their present value.28 Regarding the 910-day claim of

Nuvell in this case, this Court concludes likewise.

The Court is satisfied that the identification of a claim as

“allowed” and “secured” would be sufficient to overcome Debtors’

argument that § 1325(a)(5) would not apply to claims qualifying

under § 1325(a)(*), but there are, however, other sound reasons

why Debtors’ argument must absolutely fail. As pointed out in In

re Montoya,29 non-bankruptcy substantive law usually determines

26 See Brown, 339 B.R. at 821.

27 11 U.S.C. § 101(37) (2005).

28 Brown, 339 B.R. at 821.

29 Montoya, 341 B.R. at 44.

12

the existence of a creditor’s claim, while the valuation of that

claim is determined by § 506. Whether that claim is secured is a

matter of contract and applicable perfection statutes.30 This

Court agrees with the conclusion reached in Montoya that “[a]

creditor’s secured status is not erased without any further

adjudication merely because the hanging paragraph makes the § 506

valuation mechanism inapplicable to 910-day vehicle claims.”31

In Montoya, it is also noted that the grammatical structure

of § 1325(a)(*) supports the conclusion that § 1325(a)(5) is

still applicable to claims qualifying under § 1325(a)(*). The

hanging paragraph begins with the phrase: “For purposes of

paragraph (5) . . .” It should follow then that where a claim

qualifies under § 1325(a)(*), a court must consider § 1325(a)(5)

when contemplating confirmation.32

As pointed out in the case of In re Turner, 33 the conclusion

that § 1325(a)(*) serves only to prevent the bifurcation of an

allowed secured claim under § 506 is also strongly supported by

the legislative history to § 1325(a)(*). A 2005 House Report on

the new provisions of BAPCPA provides:

Protections for Secured Creditors. S. 256’s

protections for secured creditors include a

prohibition against bifurcating a secured

debt incurred within the 910-day period

preceding the filing of a bankruptcy case if

the debt is secured by a purchase money

30 Id.

31 Id.

32 Id.

33 In re Turner, NO. 05-45355, slip op. at 8 (Bankr. D.S.C. Mar. 31, 2006).

13

security interest in a motor vehicle

acquired for the debtor’s personal use.

Where the collateral consists of any other

type of property having value, S. 256

prohibits bifurcation of specified secured

debts if incurred during the one-year period

preceding the filing of the bankruptcy

case.34

Further, members of Congress dissenting to the enactment of

BAPCPA also recognized:

[S. 256] would largely eliminate the

possibility of loan bifurcations in chapter

13 cases. Under current law a debtor is

permitted to bifurcate a loan between the

secured and unsecured portions. The debt is

treated as a secured debt up to the allowed

value of the property securing the debt.

The remainder of the debt is treated as a

non-priority unsecured debt. Section 306 of

[S. 256] prevents such bifurcation

(including with regard to interest and

penalty provisions) with respect to any loan

for the purchase of a vehicle in the 910

days before bankruptcy, as well as all loans

secured by other property incurred within

one year before bankruptcy.35

Considering this legislative history, the grammatical structure

of § 1325(a)(*), and the definitions of the terms “allowed” and

“secured” found elsewhere in the Code, the Court holds that the

only sound conclusion is that a claim qualifying under §

1325(a)(*) may be considered an “allowed secured claim” for

purposes of § 1325 and would be, therefore, subject to the

present interest requirement of § 1325(a)(5).

34 H.R. REP. No. 109-31(I) at 17 (2005) (emphasis added). Note that “S. 256”

found in the portion of the House Report cited, refers to BAPCPA, which was

introduced as Senate Bill 256.

35 H.R. REP. NO. 109-31(I) at 554 (2005), as reprinted in E-2 COLLIER ON BANKRUPTCY

14

III. Applicable Interest Rate

Although Debtors in this case do not, in the alternative,

address the appropriate interest rate to be paid should the Court

conclude that Nuvell’s claim is an “allowed secured claim,” the

Court believes that for direction in this and in other cases

concerning similar issues, the applicable post-petition interest

rate should be discussed.

Under the authority granted in § 1322(b)(2), a Chapter 13

plan may “modify the rights of any creditor whose claim is

secured by an interest in anything other than ‘real property that

is the debtor’s principal residence.’”36 This power to modify is,

of course, subject to the requirement of § 1325(a)(5) that the

secured creditor receive the present value of its claim as of the

petition date. In Till v. SCS Credit Corp.,37 the United Stated

Supreme Court, considering § 1325(a)(5) and the interest to be

paid on a secured claim bifurcated under § 506, held that the

Section required payment of interest on the secured claim at a

current rate determined by an adjustment from the prime rate

based upon the risk of nonpayment.38 The Supreme Court expressly

rejected requiring the Chapter 13 plan to propose payment of the

secured claim at the contract rate of interest.

In other cases concerning § 1325(a)(*), creditors have made

at App. Pt. 10-903 (Lawrence P. King et al. eds., 15th ed. revised 2005)

(emphasis added). See Turner, No. 05-45355, slip op. at 8.

36 Till v. SCS Credit Corp., 541 U.S. 465, 475 (2004).

37 541 U.S. 465.

15

the argument that with the enactment of BAPCPA and § 1325(a)(*),

Till has been abrogated.39 There is simply no basis for this

contention. No provision of BAPCPA prohibits the modification of

secured creditors’ rights under § 1322(b)(2).40 Had Congress

intended to create an absolute safe-harbor for secured creditors

holding claims qualifying under § 1325(a)(*), like it provided

for home mortgages under § 1322(b)(2), Congress could have done

so, but it did not.41 Section § 1325(a)(*) neither addresses the

issue of interest nor prohibits the modification of claims

qualifying under that section.42 Section 1325(a)(*) only says

that § 506 is not available to bifurcate secured claims

qualifying under that section. BAPCPA did not amend § 1322(b)(2)

with its grant of leeway to amend; therefore, the right to do so

still exists. Further, there is no mention of interest or of

Till in any of the legislative history of the amendments to §

1325.43 Clearly, therefore, Till, with its mandate regarding the

payment of post-petition interest, is not abrogated. Secured

claims qualifying under § 1325(a)(*) shall be paid at the

interest rate set forth in Till so as to satisfy the present

38 Id. at 478-79. See In re Fleming, 339 B.R. 716, 721 (Bankr E.D. Mo. 2006).

39 See In re Robinson, 338 B.R. 70, 74 (Bankr. W.D. Mo. 2006); In re Wright,

338 B.R. 917, 919 (Bankr. M.D. Ala. 2006); Fleming, 339 B.R. at 722-23; In re

Shaw, No. 05-74059, 2006 WL 1278712, at *1 (Bankr. E.D.N.C. May 11, 2006); In

re Pryor, No. 05-87079, 2006 WL 1348409, at *1 (Bankr. C.D. Ill. May 12,

2006).

40 See Brown, 339 B.R. at 822.

41 See Wright, 338 B.R. at 920.

42 See Robinson, 338 B.R. at 75; Johnson, 337 B.R. at 273.

43 Robinson, 338 B.R. at 75.

16

value requirement of § 1325(a)(5).44

CONCLUSION

It is, therefore, the holding of this Court that the

security interest of Nuvell is in fact a purchase-money security

interest qualifying for treatment under § 1325(a)(*). The Court

further holds that § 1325(a)(*) serves only to prevent the

bifurcation of a secured claim under § 506 and does not

disqualify a claim from the status of an “allowed secured claim”

for purposes of applying § 1325(a)(5) and its present value

requirement. Lastly, the Court holds that the Supreme Court

decision of Till v. SCS Credit Corp. was not abrogated by BAPCPA

and that the interest requirement it mandates is applicable to

claims qualifying under § 1325(a)(*).

44 It should be noted that the vast majority of cases considering the interest

rate issue have held, as this Court does, that a creditor whose claim

qualifies under § 1325(a)(*) is entitled to receive post-petition interest at

a current rate determined by the prime rate adjusted for risk as set forth in

Till. See Johnson, 337 B.R. at 273; Robinson, 338 B.R. at 74-75; Wright, 338

B.R. at 919-20; Brown, 339 B.R. at 822; Fleming, 339 B.R. at 724; Shaw, 2006

WL 1278712, at *4; Pryor, 2006 WL 1348409, at *2.

TAMMY B. BIVINS

February 23, 2007

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

TAMMY B. BIVINS, ::

Debtor : Case No. 06-51778 RFH

:

CAPITAL ONE AUTO FINANCE, ::

Movant ::

vs. ::

TAMMY B. BIVINS and :

CAMILLE HOPE, ::

Respondents :

:

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Debtor: Robert M. Matson

P.O. Box 1773

Macon, Georgia 31202

For Capital One Auto Finance: Stephen H. Block

2270 Resurgens Plaza

945 East Paces Ferry Road

Atlanta, Georgia 30326

Molly L. McCollum

3727 Vineville Avenue

Macon, Georgia 31204

For Chapter 13 Trustee: Laura D. Wilson

P.O. Box 854

Macon, Georgia 31202

3

MEMORANDUM OPINION

Capital One Auto Finance, (“Capital One”), filed on November 20, 2006, an

Objection To Confirmation. Tammy B. Bivins, Respondent, filed a response on

December 22, 2006. The Court, having considered the record and the arguments of

counsel, now publishes this memorandum opinion.

The material facts are not in dispute. Respondent purchased a 2006 Chevrolet

Cobalt (the “vehicle”) on June 24, 2006. Capital One financed the purchase and holds

a purchase money security interest in the vehicle. The vehicle was purchased for

Respondent’s personal use. Respondent filed a petition under Chapter 13 of the

Bankruptcy Code on September 21, 2006. Respondent purchased her vehicle within

910 days of the date that she filed for bankruptcy relief. Respondent, through her

proposed Chapter 13 plan, proposes to surrender the vehicle in full satisfaction of her

obligation to Capital One. Respondent’s proposed Chapter 13 plan proposes to pay a

100% dividend on non-priority unsecured claims. Capital One filed a proof of claim

asserting a secured claim for $17,606.26. The value of the vehicle is less than the

amount of Capital One’s claim.

Capital One objects to Respondent’s proposal to surrender the vehicle in full

satisfaction of her obligation. Section 1325(a)(5) of the Bankruptcy Code provides:

4

§ 1325. Confirmation of plan.

(a) Except as provided in subsection (b), the court shall confirm a

plan if—

. . .

(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—

(I) the holder of such claim retain the lien

securing such claim until the earlier of—

(aa) the payment of the underlying

debt determined under nonbankruptcy

law; or

(bb) discharge under section 1328;

and

(II) if the case under this chapter is

dismissed or converted without completion

of the plan, such lien shall also be retained

by such holder to the extent recognized by

applicable nonbankruptcy law;

(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; and

(iii) if—

(I) property to be distributed pursuant to this

subsection is in the form of periodic

payments, such payments shall be equal

monthly amounts; and

5

(II) the holder of the claim is secured by

personal property, the amount of such

payments shall not be less than an amount

sufficient to provide to the holder of such

claim adequate protection during the period

of the plan; or

(C) the debtor surrenders the property securing such claim

to such holder;

. . .

For purposes of paragraph (5), section 506 shall not

apply to a claim described in that paragraph if the creditor

has a purchase money security interest securing the debt

that is the subject of the claim, the debt was incurred

within the 910-day preceding the date of the filing of the

petition, and the collateral for that debt consists of a motor

vehicle (as defined in section 30102 of title 49) acquired

for the personal use of the debtor, or if collateral for that

debt consists of any other thing of value, if the debt was

incurred during the 1-year period preceding that filing;

11 U.S.C.A. §1325(a)(5) (West 2004 & Supp. 2006).

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

(“BAPCPA”) became effective, in relevant part, on October 17, 2005. Respondent’s

bankruptcy petition was filed on September 21, 2006, and is governed by BAPCPA.

The last paragraph of section 1325(a) provides that for purposes of paragraph (5),

section 506 of the Bankruptcy Code shall not apply to a claim that is secured by a

purchase money security interest in a motor vehicle on a debt incurred within 910 days

11 1 U.S.C.A. § 506(a) (West 2004).

6

preceding the bankruptcy filing if the vehicle was acquired for the personal use of the

debtor. The last paragraph of section 1325(a) is sometimes referred to as the

unnumbered paragraph or the hanging paragraph. Prior to BAPCPA’s amendment of

section 1325(a), a debtor could bifurcate an undersecured claim into a secured claim

and an unsecured claim. The last paragraph of section 1325(a), as amended by

BAPCPA, prevents bifurcation of certain undersecured claims. Triad Financial Corp.

v. Brown, (In re Brown), 346 B.R. 246, 247-48 (Bankr. M.D. Ga. 2006).

Under section 506(a) of the Bankruptcy Code1 a “secured creditor’s claim is to

be divided into secured and unsecured portions, with the secured portion of the claim

limited to the value of the collateral.” Associates Commercial Corp. v. Rash, 520 U.S.

953, 117 S. Ct. 1879, 1884, 138 L.Ed.2d 148 (1997).

The secured portion of a claim becomes a secured claim and the unsecured

portion becomes an unsecured claim. United States v. Ron Pair Enterprises, Inc., 489

U.S. 235, 109 S. Ct. 1026, 1029 n3, 103 L.Ed.2d 290 (1989).

Respondent concedes that Capital One’s secured claim is protected from

bifurcation by the hanging paragraph. Section 1325(a)(5) provides three ways that

Respondent can deal with Capital One’s secured claim. First, Capital One could

accept the proposed Chapter 13 Plan. Second, Respondent could retain the vehicle

and pay the “present value” of Capital One’s secured claim. Third, Respondent could

A consent order 2 was entered on February 2, 2007, allowing Capital One “to

proceed with its remedies as allowed by Georgia law and the contract,” including

selling or disposing of the vehicle.

7

surrender the vehicle to Capital One.

Respondent has chosen to surrender the vehicle.2 Capital One does not oppose

the surrender but contends that it is entitled to file an unsecured claim for any

deficiency that remains after it disposes of the vehicle.

A majority of courts hold that under section 1325(a)(5)(C), as amended by

BAPCPA, a Chapter 13 debtor can surrender a vehicle in full satisfaction of the

secured creditor’s claim and that the creditor cannot assert an unsecured claim for a

deficiency after disposal of the vehicle. These courts hold that the hanging paragraph

applies to both subsections (B) and (C) of section 1325(a)(5). In re Quick, 2007 WL

269808 (Bankr. N.D. Okla., Jan. 26, 2007); In re Gentry, 2006 WL 3392947 (Bankr.

E.D. Tenn., Nov. 22, 2006); In re Turkowitch, 355 B.R. 120 (Bankr. E.D. Wis. 2006);

In re Feddersen, 355 B.R. 738 (Bankr. S.D. Ill. 2006); In re Pool, 351 B.R. 747

(Bankr. D. Or. 2006); In re Nicely, 349 B.R. 600 (Bankr. W.D. Mo. 2006) (Dow, J.);

In re Evans, 349 B.R. 498 (Bankr. E.D. Mich. 2006); In re Osborn, 348 B.R. 500

(Bankr. W.D. Mo. 2006) (Federman, J.); In re Sparks, 346 B.R. 767 (Bankr. S.D. Ohio

2006) (Aug, J.); In re Brown, 346 B.R. 868 (Bankr. N.D. Fla. 2006); In re Payne, 347

B.R. 278 (Bankr. S.D. Ohio 2006), (Preston, J.); In re Ezell, 338 B.R. 330 (Bankr.

E.D. Tenn. 2006).

8

In In re Nicely, the bankruptcy court stated:

If the claim may not be bifurcated when the debtor

proposes to retain the property and pay the claim over

time, pursuant to § 1325(a)(5)(B), neither should it be

bifurcated when the debtor proposes to treat the claim by

surrender of the collateral, pursuant to § 1325(a)(5)(C).

Allowing the secured creditor to assert a deficiency claim

after disposition of the vehicle, would permit the very

thing which the hanging paragraph prohibits, which is

bifurcation of the claim. Denial of the deficiency claim

upon surrender recognizes the claim as fully secured, a

result consistent with the outcome when the debtor

chooses to retain the collateral and pay the claim.

349 B.R. at 603.

A minority of courts hold that a creditor can assert an unsecured claim for a

deficiency after disposal of the vehicle. Dupaco Community Credit Union v. Zehrung,

(In re Zehrung), 351 B.R. 675 (Bankr. W.D. Wis. 2006); In re Hoffman, 2006 WL

3813775 (Bankr. E. D. Mich., Dec. 28, 2006). (“Nothing in the language of

§ 1325(a)(5) suggests that surrender of the vehicle satisfies the ‘allowed secured claim

provided for by the plan.’”); In re Duke, 345 B.R. 806 (Bankr. W.D. Ky., 2006)

(hanging paragraph is ambiguous; if Congress had intended to enact an anti-deficiency

provision, it would have made its intentions very clear in the statute); DaimlerChrysler

Financial Americas, LLC v. Barton, (In re Barton), Ch. 13, Case No. 06-41283 PWB

(Bankr. N.D. Ga., Dec. 14, 2006).

The Court is persuaded that it should follow the majority of courts which hold

9

that a Chapter 13 debtor can surrender a vehicle in full satisfaction of the secured

creditor’s claim. The Court is persuaded that the hanging paragraph applies to all

subsections of section 1325(a)(5). The hanging paragraph provides that “section 506

shall not apply to a claim described” in section 1325(a)(5). The Court is persuaded

that the statute is clear and unambiguous and that the Court should apply it as enacted

by Congress.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 23rd day of February 2007.

/s/ Robert F. Hershner

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

DAVID DUANE ADAMS

March 1, 2007

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

DAVID DUANE ADAMS, ::

Debtor : Case No. 06-51651 RFH

:

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Debtor: Ms. Stacey N. Randall

Post Office Drawer 1018

Macon, Georgia 31202

For Ford Motor Credit Mr. Ronald A. Levine

Company: 2270 Resurgens Plaza

945 E. Paces Ferry Road

Atlanta, Georgia 30326

Ms. Molly L. McCollum

3727 Vineville Avenue

Macon, Georgia 31204

For Chapter 13 Trustee: Mr. Tony D. Coy

Post Office Box 954

Macon, Georgia 31202

2

MEMORANDUM OPINION

Ford Motor Credit Company, (“FMCC”), filed on September 27, 2006, an

Objection To Confirmation. A hearing on FMCC’s objection was held on January 11,

2007. The Court, having considered the evidence presented and the arguments of

counsel, now publishes this memorandum opinion.

David Duane Adams, Debtor, purchased a new 2006 Ford Freestyle (the

“vehicle”) on October 17, 2005. FMCC financed the purchase and holds a purchase

money security interest in the vehicle. Debtor filed a petition under Chapter 13 of the

Bankruptcy Code on September 6, 2006. Debtor purchased the vehicle within 910

days of the date that he filed for bankruptcy relief. FMCC filed a proof of claim for

$28,902.51. The retail value of the vehicle is $23,350. Debtor, through his proposed

Chapter 13 plan, proposes to bifurcate FMCC’s claim into a secured claim and an

unsecured claim with the secured portion of the claim limited to the value of the

vehicle. FMCC objects to the bifurcation and contends that its claim should be paid in

full as a secured claim.

Section 1325(a)(5)(B) of the Bankruptcy Code provides:

§ 1325. Confirmation of plan.

(a) Except as provided in subsection (b), the court shall confirm a

plan if—

3

. . .

(5) with respect to each allowed secured claim provided

for by the plan—

. . .

(B)(i) the plan provides that—

(I) the holder of such claim retain the lien

securing such claim until the earlier of—

(aa) the payment of the underlying debt

determined under nonbankruptcy law; or

(bb) discharge under section 1328; and

(II) if the case under this chapter is dismissed

or converted without completion of the plan,

such lien shall also be retained by such holder

to the extent recognized by applicable

nonbankruptcy law;

(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; and

(iii) if—

(I) property to be distributed pursuant to this

subsection is in the form of periodic

payments, such payments shall be in equal

4

monthly amounts; and

(II) the holder of the claim is secured by

personal property, the amount of such

payments shall not be less than an amount

sufficient to provide to the holder of such

claim adequate protection during the period

of the plan; or

. . .

For purposes of paragraph (5), section 506 shall not

apply to a claim described in that paragraph if the creditor

has a purchase money security interest securing the debt

that is the subject of the claim, the debt was incurred

within the 910-day preceding the date of the filing of the

petition, and the collateral for that debt consists of a motor

vehicle (as defined in section 30102 of title 49) acquired

for the personal use of the debtor, or if collateral for that

debt consists of any other thing of value, if the debt was

incurred during the 1-year period preceding that filing;

11 U.S.C.A. §1325(a)(5)(B) (West Supp. 2006).

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

(“BAPCPA”) became effective, in relevant part, on October 17, 2005. Debtor’s

bankruptcy petition was filed on September 6, 2006, and is governed by BAPCPA.

The last paragraph of section 1325(a) provides that for purposes of paragraph (5),

section 506 of the Bankruptcy Code shall not apply to a claim that is secured by a

purchase money security interest in a motor vehicle on a debt incurred within the 910

days preceding the bankruptcy filing if the vehicle was acquired for the personal use

11 1 U.S.C.A. § 506(a) (West 2004).

5

of the debtor. The last paragraph of section 1325(a) is sometimes referred to as the

unnumbered paragraph or the hanging paragraph. Prior to BAPCPA’s amendment of

section 1325(a), a debtor could bifurcate an undersecured claim into a secured claim

and an unsecured claim. The last paragraph of section 1325(a), as amended by

BAPCPA, prevents bifurcation of certain undersecured claims. Triad Financial Corp.

v. Brown, (In re Brown), 346 B.R. 246, 247-48 (Bankr. M.D. Ga. 2006).

Under section 506(a) of the Bankruptcy Code1 a “secured creditor’s claim is to

be divided into secured and unsecured portions, with the secured portion of the claim

limited to the value of the collateral.” Associates Commercial Corp. v. Rash, 520 U.S.

953, 117 S. Ct. 1879, 1884, 138 L.Ed.2d 37 (1997).

The secured portion of a claim becomes a secured claim and the unsecured

portion becomes an unsecured claim. United States v. Ron Pair Enterprises, Inc., 489

U.S. 235, 109 S. Ct. 1026, 1029 n3, 103 L.Ed.2d 290 (1989).

Debtor concedes that FMCC’s claim is secured by a purchase money security

interest in a motor vehicle that was acquired within the 910 days preceding the date

that Debtor filed for bankruptcy relief.

FMCC, through its objection to confirmation, contends that the vehicle was

“acquired for the personal use of the debtor” and that its claim is protected from

6

bifurcation by the hanging paragraph of section 1325(a)(5).

The evidence presented at the hearing shows that Debtor is married and has

two children. Debtor’s wife does not work outside the home. Debtor purchased the

vehicle on October 17, 2005. Debtor is listed as the sole owner on the certificate of

title. Debtor is the sole obligator on the retail installment contract, which shows that

the vehicle was purchased for “personal” use. The other boxes to check on the retail

installment contract were for agricultural or commercial use.

When he purchased the vehicle, Debtor was a long-haul truck driver who was

away from home for two or three weeks at a time. Debtor intended that his wife

would be the primary user of the vehicle. Debtor’s wife, in fact, was the primary user.

Debtor’s wife was listed as the sole driver on the vehicle’s insurance policy. Debtor

drove the vehicle once or twice a month.

In February of 2006, Debtor began to drive the vehicle once or twice a week.

Both Debtor and his wife were now listed as drivers on the insurance policy. Debtor

and his wife separated in July or August of 2006. Debtor became the primary user of

the vehicle.

Debtor and his wife were still separated when he filed for bankruptcy relief in

September of 2006. Debtor’s wife was using her mother’s vehicle.

Debtor and his wife are now trying to reconcile. Debtor’s wife is again the

338 B.R. 923 (Bankr. M.D. Ga. 2006) (2 Walker, J.). Judge Walker is a sitting

judge of this Court.

7

primary user of the vehicle. Debtor drives the vehicle occasionally. Both Debtor and

his wife are listed as drivers on the insurance policy. The vehicle at issue is the only

vehicle that Debtor or his wife currently own.

The Chapter 13 Trustee reports that Debtor’s proposed Chapter 13 plan is

feasible and is funded. The Chapter 13 Trustee reports that the proposed plan is

confirmable regardless of how the Court rules on FMCC’s objection to confirmation.

The Court, from the evidence presented, is persuaded that the vehicle was

acquired for the use of Debtor’s wife. When he purchased the vehicle, Debtor

intended that his wife would be the primary user. Debtor’s wife, in fact, was the

primary user. Debtor’s wife was listed as the sole driver on the vehicle’s insurance

policy. Debtor drove the vehicle only once or twice a month. Only after Debtor and

his wife separated some ten months later did Debtor become the primary user. When

Debtor and his wife decided to reconcile, his wife again became the primary user.

The Court now turns to consider whether the term “acquired for the personal

use of the debtor” includes a vehicle acquired for the use of Debtor’s wife.

In In re Jackson,2 the Chapter 13 debtor purchased a vehicle for the use of his

non-debtor wife. Although the debtor occasionally used the vehicle, his wife was the

primary driver. The debtor was the sole purchaser of the vehicle under the sales

8

contract. The sales contract provided that the vehicle was purchased for “personal,

family or household” use. The debtor’s wife was not listed on the title to the vehicle.

The creditor objected to the debtor’s proposal to bifurcate its claim which was secured

by the vehicle. The court held that the vehicle was not “acquired for the personal use”

of the Chapter 13 debtor. The court stated in part:

Debtor argues that because Congress has used the phase

“personal, family, or household use” elsewhere in the

Bankruptcy Code, it must mean something different when

it limits the term to “personal use.” The Court agrees with

Debtor.

. . .

Nissan does argue, however, that the “personal use of the

debtor” may include family or household use. However,

when Congress wants to include family or household use

within the scope of a statute, it knows how to do so. For

example, § 101(8) provides, “The term ‘consumer debt’

means debt incurred by an individual primarily for a

personal, family, or household purpose.” 11 U.S.C.

§ 101(8). The phrase also arises in § 365(d)(5) (regarding

performance of obligations under an unexpired lease);

§ 506(a)(2) (regarding valuation of certain property);

§ 507(a)(7) (regarding deposits for the acquisition of

certain property); and several subsections of § 522

(regarding exempt property). Consequently, the omission

of “family and household” use from the hanging paragraph

demonstrates that Congress intended “personal use”

standing alone to have a different meaning.

“Personal” is defined as “[o]f or relating to a particular

person; private.” American Heritage Dictionary of the

English Language (4th ed.2000). In this case, the vehicle

9

must have been acquired for the use of a particular person-

Debtor— for the paragraph to apply.

338 B.R. at 925-26.

The Court is persuaded that it should follow Judge Walker’s decision in In re

Jackson. The Court is persuaded that the vehicle financed by FMCC was not

“acquired for the personal use of the debtor” as that term is used in the hanging

paragraph. The Court is persuaded that FMCC’s claim is not protected from

bifurcation by the hanging paragraph.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 1st day of March, 2007.

/s/ Robert F. Hershner, Jr.

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

10

WILLIAM K. HOLMES

October 30, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 11

:

WILLIAM K. HOLMES, ::

Debtor : Case No. 02-52793 RFH

::

WILLIAM K. HOLMES, ::

Debtor ::

vs. :::

CITIGROUP INVESTMENTS :

AGFINANCE, AS SUCCESSOR IN :

INTEREST TO THE TRAVELERS :

INSURANCE COMPANY, ::

Respondent ::

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Debtor: Mr. Joseph J. Burton, Jr.

Two Ravinia Drive, Suite 1750

Atlanta, Georgia 30346

Mr. David D. Aughtry

191 Peachtree Street, N.E.

Ninth Floor

Atlanta, Georgia 30303

Ms. Rosemary S. Armstrong

Two Ravinia Drive, Suite 1750

Atlanta, Georgia 30346

For Respondent: Mr. T. Baron Gibson, II

Post Office Box 1606

Macon, Georgia 31202-1606

1

Citigroup Investments AgFinance, in the style of its objection to confirmation, refers to

Citigroup as the Movant and William K. Holmes as the Respondent. The Court has

restyled the objection to refer to Mr. Holmes as Debtor and Citigroup as the Respondent.

3

MEMORANDUM OPINION

William K. Holmes, Debtor, filed on July 28, 2003, his First Amended Plan

of Reorganization. Citigroup Investments AgFinance, as Successor in Interest to

The Travelers Insurance Company, Respondent, filed an objection to confirmation

on August 18, 2003.1 A hearing on confirmation of Debtor’s proposed Chapter 11

plan was held on August 20, 2003, and September 30, 2003. The Court, having

considered the evidence presented and the arguments of counsel, now publishes this

memorandum opinion.

Debtor’s primary asset is a 6,708 acre tract of land (the “Farm Property”)

located in Bleckley County and Laurens County, Georgia. The Farm Property

includes irrigated farm land, timber land, a large lake, and a number of buildings.

Debtor has spent considerable time and money developing the Farm Property for

use as a quail hunting plantation.

Debtor filed a petition under Chapter 11 of the Bankruptcy Code on July 1,

2002. Debtor’s proposed Chapter 11 plan is a plan of liquidation. Debtor proposes

to sell the Farm Property through his Chapter 11 plan. Debtor proposes to use the

proceeds to pay the closing costs of the sale, the secured claims against the Farm

2

First Amended Plan of Reorganization, Sections 4.01(a)(3) and 5.01, Document No. 101.

4

Property, and the administrative claims. The remaining proceeds are to be

deposited into a Distribution Fund.2

The Court entered an order on September 4, 2003, authorizing Debtor to

enter into non-exclusive listing agreements with four real estate professionals to sell

the Farm Property. Debtor proposes to sell the Farm Property by April 1, 2004. If

Debtor is unable to close a sale by that date, a Disbursing Agent would be

appointed to sell the Farm Property within 120 days.

James F. Lawton, MAI, SRA, is a certified real estate appraiser with twentyfive

years of experience. Mr. Lawton testified that the highest and best use of the

Farm Property is as a game “shooting preserve.” Mr. Lawton testified that the Farm

Property is more valuable as a single tract than as a number of smaller tracts. Mr.

Lawton testified that, in his opinion, the fair market value of the Farm Property as a

single tract, as of December 31, 2002, is $12,240,000. Mr. Lawton testified that the

per acre value is about $1,850. If the Farm Property is broken up and sold in

smaller tracts, Mr. Lawton testified that the fair market value would be $9,180,000.

Mr. Lawton testified that a period of six to twelve months would be needed to

market the Farm Property.

Wiley Jordan is a real estate broker with thirty years of experience. Mr.

Jordan testified that he has four clients who are definitely interested in buying the

5

Farm Property. Mr. Jordan testified that the clients have the financial resources to

buy the Farm Property. Mr. Jordan testified that six to twelve months would be

needed to close the sale. Mr. Jordan testified that the “best and only way” to sell

the Farm Property is as a single tract. Mr. Jordan testified that Debtor has spent

enough time and money developing the Farm Property to justify Mr. Lawton’s

appraisal.

Zack Thwaite has been a real estate salesman for thirty years. Mr. Thwaite

testified that he has “two very good leads” who have the financial resources to buy

the Farm Property. Mr. Thwaite testified that a sale by the spring of 2004 is

possible and realistic. Mr. Thwaite testified that his asking price would be $1,850

per acre, which is the per acre value of Mr. Lawton’s appraisal. Mr. Thwaite

testified that the best way to sell the Farm Property is as a single tract “shooting

property.”

The Court, from the evidence presented, is persuaded that the Farm Property

should be sold as a single tract, that the fair market value is $12,240,000, and that a

reasonable time to market the property is six to twelve months.

Respondent filed an objection to the confirmation of Debtor’s Chapter 11

plan of reorganization. Respondent has a substantial claim that is secured by the

Farm Property. Respondent argues that Debtor proposes an unreasonable length of

time to market the Farm Property. Respondent argues that the best time to sell the

6

property is now, during hunting season. Respondent argues for a deadline of

January 31, 2004 to sell the Farm Property. Respondent’s counsel announced at the

hearing on September 30, 2003, that Respondent does not dispute Mr. Lawton’s

appraised value of the Farm Property.

The Court is not persuaded by Respondent’s arguments for a deadline of

January 31, 2004 to sell the Farm Property. The Court is persuaded that

Respondent’s secured claim is fully secured and thus adequately protected. Six

potential buyers are interested in the Farm Property. The potential buyers have the

financial resources to perform. The best way to sell the Farm Property is as a single

tract quail hunting plantation. Six to twelve months are needed to market the

property and close the sale.

The Court is persuaded that Respondent’s objection to confirmation should

be overruled.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 30th day of October 2003.

___________________________R

OBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

7

8

TOM’S FOODS INC

September 23, 2005

1 Debtor’s counsel at the September 21, 2005, hearing announced two

minor changes to the proposed procedures. One change moves up the negotiating

times. The other changes the site of the auction from Atlanta to New York City.

2 The Bank of New York’s objection also contained a cross-motion for an

order converting Debtor’s Chapter 11 case to Chapter 7, or, in the alternative, for

the appointment of a Chapter 11 trustee. The Court will schedule a hearing on the

cross-motion for October 19, 2005.

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

In the Matter of: : Chapter 11

:

TOM’S FOODS INC., :

:

Debtor : Case No. 05-40683 RFH

:

MEMORANDUM OPINION

Tom’s Foods Inc., the Chapter 11 debtor-in-possession, filed on

September 16, 2005, an expedited motion for authorization to schedule an auction

for the sale of substantially all of Debtor’s assets free and clear of all liens, claims,

and interest. The motion also requests approval of certain bidding procedures

which will govern the auction.1

The Official Committee of Unsecured Creditors and the Bank of New York

as Indenture Trustee filed objections to Debtor’s motion.2 A hearing on Debtor’s

motion was held on September 21, 2005. The Court, having considered the

2

evidence presented and the arguments of counsel, now publishes this

memorandum opinion.

Debtor is a leading regional snack food manufacturer. Debtor has some

1,400 employees. Some 800 of Tom’s franchisees employ an additional 2,000

employees. Debtor filed a petition under Chapter 11 of the Bankruptcy Code on

April 6, 2005. Debtor obtained $22,000,000 in postpetition credit from the DIP

lenders. Debtor is in default on this obligation. Debtor owes a prepetition

obligation of $70,000,000 to the Bank of New York. This obligation is secured by

liens on most of Debtor’s real property, equipment, and intellectual property.

Debtor initially intended to reorganize and to continue in business. At the

hearing on September 21st, Debtor’s president, Roland G. Divin and its chief

restructuring officer, Eugene Davis testified that this is no longer possible. Mr.

Divin testified that Debtor will run out of cash by the end of October. Mr. Divin

testified that Debtor is losing money and that there is no additional financing

available to Debtor. Mr. Divin testified that competitors are stealing Debtor’s

customers and that key employees are leaving. Mr. Davis testified that Debtor

cannot survive until November 5, 2005. Mr. Divin and Mr. Davis testified that a

sale of the business as a going concern is now the best option. The testimony of

Mr. Divin and Mr. Davis was the only evidence presented to the Court on Debtor’s

present financial condition. The Court therefore accepts the evidence as a showing

of Debtor’s present financial condition.

3

Debtor proposes to hold an auction in New York City on October 17, 2005.

Debtor asks the Court to schedule a hearing on October 19th to approve a sale to

the successful bidder.

The DIP lenders have agreed to be a “stalking horse bidder”. The DIP

lenders are owed $22,000,000 for postpetition credit extended by them to Debtor.

At the auction, the DIP lenders will offer a credit bid of $15,000,000. The DIP

lenders will offer to waive some portion of the remainder of their claims. The Dip

lenders will offer to assume certain trade accounts, executory contracts, and

unpaid payroll expenses. Most of Debtor’s employees would keep their jobs. The

DIP lenders will offer to provide not less than $2,300,000 to pay certain

administrative expenses of Debtor’s bankruptcy estate. The Dip lenders would not

receive any break up fees or reimbursement of expenses.

Section 363(b)(1) of the Bankruptcy Code provides that “The trustee, after

notice and a hearing, may use, sell, or lease, other than in the ordinary course of

business, property of the estate.” 11 .U.S.C.A. § 363(b)(1) (West 2004).

Debtor, as the Chapter 11 debtor-in-possession, has the rights and powers

of a trustee. 11 U.S.C.A. § 1107(a) (West 2004).

Collier on Bankruptcy states in part:

[f]—Standard for Approval of Sale.

In determining whether to approve a proposed sale under

section 363, courts generally apply standards that, although

4

stated variously ways, represent essentially a business

judgment test. Some courts have described the standard as

one of “good faith” or of whether the transaction is “fair and

equitable.” Others question whether the sale is “in the best

interest of the estate.” In the context of sales of substantially

all of the assets of the estate, some courts have required that

the price to be paid be “fair and reasonable.”

3 Collier on Bankruptcy, ¶ 363.02 [1] [f] (15th ed. rev. 2005).

Collier also states:

[4]—Sale of Substantial Part of the Estate.

. . .

There has been disagreement historically on the issue

of whether and under what circumstances a chapter 11

debtor may sell substantial assets under section 363. It

is now generally accepted that section 363 allows such

sales in chapter 11, provided, however that the sale

proponent demonstrates a good, sound business

justification for conducting the sale prior to

confirmation (other than appeasement of the loudest

creditor), that there has been adequate and reasonable

notice of the sale, that the sale has been proposed in

good faith, and that the purchase price is fair and

reasonable. These factors are considered to assure that

the interests of all parties in interest are protected and

that the sale is not for an illegitimate purpose.

Attempts to determine plan issues in connection with

the sale will be improper and should result in a denial

of the relief requested.

5

3 Collier on Bankruptcy, ¶ 363.02 [4] (15th ed. rev. 2005).

The business judgment rule is a presumption that corporate decision makers

acted on an informed basis, in good faith, and in the honest belief that the action

taken was in the best interests of the corporation. Courts are loath to interfere with

corporate decisions absent a showing of bad faith, self-interest, or gross

negligence. In re Global Crossing, LTD, 295 B.R. 720, 743 (Bankr. S.D. N.Y.

2003).

The Creditors Committee and the Bank of New York object to the proposed

auction basically on two grounds. First, they contend the proposed auction date

would not afford sufficient time to identify potential bidders. Second, they

contend the stalking horse bid is much lower than Debtor’s liquidation value.

The United States Trustee acknowledges that Debtor must act soon and

notes that the proposed auction is moving quickly. The United States Trustee did

not object to Debtor’s motion.

The Court has some concerns with the fast pace of the proposed auction

and with some of the procedures governing the auction. The Court notes,

however, that Debtor will soon run out of cash and cannot obtain additional

financing. The Court notes that the stalking horse bid is simply an opening bid.

The final and successful bid may be much higher.

The Court also notes that Debtor is, at this point, asking for authority to

6

conduct an auction and for approval of certain bidding procedures. After the

auction, Debtor must return to the Court for approval of the sale. The Court, at

that time, will inquire into the price and terms of the sale to ensure that the price is

fair and reasonable. The Court will also make a decision whether the interests of

all parties in interest are protected.

The Court is persuaded that Debtor’s motion should be granted in so far as

it seeks authority to schedule an auction and for approval of ceratin bidding

procedures.

An order in accordance with this memorandum opinion will be entered this

date.

Dated this 23rd day of September, 2005.

___________________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

WESTEK GEORGIA, LLC

May 14, 2004

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 11

:

WESTEK GEORGIA, LLC, :

:

Debtor : Case No. 03-55298 RFH

:

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Debtor: Mr. Bruce Z. Walker

3350 Riverwood Parkway

Suite 1600

Atlanta, Georgia 30339

Ms. Karen Fagin White

3350 Riverwood Parkway

Suite 1600

Atlanta, Georgia 30339

For Gregory W. Phillips, Mr. Hubert C. Lovein, Jr.

Robert E. Johnson, and Post Office Box 6437

Alan R. Oglesbee: Macon, Georgia 31208

For the United States Trustee: Mr. Mark Roadarmel

Assistant U.S. Trustee

433 Cherry Street, Suite 510

Macon, Georgia 31201-7910

For Flag Bank: Ms. Molly L. McCollum

2

3370 Vineville Avenue, Suite 103

Macon, Georgia 31204

For Royal Cord, Inc.: Mr. Aaron R. Warnke

1100 Peachtree Street, Suite 2800

Atlanta, Georgia 30309-4530

For Jimmy McKinley, Mr. Truitt A. Mallory

Upson County Tax Commissioner: Post Office Box 832

Thomaston, Georgia 30286-0832

1 11 U.S.C.A. § 706(a) (West Supp. 2003).

3

MEMORANDUM OPINION

Gregory W. Phillips, Robert E. Johnson, and Alan R. Oglesbee, Movants, filed

on March 24, 2004, a motion requesting the Court to appoint a Chapter 11 trustee.

Westek Georgia, LLC, debtor-in-possession, Debtor, filed on May 5, 2004, a response

opposing Movants’ motion. The Court held a hearing on May 10, 2004, on Movants’

motion. The Court, having considered the evidence presented and the arguments of

counsel, now publishes this memorandum opinion.

Movants were the sole shareholders of Westek, Inc. Westek, Inc. was a tire cord

manufacturer. Debtor acquired Westek, Inc.’s assets in November of 2002. The assets

included a manufacturing facility and equipment. Debtor operated the tire cord business

for a number of months. Debtor ceased its operations and leased the manufacturing

facility and equipment to Royal Cord, Inc.

Movants and other creditors, on November 12, 2003, filed an involuntary

bankruptcy proceeding under Chapter 7 of the Bankruptcy Code against Debtor. Debtor,

on January 14, 2004, exercised its right to convert the Chapter 7 case to a Chapter 11

case.1 Debtor is the debtor-in-possession in the Chapter 11 case. The United States

Trustee advises that Debtor is current on its operating reports and quarterly fees.

Movants request that the Court appoint a Chapter 11 trustee. Movants rely on

2 U.S.C.A. § 1104(a)(1) (West 1993).

4

section 1104(a)(1) of the Bankruptcy Code2 which provides:

§ 1104. Appointment of trustee or examiner

(a) At any time after the commencement of the case but before

confirmation of a plan, on request of a party in interest or the

United States trustee, and after notice and a hearing, the court shall

order the appointment of a trustee—

(1) for cause, including fraud, dishonesty, incompetence, or

gross mismanagement of the affairs of the debtor by

current management, either before or after the

commencement of the case, or similar cause, but not

including the number of holders of securities of the debtor

or the amount of assets or liabilities of the debtor; or

Collier on Bankruptcy states:

[i]—Appointment of Trustee as an Extraordinary

Remedy in a Chapter 11 Case.

The appointment of a trustee in a chapter 11 case is an

extraordinary remedy. The drafters of the Code recognized that, as

a general rule, in the absence of fraud, dishonesty, incompetence,

gross mismanagement, or similar grounds, the debtor’s

management should be given an opportunity to propose a plan of

reorganization for the debtor. For this reason, there is a strong

presumption that the debtor should be permitted to remain in

possession absent a showing of need for the appointment of a

trustee or a significant postpetition change in the debtor’s

management.

7 Collier on Bankruptcy, ¶ 1104.02 [3][b][i] (15th ed. rev. 2003).

Movants have the burden of showing that appointment of a Chapter 11 trustee is

necessary. Most courts hold that the showing must be by clear and convincing evidence.

In re Marvel Entertainment Group, Inc., 140 F. 3d 463, 471 (3rd Cir. 1998); In re W.R.

5

Grace & Co., 285 B.R. 148, 157 (Bankr. D. Del. 2002); In re Rivermeadows Assoc.

LTD, 185 B.R. 615, 617 (Bankr. D. Wyo. 1995); In re Tahkenitch Tree Farm

Partnership, 156 B.R. 525, 527 (Bankr. E.D. La. 1993); In re Royster Co., 145 B.R. 88,

90 (Bankr. M.D. Fla. 1992);

“Absent a showing of need for the appointment of a trustee, there is a strong

presumption that the debtor should be permitted to remain in possession.” In re Macon

Prestressed Concrete Co., 61 B.R. 432, 439 (Bankr. M.D. Ga. 1986).

The evidence presented at the hearing shows that Adam Runsdorf is the managing

member of Debtor. Debtor made a number of prepetition monetary transfers to Mr.

Runsdorf and entities related to him. The transfers total about $1.4 million. Most

transfers occurred during the one year period prior to Movants filing the involuntary

bankruptcy petition against Debtor.

Mr. Runsdorf had advanced substantial sums to Debtor so that it could meet

payroll, purchase materials, and operate its business. The transfers at issue were

prepetition repayments of money advanced by Mr. Runsdorf to Debtor. The transfers

have been disclosed and the Court finds no effort by Debtor or Mr. Runsdorf to hide the

transfers.

Movants argue that Mr. Runsdorf will not scrutinize the transfers to see whether

the transfers could be set aside as fraudulent or preferential. Debtor responded that its

Chapter 11 plan of reorganization will provide for the scrutiny through an independent

attorney or accountant. A creditors’ committee may, with leave of court, be authorized

3 See Amendment to Inventory of Assets, filed March 19, 2004. Docket No. 81.

6

to bring an avoidance action if a debtor unjustifiably fails to do so. 5 Collier on

Bankruptcy, ¶ 547.11[4] (15th ed. rev. 2003). The Court is persuaded that the transfers

do not rise to the level of fraud, dishonesty, incompetence, or gross mismanagement

which would require the appointment of a Chapter 11 trustee.

Movants also assert that Debtor failed to list on its bankruptcy schedules a Ford

Taurus automobile. Debtor responded that the automobile was included in certain

personal property valued at $1.4 million on Schedule B. Debtor notes that the

automobile is insured and was included on an amended form sent to the United States

Trustee.3 The Court is satisfied with Debtor’s response.

The Upson County Tax Commissioner testified that Debtor owes property taxes

of $326,891.29 for 2001, 2002, and 2003. Tax liens have been filed for 2001 and

2002. The Tax Commissioner supports Movants’ motion to appoint a Chapter 11

trustee.

The United States Trustee, Royal Cord, Inc., and Flag Bank oppose the

appointment of a Chapter 11 trustee.

The Court, from the evidence presented, is not persuaded that Movants have

carried their burden of showing that a Chapter 11 trustee should be appointed. The

Court is persuaded that Debtor is operating within the requirements of Chapter 11 and

should continue as debtor-in-possession.

7

An order in accordance with this memorandum opinion shall be entered this date.

DATED this 14th day of May, 2004.

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

THE TOTAL WOMAN HEALTHCARE CENTER, P.C.,

December 14, 2006

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 11

:

THE TOTAL WOMAN :

HEALTHCARE CENTER, P.C., :

D/B/A JOYCE A. RAWLS, M.D., P.C, :

:

Debtor : Case No. 06-52000 RFH

:

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Movant: Ms. Elizabeth A. Hardy

Assistant United States Trustee

440 Martin Luther King Jr. Blvd.

Suite 302

Macon, Georgia 31201

For Respondent: Mr. Neal Weinberg

P.O. Drawer 7716

Macon, Georgia 31209-7716

1 11 U.S.C.A. § 341 (a) (West 2004).

2

MEMORANDUM OPINION

The United States Trustee, Movant, filed on November 9, 2006, a Motion Of

The United States Trustee For Determination As To Whether Debtor Is A Health Care

Business And, If So, For Appointment Of An Ombudsman. The Total Woman

Healthcare Center, P.C., d/b/a Joyce A. Rawls, M.D., P.C., Respondent, filed a

response on November 30, 2006. Respondent filed a supplemental response on

December 4, 2006. Movant’s motion came on for a hearing on December 5, 2006.

The Court, having considered the evidence presented and the arguments of counsel,

now publishes this memorandum opinion.

Respondent filed on October 17, 2006, a petition under Chapter 11 of the

Bankruptcy Code. Respondent filed on October 31, 2006, its statement of financial

affairs and bankruptcy schedules. The “meeting of creditors” was held on November

21, 2006.1

Movant, in her motion, contends that Respondent is a “health care business”

and asks that the Court order the appointment of a “patient care ombudsman.”

Respondent opposes Movant’s request.

Section 101(27A) of the Bankruptcy Code provides:

(27A) The term “health care business”—

(A) means any public or private entity (without regard to

3

whether that entity is organized for profit or not for profit)

that is primarily engaged in offering to the general public

facilities and services for—

(i) the diagnosis or treatment of injury, deformity,

or disease; and

(ii) surgical, drug treatment, psychiatric, or

obstetric care; and

(B) includes—

(i) any—

(I) general or specialized hospital;

(II) ancillary ambulatory, emergency, or

surgical treatment facility;

(III) hospice;

(IV) home health agency; and

(V) other health care institution that is

similar to an entity referred to in subclause

(I), (II), (III), or (IV); and

(ii) any long-term care facility; including any—

(I) skilled nursing facility;

(II) intermediate care facility;

(III) assisted living facility;

(IV) home for the aged;

(V) domiciliary care facility; and

(VI) health care institution that is related to a

facility referred to in subclause (I), (II), (III),

(IV), or (V), if that institution is primarily

engaged in offering room, board, laundry, or

personal assistance with activities of daily

living and incidentals to activities of daily

living.

11 U.S.C.A. § 110(27A) (West Supp. 2006).

4

Section 333 of the Bankruptcy Code provides in part:

§ 333. Appointment of patient care ombudsman

(a)(1) If the debtor in a case under chapter 7, 9, or 11 is a health care

business, the court shall order, not later than 30 days after the

commencement of the case, the appointment of an ombudsman to

monitor the quality of patient care and to represent the interests of the

patients of the heath care business unless the court finds that the

appointment of such ombudsman is not necessary for the protection of

patients under the specific facts of the case.

(2)(A) If the court orders the appointment of an ombudsman under

paragraph (1), the United States trustee shall appoint 1 disinterested

person (other than the United States trustee) to serve as such

ombudsman.

. . .

(b) An ombudsman appointed under subsection (a) shall—

(1) monitor the quality of patient care provided to patients of the

debtor, to the extent necessary under the circumstances, including

interviewing patients and physicians;

(2) not later than 60 days after the date of appointment, and not

less frequently than at 60-day intervals thereafter, report to the

court after notice to the parties in interest, at a hearing or in

writing, regarding the quality of patient care provided to patients

of the debtor; and

(3) if such ombudsman determines that the quality of patient care

provided to patients of the debtor is declining significantly or is

otherwise being materially compromised, file with the court a

motion or a written report, with notice to the parties in interest

immediately upon making such determination.

11 U.S.C.A. §333 (a)(1), (2)(A), (b) (West Supp. 2006).

5

Section 333(a)(1) provides that the appointment of an ombudsman is

mandatory unless the court finds that the appointment is not necessary for the

protection of patients under the specific facts of the case.

The evidence presented at the hearing shows that Dr. Joyce A. Rawls is the

CEO of Respondent. Dr. Rawls is the only physician employed by Respondent. Dr.

Rawls is board certified in obstetrics and gynecology.

Dr. Rawls sees patients and performs physical exams, ultra sounds, and

biopsies at Respondent’s office. Other services provided by Dr. Rawls such as

surgery, delivery, and outpatient surgery, are performed at two area hospitals. The

hospitals provide nursing services, food, rooms, supplies, and other items and medical

services while the patients are in the hospital.

Respondent has the equipment necessary for Dr. Rawls to treat patients at

Respondent’s office. Respondent’s financial distress has not affected patient care.

Respondent has the same staff as before the bankruptcy filing. Dr. Rawls has not

received any complaints from patients since Respondent filed for bankruptcy relief.

Respondent’s bankruptcy has not affected Dr. Rawl’s scheduling of appointments for

patients.

If a patient decides to see another physician, the patient is provided with a copy

of her medical records. If a patient has a complaint with Dr. Rawls medical services,

the patient can file a complaint with the state medical board. Dr. Rawls understands

6

that the law would require that Respondent maintain medical records for several years

if Respondent went out of business.

The Court has reviewed Respondent’s statement of financial affairs and

bankruptcy schedules. Most of Respondent’s obligations appear to be for taxes. The

obligations do not appear to arise from deficient patient care.

The Court, from the evidence presented, is not persuaded that the appointment

of an ombudsman is necessary for the protection of patients. Patient care has not been

adversely affected by Respondent’s bankruptcy filing. Respondent’s obligations do

not appear to arise from deficient patient care. Dr. Rawls understands her obligation

to maintain patient records and to provide copies of the records to patients who decide

to see another physician.

The Court, having determined that the appointment of an ombudsman is not

necessary under the specific facts of this case, need not decide whether Respondent is

a “health care business.”

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 14th day of December, 2006.

/s/ Robert F. Hershner, Jr.

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

7

8

TRACIE M. SMITH

November 5, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 7

:

TRACIE M. SMITH, ::

Debtor : Case No. 03-30458 RFH

::

BRANCH BANKING & TRUST, ::

Plaintiff ::

vs. ::

TRACIE M. SMITH and :

WILLIAM M. FLATAU, : Adversary Proceeding

: No. 03-3031

Defendants :

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: Ms. Molly L. McCollum

3370 Vineville Avenue, Suite 103

Macon, Georgia 31204

For Tracie M. Smith: Mr. Barry Gordon Irwin

129 Bryan Street, Suite 101

Athens, Georgia 30601-1801

MEMORANDUM OPINION

1 The Court offered Plaintiff and Defendant an opportunity to file briefs

within ten days of the hearing. Neither Plaintiff nor Defendant have filed a brief.

2 See 15 U.S.C.A. § 1635 (West 1998).

2

Tracie M. Smith, Defendant, filed on July 24, 2003, Defendant’s Motion to

Dismiss. Branch Banking and Trust Company, Plaintiff, filed a response on

August 11, 2003. Defendant’s motion came on for a hearing on August 14, 2003.

The Court, having considered the record and the arguments of counsel, now publishes

this memorandum opinion.1

Defendant and her parents executed a promissory note dated April 10, 2000, in

favor of the Bank of Danielsville. Plaintiff is the successor to the Bank of

Danielsville. The obligation is secured by certain real property owned by Defendant

and by certain real property owned by her father. The obligation is a refinancing of

certain prior mortgage loans.

Defendant and her parents, in January of 2003, advised Plaintiff that they were

rescinding the obligation pursuant to the Truth-in-Lending Act (“TILA”). Plaintiff

argues that Defendant and her parents have neither the intent nor the capability of

returning the loan proceeds.2

Defendant filed a petition under Chapter 7 of the Bankruptcy Code on March

6, 2003. Defendant listed on Schedule A – Real Property, the real property that

secures her obligation to Plaintiff.

3

Plaintiff filed on June 24, 2003 an adversary proceeding to confirm the

validity and extent of its lien against Defendant’s real property. Plaintiff also seeks a

determination that Defendant’s obligation for her “wrongful purported recission” is

nondischargeable in bankruptcy. Defendant filed a motion to dismiss arguing, in

part, that the adversary proceeding is a non-core proceeding. Defendant does not

consent to entry of a final order by this Court asserting that this is a non-core

proceeding. 28 U.S.C.A. § 157 (c)(West 1993).

The Court entered an order on July 2, 2003, granting Defendant a discharge in

bankruptcy. Defendant argues that the Chapter 7 Trustee has abandoned the real

property that secures her obligation. The record of Defendant’s bankruptcy case,

however, does not show that the trustee has abandoned the real property or that

Defendant’s bankruptcy case been closed. See 11 U.S.C.A. § 554 (West 1993).

(trustee, after notice and a hearing, may abandon property of the estate; scheduled

property is abandoned to debtor when bankruptcy case is closed); M.D. Ga. LBR

6007-1.

The Court is persuaded that the real property at issue is part of Defendant’s

bankruptcy estate. If Plaintiff’s lien against the real estate is subject to recission, the

trustee may have a valuable asset to administer. 28 U.S.C.A. § 157(b)(2)(A),(K)(West

1993) (core proceedings include matters concerning administration of the estate and

determinations of the validity, extent, or priority of liens.) The Court therefore must

conclude that Plaintiff’s adversary proceeding is a core proceeding in Defendant’s

4

bankruptcy case.

The Court is persuaded that Defendant’s Motion to Dismiss must be denied.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 5th day November 2003.

___________________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

JIMMY C. BROWN ??a/k/a AMBER CREEK FARM and ?CHRISTY G. BROWN

May 3, 2005

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 12

:

JIMMY C. BROWN :

a/k/a AMBER CREEK FARM and :

CHRISTY G. BROWN, ::

Debtors : Case No. 04-32128 RFH

:

PINNACLE BANK, N.A. f/k/a :

FIRST NATIONAL BANK IN :

ELBERTON, ::

Movant ::

vs. ::

JIMMY C. BROWN :

a/k/a AMBER CREEK FARM :

CHRISTY G. BROWN, ::

Respondents :

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Movant: Ron C. Bingham, II

Paul A. Rogers

40 Technology Parkway South, Suite 300

Norcross, Georgia 30092

For Respondents: Ernest V. Harris

Post Office Box 1586

Athens, Georgia 30603

The Standing Chapter 12 Trustee: Walter W. Kelley

Post Office Box 70849

Albany, Georgia 31708

3

MEMORANDUM OPINION

Pinnacle Bank, N.A. f/k/a First National Bank In Elberton, Movant, filed on

April 5, 2005, a motion for relief from the automatic stay. Walter W. Kelley,

Standing Chapter 12 Trustee, filed a response on April 15, 2005. Jimmy C. Brown

a/k/a Amber Creek Farm and Christy G. Brown, Respondents, filed a response on

April 18, 2005. Movant’s motion came on for hearing on April 18, 2005. The Court,

having considered the record and the arguments of counsel, now publishes this

memorandum opinion.

Respondents executed a promissory note dated November 27, 2000, in favor of

Movant. The principal amount of the obligation was $580,000. Respondents are to

make quarterly payments of $19,354.53 over a term of fifteen years. The final

payment is due on March 27, 2016. Respondents, to secure their obligation, executed

in favor of Movant a deed to secure debt, a security agreement, and a financing

statement.

Respondents own and operate a poultry farm. Respondents and Columbia

Farms, Inc. entered into a Broiler Growing Agreement. Pursuant to the agreement,

Columbia Farms places flocks of poultry on Respondents’ farm. Respondents grow

the poultry for eight weeks. Columbia Farms then picks up the poultry and pays

Respondents in accordance with their agreement. The payment is called a production

settlement. Columbia Farms, at all relevant times, owns the poultry. Movant has no

security interest in the poultry.

1 The Assignment is a “generic form” provided by Columbia Farms.

4

Respondents and Movant executed a document entitled an Assignment which is

dated February 15, 2002.1 The Assignment authorizes and directs Columbia Farms to

deduct $12,266.40 per flock from any and all production settlements owed to

Respondents by Columbia Farms. The funds so deducted are to be jointly payable to

Respondents and Movant. The Assignment provides in part:

All parties hereto acknowledge that Columbia Farms will

deduct the funds as set out herein above solely as an

accommodation to [Respondents and Movant].

. . .

Notice: Columbia Farms has made no obligation, commitment,

understanding or representation to extend the terms of the

existing Breeder Contract Agreement with [Respondents] beyond

the existing flock or place any subsequent flocks on

[Respondents’] farm.

Respondents filed a petition under Chapter 12 of the Bankruptcy Code on

December 20, 2004. A hearing on confirmation of Respondent’s proposed Chapter 12

plan is set for May 16, 2005. Respondents continue to operate their poultry business

as debtors-in-possession.

After Respondents filed for bankruptcy relief Columbia Farms placed a flock

of poultry on Respondents’ farm. Columbia Farms is scheduled to pick up the flock

on April 18, 2005. Columbia Farms is expected to issue a production settlement

payment within the next week. Movant contends that it is entitled to $12,266.40 of

5

the payment amount. Movant contends that the Assignment divested Respondents of

their rights and interest in the $12,266.40. Movant contends that the $12,266.40 is not

property of the bankruptcy estate and is not protected by the automatic stay of the

Bankruptcy Code.

Respondents contend that they are entitled to the $12,266.40 and that the funds

are needed to fund their Chapter 12 plan. Respondents contend the Assignment was

merely an accommodation. Respondents’ counsel will hold in trust the $12,266.40

pending order of the Court.

Federal law determines whether an interest is property of the bankruptcy estate.

The nature and existence of the interest is determined by state law. Witko v. Menotte

(In re Witko), 374 F.3d 1040, 1043 (11th Cir. 2004).

Property subject to a valid assignment does not become property of the

bankruptcy estate. In re Flanders, 45 B.R. 222, 224 (Bankr. M.D. Ga. 1984).

An assignment is an absolute, unconditional, and complete transfer of all

rights, title, and interest in property. An assignment results in total relinquishment of

any control over the property. Allianz Life Insurance Co. of North America v. Riedl,

264 Ga. 395, 444 S.E. 2d 736, 738 (1994).

“[An] assignment can be inferred from the totality of the circumstances. . . .”

Forest Commodity Corp. v. Lone Star Industries, Inc., 255 Ga. App. 244, 564 S.E. 2d

755, 758 (2002), cert denied.

“Any language, however informal, will be sufficient to constitute a legal

2 103 Ga. App. 270, 118 S.E. 2d 856 (1961).

6

assignment, if it shows the intention of the owner of the right to transfer it instantly,

so that it will be the property of the transferee.” First State Bank v. Hall Flooring Co.

103 Ga. App. 270, 118 S.E. 2d 856, 857 (1961).

“An assignment is a contract and, in order to be valid, must possess the same

requisites (parties, subject matter, mutual assent, consideration) as any other

contract.” Bank of Cave Spring v. Gold Kist, Inc., 173 Ga. App. 679, 327 S.E. 2d

800, 802 (1985).

In First State Bank v. Hall Flooring Company,2 B subcontracted certain work to

C. After the work was completed, B wrote a letter to X stating that B would make

payment for C’s work jointly payable to C and X. X later contended the letter was an

assignment of the obligation that B owed to C.

The Georgia Court of Appeals disagreed and stated in part:

The sole question presented for decision is whether the

letter from B to X, in which B agreed to make payment

jointly to C and X (such arrangement being acceptable to

C), was a legal assignment of C’s chose in action.

118 S.E. 2d at 857.

The court also stated:

The purported assignment in the present case did not

show an intention to transfer the fund immediately since

the payment was to be made jointly to the purported

assignor and assignee without any distinction being shown

3 108 Ga. App. 236, 132 S.E. 2d 527 (1963).

7

as to their separate interest in such fund, and for such

reason the paper could not constitute either an equitable or

legal assignment and the judgment of the trial court so

holding was not error.

118 S.E. 2d at 858.

In Piedmont Southern Life Insurance Co. v. Gunter,3 Gunter sought to recover

medical expenses allegedly due under his health insurance policy. The doctor and

hospital that provided the medical services sought to intervene contending that Gunter

had assigned the insurance benefits to them. Gunter had signed a form which stated

in part:

“Assignment of insurance benefits: I hereby authorize

payment directly to the above named surgeon [or hospital]

of the Group Surgical [or hospital] Benefits herein

specified and otherwise payable to me but not to exceed

the charge stated above [or the hospital’s regular charges].

I understand I am financially responsible to the surgeon

[or hospital] for charges not covered by this assignment.”

132 S.E. 2d at 531.

The Georgia Court of Appeals held that Gunter had not assigned the insurance

benefits to the doctor and hospital. The court stated in part:

The [health insurance company] objected to the

intervention at the trial on the ground that these writings

gave the [doctor and hospital] no right upon which an

intervention could be based. This objection was valid.

Though the word “assignment” is used, the writings

“disclosed no intention on the part of the plaintiff [Gunter]

8

to sell or assign the indebtedness, and none on the part of

the alleged assignee to purchase the same; and, hence, the

evidence failed to show any legal or equitable assignment

of the claim in controversy.” Didschuneit & Sons v.

Enochs Lumber & Mfg. Co., 42 Ga. App. 527, 156 S. E.

720; accord Burke v. Steel, 40 Ga. 217. “* * * A mere

communication to the holder of the fund (the obligor),

containing no words of present assignment and merely

authorizing and directing him to pay to a third party, may

properly bear the interpretation that it is a mere power of

attorney to the obligor himself, empowering him to

effectuate a transfer by his own subsequent act.” 4 Corbin

on Contracts 425, §862.

132 S.E. 2d at 531.

See Erika, Inc. v. Blue Cross and Blue Shield of Alabama, 496 F. Supp. 786,

789 (N.D. Ala. 1980). (communication containing no words of a present assignment

and merely authorizing and directing payment to a third party is not an assignment.)

Turning to the case at bar, the Court is persuaded that the Assignment is merely

an authorization directing Columbia Farms to deduct $12,266.40 from each

production settlement. The body of the document does not contain words of a present

assignment. The Assignment does not show an intention to transfer any right, title, or

interest in the $12,266.40. The funds so deducted are to be jointly payable to

Respondents and Movant. Respondents did not relinquish total control over the

funds.

The Court is persuaded that Respondents did not assign to Movant the

$12,666.40 and that the funds are property of the bankruptcy estate.

An order in accordance with this memorandum opinion shall be entered this

9

date.

DATED this 4th day of May, 2005.

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

MELISSA E. WATERS

December 21, 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 7

:

MELISSA E. WATERS, ::

Debtor : Case No. 00-30961 RFH

::

MELISSA E. WATERS, ::

Movant :::

vs. :::

1ST FRANKLIN FINANCE, ::

Respondent :

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Movant: BARRY GORDON IRWIN

129 Bryan Street, Suite 101

Athens, Georgia 30601-1801

For Respondent: ROBERT D. BARCUS

RICHARD V. KARLBERG, JR.

34 Peachtree Street, Suite 2180

Atlanta, Georgia 30303

1 See Letter from Respondent to the Court dated December

4, 2000.

2

MEMORANDUM OPINION

Melissa E. Waters, Movant, filed on August 18, 2000,

a Motion to Avoid Judicial Lien(s). 1st Franklin Finance,

Respondent, filed a response on September 8, 2000. Respondent

filed on October 4, 2000, an Objection to Property Claimed as

Exempt. A hearing on Movant’s motion and Respondent’s

objection was held on November 9, 2000. The Court, having

considered the stipulation of facts and the arguments of

counsel, now publishes this memorandum opinion.

Movant owed a debt to Respondent. Respondent

obtained a judgment against Movant. Movant’s employer was

served with a summons of continuing garnishment on March 7,

2000.

Movant earned wages after May 12, 2000. Movant’s

employer withheld, pursuant to the garnishment, the sum of

$1035.87 from Movant’s wages. Movant’s employer paid the

funds into the Franklin County Magistrate Court. The

magistrate court disbursed the funds to Respondent.1 Movant

filed a petition for relief under Chapter 7 of the Bankruptcy

Code on August 11, 2000. Movant and Respondent agree that the

ninety-day preference period began on May 12, 2000. Movant’s

wages at issue were earned during the ninety-day preference

2 Chapter 7 Case No. 95-52540, Adv. No. 95-5073 (Bankr.

M.D. Ga. March 27, 1996) (Hershner, J.). A copy of that

decision is attached to this memorandum opinion. See also In

re Johnson, 239 B.R. 416 (Bankr. M.D. Ala. 1999).

3

period. See 11 U.S.C.A. § 547(b) (West 1993).

Movant listed the funds on Schedule B – Personal

Property of her bankruptcy petition. Movant claimed the funds

as exempt property on Schedule C – Property Claimed as Exempt.

Respondent filed a timely objection to Movant’s claim of

exemptions. The Chapter 7 trustee of Movant’s bankruptcy

estate has not attempted to avoid as a preferential transfer

the garnishment of Movant’s wages. See 11 U.S.C.A. § 522(h)

(West 1993) (debtor may avoid a preferential transfer to the

extent the debtor could have claimed the property as exempt if

the bankruptcy trustee does not attempt to avoid the

transfer).

The facts in the case at bar are identical to the

facts in Mathis v. West Central Georgia Bank (In re Mathis).2

In In re Mathis, the debtor’s employer was served with a

summons of garnishment prior to the ninety-day preference

period. The debtor earned wages during the ninety-day

preference period. The debtor’s employer withheld funds from

the debtor’s wages. The debtor’s employer paid the funds into

the state court. The state court disbursed the funds to the

creditor prior to the filing of the debtor’s bankruptcy

petition. This Court held that the debtor could recover the

3 Movant, in her bankruptcy petition, contends that

Respondent’s judicial lien also encumbers Movant’s furniture,

kitchen furnishings, jewelry, clothing, and personal items.

Respondent did not object at the hearing on November 9, 2000,

to the avoidance of its judicial lien on this property.

4

funds as an avoidable preferential transfer.

The Court is persuaded that Movant can recover from

Respondent the sum of $1035.87 as an avoidable preferential

transfer. Movant can claim as exempt property the $1035.87.

Respondent’s judicial lien is avoided to the extent the lien

impairs Movant’s exemptions.3 11 U.S.C.A. § 522(f)(1)(A)

(West Supp. 2000).

An order in accordance with this opinion will be

entered this date.

DATED the 21st day of December, 2000.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

TONY EDWARD MATHIS, ::

Debtor : Case No. 95-52540

::

TONY EDWARD MATHIS, ::

Plaintiff :::

vs. :::

WEST CENTRAL GEORGIA BANK, ::

Adversary Proceeding

Defendant : No. 95-5073

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: GEORGE O. HASKELL, III

Suite 100

American Federal Building

Macon, Georgia 31201

For Defendant: EMMETT L. GOODMAN, JR.

Suite 800

Fulton Federal Building

544 Mulberry Street

Macon, Georgia 31201

ATTACHMENT

4 Although Plaintiff’s pleading is entitled a motion, it is in fact a

complaint that commenced this adversary proceeding.

5 Defendant apparently obtained a judgment against Plaintiff.

6 The ninety-day preference period began on May 16, 1995.

2

MEMORANDUM OPINION

Tony Edward Mathis, Plaintiff, filed on October 5,

1995, a “Motion to Restore Garnishment Proceeds to Debtor.”4

West Central Georgia Bank, Defendant, filed its response on

October 19, 1995. Plaintiff’s complaint came on for a hearing

on January 8, 1996. The Court, having considered the

stipulation of facts and the arguments of counsel, now

publishes this memorandum opinion.

FINDINGS OF FACT

The relevant facts are not in dispute. Plaintiff

owed a debt to Defendant. Defendant filed a summons of

garnishment on March 8, 1995.5 The summons of garnishment was

served that same day on Plaintiff’s employer (the garnishee).

Plaintiff earned certain wages after May 16, 1995.6

Plaintiff’s employer withheld, pursuant to the garnishment,

the sum of $1,678.23 from Plaintiff’s wages. Plaintiff’s

employer paid the garnished funds into state court. The state

court disbursed the garnished funds to Defendant prior to the

filing of Plaintiff’s bankruptcy case. Plaintiff and

3

Defendant agree that the ninety-day preference period began on

May 16, 1995. Plaintiff’s wages at issue were earned during

the preference period.

CONCLUSIONS OF LAW

Plaintiff seeks to recover from Defendant the

garnished funds ($1,678.23) as an avoidable preferential

transfer. 11 U.S.C.A. § 547(b) (West 1993). Defendant does

not dispute that Plaintiff can claim the funds as exempt

property. 11 U.S.C.A. § 522(g) and (h) (West 1993); O.C.G.A.

§ 44-13-100 (1995). Plaintiff has the burden of proving the

avoidability of the transfer at issue. 11 U.S.C.A. § 547(g)

(West 1993).

The question presented to the Court is whether the

transfer at issue occurred on the date Defendant served the

summons of garnishment or when Plaintiff actually earned the

wages. See Taylor v. Mississippi Learning Institute (In re

Taylor), 151 B.R. 772, 775-76 (Bankr. N.D. Miss. 1993).

“The perfection of a lien by garnishment is

determined by the law of the state where the garnishment took

place.” Phillips v. Mbank Waco, N.A. (In re Latham), 823 F.2d

108, 110 (5th Cir. 1987). “In bankruptcy, the existence and

power of a garnishment lien is controlled by state law.” T.B.

Westex Foods, Inc. v. Federal Deposit Insurance Corp. (In re

T.B. Westex Foods, Inc.), 950 F.2d 1187, 1991 (5th Cir. 1992);

7 O.C.G.A. § 18-4-20(b) (1991).

8 O.C.G.A. § 18-4-111(a) (1991).

4

see also Continental National Bank of Miami v. Tavormina (In

re Masvidal), 10 F.3d 761, 763 (11th Cir. 1992) (state law

determines effect of writ of garnishment).

Georgia Code section 18-4-20(b)7 provides:

18-4-20. Property subject to garnishment

generally; claim amount and

defendant’s social security number on

summons of garnishment.

. . . .

(b) All debts owed by the garnishee to the

defendant at the time of service of the summons

of garnishment upon the garnishee and all debts

accruing from the garnishee to the defendant

from the date of service to the date of the

garnishee’s answer shall be subject to process

of garnishment; and no payment made by the

garnishee to the defendant or to his order, or

by any arrangement between the defendant and

the garnishee, after the date of the service of

the summons of garnishment upon the garnishee,

shall defeat the lien of such garnishment.

O.C.G.A.§ 18-4-20(b) (1991) (emphasis added).

Georgia Code section 18-4-111(a)8 provides:

18-4-111. Property, money, or effects subject

to continuing garnishment.

(a) All debts owed by the garnishee to the

defendant at the time of service of summons of

continuing garnishment upon the garnishee and

all debts accruing from the garnishee to the

defendant from such date of service to and

including the one hundred seventy-ninth day

thereafter shall be subject to process of

continuing garnishment; and no payment made by

the garnishee to the defendant or to his order

or by any arrangement between the defendant and

the garnishee after the date of the service of

5

the summons of continuing garnishment upon the

garnishee shall defeat the lien of such

garnishment.

O.C.G.A. § 18-4-111(a) (1991) (emphasis added).

Georgia law is thus clear that debts owed by the

garnishee at the time the garnishment summons is served and

all debts as they accrue are subject to the summons of

garnishment.

“Garnishment did not exist at common law. It was

not created by statute in Georgia until 1822.” Worsham

Brothers Co. v. Federal Deposit Insurance Corp., 167 Ga. App.

163, 305 S.E.2d 816, 818 (1983), cert. denied.

“Since our garnishment laws are in derogation of the

common law [they] must accordingly be strictly construed . .

. .” Travelers Insurance Co. v. Trans State, Inc., 172 Ga.

App. 763, 324 S.E.2d 585, 586 (1984).

“Clearly, it was the legislature’s intent to allow a

garnishor to obtain a garnishment lien only on the property

over which the garnishee exercised dominion or control. `[T]he

garnishment lien is intended to reach something actually due

the defendant and which the defendant could have forced the

garnishee to pay.’” Parham v. Lanier Collection Agency &

Service, Inc., 178 Ga. App. 84, 341 S.E.2d 889, 891 (1986),

cert. denied.

“[T]he test of whether funds in the hands of a third

person are subject to garnishment is whether or not the

original defendant [the employee] could himself recover such

9 733 F.2d 1560 (11th Cir. 1984).

6

funds by suit directly against the garnishee.” Carter v.

Sherwood Plaza, Inc., 118 Ga. App. 612, 164 S.E.2d 867, 868

(1968), cert. denied.

Defendant relies upon Askin Marine Co. v. Conner (In

re Conner).9 In that case, prior to the ninety-day preference

period, the debtor’s employer was served with a summons of

garnishment and paid into state court the garnished funds.

The state court disbursed the garnished funds to the creditor

within the preference period. The Eleventh Circuit Court of

Appeals held that the debtor could not set aside the transfer

as an avoidable preference.

The facts presented in In re Conner are

distinguishable from those in the case at bar. In In re

Conner, the wages subject to garnishment were earned prior to

the preference period. In the case at bar, the wages at issue

were earned during the preference period. Subsequent to In re

Conner, two bankruptcy courts in Georgia have held that a

garnishment which attaches to wages a debtor earns during the

preference period may be avoided as a preferential transfer

even though the summons of garnishment predates the preference

period. See Kentucky Finance, Inc. v. Newell (In re Newell),

71 B.R. 672 (Bankr. M.D. Ga. 1987); Ellenberg v. General

Motors Acceptance Corp. (In re Morton), 44 B.R. 750 (Bankr.

N.D. Ga. 1984).

10 151 B.R. 772 (Bankr. N.D. Miss. 1993).

11 922 F.2d 742 (11th Cir. 1991).

7

In Taylor v. Mississippi Learning Institute (In re

Taylor),10 the bankruptcy court stated:

Most bankruptcy courts have held that wages

garnished within the 90 day preference period,

pursuant to a writ of garnishment served prior

to the preference period, are avoidable under §

547(b). These cases held that under §

547(e)(3), the debtor’s wages cannot be

transferred until they have been earned,

notwithstanding the time of the service of the

writ of garnishment. Therefore, wages earned,

withheld, and paid to the garnishing creditor

within 90 days preceding bankruptcy can

constitute avoidable preferences even if the

writ of garnishment were served before the

preference period commenced.

151 B.R. at 777.

The Court also has considered Grant v. Kaufman (In

re Hagen),11 a decision by the Eleventh Circuit Court of

Appeals. In In re Hagen, the debtor was injured in an

automobile accident. The debtor signed a contingent fee

agreement with an attorney on March 20, 1984. A settlement on

May 14, 1985, resulted in a fee being paid to the attorney.

The debtor filed a Chapter 7 bankruptcy case on July 1, 1985.

The bankruptcy trustee argued that the fee paid to the

attorney was a preferential transfer. The Eleventh Circuit

Court of Appeals held that the fee payment was not a

preferential transfer because, under Florida law, an

attorney’s charging lien relates back in time to the

commencement of the attorney’s representation. In In re

8

Hagen, the Eleventh Circuit was applying Florida law. In the

case at bar, the Court is applying Georgia law.

Turning to the case at bar, “[a]n employee does not

acquire rights to his wages until he has earned them.

Consequently, even though generally the service of summons of

garnishment is the critical point for dating a transfer as

[Askin Marine Co. v. Conner (In re Conner)] clearly holds, the

critical point for dating a transfer where the debtor has not

acquired rights to the property is the date those rights are

acquired.” In re Morton, 44 B.R. at 751-52.

Defendant has not demonstrated that its lien related

back to the date of service of its summons of garnishment.

Compare In re Hagen, 922 F.2d at 744. The Court is persuaded

that Plaintiff may recover from Defendant the sum of $1,678.23

as an avoidable preferential transfer.

An order in accordance with this memorandum opinion

will be entered this date.

DATED the 27th day of March, 1996.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

CERTIFICATE OF SERVICE

I, Carolyn Hubbard, certify that a copy of the

attached and foregoing was mailed to the following:

Mr. Barry Gordon Irwin

Attorney at Law

129 Bryan Street, Suite 101

Athens, GA 30601-1801

Mr. Robert D. Barcus

Attorney at Law

34 Peachtree Street, Suite 2180

Atlanta, GA 30303

Mr. Richard V. Karlberg, Jr.

Attorney at Law

34 Peachtree Street,, Suite 2180

Atlanta, GA 30303

Mr. Ernest V. Harris

Attorney at Law

Post Office Box 1586

Athens, GA 30603

This 21st day of December, 2000.

__________________________

Carolyn Hubbard

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 7

:

MELISSA E. WATERS, ::

Debtor : Case No. 00-30961 RFH

::

MELISSA E. WATERS, ::

Movant :::

vs. :::

1ST FRANKLIN FINANCE, ::

Respondent :

ORDER

In accordance with the memorandum opinion entered

this date; it is

ORDERED that the Objection to Property Claimed as

Exempt filed on the 4th day of October, 2000, by 1st Franklin

Finance, Respondent, hereby is overruled; and it is further

ORDERED that the Motion to Avoid Judicial Lien(s)

filed on the 8th day of September, 2000, by Melissa E. Waters,

Movant, hereby is granted; and it is further

ORDERED that the judicial lien held by Respondent

against Movant hereby is avoided to the extend the lien

impairs Movant’s exemptions; and it is further

2

ORDERED that Movant hereby is allowed to claim as

exempt property the sum of $1035.87; and it is further

ORDERED that Movant shall recover from Respondent

the sum of $1035.87 as an avoidable preferential transfer,

with interest to run from the date of this judgment at the

legal rate until this obligation is paid.

SO ORDERED this 21st day of December, 2000.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

CERTIFICATE OF SERVICE

I, Carolyn Hubbard, certify that a copy of the

attached and foregoing was mailed to the following:

Mr. Barry Gordon Irwin

Attorney at Law

129 Bryan Street, Suite 101

Athens, GA 30601-1801

Mr. Robert D. Barcus

Attorney at Law

34 Peachtree Street, Suite 2180

Atlanta, GA 30303

Mr. Richard V. Karlberg, Jr.

Attorney at Law

34 Peachtree Street,, Suite 2180

Atlanta, GA 30303

Mr. Ernest V. Harris

Attorney at Law

Post Office Box 1586

Athens, GA 30603

This 21st day of December, 2000.

__________________________

Carolyn Hubbard

Deputy Clerk

United States Bankruptcy Court

WAYNE L. PULLIAM

June 18, 2002

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 7

:

WAYNE L. PULLIAM, ::

Debtor : Case No. 00-31502 RFH

::

WILLIAM M. FLATAU, :

CHAPTER 7 TRUSTEE, ::

Plaintiff :::

vs. :::

WACHOVIA SECURITIES, INC., :

and WAYNE L. PULLIAM, ::

Adversary Proceeding

Defendant : No. 01-3015

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

2

COUNSEL:

The Chapter 7 Trustee: WILLIAM M. FLATAU

355 Cotton Avenue

Macon, Georgia 31201

For Wachovia Securities, Inc.: JOHN T. MCGOLDRICK, JR.

MICHAEL N. WHITE

Post Office Box 1606

Macon, Georgia 31202-1606

For Wayne L. Pulliam: ERNEST V. HARRIS

Post Office Box 1586

Athens, Georgia 30603

1 A rollover is a tax-free distribution of assets from one retirement plan to

another retirement plan. The contribution to the second retirement plan is called a

“rollover contribution.” Individual Retirement Arrangements (IRAs), Internal

Revenue Service Publication 590, p. 20 (2001).

3

MEMORANDUM OPINION

William M. Flatau, Chapter 7 Trustee, Plaintiff, filed on April 26,

2001, a Complaint to Avoid Transfer. Wachovia Securities, Inc., Defendant, filed a

response on May 25, 2001. Wayne L. Pulliam filed a response on May 29, 2001. A

hearing was held on July 11, 2001. The Court entered an order on May 31, 2002,

allowing Mr. Pulliam to intervene as a defendant. The Court will refer to

Mr. Pulliam as Defendant and to Wachovia Securities, Inc., as Wachovia. The Court,

having considered the evidence presented and the arguments of counsel, now

publishes this memorandum opinion.

FINDINGS OF FACT

Defendant opened an Individual Retirement Account at SunTrust Bank

in the 1980s. Defendant, around 1997, rolled over1 his IRA at SunTrust into an IRA

at Wachovia. The funds in Defendant’s IRA at Wachovia were invested in mutual

funds.

Defendant, in 1999, started a business known as Kim-Kris-Wood, Inc.

2 Defendant’s IRA and his 401(k) retirement plan were separate accounts.

3 A withdrawal is referred to as a distribution.

4 An official check is a check that a bank draws on itself. Cashier’s checks are

often labeled as official checks. 12 C.F.R. Pt. 229.2(i), App. E. Commentary.

4

Defendant and his wife were the sole shareholders of the corporation. Defendant was

the president and was a full-time employee of the corporation. Defendant testified

that he “cashed in” his 401(k) retirement plan2 to meet his living expenses when Kim-

Kris-Wood, Inc. began operations.

Pinnacle Bank provided financing for Kim-Kris-Wood, Inc. The

corporation had financial problems. Pinnacle Bank, in the summer of 2000, notified

Defendant that the bank would not provide further financing to Kim-Kris-Wood, Inc.

Ligna Machinery, Inc. filed on August 2, 2000, a complaint in state

court against Kim-Kris-Wood, Inc. and against Defendant as guarantor of the

corporation’s obligation. Ligna Machinery, Inc. sought a judgment for $214,621.01.

Defendant decided to withdraw the funds in his IRA at Wachovia.3

Defendant testified that the mutual funds in his IRA were not performing. Defendant

testified that he would not have withdrawn the funds if he had been satisfied with the

performance of his IRA. Defendant also testified that he intended to use the funds to

pay “past and future creditors.”

The mutual funds in Defendant’s IRA were sold on September 1 and

15, 2000. Wachovia Bank, N.A. issued Defendant an “Official Check”4 dated

5 Defendant’s IRA distribution would result in a ten percent tax penalty unless

the distribution was “rolled over” into another IRA within sixty days after the date

that Defendant received the distribution. See 26 U.S.C.A. § 408(d)(3) (West Supp.

2001).

5

September 18, 2000, for the net proceeds in the amount of $40,087.07. Defendant’s

daughter picked up the check at Wachovia on September 22, 2000, and delivered the

check to Defendant.

Defendant put the check in a drawer at his residence. Defendant

testified that he did not know where he wanted to invest the funds or if he would

need the funds to meet his living expenses. Defendant understood that he had sixty

days to decide.5

Defendant, some two weeks later, took the check to the residence of his

father-in-law, Jay Haywood. Defendant offered the check to Mr. Haywood to repay

loans that Mr. Haywood had made to Defendant. Defendant testified that he believed

that Mr. Haywood would continue to help him, but that his other creditors would not.

Mr. Haywood would not accept the check. Defendant left the check at

Mr. Haywood’s residence. About a week later, Mr. Haywood told Defendant to

“forget it, you don’t owe me.”

Kim-Kris-Wood, Inc. closed its business during the first or second

week of October of 2000.

Defendant’s wife signed a check dated October 10, 2000, for $3,900 to

6 Defendant and his wife had a joint checking account.

6

prepay for eye surgery for Defendant’s adult daughter.6 Defendant testified that his

daughter attends college and that he is “still looking after her.”

The Citizens Bank of Washington County filed on October 20, 2000, a

complaint in state court against Defendant. The bank sought a judgment in the

principal amount of $241,600.58.

Defendant’s wife signed a check dated October 24, 2000, for $1,000

payable to ICM, a religious ministry. Defendant testified that this check was his

tithe.

Defendant met with Ernest Harris, a bankruptcy attorney, on November

10, 2000. Defendant discussed his financial problems with Mr. Harris. After

meeting with Mr. Harris, Defendant understood that he could claim his IRA in his

exemptions if he filed for bankruptcy relief. Defendant signed a check dated

November 10, 2000, for $1,700 as a retainer for Mr. Harris’s legal services.

Defendant went to his father-in-law’s residence and picked up his IRA

distribution check. Defendant’s sixty-day window to roll over his IRA distribution

was about to expire. Defendant endorsed the distribution check over to Wachovia on

November 24, 2000. The transaction was treated as a rollover by Wachovia and

Defendant. The funds were used to purchase certain mutual funds on November 29,

7 Defendant concedes that his liabilities exceeded his assets by $4.5 million.

See Defendant’s letter brief, p. 3 (filed Aug. 2, 2001). This letter brief is filed in

Defendant’s bankruptcy case, not in this adversary proceeding.

8 The face of Defendant’s IRA provides, in part:

WAYNE PULLIAM IRA

WSI AS CUSTODIAN

PO BOX 183

WATKINSVILLE GA 30677

7

2000. Defendant admits that he was insolvent and unemployed at that time.7

Wachovia is the custodian of Defendant’s IRA.8

Defendant filed a petition for bankruptcy relief on December 4, 2000.

Defendant’s bankruptcy estate has no assets available for distribution to unsecured

creditors. Defendant claimed as exempt property his IRA at Wachovia in the amount

of $40,000. Defendant is not currently employed.

The Court entered an order and memorandum opinion on March 26,

2002, determining that Defendant could not claim as exempt his IRA because, under

applicable state law, an IRA is not property of his bankruptcy estate. See In re

Pulliam, Ch. 7 Case No. 00-31502 RFH (order entered March 26, 2002).

CONCLUSIONS OF LAW

Plaintiff seeks to recover the funds in Defendant’s IRA. Plaintiff

contends that, on the eve of bankruptcy, Defendant converted his IRA distribution

9 Plaintiff has not pursued his contention that Defendant received less than a

reasonably equivalent value from the transfer.

10 11 U.S.C.A. § 548(a)(1)(A) (West Supp. 2002).

11 11 U.S.C.A. § 550(a) (West 1993).

8

check into an IRA with actual intent to hinder, delay, or defraud creditors.9

Section 548(a)(1)(A) of the Bankruptcy Code10 provides:

§ 548. Fraudulent transfers and obligations

(a)(1) 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–

(A) made such transfer or incurred such

obligation with actual intent to hinder, delay, or

defraud any entity to which the debtor was or

became, on or after the date that such transfer was

made or such obligation was incurred, indebted; or

11 U.S.C.A. § 548(a)(1)(A) (West Supp. 2002).

Section 550(a) of the Bankruptcy Code11 provides:

§ 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,

553(b), or 724(a) of this title, the trustee may recover, for the

benefit of the estate, the property transferred, or, if the court so

orders, the value of such property, from–

(1) the initial transferee of such transfer or the

entity for whose benefit such transfer was made; or

12 This section provides as follows:

§ 101. Definitions

In this title—

. . . .

(54) “transfer” means every mode, direct or indirect, absolute

or conditional, voluntary or involuntary, of disposing of or

parting with property or with an interest in property, including

retention of title as a security interest and foreclosure of the

debtor’s equity of redemption;

11 U.S.C.A. § 101(54) (West Supp. 2002).

9

(2) any immediate or mediate transferee of such

initial transferee.

11 U.S.C.A. § 550(a) (West 1993).

Plaintiff bears the burden of proving all facts necessary to prove that a

fraudulent transfer occurred. Harris v. Huff (In re Huff). 160 B.R. 256, 260 (Bankr.

M.D. Ga. 1993).

Defendant contends that there was no “transfer” because he did not

dispose of or part with an interest in property. Defendant argues that he owned the

IRA distribution check and that he currently owns the IRA. Defendant argues that he

can withdraw the funds in the IRA and has total control over how the funds are

invested.

The Court is not persuaded by Defendant’s argument. Transfer is

defined in section 101(54) of the Bankruptcy Code.12 The legislative history to this

13 Funds in an IRA generally are not subject to garnishment until paid to the

member. O.C.G.A. § 18-4-22 (1999).

10

section provides, in part:

Paragraph (40) [(54)] defines “transfer.” . . . A transfer is a

disposition of an interest in property. The definition of transfer

is as broad as possible. . . . Under this definition, any transfer of

an interest in property is a transfer, including a transfer of

possession, custody or control even if there is no transfer of title,

because possession, custody, and control are interests in

property. A deposit in a bank account or similar account is a

transfer.

(S. Rep. No. 95-989, 95th Cong. 2d Sess. 27 (1978)).

See Village of San Jose v. McWilliams, 284 F.3d 785, 793 (7th Cir.

2002) (citing legislative history of definition of transfer); Bernard v. Sheaffer (In re

Bernard), 96 F.3d 1279, 1282 (9th Cir. 1996) (same).

Thus, a transfer includes a change of possession or custody. The face

of Defendant’s IRA shows that Wachovia Securities, Inc. is the custodian. The

testimony and evidence shows that possession or custody of the funds at issue

changed from Defendant to Wachovia. Defendant’s transfer effectively removed the

funds from the reach of his creditors.13 The Court is persuaded that Defendant

“transferred” the funds at issue.

Defendant contends that a rollover of funds into an IRA is not a

fraudulent transfer. Respondent relies upon Shaia v. Meyer (In re Meyer), 244 F.3d

352 (4th Cir.), cert. denied, 122 S. Ct. 212, 151 L. Ed. 2d 150 (2001) (debtor

11

received valuable consideration under Virginia law when debtor used cash from

specific bequest under deceased father’s will to prepay mortgage on debtor’s

residence; release of secured debt is valuable consideration for prepayment of

mortgage); Love v. Menick, 341 F.2d 680 (9th Cir. 1965) (cash value of surrendered,

potentially exempt, life insurance policy deposited, upon advice of counsel, into

exempt bank account cannot be held, by itself, to constitute fraud); and In re Simms,

243 B.R. 156 (Bankr. S.D. Fla. 2000) (debtors sold homestead and used the

potentially exempt proceeds to purchase an exempt annuity; debtors had health

problems and filed for bankruptcy relief six months after the annuity was purchased;

no evidence that debtors did not intent to pay consumer debts after annuity

purchased, no creditors had begun serious collection efforts, and debtors did not

attempt to conceal the conversion).

Defendant also relies upon Ransier v. Public Employees Retirement

System (In re Cottrill), 118 B.R. 535 (Bankr. S.D. Ohio 1990). In that case,

Mr. Cottrill, while preparing for retirement, learned that he could receive retirement

credit for his military service upon payment of a sum certain into his public

employer’s retirement system. Mr. Cottrill withdrew funds from his deferred

compensation program and deposited the funds in his checking account. Some three

weeks later, Mr. Cottrill transferred the funds to his employer’s retirement system to

purchase additional credits for his military service. Mr. Cottrill took early retirement

the next month. Mr. Cottrill and his wife filed for bankruptcy relief two months later

12

when they discovered their retirement benefits were not sufficient to meet their living

expenses. Mr. Cottrill died seven months later.

The Chapter 7 trustee contended that Mr. Cottrill did not receive

reasonably equivalent value in exchange for the transfer of funds from his deferred

compensation program into his employer’s retirement system. The trustee conceded

that the transfer was not made with fraudulent intent. The bankruptcy court

determined that Mr. Cottrill was not attempting to transfer an asset to his wife in

order to protect the asset from creditors. The bankruptcy court also noted that the

trustee had failed to present any evidence to support his contention that Mr. Cottrill

had not received reasonably equivalent value.

The bankruptcy court stated:

Additionally, because Mr. Cottrill essentially “rolled-over”

money from one exempt retirement fund into another, the

transfer cannot be considered fraudulent within the meaning of

§ 548. . . . Thus, under Ohio law, both the PERS and Deferred

Compensation fund are clearly exempt from property of a

debtor’s estate. The temporary transfer of the Deferred

Compensation funds into Mr. Cottrill’s checking account, for the

purpose of rolling over the funds into the PERS plan, did not

cause the asset to lose its exempt status. The only way

Mr. Cottrill could transfer the funds to PERS was to act as the

intermediary, and personally transfer the money from one plan

to the other. This is evidenced by the fact that the State provides

no means of rolling over funds from one retirement plan to

another, and by the fact that the money remained in

Mr. Cottrill’s checking account for less than three weeks.

In Love v. Menick, 341 F.2d 680, 682 (9th Cir. 1965), the

Ninth Circuit Court of Appeals was faced with a similar

situation to the instant case and held: “the deposit of money

13

derived from surrender of an asset, a portion of which, absent

surrender, would have already been exempt . . . into an account

of exempt quality, cannot be held, of itself, to constitute fraud.”

In Love, a debtor surrendered his life insurance policy for its

cash value, and deposited the cash into a savings and loan

association. Although this transaction took place only a few

days before the debtor voluntarily filed a petition for bankruptcy,

the court held that because under state law both assets were of

exempt status, the transaction was not fraudulent. Similarly,

Mr. Cottrill transferred money from one exempt retirement fund

into another exempt retirement fund. The temporary placement

of the money in Mr. Cottrill’s personal checking account for the

specific purpose of transferring the funds, did not cause the asset

to lose its exempt status, nor was the transfer fraudulent.

Furthermore, even if the funds did lose their exempt status

when they were placed in Mr. Cottrill’s checking account, the

subsequent transfer of money to PERS is still not fraudulent. It

is well established that the mere conversion of property from

nonexempt to exempt status on the eve of bankruptcy does not

constitute fraud. In re Beckman, 104 B.R. 866 (Bankr. S.D.

Ohio 1989). Prebankruptcy planning permits the debtor to make

full use of the exemptions to which he is entitled, and is not

fraudulent as to creditors. Beckman, at 870. There being no

evidence of fraudulent intent, the Court is not inclined to infer

fraudulent intent simply by virtue of pre-retirement or prebankruptcy

planning by the Debtors.

118 B.R. at 538-39 (emphasis added).

The Court is not persuaded by Defendant’s argument. Defendant,

when he withdrew the funds from his IRA, did not have a “specific intent” of

depositing the funds into another IRA. Defendant offered to use the funds to pay a

family member, his father-in-law, to the exclusion of his other creditors. Defendant

was insolvent, unemployed, and had learned that he could shield funds in an IRA

from his creditors. Defendant’s transfer was back to the same custodian, Wachovia.

14 134 F.3d 1046 (11th Cir. 1998).

14

This is not a typical rollover of IRA funds.

The Court now turns to consider whether Defendant acted with

fraudulent intent. Courts consider certain “badges of fraud” in determining whether a

debtor acted with actual intent to hinder, delay, or defraud creditors. Dionne v.

Keatings (In re XYZ Options, Inc.), 154 F.3d 1262, 1271 (11th Cir. 1998).

In Levine v. Weissing (In re Lewis),14 the Eleventh Circuit Court of

Appeals stated:

In determining whether a debtor actually intended to hinder,

delay, or defraud a creditor, a bankruptcy judge may consider,

inter alia, whether:

(a) The transfer or obligation was to an insider.

(b) The debtor retained possession or control of the

property transferred after the transfer.

(c) The transfer or obligation was disclosed or concealed.

(d) Before the transfer was made or obligation was

incurred, the debtor had been sued or threatened with

suit.

(e) The transfer was of substantially all the debtor’s

assets.

(f) The debtor absconded.

(g) The debtor removed or concealed assets.

(h) The value of the consideration received by the debtor

was reasonably equivalent to the value of the asset

15

transferred or the amount of the obligation incurred.

(i) The debtor was insolvent or became insolvent shortly

after the transfer was made or the obligation incurred.

(j) The transfer occurred shortly before or shortly after a

substantial debt was incurred.

(k) The debtor transferred the essential assets of the

business to a lienor who transferred the assets to an

insider of the debtor.

134 F.3d at 1053.

“Although the presence of one specific ‘badge’ will not be sufficient to

establish fraudulent intent, the ‘confluence of several can constitute conclusive

evidence of an actual intent to defraud.’” Dionne v. Keating (In re XYZ Options,

Inc.), 154 F.3d at 1271 n.17.

Turning to the case at bar, the evidence shows that Defendant converted

his IRA distribution check into an IRA about two weeks after meeting with a

bankruptcy attorney. The IRA was opened at Wachovia, the same custodian that held

Defendant’s prior IRA. Defendant understood that his IRA could be claimed as

exempt property. Defendant retains ownership of the funds after the transfer. The

transfer was made ten days before Defendant filed for bankruptcy relief. Defendant

was insolvent and unemployed. Defendant had few, if any, other unencumbered

assets. Defendant had offered to use his IRA distribution check to pay a family

member, Defendant’s father-in-law.

The Court is persuaded that Defendant “intended to shield what he

16

thought was valuable property from the claims of his creditors.” Future Time, Inc. v.

Yates, 26 B.R. 1006, 1009 (M.D. Ga.) (Owens, J.), aff’d, 712 F.2d 1417 (11th Cir.

1983). The Court is persuaded that Defendant converted his IRA distribution check

into an IRA with actual intent to hinder, delay, or defraud creditors.

An order in accordance with this memorandum opinion will be entered

this date.

DATED the 18th day of June, 2002.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

DWIGHT C. McDOWELL

February 8, 2001

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

DWIGHT C. McDOWELL, ::

Debtor : Case No. 98-54657 RFH

::

J. COLEMAN TIDWELL, TRUSTEE, ::

Plaintiff :::

vs. :::

CHARLES ROBERT HENDRICKS, ::

Adversary Proceeding

Defendant : No. 99-5113

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: ED S. SELL, III and

NEIL A. HALVORSON

Post Office Box 229

Macon, Georgia 31202-0229

2

For Defendant: CHARLES R. HENDRICKS

24273 N. San Fernando Road

Santa Clarita, California 91312

MARILYN G. McDOWELL

Post Office Box 9848

Savannah, Georgia 31412

1 Defendant is licensed to practice law in California.

Marilyn McDowell is licensed to practice law in California,

Colorado, and Georgia.

3

MEMORANDUM OPINION

J. Coleman Tidwell, Trustee, Plaintiff, filed a

complaint on September 10, 1999. Charles Robert Hendricks,

Defendant, filed a response on October 12, 1999. A trial was

held on August 8, 2000. The Court, having considered the

evidence presented and the arguments of counsel, now publishes

this memorandum opinion.

FINDINGS OF FACT

Defendant is married to Marilyn McDowell. Defendant

and Marilyn McDowell are attorneys.1 Dwight C. McDowell,

Debtor, is the father of Marilyn McDowell. Debtor is

Defendant’s father-in-law.

Debtor and Carolyn McDowell were divorced in

Colorado. Debtor was ordered to pay $310,000 to Carolyn

McDowell as a property settlement. Debtor satisfied part of

the obligation.

Marilyn McDowell was involved in the Colorado

divorce proceedings. Debtor and Marilyn McDowell were to be

held in contempt of court unless Debtor satisfied by September

4

14, 1998, the remainder of the obligation to Carolyn McDowell.

Debtor owned an interest in the Regency Apartments.

Debtor planned to sell his interest to satisfy the remainder

of his obligation to Carolyn McDowell. The sale was to close

in two parts. Debtor opened an interest-bearing checking

account at First Liberty Bank. The sole purpose of using the

account was to satisfy Debtor’s obligation to Carolyn

McDowell. Debtor deposited the proceeds from the first

closing into the account at First Liberty Bank. Debtor’s

initial deposit was in the amount of $140,000.

Debtor did not believe that the second closing on

the Regency Apartments would occur in time for him to satisfy

the remainder of his obligation prior to the contempt

deadline. Debtor, around August 27, 1998, requested a loan

from Defendant. The sole purpose of the loan was to enable

Debtor to satisfy the remainder of his obligation to Carolyn

McDowell and, thus, avoid the pending contempt action.

Defendant agreed to loan $80,000 to Debtor in order to protect

Defendant’s wife, Marilyn McDowell, from the contempt action.

Debtor signed a promissory note dated August 31,

1998. The promissory note was prepared by Defendant. The

promissory note provided that Debtor was to repay Defendant’s

loan of $80,000 plus ten percent interest in five years.

There were no other written documents memorializing the loan.

Defendant issued a check dated August 31, 1998, for

2 See Plaintiff’s Exhibit 5.

3 See Plaintiff’s Exhibit 6.

5

$80,000 payable to Debtor. Debtor deposited the check into

his account at First Liberty Bank. Debtor testified that he

understood that he could not use Defendant’s loan for any

purpose other than to satisfy his obligation to Carolyn

McDowell.

The second closing on the Regency Apartments

occurred sooner than Debtor had anticipated. Debtor deposited

the proceeds from the second closing into his account at First

Liberty Bank. Debtor drew a check on his account for $235,000

on or around September 14, 1998.2 Debtor used the funds to

purchase a cashier’s check for $235,000 to satisfy the

remainder of his obligation to Carolyn McDowell.

Debtor repaid Defendant’s loan by issuing a check

dated September 18, 1998, in the amount of $80,000.3 The

check was drawn on Debtor’s account at First Liberty Bank.

Between the initial deposit by Debtor and his $80,000

repayment to Defendant, Debtor’s balance in the First Liberty

Bank account was never less than $80,000.

Debtor closed his account at First Liberty Bank and

deposited the remaining $28,000 into an account he maintained

at another bank.

Debtor filed a petition under Chapter 7 of the

4 11 U.S.C.A. § 547(b) (West 1993). This section

provides as follows:

§ 547. Preferences

. . . .

(b) Except as provided in subsection (c) of this

section, the trustee may avoid any transfer of an

interest of the debtor in property–

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt

owed by the debtor before such transfer was

made;

(3) made while the debtor was insolvent;

(4) made–

(A) on or within 90 days before the

date of the filing of the petition; or

(B) between ninety days and one year

before the date of the filing of the

petition, if such creditor at the time of

such transfer was an insider; and

(5) that enables such creditor to receive

more than such creditor would receive if–

(A) the case were a case under chapter

7 of this title;

(B) the transfer had not been made; and

6

Bankruptcy Code on October 26, 1998.

CONCLUSIONS OF LAW

Plaintiff seeks to avoid, as a preferential

transfer,4 Debtor’s payment of $80,000 to Defendant.

(C) such creditor received payment of

such debt to the extent provided by the

provisions of this title.

11 U.S.C.A. § 547(b) (West 1993).

7

Plaintiff and Defendant stipulated that the only issue for

trial was whether the payment was a “transfer of an interest

of the debtor in property.” Defendant, in defense of

Plaintiff’s complaint, contends that his loan to Debtor was

“earmarked.” Defendant also contends that the $80,000 was

held by Debtor in an implied trust. Simply stated, Defendant

contends that Debtor had no interest in the $80,000.

Plaintiff must prove that the payment at issue was a

transfer of an interest of the Debtor in property. Plaintiff

has the burden of proving that the $80,000 loan by Defendant

to Debtor was not earmarked. Cielinski v. Douglas Leonhardt &

Assoc., Inc. (In re B&B Automatic Fire Protection, Inc.), Ch.

7 Case No. 94-40224, Adv. No. 96-4004, p. 11 (Bankr. M.D. Ga.

June 13, 1997) (Laney, J.); see also Kaler v. Community First

National Bank (In re Heitkamp), 137 F.3d 1087, 1089 (8th Cir.

1998).

Defendant relies, in part, on the following

statement in Collier on Bankruptcy:

When a third person makes a loan to a debtor

specifically to enable that debtor to satisfy

the claim of a designated creditor, the

proceeds never become part of the debtor’s

assets, and therefore no preference is created.

The rule is the same regardless of whether the

5 162 B.R. 359 (Bankr. S.D. Fla. 1993).

8

proceeds of the loan are transferred directly

by the lender to the creditor or are paid to

the debtor with the understanding that they

will be paid to the creditor in satisfaction of

his claim, so long as the proceeds are clearly

“earmarked.”

5 Collier on Bankruptcy ¶ 547.03[2], 547-23 (15th ed. rev.

2000).

In Tolz v. Barnett Bank of South Florida, N.A. (In

re Safe-T-Brake of South Florida, Inc.),5 the Bankruptcy Court

for the Southern District of Florida stated:

Under the earmarking doctrine, a transfer

cannot be avoided where a third party makes a

transfer of its property directly to one or

more of the debtor’s creditors or transfers

property to the debtor with the clear agreement

that the property transferred is to be used by

the debtor to pay one or more of its creditors,

and the property is in fact so used. The

transaction must be structured in such a way

that the debtor never acquires an interest in

the property to be transferred to the debtor’s

creditors.

. . . .

Application of the earmarking doctrine is

inherently fact based. The court must

determine the precise agreement between the

debtor and the transferor of property in order

to determine whether the debtor ever acquired

an interest in the property that was

transferred. . . .

. . . .

By the same token, modern caselaw has come

to recognize that the earmarking doctrine may

apply both in those situations where the lender

of new funds pays the prior creditor directly

6 137 F.3d 1087 (8th Cir. 1998).

9

or where the funds are entrusted to the debtor

with the understanding that the debtor is to

use the money only to pay the debtor’s

obligation to a specific creditor designated by

the source of the funds. In re Bohlen, 859

F.2d at 565. In the latter situation, the

debtor effectively holds the money “in trust”

for the benefit of the designated creditor and

thus the debtor has no dispositive “control”

over the funds. Under this analysis, the new

money, although in possession of the debtor,

never becomes property of the debtor because

the debtor has no control over how the funds

are ultimately distributed, and thus no

voidable preference results. Id.

162 B.R. at 363-64.

In Kaler v. Community First National Bank (In re

Heitkamp),6 the Eighth Circuit Court of Appeals stated:

According to the earmarking doctrine, there

is no avoidable transfer of the debtor’s

property interest when a new lender and a

debtor agree to use loaned funds to pay a

specified antecedent debt, the agreement’s

terms are actually performed, and the

transaction viewed as a whole does not diminish

the debtor’s estate. See McCuskey v. National

Bank of Waterloo (In re Bohlen Enters., Ltd.),

859 F.2d 561, 566 (8th Cir. 1988). No

avoidable transfer is made because the loaned

funds never become part of the debtor’s

property. See id. Instead, a new creditor

merely steps into the shoes of an old creditor.

See Buckley v. Jeld-Wen, Inc. (In re Interior

Wood Prods. Co.), 986 F.2d 228, 231 (8th Cir.

1993). Application of the earmarking doctrine

is not limited to situations in which the new

creditor is secondarily liable for the earlier

debt, but extends to situations where “any

third party . . . pays down a debt of the

debtor . . . because [the] payments . . . would

have no effect on the estate of the debtor.”

Stover v. Fulkerson (In re Bruening), 113 F.3d

10

838, 841 (8th Cir. 1997); see Hansen v.

MacDonald Meat Co. (In re Kemp Pac. Fisheries,

Inc.), 16 F.3d 313, 316 n.2 (9th Cir. 1994)

(per curiam) (earmarking doctrine not limited

to protection of guarantors); Steinberg v. NCNB

Nat’l Bank of N.C. (In re Grabill Corp.), 135

B.R. 101, 109 (Bkrtcy. N.D. Ill. 1991) (same);

Tolz v. Barnett Bank of S. Fla., N.A. (In re

Safe-T-Brake of S. Fla., Inc.), 162 B.R. 359,

364 (Bkrtcy. S.D. Fla. 1993) (“[c]aselaw has

extended the earmarking doctrine beyond the

guarantor scenario”). “[R]egardless of the

lender’s prior relationship with the debtor, or

lack thereof, replacing one creditor with

another of equal priority does not diminish the

estate and thus no voidable [transfer]

results.” In re Safe-T-Brake, 162 B.R. at 364

(citing In re Bohlen, 859 F.2d at 565-66).

137 F.3d at 1088-89.

“If all that occurs in a ‘transfer’ is the

substitution of one creditor for another, no preference is

created because the debtor has not transferred property of his

estate; he still owes the same sum to a creditor, only the

identity of the creditor has changed. This type of

transaction is referred to as ‘earmarking,’ . . .” Coral

Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351, 1356

(5th Cir. 1986). (Emphasis added).

Three requirements must be met for application of

the earmarking doctrine: “(1) the existence of an agreement

between the new lender and the debtor that the new funds will

be used to pay a specified antecedent debt, (2) performance of

that agreement according to its terms, and (3) the transaction

viewed as a whole (including the transfer in of the new funds

11

and the transfer out to the old creditor) does not result in

any diminution of the estate.” McCuskey v. National Bank of

Waterloo (In re Bohlen Enterprises, Inc.), 859 F.2d 561, 566

(8th Cir. 1988).

In In re B&B Automatic Fire Protection, Inc., Judge

Laney stated, in part, as follows:

“The earmarking doctrine is entirely a

court-made interpretation of the statutory

requirement that a voidable preference must

involve a ‘transfer of an interest of the

debtor in property.’” McCuskey v. National

Bank of Waterloo (In re Bohlen Enterprises,

Ltd., 859 F.2d 561, 565 (8th Cir. 1988).

Generally, for § 547 purposes, property is

property of the debtor when the transfer of

such property would “deprive the bankruptcy

estate of something which could otherwise be

used to satisfy the claims of creditors.”

Danning v. Bozek (In re Bullion Reserve of

North America), 836 F.2d 1214, 1217 (9th Cir.

1988). The earmarking doctrine, however,

operates as an exception to this general rule.

“This exception . . . is justified by the fact

that in such a case the funds neither are

controlled by, nor belong to, the debtor. The

money never becomes part of the debtor’s

assets; rather, the transaction merely

substitutes one creditor for another without

diminishing the value of the bankruptcy

estate.” In re Kemp Pacific Fisheries, Inc.,

16 F.3d at 316.

pp. 10-11.

Turning to the case at bar, Defendant loaned Debtor

$80,000 so that Debtor could satisfy the remainder of his

obligation to a specific creditor, namely, Carolyn McDowell.

Debtor deposited Defendant’s check into a bank account that

Debtor had established to satisfy this obligation. Debtor

12

understood that Defendant’s loan was only to be used to

satisfy this obligation. Debtor satisfied his obligation to

Carolyn McDowell. Debtor, several days later, repaid

Defendant’s loan. The payments to Carolyn McDowell and to

Defendant were both made within ninety days of Debtor’s

bankruptcy filing. Thus, both payments were within the

preference period.

In order for the earmarking doctrine to apply, there

must be no diminution in the bankruptcy estate. When Debtor

repaid the $80,000 to Defendant, it was simply repayment of a

loan. The earmarking doctrine applies when one creditor is

substituted for another. When Debtor repaid the $80,000 to

Defendant, no other creditor was substituted in Defendant’s

place. The obligation was paid in full and resulted in a

diminution of Debtor’s bankruptcy estate. The Court is not

persuaded that the earmarking doctrine applies.

Defendant also contends that the funds he loaned

Debtor were held in an implied trust. “An implied trust is

either a resulting trust or a constructive trust.” O.C.G.A.

§ 53-12-90 (1997).

“[S]ometimes it is exceedingly difficult to

differentiate between [a resulting trust and a constructive

trust]; but ordinarily distinctions are unnecessary since both

are implied trusts and are governed by the same rules.”

Hancock v. Hancock, 205 Ga. 684, 54 S.E.2d 385, 389 (1949).

Implied trusts include circumstances where the

7 173 Ga. 722, 161 S.E. 584 (1931).

8 124 Ga. App. 144, 183 S.E.2d 39 (1971).

13

parties intended that the person holding legal title to the

property would have no beneficial interests in the property.

See O.C.G.A. §§ 53-12-91, -93 (1997).

Defendant relies on Salzburger Bank v. Standard Oil

Co.7 where the Georgia Supreme Court stated: “One who receives

money to be paid to another, or to be applied to a particular

purpose, to which he does not apply it, is a trustee, and may

be sued either at law for money had and received or in equity

as a trustee for a breach of trust.” 161 S.E. at 586.

Defendant also relies on Federal Employees Credit

Union v. Capital Automobile Co.8 In that case, a credit union

agreed to make a loan to enable Pierce to purchase a car. The

loan was to be secured by a lien on the car. The credit union

issued a check jointly payable to Pierce and the car dealer.

Pierce did not purchase the car. Pierce and the car dealer

endorsed the credit union’s check. The car dealer deposited

the check. The car dealer then gave Pierce the proceeds of

the check. The credit union filed a complaint to recover the

funds from the car dealer.

The Georgia Court of Appeals ruled in favor of the

credit union and stated as follows:

When the special purpose for which defendant

held plaintiff’s funds failed, it became

defendant’s duty to return same to plaintiff.

Broome v. Cavanaugh, 102 Ga. App. 563(1), 116

9 Ch. 7 Case No. 95-30420, Adv. No. 97-3016, pp. 18-20

(Bankr. M.D. Ga. July 23, 1999).

14

S.E.2d 881; Whitaker v. Creedon, 97 Ga. App.

320(1, a), 103 S.E.2d 175; Holtsinger v.

Beverly, 53 Ga. App. 614, 186 S.E. 776; Chatham

Motor Co. v. De Sosa, 48 Ga. App. 257, 172 S.E.

604. That [the car dealer] no longer has the

money because it gave or returned same to

someone else (Pierce) is no defense, nothing

else appearing. “[T]he law is settled that an

action lies in all cases where one has received

money which another, ex aequo et bono [in

justice and fairness], is entitled to recover

and which the recipient is not entitled in good

conscience to retain.” Bill Heard Chevrolet

Company, Inc. v. Atlantic Discount Company,

Inc., 120 Ga. App. 388, 170 S.E.2d 740.

183 S.E.2d at 40-41 (emphasis added).

In Flatau v. Gooch (In re Rice),9 this Court stated:

“Because the debtor does not own an

equitable interest in property he holds in

trust for another, that interest is not

‘property of the estate.’ Nor is such an

equitable interest ‘property of the debtor’ for

purposes of § 547(b). As the parties agree,

then, the issue in this case is whether the

money [that Debtor] transferred from [his

personal checking] account to [Defendants] was

property that [Debtor] had held in trust for

[Defendants].’ Begier v. Internal Revenue

Service, 496 U.S. 53, 110 S. Ct. 2258, 2263,

110 L. Ed. 2d 46 (1990).

“While the Bankruptcy Code allows property

held in trust by a debtor not to be considered

property of that debtor, the beneficiary of the

trust is entitled to these trust assets only if

the trust assets are traceable.” Bethlehem

Steel Corp. v. Tidwell, 66 B.R. at 941.

“To establish a trust relationship that

excludes property from the bankruptcy estate, a

claimant must: (1) prove the existence of the

trust; and (2) trace the identity of his

property. Schuyler v. Littlefield, 232 U.S.

707, 34 S. Ct. 466, 58 L. Ed. 806 (1914); 4A

15

Collier on Bankruptcy, ¶ 7025[1] (14th Ed. J.

Moore 1975).” Rosenberg v. Collins, 624 F.2d

659, 663 (5th Cir. 1980).

The Court looks to the state law of Georgia

to determine the existence of a constructive

trust. See T & B Scottdale Contractors, Inc.

v. United States, 866 F.2d 1372, 1376 (11th

Cir.), cert. denied, 493 U.S. 846, 110 S. Ct.

139, 107 L. Ed. 2d 98 (1989); Old Republic

National Title Insurance Co. v. Tyler (In re

Dameron), 155 F.3d 718, 722 (4th Cir. 1998);

Bethlehem Steel v. Tidwell, 66 B.R. at 935.

The Court, however, looks to federal law to

determine whether the funds at issue can be

traced to the constructive trust. See In re

Dameron, 155 F.3d at 723; Connecticut General

Life Insurance Co. v. Universal Insurance Co.,

838 F.2d 612, 618-19 (1st Cir. 1988).

The fact that Debtor deposited Defendant’s loan into

a checking account that contained other funds does not destroy

the characterization of the loan as trust funds. Bethlehem

Steel Corp. v. Tidwell, 66 B.R. 932, 941-42 (M.D. Ga. 1986).

Plaintiff contends that under the parol evidence

rule, a trust cannot be impressed on funds where the only

written document unequivocally establishes a debtor-creditor

relationship. Plaintiff’s letter brief, p. 2 (filed Aug. 25,

2000). The written document in the case at bar is the

promissory note prepared by Defendant and signed by Debtor.

Plaintiff relies upon Probasco v. Shaw, 144 Ga. 416, 87 S.E.

466 (1915), in which the Georgia Supreme Court stated, “The

effect of the testimony would be to contradict the terms of

the [promissory] note by ingrafting into the contract

conditions resting in parol, by which the purchasers might not

10 180 Ga. 318, 178 S.E. 654 (1935).

16

be required to pay the money.” 87 S.E. at 466 (emphasis

added).

In Jansen v. Jansen,10 the Georgia Supreme Court

stated that “implied trusts may be established by parol

evidence, although the effect of such evidence is to alter or

vary a written instrument . . . .” 178 S.E. at 656 (quoting

Jenkins v. Lane, 154 Ga. 454, 475, 115 S.E. 126 (1922)). See

also Flatau v. Atef (In re Gaites), 466 F. Supp. 248, 256

(M.D. Ga. 1979).

The Georgia Code provides:

53-12-94. Parol evidence and implied trusts.

In all cases in which a trust is sought to

be implied, the court may hear parol evidence

of the nature of the transaction, the

circumstances, and the conduct of the parties,

either to imply or rebut the trust.

O.C.G.A. § 53-12-94 (1997).

The Court is persuaded that it may hear parol

evidence to determine the true nature of the transaction

between Debtor and Defendant.

The Court is persuaded that Debtor held the $80,000

in an implied trust. Defendant loaned the funds to Debtor “to

be applied to a particular purpose,” namely, to pay a specific

creditor, Carolyn McDowell. Debtor deposited the funds into a

checking account, the sole purpose of which was to satisfy his

obligation to Carolyn McDowell. Debtor understood that he

17

could not use Defendant’s loan for any purpose other than to

satisfy this obligation. Debtor’s account balance in the

First Liberty Bank account always exceeded $80,000 before he

repaid Defendant. The Court is persuaded that the $80,000

repayment was not a “transfer of an interest of the debtor in

property” as that phrase is used in section 547(b).

The $80,000 loan by Defendant to Debtor was to be

applied to a particular purpose. Justice and fairness guide

the Court in reaching this conclusion.

An order in accordance with this memorandum opinion

will be entered this date.

DATED the 8th day of February, 2001.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

DWIGHT C. McDOWELL, ::

Debtor : Case No. 98-54657 RFH

::

J. COLEMAN TIDWELL, TRUSTEE, ::

Plaintiff :::

vs. :::

CHARLES ROBERT HENDRICKS, ::

Adversary Proceeding

Defendant : No. 99-5113

ORDER

In accordance with the memorandum opinion entered

this date; it is

ORDERED that the relief sought by J. Coleman

Tidwell, Trustee, Plaintiff, in his complaint filed on the

10th day of September, 1999, hereby is denied; and it is

further

2

ORDERED that the request by Plaintiff for costs

hereby is denied.

SO ORDERED this 8th day of February, 2001.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

CERTIFICATE OF SERVICE

I, Carolyn Hubbard, certify that a copy of the

attached and foregoing was mailed to the following:

Mr. Ed S. Sell, III

Attorney at Law

Post Office Box 229

Macon, GA 31202-0229

Mr. Neil A. Halvorson

Attorney at Law

Post Office Box 229

Macon, GA 31202-0229

Mr. Charles R. Hendricks

Attorney at Law

24273 N. San Fernando Road

Santa Clarita, CA 91321

Ms. Marilyn G. McDowell

Attorney at Law

200 E. St. Julian Street

Savannah, GA 31412

Mr. J. Coleman Tidwell

Chapter 7 Trustee

Post Office Box 1796

Macon, GA 31202

Mr. Wesley J. Boyer

Attorney at Law

355 Cotton Avenue

Macon, GA 31201

This 8th day of February, 2001.

__________________________

Carolyn Hubbard

Deputy Clerk

United States Bankruptcy Court

WILLIAM K. HOLMES

August 8, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 11

:

WILLIAM K. HOLMES, ::

Debtor : Case No. 02-52793 RFH

::

WILLIAM K. HOLMES, ::

Plaintiff :::

vs. :::

JAMES E. PERRY and :

J.E. PERRY FARMS, INC., : Adversary Proceeding

:

Defendants : No. 02-5133

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: Mr. Joseph J. Burton, Jr.

Two Ravinia Drive

Suite 1750

Atlanta, Georgia 30346

For Defendant: Mr. Norman C. Pearson, III

Post Office Box 246

Macon, Georgia 31202-0246

1 The caption of this adversary proceeding shows the name of this defendant

as James E. Perry.

2 The Perry Place is also known as the White Place. The Perry Place may

contain 367 acres rather than 368 acres.

2

MEMORANDUM OPINION

William K. Holmes, Plaintiff, filed on May 7, 2003, a motion for summary

judgment. James E. Perry, Jr.1 (hereafter “Defendant”) and J. E. Perry Farms, Inc.

filed on May 8, 2003, a motion for summary judgment. The Court, having

considered the motions, the record, and the arguments of counsel, now publishes this

memorandum opinion.

Plaintiff’s ancestors, around 1820, owned some 7,000 acres of land in Laurens

County and Bleckly County, Georgia (hereafter the “Coley Place”). Parts of the

Coley Place, over the years, were acquired by third parties.

Plaintiff’s “dream” was to reassemble the Coley Place under his ownership

and to develop a quail hunting plantation. Plaintiff began acquiring parts of the Coley

Place in 1985.

James E. Perry, Sr. is Defendant’s father. Defendant’s father owned a 368

acre tract (the “Perry Place”)2 located in Laurens County and Bleckly County. The

Perry Place had been part of the Coley Place. Defendant farmed about one-half of

3 Defendant, in his deposition, testified that he is a farmer and that he and his

wife own a country store.

4 Although Defendant’s father owned the Perry Place, Plaintiff dealt with

Defendant.

5 Plaintiff owned a substantial amount of WorldCom stock.

3

the Perry Place.3 The remainder of the Perry Place was timberland. Plaintiff wanted

the buy the Perry Place. Plaintiff approached Defendant on a number of occasions

over a number of years. Defendant declined to sell.4

Plaintiff sent the “Perry Family” a letter dated June 24, 1998, which states, in

part: “It [the Perry Place] has become the most important physical thing in my life

outside of my family. It will absolutely tear me up inside and break my heart if I’m

not able to get it back into the old family land. This is not your fault, that is just the

way it is. You are all absolutely fine people and that is why [I] am bearing my soul

in my last desperate attempt to buy the land.”

Plaintiff, in the letter, made a “cash offer” of $960,000 for the Perry Place.

Plaintiff also offered to let Defendant take part or all of the sale proceeds in

WorldCom stock.5 Plaintiff offered to guarantee that the stock’s value would double

within three years. Plaintiff offered to “legally secure this guarantee”. Plaintiff, in his

deposition, testified that he, rather than Defendant, came up with the idea of offering

WorldCom stock. Defendant again declined to sell.

6 Defendant, in his deposition, testified that he was concerned about his age

and the agricultural economy.

7 Plaintiff may have offered to buy 25 acres rather than 35 acres.

8 Defendant’s wife had an interest in J.E. Perry Farms, Inc. Defendant,

however, made the decisions concerning the sales transactions at issue. Defendant,

in his deposition, testified that he decided on the amount of stock he was going to

accept on the day of the closing, March 10, 1999.

4

Defendant, in the fall of 1998, decided to sell the Perry Place.6 Plaintiff made

a written offer dated January 22, 1999. Plaintiff offered to buy 35 acres7 for

$211,000 or the entire Perry Place, some 368 acres, for $1,110,000. Plaintiff’s

written offer stated that Defendant could take part or all of the sale proceeds in

WorldCom stock and that Plaintiff would guarantee that the stock would double in

value within three years. Defendant made a counteroffer to sell the 35 acres for

$250,000 or the entire Perry Place for $1,500,000. Plaintiff decided to buy the entire

Perry Place for $1,500,000.

Defendant’s father held record title to the Perry Place. Defendant and his

father consulted with an attorney and an accountant. They were advised that, for tax

purposes, Defendant’s father should convey title to the Perry Place to J.E. Perry

Farms, Inc. Defendant’s father and his wife owned one-half of the stock of J.E.

Perry Farms, Inc. and would receive one-half of the sale proceeds, $750,000.

Defendant and his wife, Edith W. Perry, owned the other one-half of the stock of

J.E. Perry Farms, Inc. and would also receive $750,000.

Defendant decided to take $350,000 in cash and $400,00 in WorldCom stock.8

9 Plaintiff, in his first amended disclosure statement, states that he owned

some 3.2 million shares of WorldCom stock. Plaintiff states that at one time his

WorldCom stock had a value of close to $200 million. Plaintiff states that he was one

of the largest shareholders until his stock was sold by foreclosure pursuant to a series

of “margin calls” in late 1999 or early 2000.

10 See Plaintiff’s statement of undisputed material facts, para. 11 (Docket No.

15, filed May 7, 2003).

5

Plaintiff and Defendant had agreed to “cap the value” of the stock at $80 per share.

Thus, Defendant and his wife would receive $350,000 in cash and 5,000 shares of

WorldCom stock. Plaintiff agreed to guarantee that the value of the stock would

double within three years. Plaintiff also agreed to secure his guarantee by giving

Defendant and his wife a first priority deed to secure debt on the Perry Place.

Plaintiff, in his deposition, testified that nothing prevented him from just saying “no”

to the transaction other than his desire to acquire the Perry Place. Plaintiff also

testified that he believed “the stock was going to go up and it [his guarantee] was

going to be covered anyway”.

Plaintiff was the sixth largest shareholder of WorldCom, Inc.9 WorldCom

stock was worth some $80 per share in March of 1999.10

The closing on the Perry Place occurred on March 10, 1999. Plaintiff’s

attorney handled the closing. Defendant’s father signed a warranty deed conveying

title to the Perry Place to J.E. Perry Farms, Inc. Defendant as president, and

Defendant’s wife as corporate secretary, signed a warranty deed conveying title to

the Perry Place from J.E. Perry Farms, Inc. to Plaintiff. Plaintiff paid $1,500,000 for

11 Defendant, in his deposition, testified that he and his father “set aside”

$380,000 of the sales proceeds to pay capital gains taxes.

12 Some $190,000 of Defendant’s “cash” may have been “set aside” to pay

capital gains taxes.

13 Although the WorldCom stock was owned by Defendant and his wife,

Plaintiff and Defendant refer to the stock as Defendant’s stock.

6

the Perry Place. Plaintiff’s attorney, as the closing attorney, distributed from his

escrow account, the sale proceeds to Defendant’s father and his wife, and to

Defendant and his wife.11 Defendant then gave Plaintiff a check for $400,000 for

5,000 shares of WorldCom stock. Plaintiff telephoned and told his stock broker to

transfer 5,000 shares of WorldCom stock to Defendant. Thus, Defendant and his

wife received $350,000 in cash12 and 5,000 shares of WorldCom stock.

Plaintiff signed a Conditional Guarantee Agreement dated March 10, 1999, in

favor of Defendant and his wife. In the agreement, Plaintiff guaranteed that

Defendant’s WorldCom stock13 would be worth at least $800,000 at some point

between March 10, 1999 and March 9, 2002 (i.e. double in value within three years).

If the stock failed to double in value, Plaintiff agreed to pay Defendant the difference

between $800,000 and the “highest value for which [the stock] was traded at . . . on

March 9, 2002.” Plaintiff, in his deposition, testified that “the purpose of the whole

concept when I brought it up was to guarantee him [Defendant] that the stock that he

[Defendant] took would double in value. . . . All my intent was to guarantee him

another $400,000.” Defendant could sell any or all of his stock during the three year

14 Defendant’s attorney may have prepared the warranty deeds.

15 WorldCom, Inc. filed a petition for Chapter 11 relief on July 22, 2002.

7

period without changing the guarantee agreement. Plaintiff secured his “possible

indebtedness” by giving Defendant and his wife a first priority deed to secure debt

dated March 10, 1999 on the Perry Place. The Conditional Guarantee Agreement

provides that it was “part of the inducement for the sale, conveyance and delivery” of

the Perry Place.

Plaintiff signed a deed to secure debt dated March 10, 1999, in favor of

Defendant and his wife. The deed to secure debt provides that Plaintiff is indebted to

Defendant and his wife for $800,000 and that Plaintiff agrees to pay the same in

accordance with the terms of the Conditional Guarantee Agreement. Defendant

“required” the deed to secure debt as a necessary condition to close the sale.

Plaintiff’s attorney prepared the closing documents including the Consolidated

Guarantee Agreement and the deed to secure debt.14

Plaintiff concedes that the deed to secure debt was properly executed and

recorded in both Laurens County and Bleckly County.

Plaintiff began harvesting the timber on the Perry Place. Plaintiff asserts that

he used a plantation cut to enhance quail hunting habitat. Plaintiff also made other

improvements on the Perry Place.

WorldCom had financial problems.15 Plaintiff, in turn, had financial

16 In his first amended disclosure statement, Plaintiff states that his financial

problems began in late 1999 or early 2000.

17 Most of the 6,700 acres had been part of the Coley Place.

18 Mr. Lawton, in his affidavit, does not specifically address the value of the

368 acre Perry Place.

8

problems.16 Defendant’s WorldCom stock failed to double in value. Defendant has

not sold any of his WorldCom stock.

Defendant, in March of 2002, demanded that Plaintiff honor his Contractual

Guarantee Agreement that guaranteed that Defendant’s WorldCom stock would

double in value. Plaintiff was unable to perform and Defendant began foreclosure

proceedings on the Perry Place. Plaintiff filed on July 1, 2002, a petition under

Chapter 11 of the Bankruptcy Code to stop the foreclosure. Defendant and his wife

filed a proof of claim asserting a secured claim in the amount of $746,364.38.

Plaintiff was able to acquire some 6,700 acres of land before he had financial

problems.17 James F. Lawton, MAI, a certified real estate appraiser, in his affidavit,

testifies that, in his opinion, Plaintiff’s 6,700 acres of land had a fair market value of

less than $1,850 per acre as of March 10, 1999.18 Plaintiff, in his deposition,

testified that he paid more than fair market value for the Perry Place. Defendant, in

his deposition, was unable to offer an opinion as to the value of the Perry Place as of

March 10, 1999.

Plaintiff spent several millions of dollars reassembling the Coley Place and

making improvements to develop his quail hunting plantation. Plaintiff and Defendant

19 11 U.S.C.A. § 544 (b)(1) (West Supp. 2003).

9

both are currently about 54 years old.

Plaintiff filed on August 15, 2002, a Complaint to Determine Validity, Priority

and Extent of Liens and for Declaration Relief. Plaintiff urges the Court to determine

that the Consolidated Guarantee Agreement and deed to secure debt on the Perry

Place are void and unenforceable because Defendant received an amount

substantially in excess of the fair market value for the Perry Place. Plaintiff also

urges the Court to require Defendant to repay $736,000, which Plaintiff contends

represents the difference between the sales price ($1,500,000) and the fair market

value for the Perry Place. Defendant, on the other hand, urges the Court to

determine that the Conditional Guarantee Agreement and deed to secure debt are

valid and enforceable.

The Court notes that Defendant’s wife is a party to the Conditional Guarantee

Agreement and the deed to secure debt. Defendant’s wife is not named as a

defendant in this adversary proceeding. Plaintiff does not seek any relief against

Defendant’s wife.

The “strong arm” provisions of section 544 (b)(1) of the Bankruptcy Code19

provide that a “trustee may void any transfer of an interest of the debtor in property

or any obligation incurred by the debtor that is voidable under applicable law by a

creditor holding an unsecured claim that is allowable under section 502 [of the

20 Plaintiff, as debtor in possession, has the rights and powers of a chapter 11

trustee. 11 U.S.C.A. § 1107 (a)(West 1993).

21 O.C.G.A. § 18-2-22 (3) (repealed July 1, 2002). This code section was in

effect on the date the alleged fraudulent conveyances were made. Compare

O.C.G.A. § 18-2-75(a) (effective July 1, 2002) (transfer is fraudulent if debtor did not

receive a reasonably equivalent value and was insolvent or became insolvent as a

result of the transfer).

22 247 Ga. 658, 278 S.E.2d 393 (1981).

10

Bankruptcy Code]”.20

Plaintiff relies upon, as “applicable law,” former Georgia Code Section 18-2-

22(3) 21 which provides:

18-2-22. Conveyances by debtors deemed fraudulent.

The following acts by debtors shall be fraudulent in law against

creditors and others and as to them shall be null and void:

. . .

(3) Every voluntary deed or conveyance, not for a valuable

consideration, made by a debtor who is insolvent at the time of

the conveyance.

Under § 18-2-22(3), Plaintiff must prove (1) the voluntariness of the deed or

conveyance, (2) lack of a valuable consideration, and (3) insolvency of the debtor.

Dearing v. A.R. III, Inc., 266 Ga. 301, 466 S.E. 2d 565, 566 (1996).

Plaintiff agues that the Conditional Guarantee Agreement and deed to secure

debt were voluntary and without valuable consideration.

In Stokes v. McRae,22 the Supreme Court of Georgia stated:

[A] voluntary conveyance or deed is one without any valuable

consideration. McDonald v. Taylor, 200 Ga. 445, 449, 37 S.E.2d 336

(1946). A valuable consideration is founded on money, or something

11

convertible into money, or having a value in money. Hobbs v. Clark,

221 Ga. 558, 146 S.E.2d 271 (1965).

278 S.E.2d at 395.

A deed without consideration, other than love and affection, is a voluntary

conveyance. Brown v. Citizens & Southern National Bank, 253 Ga. 199, 317 S.E. 2d

180, 183 (1984).

In Brown, the Supreme Court of Georgia stated:

The cases show that the word “voluntary” is not used in its ordinary

sense, meaning “free choice” as opposed to “compelled”. In fact, the

word “voluntary” is used to mean “without valuable consideration”. In

Bussell v. Glenn, 197 Ga. 816, 818, 30 S.E.2d 617 (1944), it was held

that a deed from a father to his daughters without consideration other

than love and affection was a voluntary conveyance. In Stokes v.

McRae, 247 Ga. 658, 659, 278 S.E.2d 393 (1981), the court stated:

“We have held , as the subsection indicates, that a voluntary deed or

conveyance is one without any valuable consideration.”

317 S.E. 2d at 183.

Thus, under § 18-2-22(3), the terms “voluntary” and “not for a valuable

consideration” have the same meaning. Plaintiff must show that the Conditional

Guarantee Agreement and deed to secure debt were made “without any valuable

consideration.”

Section 13-3-41 of the Georgia Code provides:

13-3-41. Types of consideration.

Considerations are distinguished into “good” and “valuable.” A good

consideration is such as is founded on natural duty and affection or on a

strong moral obligation. A valuable consideration is founded on money

12

or something convertible into money or having a value in money, except

marriage, which is a valuable consideration.

O.C.G.A. § 13-3-41 (1982).

Plaintiff argues that he paid far in excess of the fair market value for the Perry

Place. Plaintiff argues that the Conditional Guarantee Agreement and deed to secure

debt were ‘voluntary” and “not for a valuable consideration” because Defendant

received more than the fair market value for the Perry Place. Plaintiff argues that

Defendant and J.E. Perry Farms, Inc. committed fraud or entered into a conspiracy

by requiring the unreasonably high sales price.

The undisputed facts show that it was Plaintiff who suggested that Defendant

take part or all of the sale proceeds in the form of WorldCom stock. Plaintiff offered

to guarantee that the stock’s value would double within three years. Plaintiff agreed

to secure his guarantee by giving Defendant a deed to secure debt on the Perry Place.

The Conditional Guarantee Agreement provides that it was “part of the inducement

for the sale, conveyance and delivery”of the Perry Place. The Court can only

conclude that Plaintiff’s intention was to induce Defendant to sell the Perry Place.

Defendant required the deed to secure debt as a necessary condition to close the sale.

Plaintiff’s attorney prepared the closing documents and handled the closing. Plaintiff

could have said “no” to the transaction. Plaintiff agreed to all the terms of the

transaction. The Court can only conclude that the sale was an arms length

transaction.

23 247 Ga. 605, 277 S.E. 2d. 908 (1981)

13

The Court is not persuaded that the Conditional Guarantee Agreement and

deed to secure debt were “voluntary” or “not for a valuable consideration”. Plaintiff

as a result of the transaction acquired the 368 acre Perry Place. The fact that he paid

a high price for the land does not mean that Plaintiff did not receive something of

value.

Plaintiff also must prove that he was “insolvent at the time of the conveyance.”

In Goodman v. Lewis,23 the Supreme Court of Georgia stated:

The test for determining whether a debtor is insolvent, within the

meaning of [§ 18-2-22(3)], is whether the value of his remaining property is sufficient

to pay in full all of his debts. Cohen v. Parish, 100 Ga. 335, 28 S.E. 122 (1897). The

value of the debtor’s remaining property must be determined as of the date the

conveyance sought to be set aside was made. Ayers v. Harrell, 111 Ga. 864(2), 36

S.E. 946 (1900).

277 S.E.2d at 909-10, n.1

See also Chambers v. Citizens & Southern National Bank, 242 Ga. 498, 249

S.E.2d 214, 217 (1978). (debtor is insolvent under § 18-2-22 (3) if remaining

property is not ample to pay existing debts).

“One who is in debt may make a voluntary conveyance of a part of his

property if the part retained is amply sufficient to pay his debts”. Wallace v. Williams

212 Ga. 692, 95 S.E. 2d. 369, 372 (1956).

“The value of [the debtor’s remaining] property is determined as of the date of

the questioned conveyance”. Calvin v. Brown 246 Ga. App. 40, 538 S.E. 2d. 802,

24 Plaintiff’s statement of undisputed material facts (Docket No. 15, filed May

7, 2003).

25 The Conditional Guarantee Agreement and the deed to secure debt are

dated March 10, 1999.

14

805 (2000), cert. denied (2001).

Plaintiff, in his statement of undisputed material facts24, states:

20. [Plaintiff] was rendered unable to continue to pay his ongoing

debts as they became due as a result of (i) said transfer of the

Security Deed and (ii) the eventual foreclosure created and

caused by Defendant Perry’s attempted foreclosure of the

Security Deed. [Plaintiff] has some of the same creditors at the

time of the filing of this case (July 1, 2002), as he did at the time

of the sale (March [10,] 1999), same being James Perry,

Farmers and Merchants Bank, MBNA America, Bank of

America, and State Bank of Cochran, among others. . . .

21. The conveyance or transfer of the Security Deed to Defendant

Perry left Plaintiff in a situation where he could not further pay

Defendant Perry or others once Defendant Perry commenced

foreclosure proceedings and demanded over Seven Hundred

Thousand and No/100 Dollars ($700,000.00). . . .

The relevant date for determining Plaintiff’s insolvency is March 10, 1999, the

date of the alleged fraudulent conveyances.25 Plaintiff does not allege that he was

insolvent on March 10, 1999. The record shows that Plaintiff was very wealthy in

March of 1999. Plaintiff, in his deposition, testified that he was spending “millions

and millions” developing his quail hunting plantation. The Court is not persuaded that

Plaintiff was insolvent on March 10, 1999.

The Court is not persuaded that Plaintiff, under O.C.G.A. § 18-2-22(3), can

set aside as fraudulent conveyances the Conditional Guarantee Agreement and deed

2611 U.S.C.A. § 502(a)(West 1993).

27 Fed. R. Bankr. P. 3007.

15

to secure debt.

Plaintiff argues that Defendant should have mitigated his damages when the

price of WorldCom stock began to drop. Defendant has not sold any of his

WorldCom stock.

The Consolidated Guarantee Agreement provides, in part, that Plaintiff would

pay Defendant the difference between $800,000 and “the highest value for which

[the stock] was traded at . . . on March 9, 2002″. The agreement provides that

Defendant’s election to sell part or all of his stock “shall not change the guarantee

agreement described herein.” Thus, Plaintiff’s obligations under the Conditional

Guarantee Agreement would not change whether or not Defendant sold his stock.

There being no questions of material fact, Defendant’s motion for summary

judgment on this issue will be granted.

Defendant urges the Court to determine that the proof of claim filed by

Defendant and his wife for $746,364.38 is fully secured by the deed to secure debt

on the Perry Place. See 11 U.S.C.A. § 506(a)(West 1993).

The Court notes that this issue should be addressed through the claims

objection process. Under section 502(a) of the Bankruptcy Code26 Defendant’s proof

of claim is deemed allowed unless an objection to the proof of claim is filed.27 Thus,

the relief requested by Defendant is not properly before the Court and must therefore

16

be denied. Accordingly, Defendant’s motion for summary judgment will be denied

on this issue.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 8th day of August 2003.

____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

ETHEL CORLEY and FREDDY CORLEY

August 1, 2001

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

ETHEL CORLEY and :

FREDDY CORLEY, ::

Debtors : Case No. 00-51297 RFH

::

CAMILLE HOPE, CHAPTER 13 :

TRUSTEE, ::

Movant :::

vs. :::

BANK OF UPSON, ::

Respondent :

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Movant: LAURA D. WILSON

Office of the Chapter 13 Trustee

Post Office Box 954

Macon, Georgia 31202

For Respondent: KARL E. OSMUS

544 Mulberry Street, Suite 800

Macon, Georgia 31201

1 The record does not reflect the circumstances under

which this second obligation was created.

2

MEMORANDUM OPINION

Camille Hope, Chapter 13 Trustee, Movant, filed on

January 29, 2001, a Motion to Determine Secured Status and

Objection to Claim. The Bank of Upson, Respondent, filed a

response on March 1, 2001. A hearing was held on April 5,

2001. The Court, having considered the stipulation of facts

and the arguments of counsel, now publishes this memorandum

opinion.

Ethel Corley, Debtor, purchased a 1998 Chevrolet

S-10 truck on October 23, 1998. Respondent financed the

purchase. Debtor signed a promissory note and a security

agreement, which were assigned by the dealer to Respondent.

The promissory note provided that Debtor would make sixty

monthly payments of $355.02. Respondent properly perfected

its security interest on the certificate of title.

Debtor later signed a second promissory note and

gave Respondent a second security interest in her truck.1

Debtor subsequently satisfied this second obligation.

Respondent’s employee, a bank teller, mistakenly and

inadvertently released the certificate of title on the truck

to Debtor.

Debtor did not send the certificate of title to the

2 See O.C.G.A. § 40-3-56(a)(1), (b) (1997).

3

state revenue commissioner. The commissioner, therefore, did

not release Respondent’s security interest on the certificate

of title.2 Debtor continued to make the monthly payments as

required by the promissory note dated October 23, 1998.

Debtor and her husband filed a joint petition under

Chapter 13 of the Bankruptcy Code on April 10, 2000. The

Court entered an order confirming their Chapter 13 plan on

August 31, 2000.

Respondent discovered that the title to Debtor’s

truck had been released when Respondent prepared its proof of

claim. Respondent, in its proof of claim, asserts that its

claim for $13,164.96 is secured by Defendant’s truck. Movant

contends that Respondent’s security interest has been released

and that Respondent’s claim is unsecured.

A trustee in bankruptcy, under the “strong-arm”

provisions of the Bankruptcy Code, has the rights and powers

of a hypothetical judicial lien creditor under applicable

state law. A trustee may avoid an “unperfected security

interest and relegate the debt to the status of a general

unsecured claim.” 5 Collier on Bankruptcy ¶ 544.05 (15th ed.

rev. 2001); see 11 U.S.C.A. § 544(a)(1) (West 1993).

“The secured status of a creditor is determined as

of the date of the filing of the bankruptcy petition.”

3 Ch. 13 Case No. 99-42516 JTL, Adv. No. 00-4078 (Bankr.

M.D. Ga. May 21, 2001) (Laney, J.)

4

Perkins v. Gilbert (In re Perkins), 169 B.R. 455, 458 (Bankr.

M.D. Ga. 1994). Thus, Movant may avoid Respondent’s security

interest unless the security interest was properly perfected

on the date that Debtor filed for bankruptcy relief.

In Smith v. American Honda Finance Corp. (In re

Marshall),3 the creditor perfected its security interest on

the certificate of title to the debtor’s car. The creditor

subsequently, through an error, executed a lien release on the

certificate of title and mailed the title to the debtor. The

underlying debt had not been satisfied. The debtor did not

forward the title to the Alabama Department of Revenue. The

Department of Revenue, therefore, did not issue a new

certificate of title indicating that the creditor’s security

interest had been released.

This Court held that the creditor’s security

interest was still perfected and stated, in part, as follows:

Section 32-8-64(a) of the Alabama Code

governs the issue of the release of a security

interest in an automobile. After conducting a

plain reading of § 32-8-64(a), the court finds

that three steps must be completed in order for

a lien release to be effective: (1) execution

of a release on the certificate; (2) delivery

of the certificate to the next lienholder or

owner; and (3) delivery of the certificate to

the DOR by the next lienholder or owner.

Moreover, given the beginning language of the

statute, “[u]pon satisfaction of the security

interest . . .,” the court finds that the

4 Ala. Code § 32-8-64(a) (1975).

5

satisfaction of the lien is a prerequisite for

a release to be valid. See General Electric

Capital Corp. v. Spring Grove Transport, Inc.

(In re Spring Grove Transport, Inc., 202 B.R.

862, 866 (Bankr. E.D. Va. 1996) (distinguishing

Ala. Code § 32-8-64(a) from Virginia law).

Therefore, because the lien was not satisfied

and the final step of delivery to the DOR was

not completed, the court finds that Defendant

did not effectively release its security

interest in the Honda.

This holding is consistent with the

reasoning of the only other case found

interpreting this statute which is cited by the

parties. See Southtrust Bank, N.A. v. Toffel

(In re Blackerby), 53 B.R. 649 (Bankr. N.D. Ga.

1985). Decided on facts different from the

present case, the court in In re Blackerby held

that a bank did not effectively release its

security interest simply by mistakenly noting a

release on the certificate of title. Id. at

653. The court reasoned that its holding was

consistent with “the purposes underlying the

Alabama Uniform Certificate of Title and

Antitheft Act one of which is to provide a

means for interested parties to ascertain

essential information concerning title to

vehicles.” Id. at 654. To this end, the court

further explained that even though the face of

the title reflected a release, the DOR’s

records reflected the existence of a valid

lien. Likewise in the present case, the DOR’s

records reflected, at all times, a valid lien.

Therefore, the court finds that AHFC did not

effectuate a release of its security interest.

Alabama Code Section 32-8-64(a)4 provides, in part,

as follows:

§ 32-8-64. Release of security interest

(a) Upon the satisfaction of a security

interest in a vehicle for which the certificate

of title is in the possession of the

5 O.C.G.A. § 40-3-56 (1997).

6

lienholder, he shall, within 10 days after

demand execute a release of his security

interest, in the space provided therefor on the

certificate or as the department prescribes,

and mail or deliver the certificate and release

to the next lienholder named therein, or, if

none, to the owner . . . . The owner . . .

shall promptly cause the certificate and

release to be mailed or delivered to the

department, which shall release the

lienholder’s rights on the certificate or issue

a new certificate.

Ala. Code § 32-8-64(a) (1975).

The Court notes that Alabama Code Section 32-8-64(a)

is very similar to Georgia Code Section 40-3-56.5

Georgia Code Section 40-3-56 provides, in part, as

follows:

40-3-56. Satisfaction of security interest and

liens.

(a)(1) If any security interest or lien

listed on a certificate of title is satisfied,

the holder thereof shall, within ten days after

demand, execute a release in the form the

commissioner prescribes and mail or deliver the

release to the owner, . . .

. . . .

(b) The owner may then forward the

certificate of title, the release, the properly

executed title application, and title

application fee to the commissioner or the

commissioner’s duly authorized county tag

agent, and the commissioner or authorized

county tag agent shall release the security

interest or lien on the certificate or issue a

new certificate and mail or deliver the

certificate to the owner.

7

O.C.G.A. § 40-3-56(a)(1), (b) (1997).

Turning to the case at bar, Respondent mistakenly

and inadvertently released the certificate of title on the

truck to Debtor. Debtor did not forward the title to the

state revenue commissioner to have Respondent’s security

interest released. Debtor’s underlying obligation to

Respondent has not been satisfied. The Court can only

conclude that Respondent’s security interest remains

perfected. The Court is persuaded that Movant cannot avoid

Respondent’s security interest under section 544(a)(1). See

Gover v. Home and City Savings Bank, 574 So.2d 306 (Fla. Dist.

Ct. App. 1991) (“We join the unanimity of other jurisdictions

and hold that cancellation or renunciation of an instrument [a

purchase money mortgage] is ineffective if it is unintentional

or procured by mistake”).

An order in accordance with this memorandum opinion

will be entered this date.

DATED the 1st day of August, 2001.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

CHARLEY’S AUTOMOTIVE, INC

May 8, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

CHARLEY’S AUTOMOTIVE, INC., ::

Debtor : Case No. 02-50855 RFH

::

J. COLEMAN TIDWELL, TRUSTEE, ::

Plaintiff :::

vs. :::

FIRST COMMUNITY BANK OF :

GEORGIA, ::

Adversary Proceeding

Defendant : No. 02-5155

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff William M. Flatau

355 Cotton Avenue

Macon, Georgia 31201

For Defendant Rhonda M. Jones

843 Poplar Street

Macon, Georgia 31201

2

MEMORANDUM OPINION

First Community Bank of Georgia, Defendant, filed a motion for

summary judgment on February 6, 2003. J. Coleman Tidwell, Trustee, Plaintiff, filed

a motion for summary judgment on February 7, 2003. The Court, having considered

the motions, the responses, the record, and the arguments of counsel, now publishes

this memorandum opinion.

The undisputed material facts show that Charley’s Auto Parts &

Services, Inc. owned a 1988 Ford F450 wrecker, a 1999 International 4700 wrecker,

and a 1992 Mazda pickup. Charley’s Automotive, Inc., Debtor, purchased the

wreckers and the pickup on July 3, 2000. Defendant financed the purchase.

Charley’s Auto Parts signed bills of sale dated July 3, 2000, on the wreckers in favor

of Debtor. Charley’s Auto Parts also signed as “Seller” on the reverse side of the

certificates of title. The blocks for the buyer’s name, signature, and address are

blank. No lienholder is listed on the certificates of title. The certificates of title were

delivered to Defendant. Defendant did not send the certificates of title to the state

revenue commissioner or county tag agent. Defendant’s security interest was never

recorded on the certificates of title. There was no agreement between the seller,

Charley’s Auto Parts, and the buyer, Debtor, that the seller would retain any interest

in the wreckers. Debtor was not in the business of selling vehicles to the public.

Debtor had possession of the wreckers after July 3, 2000, and used the wreckers in

1 Defendant’s Response to Plaintiff’s Motion for Summary Judgment, p. 1

(filed Feb. 25, 2003).

3

its business. Debtor paid the ad valorem taxes on the wreckers and claimed

depreciation on its income tax returns.

Defendant also financed Debtor’s purchase of the inventory and

equipment of Charley’s Auto Parts. Debtor signed a UCC-1 financing statement in

favor of Defendant. The financing statement lists certain collateral, including the

“wrecker fleet.” The financing statement was recorded on July 5, 2000.

Defendant contends that it “renewed” Debtor’s loan on December 11,

2001. Debtor signed a security agreement dated December 11, 2001, granting

Defendant a security interest in certain collateral, including the wreckers.

Debtor filed a petition for relief under Chapter 7 of the Bankruptcy

Code on February 26, 2002. Defendant had possession of the wreckers’ certificates

of title. Defendant’s security interest was never recorded on the certificates of title.

Plaintiff filed a complaint on September 23, 2002, to avoid Defendant’s security

interest in the wreckers and the pickup. Defendant concedes that it has no interest in

the 1992 Mazda pickup.1 Plaintiff has sold the wreckers and is holding the proceeds

until further order of this Court.

2 11 U.S.C.A. § 544(a)(1) (West 1993).

4

Defendant has liquidated its collateral. Defendant contends that

Debtor’s remaining obligation is $8,975.15. Defendant contends that this obligation

should be satisfied with a portion of the proceeds from Plaintiff’s sale of the

wreckers.

Plaintiff seeks to avoid Defendant’s security interest in the wreckers

under section 544(a)(1) of the Bankruptcy Code.2 This section provides:

§ 544. Trustee as lien creditor and as success to

certain creditors and purchasers

(a) The trustee shall have, as of the commencement of

the case, and without regard to any knowledge of the

trustee or of any creditor, the rights and powers of, or

may avoid any transfer of property of the debtor or any

obligation incurred by the debtor that is voidable by–

(1) a creditor that extends credit to the debtor at

the time of the commencement of the case, and

that obtains, at such time and with respect to such

credit, a judicial lien on all property on which a

creditor on a simple contract could have obtained

such a judicial lien, whether or not such a creditor

exists;

11 U.S.C.A. § 544(a)(1) (West 1993).

A trustee in bankruptcy, under the “strong-arm” provisions of the

Bankruptcy Code, has the rights and powers of a hypothetical judicial lien creditor

3 Compare In re Chappell, 224 B.R. 507 (Bankr. M.D. Ga. 1998) (Walker, J.)

(security interest in certain older vehicles may be perfected by filing a financing

statement or under certificate of title act) (decided under former O.C.G.A. § 11-9-

302(3)(b)).

5

under applicable state law. A trustee may avoid an unperfected security interest and

relegate the debt to the status of a general unsecured claim. 5 Collier on Bankruptcy

¶ 544.05 (15th ed. rev. 2003); see 11 U.S.C.A. § 544(a)(1) (West 1993).

“The secured status of a creditor is determined as of the date of the

filing of the bankruptcy petition.” Perkins v. Gilbert (In re Perkins), 169 B.R. 455,

458 (Bankr. M.D. Ga. 1994). Thus, Plaintiff may avoid Defendant’s security interest

in the wreckers unless the security interest was properly perfected on the date that

Debtor filed for bankruptcy relief.

“[T]he only way to perfect a security interest in any automobile since

the enactment of the Uniform Commercial Code is by filing under the Motor Vehicle

Certificate of Title Act. . . . A failure to perfect a security interest in a motor vehicle

pursuant to the certificate of title act does not nullify the security interest, although

the unsecured party may lose priority where the rights of third parties are

concerned.” Freeman v. Bentley, 205 Ga. App. 409, 422 S.E.2d 435, 436 (1992).

See also SunTrust Bank of Atlanta v. Atlanta Classic Cars, Inc., 249 Ga. App. 726,

549 S.E.2d 523 (2001).3

6

The filing of a financing statement is not necessary or effective to

perfect a security interest in a vehicle which is subject to the certificate of title act.

O.C.G.A. § 11-9-311(a)(2) (2002). See also former O.C.G.A. § 11-9-302(3)(b)

(current version at § 11-9-311(a)(2) (2002) (financing statement not effective to

perfect security interest in vehicle required to have certificate of title).

Debtor’s wreckers were required to have certificates of title. O.C.G.A.

§ § 40-3-4, -20 (2001).

The undisputed facts show that Defendant’s security interest was not

perfected under the certificate of title act. The Court is persuaded that Plaintiff may

avoid Defendant’s security interest under section 544(a)(1).

Defendant argues that the wreckers were not property of the

bankruptcy estate because Debtor’s name was never registered on the certificates of

title. It is undisputed that Debtor purchased, took possession, and used the wreckers

in its business. Debtor received bills of sale and paid ad valorem taxes on the

wreckers.

A transfer of ownership from the seller to the buyer of a motor vehicle

is effective despite the fact that the certificate of title registration requirements have

not been complied with. State v. Banks, 215 Ga. App. 828, 452 S.E.2d 533 (1994);

O.C.G.A. 40-3-32(d) (2001).

4 139 Ga. App. 471, 228 S.E.2d 607 (1976).

7

Property of the estate includes “all legal or equitable interests of the

debtor in property as of the commencement of the case.” 11 U.S.C.A. § 541(a)(1)

(West 1993).

The Court is persuaded that Debtor was the owner of the wreckers and

that the wreckers became property of the bankruptcy estate.

Next, Defendant argues that it held a purchase money security interest

in the wreckers. Defendant argues that a purchase money security interest has

priority over subsequent lienholders. Defendant relies on O.C.G.A. § 11-9-324(a)

(2002). That code section, however, states that “a perfected purchase money

security interest in goods . . . has priority over a conflicting security interest in the

same goods . . . .” Defendant’s security interest was never perfected as required by

the certificate of title act and thus this section does not apply.

Finally, Defendant argues that a financing statement serves the same

purpose as a certificate of title. Defendant filed a financing statement that lists as

collateral the “wreck fleet.” Defendant argues that the financing statement put

subsequent lienholders on notice of Defendant’s security interest.

Defendant relies upon Hopkins v. Kemp Motor Sales, Inc.,4 in which

the Georgia Court of Appeals stated, in part:

8

Although the holder of a security interest may fail to

comply with the provisions of the Motor Vehicle

Certificate of Title Act relating to the perfection of a

security interest, “[i]t is well settled under the recording

statutes that actual notice of the prior lien to one who

subsequently purchases or acquires a security interest is

sufficient to preserve the priority of the lien, or of title.”

Franklin Finance Co. v. Strother Ford, Inc., 110 Ga.

App. 365, 368(1), 138 S.E.2d 679, 681 (Emphasis

supplied.)

228 S.E.2d at 609.

Section 544(a)(1) provides that Plaintiff has the rights and powers of a

judicial lien creditor “without regard to any knowledge of the trustee or of any

creditor . . . .” “[W]here the holder of a security interest has not taken the essential

steps to perfect that security interest or where the recording is defective, the trustee

does not have constructive notice.” 5 Collier on Bankruptcy ¶ 544.03 (15th ed. rev.

2003).

Under section 544(a)(1) of the Bankruptcy Code, Plaintiff statutorily

has the rights and powers of a judicial lien creditor with no notice. The financing

statement filed by Defendant was not effective to perfect Defendant’s security

interest in the wreckers. Defendant failed to perfect its security interest as required

by the Motor Vehicle Certificate of Title Act. Thus, Plaintiff does not have

constructive notice of Defendant’s security interest. The Court is persuaded that

Plaintiff may avoid Defendant’s unperfected security interest in the wreckers.

9

An order in accordance with this memorandum opinion will be entered

this date.

DATED the 8th day of May, 2003.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

CHAPMAN CONSTRUCTION COMPANY

April 28, 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

MARCUS D. CHAPMAN, dba :

CHAPMAN CONSTRUCTION COMPANY, :

and JODI U. CHAPMAN, :

:

Debtors : Case No. 99-50746 RFH

:

:

MARCUS D. CHAPMAN, dba :

CHAPMAN CONSTRUCTION COMPANY, :

and JODI U. CHAPMAN, :

:

Movants :

:

:

vs. :

:

:

FIRST NATIONAL BANK OF :

BALDWIN COUNTY, :

:

Respondent :

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

2

COUNSEL:

For Movants: RALPH GOLDBERG

Suite 430

315 W. Ponce de Leon Avenue

Decatur, Georgia 30030

For Respondent: MOLLY L. MCCOLLUM

560 First Street

Macon, Georgia 31201

1 The dragnet clause provides that any present or future

agreement securing any other debt also will secure payment of

this loan. The dragnet clause also provides that this

security agreement secures this loan and any other present or

future debt.

3

MEMORANDUM OPINION

Marcus D. Chapman, dba Chapman Construction Company,

and Jodi U. Chapman, Movants, filed on January 24, 2000 a

Motion to Avoid Lien. First National Bank of Baldwin County,

Respondent, filed a response on February 1, 2000. A hearing

was held on March 9, 2000. The Court, having considered the

evidence presented and the arguments of counsel, now publishes

this memorandum opinion.

Movants obtained a loan from Respondent in the

principal amount of $3,460. Movants signed a promissory note

and security agreement dated March 4, 1996. The security

agreement contains a dragnet clause.1 Movants used the

proceeds to purchase a tractor. Respondent filed a UCC-1

financing statement on the tractor. Movants have paid off

this loan. Respondent has not released its lien because the

tractor is collateral for Movants’ other obligations under the

dragnet clause.

Movants obtained a second loan from Respondent in

the principal amount of $40,098. Movants signed a promissory

note and security agreement dated February 12, 1997. The

2 Movants do not contest the validity of Respondent’s

lien on the trailer.

4

security agreement contains a dragnet clause. Movants used

the proceeds to purchase a truck, a loader, and a twenty-foot

flatbed trailer. Respondent filed a lien on the title to the

truck. Movants gave Respondent a lien on a two-acre parcel of

realty. Respondent filed a UCC-1 financing statement on the

loader and the trailer. The State of Georgia issued a

Certificate of Title dated March 14, 1997, listing Mr. Chapman

as the owner of the trailer. Respondent is not listed as a

lienholder on the title. Respondent was not aware that a

title was issued on the trailer.2 Movants owed $32,971.65 on

this obligation when they filed for bankruptcy relief. This

obligation was never refinanced.

Movants obtained a third loan from Respondent in the

principal amount of $15,060. Movants signed a promissory note

and security agreement dated February 25, 1997. The security

agreement contains a dragnet clause. Movants used the

5

proceeds to purchase a backhoe. Movants gave Respondent a

lien on the backhoe. Movants have paid off this loan.

Mr. Chapman used the tractor and the trailer when he

was self-employed in the construction business. Mr. Chapman

was last self-employed about one year ago. Mr. Chapman wants

to return to self-employment. Mr. Chapman now works for

Brooks Equipment Company as an equipment operator.

Mr. Chapman sometimes uses the tractor and the trailer at

Brooks Equipment Company. Mr. Chapman last used, at Brooks

Equipment Company, the trailer about one month ago and last

used the tractor about two months ago. Mr. Chapman uses the

tractor and the trailer almost every weekend “doing driveways

on his side jobs.” Mr. Chapman also uses the tractor for

maintaining the yard at Movants’ residence. Mrs. Chapman does

not personally use the tractor or the trailer.

Movants suffered financial problems and filed a

petition under Chapter 7 of the Bankruptcy Code on February

22, 1999. Movants, at the time of their bankruptcy filing,

owed Respondent $32,971.65 on the loan dated February 12,

1997, $1,090.39 on personal lines of credit, and $5,587.53 on

credit card obligations. Movants and Respondent agree that

the tractor and the trailer each are worth $2,000.

In the motion before the Court, Movants seek to

avoid Respondent’s security interest to the extent that

Respondent’s liens impair their exemptions in their tractor

3 11 U.S.C.A. § 522(f)(1)(B)(ii) (West Supp. 1999).

6

and trailer under section 522(f)(1)(B)(ii) of the Bankruptcy

Code.3 This section provides as follows:

§ 522. Exemptions

. . . .

(f)(1) 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–

. . . .

(B) a nonpossessory,

nonpurchase-money security

interest in any–

. . . .

(ii) implements,

professional books, or

tools, of the trade of the

debtor or the trade of a

dependent of the debtor; or

11 U.S.C.A. § 522(f)(1)(B)(ii) (West Supp. 1999).

Movants cannot avoid a purchase money security

interest under section 522(f)(1)(B)(i). Respondent contends

that its liens on the tractor and the trailer are purchase

money security interests. Movants have the burden of

demonstrating that they are entitled to avoid Respondent’s

4 956 F.2d 252 (11th Cir. 1992).

7

security interest. Carter v. W.S. Badcock Corp. (In re

Carter), 180 B.R. 321, 323 (Bankr. M.D. Ga. 1995).

“To determine whether a security interest is a

purchase-money security interest, the Court must look to the

relevant state law.” Franklin v. ITT Financial Services (In

re Franklin), 75 B.R. 268, 270 (Bankr. M.D. Ga. 1986).

The Georgia Code defines purchase money security

interest as follows:

11-9-107. Definition: “purchase money

security interest.”

A security interest is a “purchase

money security interest” to the extent

that it is:

(a) Taken or retained by the

seller of the collateral to secure

all or part of its price; or

(b) Taken by a person who by

making advances or incurring an

obligation gives value to enable the

debtor to acquire rights in or the

use of collateral if such value is in

fact so used.

O.C.G.A. § 11-9-107 (1994).

“A PMSI requires a one-to-one relationship between

the debt and the collateral.” SouthTrust Bank of Alabama,

N.A. v. Borg-Warner Acceptance Corp., 760 F.2d 1240, 1243

(11th Cir. 1985).

In Snap-On Tools, Inc. v. Freeman (In re Freeman),4

8

the Eleventh Circuit Court of Appeals stated:

A security interest in collateral is

“purchase money” to the extent that the

item secures a debt for the money required

to make the purchase. If an item of

collateral secures some other type of

debt, e.g., antecedent debt, it is not

purchase money. In re Fickey, 23 B.R.

586, 588 (Bankr. E.D. Tenn. 1982). A

purchase money security interest cannot

exceed the price of what is purchased in

the transaction wherein the security

interest is created. In re Manuel, 507

F.2d 990, 993 (5th Cir. 1975).

956 F.2d at 254-55.

The Court is persuaded that Respondent’s lien on

Movants’ trailer is a purchase money security interest.

Movants used the loan proceeds to purchase the trailer.

Movants continue to owe a balance on the loan. The loan was

never refinanced and there was no loan consolidation.

Movants’ loan was not a revolving credit account and no future

advances were made. The Court is persuaded that Movants

cannot avoid Respondent’s lien on the trailer. Compare

SouthTrust Bank of Alabama, N.A. v. Borg-Warner Acceptance

Corp., 760 F.2d 1240 (11th Cir. 1985); Goodyear Tire & Rubber

Co. v. Staley (In re Staley), 426 F. Supp. 437 (M.D. Ga.

1977); W.S. Badcock Corp. v. Banks (In re Norrell), 426 F.

Supp. 435 (M.D. Ga. 1977).

The Court is not persuaded that Respondent’s lien on

Movants’ tractor is a purchase money security interest.

Movants paid in full the loan that was used to purchase the

5 87 B.R. 738 (Bankr. M.D. Ga. 1988) (Laney, J.).

9

tractor. Respondent has not released its lien because the

tractor is collateral for Movants’ other obligations under the

dragnet clause. Respondent’s dragnet clause does not create a

purchase money security interest.

Respondent next argues that Movants’ tractor is not

a tool of the trade under the state’s exemption laws.

In South Atlantic Production Credit Ass’n v. Jones

(In re Jones),5 this Court stated:

The equipment must be exempt as a tool

of the trade under the state’s exemption

laws for the lien on it to be avoided

under 11 U.S.C. section 522(f)[(1)(B)(i)]

. . . .

. . . [The debtor] is permitted to

combine his $500.00 exemption for tools of

the trade in O.C.G.A. section 44-13-

100(a)(7) with his “wild card” exemption

in section 44-13-100(a)(6) of $5,400.

87 B.R. at 741-42.

In order to claim as exempt the tractor, Movants

must show that they are legitimately engaged in a trade which

currently and regularly uses the specific implements or tools

being exempted. The tool of the trade exemption is not

limited by the size or value of the tool. In re Jones, 87

B.R. at 741-42.

Mr. Chapman is an equipment operator. He uses the

tractor almost every weekend on his “side jobs.” These jobs

6 Respondent argues that Movants have exhausted their

“wild card” exemption on other property.

7 Fed. R. Bankr. P. 4003(b) (trustee or creditor may file

objection to claimed exemptions within 30 days after the

conclusion of meeting of creditors or the filing of any

amendment to the exemption list).

10

provide income for Mr. Chapman’s family. The Court is

persuaded that the tractor is a tool of the trade.

Finally, Respondent argues that Movants’ exemption

amount is limited to $500.6 See O.C.G.A. § 44-13-100(a)(7)

(Supp. 1999). Movants argue that they can claim $2000 as

exempt, which is the agreed upon value of the tractor. In

their bankruptcy petition, Schedule C-Property Claimed as

Exempt, Movants claimed, in part, the following property as

exempt:

DESCRIPTION SPECIFIC LAW VALUE OF CURRENT

OF PROPERTY PROVIDING EACH CLAIMED MARKET

EXEMPTION EXEMPTION VALUE OF

PROPERTY

WITHOUT

DEDUCTING

EXEMPTION

1964 Ford 600 OCGA 44-13-100(a)(6) $2,000.00 $2,000.00

tractor

Respondent’s argument is time barred because it

failed to object to Movants’ claimed exemption within thirty

days after the meeting of creditors or within thirty days

after Movants’ amended their claimed exemptions.7 Taylor v.

Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d

280 (1992) (deadline applies even though debtor has no

11

colorable basis for claimed exemption and even though

exemption is not claimed in good faith).

The Court is persuaded that Movants may avoid

Respondent’s lien on the tractor.

An order in accordance with this memorandum opinion

will be entered this date.

DATED the 28th day of April 2000.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

JOHN BENJAMIN STEWART, JR

March 31, 2005

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 7

:

JOHN BENJAMIN STEWART, JR., ::

Debtor : Case No. 04-30528 RFH

:

HOWARD E. JOHNSON, ::

Movant ::

vs. ::

WILLIAM M. FLATAU, ::

Trustee ::

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY COURT

COUNSEL:

For Movant: Francis N. Ford

108 West Marion Street

Eatonton, Georgia 31024

For Trustee: William M. Flatau

355 Cotton Avenue

Macon, Georgia 31201

Wesley J. Boyer

355 Cotton Avenue

Macon, Georgia 31201

2

MEMORANDUM OPINION

Howard E. Johnson, Movant, filed on October 4, 2004, a motion to lift the

automatic stay. Movant filed an amended motion on October 28, 2004. William M.

Flatau, Trustee, filed a response on November 3, 2004. Movant’s motion came on

for hearing on November 30, 2004. The Court, having considered the record and the

arguments of counsel, now publishes this memorandum opinion.

John Benjamin Stewart, Jr., Debtor, owned and operated a chain of finance

companies. Debtor, to finance his business, obtained unsecured loans from a number

of individuals.

Movant loaned $750,000 to Debtor. Debtor executed a promissory note in

favor of Movant. Debtor defaulted on his payments. Movant filed a complaint on

February 10, 2003, to collect on the promissory note. The complaint was filed in the

Superior Court of Greene County, Georgia (the “state court”).

On February 19, 2003, Debtor transferred three parcels of real property to the

Janice S. Stewart Trust (the “Trust”). Janice S. Stewart was Debtor’s wife. The cotrustees

were Debtor’s sons, John B. Stewart, III and William J. Stewart. Movant

and Trustee both contend that the purpose of the Trust was to prevent Debtor’s

creditors from reaching the property.

The state court, on October 30, 2003, granted Movant’s motion for summary

judgment. Judgment for $750,000 was entered in favor of Movant and against

1 Stewart v. Johnson, 269 Ga. App. 698, 605 S.E. 2d. 111 (2004). The Court notes

that this decision was published after Debtor filed for bankruptcy relief.

2 Adv. No. 04-3036; Adv. No. 04-3021.

3

Debtor on November 13, 2003.

Debtor filed on November 26, 2003, a notice of appeal to the Court of

Appeals of Georgia. The court of appeals affirmed the state court’s grant of

summary judgment on September 23, 2004.1

Movant, with leave of court, filed an amendment to his state court complaint

on January 3, 2004. The amendment adds Debtor’s sons as defendants. The

amendment seeks to set aside as fraudulent the transfers of Debtor’s property to the

Trust. Movant has filed a motion to amend his state court complaint to add Debtor’s

wife as a defendant.

Debtor filed on March 24, 2004, a petition under Chapter 11 of the

Bankruptcy Code. The Chapter 11 case was converted to a Chapter 7 case on April

14, 2004. Trustee is the Chapter 7 trustee of Debtor’s bankruptcy estate. Debtor

died on May 13, 2004.

Trustee has filed adversary proceedings against the Trust and against

Debtor’s sons.2 Trustee seeks to set aside as fraudulent Debtor’s transfers of

property to the Trust. These are the same transfers that Movant seeks to set aside as

fraudulent in the state court action. Movant concedes that the actions to set aside the

4

transfers are property of the bankruptcy estate. 11 U.S.C.A. § 541(a) (West 2004).

Movant has filed a third motion to amend his state court complaint. The

amendment asserts a cause of action for civil damages under the Georgia RICO

(Racketeer Influenced and Corrupt Organizations) Act. O.C.G.A. § 16-14-1, -6

(2003). The amendment contends that Debtor, his wife, and his sons, acting

separately and together, committed two or more substantial steps towards the

commission of two or more crimes chargeable by indictment. The amendment also

contends that the defendants conspired to acquire or maintain an interest in property

through a pattern of racketeering. Movant seeks treble damages, punitive damages,

and attorney’s fees.

Movant concedes that his RICO action against Debtor is stayed by the

automatic stay. Movant contends that his RICO action against Debtor’s wife and

sons is not subject to the automatic stay. Trustee contends that the RICO action

against Debtor’s wife and sons is property of the bankruptcy estate and that he is the

only party who can pursue the action. Trustee has not filed a RICO action against

Debtor’s wife or sons.

Property of the Estate

Property of the estate includes causes of action that the debtor could have

asserted as of the commencement of the case. The bankruptcy trustee has the

exclusive right to assert any cause of action held by the estate. The trustee cannot

assert a cause of action that belongs solely to the estate’s creditors. Honigman v.

3 290 B.R. 171 (Bankr. M.D. Ga. 2002) (Walker, Jr.), question certified, 391 F.3d

1315 (11th Cir. 2004).

5

Comerica Bank (In re Van Dresser Corp.), 128 F.3d 945, 947 (6th Cir. 1997);

Schertz-Cibolo-Universal City, Independent School District v. Wright, (In re

Educators Group Health Trust), 25 F.3d 1281, 1283-84 (5th Cir. 1994).

“Whether a particular state cause of action belongs to the estate depends on

whether under applicable state law the debtor could have raised the claim as of the

commencement of the case.” In re Educators Group Health Trust, 25 F.3d at 1284.

See also In re Van Dresser Corp., 128 F.3d at 947; Sender v.Simon, 84 F.3d 1299,

1305 (10th Cir. 1996).

Trustee relies upon Edwards Wood Products, Inc. v. Thompson, (In re Icarus

Holdings, LLC).3 In that case Thompson was the former president, manager, and

principal member of the Chapter 11 corporate debtor-in-possession. Thompson

allegedly engaged in prepetition financial irregularities that adversely impacted the

debtor. Certain creditors of the debtor filed actions in state court contending that

Thompson was the alter ego of the debtor. The creditors contended that Thompson

was personally liable for the debtor’s obligations. The debtor contended that the

alter ego claims against Thompson were property of the estate. Judge Walker held

that an action to pierce the corporate veil under an alter ego theory against the former

principal of a corporate debtor was property of the estate. Judge Walker held that,

4 The rights, powers, and duties of a debtor-in-possession are essentially the same

as those of a trustee. 11 U.S.C.A. § 1107 (West 2004).

5 149 B.R. 96 (Bankr. N.D. Tex. 1992).

6

under Georgia law, the trustee or debtor-in-possession4 had the exclusive right to

assert the alter ego claim. The creditors filed an appeal to the United States Court of

Appeals for the Eleventh Circuit. The circuit court noted that no Georgia law

directly addresses whether a trustee or debtor-in-possession can bring an alter ego

action against the debtor corporation’s former principal. The circuit court has

certified the question to the Supreme Court of Georgia.

Trustee’s reliance on Thompson is not persuasive because Movant’s RICO

action is not based on an alter ego theory.

The Court is persuaded by Pate v. Hunt, (In re Hunt).5 In that case the

debtors and the defendants were alleged to have disposed of $100 million of

prepetition assets. The bankruptcy court appointed Independent Trustees who filed

an adversary proceeding against the defendants seeking to recover the prepetition

assets as preferential transfers or fraudulent conveyances. The Independent Trustees

also sought civil damages under federal RICO. 18 U.S.C.A. § 1964. The defendants

argued that the Independent Trustees lacked standing to pursue the RICO claims

because the debtors had participated in the alleged fraud. The bankruptcy court

agreed and stated, in part:

7

Under § 541(a)(1), then, the Independent Trustees may

pursue their RICO claims against the defendants—the

Hunts’ alleged co-conspirators—only to the extent that

the Hunts themselves could have done so at the time they

filed their bankruptcy petitions.

A co-conspirator in a fraudulent act, such as the RICO

bankruptcy fraud alleged here, “cannot also be a victim

entitled to recover damages, for he cannot have relied on

the truth of the fraudulent representations, and such

reliance is an essential element in a case of fraud.”

149 B.R. at 101.

The bankruptcy court also stated:

The Independent Trustees’ First Amended Complaint

and RICO Case Statement specifically allege that the

debtors participated in the acts giving rise to the RICO

claims. Since they were conspirators in the purported

fraud prohibited by RICO, the debtors, on the date of

their bankruptcy filings, would have been unable to sue

the present RICO defendants (their co-conspirators) for

the fraud in question.

The foregoing analysis does not preclude a trustee’s

maintenance of a RICO action against third parties on

behalf of an estate where the debtor, prior to filing his

bankruptcy petition, could have maintained the same

action—where, for example, the debtor did not

participate in the fraudulent acts.

149 B.R. at 102.

Turning to the case at bar, Debtor, his wife, and his sons are alleged to have

participated in a racketeering activity. Debtor, an alleged racketeer, could not assert

a RICO action against his co-racketeers. Trustee stands in the shoes of Debtor and is

subject to the same defenses and legal infirmities that could have been asserted

8

against Debtor. Sender v. Simon, 84 F.3d at 1305; Paul v. Monts, 906 F. 2d 1468,

1473 (10th Cir. 1990); Boyajian v. DeFusco, (In re Giorgio), 862 F. 2d 933, 936 (1st.

Cir. 1988).

The Court is persuaded that Trustee cannot assert a RICO action against

Debtor’s wife and sons. Thus, the RICO action is not property of the bankruptcy

estate.

The Automatic Stay

The automatic stay operates as a stay, with certain exceptions, of the

commencement or continuation of an action or proceeding against the debtor that was

or could have been commenced before the bankruptcy case was filed. 11 U.S.C.A.

§ 362(a)(1) (West 2004).

The automatic stay also operates as a stay of an action against property of the

estate. 11 U.S.C.A. § 362(a)(2), (3), (4), (5) (West 2004).

“Extension of an automatic stay to a debtor’s co-defendants is only proper in

unusual circumstances.” Sav-A-Trip, Inc. v. Belfort, 164 F. 3d 1137, 1139 (8th Cir.

1999). See Arnold v. Garlock, Inc., 278 F. 3d 426, 436 (5th Cir. 2001); A.H. Robins

Co. v. Piccinin, (In re A.H. Robins Co.) 788 F. 2d 994, 999 (4th Cir.) cert denied,

479 U.S. 876, 107 S. Ct. 251, 93 L.E.d. 2d 177 (1986).

“[T]he automatic stay is not available to non-bankrupt co-defendants of a

debtor even if they are in a similar legal or factual nexus with the debtor.” Maritime

Electric Co. v. United Jersey Bank, 959 F. 2d 1194, 1205 (3rd. Cir. 1991). See

9

Croyden Associates v. Alleco, Inc., 969 F. 2d 675, 677 (8th Cir. 1992) cert denied,

507 U.S. 908, 113 S. Ct. 1251, 122 L. Ed. 2d 650 (1993). Lynch v. Johns-Manville

Sales Corp., 710 F. 2d 1194, 1196-97 (6th Cir. 1983).

“The stay, however, protects only the debtor, unless the debtor and some third

party have such a similarity of interests that failure to protect the third party will

mean that the assets of the debtor itself will fall into jeopardy.” Fox Valley

Construction Workers Fringe Benefit Funds v. Pride of the Fox Masonry and Expert

Restorations, 140 F. 3d 661, 666 (7th Cir. 1998).

“[A] bankruptcy court may invoke § 362 to stay proceedings against

nonbankrupt co-defendants where ‘there is such identity between the debtor and the

third-party defendant that the debtor may be said to be the real party defendant and

that a judgment against the third-party defendant will in effect be a judgment against

or finding against the debtor.’” Reliant Energy Services, Inc. v. Enron Canada Corp.,

349 F. 3d 816, 825 (5th Cir. 2003).

“An illustration of such a situation would be a suit against a third-party who is

entitled to absolute indemnity by the debtor on account of any judgment that might

result against them in the case. To refuse application of the statutory stay in that case

would defeat the very purpose and intent of the statute.” A. H. Robins Co., 788 F.2d

at 999.

The automatic stay does not necessarily extend to nondebtor codefendants

who may have joint and several liability. Paul v. Joseph, 212 Ga. App. 122, 441 S.E.

10

2d 762, 763 (1994), cert. denied.

The Court is not persuaded that the bankruptcy estate and Debtor’s wife and

sons have such a similarity of interests or identity that a judgment under state RICO

against the wife and sons would in effect be a judgment against the estate. Trustee

does not contend that Debtor’s wife and sons would be entitled to indemnity by the

estate. The Court is persuaded that Debtor’s wife and sons are not protected by the

automatic stay.

Trustee questions the merits of Movant’s RICO action against Debtor’s wife

and sons. The Court is persuaded that the merits of the action should be ruled upon

by the state court.

An order in accordance with this memorandum opinion shall be entered this

date.

DATED this 31st day of March, 2005.

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

TERRY CARL PERRY and MARILYN MILLER PERRY

September 3, 2004

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 13

:

TERRY CARL PERRY and :

MARILYN MILLER PERRY, :

:

Debtors : Case No. 03-31648 RFH

:

TERRY CARL PERRY, :

:

Plaintiff :

:

vs. :

:

BECKY JONES and RANDY JONES, :

:

Defendants : Adversary Proceeding

: No. 04-3030

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: Mr. W. Ross McConnell

191 East Broad Street, #218

Athens, Georgia 30601

For Defendants: Mr. Thomas M. Strickland

Post Office Box 1149

Athens, Georgia 30603

MEMORANDUM OPINION

2

Becky Jones and Randy Jones, Defendants, filed a motion to dismiss on August

19, 2004. Terry Carl Perry, Plaintiff, filed a response on August 30, 2004. The Court,

having considered the record and the arguments of counsel, now publishes this

memorandum opinion.

The Court, in considering the motion to dismiss, will accept as true the well

plead facts in Plaintiff’s complaint. Defendants bear a “very high burden” of showing

that Plaintiff cannot conceivably prove any set of facts that would entitle him to relief.

Dudley v. Citicorp Mortgage, Inc., (In re Dudley), Ch. 7 Case No. 02-51225 RFH, Adv.

No. 02-5087 (Bankr. M.D. Ga., Jan. 10, 2003).

Defendants hired Plaintiff to construct an addition to their home. Plaintiff

subcontracted with Puckett Foundations to provide materials and labor. Plaintiff

received certain payments from Defendants. Plaintiff failed to pay his subcontractor,

Puckett Foundations.

Plaintiff and his wife filed a joint petition under Chapter 13 of the Bankruptcy

Code on September 17, 2003. Defendants and Puckett Foundations knew that Plaintiff

had filed for bankruptcy relief. Defendants, on September 19, 2003, filed with the

Magistrate Court of Madison County, Georgia, an Application For Warrant Issuance

Hearing. The application alleges, in part, that Plaintiff had failed to pay Puckett

Foundations. Puckett Foundations filed on October 3, 2003, a materialman’s lien

against Defendants’ property for the purpose of collecting the debt owed by Plaintiff.

1 Plaintiff has filed a motion for leave to amend his complaint. The Court has

considered the amendment in deciding the issues presented in this motion to dismiss.

2 The Court has previously dismissed Puckett Foundations, Judge Rice, and

Robert Lavender as defendants in this adversary proceeding.

3

The Honorable Harry F. Rice, Chief Magistrate of the Magistrate Court of

Madison County, conducted a hearing on October 16, 2003, on Defendants’ application

for a warrant. Becky Jones testified that no criminal charges would be brought if

Plaintiff paid the debt owed to Puckett Foundations and if the materialman’s lien was

removed. About one week later, Becky Jones told Plaintiff that Judge Rice would find

probable cause to issue a warrant for Plaintiff’s arrest unless he paid the debt to Puckett

Foundations. Plaintiff filed a Plea in Stay with the magistrate court on October 23,

2003. Plaintiff’s counsel told Judge Rice that Plaintiff’s debt to Puckett Foundations

was dischargeable in bankruptcy and that “the case lacked criminal culpability.”

Sometime later, Plaintiff learned that a criminal warrant for his arrest had been issued.

Plaintiff surrendered to the Sheriff of Madison County on December 1, 2003. Plaintiff

was released on bond.

Plaintiff filed this adversary proceeding on June 1, 2004.1 Plaintiff contends

that Defendants, Puckett Foundations, Judge Rice, and the District Attorney (Robert

Lavender), conspired to willfully violate the automatic stay of the Bankruptcy Code.

11 U.S.C.A. § 362. Plaintiff contends that the criminal proceedings are being used to

collect a civil debt. Plaintiff seeks sanctions, injunctive relief, and damages.

Defendants filed a motion to be dismissed as defendants.2

3 673 F. 2d 1250 (11th Cir. 1982).

4

The automatic stay does not stay the commencement or continuation of a

criminal action or proceeding against a debtor in bankruptcy. 11 U.S.C.A. § 362 (b)(1)

(West 1993).

“[C]riminal cases commenced solely to collect a debt are unaffected by the

automatic stay.” Smith v. Goode, (In re Smith) 301 B.R. 96, 100 (Bankr. M.D. Ga.

2003) (Walker, J.).

Under Georgia law, a contractor commits a felony if he, with intent to defraud,

fails to use the proceeds of any payment made to him to pay subcontractors for

improvements made to real property. The failure to pay subcontractors is prima-facie

evidence of intent to defraud. O.C.G.A. § 16-8-15 (2003).

Plaintiff admits that he received payments from Defendants. Plaintiff admits

that he failed to pay his subcontractor, Puckett Foundations. Thus, Plaintiff admits the

elements of a prima-facie case under O.C.G.A. § 16-8-15. The automatic stay does not

stay the commencement or continuation of a criminal action.

The Court is not persuaded that Defendants violated the automatic stay. 11

U.S.C.A. § 362(h) (individual injured by willful violation of stay entitled to recover

damages). The Court is persuaded that Plaintiff’s request for sanctions and damages

must be denied.

Plaintiff also seeks injunctive relief. In Barnette v. Evans,3 the Eleventh Circuit

4 “‘[C]ompetent evidence, tending to show that the prosecution was instituted

from improper motives . . . is always admissible’ in a criminal case.” In re Smith,

301 B.R. at 102 (quoting Duncan v. State, 58 Ga. App. 551, 552, 199 S.E. 319, 320

(1938) (emphasis added)).

5

Court of Appeals “established a two-prong test for determining whether the court

should enjoin a state criminal prosecution of a debtor on the ground that the

prosecution will frustrate the bankruptcy judge’s jurisdiction to discharge debt. First, a

debtor must establish that the criminal prosecution is brought in bad faith. Second, a

debtor must establish that it would be no defense to the criminal prosecution that the

prosecution was brought for the purpose of collecting a debt.” Sheppard v. Piggly

Wiggly, (In re Sheppard), 2000 WL 33743081 (Bankr. M. D. Ga. 2000) (Laney, J.).

See also Anderson v. Greenway, (In re Anderson), Ch. 13, Case No. 94-30637

(Bankr. M.D. Ga. July 31, 1996) (Hershner, J.).

Plaintiff has not been tried, convicted, or ordered to make restitution. Plaintiff

has not received a discharge in bankruptcy. Plaintiff has not shown that there is a great

and immediate threat of injury or that an injunction is necessary to preserve a federally

protected right. In re Smith, 301 B.R. 101-02.

Plaintiff, has set forth no facts or legal authority to demonstrate that a “debt

collection defense” could not be raised in the state court criminal proceeding.4 The

Court is persuaded that Plaintiff is not entitled to injunctive relief. The Court is

persuaded that Defendants’ motion to be dismissed as defendants should be granted.

An order in accordance with this memorandum opinion shall be entered this date.

6

DATED this 3rd day of September, 2004.

_____________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

VANESSA O. DILLARD

February 7, 2007

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 13

:

VANESSA O. DILLARD, ::

Debtor : Case No. 06-30939 RFH

:

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Vanessa O. Dillard: Mr. Barry Gordon Irwin

Post Office Box 140

Hull, Georgia 30646-0140

For Federal National Mortgage Mr. Robert Michael Sheffield

Association: 1544 Old Alabama Road

Roswell, Georgia 30076

For Chapter 13 Trustee: Mr. Tony D. Coy

Post Office Box 954

Macon, Georgia 31202

2

MEMORANDUM OPINION

Vanessa O. Dillard, Movant, filed on December 21, 2006, a Motion To Extend

The Stay Under 11 U.S.C. § 362(c)(3). Federal National Mortgage Association

(“Fannie Mae”), Respondent, filed a response on December 22, 2006. Movant’s

motion came on for hearing on January 11, 2007. The Court, having considered the

evidence presented and the arguments of counsel, now publishes this memorandum

opinion.

Movant owed an obligation to GMAC Mortgage Corporation. The obligation

was secured by a deed to secure debt on Movant’s residence. Movant defaulted on her

obligation. GMAC foreclosed on the deed to secure debt.

Charles Christopher Horton, attorney at law, conducted the foreclosure sale on

March 7, 2006. Mr. Horton concluded the sale at 12:15 p.m. GMAC was the highest

bidder. Mr. Horton “bid in” the residence on behalf of GMAC. Mr. Horton testified

that, as is customary in Georgia, he does not handle the foreclosure sale proceeds

when the lender bids in the property.

Movant filed a petition under Chapter 13 of the Bankruptcy Code at 2:00 p.m.

on March 7, 2006 (“the prior bankruptcy case”). Thus, the foreclosure sale was

concluded prior to Movant filing for bankruptcy relief. Movant was not represented

by counsel when she filed her bankruptcy case. Movant did not obtain the preThe

magistrate court had issued a writ of possession 1 but Respondent had not

removed Movant from her residence when this Court reopened Movant’s bankruptcy

case.

2 Section 362(c)(3)(A), and (B) of the Bankruptcy Code provides:

§362. Automatic Stay

. . .

3

bankruptcy credit counseling required by 11 U.S.C.A. § 109(h). The Court entered an

order on March 24, 2006, dismissing Movant’s bankruptcy case.

On April 25, 2006, a Deed Under Power (“foreclosure deed”) was filed for

record with the Clerk of Superior Court, Clarke County, Georgia. The foreclosure

deed conveyed Movant’s interest in the residence to GMAC. Also on April 25, 2006,

a Special Warranty Deed was filed for record which conveyed GMAC’s interest in the

residence to Respondent. Respondent had guaranteed Movant’s obligation to GMAC.

Respondent commenced dispossessory proceeding in the state magistrate court.

This Court entered an order on June 26, 20006, reopening Movant’s prior bankruptcy

case. The reopening stayed the dispossessory proceeding.1 The Court entered an

order on December 12, 2006, again dismissing Movant’s prior bankruptcy case.

Movant filed on December 13, 2006, her current Chapter 13 bankruptcy case.

Movant is represented by counsel. Prior to filing her current case, Movant obtained

the required credit counseling. Movant filed on December 21, 2006, a motion to

extend the automatic stay of the Bankruptcy Code.2

(c) Except as provided in subsections (d), (e), (f) and (h) of this section—

. . .

(3) if a single or joint case is filed by or against debtor who is an

individual in a case under chapter 7, 11, or 13, and if a single or joint

case of the debtor was pending within the preceding 1-year period

but was dismissed, other than a case refilled under a chapter other

than chapter 7 after dismissal under section 707(b)—

(A) the stay under subsection (a) with respect to any

action taken with respect to a debt or property securing

such debt or with respect to any lease shall terminate

with respect to the debtor on the 30th day after the

filing of the later case;

(B) on the motion of a party in interest for continuation

of the automatic stay and upon notice and a hearing,

the court may extend the stay in particular cases as to

any or all creditors (subject to such conditions or

limitations as the court may impose them) after notice

and a hearing completed before the expiration of the

30-day period only if the party in interest demonstrates

that the filing of the later case is in good faith as to the

creditors to be stayed:

11 U.S.C.A. § 362(c)(3)(A), (B) (West Supp. 2006).

4

The evidence presented at the hearing on Movant’s motion to extend the

automatic stay shows that Movant is a registered nurse who is employed full-time.

Movant’s mother, brother, and grandmother live with Movant in the residence.

Movant supports her brother and grandmother. Movant’s mother is employed. The

Chapter 13 Trustee reports that Movant’s proposed Chapter 13 plan is feasible and

that a wage deduction order is in place. Some $9,000 that Movant “paid into” her

Hurt v. Norwest Mortgage, Inc., 260 Ga. App. 651, 3 580 S.E.2d 580, 586 (2003)

(following foreclosure, resident becomes tenant at sufferance subject to dispossessory

action).

5

prior Chapter 13 case has been transferred to her current Chapter 13 case. Movant has

“paid in” an additional $2,000 during her current Chapter 13 case. Movant’s prior

Chapter 13 case was dismissed because she failed to obtain the required prebankruptcy

credit counseling. Movant was not represented by counsel when she filed

her prior bankruptcy case. Movant has now obtained the credit counseling. No party

in interest except Respondent opposes the extension of the automatic stay. The Court

is persuaded that Movant has demonstrated that her current bankruptcy case was filed

in good faith as that term is used in § 362(c)(3)(B).

Respondent contends that Movant’s interest in her residence terminated prepetition

and that the residence is not protected by the automatic stay. Respondent

contends that Movant is a tenant at sufferance after foreclosure.3 The evidence shows

that Mr. Horton, on behalf of GMAC, concluded the foreclosure sale before Movant

filed her prior bankruptcy case. The foreclosure deed and the special warranty deed

were filed for record after dismissal of Movant’s prior bankruptcy case and before it

was reopened. Thus, Movant had no bankruptcy case pending when the deeds were

filed for record.

“Under Georgia law, a deed to secure debt transfers legal title to the property

conveyed to the grantee and the grantor retains equitable title with the equitable right

6

of redemption by payment of the debt. Redemption can be accomplished only by

payment in full of the secured debt. This equitable right of redemption is a property

right of the debtor within the jurisdiction of the bankruptcy court. . . . In Georgia, a

properly conducted foreclosure cuts off the grantor’s equitable right of redemption.”

Leggett v. Morgan, (In re Morgan), 115 B.R. 399, 401 (Bankr. M.D. Ga. 1990).

Federal law determines whether an interest in property is property of the

bankruptcy estate. The nature and existence of the interest is determined by state law.

Witko v. Menotte, (In re Witcko), 374 F.3d 1040, 1043 (11th Cir. 2004). A debtor’s

equitable right of redemption is property of the bankruptcy estate. Commercial

Federal Mortgage Corp. v. Smith, (In re Smith), 85 F.3d 1555, 1557-58 (11th Cir.

1996). Whether a debtor’s equitable right of redemption is terminated by a

foreclosure sale is a question of state law.

The Bankruptcy Courts for the Northern District of Georgia and the Southern

District of Georgia have held that a debtor’s equity of redemption terminates upon sale

to the highest bidder on the date the foreclosure is held even though the foreclosure

deed is not recorded until after the debtor filed for bankruptcy relief. First Nationwide

Mortgage Corp. v. Davis, (In re Davis), 1998 WL 34066146 (Bankr. S.D. Ga., Jan. 21,

1998) (Dalis, J.); Sanders v. Amsouth Mortgage Co., (In re Sanders), 108 B.R. 847,

849 (Bankr. S. D. Ga., 1989) (Davis, J.); Pearson v. Fleet Finance Center, Inc., (In re

Pearson),75 B.R. 254, 255 (Bankr. N.D. Ga., 1985) (Drake, J.).

7

Movant relies upon this Court’s decision in Chase Home Finance LLC v.

Geiger, (In re Geiger), 340 B.R. 422 (Bankr. M.D. Ga., 2006). In Geiger, the lender

was the highest bidder at foreclosure. No tender of the bid amount or execution of the

foreclosure deed occurred before the debtor filed for bankruptcy relief.

The case at bar is factually different from Geiger. The foreclosure sale was

concluded and the foreclosure deed and special warranty deed were filed for record

prior to the filing of Movant’s current bankruptcy case. Respondent was called upon

to honor its guarantee of Movant’s obligation to the foreclosing lender, GMAC. The

Court is persuaded that Movant’s equity of redemption was terminated.

The Court is persuaded that Movant’s motion to extend the automatic

stay must be denied to the extent it seeks to apply the automatic stay to Respondent.

The Court is persuaded that the residence at issue is not property of Movant’s

bankruptcy estate and that Respondent may proceed with its dispossessory action in

the state magistrate court. Movant’s motion, to the extent that it seeks to apply the

automatic stay to Movant’s other creditors, should be granted because those creditors

do not object to the extension.

Movant questions whether Respondent or GMAC is the proper creditor on her

residential obligation. Movant received a GMAC Mortgage Account Statement dated

December 18, 2006. The statement is dated some eight months after GMAC

conveyed Movant’s residence to Respondent. The evidence is clear that GMAC was

8

the original holder of Movant’s obligation, and that GMAC conveyed its interest to

Respondent by special warranty deed. Movant’s contention that GMAC violated the

automatic stay by sending the account statement is not properly before the Court.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 7th day of February, 2007.

/s/ Robert F. Hershner, Jr.

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

TOM’S FOODS INC

July 13, 2006

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

In the Matter of: : Chapter 11

:

TOM’S FOODS INC., ::

Debtor : Case No. 05-40683 RFH

:

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Responsible Officer Mr. John T. Sanders, IV

of Tom’s Foods Inc.: Mr. J. Robert Williamson

1500 Candler Building

127 Peachtree Street, NE

Atlanta, Georgia 30303

For Heico Holding, Inc.: Mr. Jason J. DeJonker

McDermott Will Emery LLP

227 West Monroe Street

Chicago, Illinois 60606-5096

Ms. Barbara Ellis-Monro

Mr. David M. Fass

Suite 3100 Promenade II

1230 Peachtreet Street, NE

Atlanta, Georgia 30309-3592

For Ad Hoc Committee of Noteholders: Mr. Frank W. DeBorde

Mr. Daniel P. Sinaiko

1600 Atlanta Financial Center

3343 Peachtree Road, N.E.

Atlanta, Georgia 30326

Mr. Ira S. Dizengoff

Mr. David P. Simonds

Mr. Patrick C. Schmitter

Mr. Charles D. Riely

590 Madison Avenue

New York, New York 10022

For Lance, Inc.: Mr. Joseph B.C. Kluttz

Hearst Tower, 47th Floor

214 North Tryon Street

Charlotte, North Carolina 28202

Mr. Davis 1 is responsible for “winding up” the affairs of Debtor, which has

liquidated most of its assets.

2 Heico was the major shareholder of Tom’s Foods Holdings, which in turn was

the major shareholder of Tom’s Foods Inc., Debtor. Memorandum In Support Of

Preserving Attorney-Client Privilege For Joint-Defense Documents, p. 4, (filed May

23, 2006), Docket No. 962.

3 Heico’s memorandum is joined in by Rolland G. Divin, Stanley H. Meadows,

Michael E. Heisley, Emily Heisley – Stoeckel, Andrew G.C. Sage, II, and Damien

3

MEMORANDUM OPINION

Eugene I. Davis, “Responsible Officer” for Tom’s Foods Inc., Debtor,1 filed on

April 19, 2006, his “Motion Of Eugene I. Davis, Responsible Officer For Tom’s

Foods Inc., For An Order Authorizing Examination Pursuant To Bankruptcy Rule

2004 and Requiring The Production Of Documents.” The Responsible Officer seeks

to compel for examination the attendance of a designated representative of Heico

Holding, Inc., (“Heico”). The Responsible Officer also seeks the production of

certain documents by Heico.2 Heico filed on May 4, 2006, its “Motion of Heico

Holding, Inc., for Protective Order.” The Responsible Officer’s motion came on for a

hearing on May 9, 2006. At the hearing, the Court suggested that counsel submit

briefs on the issues presented in Heico’s motion for protective order.

Heico filed on May 23, 2006, a memorandum in support of its motion for

protective order.3 The Responsible Officer filed on June 7, 2006, a memorandum in

Kovary.

It is unclear whether Heico or 4 some other party currently has possession of the

documents at issue.

5 Fed. R. Civ. P. 26(b)(5) (party claiming that material is privileged shall describe

nature of the material without revealing information itself).

4

opposition to Heico’s motion. The Ad Hoc Committee of Noteholders also filed on

June 7, 2006, a memorandum in opposition to Heico’s motion. The Court, having

considered the record and the arguments of counsel, now publishes this memorandum

opinion.

The Responsible Officer, in his motion to compel, contends that employees or

agents of Heico removed certain documents from Debtor’s corporate offices. The

Responsible Officer contends that the documents are property of Debtor’s estate.

Heico has returned most of the documents.

The parties have resolved most of the issues presented in Heico’s motion for

protective order. The only remaining issue is whether certain documents are protected

by the attorney-client privilege and the joint-defense privilege. Heico refuses to return

these documents.4 Heico contends the attorney-client privilege protecting the

documents belongs to third parties and not to Debtor. A privilege log5 of the

documents in dispute is attached as Exhibit A to Heico’s memorandum dated May 23,

Ron Divin’s 6 full name is Rolland G. Divin.

7 Heico contends that Mr. Meadows “represented” two of the three directors.

8 Memorandum In Support Of Preserving Attorney-Client Privilege For Joint-

Defense Documents, p. 4, (filed May 23, 2006), Docket No. 962.

5

2006. The parties agreed at the hearing held on May 9, 2006, that the Court could

review the documents in camera.

The documents in dispute are ten e-mails sent by “Ron Divin.”6 The e-mails

are dated from February 22, 2005, through May 11, 2005. Mr. Divin was, at the

relevant time, the president, CEO, and a director of Debtor. The e-mails were sent to

Stanley Meadows, an attorney who served on Debtor’s Board of Directors. Nine of

the e-mails were also sent to other individuals. Five of the e-mails were sent by “blind

copy” to other individuals. The “other individuals” who received various e-mails

were three of Debtor’s directors,7 six officers of Debtor, four persons associated with

Heico, and one person who owned 20 percent of Tom’s Foods Holdings and who had

a contractual right to appoint a member of Debtor’s Board of Directors.8 Four of the

e-mails are marked “Attorney-Client Privilege.”

The documents in dispute do not include Mr. Meadow’s responses to the ten emails

sent by Mr. Divin. The e-mail dated February 22, 2005 states that Mr. Meadows

was “on Heico’s board and Tom’s [Debtor’s] board.” The e-mail dated March 25,

Debtor filed on April 9 6, 2005, a petition for relief under Chapter 11 of the

Bankruptcy Code.

6

2005, states that Mr. Meadows was “the Company’s [Debtor’s] attorney in such

matters. . . .”

Debtor was having severe financial problems when Mr. Divin sent the e-mails

to Mr. Meadows.9 Heico contends that certain creditors of Debtor, the “Noteholders,”

were threatening Mr. Divin and other officers and directors of Debtor with legal

action and personal liability. Heico contends that Mr. Divin was seeking legal advice

on how to deal with the threats. The Responsible Officer contends the e-mails are not

privileged and demands that the e-mails be turned over to him.

“The party invoking the attorney-client privilege has the burden of proving that

an attorney-client relationship existed and that the particular communications were

confidential. In order to show that communications made to an attorney are within the

privilege, it must be shown that ‘the communication was made to him confidentially,

in his professional capacity, for the purpose of securing legal advice or assistance.’

‘The key question in determining the existence of a privileged communication is

“whether the client reasonably understood the conference to be confidential.” ’ ”

United States v. Schaltenbrand, 930 F.2d 1554, 1562 (11th Cir.), cert. denied 502 U.S.

1005, 112 S.Ct. 640, 116 L.Ed 2d 685 (1991) (internal citations omitted)

The attorney-client privilege does not apply when the attorney is asked for

144 F.3d 653 (10th Cir.), 10 cert denied 525 U.S. 966, 119 S.Ct. 412, 142 L.Ed 2d

334 (1998).

7

business advice rather than for legal advice. United States v. Rowe, 96 F.3d 1294,

1297 (9th Cir. 1996); In re Walsh, 623 F.2d 489, 494 (7th Cir.), cert denied 449 U.S.

994, 101 S. Ct. 531, 66 L.Ed 2d 291 (1980); Olender v. United States, 210 F.2d 795,

806 (9th Cir. 1954); United States v. Loften, 507 F. Supp. 108, 112 (S.D. N.Y. 1981).

See also In re Grand Jury Investigation, 842 F.2d 1223 (11th Cir. 1987) (information

taxpayer gave to his attorney for purposes for preparing tax returns was not

privileged); United States v. Davis, 636 F.2d 1028, 1044 (5th Cir., Unit A), cert

denied 454 U.S. 862, 102 S.Ct. 320, 70 L.Ed 2d 162 (1981) (attorney who acts as his

client’s business advisor is not acting in a legal capacity and information is not

privileged).

In In re Grand Jury Subpoenas,10 Intervenor was the president and CEO of a

hospital. Joe Doe and Jane Roe provided legal services to the hospital. Intervenor

and the hospital became targets of a federal grand jury investigation. The grand jury

issued subpoenas seeking the testimony of attorneys Doe and Roe. Intervenor moved

to quash the subpoenas on the basis of his relationship with the attorneys in his

individual capacity, independent of the attorneys’ relationship with the hospital and its

officers in their official capacities. The Tenth Circuit Court of Appeals stated:

Any privilege resulting from communications

8

between corporate officers and corporate attorneys

concerning matters within the scope of the corporation’s

affairs and the officer’s duties belongs to the corporation

and not to the officer. . . .

The Second and Third Circuits have employed the

following test to determine whether an officer may assert a

personal privilege with respect to conversations with

corporate counsel despite the fact that the privilege

generally belongs to the corporation:

First, they must show they approached [counsel]

for the purpose of seeking legal advice. Second,

they must demonstrate that when they approached

[counsel] they made it clear that they were seeking

legal advice in their individual rather than in their

representative capacities. Third, they must

demonstrate that the [counsel] saw fit to

communicate with them in their individual

capacities, knowing that a possible conflict could

arise. Fourth, they must prove that their

conversations with [counsel] were confidential.

And, fifth, they must show that the substance of

their conversations with [counsel] did not concern

matters within the company or the general affairs of

the company.

A personal privilege does not exist merely because the

officer “reasonably believed” that he was being

represented by corporate counsel on an individual basis.

In certain circumstances, reasonable belief may be enough

to create an attorney-client relationship, but it is not

sufficient here to create a personal attorney-client

privilege.

144 F.3d at 658-59.

9

“[The joint-defense privilege is] an exception to the general rule that the

attorney-client privilege is waived upon the voluntary disclosure of the privileged

information to a third party. The joint-defense privilege allows parties who share

unified interests to exchange privileged information to adequately prepare their cases

without losing the protection afforded by the privilege.” Indiantown Realty Partners,

L.P. v. Brown-Harward, (In re Indiantown Realty Partners. L.P.) 270 B.R. 532, 539

(Bankr. S.D. Fla. 2001).

Turning to the case at bar, the Court, from its in camera review, is not

persuaded that the e-mails at issue are protected by the attorney-client privilege or the

joint-defense privilege. The e-mails were widely distributed by Mr. Divin. Several emails

were sent to persons who were not officers or directors of Debtor. Six e-mails

were sent to persons affiliated with Heico, an entity separate and distinct from Debtor.

Five e-mails were sent to persons by blind copy. The Court is not persuaded that the

e-mails were confidential communications between Mr. Divin and Mr. Meadows.

In the Court’s view, the e-mails sought guidance from Mr. Meadows on how

Debtor’s Board of Directors and management should respond to Debtor’s financial

distress. The substance of the e-mails concerned matters within Debtor’s business

affairs.

The Court is not persuaded that the e-mails at issue are protected by the

10

attorney-client privilege or the joint-defense privilege.

An order in accordance with this memorandum opinion shall be entered

this date.

DATED this 13th day of July 2006.

/s/ Robert F. Hershner, Jr.

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

TFI ENTERPRISES, INC

April 9, 2008

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

In the Matter of: : Chapter 11

:

TFI ENTERPRISES, INC. :

f/k/a Tom’s Foods Inc., ::

Debtor : Case No. 05-40683 RFH

:

EUGENE I. DAVIS, in his capacity :

as Responsible Officer for the :

Bankruptcy Estate of :

TFI ENTERPRISES, INC., f/k/a :

Tom’s Foods, Inc., ::

Plaintiff ::

vs. ::

ZURICH AMERICAN INSURANCE :

COMPANY, ::

Defendant : Adversary Proceeding

: No. 08-4005

BEFORE

ROBERT F. HERSHNER, JR.

UNITED STATES BANKRUPTCY JUDGE

APPEARANCES:

Plaintiff: Frank W. DeBorde

Lisa Wolgast

1600 Atlanta Financial Center

3343 Peachtree Road NE

Atlanta, Georgia 30326

Defendant: Margaret M. Anderson

111 South Wacker Drive

Chicago, Illinois 60606

1 Tom’s Foods Inc. is now known as TFI Enterprises, Inc.

2 The insurance policies have not been provided to the Court.

3 See Specifications To Deductible Agreement[s], pp 1-2, Exhibits D, E, F, Docket Nos.

1-6, 1-7, 1-8. Counsel ask the Court to consider certain exhibits attached to Plaintiff’s

complaint and Defendant’s motion to dismiss.

2

MEMORANDUM OPINION

Zurich American Insurance Company, Defendant, filed with the Court on

February 13, 2008, its Motion of Zurich American Insurance Company To Dismiss

Complaint For Lack Of Subject Matter Jurisdiction. Eugene I. Davis, in his capacity

as Responsible Officer for the Bankruptcy Estate of TFI Enterprises, Inc., f/k/a Tom’s

Foods, Inc., Plaintiff, filed a response March 4, 2008. Defendant’s motion came on

for a hearing on March 25, 2008. The Court, having considered the motion, the

response, and the arguments of counsel, now publishes this memorandum opinion.

Defendant is an insurance company that does business in the State of Georgia.

Tom’s Foods Inc., Debtor,1 was a producer of snack foods whose headquarters was

located in Columbus, Georgia. Defendant provided Debtor with workers’

compensation, employers’ liability, automobile liability, and general liability

insurance.2 Most policies had deductibles of $500,000 per accident.3 If a third party

made a valid claim, Debtor was responsible for the deductible and Defendant was

responsible for the remainder of the claim up to the policy limits.

Defendant and Debtor entered into a Deductible Agreement dated June 30,

Defendant’s administrative 4 offices are located is Schaumburg, Illinois.

5 For example, the premium for workers’ compensation insurance was to be adjusted in

accordance with the actual number of workers employed by Debtor.

6 The Specifications are part of the Deductible Agreement which has a binding

arbitration clause.

3

2003. The Deductible Agreement has two parts: (1) Terms and Conditions; and (2)

Specifications. Under the Terms and Conditions part, Defendant was to pay the

claims made under the insurance policies, including the deductibles which were

Debtor’s obligations. Defendant was to submit a bill to Debtor for the deductibles

which Debtor was to then pay. Debtor was required to provide collateral to secure its

obligations to reimburse Defendant for the deductibles. The collateral was to be a

letter of credit issued by a bank. The Deductible Agreement has a binding arbitration

clause which states that arbitration shall take place in Schaumburg, Illinois,4 unless the

parties agree otherwise. The Deductible Agreement states that it shall be governed by

and interpreted in accordance with the laws of the State of New York.

The second part of the Deductible Agreement was called “Specifications.”

Debtor and Defendant entered into Specifications To Deductible Agreements dated

June 30, 2003, September 4, 2004, and November 4, 2004. The Specifications state

the deductibles for the insurance policies and the deductible premiums which were

subject to audit and adjustment.5 The Specifications do not have binding arbitration

clauses.6

7 See Order, p.8 (filed Dec. 16, 2005), Docket No. 771.

4

As an alternative to providing a letter of credit under the Deductible

Agreement, Debtor purchased Deductible Protection Policies from Defendant. Debtor

was to pay “estimated premiums” which were subject to audit and adjustment. Under

the Deductible Protection Policies, Defendant was to pay itself should Debtor fail to

reimburse Defendant for any deductible payments made on Debtor’s behalf under the

Deductible Agreement. The Deductible Protection Policies do not have binding

arbitration clauses.

Debtor had financial problems and filed a petition under Chapter 11 of the

Bankruptcy Code on April 6, 2005. Debtor has liquidated substantially all of its assets

and will not reorganize as a going concern. Eugene I. Davis, Plaintiff, is the

Responsible Officer of Debtor’s bankruptcy estate. Plaintiff is responsible for

winding up Debtor’s affairs. Plaintiff is authorized to investigate, prosecute, and

settle Debtor’s claims and causes of action against any and all parties.7

Plaintiff filed on January 17, 2008, its Complaint Of Chapter 11 Responsible

Officer To Recover Property Of The Estate From Zurich American Insurance

Company. Plaintiff contends in part that Defendant has refused to refund the excess

“estimated premiums” which were subject to audit and adjustment.

Defendant filed on February 13, 2008, a motion to dismiss Plaintiff’s complaint

for lack of subject matter jurisdiction. Defendant contends that the dispute at issue is

8 9 U.S.C.A. § 3 (West 1999) (court shall stay trial of a proceeding until arbitration

concluded).

9 479 F.3d 791 (11th Cir. 2007).

5

subject to binding arbitration. At the hearing on March 25, 2008, Defendant’s counsel

suggested that the Court stay this adversary proceeding pending a ruling by the

arbitration panel on the dispute at issue rather than dismissing the adversary

proceeding.8

Plaintiff contends that the Deductible Agreement, the Specifications To

Deductible Agreements, and the Deductible Protection Policies are contracts of

insurance and are not subject to arbitration under Georgia law.

In Whiting-Turner Contracting Co. v. Electric Machinery Enterprises, Inc., (In

re Electric Machinery Enterprises, Inc.),9 the Eleventh Circuit Court of Appeals stated:

The Federal Arbitration Act (“FAA”) provides, in

pertinent part, that arbitration agreements “shall be valid,

irrevocable, and enforceable, save upon grounds as exist at law or

in equity for the revocation of any contract.” 9 U.S.C. § 2. The

FAA establishes a federal policy favoring arbitration. However,

“[l]ike any statutory directive the Arbitration Act’s mandate may

be overridden by a contrary congressional command.” “Thus,

unless Congress has clearly expressed an intention to preclude

arbitration of the statutory claim, a party is bound by its

agreement to arbitrate.” The party opposing arbitration has the

burden of proving “that Congress intended to preclude a waiver

of a judicial remedies for [the particular claim] at issue.”

(citations omitted)

479 F.3d at 795.

10 358 F.3d 854 (11th Cir. 2004).

6

In McKnight v. Chicago Title Insurance Co.10 the Eleventh Circuit stated:

Second is the exception to the [FAA] rule, found in the

McCarran-Ferguson Act, which leaves the regulation of

the insurance industry to the states. . . .15 U.S.C. 1012(b).

In the right circumstances, the McCarran-Ferguson Act

provides an exception to the general rule of arbitration

under the Federal Arbitration Act. If the state has an antiarbitration

law enacted for the purpose of regulating the

business of insurance, and if enforcing, pursuant to the

Federal Arbitration Act, an arbitration clause would

invalidate, impair, or supersede that state law, a court

should refuse to enforce the arbitration clause.

358 F.3d at 857.

The circuit court also stated:

[We conclude] that a provision in a state’s arbitration code

excepting insurance contracts is a law regulating the

business of insurance.

358 F.3d at 858.

Finally, the circuit court stated:

[W]e conclude that [Georgia Code] § 9-9-2(c)(3) is a law

enacted to regulate the business of insurance, within the

meaning of the McCarran-Ferguson Act. Thus, § 9-9-

2(c)(3) is excepted from preemption by the Federal

Arbitration Act.

358 F.3d at 859.

11 Chapter 9 of Title 9 of the Georgia Code is known as the Georgia Arbitration Code.

See O.C.G.A. § 9-9-1 (2007).

7

Section § 9-9-2(c)(3) of the Georgia Arbitration Code11 provides:

9-9-2. Applicability; exclusive method.

. . .

© This part shall apply to all disputes in which the parties thereto have

agreed in writing to arbitrate and shall provide the exclusive means by

which agreements to arbitrate disputes can be enforced, except the

following, to which this part shall not apply:

. . .

(3) Any contract of insurance, as defined in paragraph (1) of

Code Section 33-1-2; provided, however, that nothing in this

paragraph shall impair or prohibit the enforcement of or in any

way invalidate an arbitration clause or provision in a contract

between insurance companies; (emphasis added)

O.C.G.A. § 9-9-2(c)(3) (2007)

“This provision [§ 9-9-2(c)(3)] invalidates arbitration agreements in insurance

contracts as defined in OCGA § 33-1-2, with the exception that it does not prohibit

enforcement of arbitration agreements in contracts between insurance companies.”

Continental Insurance Co. v. Equity Residential Properties Trust, 255 Ga. App. 445,

565 S.E. 2d 603, 604 (2002) cert denied.

Simply stated, in Georgia a contract of insurance is not subject to arbitration

unless the contract is between insurance companies.

Georgia Code § 33-1-2(2) defines “insurance” as follows:

12 245 Ga. App. 720, 538 S.E. 2d 809 (2000).

8

33-1-2. Definitions.

As used in this title, the term:

. . .

(2) “Insurance” means a contract which is an integral part of a

plan for distributing individual losses whereby one undertakes to

indemnify another or to pay a specified amount or benefits upon

determinable contingencies.

O.C.G.A. § 33-1-2(2) (Supp. 2007).

In Golf Marketing, Inc. v. Atlanta Classic Cars, Inc.,12 the Georgia Court

of Appeals stated:

By brief, GMI argues, that the instant contract was not

an “insurance” contract governed by the Georgia

Insurance Code, OCGA § 33-1-1 et. seq. However, the

instant contract sought to indemnify ACCI for loss

occurring due to a specific, determinable contingency

which may or may not occur, i.e. an ace on the 11th hole.

The contract is referred to as a “policy”; the payment for

the contract is referred to as a “premium”; the

indemnification is referred to as “coverage”; and a request

for payment under the policy is referred to as a “claim.”

Thus, despite GMI’s assertions to the contrary, we find the

contract at issue to be in the nature of an “insurance”

contract per OCGA § 33-1-2 (2) and governed by the

applicable Code section.

538 S.E. 2d at 810 n.2.

The Court will now consider whether the agreements entered into by Debtor

9

and Defendant are subject to binding arbitration. The Deductible Agreement, part P,

states that it “shall be governed by and interpreted in accordance with the laws of the

State of New York.” Even though the Deductible Agreement contains a choice of law

provision, Georgia courts apply Georgia law to determine whether an arbitration

clause is enforceable under § 9-9-2(c)(3). Continental Insurance Co., 565 S.E. 2d at

604-05. Neither Plaintiff nor Defendant cite any New York law on the issues

presented. The Court will apply Georgia law. See Continental Technical Services,

Inc. v. Rockwell International Corp., 927 F.2d 1198, 1199 (11th Cir. 1991) (federal

courts do not have to scour the law of a foreign state for possible arguments a party

might have made).

Deductible Agreement

The Deductible Agreement, part C, states: “We [Defendant] assume a financial

risk that may require Collateral. . . .” “We accept the risk transfer excess of the

Deductible Amount(s) and the Aggregate Deductible, if applicable, up to the limits of

liability under the Policy(ies). You [Debtor] pays Us [Defendant] for Our

[Defendant’s] assumption of this obligation and for Our [Defendant’s] expenses.” In

part C, Defendant assumed a financial risk and Debtor agreed to pay Defendant for the

assumption. The Deductible Agreement, part D, provides: “The [Deductible] Program

has two primary, independent components: (1) the insurance coverage provided under

10

the Policy(ies); and (2) the cash flow benefits achieved through the financing

arrangement under the Program.” The Deductible Agreement is “an integral part of a

plan for distributing” financial risk in exchange for the payment of premiums. The

Court is persuaded that the Deductible Agreement is an insurance contract under

§ 9-9-2(c)(3) and is not subject to binding arbitration.

Specifications To Deductible Agreement

The Specifications are part of the Deductible Agreement which has a binding

arbitration clause. The Specifications do not have separate arbitration clauses. The

Specifications state the deductibles for the insurance policies and the deductible

premiums which were subject to audit and adjustment. The Specifications also state

the aggregate deductible, the premium charge for Terrorism Risk Insurance, the

premium surcharges, the unallocated loss adjustment expense, and the paid loss

billings. The Specifications deal with the risks assumed by Debtor and Defendant,

and with how much Debtor was to pay for the risks assumed by Defendant. The Court

is persuaded that the Specifications are insurance contracts under § 9-9-2(c)(3) and are

not subject to binding arbitration.

Deductible Protection Policies

The Deductible Protection Policies state:

13 Deductible Protection Policies, pages titled Important Notice – In Witness Clause,

Exhibits A, B, C, Docket Nos. 1-3, 1-4, 1-5.

11

In return for the payment of premium and subject to all the

terms of the policy, we agree with you to provide

insurance as stated in this policy.13

The Deductible Protection Policies use the following terms: policy number,

named insured, policy period, loss limit, limit of liability, estimated premiums, and

deductible amounts. These are terms that are regularly used in insurance contracts.

The Deductible Protection Policies do not contain arbitration clauses. The

Court is persuaded that the Deductible Protection Policies are insurance contracts

under § 9-9-2(c)(3) and are not subject to binding arbitration.

The Court is persuaded that Defendant’s motion to dismiss Plaintiff’s

complaint must be denied.

An order in accordance with this memorandum opinion will be entered this

date.

DATED this 9th day of April 2008.

/s/ Robert F. Hershner, Jr.

ROBERT F. HERSHNER, JR.

Bankruptcy Judge

United States Bankruptcy Court

RICHARD J. DENZIK and PATRICIA C. DENZIK

June 15, 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

In the Matter of: : Chapter 7

:

RICHARD J. DENZIK and :

PATRICIA C. DENZIK, :

:

Debtors : Case No. 98-41035 RFH

:

:

COLUMBUS BANK AND TRUST :

COMPANY, :

:

Plaintiff :

:

:

vs. :

:

:

RICHARD J. DENZIK and :

PATRICIA C. DENZIK, :

: Adversary Proceeding

Defendants : No. 98-4072

BEFORE

ROBERT F. HERSHNER, JR.

CHIEF UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Plaintiff: ROBERT K. IMPERIAL and

W. G. SCRANTOM, JR.

Post Office Box 1199

Columbus, Georgia 31902-1199

For Defendants: FIFE M. WHITESIDE

Post Office Box 5383

Columbus, Georgia 31906

2

MEMORANDUM OPINION

Columbus Bank and Trust Company, Plaintiff, filed on

March 7, 2000, its Plaintiff’s Motion to Amend Complaint to

Determine Dischargeability of Debt and Objecting to Discharge.

Richard J. Denzik and Patricia C. Denzik, Defendants, filed on

March 23, 2000, their response. The Court, having considered

the motion, the response, and the arguments of counsel, now

publishes this memorandum opinion.

Defendants filed a joint petition under Chapter 7 of

the Bankruptcy Code on May 15, 1998. The bar date to file a

complaint objecting to discharge or to file a complaint

objecting to the dischargeability of a debt was, by order of

this Court, extended until November 2, 1998. Thus, the bar

date for filing complaints was November 2, 1998. See Fed. R.

Bankr. P. 4004(a); 4007(c).

Plaintiff is a judgment creditor of Richard Denzik.

Plaintiff filed on November 2, 1998, its Complaint to

Determine Dischargeability of Debt and Objecting to Discharge.

Defendants filed a response on December 9, 1998.

Plaintiff, in its complaint, contends that (1)

Defendants, with the intent to hinder, delay, or defraud, set

up a real estate business in Patricia Denzik’s name in order

to transfer, remove, or conceal certain property; (2)

1 11 U.S.C.A. § 727(a)(2), (4)(A), (5) (West 1993).

2 11 U.S.C.A. § 523(a)(2)(B), (6) (West 1993).

3

Defendants made a false oath or account by understating the

value of their personal property; (3) Defendants failed to

explain the dramatic decrease in Richard Denzik’s income; (4)

Defendants failed to explain the relationship between the

amount of their unsecured obligations and the value of their

assets; (5) Defendants caused a willful and malicious injury

to Plaintiff; and (6) Richard Denzik published false financial

statements upon which Plaintiff reasonably relied.

Plaintiff, in Counts 1, 2, and 3 of its complaint,

contends that Defendants’ discharge should be denied under

section 727(a)(2), (4)(A), and (5) of the Bankruptcy Code.1

Plaintiff contends, in Counts 4 and 5, that certain

obligations owed to Plaintiff are nondischargeable under

section 523(a)(2)(B) and (6) of the Bankruptcy Code.2

Plaintiff, in its motion to amend its complaint,

“seeks to amend its Complaint by more specifically setting

forth facts it has learned through discovery conducted in this

case which Plaintiff contends supplements and supports various

counts set forth in its original complaint.” Plaintiff’s

Motion to Amend Complaint to Determine Dischargeability of

Debt and Objecting to Discharge, paragraph 4 (filed March 7,

2000).

3 11 U.S.C.A. § 727(a)(3) (West 1993).

4 Fed. R. Civ. P. 15(c)(2).

5 Fed. R. Bankr. P. 7015.

4

Plaintiff, in its amended complaint, seeks to add a

new Count 6, which contends that Defendants’ discharge should

be denied under section 727(a)(3) of the Bankruptcy Code.3

Plaintiff’s motion to amend its complaint was filed

after the bar date to file a complaint objecting to discharge

or to file a complaint objecting to dischargeability of a

debt. See Fed. R. Bankr. P. 4004(a); 4007(c). Thus,

Plaintiff’s amended complaint, to be timely, must relate back

to the filing of Plaintiff’s original complaint. Federal

Rules of Civil Procedure 15(c)(2),4 applicable to this

adversary proceeding,5 provides:

Rule 15. Amended and Supplemental

Pleadings

. . . .

(c) Relation Back of Amendments. An

amendment of a pleading relates back to

the date of the original pleading when

. . . .

(2) 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, or

Fed. R. Civ. P. 15(c)(2).

6 989 F.2d 1129 (11th Cir. 1993).

5

In Moore v. Baker6 the Eleventh Circuit Court of

Appeals stated:

Leave to amend a complaint “shall be

freely given when justice so requires.”

Fed. R. Civ. P. 15(a). While a decision

whether to grant leave to amend is clearly

within the discretion of the district

court, a justifying reason must be

apparent for denial of a motion to amend.

In the instant case, the lower court

denied leave to amend on the ground that

the newly asserted claim was barred by the

applicable statute of limitations and that

allowing the amendment would, therefore,

be futile. If correct, the district

court’s rationale would be sufficient to

support a denial of leave to amend the

complaint.

. . . The critical issue in Rule 15(c)

determinations is whether the original

complaint gave notice to the defendant of

the claim now being asserted.

989 F.2d at 1131.

“Thus, amendments that do no more than restate the

original claim with greater particularity or amplify the

details of the transaction alleged in the preceding pleading

fall within Rule 15(c). But, if the alteration of the

original statement is so substantial that it cannot be said

that defendant was given adequate notice of the conduct,

transaction, or occurrence that forms the basis of the claim

or defense, then the amendment will not relate back and will

be time barred if the limitations period has expired.” 6A

7 Ch. 7 Case No. 96-60356, Adv. No. 96-6026 (Bankr. M.D.

Ga. July 3, 1997) (Laney, J.).

6

Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal

Practice and Procedure, Civ. 2d § 1497 at 74-79 (1990).

In Terra International, Inc. v. Helms (In re Helms)7

the creditor filed a timely complaint to determine the

dischargeability of a debt under section 523(a)(2)(B) of the

Bankruptcy Code. The creditor filed an amended complaint

after the bar date. In the amended complaint, the creditor

contended that the debtor’s obligation was nondischargeable

under section 523(a)(2)(A) based upon the same facts that were

alleged in the original complaint. This Court allowed this

part of the amended complaint. The creditor, in its amended

complaint, also contended that the debtor’s obligation was

nondischargeable under section 523(a)(4) based upon additional

facts that were not alleged in the original complaint. This

Court did not allow this part of the amended complaint. This

Court noted that the creditor was asserting a new cause of

action through additional factual allegations.

See generally Hunt v. American Bank & Trust Co. of

Baton Rouge Louisiana, 783 F.2d 1011, 1014 (11th Cir. 1986)

(amended complaint asserting a separate incident of fraud did

not relate back to date of original complaint).

The Court is persuaded that Plaintiff’s amended

complaint as to Counts 1, 2, 3, and 5 should be allowed.

7

Plaintiff is asserting additional factual allegations in

support of the same causes of action asserted in its original

complaint.

The Court is not persuaded that Plaintiff’s amended

complaint which seeks to add a new Count 6 should be allowed.

In Count 6, Plaintiff contends that, during discovery,

Defendants failed to produce certain bank statements, canceled

checks, check registers, and deposit receipts. Plaintiff

contends that Defendants’ discharge should be denied under

section 727(a)(3) because Defendants concealed, destroyed, or

failed to keep or preserve information concerning their

financial condition. None of these factual allegations nor

any such cause of action under section 727(a)(3) was asserted

in the original complaint. This is a substantial alteration

of the original complaint which does not relate back and thus

is barred by the bar date.

An order in accordance with this memorandum opinion

will be entered this date.

DATED the 15th day of June, 2000.

______________________________

ROBERT F. HERSHNER, JR.

Chief Judge

United States Bankruptcy Court

TROY ERIC CRUMP,

November 2, 2010

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 13

:

TROY ERIC CRUMP, :

:

Debtor : Case No. 10-51789 JPS

:

TROY ERIC CRUMP, :

:

Movant :

:

vs. :

:

TITLEMAX, :

Respondent :

BEFORE

JAMES P. SMITH

UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

SIGNED this 02 day of November, 2010.

________________________________________

JAMES P. SMITH

__________________________________U_N_IT_E_D_ S_T_A_T_E_S _B_A_N_KR_U_P_T_C_Y_ J_U_D_G_E__

Movant: James W. Davis

143 Lamar Street

Macon, Georgia 31204

Respondent: Jenny Martin Stansfield

240 Third Street

P.O. Box 1606

Macon, Georgia 31202-1606

Chapter 13 Trustee: Laura Wilson

P.O. Box 954

Macon, Georgia 31202

Although the 30 day grace period expired on Saturday, December 12, 2009, TitleMax 1

was not open on that date. Accordingly, pursuant to the statute and contract, the grace period

was extended until the following Monday, December 14, 2009.

3

MEMORANDUM OPINION

This matter comes before the Court on Debtor’s Motion To Require Turnover

Of Property which was heard on an expedited basis. For purposes of this motion, the

parties stipulated the facts set forth herein.

Prior to filing for bankruptcy relief, Debtor Troy Eric Crump entered into a

series of “pawn transactions” with TitleMax of Georgia, Inc.(“TitleMax”). To secure

these “pawn transactions”, Debtor pledged to TitleMax his 2001 Chevrolet Silverado

truck. Debtor’s final contract with TitleMax, which was dated October 13, 2009,

required Debtor to pay the sum of $4,574.92 by November 12, 2009, or Debtor would

be in default. Pursuant to the terms of the contract, and consistent with OCGA § 44-

14-403, if Debtor did not cure the default within 30 days, or by the next business day

after the expiration of the grace period if the last day of the grace period fell on a day

TitleMax was not open for business, ownership in the truck would be automatically

forfeited to TitleMax.

Debtor did not pay the amount due on the maturity date of November 12, 2009,

or within the 30 day grace period which ended on December 14, 2009. 1

On December 18, 2009, Debtor filed a petition under Chapter 13 of the

11 USC § 1326(a)(1)(C) 2

4

Bankruptcy Code (Case No. 09-54166). Debtor listed the truck as an asset on his

Schedule B and listed TitleMax on his Schedule D as having a secured claim of

$4,535, secured by the truck. Debtor filed a Chapter 13 plan which, in part, proposed

to pay TitleMax preconfirmation adequate protection payments of $10 per month, 2

and proposed to pay the secured claim, plus interest of 4.75% per annum, by monthly

installments of $100. Prior to confirmation, the Chapter 13 plan was modified to

reduce the interest to be paid to TitleMax to 4 % per annum.

On January 8, 2010, TitleMax filed a proof of claim in the case asserting that it

had a secured claim in the amount of $4,990.44, secured by the truck.

Debtor made sporadic payments on his plan prior to confirmation and TitleMax

received, in April and May 2010, a total of $40 in preconfirmation adequate protection

payments. However, prior to confirmation, Debtor’s Chapter 13 case was dismissed

on June 2, 2010, for failure to make payments on the plan as required by 11 USC

§ 1326.

On June 8, 2010, TitleMax repossessed the truck. Debtor then filed the current

Chapter 13 case on June 9, 2010. Debtor’s Chapter 13 plan, which has not been

confirmed, proposes to pay his debt to TitleMax through his plan. After attempts to

negotiate the return of the truck were unsuccessful, Debtor filed this motion for

turnover. As of the hearing on this motion, the Chapter 13 trustee reported that

Due to the expedited hearing, TitleMax was unable to produce a witness to explain why 3

TitleMax had asserted a secured claim in the first case instead of asserting an ownership

interest in the truck.

5

Debtor was current on his plan payments.

TitleMax contends that ownership of the truck was forfeited to TitleMax prior

to the filing of Debtor’s first bankruptcy case. TitleMax further contends that, as 3

owner of the truck, it was entitled to take possession of the truck after the dismissal of

the first case and was not required to return the truck to Debtor upon the filing of the

current case. Debtor contends that, while ownership of the truck may have been

forfeited to TitleMax prior to the filing of the first case, TitleMax waived its

ownership interest when, instead of asserting its ownership interest, it filed a proof of

claim in the first case and accepted adequate protection payments. Thus, Debtor

contends that he still owns the truck and is entitled to its return pursuant to 11 USC

§ 542.

Debtor, as the moving party, has the burden of proof in an action under Section

542 which requires, in part, that an entity turn over property of the estate that is in its

possession, custody, or control. 5 Collier on Bankruptcy ¶ 542.02 and [2] (16th ed.

2010). However, property of the estate does not include property that the debtor

pledged as collateral in a “pawn transaction” if the debtor did not exercise his right to

redeem the property within the time provided in the contract or state law. Id.

¶ 541.24. See 11 USC § 541(b)(8).

6

Georgia’s pawnbroker lien statute, OCGA § 44-14-403, provides, in pertinent

part:

(b)(1) There shall be a grace period on all pawn

transactions. On pawn transactions involving motor

vehicles or motor vehicle certificates of title, the grace

period shall be 30 calendar days…. In the event that the

last day of the grace period falls on a day in which the

pawnbroker is not open for business, the grace period shall

be extended through the first day following upon which

the pawnbroker is open for business…

. . .

(3) Pledged goods may be redeemed by the pledgor or

seller within the grace period by the payment of any

unpaid accrued fees and charges, the repayment of the

principal, and the payment of an additional interest charge

not to exceed 12.5 percent of the principal. Pledged goods

not redeemed within the grace period shall be

automatically forfeited to the pawnbroker by operation of

this Code section, and any ownership interests of the

pledgor or seller shall automatically be extinguished as

regards the pledged item.

Thus, if a pledged motor vehicle is not redeemed within the 30 day grace period, the

vehicle is automatically forfeited to the pawnbroker and the pledgor’s ownership

interest is automatically extinguished.

In Debtor’s first Chapter 13 case, TitleMax filed a proof of claim and received

$40 as adequate protection payments through Debtor’s Chapter 13 plan. The record

shows that, during the six month term of that case, Titlemax did not seek relief to

obtain possession of truck. However, even if TitleMax sought payment of the past

7

due redemption price as a secured claim rather than asserting ownership of the truck,

upon dismissal of the Chapter 13 case, neither Debtor nor TitleMax were bound by

positions taken during the case.

Section 349 of the Bankruptcy Code sets forth the effects of dismissal of a

case. “The objective of [11 USC § 349(b)] is to undo the title 11 case, insofar as

practicable, and to restore all property rights to the position they occupied at the

beginning of such case.” 3 Collier on Bankruptcy ¶ 349.01 [2] (16th. ed. 2010).

In Christie v. First State Bank of Stratford, B.A. (In re Keener), 268 B.R. 912,

920 (Bankr. N.D. Tex. 2001), the court stated:

The case law interpreting the effect of a dismissal is

consistent with a plain reading of the statute and its

legislative history. Since rights that the debtor acquires as

a result of bankruptcy are usually an extension of the

debtor’s ability to abide by terms of the Bankruptcy Code,

the debtor who is unwilling or unable to comply with the

Code generally should not receive the benefits of

bankruptcy once the case is dismissed. See In re Derrick,

190 B.R. 346 (Bankr. W.D. Wis. 1995). When a

bankruptcy case is dismissed without the debtor having

obtained a discharge, the consequences of the bankruptcy

petition are negated, and the parties are restored to their

rights and positions as they existed prior to the filing of

the bankruptcy case. See In re Irons, 173 B.R. 910

(Bankr. E.D. Ark. 1994). Unless the court indicates

otherwise, the general effect of an order of dismissal is to

restore the status quo ante; it is as though the bankruptcy

case had never been brought. See In re Lewis & Coulter,

Inc., 159 B.R. 188 (Bankr. W.D. Pa. 1993). Dismissal of a

bankruptcy case operates to reinstate the status of interests

of debtor and his creditors to their status quo ante. See In

re Lawson, 156 B.R. 43 (9th Cir. BAP 1993). To the

8

extent possible, dismissal of bankruptcy petition reverses

what has transpired during bankruptcy. See In re Newton,

64 B.R. 790 (Bankr. C.D. Ill. 1986).

See Hilderbrand v. United States, 905 F. Supp. 774, 785 (E.D. Calif. 1995) (dismissal

without confirmation of Chapter 11 plan means parties are returned to the status quo

prior to filing of bankruptcy.) Accordingly, the position TitleMax asserted during the

first case did not act as a waiver of its ownership interest once that case was

dismissed. Rather, upon dismissal, the parties were returned to their positions as they

existed at the time of filing. Due to Debtor not redeeming the truck prior to the

expiration of the grace period, TitleMax was the owner of the truck at the time the

first case was filed.

Debtor also contends that, because TitleMax waived its right to assert

ownership in the first case, he had a new 30 day grace period to redeem the truck after

dismissal of his first Chapter 13 case. However, there is no legal support for this

contention under state law or the Bankruptcy Code.

In conclusion, the Court finds that Debtor’s interest in the truck was forfeited

before he filed his first Chapter 13 case. TitleMax is the owner of the truck.

Accordingly, Debtor’s motion for turnover is denied.

An order in accordance with this memorandum opinion will be entered this

date.

** END OF DOCUMENT **

JAMES DELMAR DUNN, III

September 10, 2010

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 7

:

JAMES DELMAR DUNN, III :

JACKIE BOYER DUNN, :

:

Debtors : Case No. 09-31182 JPS

:

ERNEST V. HARRIS, TRUSTEE, :

:

Plaintiff :

vs. :

:

PANDA K. NELSON, JEFFREY L. :

NELSON, SUMMIT ASSET GROUP, :

INC., and WATER OAK PROPERTIES, :

LLC, :

:

Defendants : Adversary Proceeding

: No. 09-3054

BEFORE

JAMES P. SMITH.

UNITED STATES BANKRUPTCY JUDGE

SIGNED this 10 day of September, 2010.

________________________________________

JAMES P. SMITH

__________________________________U_N_IT_E_D_ S_T_A_T_E_S _B_A_N_KR_U_P_T_C_Y_ J_U_D_G_E__

COUNSEL:

Chapter 7 Trustee: Ernest V. Harris

Harris & Liken, L.L.P.

Post Office Box 1586

Athens, Georgia 30603

Defendants Panda Nelson

and Jeffrey Nelson: Christopher D. Phillips

Lamberth, Cifelli, Stokes, Ellis & Nason, P.A.

3343 Peachtree Road, N.E.

Suite 550

Atlanta, Georgia 30326-1022

Defendants Summit Asset Group, Inc. and Water Oak Properties, LLC did not file 1

a response to Trustee’s complaint. Accordingly, a default judgement was entered against

those defendants on March 2, 2010.

3

MEMORANDUM OPINION

This matter arises from the Chapter 7 trustee’s complaint in which he asks the

Court to determine the interests of Debtors’ estates in certain proceeds from the prepetition

sale of real property. The proceeds are currently held in “escrow” pursuant

to agreements signed by the parties who owned the property at the time of the sale.

The case was tried on June 24, 2010. This opinion constitutes the Court’s findings 1

of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure

7052.

BACKGROUND

Ernest V. Harris, Trustee, is the Chapter 7 trustee of Debtors’ estates. At the

trial, Debtor James Delmar Dunn, III (“Mr. Dunn”) testified for Trustee. Frank A.

Lightmas, Jr. (“Mr. Lightmas”), who was counsel for Defendants Panda K. Nelson

and Jeffrey L. Nelson (the “Nelsons”) in connection with their pre-petition

transactions with Debtors, testified for the Nelsons. Except for the purpose of the

escrows, the facts are not in dispute.

Documentation introduced at trial referred to Summit as a corporation, Summit Asset 2

Group, Inc., and as a limited liability company, Summit Asset Group, LLC. Because the

corporate entity is the defendant in this case, the Court will treat Summit as a corporate

entity.

The record does not reveal any evidence as to the percentage ownership interests of 3

Mr. Bailey and Mr. Nelson in Water Oak, or whether Mrs. Nelson had any ownership

interest. However, since Trustee is only seeking to determine the estates’ interests in the

sale proceeds, and not the interests of any other party, this lack of evidence has no bearing of

the outcome of this case.

4

The Nelsons and Summit Asset Group, Inc. (“Summit”) jointly owned real 2

property at 3651 Mars Hills Road, Watkinsville, Georgia (the “Mars Hill Property”).

Summit owned a 75% interest and the Nelsons each owned a 12 ½ percent interest in

the property. Each of the Debtors owned a 25 percent interest in Summit, with the

remaining 50 percent interest in Summit being owned by Hank Bailey and

Mrs. Bailey.

In addition, Water Oak Properties, LLC (“Water Oak”) (in which Mr. Bailey

and Mr. Nelson had ownership interests) owned a 75 percent interest and Mr. Dunn 3

owned a 25 percent interest in a condominium in Hilton Head, South Carolina (the

“Hilton Head Property”).

The Nelsons and Mr. Bailey also jointly owned another condominium in

Hilton Head, South Carolina, and a lake house in South Carolina (collectively the

“Other Properties”). Debtors had no interest in the Other Properties.

In the fall of 2006, the Nelsons contacted Mr. Lightmas regarding concerns

they had with the accounting of revenues from some of this real property. As time

Although Calloway is the holder of the proceeds at issue, Trustee did not join 4

Calloway as a party to this adversary proceeding on the belief that Calloway would

voluntarily comply with any order of this Court.

5

went by, Mr. Lightmas learned that the Nelsons had purchased insurance products

from Mr. Bailey and Debtors. Upon investigation, he concluded that Mr. Bailey and

Debtors had engaged in alleged fraud in the sale of these products to the Nelsons.

Mr. Lightmas further concluded that the Nelsons had significant damages claims

against Mr. Bailey and Debtors arising out of these insurance product sales.

In April 2007, Summit and the Nelsons sold the Mars Hills Property. Pursuant

to an “ESCROW AGREEMENT” signed by Mr. Dunn (on behalf of Summit) and the

Nelsons, proceeds from the sale totaling $43,317.65 were placed in escrow with

Calloway Title and Escrow, LLC (“Calloway”). 4

Thereafter, in September 2007, Water Oak and Mr. Dunn sold the Hilton Head

Property. Pursuant to an “ESCROW AGREEMENT” signed by Mr. Bailey and

Mr. Nelson (on behalf of Water Oak), Mrs. Nelson and Mr. Dunn, proceeds from the

sale totaling $71,763.44 were placed in escrow with Calloway.

In 2008, the Nelsons, represented by Mr. Lightmas, brought suit against

Mr. Bailey, Debtors and various insurance companies in the Superior Court of Fulton

County, Georgia (Civil Action File No. 2008CV152648) in which they sought to

recover damages for alleged fraud, negligent misrepresentation, breach of fiduciary

duty, negligence and breach of contract by Mr. Bailey and Debtors in connection with

6

the sale of the insurance products.

Paragraph 4 of each of the escrow agreements, which were substantially

identical, provides:

Upon written notification from the Parties that they have agreed as to

the disbursement of the above Escrow Funds or upon receipt of a court

order instructing Escrow Agent to disburse the above Escrow Funds,

Escrow Agent shall deliver to the appropriate parties the appropriate

amounts as disclosed by said written notification or said court order.

Except for this paragraph, the agreements are silent as to the terms, conditions or

basis upon which the parties were to reach an agreement as to the disbursement of the

funds and provide no other direction to the escrow agent regarding disbursement.

Not surprisingly, Trustee and the Nelsons disagree as to the meaning and intent of

paragraph 4 of the agreements, the conditions upon which the funds were to be

disbursed and whether Debtors’ interests in the funds are property of the estate.

Trustee contends that the agreements are not true “escrow” agreements

because there was no meeting of the minds with respect to the intent of paragraph 4

of the agreements and because the escrow agreements do not specify the beneficiaries

who are to receive the funds. Thus, he contends that Debtors’ interests in these funds

are property of the estate.

The Nelsons, on the other hand, contend that the sales proceeds were placed in

escrow in order to provide a fund against which they could recover from Debtors

their damages arising out of the insurance products sales. Accordingly, they contend

239 F.3d 1195 (11th Cir. 2001). 5

7

that the funds in escrow are not property of Debtors’ estates.

DISCUSSION

Trustee contends that the interests of Debtors’ estates in the funds being held

in escrow are property of the estate. Trustee, as plaintiff, has the burden of proof on

his claim. Schaffer v. Weast, 546 U.S. 49, 56, 126 S.Ct. 528, 534, 163 L.Ed2d 387

(2005). The preponderance of evidence standard applies to this proceeding. Grogan

v. Garner, 498 U.S. 279, 286, 111 S. Ct. 654, 112 L.E.2d 755 (1991).

In Dzikowski v. NASD Regulation, Inc. (In re Scanlon), the Eleventh Circuit 5

Court of Appeals held :

A debtor’s estate in bankruptcy consists of all legal and equitable

interests of the debtor in property as of the commencement of the case.

The extent and validity of the debtor’s interest in property is a question

of state law.

239 F.3d at 1197. (citations and internal quotation marks omitted). Applying Florida

law, the court explained:

[L]egal title to property placed in an escrow account remains with the

grantor until the occurrence of the condition specified in the escrow

agreement. Nonetheless, funds that are deposited into an escrow

account by a debtor, for the benefit of others, cannot be characterized

as property of the estate.

239 F.3d at 1197-98. (citations and internal quotation marks omitted). Florida and

Georgia law are identical on the subject of title to funds that are placed in escrow.

188 Ga. App. 558, 373 S.E.2d 792 (1988), rev’d on other grounds, 258 Ga. 891, 376 6

S.E. 2d 655 (1989).

8

Georgia Heritage Ass’n. LP v. Westfield Apartments, LLC (In re Westfield

Apartments, LLC), 2010 WL 2179622, at *5, n.6 (Bankr. S.D. Ga., April 27, 2010).

Trustee and the Nelsons disagree as to the enforceability and interpretation of

the escrow agreements. In Giddens Construction Co. v. Fickling & Walker Co. , the 6

court held

‘The cardinal rule of construction [of a contract] is to ascertain the

intention of the parties,’ O.C.G.A. § 13-2-3, and ‘[e]scrow agreements

will be given a reasonable construction in order to carry out the

manifest intentions of the parties,’ 11 EGL, Escrows § 6.

373 S.E.2d at 794. “The intention of the parties may differ among themselves. In

such case, the meaning placed on the contract by one party and known to be thus

understood by the other party at the time shall be held as the true meaning.” O.C.G.A.

§ 13-2-4. However, where both sides to a contract have different intentions with

respect to an essential term of the contract, no valid and binding contract is created.

Tekin v. Whiddon, 233 Ga. App. 645, 504 S.E.2d 722, 725 (1998).

‘A meeting of the minds is the first requirement of the law relative to

contracts.’ (Citation and punctuation omitted). Simmons v. McBride,

228 Ga. App. at 753, 492 S.E.2d. 738. See OCGA § 13-3-2. ‘(I)f there

was in fact an essential part of the contract upon which the minds of the

parties had not met, or upon which there was not an agreement it must

follow than a valid and binding contract was not made.’ (Citations and

punctuation omitted) . BellSouth Advertising, Inc. etc., Corp. v.

McCollum, 209 Ga. App. 441, 445 (2) 433 S.E.2d 437 (1993).

9

504 S.E.2d at 725. See also, Camp v. Peetluk, 262 Ga. App. 345, 585 S.E.2d 704

(2003), cert. denied.

Trustee contends that the escrow agreements are not enforceable because the

agreements are silent as to the beneficiaries of the escrows. However, “[i]f only a

part of a contract is reduced to writing… and it is manifest that the writing was not

intended to speak the whole contract, then parol evidence is admissible”. O.C.G.A. §

13-2-2(1). Thus, the identity of the beneficiaries could be proved by parol evidence.

However, unless the Court finds that the parties had a meeting of the minds with

respect to the intent of paragraph 4 of the agreements, the disagreement regarding the

beneficiaries of the escrows will be moot.

In explaining his understanding of the escrow agreements, Mr. Dunn testified

that he and Mr. Bailey were represented by the law firm of Bird, Loechl, Brittain &

McCants (“Bird & Loechl”) in the sale of the Mars Hills Property and the Hilton

Head Property. Mr. Dunn testified that, in connection with the closing on the sale of

the Mars Hills Property, he was contacted by an attorney at Bird & Loechl and

advised that the Nelsons wanted the sale proceeds placed in escrow until a proper

accounting of the parties’ interests could be conducted to ensure that everyone

received their proper amount of the proceeds. Having no objection, Mr. Dunn agreed

to the escrow.

With respect to the Hilton Head Property, Mr. Dunn testified that, when a

11 U.S.C. § 341(a). 7

10

similar escrow for those sale proceeds was suggested, he initially objected because he

was unaware of any dispute regarding the ownership of that property. However,

Mr. Dunn testified that Bird & Loechl advised him that if he did not agree to the

escrow, the buyers would sue him for causing the sale to fail. Accordingly, Mr. Dunn

testified that he then relented to the proceeds being placed in escrow pending an

accounting of the parties’ interests.

Although there was no testimony to refute Mr. Dunn’s version of the facts, the

Nelsons argue that Mr. Dunn’s testimony is not credible. They point to the fact that

Debtors did not list their interests in the escrow funds on their schedules of assets in

their bankruptcy case. The Nelsons argue that this suggests that Debtors did not

believe that they had an interest in the funds. However, Mr. Dunn testified that he

advised his bankruptcy attorney of the escrow funds and that the attorney included

the value of the Mars Hills Property escrow in the value of Mr. Dunn’s interest in

Summit which he disclosed on the schedules. Mr. Dunn testified that the attorney

erroneously included his interest in the Hilton Head Property escrow as part of his

interest in Summit. Further, Mr. Dunn testified that he and Mrs. Dunn voluntarily

disclosed information regarding the escrow funds to Trustee at the meeting of

creditors. The Court finds Mr. Dunn’s explanation credible. 7

The Nelsons also challenge the credibility of Mr. Dunn’s testimony because

In his schedules of assets and liabilities introduced at trial, Debtors reported secured 8

claims in the amount of $394,500 and unsecured nonpriority claims totaling $245,941.41.

11

after the proceeds were placed in escrow, Debtors never attempted to recover the

funds from the escrow agent. However, Mr. Dunn testified that until shortly before

he and his wife filed bankruptcy, he had a high enough income that he did not need

immediate access to his interest in the funds. When his economic condition

deteriorated, the value of his interest in the funds relative to the amount of his debts8

was not significant and would not have solved his financial problems. He also

testified that once the Nelsons filed the insurance claims lawsuit he knew they would

not voluntarily agree to release his interest in the funds and he could not afford to pay

an attorney to litigate over the funds. The Court finds Mr. Dunn’s explanation

credible.

Accordingly, the Court finds that Trustee has established, by a preponderance

of the evidence, that Mr. Dunn’s sole reason for agreeing to the escrow was to hold

the funds pending an accounting of the parties’ ownership interests. Had this

understanding been conveyed by Bird & Loechl to Mr. Lightmas, who was

representing the Nelsons in connection with the property sales, the Court could find

that the Nelsons were aware of Mr. Dunn’s intent. Knowledge that their attorney,

Mr. Lightmas, obtained in the matter in which he had been engaged would be the

equivalent of knowledge of his clients. Roylston v. Bank of America, N.A., 290 Ga.

App. 556, 660 S.E.2d 412, 417 (2008).

Even if the Court were to find that the parties had a meeting of the minds that the 9

purpose of the escrow was to facilitate an accounting of the parties’ interests, the outcome of

this case would not change because Mr. Lightmas testified that the accounting of revenues

dispute was with Mr. Bailey and not with Debtors. Thus, the Nelsons would have no claim

against Debtors’ interests in the funds arising out of the accounting dispute with Mr. Bailey.

12

Further, had the Nelsons not objected to this intent, then the Court could hold

that this was the intent of the parties with respect to paragraph 4. O.C.G.A. § 13-2-4.

However, there is no evidence that Bird & Loechl conveyed Mr. Dunn’s intent to

Mr. Lightmas. Thus, there is no evidence that the parties had a meeting of the minds

that the purpose of the escrow was to facilitate an accounting of the parties’

interests.9

In explaining his understanding of the escrow agreements, Mr. Lightmas

testified that he began talking with Bird & Loechl about the revenue accounting

issues in early 2007. He testified that he also attempted to discuss the insurance

claims with Bird & Loechl. However, they advised him that they did not know

anything about those claims and could not talk to him about them.

Mr. Lightmas testified that when the Mars Hills Property was sold, he told the

attorneys at Bird & Loechl that he wanted to escrow the proceeds as a fund from

which the Nelsons could recover their claims arising from the insurance product

purchases. He testified that Bird & Loechl agreed to this and sent him a proposed

escrow agreement form. Mr. Lightmas testified that he made changes to the

proposed form, the most important of which was to add the phrase in paragraph 4 that

13

the escrow agent was to disburse the funds “upon receipt of a court order instructing

Escrow Agent to disburse the Escrow Funds”. Mr. Lightmas further testified that

when the Hilton Head property was sold, he again demanded that the sales proceeds

be placed in escrow. He testified that Bird & Loechl had no objection and the same

escrow agreement form was used.

Mr. Dunn testified that Bird & Loechl, which was representing him in the real

estate matters, never advised him that the purpose of the escrow was to provide a

source of collection for any recoveries by the Nelsons on their insurance claims.

Mr. Dunn testified, without contradictation, that he was not even aware that the

Nelsons were asserting the insurance claims against him until the lawsuit was filed

and served in June or July of 2008, almost one year after the property sales were

closed. He further testified that he would have never agreed to an escrow for this

purpose. Nevertheless, if Bird & Loechl was aware of the Nelsons’ purpose, then

that knowledge would be charged to their client, Mr. Dunn. Roylston v. Bank of

America, N.A., supra. Thus, the Court must decide whether Mr. Lightmas conveyed

this intent to Bird & Loechl.

Although Mr. Lightmas testified that he had expressed this intent to Bird &

Loechl, the Court finds that this testimony is not credible because it is completely

inconsistent with the documentary evidence introduced at trial. Although

Mr. Lightmas testified that, from January of 2007 through September of 2007, he

14

had numerous conversations with Bird & Loechl regarding the insurance claims,

there are no letters, e-mails or memoranda which mention these claims. Several

letters, settlement memoranda and e-mails generated during this period of time were

introduced into evidence. All discuss the accounting disputes the Nelsons were

having with Mr. Bailey and several suggest the possibility of litigation to resolve

those disputes. However, there is no mention of the insurance claims in any of these

documents, nor is litigation regarding those claims ever mentioned. In fact,

Mr. Lightmas acknowledged that Trustee had reviewed all of the e-mails and

correspondence between Mr. Lightmas and Bird & Loechl that were generated during

this time frame and there was no mention in any of them of the insurance claims.

Further, it was Mr. Lightmas who demanded that the escrow agreement forms

contain a clause requiring the escrow agent to respond to an order of court regarding

disbursement of the sale proceeds. However, Mr. Lightmas, who filed the insurance

claims lawsuit on behalf of the Nelsons, did not request in that suit that the court

order the escrow agent to disburse the funds in payment of those claims.

Mr. Lightmas’ testimony that he did not include such a claim because he intended to

file a second lawsuit regarding the escrows is not credible. Rather, his failure to

include a claim on the escrows in the lawsuit suggests that he did not believe that the

sales proceeds were escrowed for that purpose.

In summary, there is a paper trail to support Mr. Lightmas’ testimony that,

192 Ga. 526, 15 S.E.2d 848 (1941). 10

15

during the relevant period of time, he was discussing with Bird & Loechl the

accounting disputes between the Nelsons and Mr. Bailey. However, there is no

similar paper trail evidencing his discussions regarding the insurance claims.

Further, his failure to seek a court order regarding the funds in the lawsuit asserting

those claims belies his assertion that the funds were escrowed for that purpose.

Accordingly, the Court does not find Mr. Lightmas’ testimony credible and the Court

finds that there was not a meeting of the minds that the purpose of the escrows was to

provide a fund against which the Nelsons could recover on their insurance claims.

As explained by the court in Fulton Land Co. v. Armor Insulating Co. : 10

In order to create a valid and binding escrow, it is necessary that there

be an actual contract between the parties in interest, a proper subject

matter, and an absolute deposit of [the money] with a depositary acting

for the parties, by which it passes beyond the control of the depositor to

withdraw the deposit on the performance or happening of the agreed

conditions of the escrow period.

15 S.E.2d at 849 (emphasis supplied). Where there is no meeting of the minds as to

the terms of an escrow agreement, no valid and binding agreement is formed. Camp

v. Peetluk, supra

The Court finds that Trustee has established by a preponderance of the

evidence that the Nelsons and Mr. Dunn had different understandings of the purpose

of the escrow agreement. Since there was no meeting of the minds with the respect

to its purpose, no valid contract was formed. Accordingly, the Court finds that

16

Mr. Dunn’s interest in the escrowed funds is property of the estate.

It is undisputed that Summit had a 75 percent ownership interest in the

proceeds of $43,317.65 from the sale of the Mars Hills Property. It is undisputed that

Mr. Dunn owned a 25 percent interest in Summit and, accordingly, owned a 25

percent interest in the proceeds. Thus, with respect to the funds from the sale of the

Mars Hills Property, the Court finds that Mr. Dunn’s interest is $8,122.06.

With respect to the Hilton Head Property, Mr. Dunn owned a 25 percent

interest in the sales proceeds of $71, 763.44. Accordingly, his interest is $17,940.86.

With respect to Mrs. Dunn, there is no evidence that Bird & Locehl

represented her interest in the sale of the Mars Hill Property. Further, there is no

evidence of her intent with respect to the escrow agreement nor is there any evidence

that the Nelsons’ purpose for the escrow was ever conveyed to her. Accordingly, the

Court finds that, with respect to Mrs. Dunn, there was no meeting of the minds

regarding the purpose of the escrow, and accordingly, her interest in the escrow is

property of the estate. It is undisputed that she had a 25 percent ownership interest in

Summit. Accordingly, her interest in the sales proceeds from the Mars Hill Property

is $8,122.06.

Trustee, as Chapter 7 trustee of Debtors’ estates, succeeds to their interests in

the funds being held by Calloway. 11 U.S.C. § 704.

An order consistent with this opinion will be entered.

NANCY DIANE ALLEN,

October 4, 2010

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

In the Matter of: : Chapter 7

:

NANCY DIANE ALLEN, :

:

Debtor : Case No. 10-50827 JPS

BEFORE

JAMES P. SMITH

UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

Chapter 7 Trustee: Thomas D. Lovett

P.O. Box 1164

Valdosta, Georgia 31603

Debtor: Jason M. Orenstein

P.O. Box 4086

Macon, Georgia 31208

SIGNED this 04 day of October, 2010.

________________________________________

JAMES P. SMITH

__________________________________U_N_IT_E_D_ S_T_A_T_E_S _B_A_N_KR_U_P_T_C_Y_ J_U_D_G_E__

In March 2000, Debtor was known as Nancy Diane Torbush. 1

2

MEMORANDUM OPINION

This matter arises from the Chapter 7 trustee’s objection to Debtor’s claim of

exemption of an annuity. Upon considering the stipulated facts, the annuity and the

arguments of counsel, the Court now publishes this memorandum opinion.

BACKGROUND

The undisputed facts are that in March 2000, Debtor Nancy Diane Allen was 1

injured in a motor vehicle accident and thereafter asserted a claim for negligence

against a third party whose liability insurer was Metropolitan Property and Casualty

Insurance Company (“Metropolitan”). In May 2002, Debtor’s claim was settled for

$225,000 under the terms of a Settlement Agreement And Release which recited in

part that “all sums set forth herein constitute damages on account of personal

injuries. . . .” Debtor received $200,000 via a cash payment at the time of settlement.

The remaining settlement funds, $25,000, were used to purchase an annuity policy

from Metropolitan Life Insurance Company (“MetLife”) which will pay Debtor

$1,101 per month for sixty months commencing in April 2015. Metropolitan is owner

of the annuity policy, Debtor is payee of the deferred monthly payments, and a third

party is beneficiary should Debtor die. The annuity policy expressly provides that the

payments are nonassignable, cannot be encumbered, and will be exempt from the

3

claims of creditors to the maximum extent permitted by law. Although the annuity

policy expressly prohibits the acceleration or early withdrawal of any funds, there is

no restriction on how Debtor may use the annuity payments. At all relevant times,

Debtor has been a citizen and resident of Georgia.

On March 17, 2010, Debtor filed her Chapter 7 case and listed on Schedule B -

Personal Property, the annuity as having a current value of $66,000. On Schedule C -

Property Claimed As Exempt, Debtor claimed the entire value of the annuity

($66,000) as exempt under Georgia Code § 33-28-7, describing it as “annuity from

personal injury settlement in 2001, can not receive money until 2015.” On Schedule

F, Debtor listed unsecured nonpriority claims totaling $23,650. Through his objection,

Walter W. Kelley, Trustee, contends that Debtor’s exemptions are limited to those

allowed under Georgia’s bankruptcy specific exemption statute OCGA § 44-13-100.

DISCUSSION

Trustee has the burden of proving that the exemption is not properly claimed.

Fed. R. Bank. P. 4003(c). An individual in bankruptcy may claim as exempt certain

property of the estate. 11 U.S.C. § 522(b)(1). Because the state of Georgia has “opted

out” of the federal exemption provisions, OCGA § 44-13-100(b), the exemptions that

Debtor may claim are, in relevant part, those prescribed by state law. 11 U.S.C.

§ 522 (b)(2), (3).

Because none of the exemptions rights under OCGA § 44-13-100 have been claimed by 2

Debtor, the Court takes no position on which, if any, of such exemptions might apply to the

annuity rights in question.

4

Georgia’s bankruptcy specific exemptions are found in OCGA § 44-13-100.

That statute provides that “. . . any debtor who is a natural person may exempt,

pursuant to this article, for purposes of bankruptcy . . .” certain property described

therein. OCGA § 44-13-100(a). The only exemption right specifically addressing

annuities is found in Section 44-13-100(a)(2)(E). The exemption is limited in amount

and is applicable to only certain types of annuities. Specifically, Section 44-13-

100(a)(2)(E) allows a debtor in bankruptcy to exempt:

(2) The debtor’s right to receive:

. . .

(E) A payment under a pension, annuity, or similar plan

or contract on account of illness, disability, death, age, or

length of service, to the extent reasonably necessary for

the support of the debtor and any dependent of the debtor;

Other provisions in Section 44-13-100 might be used to exempt a limited amount of a

debtor’s right to receive payments under an annuity, such as the “wild card”

exemption under Section 44-13-100(a)(6) and the exemption of payments on account

of personal bodily injury under Section 44-13-100(a)(11)(D). 2

Contending that Section 44-13-100 is not the exclusive source of exemptions

under state law for a debtor in bankruptcy, Debtor seeks to exempt her annuity rights

Title 33 is known as the Georgia Insurance Code. OCGA § 33-1-1. 3

Although MetLife is the owner of the annuity policy in question, the parties did not 4

stipulate nor submit evidence on whether MetLife is a citizen or resident of Georgia. Thus,

this statute may not even apply to the annuity policy in question since the statute is limited

to contracts issued to citizens or residents of Georgia. Since neither party raised this issue,

the Court will assume, without deciding, that the statute is applicable.

Both Section 33-23-7 and Section 33-25-11(c) were enacted during the 2006 legislative 5

session.

5

under Georgia Insurance Code § 33-28-7. This statute was enacted by the Georgia 3

Legislature in 2006 and provides:

The proceeds of annuity, reversionary annuity, or pure

endowment contracts issued to citizens or residents of this state,

upon whatever form, shall not in any case be liable to attachment,

garnishment, or legal processing in favor of any creditor of the

person who is the beneficiary of such annuity contract unless the

annuity contract was assigned to or was effected for the benefit of

such creditor or unless the purchase, sale, or transfer of the policy

is made with the intent to defraud creditors. 4

Thus, Georgia’s bankruptcy specific exemption statute provides limited

protection to the right to receive payments under certain types of annuity policies.

However, Section 33-28-7 completely protects annuity payments of all types.

Therefore, if Section 33-28-7 is construed to provide an exemption in bankruptcy

cases, it would be in conflict with Section 44-13-100.

Contemporaneously with the enactment of Section 33-28-7, the Georgia

Legislature also enacted Georgia Insurance Code § 33-25-11(c) to protect an

unlimited amount of cash surrender value of life insurance policies. That statute 5

6

provides:

The cash surrender values of life insurance policies

issued upon the lives of citizens or residents of this state,

upon whatever form, shall not in any case be liable to

attachment, garnishment, or legal process in favor of any

creditor of the person whose life is so insured unless the

insurance policy was assigned to or was effected for the

benefit of such creditor or unless the purchase, sale, or

transfer of the policy is made with the intent to defraud

creditors.

By contrast, the bankruptcy specific exemption statute which addresses the cash

surrender value of life insurance policies, Section 44-13-100(a)(9), provides:

The debtor’s aggregate interest, not to exceed $2,000.00

in value, less any amount of property of the estate

transferred in the manner specified in Section 542(d) of

U.S. Code Title 11, in any accrued dividend or interest

under, or loan or cash value of, any unmatured life

insurance contract owned by the debtor under which the

insured is the debtor or an individual of whom the debtor

is a dependent.

As is the case with Section 33-28-7, if Section 33-25-11(c) is construed to provide an

exemption in bankruptcy cases, then it will be in conflict with Section 44-13-100.

“For purposes of statutory interpretation, a specific statute will prevail over a

general statute, absent any indication of a contrary legislative interest.” Vines v. State,

269 Ga. 438, 499 S.E.2d 630, 632 (1998). Further:

While repeal by implication is not favored, a statute will

be held to have repealed a prior statute where the later [i.e.

the prior statute] is clearly inconsistent and contrary to the

OCGA § 44-13-100 is also applicable to intestate insolvent estates where there is a 6

living widow or child of the intestate. OCGA 44-13-100(c).

7

most recently enacted law or where the later enactment

[i.e. the most recent statute] appears to cover the entire

subject matter and give expression to the whole law on the

subject.

Kyles v. State, 245 Ga. 49, 50, 326 S.E.2d 216, 217 (1985) (internal quotations and

citations omitted).

OCGA § 44-13-100 provides a specific list of exemptions which a debtor may

only use in bankruptcy cases. On the other hand, the Georgia Insurance Code 6

“extensively and exhaustively regulates, at the state level, all aspects of the insurance

industry in Georgia. . . .” Cotton States Mut. Ins. Co. v. DeKalb County, 251 Ga. 309,

312, 304 S.E.2d 386, 389 (1983). Section 44-13-100 is a statute dealing specifically

with bankruptcy exemptions, while Section 33-28-7 is more general in nature. By its

text, Section 33-28-7 does not address the subject matter of bankruptcy exemptions at

all.

The Georgia Legislature knows how to enact exemption rights applicable to

bankruptcy cases. In 1980, when Georgia enacted its first bankruptcy specific

exemption statute, former Ga. Code Title 51-1301.1, the preamble of the Act stated

that it was “to provide for exemptions to be used for the purposes of bankruptcy and in

actions involving bankruptcy.” 1980 Ga. Laws, p. 952. The preamble to the 1981

Ga. Code Title 51-1301.1 was codified as OCGA § 44-13-100 in 1982. OCGA 7

§ 1-1-1 to – 9.

8

revisions of the Act contained the same language. 1981 Ga. Laws, pp. 626, 627. 7

There is no indication in the Georgia Insurance Code statutes that the Georgia

Legislature intended to amend the bankruptcy exemption rights found in OCGA § 44-

13-100. Neither Section 33-28-7 nor Section 33-25-11(c) make reference to Section

44-13-100. Nor do either of the insurance statutes contain a phrase such as “all laws

and parts of laws in conflict with this statute are repealed” to indicate that the Georgia

Legislature meant to repeal any other statute. See Marshall v. Speedee Cash of

Georgia, 292 Ga. App. 790, 792, 665 S.E.2d 888, 890 (2008).

In contrast, in the past, when the Georgia Legislature intended to change the

exemption rights available to debtors in bankruptcy, it did so by specifically amending

Section 44-13-100. For instance, in its most recent amendments to the bankruptcy

exemption statutes, the Georgia Legislature made changes to the language of the

statute and substantially changed the dollar amounts for the various types of property

exempt under Section 44-13-100 by making changes to that specific statute. See 2001

Ga. Laws, p. 745, § 1.

In summary, there is no indication that the Georgia Legislature intended to

amend or supplement the bankruptcy specific exemptions found in Section 44-13-100

by way of the more general Georgia Insurance Code provisions. Rather, it appears

9

that the Legislature intended the Georgia Insurance Code to apply to nonbankruptcy

situations, with the bankruptcy specific exemptions in Section 44-13-100 applying in

bankruptcy cases.

In support of her contention that Georgia Insurance Code § 33-28-7 provides

an additional exemption to those found in Section 44-13-100, Debtor relies upon In re

Fullwood, Ch. 13, Case No. 07-41115 (Bankr. S.D. Ga., March 17, 2010) in which

Judge Davis held that a workers’ compensation lump sum settlement for future

benefits was exempt in bankruptcy under OCGA § 34-9-84 (workers’ compensation

claim for compensation not assignable and is exempt from all creditors’ claims).

Judge Davis, on page 4, stated “Some of Georgia’s state exemptions are found in

O.C.G.A. § 44-13-100. . . . [But] [i]n short, not all of Georgia’s exemptions are

contained within the four corners of O.C.G.A. § 44-13-100.” Judge Davis, at pages 4-

5, explained:

Georgia first passed its own bankruptcy-specific

exemptions, contained at the time in Ga. Code Title 51-

1301.1, in the 1980 legislative session. 1980 Ga. Laws

952. While that statute did not specifically exempt

Workers’ Compensation awards, it specifically

contemplated opting out of the federal exemptions. Id. at

§ 1. While the statute purported to exempt “for purposes

of bankruptcy, the following property:”which did not

include Workers’ Compensation awards, it did so in the

context of a long history exempting Workers’

Compensation awards from all claim of creditors. Georgia

first enacted its Workers’ Compensation statute in 1920.

The very first iteration of Georgia’s Workers’

Compensation statute declared that “no claim for

The prior version of Section 33-28-7 protected the interest of a beneficiary or assignee 8

of an annuity contract from the creditors of “the person effecting the [annuity] contract” as

long as that person was not also the beneficiary. See former OCGA 33-28-7 (amended

2006), 1960 Ga. Laws, p. 289 § 1. The beneficiary was not protected from his own creditors

until the 2006 enactment of the current version of Section 33-28-7.

10

compensation under this act shall be assignable, and all

compensation and claims therefore shall be exempt from

all claims of creditors.” 1920 Ga. Laws 167, § 22.

Georgia’s opt out exemptions were clearly adopted

within a framework in which Workers’ Compensation

claims are completely unreachable by all creditors. Had

the Georgia General Assembly included Workers’

Compensation awards in the 1980 bankruptcy exemption

list, after sixty years of statutory exemption arising from a

different law, it would have been redundant. The drafters

of the legislation assuredly thought that “exempt from all

claims of creditors” was strong enough language to ensure

that a debtor did not lose rights by declaring bankruptcy.

The historical context of the Workers’ Compensation statute is clearly

distinguishable from the Georgia Insurance Code annuity statute at issue in this case.

As Judge Davis explained in In re Fullwood, workers’ compensation benefits had

been exempt from creditors’ claims for sixty years prior to enactment of Georgia’s

bankruptcy specific exemption statute. By contrast, the current verison of Georgia

Insurance Code § 33-28-7 upon which Debtor relies did not become effective until 8

May 2006, some 26 years after the Georgia Legislature enacted Section 44-13-100.

Therefore, while this Court takes no position on whether In re Fullwood was correctly

decided, the historical justification relied upon by that court is not present in this case

and thus provides no basis for concluding that the Georgia Insurance Code annuity

LeCroy v. McCollam, 612 So.2d 572 (1993). 9

11

statute provides an additional exemption right to debtors in bankruptcy.

Debtor also relies upon LeCroy v. McCollam (In re McCollam), 986 F.2d 436

(11th Cir. 1993), in support of her contention that the Georgia Insurance Code annuity

statue provides an additional exemption. In LeCroy, the Eleventh Circuit had certified

to the Florida Supreme Court the question of whether a debtor in bankruptcy could use

Florida statute § 222.14 to fully exempt payments the debtor was to receive under an

annuity contract purchased by an insurance company in settlement of the debtor’s

prepetition tort claim. The Florida Supreme Court held that the payments under the 9

annuity contract were exempt for purposes of bankruptcy.

Debtor argues that the Florida annuity exemption statute is very similar to

OCGA § 33-28-7 and that this Court should follow the Eleventh Circuit’s LeCroy

decision. However, Florida law allows debtors to claim the “exemptions given to

residents of this state by the State Constitution and the Florida Statutes.” Fla. Stat.

§ 222.20. See In re Stewart, 373 B.R. 736, 739-40 (Bankr. M.D. Fla. 2007). Unlike

Georgia, Florida does not have a separate statute prescribing the exemptions available

to debtors in bankruptcy. Rather, in Florida the same exemption statutes are available

to both bankruptcy debtors and general judgment debtors. Thus, the issue of whether

a general exemption statute supplemented a bankruptcy specific exemption statute was

not before the Court in LeCroy. Accordingly, LeCroy is distinguishable and provides

The Georgia Legislature repealed the Georgia Trust Act and replaced it with The 10

Revised Georgia Trust Code of 2010 effective July 1, 2010. 2010 Ga. Laws, p. 579. Because

Debtor’s bankruptcy case was filed prior to July 2010, the provisions of the Georgia Trust

Act apply to this case.

12

Debtor with no support.

Alternatively, Debtor contends that her annuity is a spendthrift trust and, thus,

is not property of the estate under 11 U.S.C. § 541(c)(2). That statute, which excludes

spendthrift trusts from property of the estate, provides:

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.

See 5 Collier on Bankruptcy ¶ 541.27 (16th ed. 2010) (valid spendthrift trust is not

property of the estate). Trustee responds that the restrictions on the transfer of

Debtor’s interest in the annuity are not enforceable under Georgia law because Debtor

is both the settlor and beneficiary of a trust. OCGA § 53-12-28(c) (“spendthrift

provision [in a trust] prohibiting involuntary transfers is not valid if the beneficiary is

the settlor.”). 10

While both 11 U.S.C. § 541(c)(2) and OCGA § 53-12-28(c) concern

restrictions on alienation of an interest in a trust, neither Debtor nor Trustee have

addressed the issue of whether Debtor’s annuity is a trust. The Georgia Insurance

Code defines annuity as:

“Annuity” means a contract by which one party in return for a

stipulated payment or payments promises to pay periodic

OCGA § 53-12-1. 11

278 Ga. App. 273, 628 S.E.2d 680 (2006). 12

13

installments for a stated certain period of time or for the life or

lives of the person or persons specified in the contract. The term

does not cover the proceeds of life insurance no matter how

payable.

OCGA. § 33-28-1(1). The Georgia Trust Act defines trust as: 11

“Trust” means a fiduciary relationship with respect to property

arising from a settlor’s intention to impose equitable duties on a

person to hold, manage, or otherwise administer that property for

the benefit of another person.

OCGA. § 53-12-2 (8). In Peach Consolidated Properties, L.L.C. v. Carter , the court 12

stated:

“A trust is an equitable obligation, either express or implied,

resting upon a person by reason of a confidence reposed in him,

to apply or deal with property for the benefit of some other

person, or for the benefit of himself and another or others,

according to such confidence.” (Citation and punctuation

omitted.) Smith v. Francis, 221 Ga. 260, 267(4)(b), 144 S.E.2d

439 (1965).”

628 S.E.2d at 682. Under OCGA § 53-12-20, an express trust, which must be in

writing, has the following elements: an intent to create a trust, trust property, a

beneficiary, a trustee, and active duties imposed on the trustee which are specific in

the writing or implied by law.

“Annuity agreements create only the relation of debtor and creditor, not a

For this reason, Debtor’s reliance on Meehan v. Wallace (In re Meehan), 102 F. 3d 13

1209 (11th. Cir. 1997), is misplaced because the IRA at issue there was, by statute, a trust.

See Id., at 1211 n.4.

14

trust.” Chatham County Hospital Authority v. John Hancock Mutual Life Insurance

Co., 325 F. Supp. 614, 619-20 (S.D. Ga. 1971). “The purchase of an annuity

ordinarily creates the relationship of debtor/creditor, not trustee/beneficiary, and a

debt is not a trust.” Rhiel v. Adams (In re Adams), 302 B.R. 535, 541 (6th Cir. BAP

2003) (internal citations and quotation marks omitted). See In re Hupton, 287 B.R.

438, 443 (Bankr. M. D. Iowa 2002) (consensus of courts is that annuities are not

spendthrifts trusts for purposes of § 541(c)(2)). “ The relationship of an insurer and an

annuitant is not a fiduciary one.” 3B C.J.S. Annuities § 34 (2010). “A debt is not a

trust.” Restatement (Second) of Trusts §12 (2010).

With regard to Debtor’s annuity policy, there is no mention of a trust, no

appointment of a trustee, no creation of a fiduciary relationship with respect to

property, and no duty imposed upon MetLife to hold, manage or administer property

for the benefit of Debtor. There is no trust corpus or res. MetLife’s sole obligation is

to make deferred monthly payments of a fixed amount ($1,101), for a fixed time

period (60 months), commencing on a date certain (April 2015). Thus, Debtor’s

annuity policy is not a trust. Therefore, 11 U.S.C. § 541(c)(2) is inapplicable. 13

In conclusion, this Court holds that Debtor’s interest under the annuity policy is

property of the estate. Further, this Court holds that Georgia Insurance Code § 33-28-

15

7 does not provide Debtor with an exemption right in her bankruptcy case. Rather,

with respect to the right to receive payments under the annuity policy, Debtor’s

exemption rights are limited to those found in OCGA § 44-13-100. Accordingly, the

Court will enter an order sustaining Trustee’s objection and disallowing Debtor’s

exemption.

An order in accordance with this memorandum opinion will be entered

this date.

**END OF DOCUMENT**

SHANNON HOWARD CONNER and ERIN GINN CONNER

April 23, 2010

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 7

:

SHANNON HOWARD CONNER and :

ERIN GINN CONNER, ::

Debtors : Case No. 09-30750 JPS

:

JAMIE DALE DAVIS, ::

Plaintiff :

vs. : Adversary Proceeding

: No. 09-3033

SHANNON HOWARD CONNER, ::

Defendant ::

BEFORE

JAMES P. SMITH

UNITED STATES BANKRUPTCY JUDGE

SO ORDERED.

SIGNED this 23 day of April, 2010.

________________________________________

JAMES P. SMITH

__________________________________U_N_IT_E_D_ S_T_A_T_E_S _B_A_N_KR_U_P_T_C_Y_ J_U_D_G_E__

COUNSEL:

Plaintiff: James A. Attwood

6400 Powers Ferry Road, Suite 112

Atlanta, Georgia 30339

Defendant: R. Douglas Lenhardt

230 College Ave., Suite 500

Athens, Georgia 30605

1 See Plaintiff’s Exhibit D attached to Plaintiff’s Amended Complaint To Determine

Dischargeability Of A Particular Debt.

3

MEMORANDUM OPINION

This matter arises in an adversary proceeding in which the Plaintiff, Jamie Dale

Davis (“Davis”), seeks to have his claim against the Debtor, Shannon Howard Conner

(“Debtor”), declared nondischargeable under 11 U.S.C. § 523(a)(4) and (6). Davis

has filed a motion for summary judgment to which Debtor has responded. The Court,

having considered the motion, the response and the record, now publishes this

memorandum opinion.

FACTS

Prior to the filing of this bankruptcy case, Davis filed a complaint in the

Superior Court of Franklin County, Georgia (the “state court action”) against Debtor

and Conner Auto Sales, Inc. (“Conner Auto”) in which Davis contended that he and

Debtor had been partners in a used car business. Davis contended that he made

numerous loans to Debtor and Conner Auto. Davis further alleged that he and Debtor

had an agreement to share the partnership’s profits on an equal basis and that Debtor

failed to pay Davis his share of the profits. The complaint sought judgment for breach

of contract, breach of fiduciary duty, conversion, attorney’s fees and expenses of

litigation, and punitive damages.

Subsequently, the Superior Court of Franklin County entered an order1 which

2 Debtor’s wife is not a party in this adversary proceeding.

3Although Debtor filed his responsive materials more than 21 days after Davis served his

statement of uncontested facts, the Court will not deem such facts as admitted. Our local

rules provide that material facts “may be deemed admitted” if not timely controverted. M.D.

Ga. LBR 7056-1(b),(c). After obtaining new counsel, Debtor immediately filed responsive

4

provided as follows:

ORDER

Plaintiff’s [Davis’] Motion for Summary Judgment is

GRANTED. Judgment is entered in favor of Plaintiff [Davis] on his

claims for breach of contract, breach of fiduciary duty, attorney’s fees

under O.C.G.A § 13-6-11, and compensatory damages. It is hereby

ordered and adjudged that Plaintiff [Davis] shall recover $119,202.19

from Defendants [Debtor] and Conner Auto Sales, Inc.

Thereafter, Debtor and his wife2 filed a joint petition under Chapter 7 of the

Bankruptcy Code. Debtor and his wife were represented by counsel in the initial

bankruptcy filing. Davis then filed his complaint objecting to the dischargeability of

Debtor’s obligation arising from the state court judgment, contending that Debtor’s

obligation is nondischargeable under sections 523(a)(4) and (6) of the Bankruptcy

Code. Debtor timely filed a response denying the allegations regarding

nondischargeability. Subsequently, the Court entered an order allowing Debtor’s

counsel to withdraw in this adversary proceeding.

Thereafter, Davis filed a motion for summary judgment and a statement of

uncontested facts. Debtor, after obtaining new counsel, filed a response to the motion

for summary judgement, a statement of material facts in dispute, and an affidavit.3

materials which controverted Davis’s statement of uncontested facts. There is no suggestion

that Davis has been prejudicial in any way by the late filing.

5

CONCLUSIONS OF LAW

“A motion for summary judgment should be granted when ‘the pleadings,

depositions, answers to interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any material fact and that

the moving party is entitled to judgment as a matter of law.’ F.R.Civ.P. 56(c).” . . .

Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed. 2d 265 (1986);

see also Morisky v. Broward County, 80 F.3d 445, 447 (11th Cir. 1996). On a

summary judgment motion, the record and all reasonable inferences that can be drawn

from it must be viewed in the light most favorable to the non-moving party. See Cast

Steel, 348 F.3d at 1301.” Midrash Sephardi, Inc. v. Town of Surfside, 366 F.3d 1214,

1223 (11th Cir. 2004), cert. denied 543 U.S. 1146, 125 S.Ct. 1295, 161 L. Ed.2d 106

(2005).

The allegations made by Davis in this adversary proceeding are essentially the

same allegations made in the state court action. In his motion for summary judgment,

Davis contends that as a result of the state court judgment, collateral estoppel bars

relitigation of any issues decided by the state court and that the state court judgment

establishes that Debtor’s obligation is nondischargeable in bankruptcy.

“Collateral estoppel prohibits the relitigation of issues that have been

adjudicated in a prior action. The principles of collateral estoppel apply in discharge

4 991 F.2d 672 (11th Cir. 1993).

6

exception proceedings in bankruptcy court.” Bush v. Balfour Beatty Bahamas, Ltd.

(In re Bush), 62 F.3d 1319, 1322 (11th Cir. 1995). In St. Laurent v. Ambrose (In re

St. Laurent),4 the Eleventh Circuit Court of Appeals stated:

If the prior judgment was rendered by a state court, then

the collateral estoppel law of that state must be applied to

determine the judgment’s preclusive effect. . . . While

collateral estoppel may bar a bankruptcy court from

relitigating factual issues previously decided in state court,

however, the ultimate issue of dischargeability is a legal

question to be addressed by the bankruptcy court in the

exercise of its exclusive jurisdiction to determine

dischargeability.

991 F.2d at 675-76.

Thus, the Court will look to Georgia law to determine the effect of the state

court judgment. In Georgia:

“[T]he doctrine of collateral estoppel precludes relitigation

when there is: (1) an identity of parties or their privies; (2) a

previous determination of the same or similar issues in a

previous court with competent jurisdiction; and (3) [collateral

estoppel] precludes only those issues actually litigated or by

necessity had to be decided for the judgment to be rendered.”

Cincinnati Insurance Co. v. MacLeod, 259 Ga. App. 761, 577 S.E. 2d 799, 803

(2003) cert. denied.

Clearly, the parties in the state court action and in the adversary proceeding

are the same except that Debtor’s business, Conner Auto Sales, Inc., is not a party in

this adversary proceeding. Thus, whether collateral estoppel applies depends on what

5 Even if the judgment was a default judgment as Debtor contends, the result would be

the same. In Georgia, collateral estoppel is applicable to defaults. Spooner v. Deere

Credit, Inc., 244 Ga. 681, 536 S.E.2d 581 (2000). Compare American States Insurance Co.

v. Walker, 223 Ga. App. 194, 477 S.E.2d 360 (1996) (collateral estoppel applies to default

judgment entered after no answer filed); Branton v. Hooks (In re Hooks), 238 B.R.

880, 884-85 (Bankr. S.D. Ga. 1999) (state court default judgment has collateral estoppel

effect in nondischargeable action in bankruptcy); League v. Graham (In re Graham), 191

B.R. 489, 494-97 (Bankr. N.D. Ga. 1996) (same).

7

issues were actually litigated in the state court action and whether the same issues are

presented in this adversary proceeding.

Debtor contends that collateral estoppel is not applicable to the state court

judgment which Debtor contends was, in essence, a default judgment because the

judgment was based on Debtor’s “deemed admissions” resulting from his failure to

respond to some of the allegations in Davis’ complaint and to the requests for

admission served on Debtor by Davis in the state court action. However, the state

court entered an order granting Davis’ motion for summary judgment, rather than a

default judgment. “Summary judgment is an adjudication on the merits and, where it

disposes of the entire case, constituted a final judgement.” Vann v. Billingsley, 234

Ga. App. 803, 508 S.E.2d 180, 182 (1998). See Summer – Minter & Assoc., Inc. v.

Girodano, 231 Ga. 601, 203 S.E.2d 173, 176 (1974).5

In this adversary proceeding, as in the state court action,, Davis contends that

he and Debtor were partners in business, that Debtor breached his fiduciary duty and

that Debtor intentionally deprived Davis of his share of the partnership’s profits.

Davis contends that Debtor’s obligation arising from the state court judgment is

A technical trust, also called a passive trust, is a trust in which 6 the trustee has no duty

other than to transfer the property to the beneficiary. Black’s Law Dictionary 1550, 1552

(8th ed. 2004).

8

nondischargeable under sections 523(a)(4) and (6) of the Bankruptcy Code, which

provide:

§ 523. Exceptions to discharge

(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—

. . .

(4) for fraud or defalcation while acting in a

fiduciary capacity, embezzlement, or larceny;

. . .

(6) for willful and malicious injury by the debtor to

another entity or to the property of another entity;

11 U.S.C.A. § 523(a)(4), (6) (West 2004).

To prevail on a nondischargeability claim under section 523 (a)(4) “for fraud

or defalcation while acting in a fiduciary capacity,” the plaintiff must prove the

existence of a technical trust6 that was created voluntarily by contract, often referred

to as an express trust, or a trust created by statute that imposes fiduciary duties. The

trust relationship must arise prior to the fraudulent act. The term “fiduciary” is not

construed expansively. Involuntary trusts such as constructive or resulting trusts do

not satisfy section 523(a)(4) because the act which created the debt simultaneously

7 This Court is bound by all decisions handled down by the former Fifth Circuit Court of

Appeals prior to October 1, 1981. Bonner v. City of Prichard, Alabama, 661 F.2d 1206,

1209 (11th Cir. 1981).

9

created the trust relationship. Guerra v. Fernandez-Rocha (In re Fernandez-Rocha),

451 F.3d 813, 816 (11th Cir. 2006); Quaif v. Johnson, 4 F.3d 950, 953-54 (11th Cir.

1993); Karl v. Stalnaker (In re Stalnaker), 408 B.R. 440, 446 (Bankr. M.D. Ga.

2009), aff’d 2010 WL 1258018 (M. D. Ga., Mar. 26, 2010).

While federal law determines whether a fiduciary relationship exists, reference

to state law is relevant to determine whether a trust obligation exists. Schwager v.

Fallas (In re Schwager), 121 F.3d 177,186 (5th Cir. 1997); Blashke v. Standard (In re

Standard), 123 B.R. 444, 453 (Bankr. N.D. Ga. 1991); Betz v. Gay (In re Gay),

117 B.R. 753, 754 (Bankr. M.D. Ga. 1989).

“[M]ere breach of fiduciary duty is not the same as the requirements for an 11

U.S.C. § 523(a)(4) nondischargeability finding.” Omega Cotton Corp. v. Sutton (In

re Sutton), 2008 WL 4527761 (Bankr. M.D. Ga., Oct. 2, 2008) (Laney, C.J.). A

relationship that simply involves confidence, trust and good faith does not satisfy the

requirements of section 523(a)(4). See Angelle v. Reed (In re Angelle), 610 F.2d

1335, 1341 (5th Cir. 1980) (applying § 17(a)(4) of the former Bankruptcy Act).7 See

LSP Investment Partnership v. Bennett (In re Bennett), 989 F.2d 779, 784 (5th Cir.

cert. denied 510 U.S. 1011, 114 S.Ct. 601, 126 L.E.2d 566 (1993) (stating that

Angelle is the seminal case interpreting fiduciary capacity and that § 17(a)(4) of the

8 In this adversary proceeding, Plaintiff does not contend that his claim against Debtor

for breach of contract is nondischargeable.

10

former Bankruptcy Act and section 523(a)(4) of the Bankruptcy Code are similar

enough that decisions construing the prior statute are applicable)).

In the state court action, the state court granted Davis judgment against Debtor

on, inter alia, Davis’ breach of fiduciary duty claim .8 Under Georgia law, a claim for

breach of fiduciary duty requires proof of (1) the existence of a fiduciary duty, (2)

breach of that duty, and (3) damages proximately caused by the breach. Griffin v.

Fowler, 260 Ga. App. 443, 579 S.E.2d 848, 850 (2003) cert. denied.

“Unquestionably, partners owe a fiduciary duty to one another.” Conner v. Hart, 252

Ga. App. 92, 555 S.E.2d 783, 786 (2001) (citing O.C.G.A. § 23-2-58) See Hendry v.

Wells, 286 Ga. App. 774, 650 S.E.2d 338, 346 (2007) cert. denied (citing O.C.G.A. §

23-2-58).

However, under Georgia law, a claim for breach of fiduciary duty does not

depend upon the existence of a technical, express or statutory trust. Thus, the three

bankruptcy courts in Georgia which have addressed the issue of whether a partner’s

fiduciary duties under Georgia law satisfies the fiduciary capacity requirement under

section 523(a)(4) have unanimously concluded that it does not. Tarpon Point, LLC v.

Wheelus (In re Wheelus), 2008 WL 372470 (Bankr. M.D. Ga., Feb. 11, 2008)

(Walker, J.) (members in limited liability company); Blashke v. Standard (In re

Standard), 123 B.R. 444, 451-55 (Bankr. N.D. Ga. 1991) (Bihary, J.); Betz v. Gay (In

9 Nor has such an allegation been made in this adversary proceeding.

11

re Gay), 117 B.R. 753 (Bankr. M.D. Ga. 1989) (Hershner, J.).

An objection under section 523(a)(4) for “fraud or defalcation while acting in

a fiduciary capacity” requires the existence of a trust. Davis did not allege in the

state court action that a technical, express or statutory trust existed between him and

Debtor.9 Under Georgia law, the existence of a trust is not a necessary element for a

breach of fiduciary duty claim. Thus, the state court’s judgment on breach of

fiduciary duty did not include, nor did it have to include, a determination of the

existence of a trust. Accordingly, the state court judgment finding that Debtor

breached his fiduciary duty to Davis does not act as collateral estoppel with respect to

the issue of whether such judgment is nondischargeable under section 523(a)(4) of

the Bankruptcy Code.

Davis also contends that Debtor converted to his own use Davis’ share of the

partnership’s profits and that this claim is nondischargeable under sections 523(a)(4)

and (6). However, the terms of the state court judgment clearly show that the state

court did not rule on Plaintiff’s claim of conversion. “Before collateral estoppel will

bar consideration of an issue, that issue must actually have been decided.” Karan,

Inc. v. Auto-Owners Insurance Co., 280 Ga. 545, 629 S.E.2d 260, 263 (2006). Thus,

the Court concludes that collateral estoppel does not apply to Davis’ claim of

conversion under sections 523(a)(4) and (6).

10 523 U.S. 57, 118 S. Ct. 974, 977, 140 L.E.2d 90 (1998).

11 Id. at 118 S. Ct. at 977.

12

Finally, Davis contends that Debtor’s obligation is nondischargeable under

section 523(a)(6) “for willful and malicious injury by the debtor to another entity or

to the property of another entity.” Davis contends that Debtor is collaterally estopped

from relitigating this issue by the state court judgment because Debtor, in the state

court action, is deemed to have admitted that he “displayed a specific intent to harm

[Davis]” and “intentionally failed to share the business’s profits with [Davis].”

In both this adversary proceeding and the state court action, Davis’ complaint

is based, in part, on an intentional breach of fiduciary duty arising from Debtor’s

failure to share the partnership’s profits. The only evidence on breach of fiduciary

duty before the state court on Davis’ motion for summary judgment was the alleged

intentional conduct of Debtor. Thus, the only basis for the state court’s judgment on

breach of fiduciary duty was the evidence of the intentional acts of Debtor.

Accordingly, this Court finds that the issue of an intentional act by the Debtor was

litigated and the state court did determine that Debtor acted intentionally.

In Kawaauhau v. Geiger,10 the Supreme Court held that, as used in section

523(a)(6), “willful” means “a deliberate or intentional injury”.11 Since the state court

determined that Debtor acted intentionally to deprive Davis of his share of the profits,

the Court concludes that the state court judgment collaterally estopps the relitigation

12 “O.C.G.A. § 13-6-11 applies to both contract and tort cases.” Lowery v. Roper, 293

Ga. App. 243, 666 S.E.2d 710, 711 n.2 (2008) cert. denied.

13

of this issue and that Debtor’s obligation under the state court judgment for breach of

fiduciary duty is nondischargeable under section 523(a)(6).

However, this conclusion does not fully resolve this adversary proceeding.

The state court judgment found in favor of Davis on his claims of breach of contract,

breach of fiduciary duty, attorney’s fees and compensatory damages. The amount of

the judgement was $119,202.19. The state court did not allocate the amount of this

judgment among the various claims. Thus, an issue of material fact remains to be

tried with respect to how much of the judgment amount ($119,202.19) can be

attributable to the intentional breach of fiduciary claim.

According to the evidence before the state court, at the time Davis and Debtor

disbanded their partnership, Debtor owed Davis approximately $95,000 in unshared

profits and loans. Of that amount, $61,579.17 plus interest was related to loans made

by Davis to Debtor and Conner Auto. Thus, at most, $33,420.83 (less the interest

component relating to the loan debt of $61,579.17) can be attributed to damages

arising out of the intentional breach of fiduciary duty. There is no evidence as to the

amount of the interest associated with the loans. Thus, there remains an issue of

material fact relating to the amount of the nondischargeable claim.

The state court also entered judgment in favor of Davis on his claim for

attorney’s fees under O.C.G.A. § 13-6-11.12 These attorney’s fees are

Since Davis does not contend that his st 13 ate court breach of contract claim is

nondischargeable, the attorney’s fees attributable to that claim are dischargeable in

bankruptcy.

14

nondischargeable under section 523(a)(6) to the extent they are attributable to the

underlying intentional breach of fiduciary duty claim.13 Stinson v. Morris (In re

Morris), 2005 WL 6459867 (Bankr. N.D. Ga., Dec. 2, 2005). Since the record is

devoid of any evidence of how much of the state court judgment of $119, 202.19 is

attributable to attorney’s fees arising from the intentional breach of fiduciary duty

claim, there exists a genuine issue of material fact as to the amount of attorney’s fees

that are nondischargeable.

CONCLUSION

Federal Rule of Civil Procedure 56(d), made applicable to this adversary

proceeding by Bankruptcy Rule 7056, provides;

(d) Case Not Fully Adjudicated on the Motion.

(1) Establishing Facts. If summary judgment is not

rendered on the whole action, the court should, to the

extent practical, determine what material facts are not

genuinely at issue. The court should so determine by

examining the pleadings and evidence before it and by

interrogating the attorneys. It should then issue an order

specifying what facts – including items of damages or

other relief – are not genuinely at issue. The facts so

specified must be treated as established in the action.

(2) Establishing Liability. An interlocutory summary

judgment may be rendered on liability alone, even if there

is a genuine issue on the amount of the damages.

15

Fed. R. Civ. P. 56(d).

In conclusion, the Court determines that Plaintiff Jamie Dale Davis has failed

to establish that he is entitled to summary judgment with respect to his claim for

breach of fiduciary duty under section 523(a)(4) and on his claim for conversion

under sections 523(a)(4) and (6). The Court determines that as a result of the state

court judgment the following facts have been established and, under the doctrine of

collateral estoppel, may not be relitigated or challenged in this adversary proceeding:

a. Prior to the filing of this bankruptcy case, Davis and

Debtor were partners in a used car business and had an

agreement to share the partnership’s profits on an equal

basis.

b. Debtor intentionally failed to pay Davis his share of the

profits.

c. The amount of the unshared profits is $95,000 less the

amount of unpaid loans owed by Debtor to Davis

($61,579.17 plus interest on the loans to the date of the

state court judgment).

This Court also concludes that, as a result of the state court judgment and the

application of collateral estoppel, Plaintiff Jamie Dale Davis is entitled to partial

summary judgment in that he has established that his claim against Debtor under the

state court judgment for intentional breach of fiduciary duty and any attorney fees

attributable thereto is nondischargeable under section 523(a)(6). However, there

remains a genuine issue of material fact as to how much of the damages and

attorney’s fees awarded in the state court judgment are attributable to the intentional

breach of the fiduciary duty claim and attorney fees.

16

An order in accordance with this memorandum opinion will be entered this

date granting in part and denying in part Davis’ motion for summary judgment.

** END OF DOCUMENT **

MICHAEL W. SWEET

April 30, 2010

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ATHENS DIVISION

In the Matter of: : Chapter 13

:

MICHAEL W. SWEET :

BARBARA SWEET, ::

Debtors : Case No. 09-31829 JPS

:

BEFORE

JAMES P. SMITH

UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

Debtors: Chris R. Morgan

1090-C Founders Blvd.

Athens, Georgia 30606

Chapter 13 Trustee: Tony D. Coy

P. O. Box 954

Macon, Georgia 31202

SO ORDERED.

SIGNED this 30 day of April, 2010.

________________________________________

JAMES P. SMITH

__________________________________U_N_IT_E_D_ S_T_A_T_E_S _B_A_N_KR_U_P_T_C_Y_ J_U_D_G_E__

2

MEMORANDUM OPINION

This matter comes before the Court on the Chapter 13 Trustee’s Amended

Objection to Confirmation of the Debtors’ amended Chapter 13 Plan. At the hearing

on the objection, the parties stipulated to certain facts and agreed that the Court could

take judicial notice of the contents of the various filings by the Debtors in this case.

Upon considering that evidence and the arguments of counsel, the Court now

publishes this memorandum opinion.

FACTS

Debtors Michael W. Sweet and Barbara Sweet filed their Chapter 13 case on

November 5, 2009. Debtors own a home in Walton County, Georgia, which they

value at $290,000 on their Amended Schedule A. The home is subject to a first

priority mortgage held by Chase Home Finance of $323,000, and a second priority

mortgage also held by Chase in the amount of $110,000. Thus, Debtors have no

equity in the home. Debtors purchased their home in 2007 for $435,000. At that time,

Mr. Sweet was making $260,000 per year. However, he subsequently lost his job and

is now self-employed and makes approximately $7,200 per month. Debtors and their

two children, ages 10 and 15, live in the home.

In their bankruptcy schedules, Debtors listed personal property having a value

Amended Schedule J lists Debtors’ n 1 et monthly income (average monthly income less

expenses) as $1,636.67.

2 This assumes that Debtors are successful in objecting to two unexpected claims asserted

by a former employee which total $600,00.

3

of $10,600, all of which is claimed as exempt under 11 U.S.C. § 522(b)(3). None of

their personal property appears to be extravagant.

According to the stipulated facts, Debtors did not incur any new debt after

Mr. Sweet lost his job. Rather, Debtors went through their savings until they were

forced to file this bankruptcy case. This is the first bankruptcy case that Debtors have

ever filed.

Pursuant to their amended Chapter 13 plan, Debtors will pay $1,635 per month

to Trustee for a period of 60 months.1 From this amount, Trustee will receive her fee

for administration of the case and will pay attorney’s fees of $3,500, a secured IRS

lien of $10,600, and an arrearage of $4,700 owed to Chase Home Finance on the first

mortgage. Priority claims are to be paid in full and unsecured creditors are to receive

a total of $25,000 which will yield a dividend of slightly less than 8 percent.2 Debtors

are to make the monthly payments of $2,333 on the first priority mortgage to Chase

“outside the plan.” Debtors propose to surrender a 2006 car and to retain two older

vehicles which are “paid for,” a 1999 car and a 2004 truck.

Trustee acknowledges that Debtors have proposed a “bare bones” budget and

that Debtors “are trying.” Trustee also acknowledges that Debtors are under the

3 In her amended objection to confirmation, Trustee also contended that the proposed plan

could not be completed within 60 months as required by 11 U.S.C. § 1322. However,

Trustee did not assert this objection at the hearing and the Court will deem this objection

abandoned.

4

applicable “median income” and that they were probably eligible to file a Chapter 7

case instead of a Chapter 13 case. The deadline for creditors to object to the

dischargeability of claims has passed without any objection being filed. Debtors have

no unusual or special circumstances or inordinate medical needs.

The amended plan hinges on Debtors being able to successfully strip off the

second mortgage on their home held by Chase. Debtors have filed an adversary

proceeding contending that the second mortgage is wholly unsecured and can be

avoided. As of the publishing of this opinion, Chase had not filed a response to this

complaint.

Trustee objects to confirmation of Debtors’ amended plan contending that the

plan has not been proposed in good faith because Debtors are proposing to keep a

large home while paying a low-percentage dividend to unsecured creditors.3 The

monthly mortgage payment of $2,333 represents approximately 32 percent of the

Debtors’ gross monthly income.

Trustee acknowledges that the projected plan payments meet the disposable

income test as required by 11 U.S.C. § 1325(b). Nevertheless, Trustee contends that

Debtors are proposing to pay an unreasonable amount of their income in order to

retain a home in which they have no equity while at the same time paying a low

5

dividend to their unsecured creditors. Trustee argues that Debtors should surrender

their home, find a less expensive home to either buy or rent, and pay the savings to the

unsecured creditors, thus increasing their dividend. Trustee argues that if Debtors

rented a home for $1,500 per month, that the payments to unsecured creditors could be

increased by approximately $45,000 over the term of the plan.

CONCLUSIONS OF LAW

Section 1325(a)(3) of the Bankruptcy Code provides that a court shall confirm

a Chapter 13 plan if, inter alia, “the plan has been proposed in good faith. . . .”

11 U.S.C. § 1325(a)(3). The debtor has the ultimate burden of proving that the plan is

confirmable. In re Pearson, 398 B.R. 97, 102 (Bankr. M.D. Ga. 2008). The term

“good faith” is not defined in the Bankruptcy Code. The Eleventh Circuit Court of

Appeals has held that in determining whether a plan is proposed in good faith, a

bankruptcy court must consider the following non-exclusive factors:

(1) the amount of the debtor’s income from all sources; (2)

the living expenses of the debtor and his dependents; (3)

the amount of attorney’s fees; (4) the probable or expected

duration of the debtor’s Chapter 13 plan; (5) the

motivations of the debtor and his sincerity in seeking relief

under the provisions of Chapter 13; (6) the debtor’s degree

of effort; (7) the debtor’s ability to earn and the likelihood

of the fluctuation of his earnings; (8) special

circumstances such as inordinate medical expense; (9) the

frequency with which the debtor has sought relief under

the Bankruptcy Reform Act and its predecessors; (10) the

circumstances under which the debtor has contracted his

6

debts and his demonstrated bona fides, or lack of same, in

dealing with his creditors; (11) the burden which the

plan’s administration would place on the trustee.

Kitchens v. Georgia R.R. Bank and Trust Co. (In re Kitchens), 702 F.2d 885, 888-89

(11th Cir. 1983).

Other factors include the extent to which claims are modified, the extent of

preferential treatment among classes of creditors, the substantiality of repayment to

unsecured creditors, whether a debt would be nondischargeable under Chapter 7, and

the accuracy of the plan’s statements of debts and expenses. Id. at 889. The Eleventh

Circuit also stated, “we do wish to note that other factors or exceptional circumstances

may support a finding of good faith, even though a debtor has proposed no or only

nominal payment to unsecured creditors.” Id.

Good faith is a finding of fact. Jim Walter Homes, Inc. v. Saylors (In re

Saylors), 869 F.2d 1434, 1438 (11th Cir. 1989). The bankruptcy courts in the

Eleventh Circuit have held that good faith is determined by the totality of the

circumstances. Baxter v. Turner (In re Turner), 2010 WL 1189806 (Bank. S.D. Ga.,

Mar. 17, 2010) (Barrett, J.); In re Lewis, 2009 WL 1856584 (Bankr. M.D. Ala., June

24, 2009) (Williams, J.); In re Pearson, 398 B.R. 97, 102 (Bankr. M.D. Ga. 2008)

(Hershner, J.); In re Weiser, 391 B.R. 902, 909 (Bankr. S.D. Fla. 2008) (Cristol, J.); In

re Murphy, 375 B.R. 919, 922 (Bankr. M.D. Ga. 2007) (Walker, J.); In re Shelton, 370

B. R. 861, 866 (Bankr. N.D. Ga. 2007) (Murphy, J.); Baxter v. Johnson (In re

7

Johnson), 346 B.R. 256, 261 (Bankr. S.D. Ga. 2006) (Dalis, J.); In re Screen, 2004

WL 2201246 (Bankr. S.D. Ga., Aug. 30, 2004) (Davis, J.).

Applying the Kitchens factors to the case at bar, the Court finds that Debtors

are devoting all of their net income to their plan payments, Debtors’s budget is “bare

bones,” Debtors propose to surrender their newest car and keep two unencumbered

older vehicles, the attorney’s fees of $3,500 requested by Debtors’ attorney are

comparable to those awarded in similar cases in this district, after Mr. Sweet lost his

job Debtors used their savings to pay their bills rather than incurring new debt, this is

the first bankruptcy case that Debtors have filed, there is no allegation that Debtors’

bankruptcy schedules or statements are not accurate, and no creditor contends that its

claim is nondischargeable in bankruptcy. The Court notes that although Debtors were

eligible to file a Chapter 7 case and that they have no non-exempt assets, they chose to

file a Chapter 13 plan which at least offers some dividend to unsecured creditors. The

60 month term of the proposed plan is the maximum allowed under the Bankruptcy

Code. The Court finds that Debtors made a commendable effort before bankruptcy to

use their personal savings to meet their obligations rather than to incur debt. Debtors

find themselves in financial distress because Mr. Sweet lost his job.

Trustee does not argue that consideration of these factors requires a finding of

bad faith. Rather, Trustee objects to Debtors keeping a large home while not making

a substantial repayment to the unsecured creditors. Although the Eleventh Circuit in

4 72 B.R. 311 (D. Del. 1987).

8

Kitchens rejected a per se rule that a debtor’s failure to make a substantial repayment

to unsecured creditors demonstrates a lack of good faith, the circuit court did hold that

substantiality of repayment is one of the factors to be considered. Id. at 888-89.

Trustee relies on numerous cases from other jurisdictions where courts have

held that the debtors did not propose their plans in good faith where they sought to

retain an expensive home while paying only a small dividend to unsecured creditors.

However, a close review of those cases reveals that the courts found additional factors

other than just the amount of the house payment and dividend to the unsecured

creditors in finding a lack of good faith.

For instance, in In re Rice,4 the court found that the plan had not been proposed

in good faith where the debtors had “imprudently” purchased a new home four months

prior to the bankruptcy case on the hope that their salaries would increase so that they

could afford the home. When they did not realize the increased salaries, the debtors

filed for Chapter 13 relief and sought to keep the home while paying only a 13 percent

dividend to the unsecured creditors. The court stated that the proposed plan would

permit the debtors to maintain their recently acquired jump in lifestyle at the expense

of the unsecured creditors. In the case at bar, Debtors purchased their home more than

three years ago when their income was significantly higher than now. Subsequent

events, apparently over which they had no control, placed them in financial distress.

5 292 B.R. 243 (Bankr. W. D. Pa. 2003)

6 65 B.R. 615 (Bankr. E. D. N. C. 1986)

9

Accordingly, unlike the debtors in Rice, the financial problems of Debtors did not

result from imprudent purchases.

In In re Leone,5 the court held that the plan had not been proposed in good faith

where the debtors proposed a 36 month plan which paid a dividend of 11 percent to

unsecured creditors while paying $205,796 over time (including an arrearage of

$18,957) on a home valued at $138,380. The court held that good faith would require

that the debtors either find a cheaper replacement home or extend their plan for a term

of up to 60 months. In the case at bar, the difference between the amount owed on the

first mortgage and the value of Debtors’ home is much less than that found in Leone

and Debtors propose a 60 month plan, the maximum allowed under the Bankruptcy

Code.

In In re Kitson,6 the debtors proposed a plan which would pay unsecured

creditors a 38 percent dividend while retaining a home for which the mortgage

payments equaled 28 percent of their net monthly income. The court concluded that

the debtors had failed to show good faith in proposing their plan and noted many other

excessive expense items in their budget, including child care, club memberships, gym

classes, and other miscellaneous expenses. The court noted that certain secured

claims would be paid in full early in the plan, but the income which had been used to

7 389 B.R. 741 (Bankr. W. D. Wash. 2008)

8 367 B.R. 660 (Bankr. D. Colo. 2007)

10

pay those debts was not then redirected to the unsecured creditors for the remainder of

the plan. The court also concluded that the debtors’ tax withholdings were excessive.

Accordingly, the court held that the debtors were not paying all their disposable

income into the plan. Thus, it was not just the mortgage payment and small unsecured

dividend that caused the court to find bad faith, but a multitude of expenses which the

court found to be unreasonable. In the case at bar, Trustee conceded at the hearing

that Debtors have a “bare bones” budget. Furthermore, Debtors are paying all their

net income into the plan for a period of 60 months.

In In re Talley,7 the trustee moved to dismiss the debtor’s Chapter 7 case

contending that it was an abusive filing under 11 U.S.C. § 707(b)(1). The court found

that it was unreasonable for the Chapter 7 debtor who was single and had no children

to contribute 80 percent of his net income to pay a mortgage on a rural mobile home

with 38 acres. The home was located 106 miles from the debtor’s job, thus, increasing

his transportation costs. Further, the purpose for which the land had been bought had

failed due to environmental regulations. Keeping the home resulted in a budget where

the debtor’s income was less than projected expenses with the debtor having no means

to make up the difference. None of these facts exist in the case at bar.

In In re Loper,8 the debtor proposed a plan which would pay unsecured

9 2005 WL 612863 (Bankr. N. D. Iowa, Mar. 10, 2005)

11

creditors a 10 percent dividend. The debtors were making interest only payments

equal to two-thirds of their monthly income on a 10 year mortgage on a home in

which they had no equity. Nor were they ever likely to have any equity since they

were making interest only payments. In addition, although certain classified debts

were to be paid in full early in the plan, the debtors did not redirect those payments to

unsecured creditors for the remaining term of the plan. The debtors were also

providing preferential treatment for an unsecured retirement plan loan. Again, none

of these facts exist in the case at bar.

Finally, in In re Baird,9 the court refused to find good faith in a plan which paid

a 31 percent dividend to the unsecured creditors. The debtors had purchased their

home and a new car while they were in financial difficulty, were already

contemplating bankruptcy and already owed $175,000 on credit cards. Under those

circumstances, the court found that the monthly house payment was not reasonable.

In the case at bar, Debtors purchased their home three years ago when they were on

sound financial footing.

In summary, none of the cases relied upon by Trustee stand for the proposition

that a plan which pays a small dividend to unsecured creditors while allowing the

debtors to retain a home in which they have little or no equity is per se proposed in

bad faith. The cases include these factors, but also include a multitude of other factors

12

which, when viewed together, demonstrate the bad faith of the debtors. While there

may be instances where the mortgage payment is so large on a home with no equity

and the distribution to unsecured creditors is so small that these factors alone will

justify a finding of bad faith, the case at bar is not such a case.

In the case at bar, Debtors find themselves in financial difficulty not because of

their imprudent spending habits but because Mr. Sweet lost his job. Having

considered the totality of the circumstances, the Court finds that Debtors’ plan has

been proposed in good faith and that Trustee’s objection to confirmation should be

overruled.

CONCLUSION

The Court finds that Debtors’ Chapter 13 plan has been proposed in good faith

and that Trustee’s objection to confirmation should be overruled. At the hearing on

Trustee’s objection, Trustee advised that other matters need to be resolved before the

plan is ready for confirmation. An order in accordance with this memorandum

opinion will be entered this date.

ALLIANCE AEROSPACE, LLC,

April 19, 2002

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 11

) CASE NO. 01-52973-JDW

ALLIANCE AEROSPACE, LLC, ))

DEBTOR. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Alliance Aerospace, LLC Wesley J. Boyer

355 Cotton Avenue

Macon, Georgia 31201

For Lucas Western, Inc. James P. Smith

Jerome L. Kaplan

201 Second Street, Suite 1000

Macon, Georgia 31201

For G. William and Lori Northrup Thomas C. James, III

P.O. Box 4283

Macon, Georgia 31208-4283

2

For Committee of Unsecured Creditors Hubert C. Lovein, Jr.

P.O. Box 6437

Macon, Georgia 31208-6437

For International Ass’n of Machinists James Fagan

and Aerospace Workers, AFL-CIO, its 1401 Peachtree Street, NE

Local No. 2726 and the Employees, Suite 238

Members of the Local’s Hourly Atlanta, Georgia 30309-3000

Bargaining Unit

For Keltic Financial Partners, LP Rufus T. Dorsey, IV

1500 Marquis Two Tower

285 Peachtree Center Avenue, NE

Atlanta, Georgia 30303

3

MEMORANDUM OPINION

This matter comes before the Court on Lori and G. William Northrup’s Motion for

Allowance of 11 U.S.C. § 502(e)(1) Claim and Recognition of Assignment Thereof Under

Bankruptcy Rule 3001(e)(2). This is a core matter within the meaning of 28 U.S.C. §

157(b)(2)(B). The Court, having held a hearing on the motion on March 12, 2002, and

having considered the pleadings, the evidence, and the applicable authorities, enters the

following findings of fact and conclusions of law in conformance with Federal Rule of

Bankruptcy Procedure 7052.

FINDINGS OF FACT

On or about December 21, 2000, Alliance Aerospace, LLC borrowed $500,000 from

Lucas Western, Inc. and gave Lucas Western a promissory note in the principal amount of

$500,000. Several other related transactions also occurred on that date: Lori and G. William

Northrup, the principals of Alliance Aerospace, gave Lucas Western a personal guaranty on

the $500,000 note; Alliance Aerospace agreed to reimburse the Northrups for any payments

made under the guaranty; and Alliance Aerospace gave the Northrups a second lien on

certain equipment known as the Mazak equipment to secure the reimbursement agreement.

The Northrups filed a financing statement in the Superior Court of Bibb County to perfect the

lien.

Alliance Aerospace filed a Chapter 11 petition on July 16, 2001. On August 7, 2001,

the Court authorized the sale of substantially all of Alliance Aerospace’s assets, including the

Mazak equipment. After the first lien on the Mazak equipment was satisfied, $180,312.51 in

proceeds remained and are held in escrow by counsel for Alliance Aerospace. The Northrups

1 Section 101(5)(A) defines a claim as a “right to payment, whether or not such right

is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,

disputed, undisputed, legal, equitable, secured, or unsecured[.]” 11 U.S.C.A. § 101(5)(A)

(West 1993). A creditor is defined as an “entity that has a claim against the debtor that arose

at the time of or before the order for relief concerning the debtor[.]” Id. § 101(10)(A).

Although the Bankruptcy Code does not define “contingent” claims, the legislative history

states that “[a] guarantor of or surety for a claim against the debtor will also be a creditor,

because he will hold a contingent claim against the debtor.” H.R. Rep. No. 95-595 to

accompany H.R. 8200, 95th Cong., 1st Sess. (1977) p. 310, reprinted in Collier on

Bankruptcy, App. Pt. 4(d)(i) (15th ed. rev’d 2001).

4

filed a proof of claim in the case on November 19, 2001, asserting a contingent claim for their

guaranty. On December 19, 2001, the Northrups gave Lucas Western a promissory note in

the amount of $180,312.51 and paid the proceeds of the note to Lucas Western in partial

satisfaction of their guaranty. Also on December 19, 2001, the Northrups executed an

assignment of their claim against Alliance Aerospace to Lucas Western. Through the motion

at issue, the Northrups seek to have their claim allowed as a secured claim and the

assignment of that claim to Lucas Western recognized by the Court.

CONCLUSIONS OF LAW

As guarantors of Alliance Aerospace’s debt to Lucas Western, the Northrups are

creditors of Alliance Aerospace with a contingent right to payment. See 11 U.S.C. §§

101(5)(A), 101(10)(A).1 The contingent claims of guarantors are governed by 11 U.S.C. §

502(e), which reads in pertinent part as follows:

(1) Notwithstanding subsections (a), (b), and (c) of this section

and paragraph (2) of this subsection, the court shall disallow

any claim for reimbursement or contribution of an entity that is

liable with the debtor on or has secured, the claim of a

creditor, to the extent that–

. . .

(B) such claim for reimbursement or contribution is

contingent as of the time of allowance or disallowance of such

2 The validity of the Northrup’s security interest in the Mazak equipment has not been

challenged.

5

claim for reimbursement or contribution;

. . .

(2) A claim for reimbursement or contribution of such an entity

that becomes fixed after the commencement of the case shall

be determined, and shall be allowed under subsection (a), (b),

or (c) of this section, or disallowed under subsection (d) of this

section, the same as if such claim had become fixed before the

date of the filing of the petition.

11 U.S.C.A. § 502(e) (West 1993).

When the Northrups filed their proof of claim, their entire claim was contingent upon

a demand by Lucas Western that they pay Alliance Aerospace’s debt. When they made a

postpetition payment of $180,312.51, their claim became fixed to the extent of the payment.

In re Drexel Burnham Lambert Group, Inc., 148 B.R. 982, 990 (Bankr. S.D.N.Y. 1992) (“A

contingent claim becomes fixed and allowable to the extent that the co-debtor has paid the

underlying claim.”). Under 502(e)(2), their claim, to the extent of payment, is treated as a

prepetition claim. In this case, it is a prepetition secured claim.2

The Unsecured Creditors Committee argues that the Northrups have not made the

payment necessary to remove the contingency because no money has changed hands;

therefore, the transaction is little more than “alchemy,” a “hocus pocus” scheme to “magically

transform” Lucas Western’s unsecured claim into a secured claim. While the Court does not

entirely disagree with the Committee’s characterization of the transaction, the Committee’s

contention has no merit as a legal argument. As a general rule, “a promissory note given in

payment of a pre-existing debt will extinguish that pre-existing debt, when it is the express

understanding of the parties that the promissory note shall have that effect.” Saunders,

6

Stuckey & Mullis, Inc. v. Citizens Bank & Trust Co., 265 Ga. 453, 455, 458 S.E.2d 337, 340

(1995). In Saunders, the court held that a judgment debt had been extinguished when the

debtor gave the bank a promissory note for $100,000 and the bank filed a “Satisfaction of

Judgment.” Id.; c.f. A.M. Kidder & Co. v. Clement A. Evens & Co., 117 Ga. App. 346, 348,

160 S.E.2d 869, 872 (1968) (promissory note did not serve as payment because it was used

only to evidence amount owed).

The Court is satisfied that the Northrups and Lucas Western understood the

promissory note given by the Northrups to Lucas Western to serve as payment on the

guaranty. Counsel for both parties acknowledged at the hearing that Alliance Aerospace’s

debt to Lucas Western was reduced by the amount of the note, and the Northrups incurred a

debt to Lucas Western separate from the Alliance Aerospace debt and their guaranty.

Furthermore, the facts in the present case are indistinguishable from a hypothetical scenario in

which the Northrups borrowed $180,312.51 from a disinterested bank, gave the bank a

promissory note, and paid the proceeds of the loan to Lucas Western. The source of the

funds does not render the payment ineffective.

The Northrups’ contingent claim became fixed to the extent of $180,312.51 when

they executed a promissory note in that amount in favor of Lucas Western in partial

satisfaction of their guaranty. No valid basis for disallowing the claim has been advanced. As

a result, the Northrups hold an allowed secured claim in the amount of $180,312.51.

The Northrups also have requested court approval for the assignment of their claim to

Lucas Western. Bankruptcy Rule 3001(e)(2) governs the transfer of claims and requires

3 Rule 3001(e)(2) reads as follows:

If a claim other than one based on a publicly traded note, bond,

or debenture has been transferred other than for security after

the proof of claim has been filed, evidence of the transfer shall

be filed by the transferee. The clerk shall immediately notify

the alleged transferor by mail of the filing of the evidence of

transfer and that objection thereto, if any, must be filed within

20 days of the mailing of the notice or within any additional

time allowed by the court. If the alleged transferor files a

timely objection and the court finds, after notice and a hearing,

that the claim has been transferred other than for security, it

shall enter an order substituting the transferee for the

transferor. If a timely objection is not filed by the alleged

transferor, the transferee shall be substituted for the transferor.

Fed. R. Bankr. P. 3001(e)(2).

7

court intervention only if the transferor objects.3 In this case, because it is the transferors, the

Northrups, who are attempting to validate the assignment, the Court need not decide whether

to recognize the assignment. Therefore, the Court declines to rule on the portion of the

Northrup’s motion relating to the assignment.

An Order in conformance with this Opinion will be entered on this date.

Dated this 19th day of April, 2002.

________________________________

James D. Walker, Jr.

United States Bankruptcy Judge

8

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been served on the

following:

Wesley J. Boyer James P. Smith

355 Cotton Avenue Jerome L. Kaplan

Macon, Georgia 31201 201 Second Street, Suite 1000

Macon, Georgia 31201

Thomas C. James, III Hubert H. Lovein, Jr.

P.O. Box 4283 P.O. Box 6437

Macon, Georgia 31208-4283 Macon, Georgia 31208

James Fagan Rufus T. Dorsey, IV

1401 Peachtree Street, NE 1500 Marquis Two Tower

Suite 238 285 Peachtree Center Avenue, NE

Atlanta, Georgia 30309-3000 Atlanta, Georgia 30303

Mark W. Roadarmel

433 Cherry Street, Suite 510

Macon, Georgia 31201

This _______ day of April, 2002.

_______________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 11

) CASE NO. 01-52973-JDW

ALLIANCE AEROSPACE, LLC, ))

DEBTOR. )

ORDER

In accordance with the Memorandum Opinion entered on this date, the Court finds

that Lori and G. William Northrup hold an allowed secured claim in the amount of

$180,312.51. The Court further finds it unnecessary to rule on the issue of recognition of the

assignment of the Northrups’ claim to Lucas Western, Inc.

So ORDERED, this 19th day of April, 2002.

_________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been served on the

following:

Wesley J. Boyer James P. Smith

355 Cotton Avenue Jerome L. Kaplan

Macon, Georgia 31201 201 Second Street, Suite 1000

Macon, Georgia 31201

Thomas C. James, III Hubert H. Lovein, Jr.

P.O. Box 4283 P.O. Box 6437

Macon, Georgia 31208-4283 Macon, Georgia 31208

James Fagan Rufus T. Dorsey, IV

1401 Peachtree Street, NE 1500 Marquis Two Tower

Suite 238 285 Peachtree Center Avenue, NE

Atlanta, Georgia 30309-3000 Atlanta, Georgia 30303

Mark W. Roadarmel

433 Cherry Street, Suite 510

Macon, Georgia 31201

This _______ day of April, 2002.

_______________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

DAVID RANDOLPH YORK, JR.,

July 1, 2002

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 01-11208-JDW

DAVID RANDOLPH YORK, JR., ))

DEBTOR. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Debtor: George W. Woodall

P.O. Box 322

Albany, Georgia 31702-0322

For SunTrust Bank: Deena Plaire-Haas

P.O. Drawer 71788

Albany, Georgia 31708-1788

For Albany Bank & Trust: Timothy O. Davis

P.O. Box 607

Albany, Georgia 31702-0607

2

MEMORANDUM OPINION

This matter comes before the Court on objections to confirmation filed by Albany

Bank & Trust and SunTrust Bank alleging lack of good faith by Debtor, David York, Jr.

This is a core matter within the meaning of 28 U.S.C. § 157(b)(2)(L). The Court held

hearings on February 19, 2002, March 25, 2002, and April 22, 2002, during which the parties

presented evidence. After considering the pleadings, the evidence, and the applicable

authorities, the Court enters the following findings of fact and conclusions of law in

conformance with Federal Rule of Bankruptcy Procedure 7052.

Findings of Fact

Prior to filing bankruptcy, Debtor had interests in several businesses, including

Quality Land Improvement, Land Improvements, Inc., and Your Buds Land Improvement.

In addition, Debtor had been an officer of, but not a shareholder in, Tri-State Trailer Sales.

Quality Land Improvements was a timber improvement operation in which Debtor was in

partnership with James Williams. Your Buds Land Improvement initially was a sole

proprietorship involved in landscaping. Land Improvements, Inc. was a corporation created

by Debtor, which subsequently began doing business as Your Buds Land Improvements.

On March 5, 2001, Debtor executed a promissory note on behalf of Land

Improvements, Inc. in favor of Albany Bank & Trust (“AB&T”) in the amount of $48,130.

Debtor personally guaranteed the note. Debtor told Paul Joiner, a loan officer with AB&T,

that his business had been awarded a contract to do landscaping work for the city of Albany

(“the City”). AB&T sought an assignment of the contract as collateral for the note.

3

Debtor and Mr. Joiner signed an assignment agreement that referenced contract

number 00-136 between the City and Land Improvements, Inc.; their signatures were

witnessed and notarized. One signature line was left blank for the City’s acknowledgment of

the contract. Mr. Joiner mailed the agreement to Yvette Fields, purchasing manager for the

City.

Upon receiving the agreement, Ms. Fields contacted Mr. Joiner to inform him that

Debtor did not have contract number 00-136 with the City. On the same day, Debtor sought

a distribution of the note, and Mr. Joiner refused, explaining the problem to Debtor. Debtor

told Mr. Joiner it was a mistake and said he would straighten it out with the City. Later that

day, Debtor returned to Mr. Joiner with the original assignment agreement and a set of bid

documents with contract number 01-092 on them.

The acknowledgment line for the City on the assignment agreement bore the signature

“Willie Davis.” Willie Davis was an employee of the City’s Department of Economic and

Community Development, with whom Debtor had worked before. Mr. Davis and Ms. Fields

both testified that the signature was not Mr. Davis’ signature and that he did not have

authority to make such an acknowledgment on behalf of the City. Mr. Davis further testified

that he did not sign the document. In addition, the contract number on the assignment had

been marked out and replaced with the number 01-092, with the initials W.D. next to it. Mr.

Davis testified that he did not alter the number or place his initials on the document. Ms.

Fields testified that when she gave the agreement to Debtor, it had not been signed by anyone

from the City. Debtor testified that when he received the assignment from Ms. Fields, it was

in an envelope, and he did not look at it. He said that he did not see it signed by any

4

employee of the City. He also testified that he placed no signature on the document other

than his own and that he did not alter the document in any way.

Upon returning the assignment to Mr. Joiner, Debtor said the mix up was caused

because the wrong contract number had been written on the assignment. With the

assignment seemingly acknowledged by the City, Debtor received disbursements on the note.

He later defaulted on his payments.

Debtor testified that he was performing work under contract number 01-092, but no

actual contract had been executed. He testified that in his usual course of dealing with the

City, he did not sign a formal contract, but rather worked off the bid documents. Ms. Fields

testified that she later met with Mr. Joiner at her office, looked up contract number 01-092,

and determined it had not been awarded to Debtor. Mr. Davis testified that Debtor had done

some work for the City in early 2001, but he did not know what contract number was

associated with the work, and Debtor had ceased working before the project was complete.

Debtor said he quit working because some of his equipment was repossessed by SunTrust

Bank.

Between January 12, 2000, and March 16, 2001, Debtor executed eleven promissory

notes, either individually or in his capacity as owner of Quality Land Improvement, in favor

of SunTrust. The bank’s exposure in the transactions totaled approximately $450,000. The

bank collateralized the debt with perfected security interests in numerous pieces of equipment

used by Debtor in his various businesses.

After Debtor defaulted on the loans, SunTrust obtained a writ of possession in June

2001 and repossessed several pieces of the equipment. However, the bank was unable to

5

locate all the collateral. David Lassiter, senior vice president and senior loan officer for

SunTrust, and Joe Holt, commercial loan officer for SunTrust, met with Debtor on June 22,

2001, to discern the location of certain collateral. The parties dispute what Debtor said at

that meeting and they dispute the location of collateral. The testimony of Mr. Lassiter, Mr.

Holt, and Debtor for each piece of collateral at issue is as follows:

As to a John Deere 950 tractor, Mr. Lassiter and Mr. Holt testified that Debtor said

he never owned it. Debtor denied saying this. He testified that the loan had been moved to a

different bank, and SunTrust had been paid off.

With respect to a Weiss McNair B85 blower, Mr. Lassiter testified that Debtor said

he sold it, but did not have the name and address of the buyer. Debtor testified that he traded

the blower at Albany Tractor for a seed broadcaster and did so with the permission of Pam

Simmons, who was an employee of SunTrust at the time. He also testified that he told

SunTrust where the seed broadcaster was located, but the bank never repossessed it.

As to a Bush Hog pulverizer, Mr. Lassiter testified that at the June meeting, he asked

Debtor the location of the pulverizer, and Debtor told him it was at the Rocking Horse Ranch

(now Georgia Watermelon Growers) in Sylvester. Mr. Holt testified that when the bank

spoke to the ranch owner, the owner told the bank he had never heard of Debtor and none of

Debtor’s equipment was at the ranch. Mr. Lassiter testified that although equipment similar

to the pulverizer was located at the ranch, none matched the serial number of Debtor’s

pulverizer. The bank did not pursue the matter further. Debtor testified that the pulverizer

was, and currently is, at Rocking Horse Ranch in the possession of Randy Finch. Debtor said

he had been keeping the pulverizer at a cousin’s house. He explained that Mr. Finch went to

6

the house to pick up some other equipment and mistakenly took the pulverizer, as well.

Debtor also said the owner of Rocking Horse does not know Debtor, but Mr. Finch does live

on the property at Rocking Horse.

With respect to a Semco box blade, Mr. Lassiter and Mr. Holt testified that Debtor

said he never owned it. Debtor testified that he did not deny ownership. He said that the

equipment is in the backyard of his former home, which was foreclosed on by another bank

and that he told SunTrust it was there, but the bank has not taken it. Mr. Holt testified that

employees of SunTrust went to the house and looked around the yard and adjacent lot but

were unable to locate any collateral on the property.

As to a 1984 Chevrolet flatbed truck, Mr. Lassiter testified that Debtor said he sold it

to Sammy Smith. Debtor testified that he never told the bank he sold the truck, but he did

tell SunTrust he traded the truck for services. Debtor says he has the truck back now, but it

is still located at Mr. Smith’s house. Mr. Holt testified that he went to Mr. Smith’s residence

and did not find the truck. Mr. Holt then called Mr. Smith, who told Mr. Holt he had no

property related to Debtor.

As to a 1995 twelve-ton Econoline backhoe pro trailer, Mr. Lassiter and Mr. Holt

testified that Debtor said he never owned it. Debtor denied saying this. Debtor testified that

he traded the Econoline for an Eager Beaver ten-ton trailer, and SunTrust financed the trade.

Mr. Holt said the bank did finance an Eager Beaver that the bank successfully repossessed.

As to a 1999 Cato fuel line trailer and tank, Mr. Lassiter and Mr. Holt testified that

Debtor told them James Williams had the equipment. The bank attempted to recover it, but

7

has been unable to do so. According to Mr. Holt, Mr. Williams said he did not have the

trailer. Debtor did not offer any testimony about this piece of equipment.

With respect to a 1999 Cato trailer, Mr. Lassiter testified that Debtor told him he had

sold the trailer to someone in Texas. The bank does not know the buyer’s name or the

trailer’s location and has been unable to recover the trailer. Debtor testified that he did sell

the trailer. However, the trailer was among the inventory of Tri-State Trailer Sales. The

bank had financed the trailer in Debtor’s name, knowing that it would be resold in the

ordinary course of Tri-State’s business. When it was sold, the bank originated a second note

to cover the outstanding debt remaining on the original note. Mr. Holt testified that he was

not aware of the bank receiving any proceeds from the sale.

As to a 2001 Honda motorcycle, Mr. Lassiter testified that Debtor sold it to a relative

and that Debtor said he would give the bank the name and address of the buyer. The bank

has been unable to locate the motorcycle and never has received the proceeds from Debtor.

Debtor testified that he had discussed his intention to sell the motorcycle with SunTrust

employee Rick Stone. Mr. Stone did not object to the sale. When the sale was completed,

Debtor gave the $6,500 in proceeds to Mr. Stone. Debtor also testified that he gave the bank

the name of the purchaser, but not the address. Mr. Holt testified that Debtor did not offer

any information at the June meeting about having given the proceeds to Mr. Stone.

As to a 1985 Mack truck, Debtor testified that it was sold to a buyer found by

SunTrust for $15,000. Mr. Lassiter testified that the bank financed the sale and deposited the

proceeds into Debtor’s account. However, Debtor said he never saw or endorsed the

proceeds check. A copy of the check entered as evidence shows no endorsement by Debtor.

8

Debtor testified that he was unaware that it had been deposited in his account and that he did

not know what became of the money. Counsel for SunTrust stressed the fact that Debtor did

not immediately–indeed, did not ever–submit the proceeds to SunTrust. However, SunTrust

was in control of the proceeds and chose to deposit it into Debtor’s account rather than

applying it toward his outstanding debt.

As to a Kubota M5400 tractor, Mr. Lassiter testified that Debtor said he never owned

it. Debtor testified that the only Kubota he had ever owned was an M8200, which had been

repossessed.

As to a Bush Hog loader, Mr. Lassiter testified that Debtor said he never owned the

equipment and that the bank was never successful in locating it. Debtor testified that he had

never owned a Bush Hog loader even though he had signed a financing statement pledging it

as collateral. He stated it might be an attachment to another piece of equipment. Mr. Holt

said the loader was attached to a Kubota M5400 tractor.

With respect to a JCB loader, Mr. Lassiter and Mr. Holt testified Debtor traded it for

a new loader, but SunTrust had never released the collateral and never received any

proceeds. Mr. Holt said he called the business where Debtor traded it, but the business had

no records of the trade. Debtor testified that he sold the loader with the permission of

SunTrust for approximately $20,000 and that he gave the proceeds to SunTrust, which it says

it never received.

Pam Simmons, a former loan officer with SunTrust, who had signed all the financing

statements filed by SunTrust to perfect its security interests in the collateral at issue, testified

that she never had given Debtor permission to sell any of the collateral, contrary to Debtor’s

1 Debtor has since filed another amended plan based on an anticipated increase in

income that proposes a 20 percent dividend to creditors over 4 years and 9 months.

2 Although neither AB&T nor SunTrust has made a formal motion to dismiss, the

Court entertains such motions as a matter of course along with objections to confirmation.

The notice of bankruptcy sent out by the clerk of court states that if confirmation is denied, a

motion to dismiss may be granted for cause. The Court stated several times during the

confirmation hearing that if it found a lack of good faith, it would dismiss the case. In

addition, when asked by the Court, counsel for AB&T and SunTrust said that if confirmation

were denied, the banks wanted the case dismissed. Thus, the Court construes the objections

to confirmation to include motions to dismiss.

9

testimony that she had approved certain sales. Ms. Simmons also testified that it had been

approximately two or three years since she had seen Debtor’s file at SunTrust. When

questioned about the purchase of specific collateral, she was unable to recall details.

Debtor filed a Chapter 13 petition on July 2, 2001. He filed a Chapter 13 plan on July

6, 2001 that proposed a $3,000 dividend to unsecured creditors over a term of four years and

nine months. On November 29, 2001, Debtor filed an amended plan that provided no

dividend to unsecured creditors over a term of three years.1 AB&T and SunTrust filed

objections to confirmation alleging lack of good faith.2

Conclusions of Law

Pursuant to Section 1325(a)(3) of the Bankruptcy Code, a Chapter 13 plan may not

be confirmed unless it “has been proposed in good faith and not by any means forbidden by

law.” 11 U.S.C.A. § 1325(a)(3) (West 1993). Although the ultimate burden of showing

good faith is on the debtor, if a creditor “preemptively can demonstrate an absence of good

faith, or the affirmative presence of bad faith, it will enjoy a valid objection to confirmation.”

In re Baird, 234 B.R. 546, 550-51 (Bankr. M.D. Fla. 1999).

10

Neither the Code nor the legislative history provides any specific standard or

definition of good faith under Section 1325(a)(3). Shell Oil Co. v. Waldron (In re Waldron),

785 F.2d 936, 939 (11th Cir. 1986). Rather, the law requires the Court to consider the

totality of the circumstances to determine whether a debtor has abused the provisions,

purpose, or spirit of Chapter 13 in his plan proposal. See Kitchens v. Georgia R.R. Bank &

Trust Co. (In re Kitchens), 702 F.2d 885, 888-89 (11th Cir. 1983).

Kitchens provides a nonexclusive list of factors for courts to consider in the good

faith analysis: (1) the amount of the debtor’s total income; (2) his living expenses; (3) the

amount of attorney fees; (4) the duration of the Chapter 13 plan; (5) the debtor’s motivations

and sincerity in seeking Chapter 13 relief; (6) his degree of effort; (7) his earning ability and

its likelihood of fluctuating; (8) special circumstances, such as inordinate medical costs; (9)

the frequency with which the debtor has sought bankruptcy relief; (10) the circumstances of

his dealings with his creditors; and (11) the burden of plan administration on the trustee. Id.

at 888-89. Other factors courts appropriately consider are the debtor’s prepetition conduct,

Baird, 234 B.R. at 551; In re Elisade, 172 B.R. 996, 1000 (Bankr. M.D. Fla. 1994), and the

debtor’s honesty. Waldron, 785 F.2d at 939.

The confirmation hearing is a debtor’s opportunity to seek approval of his plan and to

demonstrate that it meets all the criteria for confirmation. “Lack of candor, which evinces an

‘intent to abuse the judicial process,’ is a basis for non-confirmation of a plan.” Elisade, 172

B.R. at 1001 (quoting Albany Partners, Ltd. v. Westerbrook (In re Albany Partners, Ltd.),

749 F.2d 670, 674 (11th Cir. 1984)). See also Fawcett v. United States (In re Fawcett), 758

F.2d 588, 589 (11th Cir. 1985) (quoting Johnson v. Vanguard Holding Corp. (In re Johnson),

11

708 F.2d 865, 868 (2d Cir. 1983)) (good faith requires the debtor to conduct himself with

honesty “‘in the submission, approval, and implementation of a Chapter 13 bankruptcy

plan’”).

In Waldron, the Eleventh Circuit Court of Appeals said that good faith under Section

1325(a)(3) requires the Chapter 13 debtor to file his petition with the honest intent to use

Chapter 13 as a vehicle for reorganization of debt, not as a device for a “sinister” or

“unworthy” purpose. 785 F.2d at 939 (quoting In the Matter of Southern Land Title Corp.,

301 F. Supp. 379, 428 (E.D. La. 1968)). The court said,

We hold that with section 1325(a)(3) Congress

intended to provide bankruptcy courts with a discretionary

means to preserve the bankruptcy process for its intended

purpose. Accordingly, whenever a Chapter 13 petition

appears to be tainted with a questionable purpose, it is

incumbent upon the bankruptcy courts to examine and

question the debtor’s motives. If the court discovers

unmistakable manifestations of bad faith, . . . confirmation

must be denied.

Unmistakable manifestations of bad faith need not be

based upon a finding of actual fraud, requiring proof of malice,

scienter or an intent to defraud. We simply require that the

bankruptcy courts preserve the integrity of the bankruptcy

process by refusing to condone its abuse.

The cornerstone of the bankruptcy courts has always

been the doing of equity. The protections and forgiveness

inherent in the bankruptcy laws surely require conduct

consistent with the concepts of basic honesty.

Id. at 941 (emphasis added).

The factors on which the Court has placed the greatest weight in this case are the

circumstances of Debtor’s dealings with his creditors (subsumed within this factor are

Debtor’s honesty with his creditors and his prepetition conduct with respect to his creditors),

12

Debtor’s honesty to the Court during his confirmation hearing, and Debtor’s motivations and

sincerity in seeking Chapter 13 relief.

As to AB&T, Debtor acted fraudulently in contracting his debt to AB&T and lied

under oath to the Court during his confirmation hearing. Debtor provided Mr. Joiner with a

document containing a signature he knew was forged, knowing that Mr. Joiner would rely on

the validity of that signature in extending credit. Debtor maintained under oath that he did

not know how the signature appeared on the agreement. But the Court finds the testimony

of Mr. Joiner and the disinterested testimony of Ms. Fields and Mr. Davis to be more credible

than that of Debtor, who wants to secure a discharge and could have a variety of reasons for

wanting to conceal his complicity in the alteration of the assignment agreement.

The Court is convinced Debtor testified untruthfully with respect to the

acknowledgment of the City on the assignment. Mr. Joiner testified that he mailed the

original copy of the assignment agreement to Ms. Fields, and Ms. Fields testified that on the

same day she received the agreement, she gave it to Debtor. When she gave it to Debtor, it

was unsigned by the City. Because a signature purporting to be a representative of the City

was affixed to the assignment agreement when Debtor presented the agreement to Mr. Joiner

that same day, the Court must conclude that the signature was added while the agreement

was in Debtor’s possession.

By denying any knowledge of how the City’s acknowledgment was placed on the

agreement, Debtor has sustained a deception into the confirmation process that he began

prepetition. Now, he is not only attempting to deceive a creditor, he is attempting to deceive

the Court. A debtor who lies to a creditor to obtain financing and maintains that deceit

3 In addition, with respect to Debtor’s motivations and sincerity in seeking Chapter 13

relief, the Court has considered that the debt owed to AB&T likely would be

nondischargeable in Chapter 7. The evidence presented by AB&T is sufficient to make a

prima facie showing of nondischargeability under § 523(a)(2) in that Debtor made a

representation he knew to be false, with the intent of deceiving AB&T, on which AB&T

relied and, as a consequence, sustained a loss. 4 Collier on Bankruptcy ¶ 523.08[1] (15th ed.

revised 2002); 11 U.S.C.A. § 523(a)(2)(A) (West 1993 & Supp. 2002) (“A discharge under

section 727 . . . does not discharge an individual debtor from any debt– . . . (2) for money . .

. or an extension . . . of credit, to the extent obtained by (A) false pretenses, a false

representation, or actual fraud.”). Standing alone, such a motive would not be indicative of

bad faith. However, when considered alongside Debtor’s persistent deceit with respect to

AB&T and his general evasiveness with respect to SunTrust, it serves as further evidence of

Debtor’s bad faith.

13

through the confirmation process cannot be said to have proposed his plan in good faith by

acting in a manner “consistent with the concepts of basic honesty.” Waldron, 785 F.2d at

941.

The Court also has considered Debtor’s behavior toward SunTrust. Although

SunTrust was unable to produce the type of “smoking gun” evidence of fraud that AB&T

did, the testimony presented on SunTrust’s objection shows a pattern of evasiveness that

strongly suggests deception by Debtor. Debtor sold collateral out of trust and failed to

submit the proceeds to SunTrust, he repeatedly directed SunTrust to erroneous locations of

collateral, and he gave convoluted, nonsensical explanations for the disappearance of

collateral. Even during the confirmation hearing, he provided virtually no information that

would be helpful to SunTrust in reclaiming its collateral.3

Debtor’s lack of candor before the Court in response to AB&T and SunTrust’s

objections demonstrates his intent to abuse both the judicial process and the bankruptcy

system. The Court refuses to effectively legitimize Debtor’s tactics by approving his plan

under these circumstances. The Court concludes that Debtor has failed to meet his burden to

14

demonstrate that he filed in plan in good faith. Instead, the banks have shown that Debtor

has engaged in a pattern of behavior repugnant to the bankruptcy system. A fresh start

cannot be built on a foundation of deceit. Thus, the objections to confirmation are sustained,

and Debtor’s case is dismissed.

An Order in accordance with this Opinion will be entered on this date.

Dated this 1st day of July, 2002.

________________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been served on the

following:

George W. Woodall

P.O. Box 322

Albany, Georgia 31702-0322

Deena Plaire-Haas

P.O. Drawer 71788

Albany, Georgia 31708-1788

Timothy O. Davis

P.O. Box 607

Albany, Georgia 31702-0607

Kristen Smith

Chapter 13 Trustee

P.O. Box 1907

Columbus, Georgia 31902

This 1st day of July, 2002.

_______________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 01-11208-JDW

DAVID RANDOLPH YORK, JR., ))

DEBTOR. )

ORDER

In accordance with the Memorandum Opinion entered on this date, the objections to

confirmation of Albany Bank & Trust and SunTrust Bank are hereby SUSTAINED. The

confirmation of Debtor David Randolph York, Jr.’s Chapter 13 plan is hereby DENIED

because he failed to propose it in good faith as required by 11 U.S.C. Section 1325(a)(3). As

a result, Debtor’s case is hereby DISMISSED.

So ORDERED, this 1st day of July, 2002.

_________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been served on the

following:

George W. Woodall

P.O. Box 322

Albany, Georgia 31702-0322

Deena Plaire-Haas

P.O. Drawer 71788

Albany, Georgia 31708-1788

Timothy O. Davis

P.O. Box 607

Albany, Georgia 31702-0607

Kristen Smith

Chapter 13 Trustee

P.O. Box 1907

Columbus, Georgia 31902

This 1st day of July, 2002.

_______________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

TARA LATOUCHE STRANGE,

January 20, 2010

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 09-51938-JDW

TARA LATOUCHE STRANGE, ))

DEBTOR. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

SO ORDERED.

SIGNED this 20 day of January, 2010.

________________________________________

JAMES D. WALKER, JR.

__________________________________U_N_IT_E_D_ S_T_A_T_E_S _B_A_N_KR_U_P_T_C_Y_ J_U_D_G_E__

COUNSEL

For Debtor: Jason Orenstein

Post Office Box 4086

Macon, Georgia 31208

For Fidelity Bank: Ronald A. Levine

2270 Resurgens Plaza

945 E. Paces Ferry Road

Atlanta, Georgia 30326

Daniel Wilder

544 Mulberry Street, Suite 800

Macon, Georgia 31201-2776

For CitiFinancial

Auto Credit: Lisa Ritchie Craig

Christopher Reading

171 17th Street, NW, Suite 975

Atlanta, Georgia 30363

For Chapter 13

Trustee: Camille Hope

Post Office Box 954

Macon, Georgia 31202

1 There is some dispute as to the value of the Suburban. That dispute is not relevant

because even the most generous valuation is substantially less than the amount of the debt.

3

MEMORANDUM OPINION

This matter comes before the Court on objections to confirmation by Fidelity Bank and

CitiFinancial Auto Credit, Inc. This is a core matter within the meaning of 28 U.S.C. §

157(b)(2)(L). After considering the pleadings, the evidence, and the applicable authorities, the

Court enters the following findings of fact and conclusions of law in conformance with Federal

Rule of Bankruptcy Procedure 7052.

Findings of Fact

Debtor Tara Strange filed a Chapter 13 petition on June 23, 2009. Her plan proposed to

pay secured creditors CitiFinancial Auto Credit, Inc. and Fidelity Bank the value of their

collateral, with no dividend for unsecured claims. CitiFinancial is secured by a 2007 Chevrolet

Suburban, which Debtor valued at $25,000.1 She owes approximately $44,000 on the note for

the Suburban. Fidelity Bank is secured by a 2007 Kia Optima, which Debtor valued at $10,000.

She owes approximately $23,000 on the note for the Kia.

Debtor is married with five minor children, ranging in age from 5 to 17. Her husband,

Stacy Strange, has not filed for bankruptcy. Debtor’s bankruptcy case was precipitated by the

incarceration of Mr. Strange for a parole violation and the resulting loss of his income.

Debtor and Mr. Strange both are registered nurses. Debtor works at a hospital in Griffin,

Georgia, near the family home. Mr. Strange works for a hospice in Marietta, Georgia, which is

approximately 60 miles from the home. Mr. Strange has worked for the hospice for eight years

and will return to work there after completing all his obligations related to his parole violation.

4

Debtor testified that at the time she purchased the Suburban in July 2007, it was intended

for her use. After the purchase, she drove it daily to work. Furthermore, it is the only vehicle

that can accommodate all five children, so she also drives it when necessary to transport the

entire family.

Debtor and Mr. Strange both testified that they purchased the Kia in May 2008 to replace

a prior car that was no longer reliable. They specifically wanted a fuel-efficient car because they

intended Mr. Strange to drive it to and from work in Marietta. Mr. Strange testified that he had

driven the Suburban to work a couple of times, but the fuel costs made it impractical for him to

use for commuting. Debtor and Mr. Strange purchased the Kia together because, of the two, Mr.

Strange had the higher income and Debtor had the better credit rating. After purchasing the Kia,

Mr. Strange did use it to commute. In addition, Debtor used it on Mr. Strange’s days off and

while he was incarcerated to take advantage of its fuel economy.

CitiFinancial and Fidelity Bank filed objections to confirmation of Debtor’s plan on the

ground that the Bankruptcy Code prohibits bifurcation and cramdown of their claims. The Court

held a hearing on the objections on December 8, 2009. At the conclusion of the hearing, the

Court invited the parties to file briefs. Having considered the evidence and the law, the Court

finds Fidelity Bank’s claim as to the Kia is not subject to the hanging paragraph and,

consequently, may be crammed down. However, CitiFinancial’s claim as to the Suburban falls

within the scope of the hanging paragraph and cannot be crammed down. Therefore, the Court

will sustain CitiFinancial’s objection to confirmation and overrule Fidelity Bank’s objection.

The Court will further order Debtor to modify her plan in accordance with this ruling.

The hanging paragraph is so called because 2 it was inserted by The Bankruptcy Abuse

Prevention and Consumer Protection Act of 2005 as a separate, unenumerated paragraph

following § 1325(a)(9). It is commonly cited as § 1325(a)(*).

5

Conclusions of Law

At issue in this case is whether or not Debtor can cram down the debts on the Suburban

and the Kia–by bifurcating them into secured and unsecured claims–over the objection of the

respective creditors. Section 1325(a)(5)(B) of the Bankruptcy Code provides for cramdown so

long as the secured creditor retains its lien and receives the present value of its secured claim.

However, the applicability of cramdown is limited by the hanging paragraph,2 which provides in

relevant part that the debtor may not cram down a claim

if the creditor has a purchase money security interest securing the

debt that is the subject of the claim, the debt was incurred within

the 910-day [period] preceding the date of the filing of the petition,

and the collateral for that debt consists of a motor vehicle …

acquired for the personal use of the debtor[.]

11 U.S.C. § 1325(a)(*). Thus, the hanging paragraph applies if four elements are satisfied with

regard to (1) type of security interest (purchase money); (2) type of collateral (motor vehicle); (3)

time of acquisition (within 910 days before the petition date); and (4) purpose of acquisition

(personal use of the debtor). Neither Debtor nor the creditors have disputed the first three

elements. Therefore, the only issue in this case is whether or not the Kia and Suburban were

acquired for the personal use of Debtor.

Framework for Interpreting the Hanging Paragraph

Since its enactment in 2005 as part of the Bankruptcy Abuse Prevention and Consumer

Protection Act (“BAPCPA”), the hanging paragraph has been the subject of numerous judicial

opinions, including three cases decided by the Eleventh Circuit Court of Appeals. The circuit

In Barrett, the court held that when a debtor surrenders a 910 vehicle, 3 the creditor may

pursue a deficiency claim if allowed by state law. 543 F.3d at 1247. In Graupner, the court held

that in the context of a 910 vehicle, a purchase money security interest covers any negative equity

financed by the lender. 537 F.3d at 1303. In Nuvell Fin. Servs. Corp. v. Dean (In re Dean), the

court held that a creditor with a 910 claim is entitled to interest on the full amount of the claim.

537 F.3d 1315, 1320 (11th Cir. 2008).

4 It is unclear which specific legislative history the circuit court relies on for its

conclusions as to congressional intent. However, the court makes a passing reference to the

headings to Section 306 of BAPCPA, which provided for the amendment of § 1325. See Barrett,

543 F.3d at 1246. The overall heading of Section 306 is “Giving Secured Creditors Fair

Treatment in Chapter 13.” Subsection 306(b), which adds the hanging paragraph to the

Bankruptcy Code, is titled “Restoring the Foundation for Secured Credit.” Pub. L. No. 109-8,

sec. 306.

6

court has described the language of the hanging paragraph as “plain and unambiguous,” while

also finding that applying the language as written may lead to an absurd result. DaimlerChrysler

Fin. Servs. Ams. LLC v. Barrett (In re Barrett), 543 F.3d 1239, 1246 n.7 (11th Cir. 2008). As the

circuit court also has acknowledged, the hanging paragraph is notorious for “its poor drafting.”

Graupner v. Nuvell Credit Corp. (In re Graupner), 537 F.3d 1295, 1297 (11th Cir. 2008).

None of the cases decided by the court of appeals addressed the issue raised in this case.3

However, in each of its decisions, the circuit court was guided by its conclusions about

congressional intent. The court has stated that the “legislative history leaves little doubt” about

Congress’ intent, Graupner, 537 F.3d at 1297-98; Barrett, 543 F.3d at 1246, and that “[i]t seems

to be undisputed that Congress viewed th[e] use of ‘cramdown’ as abusive and unfair to car

lenders and other lienholders, so it sought to protect ‘910-claims’ by adding the hanging

paragraph …,” Nuvell Fin. Servs. Corp. v. Dean (In re Dean), 537 F.3d 1315, 1318.4 In other

words, the hanging paragraph is intended to benefit certain secured creditors. Based on this

determination of congressional intent, the circuit court has rejected interpretations of the hanging

7

paragraph that leaves 910 creditors no better off than they were under pre-BAPCPA law. See

Barrett, 543 F.3d at 1246 n.7.

The circuit court also has rejected attempts to limit the reach of the hanging paragraph.

For example, in Graupner, the circuit court suggested that an overly narrow reading of the

hanging paragraph that serves to exclude a significant number of common transactions in the

realm of car sales (loans that include financing of negative equity) would necessarily lead to an

absurd result.

If Congress did not intend for the hanging paragraph to apply to a

trade-in’s negative equity, as the Debtor ultimately contends, it

would have the effect of excluding a substantial number of lawful

auto finance transactions that were industry practice when

BAPCPA was enacted (a practice that Congress is presumed to

have known about). This would be an absurd result given that it is

recognized that the “architects [of the hanging paragraph] intended

only good things for car lenders and other lienholders.”

Graupner, 537 F.3d at 1303 (quoting In re Long, 519 F.3d 288, 294 (6th Cir. 2008)). See also

Barrett, 543 F.3d at 1246 (“[C]ar lenders and lienholders should clearly not be negatively

impacted by the hanging paragraph in situations where the debtor surrenders a 910 vehicle, yet

that is exactly the effect if surrendering the vehicle is deemed to fully satisfy the debt when the

contract provides for recourse. Congress obviously did not intend such a result in legislation

purporting to ‘Restor[e] the Foundation for Secured Credit.’”).

Personal Use of the Debtor

With the understanding that the Eleventh Circuit cases indicate the hanging paragraph

should be construed in favor of the 910 creditor, the Court turns to interpreting the phrase

“personal use of the debtor.” As a preliminary matter, it is well-established that the relevant time

5 See In re Heglar, No. 09-51077, 2009 WL 2843302, at *2 (Bankr. M.D.N.C. Aug. 31,

2009) (collecting cases).

6 See In re Bethoney, 384 B.R. 24, 29 n.18 (Bankr. D. Mass. 2008) (collecting cases).

8

period for analyzing the personal use question is the time of acquisition of the vehicle at issue. In

re Lorenz, 368 B.R. 476, 485 (Bankr. E.D. Va. 2007).

The Court previously parsed the phrase “personal use of the debtor” in In re Jackson, 338

B.R. 923 (Bankr. M.D. Ga. 2006) (Walker, J.). In Jackson, the debtor purchased a car for the

primary use of his non-filing spouse. The lender argued its claim fell within the scope of the

hanging paragraph. Id. at 925. The Court reasoned that personal use of the debtor is distinct

from family or household use, noting that “when Congress wants to include family or household

use within the scope of a statue, it knows how to do so.” Id. at 925-26 (citing 11 U.S.C. §§

101(8), 365(d)(5), 506(a)(2), 507(a)(7), 522). The Court concluded that because the car at issue

was not purchased for the debtor’s personal use, but rather primarily for his wife’s use, then it

was not a 910 car. Id. at 926.

Since Jackson was decided, a growing body of case law has emerged on the personal use

issue. Such cases generally can be divided into two categories: (1) those in which the debtor

argues the vehicle was purchased for business rather than personal use;5 and (2) those in which

the debtor argues the vehicle was purchased for the use of someone other than the debtor.6 Thus,

the personal use element of the hanging paragraph can be divided into two sub-elements: why

and who. In re Finnegan, 358 B.R. 644, 648 (Bankr. M.D. Pa. 2006); see also In re Ford, No. 07-

28188, 2008 WL 1925153, at *3 (Bankr. E.D. Wis. Apr. 29, 2008) (“the proper construction of

the hanging paragraph must afford some meaning to the words ‘of the debtor’ after the term

9

‘personal use’”).

Personal Use: The Bankruptcy Code does not define “personal use.” Consequently,

courts have looked to other sources to give some meaning to the phrase. In doing so, they have

often sought guidance in the reasoning of Cypher Chiropractic Center v. Runski (In re Runski),

102 F.3d 744 (4th Cir. 1996), which addresses similar language in a different context. In Runski,

the court considered whether the debtor could redeem certain medical equipment pursuant to §

722, which provides for redemption of “personal property intended primarily for personal,

family, or household use[.]” Id. at 745-46 (citing 11 U.S.C. § 722). The debtor argued that

although the equipment was used in her business, it should be deemed personal use property

because it was titled in her name and was used by her. Id. at 747. The court disagreed, holding

that “property used for business purposes or with a profit motive is not ‘property intended

primarily for personal … use[.]’” Id. The court rejected an interpretation of “personal” based

solely on the identity of the person using the property. In other words, the fact that the debtor

was the only person to use the property did not render such use “personal use.” More relevant to

the court was how the property was used. Because the debtor used the equipment to earn money,

it was not personal use property. Id.

By analogizing to Runski, most courts have concluded that “personal use” in the context

of the hanging paragraph simply means any non-business use. See In re Phillips, 362 B.R. 284,

303-04 (Bankr. E.D. Va. 2007). Moreover, by separating the identity of the use from the how the

property is used, the reasoning in Runski is consistent with a two-part approach to the analysis of

the “personal use of the debtor” language, such that “personal use” describes the type of use,

while “of the debtor” describes the user.

10

Of the Debtor: Next the Court must consider the meaning of “of the debtor.” Section

101(13) of the Bankruptcy Code defines “debtor” as the “person … concerning which a case

under this title has been commenced.” 11 U.S.C. § 101(13). There is no reason to believe that

Congress intended “debtor” to mean something different in the context of the hanging paragraph.

Therefore, to be “of the debtor,” Debtor must have intended to use the vehicles at the time of

their acquisition. However, even with this understanding of the language, the statute cannot be

applied without adding some qualifier as to the extent of Debtor’s use.

Courts have taken varying approaches to filling the gap. For example, in Jackson, this

Court focused on whether the debtor was the primary user, noting that “the vehicle must have

been acquired for the use of a particular person–Debtor–for the hanging paragraph to apply.” 338

B.R. at 926. Because the car at issue was purchased for the use of the non-filing spouse, because

the non-filing spouse was the primary driver of the car, and because the debtor drove a different

car as his primary vehicle, the Court concluded the car at issue was not a 910 car. Id.

Other courts have adopted the “significant and material use” test set forth in In re Solis.

356 B.R. 398 (Bankr. S.D. Texas 2006). First, the court stated that a car used exclusively by a

non-debtor generally cannot be a 910 car. Id. at 409. However, the court also expressed its

willingness to treat a non-debtor spouse’s use as use by the debtor if the circumstances warrant

such a conclusion. Id. As to the amount of use by the debtor, the court found “no authority in

the statute to determine that a vehicle is not a 910 Vehicle because the purchaser intended

someone [other than the debtor] to use part of the time.” Id. The court, therefore, adopted what

it described as “its best estimate of a reasonable conclusion,” and set forth the requirement that

the “acquirer intended a debtor’s use to be significant and material.” Id. Jackson, Solis, and

11

other cases that attempt to measure or quantify the debtor’s use of a vehicle do so by reference to

the totality of the circumstances. See In re Matthews, 378 B.R. 481, 490 (Bankr. D.S.C. 2007);

In re Smith, No. 07-30201, 2007 WL 1577668, at *4 (Bankr. S.D. Texas May 29, 2007).

Even though they often apply slightly different tests, courts have reached consistent

results when deciding whether the personal use is “of the debtor.” As a general rule, when

someone other than the debtor is the exclusive user of a vehicle, the vehicle does not fall within

the scope of the hanging paragraph. In addition, courts often find that when a non-filer is the

primary user of the vehicle, the hanging paragraph does not apply. In re Lewis, 347 B.R. 769

(Bankr. D. Kan. 2006) (car purchased by debtor for independent adult daughter who had bad

credit was not a 910 car); In re Solis, 356 B.R. 398 (Bankr. S.D. Tex. 2006) (car purchased for

the use of independent adult son was not a 910 car); In re Finnegan, 358 B.R. 644 (Bankr. M.D.

Pa. 2006) (car purchased for the use of non-filing spouse, who used it for his business, was not a

910 car); In re Davis, No. 06-10461, 2006 WL 3613319 (Bankr. M.D. Ala. Dec. 8, 2006) (car

purchased for exclusive use of non-filing spouse was not a 910 car); In re Smith, No. 07-30201,

2007 WL 1577668 (Bankr. S.D. Tex. May 29, 2007) (car purchased exclusively for use of nonfiling

spouse was not a 910 car); In re Beasley, No. 07-40280, 2007 WL 2986124 (Bankr. M.D.

Ga. Oct. 9, 2007) (Laney, J.) (car purchased exclusively for use of debtor’s spouse, who was a

debtor in a separately filed bankruptcy case, was not a 910 car); In re Pearson, No. 07-00478,

2008 WL 687058 (Bankr. E.D.N.C. Mar. 7, 2008) (car purchased for the use of non-filing spouse

was not a 910 car, even when the debtor later became its sole user); In re Ford, No. 07-28188,

2008 WL 1925153 (Bankr. E.D. Wis. Apr. 29, 2008) (car purchased for the exclusive use of nonfiling

fiancé was not a 910 car); In re Geddes, No. 308-00713, 2008 WL 4490113 (Bankr. M.D.

7 Grimme is an aberration, because it does not consider the identity of the user to be

determinative so long as the vehicle is acquired for a non-business purpose. 371 B.R. at 816-17.

It sets forth the test for personal use of the debtor as follows: “When the evidence shows that a

vehicle has been acquired for business purposes, the hanging paragraph will not apply.

Conversely, if the evidence shows that a vehicle was acquired for non-business purposes, the

hanging paragraph will apply.” Id. at 816 (citations omitted).

12

Tenn. June 17, 2008) (car purchased for the exclusive use of debtor’s adult daughter was not a

910 car); In re Matthews, 378 B.R. 481 (Bankr. D.S.C. 2007) (car purchased by debtor and her

mother that was used by debtor only for transporting her mother, when debtor had another car for

her personal use, was not a 910 car); In re Adaway, 367 B.R. 571 (Bankr. E.D. Texas 2007) (car

purchased for non-filing spouse’s transportation while debtor and his other vehicle were out of

town on business for extended periods of time was not a 910 car); In re Adams, No 06-51651,

2007 WL 675958 (Bankr. M.D. Ga. Mar. 1, 2007) (Hershner, J.) (car purchased for use primarily

by non-filing spouse was not a 910 car); In re Press, No. 06-10978, 2006 WL 2734335 (Bankr.

S.D. Fla. July 26, 2006) (car purchased primarily for use of co-filing spouse was not a 910 car);

compare In re Grimme, 371 B.R. 814 (Bankr. S.D. Ohio 2007) (car purchased for debtor’s son,

who occasionally took debtor on errands was a 910 car).7

On the other hand, when courts find that a car was purchased primarily for the use of the

bankruptcy debtor, they conclude it is subject to the hanging paragraph. In re Bolze, No. 06-

40036, 2006 WL 4491438 (Bankr. D. Kan. Aug. 31, 2006) (car used by co-filing spouse when

transporting the whole family was a 910 car); In re Solis, 356 B.R. 398 (Bankr. S.D. Tex. 2006)

(car purchased primarily for the debtor and her non-filing spouse to share as their sole vehicle is

a 910 car); In re Phillips, 362 B.R. 284 (Bankr. E.D. Va. 2007) (car purchased for the debtor to

use in commuting, driving her kids, and running household errands was a 910 car); In re Lorenz,

13

368 B.R. 476 (Bankr. E.D. Va. 2007) (car purchased for the debtor for both personal and

business use was a 910 car); In re Cross, 376 B.R. 641 (Bankr. S.D. Ohio 2007) (car was a 910

car when there was no credible evidence that it was purchased primarily for the use of the nondebtor

wife, and it was actually used interchangeably by both spouses depending on the

circumstances); In re Bethoney, 384 B.R. 24 (Bankr. D. Mass. 2008) (car purchased for family

use was a 910 car; the opinion provided no facts as to who the primary driver was); In re Vagi,

351 B.R. 881 (Bankr. N.D. Ohio 2006) (car purchased for the personal use of co-filing spouse

was a 910 car).

The weight of authority suggests that the debtor’s use of the car must be more than

incidental but not necessarily exclusive. However, when judicially rewriting a statute to fill a

gap left by Congress, as courts seem compelled to do in the case of careless draftsmanship, the

Court must consider more than mere weight of authority. In this case, the provision at issue

upends one of the foundational policies behind bankruptcy law, as well as long-standing practice:

providing equal treatment of similarly situated creditors. The hanging paragraph allows a

preferred class of undersecured creditors to be treated as fully secured. Thus, the unsecured

portion of their claims are paid in full with interest. Not only does the hanging paragraph provide

special treatment to 910 creditors over other unsecured creditors–who only receive a pro rata

share of their claim–it also diminishes the pool of money available to pay the other unsecured

creditors. The Supreme Court has indicated that, “absent clear[] textual guidance” to the

contrary, statutes generally should be interpreted to harmonize with rather than disrupt longstanding

practices and policies. BFP v. Resolution Trust Corp., 511 U.S. 531, 543, 114 S. Ct.

1757, 1764 (1994). However, the Court also noted that Congress can override such practices and

14

policies “by implication when the implication is unambiguous.” Id. at 546, 114 S. Ct. at 1765.

The Court is mindful that, as discussed earlier, the Eleventh Circuit Court of Appeals has

found–based on the legislative history of the hanging paragraph–an unambiguous implication by

Congress to prefer 910 creditors over other unsecured creditors. Furthermore, the circuit court

has rejected as absurd a reading of the hanging paragraph so narrow that it would exclude claims

arising from transactions that included the relatively common practice of financing negative

equity. Graupner, 537 F.3d at 1303. Based on this reasoning, the circuit court likely would look

unfavorably upon any interpretation of the hanging paragraph that excludes cars purchased for

the debtor’s use simply because they occasionally are used by a non-bankruptcy filer. Car buyers

commonly anticipate the vehicle they purchase sometimes may be used by others, especially

family members. If the statute were read to apply only to vehicles purchased for exclusive use by

the debtor–a reasonable conclusion from a plain meaning reading of the provision–few cars

would fall within the scope of the hanging paragraph. Under Eleventh Circuit reasoning, such a

result would be absurd.

While exclusive use by the debtor represents one extreme for interpreting the hanging

paragraph, incidental or de minimis use by the debtor lies at the other extreme. And, it is an

equally unsuitable interpretation. Congress imposed four express statutory limits on 910 claims,

which provides textual evidence that it did not intend to sweep every non-business car within

reach of the hanging paragraph. As the weight of authority dictates, it is more reasonable to

assume Congress intended it to reach vehicles purchased with the expectation that the debtor

would make some regular use of the vehicle–whether that use is defined as “primary use” or

“significant and material use” or some other qualifier. Whether the debtor’s intended use of the

8 The line here between reasonable interpretation of a statute’s plain language and

outright judicial redrafting is close at hand. Reading “personal use of the debtor” to mean

“primarily of the debtor” or “significantly and materially of the debtor” may be the kind of

judicial excess that could be fairly criticized by constitutional purists. In a landscape free of

judicial precedent, I would construe the provision narrowly rather than expansively because of

the inequality of treatment it creates among creditors.

15

vehicle is sufficient to bring it within the hanging paragraph must therefore depend on the court’s

subjective consideration of the totality of the circumstances rather than a clearly defined statutory

standard.8

Evaluation of the Suburban and the Kia

The evidence in this case is limited to the unrefuted testimony of Debtor and Mr. Strange.

As to the Suburban, Debtor testified she purchased the vehicle to provide for her transportation

and for those occasions when she needed to transport the entire family. In other words, the

Suburban is used by Debtor, and in some cases the entire family, for nonbusiness purposes. The

only evidence about any other person driving the car is Mr. Strange’s testimony that he drove it

to work a couple of times. Based on these facts, the Court finds Debtor purchased the Suburban

intending to be its primary user and that she intended to use it for personal purposes. Therefore,

CitiFinancial’s claim in this case is protected by the hanging paragraph and cannot be crammed

down.

As to the Kia, both Debtor and Mr. Strange testified it was purchased for Mr. Strange to

drive to and from work. Mr. Strange used it for that purpose. Debtor also used the car on Mr.

Strange’s days off and to run errands. In addition, she drove it as her primary vehicle while Mr.

Strange was incarcerated. However, there is no evidence that Debtor foresaw Mr. Strange’s

incarceration at the time of purchase or that she intended her use of the car to be anything more

16

than incidental. It was not purchased for general family use because it cannot accommodate the

entire family. Based on these facts, the Court finds the Kia was purchased for nonbusiness use.

In addition, it was purchased primarily for the use of a non-filer. Therefore, Fidelity Bank’s

claim in this case is not subject to the hanging paragraph and can be crammed down.

Conclusion

The Court finds both the Kia and the Suburban were acquired for personal, rather than

business, use. Furthermore, the Court finds the Suburban was acquired for use primarily by

Debtor, while the Kia was acquired for use primarily by her non-filing husband. Based on these

findings, the Court concludes CitiFinancial holds a 910 claim, while Fidelity Bank does not. As

a result, CitiFinancial’s objection to confirmation will be affirmed, and Fidelity Bank’s objection

will be overruled. Debtor shall amend her Chapter 13 plan in accordance with this Opinion.

An Order in accordance with this Opinion will be entered on this date.

END OF DOCUMENT

JILL AMANDA ROUSE,

April 11, 2005

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 03-12205-JDW

JILL AMANDA ROUSE, )

)

DEBTOR. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Debtor: Jeanie K. Tupper

1205 Dawson Road

Albany, Georgia 31707

For Creditor: Timothy O. Davis

Post Office Box 607

Albany, Georgia 31702-0607

For Guarantor: Alfred N. Corriere

Post Office Box 346

Albany, Georgia 31702

2

MEMORANDUM OPINION

This matter comes before the Court on Debtor’s motion to modify a confirmed plan

and Albany Bank & Trust’s objection to that motion. This is a core matter within the

meaning of 28 U.S.C. § 157(b)(2)(A). After considering the pleadings, the evidence, and

the applicable authorities, the Court enters the following findings of fact and conclusions of

law in conformance with Federal Rule of Bankruptcy Procedure 7052.

Findings of Fact

Debtor Jill Rouse filed a Chapter 13 petition and proposed plan on September 29,

2003. Albany Bank & Trust (“ABT”) filed an unsecured claim for $17,147.72. ABT’s

claim is based on a note on which Debtor’s deceased husband was a co-maker. S. Donald

McClure, a friend of Debtor’s husband, had executed a guarantee on the note for $10,000.

The guarantee provided in part as follows: “[N]o act or thing, except full payment and

discharge of all indebtedness, shall in any way exonerate the Undersigned or modify,

reduce, limit or release the liability of the Undersigned hereunder.” (Obj. to Mod. of Plan,

Ex. B, ¶ 1.)

ABT filed an objection to confirmation of Debtor’s plan on December 29, 2003. The

plan was confirmed on June 1, 2004, and provided a 0% dividend to unsecured creditors.

On January 31, 2005, Debtor filed a motion to modify the plan. The modification proposes

to separately classify ABT’s claim and pay $10,000 without interest “to protect co-debtor.”

It makes no specific mention of the guarantee or Mr. McClure’s liability. ABT objected to

the modification. The Court held a hearing on the objection on March 21, 2005.

During the hearing, counsel for both parties indicated that prior to confirmation, they

3

had discussed and agreed to a plan provision to pay ABT $10,000 in exchange for ABT

releasing Mr. McClure from all liability under the guarantee. ABT’s counsel stated that he

believed the confirmed plan reflected the change and had closed his file on the case. He did

not realize the plan was unchanged until ABT told him it had not received any payments

under the plan. He alerted Debtor’s counsel to the lack of payments in December 2004.

Debtor’s counsel stated that she did not modify the plan prior to confirmation

because she was waiting for written acknowledgment from ABT’s counsel regarding

elimination of Mr. McClure’s liability. She never received such acknowledgment, and no

writing was ever made to memorialize the agreement. According to Debtor’s counsel, the

proposed modification at issue is intended to implement the agreement made prior to

confirmation with counsel for ABT.

Conclusions of Law

The purpose of Debtor’s proposed modification is to eliminate Mr. McClure’s

liability as a guarantor. All parties understand this to be the case even though the proposed

plan is vague as to who is protected and how. There is no dispute that the parties negotiated

an agreement and that counsel for ABT thought the agreement had been implemented.

The circumstances raise a question of bankruptcy law: Can a Chapter 13 plan

provision be used to unilaterally alter the contractual relationship between a creditor and a

nondebtor guarantor? The question is not relevant if the creditor entered into a separate,

binding agreement to alter its rights with respect to the guarantor.

Existence of a Contract

The burden is on the party seeking to enforce the contract–in this case, Debtor–to

4

prove all the elements of a contract, including assent to its essential terms. TranSouth Fin.

Corp. v. Rooks, 269 Ga. App. 321, 324, 604 S.E.2d 562, 564 (2004). The only evidence

before the Court on the issue of whether the parties entered into a contract are the statements

of counsel for Debtor and ABT. Although neither attorney was under oath, their respective

factual allegations were not disputed, and the Court will accept their statements as true.

Under Georgia law, the essential elements of a contract are: (1) parties able to

contract; (2) consideration; (3) mutual assent to the terms; and (4) subject matter of the

contract. O.C.G.A. § 13-3-1 (1982). The only element disputed in this case is mutual

assent. “[I]t is well settled that an agreement between two parties will occur only when the

minds of the parties meet at the same time, upon the same subject matter, and in the same

sense.” Southern Med. Corp. v. Liberty Mut. Ins. Co., 216 Ga. App. 289, 291, 454 S.E.2d

180, 182 (1995) (citations omitted).

For a contract to be formed, an offer must be accepted within a reasonable time

unless the offer provides otherwise. Wilkins v. Butler, 187 Ga. App. 84, 84, 369 S.E.2d

267, 268 (1988). “What constitutes a reasonable time in any given case must depend upon

its own peculiar facts. It is generally a question for the jury, but in any case of unusual

delay it may become a question of law, rather than of fact.” Home Ins. Co. v. Swann, 34

Ga. App. 19, 25, 128 S.E. 70, 72 (1925). In Home Insurance, six months was an

unreasonable time for accepting an application for fire insurance. Id., 128 S.E. at 73. In

Wilkins, one year was an unreasonable time for accepting a settlement offer in a personal

injury case. 187 Ga. App. at 85, 369 S.E.2d at 268.

Assuming ABT was the “offeror,” Debtor’s attempt to accept the agreement eight

5

months after it was negotiated by seeking to modify the plan is unreasonable. Because the

confirmed plan provided for no dividend to unsecured creditors, ABT was receiving no

payments during that eight-month period. In addition, if ABT complied with the terms of

the agreement it believed to be in force, it could not seek payment from the guarantor.

Under either the proposed plan provision or the terms of the guarantee, ABT was limited to

$10,000 with no interest. Any delay in recovering that money resulted in a loss of its time

value.

Even if the delay in acceptance were reasonable, the parties must be in agreement as

to all essential terms of the contract. “The requirement of certainty extends not only to the

subject matter and purpose of the contract, but also to the parties, consideration, and even

the time and place of performance where time and place are essential.” Gill v. B&R Int’l,

Inc., 234 Ga. App. 528, 531, 507 S.E.2d 477, 480 (1998) (emphasis added). Thus, if Debtor

rather than ABT was the “offeror,” a lack of mutual assent as to the time for performance

could doom the contract. As explained above, timing is an essential term because it affects

the time value of ABT’s recovery.

A lack of mutual assent as to the timing of the plan modification is evident from the

contradictory actions of the parties. The Court is persuaded that ABT contemplated that the

confirmed plan would reflect the new plan provision. In other words, according to ABT’s

understanding of the terms, Debtor was to modify the plan prior to confirmation. Debtor has

demonstrated by waiting until eight months after confirmation to modify the plan that she

did not believe timing to be an issue. Or, if Debtor did believe it to be an issue, she did not

think a contract had been finalized. Because Debtor did not accept the agreement within a

6

reasonable time and because the parties did not reach mutual asset as to the terms, no

contract was formed.

Permissibility of Proposed Plan Modification

Section 524(e) of the Bankruptcy Code provides that, except in certain

circumstances not present in this case, “discharge of a debt of the debtor does not affect the

liability of any other entity on, or the property of any other entity for, such debt.” 11

U.S.C.A. § 524(e) (West 2004). The district court has stated that § 524(e) “prohibits release

or a post-confirmation stay of the obligations of non-party guarantors.” In re Davis

Broadcasting, Inc., 176 B.R. 290, 292 (M.D. Ga. 1994); see also In re Sun Valley

Newspapers, Inc., 171 B.R. 71, 77 (B.A.P. 9th Cir. 1994) (“The first two plans proposed to

release the non-debtor guarantors from obligations to creditors, and therefore violate §

524(e) and are not confirmable.”).

In Davis Broadcasting the debtor’s Chapter 11 plan included a provision barring

creditors from pursuing nondebtor guarantors pending execution of the plan. The creditor

did not object to the provision, and the plan was confirmed. After confirmation, the creditor

attempted to recover from certain guarantors, who raised the plan provision as a defense.

The creditor sought relief from the plan provision. The bankruptcy court denied the relief,

and the creditor appealed. Id. at 291-92. The district court reversed, holding that the

bankruptcy court has no power to approve a postconfirmation stay of guarantee obligations.

Id. at 292. Even the creditor’s failure to object did not help the guarantor because “a

creditor’s express or implied assent to an improper stay does not, and cannot, confer

jurisdiction on the Court to provide such relief.” Id. Although some courts have held

7

guarantor release provisions are enforceable if the creditor failed to object to confirmation of

the plan, Marine Midland Business Loans, Inc. v. Miami Trucolor Offset Serv. Co., 217

B.R. 341, 345 (S.D. Fla. 1998), those cases are distinguishable because ABT has formally

objected in this case.

In Davis Broadcasting, a temporary stay was at issue. In this case, Debtor’s

proposed modification would impose a permanent injunction on ABT. If the Court is

without jurisdiction to effect a temporary stay, it certainly cannot grant permanent relief.

Nothing in the Bankruptcy Code gives the Court the power to alter ABT’s rights against Mr.

McClure

over ABT’s objection. Therefore, the Court will deny Debtor’s motion to modify her plan.

Subrogation of Rights

By way of a letter brief, Mr. McClure has asked the Court that, in the event it denies

modification, he be allowed to pay his guarantee obligation in full, be subrogated to the

rights of ABT, and be paid under the plan according to the terms of the modification. Even

if it were appropriate for the Court to consider such a request, the Court could not grant it

because the Court has not allowed any modification. Consequently, no plan provision

provides for payment of the $10,000 at issue. Nothing prevents Debtor from proposing a

new plan modification to address this situation, although she may wish to consider whether

a separate classification would be permissible in such circumstances.

An Order in accordance with this Opinion will be entered on this date.

Dated this 11th day of April, 2005.

________________________________

James D. Walker, Jr.

United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 03-12205-JDW

JILL AMANDA ROUSE, )

)

DEBTOR. )

ORDER

In accordance with the Memorandum Opinion entered on this date, the Court hereby

DENIES Debtor’s motion for modification of plan after confirmation.

So ORDERED, this 11th day of April, 2005.

_________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CAROL D. ROBERTS,

March 17, 2006

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 05-11325-JDW

CAROL D. ROBERTS, ))

DEBTOR. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Debtor: Cawthon H. Custer

Post Office Box 605

Albany, Georgia 31702

For Bank: T. Lee Bishop, Jr.

Post Office Box 1791

Albany, Georgia 31702-1791

2

MEMORANDUM OPINION

This matter comes before the Court on Bank of Dawson’s objection to confirmation

of Debtor’s Chapter 13 plan. This is a core matter within the meaning of 28 U.S.C. §

157(b)(2)(L). After considering the pleadings, the evidence, and the applicable authorities,

the Court enters the following findings of fact and conclusions of law in conformance with

Federal Rule of Bankruptcy Procedure 7052.

Findings of Fact

Debtor Carol Roberts filed a Chapter 13 petition and plan on June 24, 2005. The

plan indicated that Debtor owed Bank of Dawson (the “Bank”) $49,136 for three accounts.

Debtor proposed to pay $17,575, the value of a 2004 Jeep Cherokee used as collateral, at a

rate of $388 per month with 9 percent interest for a term of 56 months. Debtor also

proposed to surrender additional collateral, a 2002 Jeep Cherokee. The plan provided no

dividend to unsecured creditors.

The Bank filed an objection to confirmation of the plan. At the confirmation hearing

held on February 22, 2006, the Bank objected on several grounds that the plan was not filed

in good faith, citing numerous irregularities and inaccurate representations in Debtor’s

schedules, and that the plan was not feasible. Based on evidence presented at that hearing,

the Court finds the following facts with respect to problems identified by the Bank:

Mother’s residence. Sometime prior to filing for bankruptcy, Debtor’s mother

transferred real property valued at approximately $40,000 to Debtor and Debtor’s husband.

The mother made the transfer to enable Debtor and her husband to obtain a loan for the

3

mother’s benefit. The loan proceeds were used to make improvements to the property. The

mother could not borrow the money because she was not credit-worthy. However, the

mother made all the payments on the loan. The current balance of the loan is approximately

$30,000.

When Debtor filed this bankruptcy case, she failed to list her one-half interest in the

mother’s residence. Because the house has approximately $10,000 in equity, Debtor’s

interest could be valued at $5,000. The identity of the mortgage holder was listed in the

schedule of unsecured debts with a debt of $1 and a description of “surrender.” Debtor’s

attorney stated in his place that the $1 amount of the debt was listed because he did not know

the amount of the debt and that the description of “surrender” was his best effort at trying to

describe the status of the property. However, later in the hearing, Debtor’s attorney admitted

that Debtor had supplied the information about the house to him and that the disclosure had

been partly made in the initial schedules. Confusion over the way to treat the listing of the

property in this bankruptcy led the lawyer, through inadvertence, to fail to list the property as

owned by Debtor in the schedule of real property.

Debtor gave a slightly different explanation for the omission. She testified that she

never thought she had any actual ownership interest in the property and had done nothing to

justify entitlement to any of the equity. In addition, the identity of the subdivision contained a

name different from the street address of the house. Debtor testified that she did not

recognize the name of the subdivision and was, therefore, unable to identify the property in

questioning at the § 341(a) meeting by the Bank’s counsel. However, in a prior Chapter 7

case filed in 2000, Debtor did list the property and reaffirmed the debt. Debtor explained that

4

the property was reaffirmed after the Chapter 7 case to permit her mother to continue to pay

the debt. After being confronted with the ownership of the property at the Section 341(a)

meeting, Debtor amended her schedules to include it.

The Court finds that Debtor’s explanation of the failure to identify this property as

only moderately credible. It is impossible to know how familiar the name of the subdivision

may be as a point of reference for identity to this property. Sometimes subdivision names are

prominent in the identity and sometimes they are not. It is impossible to know based on the

evidence presented at the hearing whether this ambiguity was a legitimate encumbrance to

Debtor’s recollection.

It also is notable that Debtor failed to list her previous residence of some 12 years at

this property. Debtor’s lawyer stated that Debtor actually told him about the prior residence

but through inadvertence it was omitted from her bankruptcy petition.

1.5 acres. Also at issue is a tract of real property, 1.5 acres of undeveloped land.

There is some dispute about whether the Bank has a security interest in the land. Debtor

owned the property at some point in the past and gave the Bank a mortgage on it while she

owned it; that mortgage was paid in full. The Bank made subsequent advances to Debtor;

the parties dispute whether the later advances were secured by the 1.5 acres.

Documents supplied by the Bank at the hearing show that Debtor had given the land

as collateral on two separate occasions; on neither occasion did she own the property. In a

promissory note and security agreement dated July 29, 2004, Debtor borrowed $22,106.05,

and gave the Bank a security interest in the 1.5 acres and in two vehicles. In a promissory

note and security agreement dated January 5, 2005, Debtor borrowed $2,585 and gave the

5

Bank a security interest in the 1.5 acres.

Debtor testified that the documents did not contain a reference to the 1.5 acres at the

time she signed them. She further testified that after receiving copies of the notes, she called

the Bank twice to complain about the inclusion of the 1.5 acres as collateral and explained

that she did not own the property. She testified that the two calls were made after she signed

the first note but were not the subject of any discussion following the execution of the second

note.

Debtor’s testimony as to the fact that the notes did not contain the reference to the

1.5 acres was credible, but the testimony of the Bank’s officer to the effect that the Bank

does not have any blank note and mortgage documents was more credible. On balance, the

Court finds Debtor’s testimony to be erroneous but not intentionally misleading. Her

testimony can be interpreted to mean that she did not understand that the Bank was making a

claim of collateral interest in the property, but the Court finds that the documents did contain

the reference to the 1.5 acres as collateral at the time Debtor signed them.

With respect to Debtor’s ownership of the 1.5 acres, she transferred the property to

her mother before signing either of the notes at issue. Debtor credibly explained that she

effected the conveyance to protect the property from claims by her husband during a time of

martial strife. The 1.5 acres does not have a permanent structure established on it. At one

time, Debtor and her husband lived on the 1.5 acres in a mobile home owned by Debtor’s

nephew. At this time, however, it appears the property is vacant and undeveloped.

It is worth noting that in taking the 1.5 acres as security, the Bank never conducted

any title examination to determine that Debtor was the actual owner of the property. At a

6

minimum, the Court finds the claim of security interest was not considered by the Bank to be

essential security. Furthermore, considering the Bank officer’s testimony that he had a long

relationship with Debtor, it is as likely that he relied on this relationship in believing Debtor’s

representation as it is likely that he picked up the real estate property from previous bank

records and asserted a claim to the real estate in the documentation without any actual

discussion with Debtor. While the Bank officer was credible, his recollection of the facts was

sketchy and based more on standard practice than on specific recollection of transactions and

conversations with Debtor.

Debt to mother. In addition to the mother’s involvement with Debtor’s real

property, the Bank complained that Debtor did not list indebtedness to her mother in the

amount of $3,000 or repayment of that indebtedness in the amount of $600. However, the

debt was never reduced to writing. Debtor admitted that the mother did loan her $3,000 and

that she felt a moral obligation to pay the debt but explained that she omitted the debt from

her schedules because she would not have to pay it if she was unable to do so.

A payment of $600 to the mother, admitted by Debtor, was not repayment of the debt

but was instead intended as assistance to her mother and repayment of other short term loans

from her mother. While the Court finds there is some sense of indebtedness between Debtor

and her mother, it is not one that could be the subject of any legal action and arguably could

be, although it should not have been, disregarded by Debtor in preparing a list of creditors.

Purchase of home. Shortly before filing this case, Debtor and her husband

purchased a new home with payments of about $1,100 per month. The new home is titled in

the husband, whose income substantially exceeds Debtor’s. The purchase was financed by a

7

gift of $5,000 from Debtor’s sister, which was not listed in Debtor’s schedules. Debtor

testified that the gift was from her sister to her husband to help in the purchase of the house.

Amendments to schedules. At the time of trial, Debtor’s schedules had been

amended to correct all of the irregularities complained of by the objecting creditor. It

appears these amendments were made promptly upon being confronted with the irregularities

by the creditor. This prompt amendment militates to some degree the inaccuracies in the

schedules.

Payment arrearage. Debtor fell behind in the payments initially, in this case.

However, at the time of hearing, payments were up to date.

Conclusions of Law

For the Court to confirm a Chapter 13 plan, it must have been “proposed in good

faith,” and the debtor must “be able to make all payments under the plan and to comply with

the plan[.]” 11 U.S.C. § 1325(a)(3), (6). These are known, respectively, as the good-faith

and feasibility requirements.

Feasibility

The Bank’s objection to confirmation based feasibility can be easily decided.

Although Debtor fell behind with payments early in the case, she is now current. No

evidence demonstrates that Debtor will be unable to make payments or comply with the plan.

Consequently, the Bank’s challenge to feasibility is without merit.

Good Faith

“Good faith” is one of those nebulous terms that Congress has left undefined.

1 The factors are as follows:

(1) the amount of the debtor’s income from all sources;

(2) the living expenses of the debtor and his dependents;

(3) the amount of attorney’s fees;

(4) the probable or expected duration of the debtor’s Chapter 13 plan;

(5) the motivations of the debtor and his sincerity in seeking relief under the provisions of

Chapter 13;

(6) the debtor’s degree of effort;

(7) the debtor’s ability to earn and the likelihood of fluctuation in his earnings;

(8) special circumstances such as inordinate medical expense;

(9) the frequency with which the debtor has sought relief under the Bankruptcy Reform Act

and its predecessors;

(10) the circumstances under which the debtor has contracted his debts and his demonstrated

bona fides, or lack of same, in dealings with his creditors;

(11) the burden which the plan’s administration would place on the trustee;

(12) the substantiality of the repayment to unsecured creditors;

(13) whether the debt would be nondischargeable under Chapter 7; and

(14) the accuracy of the plan’s statements of debts and expenses and whether any

inaccuracies are an attempt to mislead the court.

702 F.2d at 888-89.

8

Consequently, courts have been obliged to craft a test to determine whether or not good faith

exists. The Eleventh Circuit Court of Appeals set forth such a test when considering whether

a Chapter 13 plan had been proposed in good faith as required by § 1325(a)(3). Kitchens v.

Georgia R.R. Bank & Trust Co. (In re Kitchens), 702 F.2d 885 (11th Cir. 1983). In that

case, the court adopted a totality of the circumstances test and articulated a nonexclusive list

of factors1 for courts to consider. Id. at 888-89. The factors are merely a guide, and

“‘[b]roadly speaking, the basic inquiry should be whether or not under the circumstances of

the case there has been an abuse of the provisions, purpose or spirit of [the chapter] in the

proposal.’” Id. at 888, (quoting 9 Collier on Bankruptcy ¶ 9.20 (14th ed. 1978)). The

analysis has also been applied in determining whether the case itself has been filed in good

faith. NeSmith v. James (In re James), No. 98-20139, 1998 WL 34064494, at *3 (Bankr.

9

S.D. Ga. July 30, 1998).

In this case, the Bank has raised a number of inaccuracies in Debtor’s schedules. Any

one of them alone likely would not be sufficient to suggest a lack of good faith. However,

the Court must consider whether, when considered in their entirety, they indicate a lack of

good faith.

Mother’s residence. Creditor had multiple objections with respect to the mother’s

residence that can be consolidated into two categories. First, Debtor failed to list her interest

in the property. Second she failed to list the property as her prior residence for 12 years.

The Bank contends that Debtor omitted these facts for the purpose of concealing her

ownership in her mother’s home. The facts are troublesome because Debtor did list her

interest in the property in a prior bankruptcy case. Nevertheless, it is possible Debtor

misunderstood the legal implications of the transactions, especially since they were done

primarily for the benefit of the mother, and the mother made all debt payments owing on the

residence.

Furthermore, it is true that Debtor told her attorney about the prior residence but

through inadvertence the attorney omitted it from her bankruptcy schedules. However,

Debtor read and signed the petition after it was prepared without the necessary address. It

raises the difficult question of whether a case is filed in good faith when an omission occurred

due to the lawyer’s inadvertence but was not remedied by the debtor’s review of the

schedules before signing. Although the Court is not inclined to dismiss this case on the

strength of this element, it is cumulative in the collection of discrepancies in this case.

1.5 acres. Debtor listed a loan from the Bank for $2,585 as an unsecured claim.

10

However, the Bank presented a promissory note and security agreement signed by Debtor

demonstrating that the loan was secured by certain 1.5 acres of real property. In addition, a

second loan from the Bank was listed as secured by a single vehicle. Again, the Bank

presented a promissory note and security agreement signed by Debtor indicating that it was

secured by two vehicles and the 1.5 acres. Debtor did not own the 1.5 acres at the time she

signed either note, and she testified that the reference to the 1.5 acres was added to the note

after she signed it.

The Court is persuaded that the two notes did list the 1.5 acres as security at the time

Debtor signed them. However, the Court also is persuaded that Debtor did not realize the

property was listed as security and that she did not intend to give the property as security.

Most likely the 1.5 acres was added to the security agreement as a result of the Bank’s long

relationship with Debtor rather than any express discussion between the Bank and Debtor.

This inaccuracy is the result of a misunderstanding rather than bad faith or intentional

deception.

Debt to mother. The Bank has pointed to Debtor’s failure to list the debt to her

mother as indicative of bad faith. However, the debt has no relevance to the issue of good

faith. It is not a legally binding debt, so Debtor had no obligation to list it. Therefore, its

omission does not add to the indicia of lack of good faith.

Purchase of home. The Bank contends that the gift of $5,000 from Debtor’s sister

was to Debtor–not her husband–and was used to purchase Debtor’s current residence for the

benefit of both Debtor and her husband. The Bank complains that Debtor failed to list this

gift in the schedules and that the use of this gift to assist in the purchase of the home should

11

have given Debtor an ownership interest in the home for the benefit of creditors. The Bank

argues that creation of ownership solely in the husband shortly before filing bankruptcy was

an effort by Debtor to place this property out of reach of creditors in her bankruptcy case.

The Bank’s contentions on these points are without merit. If this had been a joint

case, in which the husband had sought relief from this Court to make it possible to purchase

the new home shortly before bankruptcy, the Bank’s arguments might be significant. It

appears, instead, that the husband’s finances are secure and that he will not need significant

assistance from Debtor to make the monthly payments on this mortgage. Furthermore, the

mortgage of about $1,100 per month does not seem excessive to the financial circumstances

of these spouses. It often happens that debtors file Chapter 13 cases to make it possible to

retain a residence. The acquisition of a home shortly before filing the bankruptcy is a

circumstance worthy of careful examination but not one that necessarily points to any

misconduct or bad faith on the part of Debtor.

Lack of advantage. The errors and omissions complained about by the Bank would

have gained Debtor no more advantage than if they had never been discovered. The equity in

the mother’s house owned by Debtor and not listed in the schedules would have been easily

included with an amendment and might possibly be established as worthless to the estate

based on the equitable claims of the mother to ownership of the property.

Upon being confronted with that proposition, the Bank’s counsel could not offer any

argument to show how Debtor might have obtained some advantage from these omissions

and inaccuracies. While this fact is not conclusive, it is another mitigating element toward the

conclusion that Debtor’s intentions in filing this case did not include deceiving any of the

12

creditors, including the Bank.

Conclusion. This is a case dominated by family issues. The reference to “family

issues” does not excuse errors and omissions, but it does explain the ambiguity of

circumstances when relations between trusted family members are not clearly defined or

documented. The alleged debt from the mother is one such matter, as is the gift from the

sister and Debtor’s one-half interest in the home believed by Debtor to be owned by her

mother. Because of this fact, coupled with the lack of any genuine advantage or incentive to

Debtor, it does not appear to the Court that Debtor has abused the provisions, purpose or

spirit of Chapter 13. Therefore, the Court is not inclined to dismiss this case or deny

confirmation for lack of good faith. For that reason, the Bank’s objection will be overruled.

An Order in accordance with this Opinion will be entered on this date.

Dated this 17th day of March, 2006.

/s/ James D. Walker, Jr.

James D. Walker, Jr.

United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 05-11325-JDW

CAROL D. ROBERTS, ))

DEBTOR. )

ORDER

In accordance with the Memorandum Opinion entered on this date, the Court hereby

OVERRULES the Bank of Dawson’s objection to confirmation of Debtor’s Chapter 13 plan.

So ORDERED, this 17th day of March, 2006.

/s/ James D. Walker, Jr.

James D. Walker, Jr.

United States Bankruptcy Judge

RUPERT WHITE MURPHY, JR.,

June 28, 2007

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 07-50302-JDW

RUPERT WHITE MURPHY, JR., )

)

DEBTOR. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Debtor: Jason M. Orenstein

Post Office Box 4086

Macon, Georgia 31208

For Creditor: Robert Fricks

239-B Smithville Church Road

Warner Robins, Georgia 31088

Philip L. Rubin

5555 Glenridge Connector, Suite 900

Atlanta, Georgia 30342

2

MEMORANDUM OPINION

This matter comes before the Court on Citizens Auto Finance’s objection to

confirmation. This is a core matter within the meaning of 28 U.S.C. § 157(b)(2)(L). After

considering the pleadings, the evidence, and the applicable authorities, the Court enters the

following findings of fact and conclusions of law in conformance with Federal Rule of

Bankruptcy Procedure 7052.

Findings of Fact

Debtor Rupert Murphy, Jr. filed a Chapter 13 petition on February 8, 2007. He listed

Citizens Auto Finance (“CAF”) as a partially secured creditor with a claim of $22,000 secured

by a 2003 Hyundai Santa Fe motor vehicle, which Debtor valued at $11,750. Debtor’s Chapter

13 plan proposes to split CAF’s claim into secured and unsecured portions, to pay the secured

portion in full plus 8% interest, and to pay no dividend to the unsecured portion. In other words,

the plan proposes to “cram down” CAF’s claim.

The current case is Debtor’s third bankruptcy case. He filed a Chapter 7 on February 1,

1999, and received a discharge on May 19, 1999. He then filed a Chapter 13 on July 21, 2006,

which was dismissed for lack of payment on December 28, 2006.

During the 2006 Chapter 13 case, CAF undisputedly held what is commonly called a 910

claim–a purchase money security interest, for a debt incurred during the 910 days prior to the

bankruptcy filing, secured by a motor vehicle purchased for the personal use of the debtor. This

is significant because 910 claims receive special treatment in Chapter 13 pursuant to the hanging

paragraph in § 1325(a)(9). However, when Debtor filed the current case, he did so on the 915th

day after acquiring the Hyundai, raising a dispute about whether CAF continues to be eligible for

1 A debtor may not receive a Chapter 7 discharge if he has received a Chapter 7 discharge

in a case filed within 8 years of the petition date in the current case. 11 U.S.C. § 727(a)(8).

2 Compare In re Green, 348 B.R. 601, 611 (Bankr. M.D. Ga. 2006) (Walker, J.) (requiring

the greater of payment of the claim in full without interest or cram down) with In re Brown, 346

B.R. 246, 248 (Bankr. M.D. Ga. 2006) (Hershner, C.J.) (requiring payment of the claim in full

with interest).

3

treatment as a 910 claimant.

CAF filed an objection to confirmation on the ground that Debtor filed the current case in

bad faith. The Court held a hearing on the objection on May 21, 2007. During the hearing,

Debtor testified he had no significant change in debt or income between the filing of his 2006

case and the filing of his current case. His expenses also remained the same. However, in May

2007, he changed apartments and reduced his monthly rent from $525 to $400. Debtor further

testified that his first case failed because the plan payments increased from $300 to $520 to

accommodate CAF’s status as a 910 claimant.

Also during the hearing, Debtor’s counsel offered additional explanation for Debtor’s

current situation. Debtor could not file a Chapter 7 case because he would have been ineligible

for a discharge due to the timing of his prior Chapter 7 discharge.1 When Debtor filed his prior

Chapter 13 case and plan, counsel was unsure which judge would be assigned the case. Because

Chief Judge Hershner and I follow different interpretations of the hanging paragraph with

respect to 910 claims,2 counsel initially filed a plan proposing a cram down (which resulted in a

plan payment affordable for Debtor) and later amended the plan to treat CAF’s claim as fully

secured after Judge Hershner was assigned to the case. Debtor was unable to afford the amended

plan payment. However, he did pay $1,200 into the plan at a monthly rate of $300 for four

months prior to dismissal of the case.

3 Such claims are not subject to bifurcation under § 506. 11 U.S.C. § 1325(a)(9), hanging

paragraph.

4 At the hearing, CAF raised and abandoned an equitable tolling argument. Generally,

equitable tolling applies when a party’s time to protect a right has been curtailed. See Young v.

U.S., 535 U.S. 43, 47, 122 S. Ct. 1036, 1039 (2002). In this case, the 910-day time period is not

a period during which the creditor must take some steps to protect its rights. Instead, it is simply

4

For the reasons that follow, the Court finds Debtor filed his current case and plan in good

faith. Therefore, CAF’s objection will be overruled.

Conclusions of Law

At issue in this case is confirmation of Debtor’s Chapter 13 plan. The Court must

confirm the plan if it complies with the requirements of § 1325(a) of the Bankruptcy Code. The

hanging paragraph after § 1325(a)(9) mandates special treatment3 for creditors with “a purchase

money security interest securing the debt that is the subject of the claim, the debt was incurred

within the 910-day [period] preceding the date of the filing of the petition, and the collateral for

that debt consists of a motor vehicle … acquired for personal use of the debtor ….” 11 U.S.C. §

1325(a), hanging paragraph. In addition, § 1325(a)(3) and (7) can operate as a bar to

confirmation in the absence of good faith by Debtor. “[T]he court shall confirm a plan if … (3)

the plan has been proposed in good faith and not by any means forbidden by law; [and] … (7) the

action of the debtor in filing the petition was in good faith[.]” 11. U.S.C. § 1325(a)(3), (7).

The parties do not dispute that under Debtor’s prior Chapter 13 case, CAF was entitled to

the special treatment set forth in the hanging paragraph. In the current case, CAF meets all the

criteria for special treatment except that the debt was incurred outside the 910-day period prior to

the bankruptcy filing. CFS argues that Debtor acted in bad faith by waiting for the lookback

period to expire before refiling his case.4

a formula for determining whether a claim will be subject to § 506 of the Bankruptcy Code.

5 The factors are as follows:

(1) the amount of debtor’s income from all sources;

(2) the debtor’s living expenses;

(3) the amount of attorney’s fees;

(4) the duration of the Chapter 13 plan;

(5) the debtor’s motivations and sincerity in seeking Chapter 13 relief;

(6) the debtor’s degree of effort;

(7) the debtor’s earning ability and the likelihood of fluctuation in his earnings;

(8) special circumstances such as inordinate medical expense;

(9) the frequency with which the debtor has sought bankruptcy relief;

(10) the circumstances under which the debtor has contracted his debts and his demonstrated

bona fides, or lack of same, in dealings with his creditors;

(11) the burden of the plan’s administration on the trustee;

(12) the substantiality of the repayment to unsecured creditors;

(13) whether the debt would be nondischargeable under Chapter 7; and

(14) the accuracy of the plan’s statements of debts and expenses and whether any inaccuracies

are an attempt to mislead the court.

702 F.2d at 888-89.

5

The term “good faith” is not defined by the Bankruptcy Code. However, courts in the

Eleventh Circuit evaluate a debtor’s good faith–or lack of good faith–based on the totality of the

circumstances in accordance with a non-exclusive list of factors5 set forth in Kitchens v. Georgia

Railroad Bank and Trust Company (In re Kitchens), 702 F.2d 885, 888-89 (11th Cir. 1983). The

factors are merely a guide, and “‘[b]roadly speaking, the basic inquiry should be whether or not

under the circumstances of the case there has been an abuse of the provisions, purpose or spirit

of [the chapter] in the proposal.’” Id. at 888, (quoting 9 Collier on Bankruptcy ¶ 9.20 (14th ed.

1978)). See also In re Roberts, 339 B.R. 807, 811 (Bankr. M.D. Ga. 2006); In re Roberts, No.

06-71277, 2007 WL 981642, at *4 (Bankr. N.D. Ala. March 29, 2007).

CAF argues the totality of circumstances in this case indicate bad faith by Debtor. In his

prior Chapter 13 case, Debtor proposed a plan that was contrary to law–by proposing to cram

6 The automatic stay is limited to 30 days if the debtor had a prior case dismissed during

the year prior to the filing of the current case. 11 U.S.C. § 362(c)(3)(A). The Court may extend

the stay upon motion of a party in interest. Id. § 362(c)(3)(B).

7 The uncertainty remains, although the passage of time has seen virtually all judges

accept the majority view adopted by Judge Hershner and reject the minority view applied by me.

The issue currently is on appeal to the Eleventh Circuit Court of Appeals, so any remaining

uncertainty–at least in this circuit–should soon be resolved. DaimlerChrysler Fin. v. Robinson,

11th Cir. Docket No. 07-12247.

6

down a 910 claim. When Judge Hershner, who does not approve cram down of 910 claims over

objection, was assigned to the case, Debtor did not immediately modify the plan. Instead, he

waited to modify until prompted to do so by CAF’s objection to confirmation. His proposed

modification was infeasible because it required a plan payment greater than Debtor’s ability to

pay. According to CAF, by first proposing an improper plan and then pursuing an infeasible

plan, Debtor was merely attempting to run out the 910-day clock.

Debtor agrees that a previous case filed solely for purposes of delay could be evidence of

bad faith in the current case. However, he argues his prior case was not filed to delay CAF while

the lookback period ran. On the contrary, Debtor did everything he could to make the first plan

feasible because he needed to retain the car. He simply could not afford the payments after

modifying the plan. Debtor also concedes lack of good faith might be shown if he had attempted

to hide the car from CAF or otherwise to prevent repossession during the period between his two

Chapter 13 cases. However, there is no evidence Debtor played hide and seek with the car or

that CAF attempted to repossess it. In fact, CAF did not object to Debtor’s motion to extend the

automatic stay in the current case.6

The Chapter 13 trustee points out that Debtor’s first case was filed at a time when the law

was uncertain with respect to 910 claims.7 Furthermore, just because a debtor is unsuccessful at

8 This case illustrates the impact of the hanging paragraph of the Bankruptcy Abuse

Prevention and Consumer Protection Act of 2005. Debtor could have afforded to pay the value

of the car $11,750 (the amount the creditor would have realized upon liquidation of the car).

Judge Hershner, following the majority view, required Debtor to pay an additional $10,000, the

undersecured component of CAF’s 910 claim, in full with interest. Consequently, the plan

failed; no creditors were paid; and, without the fortuitous expiration of the 910 period, Debtor

would have been left with no remedy to avoid the loss of the car, his only means of

7

maintaining a plan that includes a 910 claim, all future cases should not per se require 910

treatment for that claim (assuming the claim still survives). Also, car creditors sometimes agree

to accept less than the full amount of their claim, because they prefer reduced payment to

surrender of the vehicle.

The Court agrees with Debtor and the Chapter 13 trustee that Debtor’s case was neither

filed nor his plan proposed with a lack of good faith. CAF argues Debtor’s prior Chapter 13 case

was an insincere attempt to reorganize filed solely to run out the 910-day clock. However, the

facts do not support CAF. Debtor’s attempt to cram down CAF’s claim in his previous Chapter

13 case is a reflection of both uncertainty in the law and of Debtor’s attempt to obtain the most

favorable terms. Although the Bankruptcy Code provides special treatment for 910 claims, it

does not require such treatment if the parties agree otherwise. Thus, in the circumstances,

Debtor’s proposed cramdown can be viewed as akin to a negotiation tactic, not evidence of bad

faith. While the prior case was pending, Debtor made regular plan payments totaling $1,200,

which demonstrates his intent to follow through with the case. It was the objection of CAF that

put the plan out of his reach. CAF did not want to compromise with Debtor on an affordable

plan in the prior case, it did not attempt to recover its collateral after Debtor’s bankruptcy failed,

and it is unsatisfied with Debtor’s renewed effort to repay at least the value of the car. But, just

because CAF is frustrated by its current position does not mean Debtor has acted with bad faith.8

transportation to work. Other cases of this sort either die the same quiet death by dismissal or

never get filed.

8

For the foregoing reasons, the Court concludes Debtor filed this case and proposed his

Chapter 13 plan in good faith. Therefore, CAF’s objection to confirmation will be overruled.

An Order in accordance with this Opinion will be entered on this date.

END OF DOCUMENT

AARON A. JACKSON,

March 6, 2006

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 05-58183-JDW

AARON A. JACKSON, ))

DEBTOR. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Debtor: Sharon R. Jones

187 Roberson Mill Road

Milledgeville, Georgia 31061

For Creditor: Molly L. McCollum

3370 Vineville Avenue, Suite 103

Macon, Georgia 31204

2

MEMORANDUM OPINION

This matter comes before the Court on Nissan Motor Acceptance Corp.’s objection

to confirmation. This is a core matter within the meaning of 28 U.S.C. § 157(b)(2)(L). After

considering the pleadings, the evidence, and the applicable authorities, the Court enters the

following findings of fact and conclusions of law in conformance with Federal Rule of

Bankruptcy Procedure 7052.

Findings of Fact

Debtor, Aaron Jackson, filed a Chapter 13 case on December 16, 2005. During the

910 days preceding his filing, he purchased a 2005 Pontiac Gran Prix, which was financed by

Nissan Motor Acceptance Corp. Debtor was the sole purchaser of the vehicle under the sales

contract. The contract provides that Debtor purchased the car for “personal, family or

household” use. (Nissan exhibit 1.) Debtor asserts and Nissan does not dispute that the car

was purchased for the use of his wife, who is not a debtor in this case. Debtor drives a

different vehicle. Although Debtor may occasionally use the Gran Prix, his wife is the

primary driver of that car. Debtor’s wife is not a party to the sales contract, nor is her name

on the title of the car. Nevertheless, the Gran Prix was purchased to replace her previous

vehicle, which also was titled solely in Debtor.

In his Chapter 13 plan, Debtor proposed to bifurcate and cram down Nissan’s claim.

Nissan objected to confirmation, contending that its claim is covered by a new provision in §

1325(a) of the Bankruptcy Code that prevents cram down. The Court held a hearing on the

matter on February 27, 2006, and for the following reasons, overrules the objection.

3

Conclusions of Law

At issue in this case is the definition of “personal use” in the unnumbered hanging

paragraph to 11 U.S.C. § 1325(a), which was added as part of the Bankruptcy Abuse

Prevention and Consumer Protection Act of 2005 (“BAPCPA”) and provides as follows:

For purposes of paragraph (5), section 506 shall not apply to a

claim described in that paragraph if the creditor has a purchase

money security interest securing the debt that is the subject of

the claim, the debt was incurred within the 910-day [period]

preceding the date of the filing of the petition, and the

collateral for that debt consists of a motor vehicle (as defined

in section 30102 of title 49) acquired for the personal use of

the debtor, or if collateral for that debt consists of any other

thing of value, if the debt was incurred during the 1-year

period preceding that filing.

11 U.S.C. § 1325(a), hanging paragraph (emphasis added). Nissan contends that its claim

falls within the scope of the hanging paragraph such that it is entitled to special treatment

under Debtor’s Chapter 13 plan. It argues that because Debtor acknowledged in the sales

contract that the car was purchased for “personal, family or household” use, its claim satisfies

the requirement that the collateral was “acquired for the personal use of the debtor.” Debtor

argues that because Congress has used the phrase “personal, family, or household use”

elsewhere in the Bankruptcy Code, it must mean something different when it limits the term

to “personal use.” The Court agrees with Debtor.

In interpreting the hanging paragraph, the Court begins with the principle that it must

enforce the plain language of the statute unless doing so leads to an absurd result. Lamie v.

U.S. Trustee, 540 U.S. 526, 534, 124 S. Ct. 1023, 1030 (2004) (quoting Hartford

Underwriters Ins. Co. v. Union Planters Bank, 530 U.S. 1, 6, 120 S. Ct. 1942, 1947 (2000)).

4

Furthermore, “‘[i]t is generally presumed that Congress acts intentionally and purposefully

when it includes particular language in one section of a statute but omits it in another.’” BFP

v. Resolution Trust Corp., 511 U.S. 531, 537, 114 S. Ct. 1757, 1761 (1994) (quoting

Chicago v. Environmental Defense Fund, 511 U.S. 328, 338, 114 S. Ct. 1588, 1593 (1994)).

In this case, the statute applies to a motor vehicle “acquired for the personal use of

the debtor.” Nissan does not argue that this language is in any way vague or ambiguous. In

fact, it is the one portion of the hanging paragraph of unquestionable clarity in the Court’s

view. Nissan does argue, however, that the “personal use of the debtor” may include family

or household use. However, when Congress wants to include family or household use within

the scope of a statute, it knows how to do so. For example, § 101(8) provides, “The term

‘consumer debt’ means debt incurred by an individual primarily for a personal, family, or

household purpose.” 11 U.S.C. § 101(8). The phrase also arises in § 365(d)(5) (regarding

performance of obligations under an unexpired lease); § 506(a)(2) (regarding valuation of

certain property); § 507(a)(7) (regarding deposits for the acquisition of certain property); and

several subsections of § 522 (regarding exempt property). Consequently, the omission of

“family and household” use from the hanging paragraph demonstrates that Congress intended

“personal use” standing alone to have a different meaning.

“Personal” is defined as “[o]f or relating to a particular person; private.” American

Heritage Dictionary of the English Language (4th ed. 2000). In this case, the vehicle must

have been acquired for the use of a particular person–Debtor–for the hanging paragraph to

apply. Nissan has conceded that the Gran Prix was purchased to replace Debtor’s wife’s

The hanging paragraph does l 1 eave open a question of timing. Suppose, for example,

the car originally was purchased for a wife or child but later became the debtor’s primary

vehicle. Is the use of the vehicle determined as of the purchase date, the petition date, the

hearing date, or some other date? Because the car in this case has never been Debtor’s

primary car, the Court need not answer this question.

5

previous car, that she has at all times been the primary driver of the Gran Prix,1 and that

Debtor has primary use of a different vehicle. Because the Gran Prix was not acquired for

Debtor’s personal use, the hanging paragraph does not apply to Nissan’s claim.

Nissan also contends, with the strangled use of double-negatives, that nothing in the

sales contract indicates that Debtor did not acquire the car for his personal use. This

argument is somewhat perplexing because–as noted above–the contract stated that the Gran

Prix was purchased for “personal, family or household” use. The use of the words “family”

and “household” necessarily open the scope of potential drivers and expressly contradict

Nissan’s argument.

For the reasons set forth in this Opinion, the Court will overrule Nissan’s objection to

confirmation.

An Order in accordance with this Opinion will be entered on this date.

Dated this 6th day of March, 2006.

/s/ James D. Walker, Jr.

James D. Walker, Jr.

United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 05-58183-JDW

AARON A. JACKSON, ))

DEBTOR. )

ORDER

In accordance with the Memorandum Opinion entered on this date, the Court hereby

OVERRULES the objection of Nissan Motor Acceptance Corp. to confirmation.

So ORDERED, this 6th day of March, 2006.

/s/ James D. Walker, Jr.

James D. Walker, Jr.

United States Bankruptcy Judge

LOREN L. DRISKELL,

November 20, 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 94-51403-JDW

LOREN L. DRISKELL, ))

DEBTOR )))

LOREN L. DRISKELL, ))

MOVANT ))

V. ) CONTESTED MATTER

)

INTERNAL REVENUE SERVICE, ))

RESPONDENT )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Movant: Richard M. Katz

355 Cotton Avenue

Macon, Georgia 31201

For Respondent: Lillian H. Lockary

Assistant United States Attorney

Post Office Box 1702

Macon, Georgia 31202

2

MEMORANDUM OPINION

This matter comes before the Court on Motion to Displace

the Priority Claim of the Internal Revenue Service

(“Respondent”) and on Motion to Modify Plan after Confirmation

filed by Debtor Loren L. Driskell (“Debtor”). This is a core

matter within the meaning of 28 U.S.C. § 157(b)(2)(L) and (O).

After considering the pleadings, evidence and applicable

authorities, the Court enters the following findings of fact

and conclusions of law in conformance with Federal Rule of

Bankruptcy Procedure 7052.

Findings of Fact

The Court confirmed Debtor’s Chapter 13 plan on November

21, 1994. Respondent held a Section 507 priority tax claim

for $74,318.56, of which Debtor’s plan proposed to pay one

hundred percent in accord with 11 U.S.C. § 1322(a)(2).

Respondent’s tax claim appears to have been assessed against

Debtor in the context of Debtor’s criminal activity from

November 1, 1986 to December 31, 1988. Debtor pleaded guilty

to one count of conspiracy to launder currency and two counts

of subscribing to a false income tax return on October 16,

1991.

On January 13, 2000, the Chapter 13 Trustee moved to

dismiss Debtor’s case, alleging that the plan could not be

3

completed within five years of confirmation. On of February

3, 2000, Debtor moved to displace Respondent’s priority claim,

of which $47,000.00 remains unpaid, and on April 20, 2000, he

moved to modify his plan.

Debtor proposes to pay Respondent’s priority claim

outside the plan. If allowed to do so, he can pay the Chapter

13 Trustee $7,000.00. Such amount that will allow him to

complete scheduled payments to his general unsecured creditors

and pay anticipated administrative expenses. Respondent,

which also holds a general unsecured claim for $23,294.00,

objects to both motions.

Conclusions of Law

Debtor argues Respondent will suffer no injury if the

Court grants his motions, and that Debtor will enjoy the

broader discharge afforded under Chapter 13. Such may be the

case, but there appears to be no provision circumventing the

requirement, stated in 11 U.S.C. § 1322(a)(2), that

(a) The plan shall —

* * *

(2) provide for full payment, in deferred

cash payments, of all claims entitled to

priority under section 507 of [the Code],

unless the holder of a particular claim

agrees to a different treatment of such

claim[.]

11 U.S.C. § 1322(a)(2) (emphasis added). As the emphasized

language indicates, Section 507 priority claims may be paid

other than as prescribed in Section 1322(a)(2) only if the

claim holder agrees. See In re Jones, 231 B.R. 110, 112

(Bankr. N.D. Ga. 1999).

Debtor cites no authority pursuant to which the Court

might grant his motions over Respondent’s objection. In

Matter of Ungar, 104 B.R. 517 (Bankr. N.D. Ga. 1989), though

the court considered a Section 507 priority tax claim paid

outside the plan, it addressed the dischargeability of such

claims paid thus. See Matter of Ungar, 104 B.R. at 518-19.

The court did not address the question that would have been

raised if the Section 507 priority tax claim holder had

refused to agree to having its claim paid outside the plan,

and though it is not specifically stated, it is probably the

case that the claim holder agreed to be paid outside the plan.

Debtor’s motions must be denied. He may not displace

Respondent’s Section 507 priority tax claim, nor may he,

without Respondent’s agreement, modify his plan to provide for

payment of such claim outside the plan.

An order in accordance with this opinion will be entered

on this date.

Dated this 20th day of November, 2000.

_______________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and

foregoing have been served on the following:

Richard M. Katz

355 Cotton Avenue

Macon, GA 31201

Lillian H. Lockary

Assistant U.S. Attorney

P. O. Box 1702

Macon, GA 31202

This ______ day of November, 2000.

___________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 94-51403-JDW

LOREN L. DRISKELL, ))

DEBTOR )))

LOREN L. DRISKELL, ))

MOVANT ))

V. ) CONTESTED MATTER

)

INTERNAL REVENUE SERVICE, ))

RESPONDENT )

ORDER

In accordance with the memorandum opinion entered on this

date, it is hereby

ORDERED that Debtor Loren L. Driskell’s Motion to

Displace the Priority Claim of the Internal Revenue Service,

is DENIED; and it is hereby further

ORDERED that Debtor Loren L. Driskell’s Motion to Modify

his Plan after Confirmation is DENIED.

SO ORDERED this 20th day of November, 2000.

_______________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and

foregoing have been served on the following:

Richard M. Katz

355 Cotton Avenue

Macon, GA 31201

Lillian H. Lockary

Assistant U.S. Attorney

P. O. Box 1702

Macon, GA 31202

This ______ day of November, 2000.

_____________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

ZACHARY D. and LAWANDA L. ROBINSON,

November 29, 2006

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 06-10562-JDW

ZACHARY D. and LAWANDA L. )

ROBINSON, )

)

DEBTORS. )

)

IN RE: ) CHAPTER 13

) CASE NO. 06-10776-JDW

JOHNNY D. CLYDE, JR. and )

BELINDA A. OWENS, )

)

DEBTORS. )

)

IN RE: ) CHAPTER 13

) CASE NO. 06-10729-JDW

DAVID W. and CHERYL A. )

STEVENSON, )

)

DEBTORS. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Debtors: George Woodall

Post Office Box 305

Albany, Georgia 31705-0305

For Creditors: Mark A. Gilbert

106 South Patterson Street, Suite 240

Valdosta, Georgia 31601

DaimlerChrysler Financial Servs.: H. Tucker Dewey

200 Jefferson Ave., Suite 1450

Memphis, Tennessee 38103

HSBC Auto Finance: Ronald Levine

945 East Paces Ferry Road, Suite 2270

Atlanta, Georgia 30326

GMAC: Lisa Ritchey Craig

171 17th Street, NW, Suite 975

Atlanta, Georgia 30363

3

MEMORANDUM OPINION

This matter comes before the Court on the creditors’ objections to confirmation. This is a

core matter within the meaning of 28 U.S.C. § 157(b)(2)(L). After considering the pleadings, the

evidence, and the applicable authorities, the Court enters the following findings of fact and

conclusions of law in conformance with Federal Rule of Bankruptcy Procedure 7052.

Findings of Fact

Robinsons: Debtors Zachary and Lawanda Robinson filed a Chapter 13 petition on June

22, 2006. The Robinsons owe DaimlerChrysler Financial Services America, LLC $16,340.97

for the purchase of a 2003 Toyota Camry. The parties agree that the fair market value of the

automobile is $14,235. The parties further agree that Daimler has a purchase money security

interest in the Camry, it was acquired for the Robinsons’ personal use, and it was purchased

within 910 days prior to the bankruptcy filing date.

The parties stipulate the Robinsons’ modified Chapter 13 plan proposes to either (1) cram

down the debt and to pay Daimler $14,235 at 8% interest and to pay the remainder as a general

unsecured claim or (2) pay the debt in full with no interest, whichever of the two would result in

a greater payout to Daimler. Daimler objected to confirmation of the plan.

Clyde and Owens: Debtors Johnny Clyde and Belinda Owens filed a Chapter 13 petition

on August 15, 2006. Mr. Clyde and Ms. Owens owe HSBC Auto Finance $16,294 for the

purchase of a 2005 Ford Taurus. The parties agree that the fair market value of the automobile is

$13,800. The parties further agree that HSBC has a purchase money security interest in the

Taurus, it was acquired for Mr. Clyde and Ms. Owens’ personal use, and it was purchased within

910 days prior to the bankruptcy filing date.

4

The parties stipulate Mr. Clyde and Ms. Owens’ Chapter 13 plan proposed to either (1)

cram down the debt and to pay HSBC $13,800 at 8.25% interest and to pay the remainder as a

general unsecured claim or (2) pay the debt in full with no interest, whichever of the two would

result in a greater payout to HSBC. HSBC objected to confirmation of the plan.

Stevensons: Debtors David and Cheryl Stevenson filed a Chapter 13 petition on August

2, 2006. The Stevensons owe General Motors Acceptance Corp. $15,512.32 for the purchase of

a 2005 Chevrolet Aveo. The parties agree that the fair market value of the automobile is $9,975.

The parties further agree that GMAC has a purchase money security interest in the Aveo, it was

acquired for the Stevensons’ personal use, and it was purchased within 910 days prior to the

bankruptcy filing date.

The parties stipulate the Stevensons’ Chapter 13 plan proposed to either (1) cram down

the debt and to pay GMAC $9,975 at 9% interest and to pay the remainder as a general

unsecured claim or (2) pay the debt in full with no interest, whichever of the two would result in

a greater payout to GMAC. GMAC objected to confirmation of the plan.

Conclusions of Law

At issue in this case is whether the hanging paragraph at the end of 11 U.S.C. § 1325(a)

requires a debtor to pay interest to a creditor whose collateral is a motor vehicle purchased by the

debtor for personal use within 910 days prior to filing a bankruptcy petition. For the reasons

provided in In re Carver, 338 B.R. 521, 526 (Bankr. S.D. Ga. 2006) (Walker, J.), and In re

Green, 348 B.R. 601, 611 (Bankr. M.D. Ga. 2006) (Walker, J.), the Court holds as follows:

Pursuant to a Chapter 13 plan, a creditor who holds a claim described in the hanging paragraph

1 All calculations provided by the Court are for illustrative purposes only and are not

intended as findings of fact or determinations of how much the debtors should pay. Each

calculation assumes that general unsecured creditors will receive no dividend.

5

to § 1325(a) must receive the greater of (1) the full amount of the claim without interest; or (2)

the amount the creditor would receive if the claim were bifurcated and crammed down with

interest calculated in accordance with Till v. SCS Credit Corp., 541 U.S. 465, 124 S. Ct. 1951

(2004), paid on the value of the collateral.

The facts of the three cases at issue here demonstrate the operation of this rule to 910

creditors. In two of the cases, the creditor likely will receive a greater payout if the debtors pay

the full amount of the claim without interest. The debt owed by the Stevensons on their Aveo is

$15,512.32. If they were to pay the value of the car–$9,975–with interest at 9% over 60 months

(the proposed length of their plan), the total payout would be only $12,423.88.1 Similarly, the

debt of $16,294 owed by Clyde and Owens on their Taurus exceeds the value of the

car–$13,800–with interest at 8.25% paid over 3 years (based on the applicable commitment

period because the proposed plan has no stated duration). Under a cramdown, the creditor would

receive only $15,625.27.

In the third case, however, a cramdown benefits the creditor. The Robinsons owe

$16,340.97 on their car, which is worth $14,235. If they pay the value of the car at 8% interest

over 57 months (the proposed length of their plan), the creditor will receive $17,157.57, a

slightly higher figure than the claim amount.

Because the parties in each case have stipulated that the debtors have proposed to pay

either the full amount of the claim or the amount the creditor would receive in a

cramdown–whichever would be more favorable–their plans comply with the rule set forth in this

Opinion with regard to 910 claims. Therefore, the Court will overrule the creditors’ objections

to confirmation.

An Order in accordance with this Opinion will be entered on this date.

END OF DOCUMENT

MICHAEL WADE CASTLEBERRY and VICKY LYNN CASTLEBERRY,

September 29, 2010

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 10-51298-JDW

MICHAEL WADE CASTLEBERRY and )

VICKY LYNN CASTLEBERRY, ))

DEBTORS. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Debtor: Jason M. Orenstein

Post Office Box 4086

Macon, Georgia 31208

For Creditor: Ronald A. Levine

780 Johnson Ferry Road, Suite 240

Atlanta, Georgia 30342

Daniel Wilder

544 Mulberry Street, Suite 800

Macon, Georgia 31201

SO ORDERED.

SIGNED this 29 day of September, 2010.

________________________________________

JAMES D. WALKER, JR.

__________________________________U_N_IT_E_D_ S_T_A_T_E_S _B_A_N_KR_U_P_T_C_Y_ J_U_D_G_E__

Case 10-51298 Doc 31 Filed 09/29/10 Entered 09/30/10 09:56:07 Desc Main

Document Page 1 of 10

2

MEMORANDUM OPINION

This matter comes before the Court on the Motion of Ford Motor Credit Company to

Alter, Amend and Modify Order of Confirmation. This is a core matter within the meaning of 28

U.S.C. § 157(b)(2)(L). After considering the pleadings, the evidence, and the applicable

authorities, the Court enters the following findings of fact and conclusions of law in conformance

with Federal Rule of Bankruptcy Procedure 7052.

Findings of Fact

Debtors Michael Wade Castleberry and Vicky Lynn Castleberry filed a joint Chapter 13

petition on April 27, 2010. On Schedule D, they listed Ford Motor Credit Company as a secured

creditor, with a claim of $21,000 secured by a 2007 Ford F150 valued at $15,300. On April 20,

2010, the Court issued a notice of the bankruptcy filing that included notice that the confirmation

hearing was scheduled for June 28, 2010, and that objections to confirmation were due seven

days prior to that date.

In their Chapter 13 plan, filed May 5, 2010, Debtors proposed to pay Ford Credit the

value of its collateral and to pay nothing on the unsecured portion of its claim. The plan also

included a special provision that, upon Debtors’ completion of the plan and discharge, “Ford

Credit shall release title to debtors’ vehicle to counsel for debtors with all liens marked satisfied.”

(Chapter 13 Plan, docket no. 8.) Ford Credit filed no objection to confirmation prior to the

confirmation hearing. At the hearing on June 28, 2010, the Chapter 13 Trustee recommended the

plan for confirmation. On July 8, 2010, the Court entered an order confirming the plan. Also on

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Document Page 2 of 10

1 The deadline for objecting to confirmation was June 21, 2010.

2 The deadline for filing a proof of claim was August 23, 2010.

3

July 8, 2010, Ford Credit filed an untimely objection to confirmation.1 Four days later, on July

12, 2010, Ford Credit filed a motion to alter, amend and modify the confirmation order on the

ground that its treatment under the plan is contrary to the law. The following month, on August

13, 2010, it timely filed a proof of claim,2 listing a secured claim of $20,334.70 and collateral as

the 2007 F150, purchased on October 31, 2007.

The Court held a hearing on Ford Credit’s motion on August 16, 2010. After considering

the facts and the arguments of the parties, the Court will deny the motion.

Conclusions of Law

Ford Credit seeks modification of Debtors’ Chapter 13 plan in such a way that it will

receive payment of its claim in full with interest (910 treatment). It argues it is entitled to such

treatment under the hanging paragraph of 11 U.S.C. § 1325(a) and, therefore, the Court made a

legal error by confirming a plan that provides payment of Ford Credit’s claim only to the extent

of the value of its collateral and for discharge of the unsecured portion of its claim (cramdown

treatment).

An order confirming a Chapter 13 plan is a final order. United Student Aid Funds, Inc. v.

Espinosa, __ U.S. __, 130 S. Ct. 1367, 1376 (2010). Therefore, Ford Credit’s motion is

governed by Federal Rule of Bankruptcy Procedure 9023, applicable to requests for new trial or

amendment of judgment. Kellogg v. Schreiber (In re Kellogg), 197 F.3d 1116, 1119 (11th Cir.

1999). The only grounds for granting such a motion are “newly-discovered evidence or manifest

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4

errors of law or fact.” Id.

Manifest Errors of Law or Fact

The Court will begin by considering whether it made any manifest errors or law or fact.

A manifest error “is not demonstrated by the disappointment of the losing party”; rather it arises

upon the court’s “‘wholesale disregard, misapplication, or failure to recognize controlling

precedent.’” Oto v. Metropolitan Life Ins. Co., 224 F.3d 601, 606 (7th Cir. 2000) (quoting

Sedrak v. Callahan, 987 F. Supp. 1063, 1069 (N.D. Ill. 1997)). In this case, Ford Credit argues

the provision cramming down its claim is “illegal” on its face because it is contrary to the

provisions of the hanging paragraph and, thus, the Court erred in confirming Debtors’ plan. In

addition, Ford Credit argues that if the Court does not change its treatment under the plan, it

should invalidate the special provision requiring Ford Credit to terminate its lien upon Debtors’

discharge.

Generally, secured claims are subject to bifurcation. The claim is a secured claim to the

extent of the value of the collateral. 11 U.S.C. § 506(a). Any debt in excess of that value

becomes an unsecured claim. However, the hanging paragraph to § 1325(a) provides that § 506

does not apply

if the creditor has a purchase money security interest securing the

debt that is the subject of the claim, the debt was incurred within

the 910-day [period] preceding the date of the filing of the petition,

and the collateral for that debt consists of a motor vehicle …

acquired for the personal use of the debtor.

Id. § 1325(a), hanging paragraph. Such claims, known as 910 claims, must be treated as fully

secured without regard to the value of the collateral. Nuvell Fin. Servs. Corp. v. Dean (In re

Dean), 537 F.3d 1315, 1320 (11th Cir. 2008).

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5

Under 11 U.S.C. § 1325(a), the Court “shall confirm” a plan that complies with the

provisions of the Bankruptcy Code. Espinona, 130 S. Ct. at 1381. With regard to secured

creditors, the Court is required to confirm a plan if (1) the creditor accepts the plan or (2) the

creditor retains its lien until it receives payments equal to the present value of its secured claim or

(3) the debtor surrenders the collateral. Id. § 1325(a)(5). The second option is commonly

referred to as a cramdown when the creditor is undersecured and its claim is bifurcated. In a

cramdown, the debtor pays the value of the collateral, and pays the remainder of the claim pro

rata with general unsecured creditors–who often receive no dividend. The hanging paragraph

effectively eliminates the cramdown option for 910 claims because they can never be divided

into secured and unsecured components.

The Supreme Court recently said in dicta that a bankruptcy judge is required “to address

and correct a defect in a debtor’s proposed plan even if no creditor raises the issue.” Espinosa,

130 S. Ct. at 1381, n.14. However, Debtors’ cramdown of Ford Credit’s claim is not an obvious

plan defect. First, it is not clear from the plan that Ford Credit’s claim was a 910 claim. The

Court, perhaps, could have made a reasonable assumption that Ford Credit held a purchase

money security interest based on the name of the creditor and the nature of the collateral. The

Court could even have attempted to calculate the number of days between the loan date and the

petition date (approximately 908 days). However, at the time of the hearing on confirmation,

Ford Credit had not filed a proof of claim. Even if the Court had found Ford Credit’s claim met

some of the requirements for 910 treatment, others remained in doubt. For example, at the

hearing on the motion at issue, Debtors’ counsel indicated Debtors could raise a defense to the

personal-use element of the hanging paragraph. Thus, at the time of confirmation, the Court

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6

could not determine whether the car was purchased for the personal use of Debtors without

taking evidence. Absent an objection from Ford Credit, the Court had no reason to consider such

evidence.

Second, even if the plan expressly conceded Ford Credit’s claim was a 910 claim, the

Court could not assume Ford Credit objected to such treatment when Ford Credit remained

silent. In fact, as a general rule, courts agree that a secured creditor’s failure to object to a

Chapter 13 plan may constitute its acceptance of the plan. Wachovia Dealer Servs. v. Jones (In

re Jones), 530 F.3d 1284, 1291 (10th Cir. 2008); see also Flynn v. Bankowski (In re Flynn), 402

B.R. 437, 443 (B.A.P. 1st Cir. 2009) (collecting cases). Nevertheless, a handful of courts have

held a 910 creditor’s failure to object to confirmation cannot be deemed acceptance of a plan that

crams down its claim. In re Montoya, 341 B.R. 41, 45-46 (Bankr. D. Utah 2006); In re Garner,

399 B.R. 267, 273 (Bankr. D. Utah 2009); accord In re Bethoney, 384 B.R. 24, 33-34 (Bankr. D.

Mass. 2008); Regional Acceptance Corp. v. Williams (In re Williams), No. 06-80695, adv. no.

06-9024, 2007 WL 128891, at *3-4 (Bankr. M.D.N.C. Jan. 12, 2007); In re Montgomery, 341

B.R. 843, 845 (Bankr. E.D. Ky. 2006).

In Montoya, the court said, “[I]mplied acceptance of an otherwise compliant plan … is

quite different from proposing a plan intentionally inconsistent with the Code and then waiting

for the trap to spring on a somnolent creditor.” 341 B.R. at 45. As a consequence, a plan that

provides cramdown treatment of a 910 claim “presents no less a bar to confirmation than failing

to pay priority claims in full, proposing a plan in bad faith, or proposing a plan that is not

feasible.” Id. at 46.

The Court finds Montoya unpersuasive. Unlike bad faith or infeasibility, a cramdown is

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7

not a bar to confirmation if the affected creditor accepts such treatment. According to Montoya,

implied acceptance of a plan under § 1325(a)(5)(A) is only appropriate when acceptance is

unnecessary because the plan has been “properly noticed and otherwise meets the requirements

of § 1325(a).” Id. at 45. Not only does such an exception essentially eviscerate the general rule

permitting implied acceptance, but it would also place the burden on the debtor in every case to

prove a negative–that any claim that might remotely fall within the scope of the hanging

paragraph is not a 910 claim–while absolving the creditor of any responsibility for protecting its

rights.

The introduction of the hanging paragraph to bankruptcy jurisprudence has presented a

difficult dilemma. A debtor’s decision to file bankruptcy is almost always grounded in an

acknowledgment of the reality that his or her debts can never be repaid from current earnings.

Contrary to the popular perception of rampant abuse, most debtors who receive the benefit of a

discharge in bankruptcy would never, absent bankruptcy, be able to pay the discharged debts.

Historically, creditors who have enjoyed secured status have been required to demonstrate that

the value of their collateral would afford an equivalent benefit outside of bankruptcy. There had

only been one exception to this rule–the holders of claims secured solely by a security interest in

the debtor’s principal residence. 11 U.S.C. § 1322(b)(2). Arguably that exception has been

justified by the appreciating nature of such property, recent history being the foremost exception.

In 2005, the hanging paragraph to § 1325(a) introduced another exception that applies to holders

of claims secured by 910 vehicles as described infra and to holders of claims secured by a

purchase money security interest in other goods when the debt was incurred within a year of the

bankruptcy filing.

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8

As a consequence of this new provision, bankruptcy jurisprudence lost its connection

with reality. In the case of 910 vehicles, debtors are required to pay secured claims that bear no

relation to the value of the property. Not surprisingly, debtors often propose to surrender such

vehicles to creditors and to discharge the resulting deficiency claim. Faced with those

circumstances, a creditor might find it preferable to accept payments under a plan in an amount

less than the full amount of the 910 claim rather than dealing with the liquidation of the vehicle.

Section 1322 of the Bankruptcy Code does not prohibit such a plan provision. Accordingly, any

plan proposing such treatment would not be void on its face even if a creditor could defeat the

plan proposal with an objection.

A creditor finding itself in Ford Credit’s shoes might attempt to raise the specter of bad

faith. A plan provision no reasonable creditor would ever knowingly accept might be one

proposed in bad faith. However, a plan proposal such as the one in this case, made in accordance

with economic reality, proposing treatment to the creditor that would be equal to or better than

surrender of the collateral cannot be considered as having been proposed in bad faith unless it is

specifically prohibited by the Code.

If a creditor is unhappy with its treatment under the plan, it must take some affirmative

action to timely communicate its opposition. In this case, Ford Credit did not file an objection

until more than two weeks after the deadline for doing so and more than one week after the

Chapter 13 Trustee recommended the plan for confirmation. The objection was not filed until

the same day the Court signed the confirmation order. In such circumstances, the Court may

deem Ford Credit’s silence as acceptance of the plan. Because the creditor’s acceptance of the

plan satisfies § 1325(a)(5), the Court did not commit any legal error by confirming the plan.

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3 Pursuant to 11 U.S.C. § 1322(b)(2), a Chapter 13 plan may not modify the rights of

creditors holding “a claim secured only by a security interest in real property that is the debtor’s

principal residence[.]”

4 An open question remains as to whether Bateman would dictate a different result if (1)

Ford Credit had filed a proof of claim within the time to object to confirmation that conflicted

with its treatment under the proposed plan and (2) the evidence available at confirmation

9

Ford Credit has also argued that based on the Eleventh Circuit’s opinion in Universal

Mortgage Co. v. Bateman (In re Bateman), 331 F.3d 821 (11th Cir. 2003), its lien should survive

Debtors’ discharge. However, Bateman presented a very different fact scenario. The creditor

held a first mortgage on the debtor’s principal residence. The debtor proposed to pay only a

portion of the mortgage arrearage through the plan.3 Although the creditor did not object to the

plan, it filed a timely proof of claim that disputed the amount of arrearage included in the plan.

Id. at 822-23. Because the debtor did not timely object to the proof of claim, it served to

establish the allowed amount of the arrearage. Id. at 827-28. The court found a timely filed

proof of claim that conflicts with a plan provision serves to prevent a secured creditor’s

acceptance of the plan under § 1325(a)(5)(A). Id. at 829. Because § 1325(a)(5) was not

otherwise satisfied as to the arrearage claim, the plan was erroneously confirmed by the

bankruptcy court. Although the error did not prevent the plan from enjoying res judicata effect,

the plan could not “invalidate the creditor’s lien.” Id. at 830-31. Thus, “to the extent that [the

creditor] had any rights to act against [the debtor] pursuant to the terms of the mortgage, it

retain[ed] those rights despite the terms of the plan.” Id. at 834. The court noted its decision was

specific to cases involving real property subject to the anti-modification provision of §

1322(b)(2). Id. n.12. As a result, Bateman does not apply in this case. Therefore, Ford Credit is

not entitled to retain its lien after Debtors complete their plan and receive a discharge.4

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demonstrated Ford Credit was entitled to 910 treatment. In such circumstances, the Court would

have to consider whether the anti-modification provisions of the hanging paragraph and of §

1322(b)(2) are analogous. Because the appropriate facts are not before the Court, the Court

offers no opinion on the question.

10

Newly Discovered Evidence

As discussed above, the Court did not have sufficient information at the time of

confirmation to conclude Ford Credit’s claim was a 910 claim. At the hearing on its motion,

Ford Credit argued it could prove the applicability of the hanging paragraph through the

presentation of evidence. However, it has not shown or even asserted that such evidence is

newly discovered. Consequently, any such evidence cannot be used to justify a change in the

confirmation order. Kellogg v. Schreiber (In re Kellogg), 197 F.3d 1116, 1119-20 (11th Cir.

1999). Rule 9023 is not intended to give creditors who sit on their rights a second bite at the

apple, and attempts to take that second bite are regarded as an abuse of the Rule. See Ellenberg

v. Board of Regents of the Univ. Sys. of Ga. (In re Midland Mech. Contractors, Inc.), 200 B.R.

453, 456 (Bankr. N.D. Ga. 1996).

Conclusion

The Court has found no basis to alter or amend the confirmation order. Therefore, Ford

Credit’s motion will be denied. Consequently, pursuant to 11 U.S.C. § 1327(a), Ford Credit is

bound by the provisions of the plan as confirmed.

An Order in accordance with this Opinion will be entered on this date.

END OF DOCUMENT

Case 10-51298 Doc 31 Filed 09/29/10 Entered 09/30/10 09:56:07 Desc Main

Document Page 10 of 10

JOSEPH M. CARTER,

March 22, 2000

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF GEORGIA

SAVANNAH DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 00-40704-JDW

JOSEPH M. CARTER, )

)

DEBTOR )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

OF COUNSEL:

For Debtor: Gerald L. Olding

10500-B Abercorn Street

Savannah, GA 31419

Trustee: Sylvia Ford Brown

P. O. Box 10556

Savannah, GA 31412

2

MEMORANDUM OPINION

The Court raises this issue sua sponte in considering

confirmation of the Chapter 13 plan proposed by the debtor in

this case, Joseph M. Carter (“Debtor”). At issue is the

failure of Debtor’s proposed plan to meet the “best interest

of creditors” test provided at 11 U.S.C. § 1325(a)(4). After

considering the pleadings, evidence and applicable

authorities, the Court enters the following findings of fact

and conclusions of law in conforming with Federal Rule of

Bankruptcy Procedure 7052.

Findings of Fact

In considering confirmation of the proposed plan, the

Court gives special attention to the fact that Debtor owns

substantial equity in real estate properties. Debtor’s

holdings as investment properties do not appear likely to

produce the regular income necessary for funding his plan.

However, the plan can be funded by sales of the properties.

If this were a proceeding under Chapter 7, it would be

one of those rare instances occasioning not only the full

payment of all secured and unsecured claims, but the payment

of interest on unsecured claims pursuant to 11 U.S.C. §

726(a)(5), as well. Debtor’s Chapter 13 plan does not

3

provide for payment of interest to unsecured creditors.

Conclusions of Law

Section 1325(a) of the Bankruptcy Code lists six

criteria a Chapter 13 plan must meet in order for the Court

to confirm it. See Associates Commercial Corp. v. Rash, 117

S. Ct. 1879, 1882 (1997); In re Barnes, 32 F.3d 405, 407 (9th

Cir. 1994); In re Kitchens, 702 F.2d 885, 887 (11th Cir.

1983). The “best interest of creditors” test, provided at

Section 1325(a)(4), is one of the criteria to be met in order

for the plan to be confirmed. See In re Eason, 178 B.R. 908,

909 (Bankr. M.D. Ga. 1994) (Laney, J.). The “best interest

of creditors” test requires the Court to confirm a plan if

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

[Title 11 of the U.S.C.] on such date[.]

11 U.S.C. § 1325(a)(4) (2000).

The “best interest of creditors” test is not met in

Debtor’s proposed plan because unsecured creditors receive

less than they would receive if this were a case under

Chapter 7. If Debtor’s assets were liquidated in a

proceeding under Chapter 7, not only would holders of all

secured and unsecured claims be paid in full, but unsecured

claims provided for at Sections 726(a)(1) to (a)(4) would

4

receive “payment of interest at the legal rate from the date

of the filing of the petition[.]” 11 U.S.C. § 726(a)(5).

Accordingly, the Court will not confirm Debtor’s proposed

plan until the requirements of Section 1325(a)(4) are met.

Arguably, Section 1325(a)(4) articulates not

requirements, but discretionary standards, for confirmation.

See In re Szostek, 886 F.2d 1405, 1411 (3d Cir. 1989); In re

Britt, 199 B.R. 1000, 1006-07 (Bankr. N.D. Ala. 1996); 8 KING,

COLLIER ON BANKRUPTCY ¶ 1325.01, pp. 1325-5 to 1325-6 (courts

required to confirm plans meeting standards provided in

Section 1325(a) but have discretion to confirm plans not

meeting them). Nevertheless, even if the Court were to agree

with the court in In re Britt, the only court to address the

nature of Section 1325(a) in the confirmation context, the

Court would be “extremely reluctant . . . to confirm a plan

[that] does not comply with [Section 1325(a)(4)].” See In re

Britt, 199 B.R. at 1007. Even though the In re Britt court

argued it had discretion to confirm a plan not proposed in

accordance with the provisions of 1325(a)(5), it placed a

substantial burden upon debtors asking the court to disregard

the provisions of Section 1325(a), and in the end, required

the debtors to satisfy the provisions of Section 1325(a) in

order to obtain confirmation of their plan. Id. at 1014.

Regardless of whether the circumstances in another case

would persuade the Court, in its discretion, to confirm a

5

plan that did not meet the provisions of Section 1325(a),

such circumstances are not presented in this case. Because

Debtor has readily available means of protecting his

unsecured creditors from loss, it would be inequitable to

confirm Debtor’s plan as proposed.

Conclusion

Debtor’s Chapter 13 plan cannot be confirmed as

proposed. Accordingly, an order will be entered denying

confirmation of Debtor’s proposed plan. Furthermore, the

order will dismiss Debtor’s case subject to the condition

that within ten (10) days of the entry of the order, Debtor

may file a modification of his proposed plan to meet the

requirements of Section 1325(a)(4). The modified plan would

have to provide for payment of the present value, as of the

effective date of the plan, of interest on unsecured claims

as it would be paid pursuant to Section 726(a)(5) if this

were a case under 11 U.S.C. Chapter 7.

An order in accordance with this opinion will be entered

on this date.

Dated this 22nd day of March, 2000.

_______________________________

James D. Walker, Jr.

United States Bankruptcy Judge

6

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and

foregoing have been served on the following:

Gerald L. Olding

10500-B Abercorn Street

Savannah, GA 31419

Sylvia Ford Brown

P. O. Box 10556

Savannah, GA 31412

This 22nd day of March, 2000.

______________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF GEORGIA

SAVANNAH DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 00-40704-JDW

JOSEPH M. CARTER, )

)

DEBTOR )

ORDER

In accordance with the memorandum opinion entered on

this date it is hereby

ORDERED that confirmation of the Chapter 13 plan

proposed by Debtor, Joseph M. Carter, is DENIED; and it is

further

ORDERED that this case be DISMISSED unless, within ten

(10) days of entry of this order, Debtor files a proposed

modification to his Chapter 13 plan to comply with 11 U.S.C.

§ 1325(a)(4) as stated in the memorandum opinion entered in

this case on this date.

SO ORDERED this 22nd day of March, 2000.

_______________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and

foregoing have been served on the following:

Gerald L. Olding

10500-B Abercorn Street

Savannah, GA 31419

Sylvia Ford Brown

P. O. Box 10556

Savannah, GA 31412

This 22nd day of March, 2000.

______________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

ROBERT C. BYRD,

May 1, 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: )CHAPTER 13

)CASE NO. 99-54163-JDW

ROBERT C. BYRD, )

)

DEBTOR )

)

)

BANK OF AMERICA, )

)

MOVANT )

)

VS. )CONTESTED MATTER

)

ROBERT C. BYRD, )

)

RESPONDENT )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Movant: Ronald A. Levine

2270 Resurgens Plaza

945 E. Paces Ferry Road

Atlanta, Georgia 30326

For Respondent: Homer M. Scarborough, Jr.

1200 Riverside Drive

Suite B

Macon, Georgia 31201-1684

2

MEMORANDUM OPINION

This matter comes before the Court on Objection to

Confirmation filed by Bank of America (“Creditor”). Creditor

objects to confirmation of the Chapter 13 plan proposed by

Robert C. Byrd (“Debtor”). This is a core matter within the

meaning of 28 U.S.C. § 157(b)(2)(L) (2000). After considering

the pleadings, evidence and applicable authorities, the Court

enters the following findings of fact and conclusions of law

in conformance with Federal Rule of Bankruptcy Procedure 7052.

Findings of Fact

Debtor filed for protection under Chapter 13 on October

28, 1999, owing Creditor $18,113.79, a debt secured by

Debtor’s 1996 Sierra pickup truck (the “pickup”). In his

Chapter 13 plan, Debtor proposes to retain and use the pickup

pursuant to Sections 363(b) and 1303, and he values it at

$11,000.00 for the purpose of determining Creditor’s secured

status pursuant to Section 506(a). No unsecured claims will

receive any dividend under the plan.

Creditor objects to the plan because the pickup’s

petition date replacement value was $18,137.00, an amount

sufficient to afford Creditor secured status for the entire

amount of its claim. Parties have not indicated the pickup’s

petition date liquidation value, but it was presumably less

1The term “inherently depreciable” refers to the type of

collateral where the market value inevitably depreciates over

time. Delay in liquidating “inherently depreciable”

collateral inevitably results in loss to one who has recourse

only to its lien on such property. While automobiles are

examples of such property, other types of property, such as

household furniture, would fit this definition, as well,

absent evidence to the contrary. Real estate would be an

example of property that does not fit the definition of

“inherently depreciable” collateral, absent evidence to the

contrary.

3

than $17,325.00, the pickup’s replacement value on the date of

the confirmation hearing.

As is often the case with automobiles, the pickup’s value

appears to be inherently depreciable.1 Even if Debtor

properly maintains the pickup, its value in both the

replacement and liquidation markets will decline between the

petition and the confirmation dates. Creditor has not

requested relief from the automatic stay for lack of adequate

protection pursuant to Section 362(d)(1), nor has it requested

that the Court condition Debtor’s continued use of the pickup,

pursuant to Section 363(b) to adequately protect its interest

in the pickup.

Conclusions of Law

Creditor’s objection raises the issue as to whether its

secured status should be determined, pursuant to Section

506(a) for the purposes of Section 1325(a)(5)(B), based on the

pickup’s petition date value or its confirmation date value.

4

Neither the Eleventh Circuit nor the United States Supreme

Court has directly addressed this issue. The bankruptcy and

district courts have not reached a consensus as to the correct

answer.

In In re Kennedy, 177 B.R. 967(Bankr. S.D. Ala. 1995),

the court reviewed the theories for timing determination of

secured status for the purpose of Section 1325(a)(B), and

decided that the determination should be based on collateral’s

confirmation date value. Such timing, the court argued, best

accounts for the interplay of the Code’s various sections. In

re Kennedy, 177 B.R. at 971. In re Kennedy appears to reflect

the majority view. However, the argument based on judicial

efficiency for fixing secured status based on collateral’s

petition date value has merit, at least within the context of

Chapter 13 proceedings, and it will be considered when

determining Creditor’s secured status.

I. Multiple Valuations Approach to Determination of Secured

Status Based on Value as of Confirmation Date

The argument for determining a creditor’s secured status

as to collateral’s confirmation date value, also called the

“multiple valuations” approach, appears to be the view of the

majority of courts that have considered this question.

According to courts taking the multiple valuations approach,

secured status varies depending on the purpose for which

secured status is determined. “Establishing equity, allowing

5

claims, adequate protection, Chapter 13 eligibility, and plan

confirmation” are some contexts in which such variable

determinations might need to be made pursuant to Section

506(a). In re Cason, 190 B.R. 917, 924 (Bankr. N.D. Ala

1995); see also In re Delta Resources, Inc., 54 F.3d 722, 729-

30 (11th Cir. 1995) (adequate protection determined early in

case, secured claims determined later); but see In re Beard,

324 B.R. 322, 323-24 (Bankr. N.D. Ala. 1989) (holding it

illogical for secured status to vary as the purpose for

determining secured status varies).

The argument for multiple valuations is based on a

construction of Section 506(a) that recognizes the conflict

that would be created between Section 506(a) and the Code’s

adequate protection provisions if a creditor’s secured status

were fixed for confirmation purposes as of the petition date.

Such a procedure would render superfluous the Code’s

provisions for adequate protection of a creditor’s petition

date interest in depreciable collateral. See In re Cason, 190

B.R. at 927-28; In re Kennedy, 177 B.R. at 972. The Code’s

adequate protection provisions are available to protect a

creditor from losses it might incur due to depreciation of the

collateral’s value during the period preceding plan

confirmation. See In re Delta Resources, 54 F.3d at 729; In

re Cook, 205 B.R. 437, 441 (Bankr. N.D. Fla. 1997); In re

Cason, 190 B.R. at 928; In re Kennedy, 177 B.R. at 972; In re

2Fixing secured status based on replacement value at the

petition date would not entirely negate the Code’s adequate

protection provisions. For example, Creditor’s interest in

the pickup might be inadequately protected from catastrophic

damage if Debtor failed to maintain proper insurance.

6

Dunes Casino Hotel, 69 B.R. 784, 793-94 (Bankr. D. N.J. 1986);

Matter of Melson, 44 B.R. 454, 456-57 (Bankr. D. Del. 1984);

In re Nixon Mach. Co., 9 B.R. 316, 317 (Bankr. E.D. Tenn.

1981) (automatic stay protects status quo for debtor; adequate

protection protects status quo for secured creditor). Thus,

if the Creditor’s secured status were based on the pickup’s

petition date replacement value, the Court would effectively

negate an important function of the Code’s adequate protection

provisions.2 See In re Cason, 190 B.R. at 927 (court refused

to “read the statute in a way that deprives creditors of such

a fundamental bankruptcy principle as adequate protection”).

When Debtor filed his petition, the automatic stay

prevented Creditor from realizing the liquidation value of the

pickup and applying the proceeds to the outstanding debt.

Because the pickup’s value is inherently depreciable, Creditor

may have had reason to move the Court, either for relief from

the automatic stay pursuant to Section 362(d)(1), or to

condition Debtor’s retention and use of the pickup to

adequately protect its interest pursuant to Section 363(e).

Furthermore, because Creditor was in the best position to

appreciate the risk to its interest, and to move for adequate

7

protection, it was properly Creditor’s duty to consider

whether to take such action. See In re Adams, 2 B.R. 313, 314

(Bankr. M.D. Fla. 1980) (citing In re Pennyrich Int’l, 473

F.2d 417 (5th Cir. 1973)). The canons of statutory

construction direct the Court to construe statutes in a manner

that will give meaning to all sections of the Code if

possible. See In re Cason, 190 B.R. at 928 (citing Morton v.

Mancari, 417 U.S. 535, 94 S. Ct. 2474 (1974)). Accordingly,

the Court will base its determination of Creditor’s secured

status on the pickup’s confirmation date replacement value.

II. Merits of Argument for Valuation as of Date of Petition

for Purposes of Chapter 13

The Code provides that a creditor’s secured status should

be determined based on collateral’s confirmation date

replacement value, and that a creditor, concerned about

depreciation losses in collateral’s pre-confirmation

liquidation value, may pursue its adequate protection rights.

Nevertheless, the judicial-efficiency-based argument for

fixing secured status on the petition date merits attention,

at least in matters concerning property of inherently

depreciable nature in Chapter 13 cases in this district.

Judicial efficiency served as one prong of the district

court’s argument for reversing the bankruptcy court in In re

Johnson, 165 B.R. 524 (S.D. Ga. 1994), rev’g 145 B.R. 108

3Section 507(b) gives a creditor a “superpriority” claim

that takes precedence over all other priority claims provided

for under Section 507 if adequate protection provided under

Sections 362, 363, or 364 fails to actually protect the

creditor’s interest.

8

(Bankr. S.D. Ga. 1992). In In re Johnson, 145 B.R. 108, the

bankruptcy court determined a creditor’s secured status based

on collateral’s confirmation date value, and held that the

creditor would be entitled to a superpriority claim pursuant

to Section 507(b)3 to the extent its interest lost value due

to pre-confirmation depreciation. In re Johnson, 145 B.R. at

114-15. The district court reversed the bankruptcy court,

arguing that authorization of a superpriority claim

“unnecessarily complicate[d] the administration of the secured

party’s claim[.]” In re Johnson, 165 B.R. at 528-29. The

district court stated further that “‘the proposed disposition

or use’ language in § 506(a) . . . [was] intended to address

more significant value determinations than the relatively

minor league valuations required in the Chapter 13 cram-down

context.” Id. at 529; but see Associates Commercial Corp. v.

Rash, 117 S. Ct. 1879, 1885 (1997) (precise language regarded

to be “of paramount importance” to decision in a Chapter 13

case).

Courts taking the multiple valuations approach have

rejected the rationale of judicial efficiency for fixing

9

secured status as of the petition date. See In re Cason, 190

B.R. at 927; In re Kennedy, 177 B.R. at 973. In In re

Kennedy, the court argued that

[m]otions requesting Section 361 protection in Chapter

13 cases are not routine and not necessary for all

secured creditors. Either the secured property is not

declining in value or an agreement has been reached

with the debtor in many cases. Therefore, the added

work argument is a red herring.

In re Kennedy, 177 B.R. at 973. It would seem, however, that

the circumstances of the courts that reject the argument from

judicial efficiency are somewhat different from those of this

Court. Because the Middle District of Georgia has a very high

volume of Chapter 13 filings, the argument for fixing secured

status as of the petition date has certain merit that cannot

be easily dismissed.

If every creditor in this district, secured by inherently

depreciable collateral, were forced to initiate proceedings to

ensure adequate protection of its interests, this Court would

face an avalanche of contested matters. Likewise, the legal

expense of protecting the interest of such creditors would

substantially increase. It appears that motions for Section

361 protection are not routine in Chapter 13 cases because

determination of secured status based on collateral’s

confirmation date replacement value typically accounts for the

collateral’s petition date liquidation value that the

automatic stay prevents the creditor from realizing prior to

10

confirmation. This case serves as a good example because the

pickup’s replacement value of $17,325.00 is probably more than

the amount Creditor would have realized on the petition date

if the automatic stay had not prevented Creditor from

initiating proceedings to repossess and liquidate its interest

in the pickup.

A creditor secured by inherently depreciable collateral

cannot be certain, however, that a Chapter 13 debtor’s plan

will be confirmed before the collateral’s replacement value

depreciates to an amount less than its petition date

liquidation value. The prudent and diligent creditor must be

mindful of the risk that confirmation may be delayed.

Accordingly, but for the multiple valuations approach adopted

here, such a creditor, secured by inherently depreciable

collateral, would have to move for adequate protection

immediately upon notice of a debtor’s petition for protection

under Chapter 13. Such creditors are numerous due to the

unusually large percentage of Chapter 13 cases filed in this

district. For this reason, the Court cannot so easily dismiss

the judicial efficiency argument as the courts in In re

Kennedy and In re Cason did.

III. Conclusion: Formula for Determining Secured Status of

Creditors Secured by Inherently Depreciable Collateral in

Cases Under Chapter 13

The Court concludes that because Creditor is secured by

4The Bankruptcy Court for the Southern District of

Georgia recently announced a decision that rests upon the same

basic proposition as the formula articulated here. See Davis-

McGraw, Inc. v. Johnson (In re Johnson), Chapter 13 Case

Number 97-13584, (Bankr. S.D. Ga., Augusta Division, December

23, 1999) (unpublished) (Dalis, J.). The proposition is that

while a creditor’s secured status for the purpose of Section

1325(a)(5)(B) should be determined based on collateral’s

confirmation date replacement value, the creditor should also

be treated as adequately protected for at least, but for no

more than, the collateral’s petition date liquidation value.

In Davis-McGraw, the court addressed issues that arose when

the debtors surrendered collateral post-petition, liquidation

of the collateral did not satisfy the creditor’s secured

claim, and the debtors sought to modify their plan to classify

the remaining balance as an unsecured claim. Courts are

divided on this issue. Some treat such deficiencies as

unsecured, see In re Rimmer, 143 B.R. 871, 875 (Bankr. W.D.

Tenn. 1992), and others require debtors to continue to treat

them as secured claims, see Matter of Coleman, 231 B.R. 397,

400 (Bankr. S.D. Ga. 1999). In Davis-McGraw, the court

reached a conclusion that treated the creditor as having moved

the court for adequate protection of its interest in

collateral’s petition date liquidation value as of the

petition date. The court required the debtors’ modified plan

to afford the creditor a Section 507(b) superpriority claim to

the extent that the surrendered collateral’s petition date

liquidation value exceeded the amount the creditor received

from debtor on the claim under the plan plus the amount the

creditor realized from liquidation of the collateral after

debtor surrendered it. The debtors were required to afford

the creditor an additional unsecured claim in their modified

plan for any deficiency remaining to the extent that such

deficiency was greater than the collateral’s petition date

liquidation value. The end result was to put the creditor in

the modified plan in the same position as if the debtor’s

original plan had elected to surrender the collateral pursuant

to Section 1325(a)(5)(C). Such a result requires treating the

11

inherently depreciable collateral, and is party to a case

under Chapter 13, Creditor’s secured status should be

determined based on the greater of the pickup’s replacement

value as of the confirmation date, or on its liquidation value

as of the petition date.4 The multiple valuations approach to

creditor as adequately protected for the petition date

liquidation value of collateral.

12

determining a creditor’s secured status pursuant to Section

506(a) will be adopted, and because Creditor’s secured status

should be determined based primarily upon the pickup’s

confirmation date replacement value of $17,325.00, the Court

holds that Creditor’s objection to confirmation of Debtor’s

Chapter 13 plan must be sustained unless Debtor modifies his

plan to reflect that Creditor’s claim is secured in the amount

of $17,325.00. Such a valuation would necessarily create a

general unsecured claim of $788.79 for creditor. In addition,

Creditor will be allowed to produce evidence that the petition

date liquidation value of the pickup was greater than

$17,325.00 prior to confirmation. If the Court makes such a

finding of fact, then Debtor’s plan must be modified to

reflect that Creditor holds a secured claim in the amount

adopted by the Court as the petition date liquidation value.

To the extent the Court has devised a legal fiction that

treats creditors in cases under Chapter 13 who hold claims

secured by inherently depreciable collateral as having moved

the court for adequate protection prior to confirmation, the

fiction is a necessary one.

An order in accordance with this opinion will be entered

on this date.

Dated this 1st day of May, 2000.

13

_______________________________

James D. Walker, Jr.

United States Bankruptcy Judge

14

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and

foregoing have been served on the following:

Ronald A. Levine

2270 Resurgens Plaza

945 E. Paces Ferry Road

Atlanta, GA 30326

Homer M. Scarborough, Jr.

1200 Riverside Drive, Suite B

Macon, GA 31201-1684

This 2nd day of May, 2000.

____________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: )CHAPTER 13

ROBERT C. BYRD, )CASE NO. 99-54163-JDW

DEBTOR )

)

)

BANK OF AMERICA, )

MOVANT )

)

VS. )CONTESTED MATTER

)

ROBERT C. BYRD, )

RESPONDENT )

ORDER

In accordance with the memorandum opinion entered on this

date it is hereby

ORDERED that confirmation of the Chapter 13 plan proposed

by Debtor, Robert C. Byrd, is DENIED unless within ten (10)

days Debtor modifies his plan to reflect that Creditor holds a

secured claim in an amount equal to the greater of $17,325.00

or the pickup’s petition date liquidation value; and it is

hereby further

ORDERED that Creditor may oppose Debtor’s modification

with proof of a petition date liquidation value in excess of

$17,325.00.

SO ORDERED this 1st day of May, 2000.

_______________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and

foregoing have been served on the following:

Ronald A. Levine

2270 Resurgens Plaza

945 E. Paces Ferry Road

Atlanta, GA 30326

Homer M. Scarborough, Jr.

1200 Riverside Drive, Suite B

Macon, GA 31201-1684

This 2nd day of May, 2000.

____________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

DONALD E. BERGER and,KAREN L. BERGER,

June 1, 2007

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: ) CHAPTER 13

) CASE NO. 07-10112-JDW

DONALD E. BERGER and, )

KAREN L. BERGER, )

)

DEBTORS. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Debtors: George W. Woodall

Post Office Box 305

Albany, Georgia 31702-0305

For American Express: Thomas W. Joyce

Post Office Box 6437

Macon, Georgia 31208-6437

2

MEMORANDUM OPINION

This matter comes before the Court on American Express Centurion Bank’s objection to

plan confirmation. This is a core matter within the meaning of 28 U.S.C. § 157(b)(2)(L). After

considering the pleadings, the evidence, and the applicable authorities, the Court enters the

following findings of fact and conclusions of law in conformance with Federal Rule of

Bankruptcy Procedure 7052.

Findings of Fact

Debtors Donald and Karen Berger filed a Chapter 13 petition on February 2, 2007. Their

Statement of Current Monthly Income (“CMI”), which is Form B22C, shows a monthly gross

income of $8,069.15, which exceeds the median income in Georgia for their household size of

four people. Such debtors are commonly referred to as above-median-income debtors. Based on

the calculations in Form B22C, Debtors have disposable income of $341.02. Their Schedules I

and J show monthly income of $5,857.22 and monthly expenses of $4,219.96, leaving excess

monthly income of $1,637.26. Debtors’ proposed Chapter 13 plan provides for 60 monthly

payments to the trustee–$450 per month for the first 18 months, and $630 per month for the

remainder of the plan. The increase in payments coincides with Debtors’ satisfaction of a 401(k)

loan. No further increase is proposed when a second 401(k) loan is satisfied later during the

term of the plan.

American Express Centurion Bank is an unsecured creditor with claims of more than

$21,000. American Express filed an objection to confirmation of Debtors’ plan on the ground

that it fails to propose payment of all Debtors’ disposable income to unsecured creditors. The

parties submitted briefs on the issue. After considering the facts and the arguments of the

1 The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”).

3

parties, the Court will overrule the objection for the reasons that follow.

Conclusions of Law

OVERVIEW

American Express’s objection is based on § 1325(b) of the Bankruptcy Code, which

provides as follows:

(b)(1) If the trustee or the holder of an allowed unsecured claim

objects to the confirmation of the plan, then the court may not

approve the plan unless, as of the effective date of the plan–

(A) the value of the property to be distributed under the

plan on account of such claim is not less than the amount of such

claim; or

(B) the plan provides that all of the debtor’s projected

disposable income to be received in the applicable commitment

period beginning on the date that the first payment is due under the

plan will be applied to make payments to unsecured creditors

under the plan.

11 U.S.C. § 1325(b)(1).

Debtors’ plan provides for less than full payment of unsecured claims. Therefore, in light

of American Express’s objection, the Court may not confirm the plan unless it provides Debtors

will pay all their projected disposable income into the plan. The parties dispute the meaning of

“projected disposable income.”

Prior to the 2005 Bankruptcy Code amendments,1 § 1325(b)(2) defined disposable

income as all income not reasonably necessary for the debtor’s support. If a creditor objected to

confirmation, courts generally relied on the income and expenses debtors reported on Schedules

I and J to determine disposable income. In re Miller, 361 B.R. 224, 226 (Bankr. N.D. Ala.

2 The definition in § 1325(b)(3) of “amounts reasonably necessary” for the support or

maintenance of the debtor in calculating disposable income specifically references §

707(b)(2)(B). Miller, 361 B.R. at 235 (“Under § 707(b)(2)(B), the court may consider special

circumstances that make ‘such expenses or adjustments to income necessary and reasonable.’”);

see also In re Kolb, No. 06-32036, 2007 WL 960135, at *6 (Bankr. S.D. Ohio March 30, 2007).

Special circumstances warranting adjustment of income or expenses may include a serious health

problem or active military duty. 11 U.S.C. § 707(b)(2)(B)(i).

4

2007). “Determining whether the debtor’s reported Schedule J expenses were reasonably

necessary for the support of the debtor or a dependant of the debtor was a fact-bound

undertaking that required the court to make judgments about a debtor’s lifestyle.” Id.

The 2005 amendments changed the definition of disposable income to “current monthly

income received by the debtor [other than certain child support payments] less amounts

reasonably necessary to be expended– (A)(I) for the maintenance or support of the debtor or a

dependent of the debtor,” for domestic support obligations, for qualified charitable contributions,

and for business expenses. 11 U.S.C. § 1325(b)(2). The amendments further defined “current

monthly income” as the debtor’s average income from all sources (except Social Security

payments or payments for being a victim of war crimes or terrorism) for the six months prior to

filing bankruptcy. Id. § 101(10A). Finally, the amendments provided a formula for determining

the amount of expenses “reasonably necessary” for the debtor’s support. Id. § 1325(b)(3). For

an above-median-income debtor, such expenses “shall be determined in accordance with

subparagraphs (A) and (B) of section 707(b)(2) [the means test].” Id. Under the means test,

most of an above-median-income debtor’s expenses are calculated by reference to IRS national

and local standards, rather than his actual costs. However, special circumstances may justify

additional expenses or modification of current monthly income. Id. § 707(b)(2)(B)(I).2 Chapter

13 debtors make the disposable income calculation by completing Form B22C, which they are

5

required to file pursuant to Bankruptcy Rule 1007(b)(6). In this case, Form B22C shows

Debtors have a disposable income of $341.02, while Schedules I and J indicate a net income of

$1,637.26.

The parties take different positions on the interpretation of “projected disposable income”

in light of the amendments. American Express argues the Court may look beyond Form B22C to

determine Debtors’ projected disposable income. According to its position, the term “projected

disposable income” has a different meaning than “disposable income.” “Disposable income”

requires a historical inquiry into the debtor’s income and subtraction of expenses based on IRS

standards. “Projected disposable income to be received,” on the other hand, requires a

prospective inquiry and should take into account actual income and expenses. Therefore,

American Express urges the Court to consider Debtors’ income and expenses as detailed on

Schedules I and J in deciding whether Debtors propose to pay all their projected disposable

income into the Chapter 13 plan.

Debtors argue that in the absence of a reasonable expectation of a substantial change in

circumstances, the disposable income as calculated on Form B22C is controlling. Because

Debtors anticipate no substantial change in their income or expenses, they contend their monthly

plan payments need not exceed $341.02.

Bankruptcy courts are closely split as to the proper means for calculating projected

disposable income of an above-median-income debtor. A growing minority of cases holds the

amount computed on Form B22C is determinative. In re Miller, 361 B.R. 224 (Bankr. N.D. Ala.

2007); In re Brady, No. 06-18922, 2007 WL 549359 (Bankr. D.N.J. Feb. 13, 2007); In re Kolb,

No. 06-32036, 2007 WL 960135 (Bankr. S.D. Ohio March 30, 2007); In re Naslund, 359 B.R.

3 As one court has noted, the scanty legislative history of BAPCPA has limited value as a

tool of interpretation due to the lack of a conference committee report or similar report

representing the full membership of Congress. Kolb, 2007 WL 960135, at *4. The only

available report, the House Judiciary Report “‘represents only a view of members of one

committee of one house of the federal bicameral legislature’” and does little more than

paraphrase or recite the statutory text. Id. (quoting In re Sorrell, 359 B.R. 167, 176 (Bankr. S.D.

Ohio 2007)). The report “‘often contains a mere recitation of the eventually enacted statutory

text and adds little, if any, assistance to the court’s efforts in determining Congress’s intent.’”

Id. (quoting Sorrell, 359 B.R. at 176).

6

781 (Bankr. D. Mont. 2006); In re Barr, 341 B.R. 181 (Bankr. M.D.N.C. 2006); In re Alexander,

344 B.R. 742 (Bankr. E.D.N.C. 2006); In re Farrar-Johnson, 353 B.R. 224 (Bankr. N.D. Ill.

2006) (only considering the relevance of Schedule J). The majority holds the court may consider

Schedules I and J, although the cases offer varying opinions about the amount of weight given to

the schedules. In re Grant, No. 06-32299, 2007 WL 858805 (Bankr. E.D. Tenn. March 19,

2007); In re LaPlana, No. 6:05 BK 17635, 2007 WL 431627 (Bankr. M.D. Fla. Feb. 9, 2007); In

re Clemons, No. 05-85163, 2006 Bankr. Lexis 1366 (Bankr. N.D. Ga. June 1, 2006); In re

Grady, 343 B.R. 747 (Bankr. N.D. Ga. 2006); In re Watson, No. 06-11948, 2007 WL 1086582

(Bankr. D. Md. April 11, 2007).

PRINCIPLES OF STATUTORY INTERPRETATION

When interpreting the meaning of “projected disposable income,” the Court must begin

with the text of the statute. Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S. Ct. 1023, 1030

(2004). If the statute is clear on its face, the Court must enforce the plain meaning unless doing

so would lead to an absurd result or a result demonstrably at odds with congressional intent.3

U.S. v. Ron Pair Enter., Inc., 489 U.S. 235, 241, 109 S. Ct. 1026, 1030 (1989). The mere

presence of ungrammatical language will not render the statue ambiguous. Lamie, 540 U.S. at

534, 124 S. Ct. at 1030. Furthermore, harsh results are not necessarily absurd. Id. at 538, 124 S.

7

Ct. at 1032. “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, 158, 112 S. Ct. 527, 531 (1991).

LEGAL ANALYSIS

Beginning with the text of the statute, Congress has provided a specific definition of

“disposable income” with regard to above-median-income debtors that refers to the means test in

§ 707(b)(2). A primary element of the majority’s reasoning is “projected disposable income” has

a meaning separate and distinct from “disposable income”–it is forward-looking rather than

historic. Grady, 343 B.R. at 750-51; La Plana, 2007 WL 431627, at *5. To conclude otherwise,

they reason, would render the word “projected” superfluous. In re Jass, 340 B.R. 411, 415-16

(Bankr. D. Utah 2006).

However, the majority’s interpretation renders not just one word superfluous, but the

entirety of subsection 1325(b)(2), which states, “disposable income” is defined “[f]or purposes

of this subsection [§ 1325(b)]….” The only other reference to “disposable income” in that

subsection is in the phrase “projected disposable income.” Thus, if the definition does not apply

to “projected disposable income” it has no application at all. Kolb, 2007 WL 960135, at *9-10.

Another provision of the Code lends support to the view that “projected disposable

income” must be defined by reference to the means test for an above-median-income debtor.

Section 1129(a)(15) provides that when an unsecured creditor objects to an individual debtor’s

Chapter 11 plan, the debtor must pay all unsecured claims in full or make distributions valued at

“not less than the projected disposable income of the debtor (as defined in section 1325(b)(2)) to

be received” during the plan. 11 U.S.C. § 1129(a)(15)(B) (emphasis added). In this provision

8

Congress expressly states the definition of “projected disposable income” is controlled by the

definition of “disposable income.”

In addition, the most relevant dictionary definition of the verb “project” is “[t]o calculate,

estimate, or predict (something in the future), based on present data or trends: projecting next

year’s expenses.” The American Heritage Dictionary of the English Language, 4th ed., (2004)

(emphasis in original). Thus, according to the ordinary meaning of “project,” the Court should

look at existing data and extrapolate it over the term of the plan. In this respect, “applying

historical data such as CMI to future months is no less ‘future-oriented’ than applying the more

recent income and expenses from a debtor’s schedules.” Kolb, 2007 WL 960135, at *8 n.17.

Prior to the amendments, courts extrapolated projected disposable income from information in

Schedules I and J. Under the amendments, Congress has directed the Court to extrapolate from a

different source–disposable income as calculated in accordance with the means test and reported

on Form B22C. See Brady, 2007 WL 549359, at *5. As one court noted, “The use of ‘shall’ in

section 1325(b)(3) [with regard to applying the means test] is mandatory and leaves no discretion

with respect to the expenses and deductions that are to be deducted in arriving at disposable

income.” Barr, 341 B.R. at 185.

Another point raised by the majority for the proposition that courts may look outside

Form B22C to determine projected disposable income is the inclusion of the phrase “to be

received” in § 1325(b)(1)(B). The majority reasons the phrase indicates Congress’s intent to

require plan payments based on the debtor’s actual future disposable income, rather than the

figure that results from application of the statutory formula. Kolb, 2007 WL 960135, at *10

n.19. At least one court in the minority, however, has read the phrase in a different manner.

9

[T]he fact that the phrase [“to be received”] is “forwardlooking”

is not inconsistent with the court’s analysis. The

phrase simply refers to the payments that will be received

throughout the life of the plan. … At worst, the phrase

could be viewed as figurative, a loose and inartful

expression that the current monthly income belongs to or is

attributable to the debtor.

Id. (internal citations omitted).

From a policy perspective, rigid application of the disposable income formula can lead to

seemingly inequitable results. This case offers a good example. Debtors’ actual funds available

to pay unsecured creditors exceeds the Form B22C amount by more than $1,000 per month.

Thus, the unsecured creditors are shortchanged and Debtors receive a windfall. In different

circumstances, if a debtor’s income drops dramatically or his expenses increase substantially

post-petition, his plan may be unconfirmable pursuant to § 1325(a)(6) because he cannot feasibly

pay the amount dictated by the formula. Nevertheless, the formula “represents, by the

definition’s plain language, the policy judgment of Congress of how [projected disposable]

income should be determined in the context of chapter 13 after BAPCPA.” Kolb, 2007 WL

960135, at *6; see also Brady, 2007 WL 549359, at *6 (“Congress’ chosen method of

determining the debtors’ disposable income must be respected.”).

While the results of applying the formula may be troubling in some cases, they are not

absurd and do not justify deviating from the plain language of the statute. The Eleventh Circuit

Court of Appeals recently cautioned courts against crossing into congressional territory by

attempting to “fix” or “improve” statutes. Bracewell v. Kelley (In re Bracewell), 454 F.3d 1234,

1246 (11th Cir. 2006). It is for Congress to decide whether the inequities produced by

application of a strict formula are preferable to the inequities that may result from a judge’s use

4 Section 707(b)(2)(A)(iii) requires payment of secured claims to be calculated over a 60

month period, even if they will be satisfied in less time. Therefore, Debtors’ projected

disposable income takes into account full payment of their 401(k) loans, and additional

adjustments need not be made once the loans are satisfied. See Brady, 2007 WL 549359, at *8.

10

of discretion after considering all the facts. As one court explained, Congress has provided

“detailed and inflexible” definitions

particularly as to expenses and deductions for above-medianincome

debtors. As to such debtors, it appears that Congress

intended to adopt a specific test to be rigidly applied rather than a

standard to be applied according to the facts and circumstances of

the case. Calculating “disposable income” for above-medianincome

debtors … is now separated from a review of Schedules I

and J and no longer turns on the court’s determination of what

expenses are reasonably necessary for the debtor’s support.

Barr, 341 B.R. at 185.

CONCLUSION

For the foregoing reasons, the Court holds the plain language of § 1325(b) requires an

above-median-income debtor’s projected disposable income to be determined in accordance with

current monthly income minus expenses set forth in the means test in § 707(b). In other words,

Debtors’ are not obligated to pay more than the disposable income calculated on Form B22C.

This applies regardless of any known changes in Debtors’ expenses, such as satisfaction of their

two 401(k) loans.4 Because Debtors’ plan proposes monthly payments exceeding their

disposable income, American Express’s objection to confirmation will be overruled.

An Order in accordance with this Opinion will be entered on this date.

END OF DOCUMENT

JAMES L. SAUNDERS,

November 29, 2007

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: ) CHAPTER 12

) CASE NO. 07-10557-JDW

JAMES L. SAUNDERS, ))

DEBTOR. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

2

COUNSEL

For Debtor: Wesley J. Boyer

355 Cotton Avenue

Macon, Georgia 31201

For Creditors: Deena Plaire-Hass

Post Office Drawer 71788

Albany, Georgia 31708

Edgar W. Duskin, Jr.

Post Office Drawer 71727

Albany, Georgia 31708

For Trustee: Walter Kelley

Post Office Box 70849

Albany, Georgia 31708

3

MEMORANDUM OPINION

This matter comes before the Court on CNH Capital America, LLC and Sumter Bank &

Trust’s objections to confirmation. This is a core matter within the meaning of 28 U.S.C. §

157(b)(2)(L). After considering the pleadings, the evidence, and the applicable authorities, the

Court enters the following findings of fact and conclusions of law in conformance with Federal

Rule of Bankruptcy Procedure 7052.

Findings of Fact

Debtor James Saunders filed a Chapter 12 petition on May 9, 2007. CNH Capital

America, LLC and Sumter Bank & Trust objected to confirmation of his plan, alleging, among

other things, Debtor is not eligible for Chapter 12 because the majority of his debt cannot be

characterized as farm-related debt. The Court held a hearing on the objections on September 13,

2007.

During the hearing the parties stipulated to the relevant facts. Debtor pledged his farm as

collateral for business debts unrelated to his farming operation, primarily for debts arising from

his ownership of an automobile dealership. Based on Debtor’s bankruptcy schedules, he has

total debt of $3,248,286. Of that, $1,331,686 was incurred for farming purposes and $1,916,500

was incurred for non-farming purposes, including non-farm business.

The schedules include some disputed and unliquidated claims and some minor errors and

omissions. For example, they do not reflect a potential offset Debtor has against a $175,000 debt

that was incurred for non-farm purposes. However, even if all the discrepancies and questions

are resolved in Debtor’s favor, less than 50 percent of his debt can be characterized as farm4

related unless all debt secured by the farmland–regardless of the debt’s purpose–is deemed farmrelated

debt.

After considering the fact and the arguments of the parties, the Court finds Debtor

ineligible for Chapter 12 for the reasons that follow.

Conclusions of Law

Pursuant to § 109(f) of the Bankruptcy Code, “[o]nly a family farmer or family

fisherman with regular annual income may be a debtor under chapter 12 ….” 11 U.S.C. § 109(f).

The Bankruptcy Code defines a “family farmer,” in part, as an

individual or individual and spouse engaged in a farming operation

whose aggregate debts do not exceed $3,237,000 and not less than

50 percent of whose aggregate noncontingent, liquidated debts

(excluding a debt for the principal residence of such individual or

such individual and spouse unless such debt arises out of a farming

operation), on the date the case is filed, arise out of a farming

operation owned or operated by such individual or such individual

and spouse ….

11 U.S.C. § 101(18)(A) (emphasis added).

The key question in this case is whether loans secured by farmland used to operate a car

dealership constitute debt “aris[ing] out of a farming operation.” A small number of courts have

considered the issue of when debt is farm-related. The majority have focused on the purpose of

the debt–whether it was incurred and the proceeds used for the farming operation.

The court in In re Kan Corp., 101 B.R. 726 (Bankr. W.D. Okla. 1988), faced facts similar

to those in Debtor’s case and looked to the use of the loan to determine whether the debt was

farm-related. Id. at 727. The debtor obtained an interim loan from a bank to finance the

purchase of a beer distributorship. The loan was partially secured by debtor’s farmland. The

5

debtor later obtained permanent financing from an insurance company and continued to offer the

farmland as collateral. The debtor used the proceeds from the insurance company loan to repay

the bank and extinguish its mortgage on the farmland. When the debtor defaulted on the new

loan, it agreed to foreclosure on the farmland in exchange for a release of liability on personal

guarantees made by the debtor’s officers. The debtor filed a Chapter 12 petition the same day it

made the agreement. Id. at 726-27.

The court held the insurance company loan “did not ‘arise out of farming operations.’” Id.

at 727. It set forth a test for farm-related debt as follows: “Whether a debt incurred from a loan

‘arises out of farming operations’ is determined by the use made of the loan proceeds.” Id. In

this case, the original loan was use to purchase a beer distributorship and the second loan was

used to pay off the first loan. The farmland was only implicated because the debtor used it as

collateral. Id. The court refused to “characterize loans by the nature of the collateral or the

motive of the debtor, rather than the more objective criteria of the use made of the loan

proceeds.” Id. To qualify as farm debt, “the proceeds of the loan must in some way be directly

applied to or utilized in the farming operation.” Id.

The court in Otoe County National Bank v. Easton (In re Easton), 883 F.2d 630 (8th Cir.

1989) also focused on the “purpose to which the borrowed funds have been put” to determine

whether the debt arose from a farming operation. Id. at 636. In that case, the debtors’ grandson

obtained a loan for a hog-raising operation on his own land. The debtors guaranteed the loan and

offered their farmland as collateral. Id. at 631. The court rejected an analysis that would treat

any loan secured by farmland as farm debt, stating, “That approach is not faithful to the language

of the statute because it would permit inclusion toward satisfaction of the minimum debt

6

requirement debt incurred by an owner of land without regard to the connection between the debt

and the debtor’s own farming activity.” Id. at 636. Because the debt had no relation to the

debtors’ farming operation, the court concluded it was not farm debt. Id. at 636-37.

In In re Marlatt, 116 B.R. 703 (Bankr. D. Neb. 1990), the court followed Easton, stating,

“for a debt to arise out of a farming operation, there must be a connection between the debt and

the debtor’s farming activity.” Id. at 705 (citing Easton, 883 F.2d at 636). Prior to filing for

bankruptcy, the debtor and his wife divorced. The debtor was ordered to pay her $130,000,

secured by a lien on all his real estate, including farm property. Id. To decide whether the

divorce debt arose from the debtor’s farming operation, the court “examine[d] the substance of

the underlying transaction.” Id. It concluded that the farm property on which the debtor’s exwife

had a lien was a significant part of the marital estate, and the debt was part of the division of

that property. Id. at 706. “The underlying purpose of the debtor’s payment to his former spouse

was to allow the debtor to retain the farming operation.” Id. Thus, the debt was “‘inescapably

woven’” with the farming operation and came within the scope of farm debt. Id. Contra Aud v.

Van Fossan (In re Van Fossan), 82 B.R. 77, 80 (Bankr. W.D. Ark. 1987) (debtor’s obligation to

ex-wife under divorce decree was not farm-related debt because it “was not incurred as a result of

a risk or activity involved in a farming operation ….”).

The court in In re Douglass, 77 B.R. 714 (Bankr. W.D. Mo. 1987), articulated a similar

test: “it is (or should be) the reason or purpose for which the debt was incurred coupled with the

use to which the borrowed funds were put that should be the criteria to determine whether the

debt ‘arises out of a farming operation.’” Id. at 715. The debtors in that case owed a service

station that they offered as collateral for a loan, the proceeds of which they used to keep their

7

farm running. Id. Because the debt was incurred for farming purposes and actually used for

farming operations, the court found it to be farm-related debt. Id.

Faced with somewhat different circumstances, the court in In re Rinker, 75 B.R. 65

(Bankr. S.D. Iowa 1987), relied on the subject matter of the proceeding from which the debt

resulted to determine whether it was farm debt. Id. at 68. The debt arose out of a will dispute.

The debtor’s parents bequeathed their farmland in equal shares to their four children. After the

death of his father, the debtor contracted with his mother to purchase most of the farmland.

Upon the mother’s death, the sale contract was ruled invalid by a probate judge. The debtor

appealed the ruling. Before the appeal was decided, the debtor reached a settlement with his

siblings–three sisters. As part of the settlement, the sisters agreed to sell their share of the

farmland to the debtor. The debtor gave each a down payment and a mortgage on the farmland

for the remaining amount due. Six years later, the debtor filed a Chapter 12 petition; he still

owed $431,300 to his sisters. At the time of filing, the debtor had been farming the land at issue

for 30 years. Id. at 66-67.

To determine whether the debt to his sisters arose from a farming operation, the court had

to “examine the nature of the questioned activity, here the settlements, and their relation to the

[debtor’s] farming operation.” Id. at 68. The mere fact that the debt resulted from a settlement

did not preclude it from arising from a farm operation. Id. The court found a direct link between

the basis of the lawsuit and subsequent settlement and the farming operation. The siblings were

fighting over the farmland, which was necessary to the debtor’s farming operation, and the debtor

settled the suit to preserve his farming operation. Id. In such circumstances, the relationship

between the subject of the settlement and the ‘farming operation’ … is clear and direct.” Id.

The court also referred to In re Armstrong, 812 F.2d 1024 1 (7th Cir. 1987), as creating a

“but for” test. However, the issue in Armstrong related to farm income, not farm debt.

8

Thus, the debt owed to the sisters was farm debt. Id.

In re Roberts, 78 B.R. 536 (Bankr. C.D. Ill. 1987), also dealt with inherited farmland. In

Roberts, the debt in question was an estate tax on the debtor’s inheritance. The court found the

taxes were farm-related debt because the debtor had to pay them to keep the farm. Id. at 537.

“But for the payment of the estate taxes, there would be no farm. The payment of estate taxes is

clearly ‘inescapably interwoven’ with the farming operation.” Id. Citing Rinker, the court found

a “direct link between the estate taxes and the farming activity.” Id. at 538.

In In re Reak, 92 B.R. 804 (Bankr. E.D. Wis. 1988), the court described the test applied in

Roberts and Rinker as a “but for” test.1 Id. at 806. In each case, but for the debt, there would be

no farm. Id. at 805-06. In Reak, the debtor and his wife borrowed money to purchase farmland,

giving the lender a mortgage. When the couple divorced, the divorce decree required the debtor

take full responsibility for the joint debt and hold his ex-wife harmless on it. Id. at 805. The

court applied the “but for” test to find the debt was “‘inescapably interwoven’ with the farming

operation.” Id. at 806. If not for the original loan, there would be no farm, and the divorce

decree did nothing to alter the original debt. Id. Therefore, the court concluded the debt was

farm-related.

Based on the reasoning of other courts to consider this issue, the Court concludes that to

“arise out of a farming operation” the purpose of a debt must have some connection to the

debtor’s farming activity. Merely using farmland as collateral for a debt that has no other

relation to the farming activity will not suffice. In this case, Debtor used the proceeds of the

9

loans at issue for business reasons, primarily operating a car dealership–an enterprise wholly

unrelated to farming. Therefore, the debt cannot be said to “arise out of a farming operation” and

cannot count towards the 50 percent farm-related debt requirement for Chapter 12 eligibility.

Because the business debt secured by the farm cannot be treated as farm-related debt,

Debtor’s farm-related debt consists of less than half of his total debt. Consequently his is not

eligible for Chapter 12. CNH Capital and Sumter Bank’s objections as to Debtor’s eligibility

will be sustained.

An order dismissing this case will be entered not sooner than seven calendar days from

the date of entry of this opinion. This delay will afford Debtor a brief time to consider whether to

attempt to convert this case to a case under another chapter. By providing a period of time for

consideration of such a possibility, the Court does not intend to opine that such a conversion

would be permissible as a matter of law.

END OF DOCUMENT

FIRSTLINE CORPORATION,

January 25, 2007

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

VALDOSTA DIVISION

IN RE: ) CHAPTER 11

) CASE NO. 06-70145-JDW

FIRSTLINE CORPORATION, )

)

DEBTOR. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Trustee: David W. Cranshaw

3343 Peachtree Road NE

1600 Atlanta Financial Center

Atlanta, GA 30326

For Official Committee Todd C. Meyers

of Unsecured Creditors: Colin Michael Bernardino

Michael D. Langford

1100 Peachtree Street, Suite 2800

Atlanta, GA 30309

For Donald J. Murphy: Wesley J. Boyer

355 Cotton Avenue

Macon, GA 31201

3

MEMORANDUM OPINION

This matter comes before the Court on Donald J. Murphy’s objection to confirmation of

the plan. This is a core matter within the meaning of 28 U.S.C. § 157(b)(2)(L). After

considering the pleadings, the evidence, and the applicable authorities, the Court enters the

following findings of fact and conclusions of law in conformance with Federal Rule of

Bankruptcy Procedure 7052.

Findings of Fact

This Chapter 11 case commenced on March 6, 2006. On November 29, 2006, the

Official Committee of Unsecured Creditors filed an amended Chapter 11 plan. Donald J.

Murphy, the sole equity holder of the debtor, filed an objection to the inclusion of exculpation

and indemnification clauses in the plan.

Section 12.5 of the plan provides as follows:

The Exculpated Persons shall not have or incur any liability to any

Person served with a copy of this Plan or otherwise having notice

regarding the filing of the Plan, including, without limitation, the

Debtor, for any act taken or omission made in good faith in

connection with or in any way related to, or arising out of, the

Bankruptcy Case…except for gross negligence, willful misconduct,

or breach of fiduciary duty as determined by the Bankruptcy Court.

The Exculpated Persons shall have no liability to any Person

served with a copy of this Plan or otherwise having notice

regarding the filing of the Plan for actions taken in good faith

under or relating to this Plan…except for gross negligence, willful

misconduct, or breach of fiduciary duty as determined by the

Bankruptcy Court. Further, the Exculpated Persons shall not have

or incur any liability to any Person served with a copy of this Plan

or otherwise having notice regarding the filing of the Plan for any

act or omission in connection with or arising out of their

administration of this Plan or the property to be distributed under

this Plan or the operations or activities of the Debtor, the Trustee

or the Liquidating Agent, except for gross negligence, willful

4

misconduct, or breach of fiduciary duty as determined by the

Bankruptcy Court. Without limiting the foregoing, the Exculpated

Persons shall not have or incur any liability to any Person entitled

to a distribution under this Plan if insufficient funds are present to

pay that Person that which it is entitled to under this Plan.

Notwithstanding anything to the contrary contained herein, none of

the Exculpated Persons shall be released or otherwise free from

liability on account of any Avoidance Action held by or belonging

to the Estate.

Section 12.6 provides as follows:

The Debtor will indemnify, hold harmless and reimburse the

Exculpated Persons from and against any and all losses, Claims,

causes of action, damages, fees, expenses, liabilities, and actions

for which liability is limited pursuant to Sections 12.4 and 12.5 of

this Plan, and the losses, Claims, expenses, etc. of the Exculpated

Persons shall be paid from the Estate Assets as they are incurred

by the Exculpated Persons. All rights of the Exculpated Persons

indemnified pursuant to this Section shall survive confirmation of

this Plan.

Section 1.2.40 of the plan defines exculpated persons as “the Debtor, the Trustee, the

Committee, the Committee’s individual members acting in their capacity as members of the

Committee, the Debtor’s Chief Restructuring Officer, and the Debtor’s, the Trustee’s, and the

Committee’s respective advisors, attorneys, consultants or professionals.”

The Court held a hearing on the objection on January 16, 2007. During the hearing, Mr.

Murphy waived other objections unrelated to the exculpation and indemnification provisions.

For the following reasons, the Court will overrule the objection to the exculpation and

indemnification provisions.

Conclusions of Law

Courts generally hold that exculpation and indemnification clauses are permissible in

retention agreements if the clauses are reasonable in accordance with 11 U.S.C. § 328(a). United

5

Artists Theater Co. v. Walton, 315 F.3d 217, 230 (3d Cir. 2003). In addition, a handful of cases

have considered and approved exculpation clauses in the plan, with no reference to a retention

agreement. These courts reason that because the clauses do not exclude liability for gross

negligence or willful misconduct, they merely restate the standard of care already in effect and

are therefore unobjectionable.

In In re Friedman’s, Inc., No. 05-40129, 2005 WL 4927681 (Bankr. S.D. Ga. Nov. 23,

2005), the court held that an exculpation provision in the Chapter 11 plan was neither per se

against public policy nor unreasonable because (1) it excluded gross negligence and willful

misconduct and (2) because of the transparency of the conduct of the exculpated parties during

the bankruptcy proceedings. Id. at *4. The provision merely protected the exculpated parties in

accordance with the business judgment rule and similar concepts. Id.

In In re Enron Corp., 326 B.R. 497 (S.D.N.Y. 2005), one of the creditors objected to an

exculpation provision in the Chapter 11 plan and appealed confirmation of the plan. While the

district court found the appeal moot, it noted that the bankruptcy court had specifically addressed

the provision, finding it appropriate because it excluded gross negligence and willful

misconduct. Id. at 501. In addition, the district court commented that the provision was

necessary to keep key employees on board, many of whom had agreed to stay on in reliance on

that provision, to wind up the company’s affairs. Id. at 503.

Similarly, in In re PWS Holding Corp., 228 F.3d 224 (3d Cir. 2000), the court found that

a clause exculpating the debtor, creditor’s committee, and professionals had no practical effect

and would not prevent confirmation of the plan because those parties remained liable for gross

negligence and willful misconduct, which is the standard that would apply without the

6

exculpation clause. Id. at 246.

The Court finds these cases persuasive. The exculpation and indemnity provisions at

issue are not prohibited by the Bankruptcy Code, they do not offend public policy, and they are

not unreasonable. In fact, similar standards are applied outside of bankruptcy in accordance with

the business judgment rule. See O.C.G.A. § 14-2-830 (2003) (relieving a director from liability

to the corporation or shareholders for actions taken in performing the duties of his office if he

acts in a manner he believes to be in the best interests of the company and he exercises the care

of a prudent person in a like position and like circumstances).

The circumstances of this case are particularly suited to such provisions. In an opinion

and order appointing a trustee in this case, entered on May 25, 2006, the Court has already

detailed Mr. Murphy’s efforts to obstruct the case and frustrate the efforts of the chief

reconstruction officer. Based on his prior conduct, it is reasonable to anticipate that Mr. Murphy

may seek to express any continuing dissatisfaction through litigation.

Because the exculpation and indemnification clauses do not affect the exculpated parties’

liability for gross negligence, willful misconduct, or breach of fiduciary duty, they are

appropriate in this case. Furthermore, the clauses are necessary to discourage any frivolous

litigation.

An Order in accordance with this Opinion will be entered on this date.

END OF DOCUMENT

ADRIAN JON SPICE,

July 11, 2005

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: ) CHAPTER 7

) CASE NO. 03-43255-JDW

ADRIAN JON SPICE, ))

DEBTOR. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Debtor: Teresa Carswell Howard

Post Office Box 1478

Columbus, Georgia 31902-1478

For U.S. Foodservice, Inc.: James W. Martin

One Securities Centre, suite 300

3490 Piedmont Road, NE

Atlanta, Georgia 30305

2

MEMORANDUM OPINION

This matter comes before the Court on Debtor’s amendment of schedules. This is a

core matter within the meaning of 28 U.S.C. § 157(b)(2)(B). After considering the

pleadings, the evidence, and the applicable authorities, the Court enters the following

findings of fact and conclusions of law in conformance with Federal Rule of Bankruptcy

Procedure 7052.

Findings of Fact

The origins of this case lie in a garnishment against Debtor Adrian Spice’s bank

account. U.S. Foodservice, Inc. obtained a judgment against Debtor in the Superior Court of

Muscogee County, Georgia, on October 20, 2003. On December 15, 2003, U.S. Foodservice

served the garnishment on Columbus Bank & Trust (“CB&T”), which froze Debtor’s

account in response.

Debtor filed a Chapter 7 petition on December 23, 2003, listing a judgment debt to

U.S. Foodservice in the amount of $14,993.19. On Schedule B, he listed a checking account

at CB&T with $10 and a savings account at CB&T with $5. He also listed those amounts as

exempt on Schedule C. On December 29, 2003, U.S. Foodservice filed a notice of the

bankruptcy filing in the state court to stay the garnishment.

On January 8, 2004, Debtor filed a motion to terminate the garnishment and to order

the release of funds subject to the garnishment. The Court held a hearing on the motion on

February 5, 2004. At that hearing, Debtor’s counsel, Teresa Howard, indicated that Debtor

had more than $15 in his bank accounts at the time the garnishment was served and the

3

bankruptcy case was filed. However, she did not know how much money was in the

accounts. Ms. Howard also said that she believed, but was not certain, that money subject to

the garnishment had been released by CB&T to Debtor. The Court stated that because the

state court had been notified of the bankruptcy, Debtor’s motion to terminate the

garnishment did not seem necessary and that the more appropriate course of action would be

for Debtor to amend his schedules and file an adversary proceeding to avoid U.S.

Foodservice’s judicial lien. At the conclusion of the hearing, the Court terminated the

motion and instructed the parties to sort out the facts and then follow the appropriate

procedural avenues.

On February 6, 2004, James Martin, counsel for U.S. Foodservice sent a letter to Ms.

Howard to confirm that she would determine the balance of Debtor’s checking account on

the date the bankruptcy case was filed and provide him with that information. Mr. Martin

sent a follow-up letter on February 20, 2004, to inquire why Ms. Howard had not yet

provided the bank account balance. On March 1, 2004, Mr. Martin subpoenaed the

information directly from CB&T and learned that Debtor had approximately $6,040 in his

checking account at the time of garnishment and bankruptcy filing.

On April 12, 2004, the Court entered orders discharging Debtor and closing the case.

Almost one year later, on March 31, 2005, Debtor filed a motion to reopen the case so he

could file a motion to hold U.S. Foodservice in contempt and file a motion to avoid U.S.

Foodservice’s judicial lien. Debtor’s actions were precipitated by U.S. Foodservice’s efforts

to revive the garnishment. On March 28, 2005, Mr. Martin wrote CB&T requesting that

CB&T answer the garnishment. In response, CB&T froze Debtor’s accounts and tendered

1 Judge John T. Laney, Jr. was assigned to this case originally, and he presided over

the hearings on February 5, 2004 and April 4, 2005. He recused himself by order of April 5,

2005.

4

the balance, $3,825.20, to the registry of the Court. U.S. Foodservice conceded that it had

no interest in those specific funds because Debtor obtained them postpetition, and the parties

ultimately agreed to a consent order releasing the funds to Debtor.

The Court held a hearing on Debtor’s motion to reopen the case on April 4, 2005.

U.S. Foodservice opposed reopening the case. Also on April 4, 2005, Debtor filed an

amended Schedule B, showing his CB&T checking account with $6,041.42, an amended

Schedule C, claiming an exemption in the checking account for $5,589, pursuant to

O.C.G.A. § 44-13-100(a)(6), and a motion to avoid U.S. Foodservice’s judicial lien. The

Court granted the motion to reopen based on the need to administer the previously

unreported checking account balance and appointed a trustee.1

On May 16, 2005, the Court held a hearing on Debtor’s motion to avoid U.S.

Foodservice’s judicial lien. One issue raised during the hearing was whether the Court

should disallow Debtor’s exemption amendment because it was filed more than a year after

the Court indicated to Ms. Howard that an amendment was necessary.

Ms. Howard has taken responsibility for the failure to amend schedules. She stated

that her husband and law partner died unexpectedly of a heart attack on April 7, 2003, which

threw the law practice into chaos for about a year. She first consulted with Debtor on

December 19, 2003, about seven months after her husband’s death. On a client information

form Ms. Howard provided to Debtor, he listed a checking account with CB&T. In

parentheses, he wrote “garnish” and indicated a balance of $6,038. Ms. Howard said she did

5

not know why the $6,038 was not listed on the bankruptcy schedules, although she

speculated that the employee who transferred the information to the bankruptcy petition may

have assumed that because the amount was garnished, it was not available. Although Ms.

Howard reviewed the schedules prior to filing them, she apparently did not notice the error.

She had no explanation for the long delay in filing amendments other than the general

turmoil in the wake of her husband’s death.

Conclusions of Law

A debtor may avoid a judicial lien to the extent it impairs an exemption. 11 U.S.C.A.

§ 522(f)(1) (West 2004). At issue in this case is whether Debtor should be permitted to

amend his schedules to claim an exemption that would serve as the basis for avoiding a

judicial lien. Pursuant to Federal Rule of Bankruptcy Procedure 1009(a), “[a] voluntary

petition, list, schedule, or statement may be amended by the debtor as a matter of course at

any time before the case is closed.” Courts recognize two well-established judicial

exceptions to this rule: either the debtor acted in bad faith with respect to the amendment or

a creditor will suffer prejudice as a result of the amendment. Kaelin v. Bassett (In re

Kaelin), 308 F.3d 885, 889 (8th Cir. 2002); Lowe v. Sandoval (In re Sandoval), 103 F.3d 20,

22 (5th Cir. 1997); Calder v. Job (In re Calder) 973 F.2d 862, 867 (10th Cir. 1992). See also

Doan v. Hugdins (In re Doan), 672 F.2d 831, 833 (11th Cir. 1982) (construing predecessor

to Rule 1009(a)). If either exception is proved, the Court may disallow the amendment.

No interested party has made an allegation of bad faith, and the Court can find no

evidence of bad faith in the facts. The most obvious example of bad faith is intentional

6

concealment of an asset. See In re Rolland, 317 B.R. 402, 415 (Bankr. C.D. Cal. 2004).

But, it may also be shown by a “debtor’s deliberate and intentional delay in amending an

exemption in order to gain an economic or tactical advance [sic] at the expense of creditors

and interests of the estate ….” In re Kauffman, 299 B.R. 641, 644 (Bankr. M.D. Fla. 2003).

As in Kauffman, the failure to list the $6,038 on Schedules B and C was attorney error and

not due to any bad faith by Debtor. Id. In fact, Debtor disclosed the full balance of his

checking account to Ms. Howard prior to filing the petition. Furthermore, he gained no

tactical advantage by the delay; rather he reaps the same benefit from amending his

schedules today that he would have received had he filed the amendments a year ago. Thus,

bad faith on the part of Debtor cannot be a basis for denying Debtor’s right to amend.

Similarly, no creditor is prejudiced by the amendments. In Doan, the Eleventh

Circuit stated that neither mere delay in amending nor the grant of an exemption based on

the amendment constitutes prejudice. 672 F.2d at 833. See also Goswami v. MTC Distrib.

(In re Goswami), 304 B.R. 386, 394 (B.A.P. 9th Cir. 2003) (allowing debtors to reopen their

case, amend their exemptions, and avoid a lien five years after they received a discharge). If,

however, “the parties would have taken different actions or asserted different positions had

the exemption been claimed earlier, and the interests of those parties are detrimentally

affected by the timing of the amendment, then the prejudice is sufficient to deny

amendment.” In re Talmo, 185 B.R. 637, 645 (Bankr. S.D. Fla. 1995). An amendment may

also be prejudicial “if it impairs a trustee in the diligent administration of the estate.” Id.

U.S. Foodservice’s best argument for prejudice is that it will lose its judicial lien if Debtor is

allowed to amend his schedules. But, it has not shown that it changed its position in any

7

way in reliance on the original schedules. The Bankruptcy Code allows a judicial lien to be

avoided if it impairs an exemption. U.S. Foodservice wants to benefit from Debtor’s error;

rather, it does not want to lose what it gained through Debtor’s inadvertence. The fact that

rectifying that error subjects U.S. Foodservice to a provision of the Code does not constitute

prejudice.

The Court has been concerned that Debtor’s counsel has not complied with previous

instructions of this Court. While the Court is sympathetic to Ms. Howard’s personal

circumstances, they cannot fully justify her neglect. Nevertheless, her neglect does not

provide a legal basis to disallow the amendments.

For the foregoing reasons, the Court will allow Debtor to amend his schedules.

Pursuant to Federal Rule of Bankruptcy Procedure 4003(b), parties in interest will have 30

days after the amendment is filed to object to the amended exemption. The amendment shall

be deemed to be filed on the date of entry of this Opinion and accompanying Order. The

Court will postpone ruling on Debtor’s motion to avoid judicial lien until the amended

exemption has been conclusively established.

An Order in accordance with this Opinion will be entered on this date.

Dated this 11th day of July, 2005.

________________________________

James D. Walker, Jr.

United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: ) CHAPTER 7

) CASE NO. 03-43255-JDW

ADRIAN JON SPICE, ))

DEBTOR. )

ORDER

In accordance with the Memorandum Opinion entered on this date, it is hereby

ORDERED that the amendments to Schedules B and C submitted by Debtor shall be

allowed, and it is further hereby ORDERED that the amendments shall be deemed filed as of

the date of entry of this Order.

So ORDERED, this 11th day of July, 2005.

_________________________

James D. Walker, Jr.

United States Bankruptcy Judge

BENNIE ROSS, JR.,RENEE P. ROSS,

October 5, 2001

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE ) CHAPTER 13

) CASE NO. 98-50799-JDW

BENNIE ROSS, JR., )

RENEE P. ROSS, ))

DEBTORS )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Renee Ross: Stacey Nestor Randall

401 Cherry Street, 5th Floor

P.O. Drawer 1018

Macon, Georgia 31202

For Randy Rowland: Richard A. Epps, Jr.

240 Third Street

P.O. Box 1606

Macon, Georgia 31202-1606

2

MEMORANDUM OPINION

This matter comes before the Court on Debtor Renee P. Ross’s Motion to

Reopen Chapter 13 Case Pursuant to 11 U.S.C. Section 350(b). This is a core

matter within the meaning of 28 U.S.C. § 157(b)(2)(A). Having held a hearing

on this matter on August 27-28, 2001, and after considering the pleadings, the

evidence, and the applicable authorities, the Court enters the following findings

of fact and conclusions of law in conformance with Federal Rule of Bankruptcy

Procedure 7052.

Findings of Fact

Debtors Bennie Ross, Jr. and Renee P. Ross filed a Chapter 13 bankruptcy

petition on February 19, 1998. Their Chapter 13 plan was confirmed on May 14,

1998. On or about March 19, 1999, Renee Ross (“Debtor”) was involved in an

automobile accident. She did not seek to amend her schedules to add the civil

claim arising out of the accident. On August 9, 1999, the Court entered an Order

dismissing the Chapter 13 case, and on November 9, 1999, Trustee filed a final

report. On December 13, 1999, the Court entered a Final Decree closing the case.

Debtor has since filed suit against Randy Rowland (“Defendant”) in state

court for recovery of damages arising out of the auto accident. Defendant filed a

motion for summary judgment in the state court case on the ground that the

doctrine of judicial estoppel bars Debtor from pursuing her tort claim against

him because she failed to list the claim on her bankruptcy schedules. In an

attempt to preserve her rights, Debtor filed a motion to reopen her Chapter 13

1 Section 350 reads in full as follows: “(a) After an estate is fully

administered and the court has discharged the trustee, the court shall close the

case. (b) A case may be reopened in the court in which such case was closed to

administer assets, to accord relief to the debtor, or for other cause.” 11 U.S.C. §

350.

3

case.

At the hearing on the motion to reopen, the Chapter 13 Trustee stated that

the case had been dismissed for Debtor’s failure to make plan payments.

However, Trustee also pointed out that as a result of the accident, Debtor’s car

was totaled and she lost her job, thus leaving her unable to make those payments.

The accident, far from being an asset concealed for Debtor’s benefit, was a

devastating financial catastrophe. Debtor’s recovery on the claim, if any, in the

state court would be remedial and compensatory.

Debtor seeks to reopen her Chapter 13 case to amend her schedules to

reflect the tort claim so she can assert the state court action. Defendant objects,

arguing that a dismissed case may not be reopened.

Conclusions of Law

The Court may reopen a bankruptcy case pursuant to Section 350(b) of

the Bankruptcy Code “to administer assets, to accord relief to the debtor, or for

other cause.” 11 U.S.C.A § 350(b) (1993).1 Defendant argues that Debtor cannot

use Section 350(b) to seek to reopen her case because her case was dismissed

rather than closed. Although there is no intelligible standard for the

circumstances in which a case will be deemed “closed” for purposes of Section

4

350(b), some courts have made it clear that whatever the standard, dismissal

does not fit within it. See Armel Laminates, Inc. v. Lomas & Nettleton Co. (In re

Income Prop. Builders, Inc.), 699 F.2d 963, 965 (9th Cir. 1982); Critical Care

Support Servs., Inc. v. U.S. (In re Critical Care Support Servs.), 236 B.R. 137,

140-41 (E.D.N.Y. 1999); In re Woodhaven, Ltd., 139 B.R. 745, 747 (Bankr.

N.D. Ala. 1992); In the Matter of Garcia, 115 B.R. 169, 170 (Bankr. N.D. Ind.

1990).

These courts have relied on the plain language interpretation of Section

350 to determine the effect of a dismissal. By this reasoning, they conclude that

the language of Section 350(b) refers to “closed” cases and should be read with

reference to Section 350(a), which allows courts to close a case after the estate

has been fully administered and trustee discharged. Woodhaven, 139 B.R. at

747. They reason that a dismissed case does not fit this definition because it

terminates “for reasons other than the completed administration of the estate.”

Garcia, 115 B.R. at 170; see also Income Property, 699 F.2d at 965. Because the

effect of dismissal is to restore the parties to their prebankruptcy status, they

conclude that dismissal is intrinsically different from closure. Woodhaven, 139

B.R. at 748. Accordingly, they determine that reopening of dismissed cases

under Section 350 “would make dismissal an almost meaningless act, since the

court would be required to reinstate a dismissed case upon being presented with

2 The analysis of the statute in these cases seems to be preceded by an

equitable conclusion that fairness would not favor reopening the case. Income

Properties, 699 F.2d at 964-65 (junior lien creditor who wanted to keep

automatic stay in effect against senior lienholder failed to protect his rights by

objecting to dismissal, appealing dismissal, or seeking to vacate dismissal within

required time frame); Critical Care, 236 B.R. at 139-40 (district court recognized

that the debtor had perpetrated fraud upon the bankruptcy court as evidenced by

the guilty pleas of debtor’s sole shareholder and debtor’s bankruptcy counsel to

charges of conspiracy to defraud the United States and criminal evasion of

taxes); Woodhaven, 139 B.R. at 750 (movants chose to sit on their rights after

the case had been dismissed; other parties who had acted in reliance on the

dismissal were “in a position to suffer potential harm” if the case were

reopened); Garcia, 115 B.R. at 170-71 (court had ordered dismissal because after

the Chapter 13 case “had been pending for more than one year, there was no plan

before the court for consideration”).

5

some articulated ‘cause’ for reopening it.”2 Garcia, 115 B.R. at 170.

These holdings are not helpful to the resolution of the case before this

Court. Beginning with the plain language of Section 350, the Court finds two

prerequisites for closing a case and, thus, enabling it to be reopened under

Section 350(b): (1) the full administration of the estate, and (2) the discharge of

the trustee. It is only the first requirement that causes confusion. Neither the

Bankruptcy Code nor the Bankruptcy Rules define “fully administered.”

However, Rule 5009 states that a Chapter 13 case is presumed to be fully

administered when “the trustee has filed a final report and final account and has

certified that the estate has been fully administered, and if within 30 days no

objection has been filed by the United States trustee or a party in interest.”FED.

R.BANKR. P. 5009. Based on this Rule, a dismissed case can be fully

administered after the trustee has done what the Rule requires with no

objections. Once it has been fully administered and the trustee discharged, the

3 The court in Woodhaven mentioned this issue, but attempted to

distinguish the “statutory” closing of a completed bankruptcy case with the

“administrative” or “judicial” closing that occurs after dismissal. 139 B.R. at 747

n.1. The court said a case that has been judicially closed cannot be reopened

under Section 350(b). Id. The court’s only basis for that distinction was a

comment in the Bankruptcy Forms Manual published by the Administrative

Office of the United States Courts. Id. This Court has perused the most recent

edition of that Manual and has been unable to find any support for the distinction

either in the Manual or from any other source. Therefore, the Court is not

persuaded by distinction.

4 Section 362(c) reads in pertinent part as follows:

Except as provided in subsections (d), (e), and (f) of this

section–

(1) the stay of an act against property of the estate

under subsection (a) of this section continues until such

property is not longer property of the estate; and

6

Court is required to close it. 11 U.S.C. § 350(a) (“the court shall close the case”)

(emphasis added).

The Court understands the assertion that closure and dismissal are two

very different creatures. However, the Court fails to see how a motion to reopen

in any way undermines the order to dismiss. Rather, Debtor here is dealing with

the Final Decree, which deems the case to be closed.3 The dismissal of a case is

not the end of that case. The trustee still has duties to complete before she can be

discharged from the case. Here, the case was dismissed in August, but Trustee

did not file her final report until November, and the Court did not enter a final

decree until December. That decree specifically stated that the case had been

fully administered, the Trustee was discharged, and the case was closed. The

automatic stay would not be revived by reopening the case as it terminated upon

dismissal.4 The Court can reopen this case without any effect on the Order of

(2) the stay of any other act under subsection (a) of

this section continues until the earliest of–

(A) the time the case is closed;

(B) the time the case is dismissed; or

(C) . . . the time a discharge is granted or denied.

11. U.S.C.A. § 362(c) (1993).

5 The concept of “substantial justice” would support the holdings in the

Income Property, 699 F.2d at 965, Critical Care, 236 B.R. at 140-41,

Woodhaven, 139 B.R. at 747, and Garcia, 115 B.R. at 170, cases better than the

strained “plain meaning” rationale.

7

Dismissal. Therefore neither the language of the Section 350 nor the effect of

dismissal support the exclusion of a case that has been dismissed and

subsequently closed from the operation of Section 350(b).

Having determined that this case may be reopened under Section 350(b),

the Court must now decide whether to allow it. The decision is solely within the

discretion of the bankruptcy court. In the Matter of Shondel, 950 F.2d 1301,

1304 (7th Cir. 1991); Critical Care, 236 B.R. at 140. When applying that

discretion, “‘the bankruptcy court should exercise its equitable powers with

respect to substance and not technical considerations that will prevent substantial

justice.’”5 Shondel, 950 F.2d at 1304 (quoting Stark v. St. Mary’s Hosp. (In re

Stark), 717 F.2d 322, 323 (7th Cir. 1983)); Critical Care, 236 B.R. at 140.

Debtor argues that to deny her the opportunity to reopen her case would

lead to a particularly unjust and inequitable result. Defendant wants to take

advantage of a Georgia Supreme Court decision that apparently requires debtors

to amend their bankruptcy schedules to include tort claims that they previously

6 Wolfork v. Tackett, 273 Ga. 328, 540 S.E.2d 611 (2001), petition for

cert. filed, 69 U.S.L.W. 3764 (Apr. 5, 2001) (No. 00-1798).

7 The opportunities for favorable consideration of a motion to reopen a

dismissed case are likely to be exceedingly rare. The circumstances of this case

would not give rise to a motion to reopen except for the fact that the state law of

judicial estoppel and the bankruptcy law of revesting of property have not

developed sufficiently to assure Debtor that the formality of reopening the

bankruptcy case to list her claim is not necessary either in the bankruptcy case or

in the state court case.

8

omitted.6 Under Wolfork v. Tackett, a debtor’s tort claim may be barred by

judicial estoppel if she successfully asserted a contradictory position in

bankruptcy court., i.e., if she failed to schedule the claim. 273 Ga. at 328, 540

S.E.2d at 612. A debtor is deemed to have successfully asserted a contradictory

position if the bankruptcy court adopted that position and if the debtor benefitted

from the adoption to the detriment of her creditors.7 Dillard-Winecoff, LLC v.

IBF Participating Income Fund, No. A01A0369, 2001 WL 792723, *2 (Ga. Ct.

App. July 16, 2001).

A bright-line rule for determining when a bankruptcy court has adopted a

position asserted by the debtor would be helpful. However, the reality of

procedures in a bankruptcy case make such a rule difficult to develop. Parties at

interest, such as creditors and trustees, sometimes rely on schedules in deciding

what positions they should take in a bankruptcy case. Sometimes they do not

oppose positions advanced by debtors in reliance on the schedules. Sometimes

they make independent inquiries in Rule 2004 examinations and Section 341

meetings about matters covered in the schedules. Sometimes they are aware of

8 “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 section 1325 of this title, and

after notice and a hearing, the court may revoke such order if such order was

procured by fraud.” 11 U.S.C.A. § 1330 (1993).

9 A Chapter 7 debtor could also find himself in this position. Section

727(d) provides that

[o]n request of the trustee, a creditor, or the United States

trustee, and after notice and a hearing, the court shall

revoke a discharge granted under subsection (a) of this

section if–

(1) such discharge was obtained through the fraud

of the debtor, and the requesting party did not know of

such fraud until after the granting of such discharge;

(2) the debtor acquired property that is property of

the estate, or became entitled to acquire property that

would be property of the estate, and knowingly and

fraudulently failed to report the acquisition of or

entitlement to such property, or to deliver or surrender

such property to the trustee; or

(3) the debtor committed an act specified in

subsection (a)(6) of this section.

11 U.S.C.A. § 727(d) (1993).

9

omissions and urge positions with full knowledge as to omitted information. In

other words, a state court should not assume that merely because the court

confirmed a plan or granted a discharge to the debtor that it was aware of and

adopted a particular position asserted by the debtor as set out in the schedules.

Further, even if the court specifically considered a matter favorable to the debtor

without knowledge as to a fact required to be disclosed, the nondisclosure would

be likely to leave the debtor in the precarious position of losing the benefit of

any determinations the bankruptcy court may have made, including confirmation

of a plan8 and granting of a discharge.9 Nevertheless, one narrow set of

circumstances, which are present in this case, do lend themselves to a bright-line

10 Section 541 reads as follows:

(a) The commencement of a case . . . creates an estate.

Such estate is comprised of all of the following property,

wherever located and by whomever held: (1) Except as

provided in subsections (b) and (c)(2) of this section, all

legal or equitable interests of the debtor in property as of

the commencement of the case.

11 U.S.C.A. § 541(a)(1) (1993).

11 Section 1306 reads as follows:

(a) Property of the estate includes, in addition to the

property specified in section 541 of this title–

(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

10

rule: When dealing with a claim arising post-confirmation in a Chapter 13 case,

the Court has not, by having previously confirmed the Chapter 13 plan, adopted

a position taken by the debtor that contradicts a position the debtor takes in state

court by asserting that claim.

The law in the Eleventh Circuit is settled that assets acquired postconfirmation

are not property of the bankruptcy estate unless they are necessary

to maintain the plan. Telfair v. First Union Mortgage Corp., 216 F.3d 1333,

1340 (11th Cir. 2000); In re Brown, 260 B.R. 311, 313 (Bankr. M.D. Ga. 2001);

In re Carter, 258 B.R. 526, 527 (Bankr. S.D. Ga. 2001). All the debtor’s legal

and equitable interests in property as of the time of filing bankruptcy become

property of the estate. 11 U.S.C. § 541(a)(1).10 In addition, for Chapter 13

debtors, any property interests acquired post-petition but prior to either closure,

dismissal, or conversion of the case become property of the estate. Id. §

1306(a).11 However, upon confirmation of a Chapter 13 plan, the property of the

to a case under chapter 7, 11, or 12 of this title . . . .

11 U.S.C.A. § 1306(a)(1) (1993).

12 Section 1327 reads as follows: “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.” 11 U.S.C.A. § 1327(b) (1993).

13 Actual recovery on the claim by Debtor might trigger a disclosure

requirement as previously discussed by the Court in Brown. 260 B.R. at 314 n.3.

11

estate vests in the debtor. Id. § 1327(b).12 Because of the tension between

Sections 1306 and 1327 with respect to property acquired post-confirmation, the

Eleventh Circuit Court of Appeals held “‘the plan upon confirmation returns so

much of that property to the debtor’s control as is not necessary to the fulfillment

of the plan.’” Telfair, 216 F.3d at 1340 (quoting Black v. U.S.P.S. (In re Heath),

115 F.3d 521, 524 (7th Cir. 1997)).

Debtor’s plan payments of $238 per month were based on her disposable

income. Therefore, only that amount of her future earnings was the property

necessary to maintain the plan and, thus, property of the estate. All her other

future assets, including the tort claim against Defendant, became Debtor’s

property. As in Carter, “[j]udicial estoppel is inapplicable because the post plan

confirmation tort claim was simply not involved in the bankruptcy case.

[Debtor] had no reason much less obligation to disclose it.”13 258 B.R. at 528.

Because Debtor has no duty to disclose the tort claim to the Court, the Court has

no reason to allow Debtor to reopen her case to make such a disclosure. Stated

another way, nondisclosure of the claim in the bankruptcy case is not

inconsistent with asserting the claim in another forum. In fact, if the Court

12

granted Debtor’s motion, its only reason for doing so would be to attempt to

influence the outcome in state court, which is an inappropriate use of this

Court’s power and an infringement on the state court’s jurisdiction. See In the

Matter of Dewberry, No. 99-21608, p.7 (Bankr. S.D. Ga. Aug. 30, 2001).

Therefore, Debtor’s motion is denied.

An Order in conformance with this Opinion will be entered on this date.

Dated this 5th day of October, 2001.

________________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been

served on the following:

Stacey Nestor Randall

401 Cherry Street, 5th Floor

P.O. Drawer 1018

Macon, Georgia 31202

Richard A. Epps, Jr.

240 Third Street

P.O. Box 1606

Macon, Georgia 31202-1606

Camille Hope

Chapter 13 Trustee

P.O. Box 954

Macon, Georgia 31202

This 5th day of October, 2001.

_______________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE ) CHAPTER 13

) CASE NO. 98-50799-JDW

BENNIE ROSS, JR., )

RENEE P. ROSS, ))

DEBTORS )

ORDER

In accordance with the Memorandum Opinion entered on this date, the

Court hereby DENIES Debtor Renee P. Ross’s Motion to Reopen Chapter 13

Case Pursuant to 11 U.S.C. Section 350(b).

So ORDERED, this 5th day of October, 2001.

_________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been

served on the following:

Stacey Nestor Randall

401 Cherry Street, 5th Floor

P.O. Drawer 1018

Macon, Georgia 31202

Richard A. Epps, Jr.

240 Third Street

P.O. Box 1606

Macon, Georgia 31202-1606

Camille Hope

Chapter 13 Trustee

P.O. Box 954

Macon, Georgia 31202

This 5th day of October, 2001.

_______________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

STEPHEN C. PHILLIPS, FRANCES M. PHILLIPS,

September 9, 2002

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: ) CHAPTER 7

) CASE NO. 00-11306-JDW

STEPHEN C. PHILLIPS, )

FRANCES M. PHILLIPS, ))

DEBTORS. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Debtor Danny C. Griffin

P.O. Box 365

Colquitt, Georgia 31737

For Farmers & Merchants Bank, M. Jeremy Lynch

f/k/a Security Bank and Trust P.O. Box 64

Company of Albany Albany, Georgia 31702-0064

2

MEMORANDUM OPINION

This matter comes before the Court on Farmers & Merchants Bank’s Motion to

Reopen Bankruptcy Case to Determine Dischargeability of Debt and for Other Relief

Deemed Just and Appropriate. This is a core matter within the meaning of 28 U.S.C. §

157(b)(2)(A). The Court held a hearing on the motion on July 23, 2002. After considering

the pleadings, the evidence, and the applicable authorities, the Court enters the following

findings of fact and conclusions of law in conformance with Federal Rule of Bankruptcy

Procedure 7052.

Findings of Fact

Debtors, Steven C. Phillips and Frances M. Phillips, filed a joint Chapter 7 petition

on September 7, 2000. On Schedule D – Creditors Holding Secured Claims, they listed

Security Bank & Trust, now known as Farmers and Merchants Bank (the “Bank”), as a

creditor secured by a term life insurance policy. A loan officer for the Bank, R.W. Little,

Jr., testified that the Bank made the loan for living expenses based on Mr. Phillips

assurances that he was terminally ill. The Bank does not contest that it received notice of

the bankruptcy case or that it received notice that the bar date for filing a complaint to

determine dischargeability of debt was December 26, 2000.

This Court entered an order granting the Phillips a discharge on January 4, 2001. A

final decree discharging the trustee of his duties and closing the case was entered on January

22, 2001. Mr. Little testified that in late 2001, he began to have reason to doubt that Mr.

Phillips was in ill health. The Bank filed the present Motion to Reopen Bankruptcy Case on

May 23, 2002. The Bank has indicated that if successful on its motion to reopen, it can

1 Rule 60(b) provides in relevant part as follows:

On motion and upon such terms as are just, the court may

relieve a party or a party’s legal representative from a final

judgment, order, or proceeding for the following reasons: (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 a new trial under

Rule 59(b); (3) fraud (whether heretofore denominated

intrinsic or extrinsic), misrepresentation, or other misconduct

of an adverse party . . . . The motion shall be made within a

reasonable time, and for reasons (1), (2), and (3) not more

than one year after the judgment, order, or proceeding was

entered. . . .

3

show that when Mr. Phillips sought the loan, he provided a letter purporting to be written by

a medical doctor specializing in cancer treatment confirming Mr. Phillips’ illnesses and that

the letter was forged.

Conclusions of Law

A motion to reopen a bankruptcy case is controlled by 11 U.S.C. Section 350(b),

which states, “A case may be reopened in the court in which such case was closed to

administer assets, to accord relief to the debtor, or for other cause.” 11 U.S.C.A. § 350(b)

(West 1993). In this case, the Bank seeks to reopen so that it may challenge the

dischargeability of its debt. In other words, it is seeking to reopen the case “for other

cause.” Whether or not to reopen the case is a decision solely within the discretion of the

bankruptcy court. In re Cheely, 280 B.R. 763, 765 (Bankr. M.D. Ga. 2002). The Court will

not reopen the case if doing so would be futile–i.e., if the Bank’s complaint is time-barred.

Relief From Judgment or Order

At the July 23, 2002, hearing, the Bank argued for relief under Federal Rule of Civil

Procedure 60(b),1 made applicable to bankruptcy through Federal Rule of Bankruptcy

Fed. R. Civ. P. 60(b).

2 Bankruptcy Rule 9024 provides as follows:

Rule 60 F.R.Civ.P. applies in cases under the Code except

that (1) a motion to reopen a case under the Code or for the

reconsideration of an order allowing or disallowing a claim

against the estate entered without contest is not subject to the

one year limitation prescribed in Rule 60(b), (2) a complaint to

revoke a discharge in a chapter 7 liquidation case may be filed

only within the time allowed by § 727(e) of the Code, and (3)

a complaint to revoke an order confirming a plan may be filed

only within the time allowed by § 1144, § 1230, or § 1330.

Fed. R. Bankr. P. 9024.

3 “The trustee, a creditor, or the United States trustee may request a revocation of a

discharge– (1) under subsection (d)(1) of this section within one year after such discharge is

granted . . . .” 11 U.S.C.A. § 727(e)(1) (West 1993).

4 Section 727(d)(1) provides as follows:

On request of the trustee, a creditor, or the United States

trustee, and after notice and a hearing, the court shall revoke a

discharge granted under subsection (a) of this section if– (1)

such discharge was obtained through the fraud of the debtor,

and the requesting party did not know of such fraud until after

the granting of such discharge . . . .

11 U.S.C.A. § 727(d)(1) (West 1993).

4

Procedure 9024.2 Under Rule 60(b), a party may seek relief from a judgment or an order

due to fraud or newly discovered evidence within one year of the judgment. Based on

testimony of the Bank’s loan officer, the Bank is seeking relief on the grounds that Debtor

fraudulently concealed his physical condition from the Bank. In this case, the only order

from which the Bank could seek relief is the order granting Debtors a discharge.

Bankruptcy Rule 9024 modifies Rule 60 to allow relief from a discharge order only

to the extent allowed under Section 727(e)3 of the Bankruptcy Code, which provides for

revocation of discharge. Section 727(e) must be read in conjunction with Section 727(d).4

When read together, they specifically anticipate the possibility that a debtor’s fraud may go

5 11 U.S.C. § 523(c)(1) provides as follows:

Except as provided in subsection (a)(3)(B) of this section, the

debtor shall be discharged from a debt of a kind specified in

paragraph (2), (4), (6), or (15) of subsection (a) of this section,

unless, on request of the creditor to whom such debt is owed,

and after notice and a hearing, the court determines such debt

to be excepted from discharge under paragraph (2), (4), (6), or

5

undiscovered but, nevertheless, impose a one-year time limit on revoking the discharge.

Dahar v. Bevis (In re Bevis), 242 B.R. 805, 809 (Bankr. D.N.H. 1999). Although equitable

tolling might be applied to stop the running of the deadline, doing so would directly conflict

with the statute. Id. (“[W]hen § 727(e)(1) is placed against the backdrop of § 727(d)(1), it

appears that Congress did not intend for equitable tolling to apply to § 727(e)(1).”) Because

the one-year deadline for a motion for relief from discharge order has passed and because

equitable tolling could not apply to the deadline, such a motion provides no basis for relief to

the Bank and, therefore, no cause for reopening Debtor’s bankruptcy case.

Determination of Dischargeability

Although the Bank cannot succeed on a Rule 60 motion, another option available to

it is to file a nondischargeability complaint. Section 523(a) of the Bankruptcy Code excepts

19 types of debts from discharge. The apparent basis for a complaint by the Bank is the

Phillips’ alleged fraud in misrepresenting the state of Mr. Phillips’ health to obtain a loan.

Under Section 523(a)(2)(A), a debt is nondischargeable if obtained by “false pretenses, a

false representation, or actual fraud.” 11 U.S.C.A. § 523(a)(2)(A) (West 1993 & Supp.

2002). Debts obtained by fraud also fall within the scope of Section 523(c)(1), which

provides that debts of the kind in Sections 523(a)(2), (4), (6), and (15) will be discharged

unless a bankruptcy court determines otherwise.5

(15), as the case may be, of subsection (a) of this section.

11 U.S.C.A. § 523(c)(1) (West Supp. 2002).

6 Rule 4007(c) provides as follows:

A complaint to determine the dischargeability of a debt under

§ 523(c) shall be filed no later than 60 days after the first date

set for the meeting of creditors under § 341(a). The court

shall give all creditors no less than 30 days’ notice of the time

so fixed in the manner provided in Rule 2002. On motion of a

party in interest, after hearing on notice, the court may for

cause extend the time fixed under this subdivision. The

motion shall be filed before the time has expired.

Fed. R. Bankr. P. 4007(c).

7 “The court may enlarge the time for taking action under Rules 1006(b)(2), 1017(e),

3002(c), 4003(b), 4004(a), 4007(c), 8002, and 9033, only to the extent and under the

conditions stated in those rules.” Fed. R. Bankr. P. 9006(b)(3).

6

The Bankruptcy Rules establish the deadlines for filing a nondischargeability

complaint. Under Rule 4007(b), “[a] complaint other than under § 523(c) may be filed at

any time.” Fed. R. Bankr. P. 4007(b) (emphasis added). However, if the complaint falls

under Section 523(c), as does the Bank’s proposed complaint, it must “be filed no later than

60 days after the first date set for the meeting of creditors under § 341(a).” Fed. R. Bankr.

P. 4007(c).6 The Court may grant an extension, but only if it is requested before the time to

file has run. Id.; Fed. R. Bankr. P. 9006(b)(3).7

It is uncontested that the deadline for filing a complaint or seeking an extension to

file has long since passed without any action by the Bank. If the deadline is jurisdictional in

nature, then the Court has no power to consider the Bank’s complaint, leaving the Court

with no basis for reopening the case. On the other hand, if the deadline is in the nature of a

statute of limitations, equitable principles apply, which may provide a basis for allowing the

Bank to file its complaint notwithstanding the deadline and, thus, for the Court to reopen the

7

case. United States v. Locke, 471 U.S. 84, 94 n.10, 105 S. Ct. 1785, 1792 n.10 (1985)

(“Statutory filing deadlines are generally subject to the defenses of waiver, estoppel, and

equitable tolling.”).

The Eleventh Circuit Court of Appeals has not decided any cases directly on point;

however, several of its cases are helpful in reaching a conclusion. In Byrd v. Alton (In re

Alton), 837 F.2d 457 (11th Cir. 1988), the creditor filed a prepetition suit for fraud against

the debtor. When the debtor filed for bankruptcy, he failed to list the creditor on his

bankruptcy schedules. Yet, the creditor acknowledged that he did receive actual notice of

the bankruptcy filing in time to file a nondischargeability complaint for fraud. Nevertheless,

when the creditor failed to file a complaint by the deadline, he argued that equitable

principals should apply to allow him to file a late complaint. Id. at 458. The court rejected

his argument on the ground that a creditor who sits on his rights is not entitled to equitable

relief, notwithstanding any wrongdoing by the debtor. Id. at 458-59. The court

acknowledged that the case contained “some disturbing aspects” in that the debtor had

omitted the creditor from his schedules, but concluded that “the time specifications set out in

the Bankruptcy Code are sufficiently clear to have placed an obligation on [the creditor] to

follow the case and to take the timely action necessary to pursue his claim.” Id.

In Durham Ritz, Inc. v. Williamson (In re Williamson), 15 F.3d 1037 (11th Cir.

1994), the creditor had notice of the bankruptcy case but filed a nondischargeability

complaint based on fraud after the deadline to file had passed. The creditor complained that

it had not received notice of the bar date from the court. Id. at 1039. The bankruptcy court

dismissed the complaint as untimely. Id. The Eleventh Circuit affirmed, reiterating its

8 Rule 4004 provides as follows:

(a) Time for Filing Complaint Objecting to Discharge; Notice

of Time Fixed. In a chapter 7 liquidation case a complaint

objecting to the debtor’s discharge under § 727(a) of the Code

shall be filed no later than 60 days after the first date set for

8

position in Alton that a creditor who has notice of the bankruptcy cannot later complain

about not knowing the bar date. Id. The court said, “The equities in this case do not justify

the disregard of the time provisions in the Bankruptcy Code. . . . It was [the creditor’s]

inaction and not any action by [the debtor] or the court that caused the filing to be late.” Id.

at 1040.

In both Alton and Williamson, the Eleventh Circuit denied an equitable remedy

because the burden was on the creditor with knowledge of a bankruptcy case to meet filing

deadlines, even if it had not received notice of those deadlines from the clerk of the

bankruptcy court. The deadlines are ascertainable by examining the debtor’s bankruptcy

file and the Bankruptcy Rules. A creditor that fails to take minimum steps to protect its

rights cannot later expect a court to overlook the creditor’s lack of diligence by allowing it to

file an untimely Section 523(c)(1) complaint to determine dischargeability.

The court in Hsu v. Ginn (In re Ginn), 179 B.R. 349 (Bankr. S.D. Ga. 1995)

recognized that Williamson left room for an inference that “the Eleventh Circuit might,

under the appropriate circumstances, carve out an equitable exception to the time

requirements of FRBP 4004 or 4007.” Id. at 352 n.7. However, the court rejected that

inference based on the Eleventh Circuit’s decision in Coggin v. Coggin (In re Coggin), 30

F.3d 1443 (11th Cir. 1994) and certain language in Alton. 179 B.R. at 351-52. In Coggin,

the court repeatedly referred to the time limits in Rule 4004(b),8 which govern the filing of

the meeting of creditors under § 341(a). . . .

(b) Extension of Time. On motion of any party in interest,

after hearing on notice, the court may for cause extend the

time to file a complaint objecting to discharge. The motion

shall be filed before the time has expired.

Fed. R. Bankr. P. 4004(a), (b). In addition, Rule 9006(b)(3) applies to Rule 4004(a) to

prevent the bankruptcy court from extending the time to file a complaint except as provided

in the Rule. See supra note 3. This Rule is virtually identical to Rule 4007(c).

9 “We hold that if a motion is filed but not served prior to the bar date, the

jurisdictional requirement of rule 4004(b) is met, and the bankruptcy court retains

jurisdiction to extend the bar date . . . .” 30 F.3d at 1450. “[O]nly failure to file a motion for

extension of the bar date raises a jurisdictional bar under Rule 4004(b) . . . .” Id. at 1451.

“[T]he appellees satisfied the jurisdictional bar of Rule 4004(b) when they filed their

motions prior to the expiration of the bar date . . . .” Id.

9

complaints objecting to discharge under Section 727, as jurisdictional.9 In addition, in Alton,

the Eleventh Circuit stated that “‘the provisions of F.R.B.P. 4007(c) are mandatory and do

not allow the Court any discretion to grant a late filed motion to extend time to file a

dischargeability complaint.’” 837 F.3d at 459 (quoting In re Maher, 51 B.R. 848, 852

(Bankr. N.D. Iowa 1985)). The court in Ginn was persuaded that the language in Coggin

and Alton compelled a conclusion that Rule 4007(c) is jurisdictional. 179 B.R. at 351-52.

See also In re Rowland, 275 B.R. 209, 215 (Bankr. E.D. Pa. 2002) (“we hold here that the

deadline in [Rule 4007(c)] is jurisdictional”); In re Tucker, 263 B.R. 632, 636 (Bankr. M.D.

Fla. 2001) (“Absent extraordinary circumstances, the provisions of Rule 4007(c) are

jurisdictional . . . .”).

With respect to the Coggin case, this Court agrees with the Sixth Circuit Bankruptcy

Appellate Panel that the term “jurisdictional” is an inaccurate label for time limits imposed

by the Bankruptcy Rules. Ohio Farmers Ins. Co. v. Leet (In re Leet), 274 B.R. 695, 700 n.6

(B.A.P. 6th Cir. 2002). The B.A.P. stated:

10 With respect to the Ginn case’s reliance on Alton, this Court interprets Alton

differently. As explained supra, the Eleventh Circuit was merely refusing to grant an

equitable remedy to a creditor who had slept on his rights. The court did entertain the

creditor’s equity argument and spent some time discussing the circumstances of the late

filing before concluding that an equitable remedy did not apply in that case.

11 The statute covering bankruptcy jurisdiction provides in relevant part as follows:

(a) Each district court may provide that any or all cases under

title 11 and any or all proceedings arising under title 11 or

arising in or related to a case under title 11 shall be referred to

10

We do not think any real light is shed on the subject by calling

the time limits established by rules “jurisdictional,” and we

view usage of the term as a shorthand denomination of the

idea that rules exist, not just to regulate the parties, but in

some cases to limit courts in the exercise of their powers and

discretion.

Id. Furthermore, the United States Supreme Court, in considering a statutory filing deadline

related to the Civil Rights Act, stated that although it had in previous cases referred to the

deadline as jurisdictional, such a reference was not inconsistent with a finding that the

deadline was in the nature of a statute of limitations, particularly when “the legal character

of the requirement was not at issue in those cases” in which it had made the references.

Zipes v. Trans World Airlines, Inc., 455 U.S. 385, 395, 102 S. Ct. 1127, 1133 (1982).

Considering the Leet and Zipes cases, this Court disagrees with Ginn that merely

because the Eleventh Circuit attached the label “jurisdictional” to the time requirements of

Rule 4004(b) that it creates a jurisdictional prerequisite to filing a dischargeability

complaint.10 Coggin provided no discussion of the question of jurisdiction, and the court did

not decide that Rule 4004(b) was jurisdictional; rather it apparently used the word as a mere

convenience, or as the Sixth Circuit B.A.P. said, a shorthand. Furthermore, this Court’s

jurisdiction is determined by 28 U.S.C. Section 157(b),11 and nothing in that statute

the bankruptcy judges for the district.

(b)(1) Bankruptcy judges may hear and determine all cases

under title 11 and all core proceedings arising under title 11, or

arising in a case under title 11, referred under subsection (a) of

this section, and may enter appropriate orders and judgments .

. . .

(2) Core proceedings include, but are not limited to–

. . .

(I) determinations as to the dischargeability of particular

debts[.]

28 U.S.C.A. § 157 (West 1993).

12 The Advisory Committee note to Rule 4007 states that while bankruptcy and

nonbankruptcy courts have concurrent jurisdiction over complaints filed pursuant to

subsection (b), “[t]he bankruptcy court has exclusive jurisdiction to determine

dischargeability” of debts under subsection (c). Fed. R. Bankr. P. 4007 adv. comm. note.

The note gives no indication that as a consequence of untimely filing, the bankruptcy court is

divested of its jurisdiction. Rather, it merely states that “[i]f a complaint is not timely filed,

the debt is discharged.” Id.

11

conditions jurisdiction over discharge objections on timeliness.12 In re Kontrick, 295 F.3d

724, 732 (7th Cir. 2002). The circumstances here are analogous to those in Zipes, in which

the Supreme Court stated that the

provision granting district courts jurisdiction . . . does not limit

jurisdiction to those cases in which there has been a timely

filing with the EEOC. It contains no reference to the timelyfiling

requirement. The provision specifying the time for filing

charges with the EEOC appears as an entirely separate

provision, and it does not speak in jurisdictional terms or refer

in any way to the jurisdiction of the district courts.

455 U.S. at 393-34, 102 S. Ct. at 1132-33. See also Schunck v. Santos (In re Santos), 112

B.R. 1001, 1005-06 (B.A.P. 9th Cir. 1990).

Although the court in Leet rejected the “jurisdictional” terminology, it concluded

that the Supreme Court’s decision in Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct.

1644 (1992) requires a conclusion that equitable principles do not apply to Rule 4007(c).

13 Rule 4003(b) provides as follows:

A party in interest may file an objection to the list of property

claimed as exempt only within 30 days after the meeting of

creditors held under § 341(a) is concluded or within 30 days

after any amendment to the list or supplemental schedules is

filed, whichever is later. The court may, for cause, extend the

time for filing objections if, before the time to object expires, a

party in interest files a request for an extension.

Fed. R. Bankr. P. 4003(b). Like Rule 4004, this Rule is virtually indistinguishable from Rule

4007(c) and is governed by Rule 9006(c)(3) to preclude extensions of time to file except as

provided within the Rule.

12

274 B.R. at 697. In addition, the court said that the Supreme Court’s more recent decision

in Young v. United States, __ U.S. __, 122 S. Ct. 1036 (2002) to apply equitable tolling to a

deadline in the Bankruptcy Code did not change its opinion regarding the application of

equitable principles to Rule 4007(c). 274 B.R. at 1039-40.

The case before this Court compels a different conclusion. The debtor in Taylor had

claimed the proceeds of a lawsuit as exempt, but indicated that she did not know the full

value of the lawsuit. The trustee made some inquiries with her lawyers, who told him they

expected to settle for $110,000. Nevertheless, the trustee concluded that the lawsuit was not

likely to yield a significant payout to the debtor. The trustee was wrong. After the debtor

settled for $110,000, and after the time for objecting to exemptions had expired under Rule

4003,13 the trustee objected to the exemption claiming that it had been filed in bad faith and,

thus, the deadline for filing an objection did not apply. 503 U.S. at 640-41, 112 S. Ct. at

1646-47. The Supreme Court refused to allow him to make an untimely objection based on

the debtor’s lack of good faith in claiming exemptions without a colorable basis for doing so.

Id. at 643-44, 112 S. Ct. at 1648. “The Court did not hold, however, . . . that Rule 4003(b)

was not subject to the ususal equitable doctrines that apply to other deadlines and statutes of

14 A debtor is not discharged from a tax “of the kind and for the periods specified in

section 507(a)(2) or 507(a)(8) of this title.” 11 U.S.C.A. § 523(a)(1)(A) (West 1993 & Supp

2002).

13

limitations.” Kontrick, 295 F.3d at 733 n.4. In fact, because the argument had not been

raised in the lower courts, the Court expressly declined to consider whether a bankruptcy

court could use its equitable power under Section 105(a) to permit an untimely objection.

503 U.S. at 645, 112 S. Ct. at 1649.

The holding in Taylor is consistent with the Eleventh Circuit’s holdings in Alton and

Williamson. In each case, the court refused to grant equitable relief to a complaining party,

whose grievance was of its own making. The Court in Taylor stated that despite what the

debtor’s attorneys repeatedly told him about the value of the debtor’s discrimination lawsuit,

“Taylor did not object to the claimed exemption. . . . Taylor cannot now seek to deprive [the

debtor and her attorneys] of the exemption.” Id. at 644, 112 S. Ct. at 1648.

When the Supreme Court did accept a bankruptcy case for review with facts

amenable to the application of an equitable remedy, the Court allowed tolling. In Young, the

Court considered whether the three-year look back period in Sections 523(a)(1)(A) and

507(a)(8)(A)(i) of the Bankruptcy Code was a statute of limitations subject to equitable

tolling. __ U.S. at __, 122 S. Ct. at 1038. The debtors owed federal income taxes on a

return that was due on October 15, 1993. They filed a Chapter 13 petition on May 1, 1996.

In March 1997, the case was dismissed, and the debtors filed a Chapter 7 petition. The

debtors argued that because the taxes were due more than three years prior to the filing of

the Chapter 7 case, they were nondischargeable under Sections 523(a)(1)(a)14 and

15 Section 507(a)(8)(A)(i) provides for priority of payment of income tax claims “for

a taxable year ending on or before the date of the filing of the petition for which a return, if

required, is last due, including extensions, after three years before the date of the filing of

the petition.” 11 U.S.C.A. § 507(a)(8)(A)(i) (West 1993 & Supp. 2002).

14

507(a)(8)(A)(1) of the Bankruptcy Code.15 Id. The Court concluded that the look back

period was a statute of limitations that was tolled during the debtors’ Chapter 13 case

“because it prescribes a period within which certain rights (namely, priority and

nondischargeability in bankruptcy) may be enforced.” Id. at 1039. This same statement can

be applied to Rule 4007. It prescribes a period (60 days after the first date set for the

meeting of creditors) within which the right to a determination of nondischargeability may be

enforced.

Furthermore, as the courts in Santos and Kontrick explained, “characterization of

[the] bankruptcy rules as jurisdictional would yield too rigid a result to achieve the goals of

the bankruptcy statute.” 295 F.3d at 732; 112 B.R. at 1006. The goals of Rule 4007 include

prompt administration of bankruptcy estates and protection of the debtor’s fresh start. 295

F.3d at 732. They are “best fostered, not by a rigid jurisdictional approach, but by the

exercise of equitable discretion in a manner consistent with the policies that animate the

Bankruptcy Code.” Id.

Based on the foregoing, the Court concludes that the bar date set by Rule 4007(c) is

in the nature of a statute of limitations. As the Supreme Court said in Young,

It is hornbook law that limitations periods are customarily

subject to equitable tolling unless tolling would be inconsistent

with the text of the relevant statute. Congress must be

presumed to draft limitations periods in light of this

background principle. That is doubly true when it is enacting

limitations periods to be applied by bankruptcy courts, which

15

are courts of equity.

__ U.S. at __, 112 S. Ct at 1040-41 (internal citations and quotation marks omitted). The

Court does not now decide whether equitable tolling applies in this case. Rather, the Court

concludes that even if the bar date has passed, there is a basis for filing a complaint that falls

within the scope of Section 523(c) and Rule 4007(c) and that the Bank has made a sufficient

showing to persuade the Court that an equitable tolling argument would not be frivolous.

Thus, the Court will exercise its discretion to reopen the case. The Bank will still bear the

burden of demonstrating why its complaint should be allowed notwithstanding the passage of

the bar date.

An Order in accordance with this Opinion will be entered on this date.

Dated this 9th day of September, 2002.

________________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been served on the

following:

Danny C. Griffin

P.O. Box 365

Colquitt, Georgia 31737

M. Jeremy Lynch

P.O. Box 64

Albany, Georgia 31702-0064

This 9th day of September, 2002.

_______________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: ) CHAPTER 7

) CASE NO. 00-11306-JDW

STEPHEN C. PHILLIPS, )

FRANCES M. PHILLIPS, ))

DEBTORS. )

ORDER

In accordance with the Memorandum Opinion entered on this date, Farmers &

Merchants Bank’s Motion to Reopen Bankruptcy Case to Determine Dischargeability of

Debt and for Other Relief Deemed Just and Appropriate is hereby GRANTED.

So ORDERED, this 9th day of September, 2002.

_________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been served on the

following:

Danny C. Griffin

P.O. Box 365

Colquitt, Georgia 31737

M. Jeremy Lynch

P.O. Box 64

Albany, Georgia 31702-0064

This 9th day of September, 2002.

_______________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

KOREY P. MADDOX, ETHEL M. MADDOX,

September 16, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: )CHAPTER 13

)CASE NO. 03-10945-JDW

KOREY P. MADDOX, )

ETHEL M. MADDOX, ))

DEBTORS ))

VS. ))

JANIE MAE PORTER, ))

RESPONDENT )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

OF COUNSEL:

For Debtors GREG ALAN CLARK

Custer & Custer

P. O. Box 605

Albany, Georgia 31702

Janie Mae Porter Janie Mae Porter (Pro Se)

711 W. 12th Avenue

Cordele, Georgia 31015

Page -2-

MEMORANDUM OPINION

Debtor filed a motion to avoid the judgment lien of Janie

Mae Porter. After notice of the motion and a response from

Janie Porter, the Court convened a hearing on June 16, 2003,

to consider the motion and the responsive objection.

The judgment lien against Debtor was obtained following a

tortured path of legal relations between Debtor and Ms. Porter

caused by the inadequate documentation of a loan for a car

sold by Debtor to Ms. Porter. In the end, Ms. Porter elected

to receive a judgment in the U.S. Magistrate Court as an

alternative to a return of the car and the continuation of the

interpersonal difficulties experienced between Debtor and Ms.

Porter.

The Court conducted the first of three hearings in this

case on June 16, 2003. The evidence indicated abusive and

predatory treatment of Ms. Porter by Debtor. Likewise, the

record indicated irregularities in the payments made by Ms.

Porter to Debtor. These circumstances would not ordinarily

have any relevance to the question of whether the judgment

lien should be avoided. Unfortunately, there was direct

contradiction between the testimony of Debtor and Ms. Porter.

The Court reasoned at that time that if Debtor were presenting

false testimony to the Court, the Court should entertain the

possibility that he would not enjoy the benefit of the lien

Page -3-

avoidance and might suffer the dismissal of the bankruptcy

case as a sanction. Also, because Ms. Porter is proceeding

pro se, the Court concluded that it would be appropriate to

also consider her presentation as a request to dismiss this

case as having been filed in bad faith. An order to that

effect was entered on June 18, 2003, setting a hearing on the

matter for July 22, 2003.

The most troublesome allegation in this case was

developed as a matter of evidence at the July 22, 2003,

hearing. Debtor contends that Ms. Porter signed a document

evidencing a security interest in the disputed automobile.

Ms. Porter indicates that she never signed any such document.

The testimony from the two parties on this point indicates a

clear intention by one of the parties to commit perjury in

this Court due to the fact that the presence of Ms. Porter at

a meeting in a lawyer’s office is a principal point of

contention. Ms. Porter says she never attended such a meeting

and never signed the document. Debtor contends she did attend

the meeting and she did sign the document. Such a discrepancy

is most troublesome to this finder of fact. To aid the Court

in resolving the disputed issue, the Court requested that the

lawyer who drafted the document and witnessed the signatures

of Debtor and Ms. Porter be required to appear in Court and

testify about the transaction.

Page -4-

John C. Cotton, attorney at law, from Cordele, Georgia,

complied with the Court’s requirement and appeared in Court at

a hearing on August 18, 2003, and testified as follows:

1. He did prepare a document at the request of Debtor.

2. A female person did accompany Debtor to his office

and represent that she was Ms. Porter.

3. The lawyer did not require the person identified as

Ms. Porter to provide any identification of herself

in the form of a driver’s license or other official

document.

4. The lawyer could not confirm or deny that Ms.

Porter, present in the courtroom during his

testimony, was the same person who accompanied

Debtor to his office.

5. The lawyer said that on the day of the office

conference he went outside to inspect the vehicle

and obtain the vehicle identification number.

6. The lawyer said he observed that the vehicle was

red.

Mr. Cotton’s secretary also appeared and testified at the

hearing. Her recollection was consistent with Mr. Cotton’s

testimony. She too was unable to confirm or deny that Ms.

Porter, present in the courtroom, was the person who signed

the document she witnessed.

Page -5-

The testimony regarding the meeting in the lawyer’s

office is critical. The document was dated December 12, 2002.

Ms. Porter claimed that she was in possession of the car on

that date and it was not repossessed by Debtor from her until

December 18, 2002. This would mean that Debtor was unable to

present the car to the lawyer for inspection at the meeting in

his office. The lawyer testified that he obtained the serial

number used in the disputed document from the vehicle he

inspected. He described that vehicle as red. While the

serial number was the same as the disputed vehicle allegedly

in Ms. Porter’s custody on December 12, 2002, the color of the

disputed vehicle is blue.

In a further effort to get at the truth, the Court

required Debtor to bring the disputed vehicle to the lawyer’s

office along with another vehicle which was alleged by Ms.

Porter to be the one which was actually presented on the day

of the conference in the lawyer’s office. Mr. Cotton was

asked to inspect both vehicles, describe their color, and

obtain serial numbers from each of them and report to the

Court. Mr. Cotton’s letter of August 20, 2003, reported that

the serial number from the disputed vehicle was exhibited on a

blue rather than a red vehicle. He concluded in his letter

that he was mistaken in remembering the car as red. The other

vehicle was a burgundy vehicle which Ms. Porter contends was

Page -6-

the one exhibited to the lawyer. Unfortunately for Ms.

Porter’s case, the serial number from that vehicle did not

match the one the lawyer said he inspected on the day of the

office conference.

Something is very wrong with the testimony in this case.

Ms. Porter disputes Debtor’s account of the office meeting.

If she is correct in her testimony, Debtor has committed a

serious fraud on this Court. Unfortunately for Ms. Porter,

there is no preponderance of the evidence sufficient to cause

the Court to come to such a conclusion. There is ample

support for Debtor’s position in the form of testimony and

followed with documentation from the lawyer who hosted the

conference. There is no reason to have any doubt about the

lawyer’s testimony since he is a respected member of the bar

and, further, has no interest in this proceeding. As much as

Ms. Porter is very credible, persuasive, and adamant in her

insistence that Debtor has misrepresented the facts to this

Court, her intensity, diligence, and passion are not

sufficient as a matter of evidence to permit the Court to come

to a conclusion adverse to the Debtor. The preponderance of

the evidence supports Debtor’s account of the proceedings.

Without evidence of bad faith on the part of Debtor, there is

no support for the idea of dismissing the case based on

allegations of Debtor’s bad faith.

Page -7-

Furthermore, the initial matter of lien avoidance is one

which was never in dispute. There was never any evidence

offered directly in opposition to the motion for lien

avoidance. The judgment lien impaired Debtor’s exemption. As

such, the Bankruptcy Code mandates, upon motion duly made, its

avoidance.

An order in accordance with these findings and

conclusions will be entered on this date.

Dated this 16th day of September, 2003.

_____________________________

Hon. James D. Walker, Jr.

United States Bankruptcy Court

Page -8-

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and

foregoing have been served on the following:

Greg Alan Clark

Custer & Custer

P. O. Box 605

Albany, GA 31702

Janie Mae Porter

711 W. 12th Avenue

Cordele, GA 31015

Kristin Smith

Chapter 13 Trustee

P. O. Box 1907

Columbus, GA 31902

This 16th day of September, 2003.

____________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: )CHAPTER 13

)CASE NO. 03-10945-JDW

KOREY P. MADDOX, )

ETHEL M. MADDOX, ))

DEBTORS )

ORDER

Debtor has filed a motion to avoid the judgment lien of

Janie Mae Porter. In objecting to the motion, Ms. Porter has

filed documents interpreted by the Court as a request to

dismiss Debtors’ case for bad faith. This order is entered in

accordance with the findings of fact and conclusions of law

stated in the memorandum opinion of even date.

Now, therefore it is hereby

ORDERED that Ms. Porter’s motion to dismiss this case be

and it hereby is DENIED; and it is hereby further

ORDERED that Debtors’ motion to avoid the judgment lien

of Janie Mae Porter be and it hereby is GRANTED and Ms.

Porter’s objection is overruled.

Dated this 16th day of September, 2003.

_____________________________

JAMES D. WALKER, JR.

United States Bankruptcy Court

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and

foregoing have been served on the following:

Greg Alan Clark

Custer & Custer

P. O. Box 605

Albany, GA 31702

Janie Mae Porter

711 W. 12th Avenue

Cordele, GA 31015

Kristin Smith

Chapter 13 Trustee

P. O. Box 1907

Columbus, GA 31902

This 16th day of September, 2003.

___________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

TIFFANY LESANE,

September 15, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: )CHAPTER 13

)CASE NO. 03-53571-JDW

TIFFANY LESANE, ))

DEBTOR )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Debtor: Tiffany LeSane (pro se)

107 Erin Court

Byron, Georgia 31008

Page -2-

MEMORANDUM OPINION

On September 8, 2003, the Court convened a hearing

pursuant to its Show Cause Order entered on August 12, 2003.

The order required Debtor to show cause why this sixth

bankruptcy case filed since February 14, 2002, should not be

dismissed as having been filed in bad faith.

FINDINGS OF FACT

Debtor’s first case was filed on February 14, 2002, as

case number 02-50701. The filing fee was paid in that case,

but the case was dismissed because Debtor did not file a plan

or schedules and did not attend the Section 341(a) meeting.

The order of dismissal was dated May 9, 2002.

Debtor’s second case was filed on May 2, 2002, as case

number 02-52186. The filing fee was not paid directly by

Debtor as required by the Court’s order, but some of the funds

paid to the Trustee were later paid over to the Court to pay

the filing fee. Before the Court could enter a show cause

order requiring Debtor to show cause why the case should not

be dismissed for nonpayment of the filing fee, the case was

dismissed pursuant to the Trustee’s motion to dismiss on

Page -3-

grounds that no plan or schedules had been filed and that

Debtor had not attended the Section 341(a) Meeting. The case

was dismissed by order of August 5, 2002.

The third case was filed on August 19, 2002, as case

number 02-53590. While the filing fee was paid in this case,

the Trustee filed a motion to dismiss on grounds that Debtor

did not file a plan or schedules and did not attend the

Section 341(a) Meeting. The case was dismissed by the Court’s

order of November 6, 2002.

A fourth case was filed on December 16, 2002, as case

number 02-55742. No filing fee was paid in the case. The

case was dismissed pursuant to Trustee’s motion to dismiss for

failure to file schedules or plan and failure to attend the

Section 341(a) Meeting. An order dismissing the case was

entered on April 15, 2003.

The fifth case was filed on April 30, 2003, as case

number 03-51946. No filing fee was paid in the case, and the

Court entered an order requiring Debtor to show cause why the

case should not be dismissed for failure to pay the filing

fee. No cause was shown and the case was dismissed on July

10, 2003. The Trustee had also requested dismissal on the

grounds that Debtor had not filed a plan or schedules and did

not attend the Section 341(a) Meeting. The case was dismissed

on the Court’s show cause order before the Trustee’s motion

Page -4-

could be considered.

In this sixth case, the filing fee and schedules were

filed after the show cause notice. All of Debtor’s petitions

have been filed pro se and never list any previous filings as

required by the petition form. Debtor has never attended a

Section 341(a) Meeting of Creditors.

Debtor offered no explanation as to why the Court should

consider the current case as having been filed in good faith.

Furthermore, there was no evidence presented that any of the

previous cases were filed in good faith. Debtor stated at the

hearing that she would file a case when she would lose a job

so as to give her time to find a new job and protect her from

the adverse consequences of creditors’ recovery efforts. Such

an objective has been repeatedly held by this Court as one

which would not support the good faith filing of a bankruptcy

case. In order to file a Chapter 13 case in good faith, the

Code requires that a debtor have “regular income.” This

Debtor indicated no such regular income, and in fact,

indicated the lack of same as the reason for filing the case.

CONCLUSIONS OF LAW

This case has not been filed in good faith and should be

dismissed. Furthermore, this Debtor should be enjoined from

filing any future cases in this court for a period of thirtyPage

-5-

six (36) months, which period of time is due in part to the

fact that five such previous cases have been filed in this

Court within a fairly short interval.

An order in accordance with this memorandum opinion will

be entered on this date.

Dated this 15th day of September, 2003.

___________________________________

Hon. James D. Walker, Jr.

United States Bankruptcy Court

Page -6-

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and

foregoing have been served on the following:

Tiffany LeSane

107 Erin Court

Byron, GA 31008

Camille Hope

Chapter 13 Trustee

P. O. Box 954

Macon, GA 31202

This 15th day of September, 2003.

___________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: )CHAPTER 13

)CASE NO. 03-53571-JDW

TIFFANY LESANE, ))

DEBTOR )

ORDER

On September 8, 2003, the Court convened a hearing

pursuant to a previous show cause order entered on August 12,

2003. This order is entered in accordance with the memorandum

opinion of even date.

Now, therefore it is hereby

ORDERED that this Chapter 13 Case be and it hereby is

DISMISSED; and it is hereby further

ORDERED that Debtor in this case be enjoined for a period

of thirty-six (36) months from filing any bankruptcy case

under any chapter in this Court.

Dated this 15th day of September, 2003.

_______________________________

JAMES D. WALKER, JR.

United States Bankruptcy Court

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and

foregoing have been served on the following:

Tiffany LeSane

107 Erin Court

Byron, GA 31008

Camille Hope

Chapter 13 Trustee

P. O. Box 954

Macon, GA 31202

This 15th day of September, 2003.

_____________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

TED LAMAR JONES,

July 13, 2001

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: )CHAPTER 7

)CASE NO. 99-55074-JDW

TED LAMAR JONES, ))

DEBTOR ))

TED LAMAR JONES, ))

PLAINTIFF ))

VS. )ADVERSARY PROCEEDING

)NO. 01-5024-JDW

J. DALE MANN; DODD’S )

BUILDER’S SUPPLY, INC.; )

BANKSTON LUMBER COMPANY; )

RICHARD MILAM, in his )

capacity as District Attorney )

for the Towaliga Judicial )

Circuit; HOWARD SIMMS, in his )

capacity as District Attorney )

for the Macon Judicial )

Circuit; KELLY BURKE, in his )

capacity as District Attorney )

for the Houston Judicial )

Circuit, ))

DEFENDANTS )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Debtor: Jason M. Orenstein

Fricks, Dell & Orenstein

P.O. Box 4086

Macon, Georgia 31208

For Defendant

J. Dale Mann: Joel V. Sherlock

Law Offices of Charles L. Ruffin

P.O. Box 5047

Macon, Georgia 31208

3

MEMORANDUM OPINION

This matter comes before the Court on Defendant J. Dale Mann’s Motion

to Open Default pursuant to Rule 55(c) of the Federal Rules of Civil Procedure.

Fed. R. Civ. P. 55(c). The Court held a hearing on May 16, 2001. After

considering the pleadings, evidence and applicable authorities, the Court enters

the following findings of fact and conclusions of law in compliance with Federal

Rule of Bankruptcy Procedure 7052.

Findings of Fact

On March 1, 2001, Debtor filed a complaint with this Court alleging,

among other things, that J. Dale Mann (“Defendant Mann”) violated the

automatic stay and the discharge injunction order issued by this Court on

December 8,2000, by attempting to collect a debt discharged by that order.

Debtor states in his complaint that, along with his brother David Eugene Jones,

he operated a home construction business. As part of that business, they had a

revolving account with Dodd’s Builder’s Supply (“DBS”) for supplies. At the end

of 1999, Debtor and his brother owed approximately $8,000 to DBS, which they

were unable to pay. Thereafter, DBS filed a materialman’s lien for the amount

it was owed against Defendant Mann, a homeowner whose home was built by

Debtor and his brother with supplies purchased at DBS.

Defendant Mann contracted with Debtor and his brother to construct a

4

home for him and had paid them the full amount under the contract for their

services, approximately $64,800. However, when the lien was filed, Defendant

Mann paid the lien and sought to recover that money from Debtor and his

brother in state court. Defendant Mann obtained a judgment against Jones

Brothers Custom Homes, Inc. on February 22, 2000, and then sought to collect

on the judgment. However, Debtor had filed for bankruptcy on December 30,

1999. Debtor’s brother, David Eugene Jones, filed for bankruptcy on April 3,

2000, so Defendant Mann was unable to collect on his judgment from Debtor or

his brother.

Defendant Mann appeared before this Court several times in Debtor’s

case to try and collect on his judgment. Each time, Defendant Mann appeared

before this Court pro se and was advised to obtain legal counsel. Thereafter,

Debtor’s debts were discharged on December 8,2000 and David Eugene Jones’s

debts were discharged on July 17, 2000. Despite this, Defendant Mann

garnished an account of Debtor’s brother to collect on his judgment.

Subsequently, Debtor filed a complaint against Defendant Mann with this

Court claiming Defendant Mann violated the automatic stay and the discharge

injunction order. Debtor’s brother, David Eugene Jones, filed a similar

complaint.

Subsequently, Defendant Mann again appeared pro se before this Court

at an expedited hearing concerning Debtor’s complaint and the complaint filed

by his brother. While the matter in dispute at the hearing did not directly

5

affect Defendant Mann, Defendant Mann did appear and was again advised to

obtain the assistance of legal counsel. However, Defendant Mann did not

obtain legal counsel and failed to respond to the complaint filed by Debtor

against him. Accordingly, a default was entered on May 7, 2001. Thereafter,

Defendant Mann acquired legal counsel and filed this motion to open default on

May 16, 2001.

Conclusions of Law

Rule 55(c) of the Federal Rules of Civil Procedure provides “For good

cause shown the court may set aside an entry of default and, if a judgment by

default has been entered, may likewise set it aside in accordance with Rule

60(b).” Fed. R. Civ. P. 55(c). Because no judgement by default was entered in

this case, it is the good cause standard that the Court must look to in

determining whether to set aside the default.

This Court has previously noted that there are four factors which should

be considered in assessing good cause. While other factors may also be

considered, these four factors are: “(1) the promptness of the defaulting party’s

action to vacate the default, (2) the plausibility of the defaulting party’s excuse

for the default, (3) the merit of any defense the defaulting party might wish to

present in response to the underlying action, and (4) any prejudice the party not

in default might suffer if the default is opened.” Am. Express Travel Related

Serv. v. Jawish (In re Jawish), 260 B.R. 564, 567 (Bankr. M.D. Ga. 2000). In

6

looking at these factors, a court should be mindful of the general policy favoring

decisions based on the merits. Id.

The first factor to be considered is how promptly the defaulting party

acted in attempting to vacate the default. As Defendant Mann correctly notes,

Rogers v. Allied Media, Inc. found that the filing of a motion to open a default

one month after the entry of default was not per se unreasonable. Rogers v.

Allied Media, Inc. (In re Rogers), 60 B.R. 249, 252 (Bankr. N.D. Ga. 1993). In

this case, a default was entered on May 7, 2001. Defendant Mann filed his

motion to open the default on May 16, 2001. Having determined that

Defendant Mann filed his motion 9 days after the default was entered, this

Court finds that Defendant Mann was prompt and reasonable in his action to

vacate the default. However, it is the second factor in the good cause

assessment that is problematic for Defendant Mann.

The second factor that a court should consider in opening a default is

whether the defaulting party’s excuse for the default is plausible. This involves

an examination of the defaulting party’s culpability. Jawish, 260 B.R. at 568.

Here, Defendant Mann states that he did not respond to Debtor’s complaint

because he misunderstood the requirement that he respond in writing.

Defendant Mann also states that he thought that by appearing pro se before

this Court in the expedited hearing held on March 12, 2001, and presenting his

view of the case, he had responded to Debtor’s complaint. Furthermore,

Defendant Mann states that he waited to seek legal assistance because he was

7

under financial strain.

The lack of legal assistance cannot be viewed by this Court as a plausible

excuse for failing to respond to Debtor’s complaint. To allow such ignorance of

the law alone as an excuse would create an incentive for parties appearing

before this Court to forego representation and ignore the requirements of the

law. In addition, Defendant Mann was repeatedly advised by this Court to

obtain legal counsel in this proceeding. Defendant Mann’s continued insistence

on proceeding without legal counsel despite these suggestions demonstrates his

culpability in failing to respond to Debtor’s complaint.

Defendant Mann first appeared pro se before this Court on May 5, 2000,

requesting relief from stay in the form of a motion. In response to Defendant

Mann’s motion, this Court stated that Defendant Mann’s efforts were being

frustrated by his own lack of knowledge about the proceedings, that such lack of

knowledge would be a problem for him, and that his efforts were not going to be

very effective without the assistance of a lawyer. The Court went on to state

that Defendant Mann’s request involved an examination of fine legal

distinctions that some lawyers have trouble making, so the fact that Defendant

Mann might have some trouble making the distinctions was of no surprise. The

Court then reiterated that this was one of the problems in proceeding without a

lawyer. After further discussion of Defendant Mann’s motion, the Court

informed Defendant Mann of the potential consequences of proceeding without

legal assistance by stating that the matter involved difficult legal distinctions

8

and if Defendant Mann got them wrong, he could be liable for sanctions for

violating the automatic stay. The Court cautioned Defendant Mann that the

law would not be applied differently for Defendant Mann because he was not a

lawyer. The Court noted that Defendant Mann had access to counsel, that

Defendant Mann was expected to comply with the automatic stay, and that if

Defendant Mann had any question about what the stay requires, he had better

seek the advice of a lawyer. The Court then reiterated that the rules were not

different for pro se litigants than for represented litigants.

Defendant Mann next appeared in this case before this Court on July 7,

2000, requesting relief from stay again. In responding to statements made by

Debtor’s counsel in the presence of Defendant Mann, the Court stated that

Debtor’s counsel was setting Defendant Mann up to get in trouble, because

Defendant Mann would not know where to stop. Defendant Mann did not have

the assistance of a lawyer, so when Defendant Mann appeared to have violated

the automatic stay, the Court stated it would hear counsel’s motion for

sanctions against Defendant Mann. The Court went on to note that Defendant

Mann was having a difficult time, and his efforts on his own behalf would not

likely be fruitful. In responding to Defendant Mann’s statements, the Court

stated that because Defendant Mann did not have the benefit of the services of

a lawyer, he was at a disadvantage. However, the Court noted that proceeding

without a lawyer was his choice, and therefore he could proceed.

Defendant Mann made his third appearance before this Court on March

9

12, 2001. Defendant Mann appeared pro se again as a party at interest at the

expedited hearing for injunctive relief in this case and the David Eugene Jones

case. At that hearing, this Court advised Defendant Mann again that he

needed the assistance of a lawyer and that Defendant Mann could be digging a

very deep hole for himself. Because of these admonitions by this Court and

because of Defendant Mann’s decision not to employ counsel, the Court does not

find Defendant Mann’s excuse claiming a lack of understanding of the law to be

plausible. Furthermore, the Court views Defendant Mann’s conduct to be so

culpable that the Court finds that Defendant Mann has not demonstrated good

cause to open the default.

In making this determination, the Court is mindful of the fact that

Defendant Mann has a potentially meritorious defense to the underlying action.

Debtor’s complaint against Defendant Mann states that Defendant Mann

violated the automatic stay and the discharge injunction order issued in the

case by attempting to collect a debt that had been discharged. Defendant Mann

argues that he did not violate the automatic stay or the discharge injunction

order by his actions because the claim he held was against Jones Construction,

not Debtor. The claim was not listed in Debtor’s bankruptcy schedules,

therefore any of Defendant Mann’s attempts to collect the debt were not actions

that violated the automatic stay or the discharge injunction order in Debtor’s

case.

The Court also is mindful of the fact that the opening of the default

10

would not be prejudicial to Debtor. While the opening of any default would

cause delay and therefore would be somewhat prejudicial to a debtor, this must

be balanced against the policy favoring resolving disputes on the merits.

Jawish, 260 B.R. at 568. Because Defendant Mann has posed a defense with

potential merit, on balance, the opening of the default would not be prejudicial

to Debtor.

Nonetheless, these factors are not enough to warrant a finding of good

cause to open the default. Defendant Mann was repeatedly warned of the

dangers of proceeding without legal counsel. Default is certainly one of those

dangers and accordingly, a default judgment will be entered in this case.

Hereafter, the Court will provide Defendant Mann with notice of any future

actions in this case and will allow Defendant Mann to be heard on any motion

requesting punitive damages against him.

An order in accordance with this opinion will be entered on this date.

Dated this 13th day of July, 2001.

_______________________________

James D. Walker, Jr.

United States Bankruptcy Judge

11

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been

served on the following:

Jason M. Orenstein

Fricks, Dell & Orenstein

P.O. Box 4086

Macon, Georgia 31208

Joel V. Sherlock

Law Offices of Charles L. Ruffin

P.O. Box 5047

Macon, Georgia 31208

This 16th day of July, 2001.

___________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: )CHAPTER 7

)CASE NO. 99-55074-JDW

TED LAMAR JONES, )

DEBTOR ))

TED LAMAR JONES, )

PLAINTIFF ))

VS. )ADVERSARY PROCEEDING

)NO. 01-5024-JDW

J. DALE MANN; DODD’S )

BUILDER’S SUPPLY, INC.; )

BANKSTON LUMBER COMPANY; )

RICHARD MILAM, in his )

capacity as District Attorney )

for the Towaliga Judicial )

Circuit; HOWARD SIMMS, in his )

capacity as District Attorney )

for the Macon Judicial )

Circuit; KELLY BURKE, in his )

capacity as District Attorney )

for the Houston Judicial )

Circuit, )

DEFENDANTS )

ORDER

In accordance with the memorandum opinion entered on this date, it is

hereby

ORDERED that the Motion to Open Default filed by Defendant J. Dale

Mann is DENIED.

SO ORDERED this 13th day of July, 2001.

_______________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been

served on the following:

Jason M. Orenstein

Fricks, Dell & Orenstein

P.O. Box 4086

Macon, Georgia 31208

Joel V. Sherlock

Law Offices of Charles L. Ruffin

P.O. Box 5047

Macon, Georgia 31208

This 16th day of July, 2001.

________________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

KHALED M. JAWISH,

November 20, 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: )CHAPTER 7

)CASE NO. 99-54184-JDW

KHALED M. JAWISH, ))

DEBTOR )))

AMERICAN EXPRESS TRAVEL )

RELATED SERVICES, INC., ))

PLAINTIFF ))

VS. )ADVERSARY PROCEEDING

)NO. 00-5014

KHALED M. JAWISH, ))

DEFENDANT )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For American Express Travel D. Ruth Primm

Related Services Co., Inc.: P.O. Box 450268

Atlanta, Georgia 31145-0268

For Khaled M. Jawish: Charles E. Gay

433 Cherry St. Suite 16

Macon, Georgia 31201

2

MEMORANDUM OPINION

This matter comes before the Court on Motion for Entry of

Default Judgment on the Complaint to Determine

Dischargeability of Debt filed by American Express Travel

Related Services Company, Inc. (“Plaintiff”) in the case of

Chapter 7 debtor Khaled M. Jawish (“Defendant”). This is a

core matter within the meaning of 28 U.S.C. §§ 157(b)(2)(I)

and (b)(2)(J). After considering the pleadings, evidence and

applicable authorities, the Court enters the following

findings of fact and conclusions of law in compliance with

Federal Rule of Bankruptcy Procedure 7052.

Findings of Fact

Defendant filed his Chapter 7 petition on October 29,

1999, and Plaintiff filed its complaint to determine the

dischargeability of Defendant’s debt on February 4, 2000.

Defendant had a credit card account with Plaintiff in the name

of “Atlantic International” to which he charged goods,

services and travel expenses totaling $21,114.91 between

February 27, 1999, and May 24, 1999. As of the petition date,

Defendant owed $21,331.87 on the account.

Plaintiff alleged that because Defendant had only $43.00

in his monthly budget available to service credit card debt,

and because Defendant incurred $158,901.82 in what appears to

3

be credit card debt, including the debt to Plaintiff,

Defendant could not have reasonably expected to pay Plaintiff.

Accordingly, Plaintiff alleged that Defendant incurred the

$21,331.87 debt under fraudulent circumstances warranting a

determination that the debt is nondischargeable pursuant to

Section 523(a)(2)(A) of the Bankruptcy Code.

Plaintiff also alleged that Defendant should be able to

account for more than the $2,000.00 in household goods,

$500.00 in wearing apparel, and $100.00 in cash that he listed

on Schedule B. At least $12,000.00 of Defendant’s unsecured

$158,901.82 debt was incurred to Plaintiff for merchandise

purchases, and in his Statement of Financial Affairs,

Defendant indicated no losses, gifts, or transfers of personal

property in the year preceding his petition. Plaintiff

accordingly objected to Defendant’s discharge pursuant to

Sections 727(a)(2)(A), (a)(4)(A) and (a)(5).

Defendant’s cardholder agreement with Plaintiff provided

for payment of prejudgment interest at 2.5 percent per month

from the date of default to the date of judgment. The

agreement deems the account in default if the cardholder files

for bankruptcy. The agreement also requires the cardholder to

pay the costs of collection, including attorney fees at the

contractually provided rate of 15 percent of the unpaid

balance. In paragraph 35 of the Complaint, Plaintiff stated

its intention to collect attorney fees if the Court finds the

4

debt nondischargeable, which Plaintiff indicated that

Defendant could avoid if he paid $21,331.87 within 10 days of

receiving the Complaint.

Defendant failed to answer by the March 6, 2000,

deadline. The Clerk entered default, and Plaintiff moved for

entry of default judgment on July 7, 2000. The Court

scheduled the matter to be tried on September 12, 2000, and on

September 6, 2000, Defendant answered. Defendant did not file

a motion to open the default with his Answer, but at trial

Defendant’s attorney made an oral motion to open default.

Defendant’s attorney explained that he had repeatedly

attempted to discuss the pending adversary with Defendant, but

for various reasons Defendant wanted to avoid the matter.

Defendant’s attorney proffered that Plaintiff’s adversary

caused Defendant psychological distress, and Defendant

suffered marital difficulties as a result of his bankruptcy.

According to Defendant’s attorney, Defendant coped with these

problems by ignoring them. Additionally, Defendant wanted to

avoid the loss of wages he would suffer if he took time off

from work to discuss Plaintiff’s adversary with his counsel.

Conclusions of Law

1. Defendant’s Oral Motion to Open the Default

The Court will deny Defendant’s oral motion to open the

default entered against him on July 7, 2000. Pursuant to

Federal Rule of Bankruptcy Procedure 7055, Federal Rule of

5

Civil Procedure 55(c) governs Defendant’s motion. Rule 55(c)

provides, “For good cause shown the court may set aside an

entry of default and, if a judgment by default has been

entered, may likewise set it aside in accordance with Rule

60(b).” Fed. R. Civ. P. 55(c). The more lenient “good cause”

standard of Rule 55(c), as opposed to the “excusable neglect”

standard of Rule 60(b), will be applied because the Court has

not entered default judgment. See In re Tires and Terms of

Columbus, Inc., Ch. 7 Case No. 99-40719-JTL, Adv. No. 00-4072,

slip op. at 4 (Bankr. M.D. Ga. Oct. 4, 2000) (citing In re

Rogers, 160 B.R. 249, 251-52 (Bankr. N.D. Ga. 1993)).

In order to uphold the policy favoring decisions based on

cases’ merits, the Court will address the four factors that

courts in the Eleventh Circuit consider when seeking the “good

cause” necessary to open a default. See id. These factors

include consideration of (1) the promptness of the defaulting

party’s action to vacate the default, (2) the plausibility of

the defaulting party’s excuse for the default, (3) the merit

of any defense the defaulting party might wish to present in

response to the underlying action, and (4) any prejudice the

party not in default might suffer if the default is opened.

Id., slip op. at 4-5 (citing Turner Broad. Sys., Inc. v. Sanyo

Elec., Inc., 33 B.R. 996, 1001 (N.D. Ga. 1983), aff’d 742 F.2d

1465 (11th Cir. 1984); see also In re Rogers, 160 B.R. at 252.

Defendant’s motion fails on all four of these factors.

6

The Court first determines whether the Defendant moved to

open the default within a reasonable time. See In re Tires

and Terms, slip op. at 5; In re Rogers, 160 B.R. at 252. In

In re Rogers, the court held that under the less stringent

standard of Rule 55(c), filing a motion to open a default a

month after entry of default was not unreasonable per se. See

In re Rogers, 160 B.R. at 252. It is unreasonable, however,

to allow six months to pass before filing an Answer, and to

wait until the trial, scheduled more than two months after

entry of default, to move the Court to open the default. As

the Court stated at trial, allowing Defendant to answer now

would render the notion of a deadline pointless.

In considering the second factor, the Court addresses

Defendant’s possible culpability, inquiring into his excuse

for defaulting. Id. at 253. Defendant’s attorney’s proffer

of evidence at the trial were deemed proven by the Court.

They indicate that Defendant deliberately chose to ignore

Plaintiff’s pending adversary. The Court acknowledges the

psychological and marital distress Defendant experienced as a

result of his bankruptcy and the adversary proceeding. Such

distress is probably not uncommon among many individual

debtors who appear before this Court. Defendant did not offer

any evidence as to extraordinary hardship or disability

created by the pendency of the Bankruptcy proceedings and this

adversary. Defendant’s willful disregard of this Court’s

7

rules cannot be excused. See id. at 254. Defendant’s

demonstrated ability to tend to his own routine daily business

while engaging in willful dereliction of his duty to comply

with the Court’s rules points to the conclusion that the Court

cannot excuse Defendant’s failure to file a timely Answer.

Third, the Court asks whether Defendant might assert a

meritorious defense to the action on which he has defaulted.

Id. Defendant has a higher burden now that default has been

entered than if he filed a timely Answer. At this stage,

Defendant cannot rely on the general denials and conclusory

statements that would have been sufficient in a timely Answer

to avoid default. Defendant must allege some evidence of a

factual basis for a meritorious defense before the Court can

seriously consider opening the default. Id. (citing Turner

Broad., 33 B.R. at 1002). In making Defendant’s oral motion,

Defendant’s attorney offered only Defendant’s excuses for not

having filed a timely Answer. Responding only with general

admissions, denials, and statements of insufficient knowledge,

Defendant has alleged no facts establishing a meritorious

defense.

Fourth, the Court considers the prejudice Plaintiff would

suffer if the Court opens the default. Opening any default

poses the prospect of delay, and any delay is likely to have a

prejudicial aspect, however slight it may be. Plaintiff has

offered no specific showing of prejudice beyond the expense of

1Section 523(a)(2)(A) 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 -

(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

8

additional court appearances and the postponement of the

relief Plaintiff seeks to enjoy. Prejudice to the Plaintiff

must be balanced against the policy favoring resolution of

disputes on the merits. The problem here is that Defendant

has referenced no merits upon which the dispute might be

resolved in his favor. Thus there are no merits against which

the prejudice to Plaintiff might be balanced. When a

defaulting party has alleged no meritorious defense, the

expense of prosecuting a suit makes any delay unduly

prejudicial. Id. at 255.

Accordingly, Defendant’s oral motion to open the default

will be denied, and his Answer will not be considered.

Defendant is deemed to have admitted Plaintiff’s well-pleaded

allegations, and the Court will enter judgment accordingly.

See Nishimatsu Constr. Co., Ltd. v. Houston Nat’l Bank, 515

F.2d 1200, 1205 (5th Cir. 1975). The Court determines that

Defendant’s debt to Plaintiff is nondischargeable pursuant to

Section 523(a)(2)(A).1 Defendant must pay Plaintiff

insider’s financial condition[.]

11 U.S.C. § 523(a)(2)(A).

2Sections 727(a)(2)(A), (a)(4)(A), and (a)(5) provide,

(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;

. . .

(4) the debtor knowingly and fraudulently,

in or in connection with the case -

(A) made a false oath or

account; [or]

. . .

(5) the debtor has failed to explain

satisfactorily, before determination of

denial of discharge under this paragraph,

any loss of assets or deficiency of assets

to meet the debtor’s liabilities[.]

9

$23,331.87, plus interest at the rate of 2.5 percent per month

from October 29, 1999 to the date of this Opinion, and court

costs of $150.00. Furthermore, Plaintiff’s discharge will be

denied pursuant to Section 727(a)(2)(A), (a)(4)(A), and

(a)(5).2

2. Attorney Fees

The Court will not enter judgment for Plaintiff’s

3O.C.G.A. § 13-1-11(a)(3) provides

(a) Obligations to pay attorney’s fees upon any note or

other evidence of indebtedness, in addition to the rate

of interest specified therein, shall be valid and

enforceable and collectible as a part of such debt if

such note or other evidence of indebtedness is collected

by or through an attorney after maturity, subject to the

following provisions:

. . .

(3) The holder of the note or other evidence of

indebtedness or his attorney at law shall,

after maturity of the obligation, notify in

writing the maker, endorser, or party sought to

be held on said obligation that the provisions

relative to payment of attorney’s fees in

addition to the principal and interest shall be

enforced and that such maker, endorser, or

party sought to be held on said obligation has

10

attorney fees. Though the Eleventh Circuit has held that

attorney fees may be properly awarded in an action to

determine dischargeability of debt pursuant to Section 523,

“‘[t]he construction of [a] contract for attorney’s fees

presents . . . a question of local law.’” Transouth Fin.

Corp. of Fla. V. Johnson, 931 F.2d 1505, 1507 (11th Cir.

1991). (quoting Security Mortgage Co. v. Powers, 278 U.S. 149,

154, 49 S. Ct. 84, 85 (1928)). In Transouth, the Eleventh

Circuit awarded attorney fees on a contract governed by

Florida law. A contractual provision for attorney fees is

valid, enforceable, and collectible under Georgia law,

however, only after the debtor fails to pay the principal and

interest within ten days of receiving written notice from the

creditor of its intent to enforce such provision. See

O.C.G.A. § 13-1-11(a)(3).3

ten days from the receipt of such notice to pay

the principal and interest without the

attorney’s fees. If the maker, endorser, or

party sought to be held on any such obligation

shall pay the principal and interest in full

before the expiration of such time, then the

obligation to pay the attorney’s fees shall be

void and no court shall enforce the agreement.

The refusal of a debtor to accept delivery of

the notice specified in this paragraph shall be

the equivalent of such notice.

4Section 506(b) of the Code preempts the applicability of

O.C.G.A. § 13-1-11 where an oversecured creditor asserts that

its attorney fees are secured, but because Section 502(b) does

not specifically disallow unsecured claims for attorney fees,

a creditor may present such a claim. See In re Homestead

Partners, Ltd., 200 B.R. 274, 276-77 (Bankr. N.D. Ga. 1996).

11

Georgia’s statute governing contractual attorney fees has

been addressed by the United States Supreme Court, the Fifth

Circuit prior to September 30, 1981, and the Eleventh Circuit.

See generally Sec. Mortgage Co. v. Powers, 278 U.S. 149, 49 S.

Ct. 84 (1928); In re East Side Investors, 702 F.2d 214 (11th

Cir. 1983) (per curiam); In re Atlanta Int’l Raceway, Inc.,

513 F.2d 546 (5th Cir. 1975); Nat’l Acceptance Co. v. Zusmann,

379 F.2d 351 (5th Cir. 1967). These courts considered the

statute in the context of proceedings under the old Bankruptcy

Act, but insofar as unsecured claims for attorney fees are

concerned, the essential holding in these cases continues to

apply under the Code.4 If a creditor perfects its contractual

right to attorney fees in accordance with O.C.G.A. § 13-1-

11(a)(3) prior to the commencement of the case, then the

creditor is entitled to assert an unsecured claim for attorney

5Paragraph 35 of Plaintiff’s complaint to determine

dischargeability provides,

The terms and conditions of the account agreement

between the Defendant and American Express calls for

the payment of attorney’s fees of 15% of the unpaid

balance and costs expended by American Express in

the collection of the Account. Should this debt be

found nondischargeable, plaintiff hereby states its

intention to enforce this provision. Defendant may

avoid liability for these contractual fees by

voluntarily paying a total of $21,331.87 within ten

(10) days of the receipt of this complaint.

(Complaint to Determine Dischargeability ¶ 35.)

12

fees in the case. See In re East Side Investors, 702 F.2d. at

215; In re Homestead Partners, 200 B.R. at 279 (citing In re

Standard Bldg. Assoc., Ltd., 85 B.R. 644, 648-49 (Bankr. N.D.

Ga. 1988); In re Walsey, 7 B.R. 779, 785-86 (Bankr. N.D. Ga.

1980)); cf. id at 278-79 (perfection within 90 day period

prior to petition is avoidable preference). The creditor may

not, however, perfect its right after commencement of the

case. See In re East Side Investors, 702 F.2d at 215; In re

Atlanta Int’l Raceway, 513 F.2d at 549 (post-petition

perfection violated district court injunction analogous to

Code’s automatic stay).

In paragraph 35 of its complaint, Plaintiff attempted to

perfect its right to attorney fees in a manner that may be

acceptable in a state court collection action under Georgia

law.5 Under the Code, however, any effect the paragraph might

have is void ab initio because it violates the automatic stay.

6Section 362(a)(6) provides,

(a) [A] petition filed under section 301 . . . of [the

Bankruptcy Code] . . . operates as a stay, applicable to

all entities, of —

. . .

(6) any act to collect, assess, or recover a claim

against the debtor that arose before the

commencement of the case under this title[.]

11 U.S.C. § 362(a)(6).

13

See 11 U.S.C. § 362(a)(6).6 Accordingly, the Court cannot

enter judgment for Plaintiff’s attorney fees because Plaintiff

is not yet entitled to them. Defendant must first have the

opportunity to avoid liability for contractual attorney fees

that O.C.G.A. § 13-1-11(a)(3) affords him. See Powers, 287

U.S. at 158, 49 S. Ct. at 87 (purpose of Georgia statute is to

protect defaulting debtor who pays within ten days from

liability for attorney fees).

This case poses a curious circumstance for Plaintiff.

While the issue of discharge is being resolved by this

proceeding, so too is the issue of Defendant’s liability to

Plaintiff. An order will be entered in accordance with this

opinion denying discharge and awarding a judgment to Plaintiff

in the full amount of its claim, and will make no award of

attorney’s fees. If Plaintiff seeks attorney’s fees after the

stay is lifted by giving notice to Defendant under O.C.G.A. §

13-1-11(a)(3), Defendant may successfully argue that the claim

has been merged into this judgment beyond further

consideration by any court. The potential unfairness of such

a result is mitigated by Plaintiff’s decision to request a

money judgment after the Court offered to permit Plaintiff to

withdraw its money judgment demand in view of the potential

inequity. Plaintiff advised the Court at the trial that it

would prefer to have a money judgment in this adversary

proceeding, without attorney’s fees, rather than to proceed in

state court with its claim, including attorney’s fees, after

the denial of Defendant’s discharge.

An order in accordance with this opinion will be entered

on this date.

Dated this 20th day of November, 2000.

_______________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and

foregoing have been served on the following:

D. Ruth Primm

P. O. Box 450268

Atlanta, GA 31145-0268

Charles E. Gay

433 Cherry Street, Suite 16

Macon, GA 31201

This ______ day of November, 2000.

___________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: )CHAPTER 7

)CASE NO. 99-54184-JDW

KHALED M. JAWISH, )

DEBTOR ))

AMERICAN EXPRESS TRAVEL )

RELATED SERVICES, INC., )

PLAINTIFF ))

VS. )ADVERSARY PROCEEDING

)NO. 00-5014

KHALED M. JAWISH, )

DEFENDANT )

ORDER

In accordance with the memorandum opinion entered on this

date, it is hereby

ORDERED that Defendant’s debt to Plaintiff is determined

nondischargeable, and it is hereby further

ORDERED that Defendant shall pay Plaintiff $21,331.87,

plus interest on such amount at 2.5 percent per month from

October 29, 1999 to the date of this Order, and $150.00 costs,

and it is hereby further

ORDERED that Plaintiff’s demands for award of attorney

fees are DENIED; and it is hereby further

ORDERED that Defendant’s discharge is DENIED.

SO ORDERED this 20th day of November, 2000.

_______________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and

foregoing have been served on the following:

D. Ruth Primm

P. O. Box 450268

Atlanta, GA 31145-0268

Charles E. Gay

433 Cherry Street, Suite 16

Macon, GA 31201

This ______ day of November, 2000.

_____________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

FIRSTLINE CORPORATION,

May 24, 2006

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

VALDOSTA DIVISION

IN RE: ) CHAPTER 11

) CASE NO. 06-70145-JDW

FIRSTLINE CORPORATION, )

)

DEBTOR. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

2

COUNSEL

For Official Committee

of Unsecured Creditors Michael D. Langford

Kilpatrick Stockton

1100 Peachtree Street NE, Suite 2800

Atlanta, Georgia 30309

For Wells Fargo Bank David B. Kurzweil

Greenburg Traurig

Suite 400, The Forum

3290 Northside Parkway

Atlanta, Georgia 30327

3

MEMORANDUM OPINION

This matter comes before the Court on the Official Committee of Unsecured

Creditors’ motion to appoint a trustee. This is a core matter within the meaning of 28

U.S.C. § 157(b)(2)(A). After considering the pleadings, the evidence, and the applicable

authorities, the Court enters the following findings of fact and conclusions of law in

conformance with Federal Rule of Bankruptcy Procedure 7052.

Findings of Fact

Debtor, FirstLine Corporation, filed a Chapter 11 petition on March 6, 2006. Its sole

shareholder, director, and CEO is Donald Murphy.

On the petition date, Debtor hired Glass Ratner Advisory and Capital Group, LLC as

its chief restructuring officer. Thomas Santoro, the senior managing director of Glass

Ratner, worked directly with Debtor. Under an engagement agreement, his duties included

hiring and firing employees, cash management, and ensuring compliance with the DIP

financing agreement.

The DIP financing was provided by Wells Fargo Bank. Pursuant to the DIP loan

documents, Debtor was required to comply with a number of financial covenants and

“milestone” covenants. The financial covenants related to cash collections, sales, line item

cash expenditures, and total disbursements. The milestone covenants required that certain

events take place by certain deadlines, including filing a motion to approve bid procedures,

court approval of bid procedures, and filing a motion to sell. Failure to comply with any

covenant was an event of default.

The Official Committee of Unsecured Creditors filed a motion to appoint a Trustee.

4

The Court held a hearing on the motion on May 24, 2006. At the hearing, the Committee

offered evidence to demonstrate that Debtor’s principal, Mr. Murphy, engaged in behavior

that frustrated efforts to move the Chapter 11 case forward.

Mr. Santoro testified that Mr. Murphy did not allow him to carry out his duties. His

recommendations were ignored and his instructions vetoed. For example, on the first day of

his employment, Mr. Santoro proposed a key employee retention program to provide some

stability for salaried employees. Mr. Santoro raised the issue again after several key

employees–including a plant manager and both controllers–resigned. Even though the idea

had the support of Wells Fargo, Mr. Murphy refused to implement it. By refusing to permit

Mr. Santoro to use the company e-mail system, Mr. Murphy also restricted Mr. Santoro’s

ability to simply communicate with the employees in an effort to relieve the anxiety created

by the bankruptcy filing and to improve morale.

In addition, Debtor failed to comply with both milestone and financial covenants

under the DIP financing agreement. First, Debtor was required to file a motion for approval

of bid procedures by April 19, 2006. It failed to meet the deadline, and Wells Fargo granted

an extension under April 26, 2006. However, the motion was not filed until April 28, 2006,

and Debtor ultimately objected to its own motion.

With regard to the financial covenants, Debtor defaulted on the provision relating to

cash collections. Debtor was required to achieve at least 85% in actual collections of the

amount budgeted for the corresponding two-week period. It failed to do so for the period of

April 17 to April 28, 2006. Mr. Santoro was required to submit a certification to Wells

Fargo every Monday indicating whether or not Debtor was in compliance with all the

5

covenants. He certified that Debtor was in default. Subsequently, Wells Fargo sent a notice

of default to Debtor and a notice of its intent to reduce the inventory advance rate from 48%

to 38%.

The inventory advance rate establishes the amount of money Debtor can borrow.

The original rate was set at 48% of the value of Debtor’s inventory. Upon default, Wells

Fargo began reducing the rate by 2% each week, with the final reduction to occur on June 6,

2006. Each 2% reduction represented a reduction of approximately $170,000 in the amount

available to borrow. Under such circumstances, Mr. Santoro testified that Debtor would not

be able to operate for more than two or three weeks.

Mr. Santoro also testified that Mr. Murphy refused to fully fund a court-ordered

reserve to pay professional fees. Debtor was required to make monthly deposits to the

reserve. For example, it was required to pay $25,000 for Glass Ratner’s fees for the first 8

weeks, and $20,000 per week thereafter. Mr. Santoro instructed the appropriate employees

to make the payments, but Mr. Murphy countermanded those instructions. He never

allowed timely payments, and reduced the deposit amounts to match billing invoices

provided by Glass Ratner. Mr. Santoro explained to Mr. Murphy that the professionals were

not entitled to money deposited in the reserve until they obtain court approval for their fees,

and Debtor could object to the fee requests. Nevertheless, Mr. Murphy refused to fully fund

the reserve.

Debtor’s only opposition to the motion to appoint a trustee came from Mr. Murphy’s

testimony. Mr. Murphy provided little in the way of facts to contradict the testimony of Mr.

Santoro. On the contrary, Mr. Murphy testified that Wells Fargo refused to return to the

6

financing terms as they existed prior to default unless Mr. Murphy was replaced with a

Trustee. Mr. Murphy could not explain how Debtor would continue to operate if the

original terms were not reinstated. The remainder of Mr. Murphy’s testimony was

comprised of statements regarding his dedication to Debtor and what amounted to

accusations of collusion between Wells Fargo and Glass Ratner to plunder his company.

After considering the evidence, the Court granted the motion to appoint a Trustee in

open court and now supplements that Order with this Memorandum Opinion.

Conclusions of Law

The Bankruptcy Code provides for the appointment of a Chapter 11 Trustee in the

following circumstances:

(1) for cause, including fraud, dishonesty,

incompetence, or gross mismanagement of the affairs of the

debtor by current management, either before or after the

commencement of the case, or similar cause, but not including

the number of holders of securities of the debtor or the amount

of assets or liabilities of the debtor;

(2) if such appointment is in the interests of creditors,

any equity security holders, and other interests of the estate,

without regard to the number or holders of securities of the

debtor or the amount of assets of liabilities of the debtor; or

(3) if grounds exist to convert or dismiss the case

under section 1112, but the court determines that the

appointment of a trustee or an examiner is in the best interests

of creditors and the estate.

11 U.S.C. § 1104(a).

In this case, Mr. Murphy has continuously obstructed efforts to proceed with the

Chapter 11 case he chose to file in this court. He has countermanded the instructions and

recommendations of the CRO, and he has interfered with the CRO’s ability to manage

Debtor’s finances, to manage communications, to hire and fire employees, and to formulate

and implement a financial stabilization plan. In addition, without the appointment of a

Trustee, the lender is unwilling to return to the favorable financing terms that will enable

Debtor to continue operating beyond the next two weeks. Based on these facts, the Court

finds that it is in the interest of the creditors and the estate to appoint a Trustee.

An Order in accordance with this Opinion has been entered on May 24, 2006.

END OF DOCUMENT

MARY MEEKS BROWN,

May 16, 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

)

IN RE: )CHAPTER 13

)CASE NO. 99-10976-JDW

MARY MEEKS BROWN, ))

DEBTOR ))

IMC MORTGAGE CO., INC., ))

MOVANT ))

VS. )CONTESTED MATTER

)

MARY MEEKS BROWN, and )

KRISTIN SMITH, TRUSTEE ))

RESPONDENTS )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL:

For Movant: S. Andrew Shuping

Shuping, Morse & Ross, LLP.

6259 Riverdale Road

Riverdale, Georgia 30274-1698

For Respondents: Kristin Smith

Chapter 13 Trustee’s Office

Post Office Box 1907

Columbus, Georgia 31702

2

MEMORANDUM OPINION

This matter comes before the Court on Motion for Relief

from Stay nunc pro tunc filed by IMC Mortgage Company, Inc.

(“Creditor”). This is a core matter within the meaning of 28

U.S.C. § 157(b)(2)(G). After considering the pleadings,

evidence and applicable authorities, the Court enters the

following findings of fact and conclusions of law in

conformance with Federal Rule of Bankruptcy Procedure 7052.

Findings of Fact

Mary Meeks Brown (“Debtor”) transmitted a facsimile of

her Chapter 13 petition to the Court on August 2, 1999. The

Court accepted it pursuant to Local Bankruptcy Rule for the

Middle District of Georgia 5005-4. On August 3, 1999,

Creditor completed a foreclosure action against Debtor’s real

property and initiated dispossessory proceedings. On August

9, 1999, the Court entered an order dismissing Debtor’s

Chapter 13 case because she failed to comply with the

provisions of Local Rule 5005-4 that required her to file the

original copy of her petition within forty-eight hours of

transmitting the facsimile and to pay a facsimile fee. Also,

Debtor did not pay the Chapter 13 filing fee.

This is the second of Debtor’s Chapter 13 cases that the

Court has dismissed. On April 27, 1999, the Court dismissed a

3

case that Debtor filed on January 5, 1999. Creditor initiated

its foreclosure proceedings prior to Debtor’s previous filing,

and it had no notice of this case until informed of it in

Debtor’s answer to the dispossessory pleadings. Creditor now

moves the Court to retroactively relieve it from the automatic

stay, effectively validating the foreclosure.

Conclusions of Law

The generally applicable rule is that acts taken in

violation of the automatic stay are void and without effect ab

initio. See In re Albany Partners, Ltd., 749 F.2d 670, 675

(11th. Cir. 1984) (citing Kalb v. Feurstein, 308 U.S. 433,

443, 60 S. Ct. 343, 348 (1940); Borg-Warner Acceptance Corp.

v. Hall, 685 F.2d 1306, 1308 (11th Cir. 1982)). Based on the

evidence presented in this case, the general rule applies.

Because Creditor foreclosed on Debtor’s real estate in

violation of the automatic stay, the foreclosure is void ab

initio. The Court notes, however, that the Eleventh Circuit’s

holding in In re Albany Partners establishes an exception to

the general rule.

In In re Albany Partners, the creditors of the debtor’s

predecessor initiated foreclosure proceedings. The

predecessor answered that it had conveyed the property to the

debtor approximately three months earlier. The predecessor

counterclaimed to enjoin the foreclosure, but it presented no

4

evidence of the conveyance at the state court’s evidentiary

hearing on the matter. The creditors could find no record of

the deed, and the predecessor did not attempt to join the

debtor in the proceedings. The state court rejected the

predecessor’s counterclaim, granted the writ of possession,

and appointed a receiver. The creditors consummated their

foreclosure a week later. In re Albany Partners, Ltd., 749

F.2d at 671-72.

Knowledge of the risk to its interest could be attributed

to the debtor because two of its general partners were general

partners in the predecessor. Though it had such knowledge,

the debtor made no attempt to intervene in the repossessory

proceedings. Rather, it petitioned for protection under

Chapter 11 on the eve of foreclosure and five days after the

state court decided in favor of the creditors. Id.

The Eleventh Circuit held that the bankruptcy court

properly dismissed the debtor’s Chapter 11 petition as a bad

faith filing. Id. at 674. The appellate court further held

that the bankruptcy court acted within its power when it

annulled the automatic stay, retroactively validating the

foreclosure because the use of the term “annul” in Section

362(d) gives bankruptcy courts power, “in appropriately

limited circumstances, to grant retroactive relief from the

automatic stay.” Id. (emphasis in original).

5

Its emphasis on the term “limited,” indicates that the

Eleventh Circuit intended a narrow application of its holding

in In re Albany Partners. The court did not specify a test

for ascertaining “appropriately limited circumstances,” but it

noted “the important congressional policy behind the automatic

stay [that] demands that courts be especially hesitant to

validate acts committed during the pendency of the stay.” Id.

(footnote omitted). The Eleventh Circuit gave special

attention to Congress’s intention of granting the debtors a

breathing spell in which to formulate a reorganization plan.

Id. at 675 n. 9 (citing H.R. REP. NO. 595, at 340 (1977),

reprinted in 1978 U.S.C.C.A.N. 5963, 6296-97). This Court

also notes that Congress intended the automatic stay to

protect other creditors, as well as the debtor. See H.R. REP.

NO. 595, at 340 (1977), reprinted in 1978 U.S.C.C.A.N. 5963,

6296-97.

The Eleventh Circuit articulated no test for determining

when to grant annulment of the stay, but minimum requirements

can be discerned. First, because it would be inappropriate

for the Court to approve a wilful violation of the automatic

stay, it should be clear that the Court will grant an

annulment only if the Creditor justifiably believed its action

did not violate the automatic stay. In In re Albany Partners,

the creditors justifiably believed their action did not

violate the automatic stay because all evidence indicated that

6

the property in question was not property of the debtor’s

bankruptcy estate. The minimum requirement is likewise met in

this case. Because Creditor acted without notice of Debtor’s

petition, Creditor’s violation of the stay was not wilful.

However, Creditor’s innocent violation of the stay alone

is not sufficient to justify annulment. In order to meet the

minimum requirements, Creditor must also show that its

innocent violation of the stay did not violate the policies

underlying the automatic stay. Thus Creditor must, at a

minimum, show that its action did not interfere with the

“breathing spell” that the stay affords Debtor, and Creditor

must show that its foreclosure had no negative impact on other

creditors.

While there may be other means of showing that Creditor’s

action did not interfere with policy of the stay requiring a

“breathing spell” for Debtor, it would be sufficient for

Creditor to show that Debtor petitioned for relief in bad

faith and with no intention of proposing a plan. Debtor’s

petition on the eve of foreclosure, her failure to propose a

plan in an earlier case, and her failure to comply with the

requirements of Local Rule 5005-4 provide sufficient evidence

to conclude that Debtor did not file her petition in good

faith.

As for the negative impact on other creditors, it does

not appear that multiple interests in the property were at

1How should the court regard the interest of a judgment

lien holder, for example, who receives notice of the

bankruptcy and is motivated to participate in the case to

protect its interest? Validation of the foreclosure would

terminate the right of that creditor and deprive that creditor

of a favorable, albeit fortuitous, advantage without any legal

justification. The advantage created for that creditor by the

filing of the case is no less important than the advantage

enjoyed by the creditor prosecuting the foreclosure action.

7

issue in In re Albany Partners, but the policy of protecting

the interests of other creditors must be taken into

consideration. For example, a junior mortgage holder or other

lien holder, with notice of Creditor’s impending foreclosure

and notice of the stay, may have assumed Creditor would be

aware of the stay and would comply with the stay. Such a

creditor would be expected to refrain from exercising a right

of redemption that it might have held, or from intervening in

some other manner available to it.1 The interest of such a

party would thus be injured if the Court granted Creditor’s

motion to annul the stay. Because Creditor seeks retroactive

relief from the stay, it is Creditor’s burden to show that

validation of its foreclosure would injure no other interest

that may exist in Debtor’s property. This could be a

difficult burden to satisfy in some cases in that it requires

proof of a negative circumstance. Creditor makes no

allegation with respect to this burden and has presented no

evidence that would satisfy this burden.

Because Debtor’s facsimile filing was dismissed after a

8

mere seven days, the record does not demonstrate whether there

were any other creditors who would have been adversely

affected by the foreclosure. Furthermore, Debtor might have

no interest in coming forward in response to this motion to

protect other such creditors. The Court is left with the

choice of speculating as to whether there were such other

creditors, or requiring proof of such circumstances as a

minimum requirement for annulment of the stay. In the proof

of a matter deemed essential to the result, speculation and

assumption cannot serve as a substitute for proof. Creditor

has not shown that its action in violation of the automatic

stay meets the minimal requirements for annulling the

automatic stay.

Conclusion

The Court will deny Creditor’s motion for relief from the

automatic stay nunc pro tunc. Unlike In re Albany Partners,

this case does not present the Court with facts warranting

annulment of the stay. Denial of the motion will be without

prejudice to the rights of creditor to renew the motion with

proof of the essential elements required for annulment of the

stay.

An order in accordance with this opinion will be entered

on this date.

Dated this 16th day of May, 2000.

9

_______________________________

James D. Walker, Jr.

United States Bankruptcy Judge

10

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and

foregoing have been served on the following:

S. Andrew Shuping

6259 Riverdale Road

Riverdale, GA 30274-1698

Kristin Smith

Chapter 13 Trustee

P. O. Box 1907

Columbus, GA 31702

This ______ day of May, 2000.

_____________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

)

IN RE: )CHAPTER 13

)CASE NO. 99-10976-JDW

MARY MEEKS BROWN, ))

DEBTOR ))

IMC MORTGAGE CO., INC., ))

MOVANT ))

VS. )CONTESTED MATTER

)

MARY MEEKS BROWN, and )

KRISTIN SMITH, TRUSTEE ))

RESPONDENTS )

ORDER

In accordance with the memorandum opinion entered on this

date, it is hereby

ORDERED that Creditor’s motion for retroactive relief

from the automatic stay is DENIED; and it is hereby further

ORDERED that denial of the motion is without prejudice to

the right of creditor to renew the motion with proof of the

essential elements required for annulment of the automatic

stay.

SO ORDERED this 16th day of May, 2000.

_______________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and

foregoing have been served on the following:

S. Andrew Shuping

6259 Riverdale Road

Riverdale, GA 30274-1698

Kristin Smith

Chapter 13 Trustee

P. O. Box 1907

Columbus, GA 31702

This ______ day of May, 2000.

___________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

ALLIANCE AEROSPACE, LLC,

September 13, 2001

IN THE UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 11

) CASE NO. 01-52973-JDW

ALLIANCE AEROSPACE, LLC, ))

DEBTOR. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Alliance Aerospace: Wesley J. Boyer

William M. Flatau

355 Cotton Ave.

Macon, Georgia 31201

For Keltic Financial Partners, Ltd.: Rufus T. Dorsey, IV

Jack C. Basham, Jr.

1500 Marquis Two Tower

285 Peachtree Center Ave. NE

Atlanta, Georgia 30303

For Lucas Western, Inc.: Jerome L. Kaplan

201 Second St., Suite 1000

Macon, Georgia 31201

For Lori and G. William Northrup: Thomas C. James, III

2

438 Cotton Ave.

Macon, Georgia 31201

For International Ass’n of Machinists James D. Fagan, Jr.

and Aerospace Workers, AFL-CIO, its Marilyn S. Bright

Local No. 2726 and the Employees, 1401 Peachtree St. NE, Suite 238

Members of the Local’s Hourly Atlanta, Georgia 30309

Bargaining Unit:

For Certain Salaried Employees: Hubert C. Lovein, Jr.

P.O. Box 6437

Macon, Georgia 31208

For United States Trustee: Mark W. Roadarmel

433 Cherry St., Suite 510

Macon, Georgia 31201

3

MEMORANDUM OPINION

This matter comes before the Court on the motion of Debtor Alliance

Aerospace, LLC (“Debtor”) to sell substantially all its assets. This is a core

proceeding within the meaning of 28 U.S.C. § 157(b)(2)(N) and (O). The Court

having held a hearing on August 2, 2001 (the “Sale Hearing”) on Debtor’s

motion, and the highest and best bid submitted at the Sale Hearing having been

made by Western Steel, Inc. (“Western Steel”) in the aggregate amount of

$5,200,000 (the “Sale Proceeds”); and the Court having announced at the Sale

Hearing that a hearing would be held on August 10, 2001 to determine how to

allocate the Sale Proceeds among the various assets to be purchased by Western

Steel; and the Court having entered an Order on August 7, 2001 (the “Sale

Order”) approving and authorizing the sale to Western Steel; and a hearing

having been commenced on August 10 and continued on August 17 (“Allocation

Hearing”) during which evidence was presented as to appropriate allocation of

the Sale Proceeds; and the sale to Western Steel having been closed on Friday,

August 17, 2001; and the Court having heard closing arguments from counsel on

August 31, 2001; and upon the record made at the Allocation Hearing and all

prior proceedings in this case and after due deliberation and sufficient cause

appearing therefore, the Court enters the following findings of fact and

conclusions of law in conformance with Federal Rule of Bankruptcy Procedure

7052:

4

Findings of Fact

On July 16, 2001 (the “Petition Date”), Debtor commenced a voluntary

case under Chapter 11 of the Bankruptcy Code. No trustee or examiner has been

appointed for Debtor, and Debtor continues to be in control of its assets as a

debtor-in-possession.

Keltic Financial Partners, LP (“Keltic”) asserts a first priority security

interest in and lien upon, among other things, the real property and

improvements located at Debtor’s facility at 7979 N.E. Industrial Boulevard,

Macon, Bibb County, Georgia (“Real Property”) and certain equipment located

on the Real Property and general intangibles relating to such equipment (the

“Keltic Equipment”). The Real Property and the Keltic Equipment are

hereinafter referred to jointly as the “Keltic Collateral.” Keltic asserts, and

Debtor does not dispute, that Debtor granted Keltic a first priority security

interest in and lien upon the Keltic Collateral to secure the indebtedness owing

by Debtor to Keltic for term loans, revolving advances and other indebtedness

and obligations owing to Keltic by Debtor pursuant to the Loan and Security

Agreement dated December 21, 2000, between Debtor and Keltic, and related

documents (“Keltic Loan Documents”).

On August 2, 2001, Keltic filed a proof of claim with the Court in the

amount of $2,309,650.06, which represents Debtor’s indebtedness to Keltic as of

the Petition Date with interest continuing to accrue on the principal indebtedness

since the Petition Date, plus attorney fees and any other fees and charges to

5

which Keltic may be entitled under the Keltic Loan Documents. No objection to

the Keltic proof of claim has been filed with the Court as of the date hereof.

Lucas Western, Inc. (“Lucas Western”) asserts a first priority security

interest in and lien upon certain items of equipment (the “Mazak Equipment”)

not included in the Keltic Equipment. Lucas Western asserts, and Debtor does

not dispute, that Debtor granted Lucas Western a security interest in and lien

upon the Mazak Equipment to secure Debtor’s indebtedness to Lucas Western

under a promissory note in the original principal amount of $1,500,000 (“Mazak

Note”). Lucas Western is also the holder of a second promissory note executed

by Debtor and in the original principal amount of $500,000 (“Second Note”).

Lucas Western contends that the Second Note is secured by a second priority

security interest in the Keltic Equipment.

At the Allocation Hearing, Lucas Western presented testimony that

Debtor’s indebtedness to Lucas Western under the Mazak Note as of the Petition

Date equals the amount of $1,569,051.40. Lucas Western also presented

testimony that Debtor was indebted to Lucas Western under the Second Note as

of the Petition Date in the amount of $523,011.16. Interest and expenses

continue to accrue on these amounts after the Petition Date.

Prior to the Sale Hearing, Fort Knox Auctioneers (“Fort Knox”) and

Western Steel offered to purchase all of the personal property of Debtor,

including the Keltic Equipment and the Mazak Equipment, for the aggregate

amount of $2,900,000. In this offer, Fort Knox and Western Steel allocated

6

$1,800,000 to the Mazak Equipment and $1,100,000 to the Keltic Equipment.

Debtor accepted this offer by Fort Knox and Western Steel prior to the Petition

Date. Western Steel also offered prior to the Sale Hearing to purchase the Real

Property for $2,100,000. At the Sale Hearing, Western Steel submitted a

combined offer to purchase the Real Property, the Keltic Equipment and the

Mazak Equipment (collectively, the “Property”) for the total purchase price of

$5,000,000 and subsequently increased its bid during the Sale Hearing to

$5,200,000.

Several witnesses testified at the Allocation Hearing. James Knox, who

formulated the offer for Western Steel, testified that the purchase offer was

based on the original allocation of $1,800,000 to the Mazak Equipment,

$1,100,000 to the Keltic Equipment with the remainder of $2,300,000

attributable to the Real Property. Lucas Western presented the expert testimony

of Tom Locke as to the orderly liquidation value of the Mazak Equipment. Mr.

Locke testified that the Mazak Equipment had an orderly liquidation value,

assuming the removal of this equipment after the liquidation sale, of $1,785,000

as of the date of the Allocation Hearing. He also testified to an orderly

liquidation value “in place” of $1,973,000, which value is based on the

assumption that the purchaser intends to use the equipment in place and as

currently configured at the location as a part of an ongoing operation. Certain

employees of Debtor presented the expert testimony of Keith Bainbridge as to

the orderly liquidation value in place of both the Mazak Equipment and the

7

Keltic Equipment. Mr. Bainbridge testified to a value of $785,555 for the Mazak

Equipment and to a value of $445,079 for the Keltic Equipment. The Northrups,

principals of Debtor, presented the expert testimony of Jerry Wernke. As to the

Keltic Equipment, he testified to an orderly liquidation value of $700,000 and an

orderly liquidation value in place of $840,000. On cross examination, he also

estimated the value of the Mazak Equipment to be between $1,750,000 and

$2,000,000. In addition, the Northrups offered the expert testimony of Trip

Yarborough, a real estate appraiser, who testified that the distressed sale value of

the Real Property equaled $2,000,000.

Debtor’s pre-petition indebtedness to Keltic is fully secured by the Keltic

Collateral. Debtor’s pre-petition indebtedness to Lucas Western under the Mazak

Note is fully secured by the Mazak Equipment. Pursuant to the Interim Order on

Keltic Financial Partners, LP’s Emergency Motion for Relief from Automatic

Stay entered July 27, 2001, and the Second Interim Order on Keltic Financial

Partners LP’s Emergency Motion for Relief from Automatic Stay entered August

13, 2001, Keltic made advances to Debtor of funds to be paid directly to

Georgia Power Company and The Macon Water Authority for electrical and

water services to Debtor’s facility in the amounts of $82,500 (the “Electric

Deposit”) and $6,795.00 (the “Water Deposit”), respectively. This indebtedness

remains outstanding.

Conclusions of Law

8

To the extent that any of the foregoing findings of fact are deemed to be

conclusions of law, then such conclusions are hereby confirmed. There has been

proper and adequate notice of the Allocation Hearing, and a proper and adequate

opportunity to be heard on the allocation of the Sale Proceeds has been given to

all parties in interest.

In determining how to allocate the Sale Proceeds, the Court will use as a

starting point the allocation in the original bids by Fort Knox and Western Steel

of $2,100,000 for the Real Property, $1,900,000 for the Mazak Equipment, and

$1,100,000 for the Keltic Equipment. Most of the expert valuation testimony

conformed relatively closely to these numbers. For the real estate, Mr.

Yarborough testified to a value of $2,000,000. For the Mazak Equipment, Mr.

Wernke and Mr. Locke testified to values ranging between $1,750,000 and

$2,000,000. For the Keltic Equipment, Mr. Wernke testified to values ranging

between $700,000 and $840,000. The only testimony that significantly deviated

from the Fort Knox/Western Steel bid allocations was that of Mr. Bainbridge,

whose appraisal for both types of equipment totaled approximately $1,200,000.

Based on this substantial deviation from both the bidders’ allocation and the

appraisals of other experts, the Court considers Mr. Bainbridge to be less

reliable than the other experts.

Nevertheless, Mr. Bainbridge’s proportions were consistent with the Fort

Knox equipment bid. The Fort Knox bid proportions were 62% of the

$2,900,000 total to Mazak Equipment and 38% to Keltic Equipment. Mr.

9

Baimbridge’s appraisals resulted in proportions of 63% of his $1,200,000 total

to Mazak Equipment and 37% to Keltic Equipment.

While the Fort Knox/Western Steel bid allocation and the valuation

testimony is helpful, the Court is not attempting to value the property. Unlike a

Section 506(b) analysis in which a court must hypothesize about the value of

certain collateral, the value of the property in this case has already been set at

$5,200,000 by the sale. Furthermore, the intentions of the purchaser in terms of

allocation are not necessarily determinative because they likely do not reflect

real world values. Reality transcends the both the buyer’s intentions and the

experts’ opinions. While the bidders’ allocation totals $5,000,000 and the most

generous appraisals total approximately $4,800,000, in reality the Court has

$5,200,000 to allocate.

Counsel for the union employees suggested that proceeds that exceed the

values established by the expert witnesses could be allocated to a fourth

intangible asset, which she described as a premium for buying all the property

intact. This argument is analogous to the residual value method of setting

goodwill value for tax purposes. Under the residual value method, the fair

market value of all assets acquired is assumed to equal the purchase price. The

fair market value of the individual assets are then subtracted from the purchase

price and the remaining value is allocated to goodwill. R.M. Smith, Inc. v.

C.I.R., 591 F.2d 248, 252 (3d Cir. 1979). However, while this method may be

useful when dealing with fair market value, it has been criticized for its failure to

10

take into account a bargain received on either side of the deal, thus resulting in

either under- or overinflated goodwill values. Id. at 252-53. Certainly the

circumstances of an expedited sale during a bankruptcy proceeding create even

more variables that the residual value method is not designed to accommodate.

Furthermore, the Court has been unable to find any precedent for using the

residual method as a basis or guide for its allocation decision and therefore

declines to do so.

The Court is most persuaded by the common proportions that run through

the bidders’ allocation and the appraisals. Therefore, based on all the evidence

and in line with those proportions, the Court concludes that the Sale Proceeds

should be allocated as follows:

Real Property $2,300,000

Keltic Equipment $1,100,000

Mazak Equipment $1,800,000

The above allocations for the Real Property and the Keltic Equipment shall

constitute the “Real Property Allocation” and the “Keltic Equipment

Allocation,” respectively for purposes of the Court’s separate order on partial

disbursement of the Sale Proceeds entered on August 31, 2001 (“Disbursement

Order”), and collectively as the “Keltic Collateral Allocation” for purposes of

the Disbursement Order. The allocation for the Mazak Equipment shall

constitute the “Mazak Collateral Allocation” for purposes of the Disbursement

Order.

11

Dated, this 13th day of September, 2001

__________________________________

James D. Walker, Jr.

United States Bankruptcy Court Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been

served on the following:

Wesley J. Boyer Rufus T. Dorsey, IV

William M. Flatau Jack C. Basham, Jr.

355 Cotton Ave. 1500 Marquis Two Tower

Macon, Georgia 31201 285 Peachtree Center Ave.

NE

Atlanta, Georgia 30303

Jerome L. Kaplan Thomas C. James, III

201 Second St., Suite 1000 438 Cotton Ave.

Macon, Georgia 31201 Macon, Georgia 31201

James D. Fagan, Jr. Hubert C. Lovein, Jr.

Marilyn S. Bright P.O. Box 6437

1401 Peachtree St. NE, Suite 238 Macon, Georgia 31208

Atlanta, Georgia 30309

Mark W. Roadarmel

433 Cherry St., Suite 510

Macon, Georgia 31201

This 13th day of September, 2001.

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 11

) CASE NO. 01-52973-JDW

ALLIANCE AEROSPACE, LLC ))

DEBTOR. )

ORDER

In accordance with the Memorandum Opinion entered on this date, it is

hereby

ORDERED that the proceeds from the sale of Alliance Aerospace, LLC’s

assets be allocated as follows: $2,300,000 to assets identified in the Opinion as

the Real Property; $1,800,000 to the assets identified in the Opinion as the

Mazak Equipment; and $1,100,000 to the assets identified in the Opinion as the

Keltic Equipment.

So ORDERED, this 13th day of September, 2001.

_________________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been

served on the following:

Wesley J. Boyer Rufus T. Dorsey, IV

William M. Flatau Jack C. Basham, Jr.

355 Cotton Ave. 1500 Marquis Two Tower

Macon, Georgia 31201 285 Peachtree Center Ave.

NE

Atlanta, Georgia 30303

Jerome L. Kaplan Thomas C. James, III

201 Second St., Suite 1000 438 Cotton Ave.

Macon, Georgia 31201 Macon, Georgia 31201

James D. Fagan, Jr. Hubert C. Lovein, Jr.

Marilyn S. Bright P.O. Box 6437

1401 Peachtree St. NE, Suite 238 Macon, Georgia 31208

Atlanta, Georgia 30309

Mark W. Roadarmel

433 Cherry St., Suite 510

Macon, Georgia 31201

This 13th day of September, 2001.

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

LJL TRUCK CENTER, INC.,LESKOSKY LAND CO., L.L.C.,MACK SALES OF ATLANTA, INC., and

April 29, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 11

) CASE NOS. 01-51665; 01-51666;

LJL TRUCK CENTER, INC., ) 01-51667; 01-51668-JDW

LESKOSKY LAND CO., L.L.C., )

MACK SALES OF ATLANTA, INC., and )

TALLAHASSEE MACK SALES, INC., )

)

DEBTORS. )

)

NAVISTAR FINANCIAL CORP., ) ADVERSARY PROCEEDING

) NO. 02-5123

PLAINTIFF, )

)

VS. )

)

TALLAHASSEE MACK SALES, INC., )

INGRAM EQUIPMENT, CO., and LJL )

TRUCK SALES, INC., )

)

DEFENDANTS. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Debtor: Thomas M. Browder, III

Ward Stone, Jr.

577 Mulberry Street, Suite 800

Macon, Georgia 31201

For Ingram T. Baron Gibson

Equipment Co.: P.O. Box 1606

Macon, Georgia 31202-1606

3

MEMORANDUM OPINION

This matter comes before the Court on the cross-claim of Ingram Equipment Company for

the recovery of property. This is a core matter within the meaning of 28 U.S.C. § 157(b)(2)(O).

After considering the pleadings, the evidence, and the applicable authorities, the Court rules in

favor of Ingram Equipment and enters the following findings of fact and conclusions of law in

conformance with Federal Rule of Bankruptcy Procedure 7052.

Findings of Fact

On July 29, 2002, Navistar Financial Corporation filed a complaint for turnover against

Tallahassee Mack Sales, Inc., LJL Truck Center, Inc. (collectively, “Debtor”), Leskosky Land

Company, L.L.C., and Ingram Equipment Company. Ingram asserted a cross-claim against

Debtor to recover certain funds held in escrow by Debtor’s counsel. Both the original complaint

and the cross-claim arose in connection with the prepetition sale of a truck to the city of Madison,

Florida (the “City”). Debtor provided the truck chassis and Ingram provided certain equipment

installed on the chassis. The City paid postpetition the full amount due for both the chassis and

truck. Navistar had financed the chassis for Debtor and sought payment from the proceeds of the

sale via its complaint for turnover. The parties settled Navistar’s claim. The only remaining issue

in this adversary proceeding is the cross-claim by Ingram for the balance of the proceeds.

In 2000, the City solicited bids for a truck equipped with a dump body and a knuckle

boom loader, which is a crane and grapple used for picking up large objects, such as tree limbs.

The City required a single bid for the entire truck, including chassis and equipment. The parties

used a bid process typically used by them and others in the business of selling public works trucks

4

to municipalities whereby one party–either the chassis dealer or the equipment dealer–submits a

bid package on behalf of both parties. In this case, Debtor learned of the opportunity and

contacted Ingram about submitting a bid. Debtor provided Ingram with specifications for the

loader and dump body. Ingram in turn provided Debtor with a price for that equipment. Debtor

then submitted a bid to the City for the complete unit, which was selected as the successful bid.

The chassis was delivered to a manufacturer in Waycross, Georgia from whom Ingram

purchased such equipment. The loader and body were mounted on the chassis, and then the truck

was delivered to Ingram’s facility in Birmingham, Alabama, for a predelivery inspection of the

equipment. The truck then went to Debtor for a predelivery inspection of the chassis. Finally, the

truck was delivered to the City.

The parties have presented conflicting evidence as to the amount owed to Ingram for the

equipment. An order acknowledgment from Ingram dated November 14, 2000, and signed by

Debtor’s employee, Todd O’Neal, shows the amount owed as $32,090. Two invoices from

Ingram, both dated March 6, 2001 and both describing the loader and dump body, show different

amounts–one shows $32,090 and the other shows $28,390. A new truck sales analysis document

completed by O’Neal and dated March 16, 2001, uses the $28,390 figure to compute profit on

the transaction. However, a pay proceeds letter dated March 30, 2001, and signed by Debtor’s

business manager, Tim McGinn, directs the City’s financing agent to pay Ingram’s financing agent

$32,090 for the equipment, and to pay the remainder due to Debtor’s financing agent.

Furthermore, Debtor’s president and CEO, Tim Leskosky testified that Debtor had no intention of

making a profit from the knuckle boom loader and dump body. Because Debtor represented to

1 Section 541(d) provides in relevant part as follows:

Property in which the debtor holds, as of the commencement of

the case, only legal title and not an equitable interest . . . becomes

property of the estate 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

5

the City in the pay proceeds letter that Ingram was owed $32,090 and Debtor’s president stated

that Debtor was not to make a profit on the equipment, the Court finds that amount owed to

Ingram for equipment and installation is $32,090. This is supported by Ingram’s initial order

acknowledgment and a subsequent invoice from Ingram to Debtor.

On April 18, 2001, Debtor filed for bankruptcy. At that time, the City had not yet paid

any money due on the truck. The City paid in full postpetition, and the funds were placed in

escrow pending a determination of how they should be distributed. Only the $32,090 attributable

to the dump body and the knuckle boom loader is at issue in this case.

Debtor argues that Ingram is merely an unsecured creditor and is not entitled to the money.

Ingram argues that an implied trust was created and that Debtor has no beneficial interest in the

money so that the money is not property of the estate. For the following reasons, the Court holds

that the money is not property of the estate and must be paid to Ingram.

Conclusions of Law

Property of the estate includes “all legal or equitable interests of the debtor in property as

of the commencement of the case.” 11 U.S.C.A. § 541(a)(1) (West 1993). While this is a broad

definition, the section is not without limitations. For example, property that the debtor holds in trust

for another is not property of the estate. 11 U.S.C. § 541(d)1; Begier v. Internal Revenue Service,

debtor does not hold.

11 U.S.C.A. § 541(d) (West 1993).

6

496 U.S. 53, 59, 110 S. Ct. 2258, 2263 (1990).

Ingram argues that Debtor holds the money at issue in an implied trust; thus, it is not

property of the estate. However, this argument is not applicable under the present facts. At the

commencement of the case, Debtor did not hold any of the money at issue. It was still in the hands

of the City. Thus, at the commencement of the case, there was no res on which an implied trust

could be imposed. See O.C.G.A. § 53-12-93 (1997); Begier, 496 U.S. at 62, 110 S. Ct. at

2265; Poss v. Morris (In re Morris), 260 F.3d 654, 666 (6th Cir. 2001) (Section 541(d) only

excludes property impressed with a “constructive trust prior to its entry in bankruptcy.”).

The Court is left with the question of whether Debtor had any legal or equitable interest in

the $32,090 attributable to the sale of Ingram’s equipment. The case of Smith v. Friskney (In re

Friskney), 282 B.R. 250 (Bankr. M.D. Fla. 2002), is helpful in this analysis. In Friskney, the

debtor owned a small silk flower arranging business, known as JF. Her husband, Friskney, had

provided a loan, equipment, and services to a third party, known as CDP. Friskney directed CDP

to make payments to JF for the debt owed him. The debtor and Friskney divorced prior to full

payment of the amount due to Friskney. The debtor filed a Chapter 7 petition, and the trustee

sought turnover of the amount still owing from CDP as part of the bankruptcy estate. Id. at 251-

52. The court found that the unpaid money was not part of the bankruptcy estate. Id. at 253.

The court made its decision based on the intent of the parties as evidenced by the following facts:

(1) certain agreements entered into by the parties specified that the money was being paid to

7

satisfy a debt owed to Friskney; (2) JF had never provided anything to CDP; (3) the payments

were made to JF in care of Friskney; and (4) JF could produce no records showing the payments

as an asset of the business. Id. From this evidence, the court concluded that “the receivable is

Friskney’s asset and was directed to be paid to JF for collection purposes only.” Id. (emphasis

added). As a result, it was not property of the debtor’s bankruptcy estate. Id.

Although the facts in this case are not identical to those in Friskney, they are similar and

lead to the same conclusion. Tim Leskosky testified that Debtor would profit only from the sale of

the chassis and not the sale of the knuckle boom loader and dump body. Each party did a

separate predelivery inspection of the portion of the truck it was providing to the City. Debtor’s

business manager wrote a letter to the City instructing it to pay $32,090 directly to Ingram. There

is no evidence that Debtor purchased the equipment from Ingram and resold it to Madison or that

Debtor ever had any interest in the equipment. As in Friskney, these facts lead the Court to

conclude that the parties intended Debtor to receive the money owed Ingram “for collection

purposes only” as a convenience to all the parties to the transaction. Thus, the evidence shows

Debtor had no legal or equitable interest in the funds attributable to the knuckle boom loader and

the dump body such that they would be property of the estate; therefore, the Court will enter

judgment for Ingram.

8

An Order in accordance with this Opinion will be entered on this date.

Dated this 29th day of April, 2003.

________________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been served on the

following:

Thomas M. Browder, III

Ward Stone, Jr.

577 Mulberry Street, Suite 800

Macon, Georgia 31201

T. Baron Gibson

P.O. Box 1606

Macon, Georgia 31202-1606

Mark Roadarmel

433 Cherry Street, Suite 510

Macon, Georgia 31201

This 29th day of April, 2003.

_______________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 11

) CASE NOS. 01-51665; 01-51666;

LJL TRUCK CENTER, INC., ) 01-51667; 01-51668-JDW

LESKOSKY LAND CO., L.L.C., )

MACK SALES OF ATLANTA, INC., and )

TALLAHASSEE MACK SALES, INC., )

)

DEBTORS. )

)

NAVISTAR FINANCIAL CORP., ) ADVERSARY PROCEEDING

) NO. 02-5123

PLAINTIFF, )

)

VS. )

)

TALLAHASSEE MACK SALES, INC., )

INGRAM EQUIPMENT, CO., and LJL )

TRUCK SALES, INC., )

)

DEFENDANTS. )

ORDER

In accordance with the Memorandum Opinion entered on this date, the Court hereby finds

that funds attributable to the sale of a knuckle boom loader and truck body to the city of Madison,

Florida, are not property of the bankruptcy estate and, further

ORDERS Debtor to turn those funds over to Ingram Equipment Company instanter.

So ORDERED, this 29th day of April, 2003.

_________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been served on the

following:

Thomas M. Browder, III

Ward Stone, Jr.

577 Mulberry Street, Suite 800

Macon, Georgia 31201

T. Baron Gibson

P.O. Box 1606

Macon, Georgia 31202-1606

Mark Roadarmel

433 Cherry Street, Suite 510

Macon, Georgia 31201

This 29th day of April, 2003.

_______________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

ICARUS HOLDINGS, LLC,

October 2002

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 11

) CASE NO. 01-55662-JDW

ICARUS HOLDINGS, LLC, )

f/k/a PIEDMONT HARDWOOD )

FLOORING, LLC, )

)

DEBTOR. ))

EDWARDS WOOD PRODUCTS, INC., ) ADVERSARY PROCEEDING

and ICARUS HOLDINGS, LLC, ) NO. 02-5081

f/k/a PIEDMONT HARDWOOD )

FLOORING, LLC, ))

PLAINTIFFS, )

)

VS. ))

BERT F. THOMPSON, SOUTHERN )

WOOD SERVICES, LLC, and )

THOMPSON LAND AND TIMBER )

COMPANY, LLC., ))

DEFENDANTS. ))

BERT F. THOMPSON and ICARUS ) ADVERSARY PROCEEDING

HOLDINGS, LLC, f/k/a PIEDMONT ) NO. 02-5069

HARDWOOD FLOORING, LLC, )

)

PLAINTIFFS, ))

VS. ))

BAILLIE LUMBER COMPANY, LP, ))

DEFENDANT. )

BEFORE

JAMES D. WALKER, JR.

UNITED STATES BANKRUPTCY JUDGE

COUNSEL

For Debtor in Possession Grant T. Stein

Sean C. Kulka

1201 West Peachtree Street

Atlanta, Georgia 30309-3424

For Bert F. Thompson, Hubert C. Lovein, Jr.

Southern Wood Services, LLC, and P.O. Box 6437

Thompson Land & Timber Co. Macon, Georgia 31208-6437

For Edwards Wood Products, Inc. J. Ellsworth Hall, IV

John F. Kennedy

P.O. Box 5088

Macon, Georgia 31208-5088

For Baillie Lumber Co., LP Ed S. Sell, III

Tilman E. Self, III

P.O. Box 229

Macon, Georgia 31202

For the Official Committee Ward Stone, Jr.

of Unsecured Creditors 577 Mulberry Street, Suite 800

Macon, Georgia 31201

3

MEMORANDUM OPINION

This matter comes before the Court on Plaintiff Bert F. Thompson’s Complaint for

Injunctive Relief and on Plaintiff Edwards Wood Products, Inc.’s Complaint for Damages.

Both proceedings have raised the issue of who may sue the principal of a debtor in

possession under an alter ego theory. This is a core matter within the meaning of 28 U.S.C. §

157(b)(2)(O). After considering the pleadings, the evidence, the briefs, and the applicable

authorities, the Court enters the following decision in conformance with Federal Rule of

Bankruptcy Procedure 7052.

Undisputed Facts

For purposes of this Opinion, the Court has consolidated two cases with identical

facts that raise the same determinative issue. The only material difference between the two

cases is their procedural posture. In the case of Edwards Wood Products, Inc., the creditor

filed an alter ego suit against Bert F. Thompson, principal of Icarus Holdings, LLC

(“Debtor,” “Debtor in Possession,” or “DIP”), in state court, the suit was removed to this

Court, and Edwards now seeks to remand the suit (the “Edwards case”). In the case of

Baillie Lumber Company, LP, Thompson is seeking an injunction to prevent Baillie from

proceeding with a similar alter ego suit it filed against him in state court (the “Baillie case”).

Debtor has intervened in both cases.

The Court asked the parties to file cross motions for summary judgment on the issue

of whether or not an alter ego claim against the principal of a corporate debtor is property of

the estate and, thus, can be brought only by the trustee or DIP. The statements of

undisputed material facts submitted with the motions were indistinguishable and provide as

1 Because the rights, powers, and duties of a debtor in possession are essentially the

same as those of a trustee pursuant to 11 U.S.C. § 1107, the terms “trustee” and “debtor in

possession” are used interchangeably throughout this Opinion.

4

follows:

Debtor operated as a national manufacturer and distributor of a variety of unfinished

solid hardwood flooring, primarily for residential use. Prior to Debtor’s bankruptcy filing,

Edwards and Baillie (the “Creditors”) sold lumber to Debtor for which Debtor has not paid.

Also prior to the filing, Debtor’s principal member and former president and

manager, Thompson, engaged in certain alleged financial irregularities that adversely

impacted Debtor’s liquidity. These irregularities included allegedly using Debtor’s assets

and resources, including Debtor’s employees and equipment, to subsidize the construction

and improvement of Thompson’s hunting lodge in Camden County, Georgia. Additionally,

Thompson used Debtor’s assets to fund the operation of Southern Wood Services, LLC, a

separate and affiliated company also owned by Thompson. Thompson no longer is involved

in the management of Debtor.

Debtor filed a Chapter 11 petition on December 17, 2001. Pursuant to Sections 1107

and 1108 of the Bankruptcy Code, Debtor continues to operate its business and manage its

property as Debtor in Possession.1

On December 28, 2001, Debtor filed an adversary proceeding in this Court against

Thompson and against Thompson Land and Timber, LLC, a company partially owned by

Thompson. The complaint asserts, among other things, that Thompson’s financial

irregularities and prepetition transfers were fraudulent transfers and that the entities,

including Thompson, holding the transferred property do so in constructive trust for Debtor.

5

The adversary proceeding was filed for the primary purpose of filing a lis pendens on the

Camden County property. Debtor did not specifically allege an alter ego or piercing the

corporate veil cause of action against Thompson or Thompson Land and Timber in the

complaint.

On January 11, 2002, the office of the United States Trustee for the Middle District

of Georgia, Macon Division, appointed the Official Committee of Unsecured Creditors (the

“Committee”). Edwards and Baillie are both members of the Committee.

Since the petition date, the Committee, Debtor, and Thompson have engaged in

settlement negotiations. While a binding settlement agreement has not been executed, the

Committee, Debtor, and Thompson have agreed orally to settle various disputes, including

Debtor’s adversary proceeding against Thompson and any alter ego claims that Debtor or

the Committee may be entitled to assert against Thompson. The proposed settlement

agreement provides that in settlement of all claims against Thompson, he shall pay to

Debtor’s estate $900,000 if paid on or before February 15, 2003, or $950,000 if paid after

February 15, 2003, and that Thompson shall remain liable on a personal guaranty of a debt

not to exceed $1,247,000 owed by Southern Wood Services to Debtor’s estate.

In January 2002, Thompson Land and Timber sold the Camden County property, and

net proceeds of approximately $540,000 were paid into the registry of the Court. Under the

terms of the proposed settlement agreement, this $540,000 will be paid to Debtor’s estate

upon approval of the settlement by the Court and will be applied to reduce Thompson’s

obligations under the proposed settlement agreement.

On January 8, 2002, Baillie filed suit against Thompson, individually, in the State

2 The Committee filed an amicus curiae brief in the Baillie case.

6

Court of Bibb County, Georgia, alleging, among other things, that Thompson is the alter ego

of Debtor and, therefore, is personally liable for Debtor’s debts, including any indebtedness

owed by Debtor to Baillie. On April 17, 2002, Thompson filed a Complaint for Injunctive

Relief against Baillie in this Court. The complaint asserts that Baillie’s alter ego claim

against Thompson is property of Debtor’s bankruptcy estate. It also alleges that, to the

extent Baillie is successful in its state court action, Thompson will be unable to satisfy his

obligations under the proposed settlement agreement.

On April 3, 2002, Edwards filed suit against Thompson, Southern Wood Services,

and Thompson Land and Timber in Bibb County Superior Court. The complaint alleges,

among other things, that as the alter ego of Debtor, Thompson is personally liable for

Debtor’s debts, including any indebtedness owed by Debtor to Edwards. Additionally, the

complaint alleges that Southern Wood Services is the alter ego of Debtor and, therefore, is

liable for Debtor’s debts, including any indebtedness owed by Debtor to Edwards. The

complaint also included an allegation that property held by Thompson Land and Timber was

held in constructive trust for the benefit of Edwards. The defendants in the state court

action answered, denying that Edwards was entitled to the relief requested. On May 1,

2002, the defendants removed the state court action to this Court. Edwards has filed a

motion to remand the case to state court.

Thompson, Debtor, the Committee,2 Southern Wood Services, and Thompson Land

and Timber contend that the alter ego claim against Thompson is property of the bankruptcy

estate; thus, only Debtor in Possession has standing to bring an alter ego claim. Baillie and

7

Edwards contend that their state court claims are not property of Debtor’s estate and that

they are not attempting to recover property of or money owed to the estate, so that neither

Debtor nor the Creditor’s Committee has the authority to settle their state court claims.

Conclusions of Law

Summary judgment is governed by Federal Rule of Civil Procedure 56, made

applicable to bankruptcy through Bankruptcy Rule of Procedure 7056. Under Rule 56, a

party is entitled to summary judgment when the “pleadings, depositions, answers to

interrogatories, and admissions on file, together with the affidavits, if any, show that there is

no genuine issue as to any material fact and that the moving party is entitled to a judgment as

a matter of law.” Fed. R. Civ. P. 56(c); McCaleb v. A.O. Smith Corp., 200 F.3d 747, 750

(11th Cir. 2000). The parties in this case concede that no material facts are in dispute. The

Court agrees. Thus, the Court may proceed to the legal question.

The issue before the Court is whether or not a suit to pierce the corporate veil under

an alter ego theory is property of a corporate debtor’s bankruptcy estate subject to the

exclusive control of the trustee. The Creditors argue that a trustee can only sue to recover

money owed to the estate; it cannot sue to recover debts owed to individual creditors.

Thompson and Debtor argue that the alter ego claim is property of the estate, and the trustee

has exclusive standing to pursue such a claim if (1) under Georgia law Debtor could have

asserted an alter ego claim to pierce its own veil, and (2) the claim is a general one that

could have been brought by any creditor. Thompson and Debtor further contend that the

3 Section 544 allows the trustee to step into the shoes of a creditor to avoid certain

transfers. 11 U.S.C.A. § 544 (West 1993 & Supp. 2002).

4 “The court may issue any order, process, or judgment that is necessary or

appropriate to carry out the provisions of this title.” 11 U.S.C.A. § 105(a) (West 1993).

8

trustee has standing to pursue alter ego claims under Section 5443 of the Bankruptcy Code.

In the alternative, Thompson and Debtor argue that the Court may use its Section 105(a)4

power to enjoin the Creditors from prosecuting alter ego actions against Thompson.

The Court holds that under Georgia law, the alter ego claim asserted by the Creditors

is property of the estate that Debtor in Possession has exclusive standing to pursue.

All parties correctly assert that this question is answered by reference to state law

regarding who can bring an alter ego claim. Section 541 of the Bankruptcy Code defines

property of the estate to include “all legal or equitable interests of the debtor in property as

of the commencement of the case.” 11 U.S.C.A. § 541(a)(1) (West 1993). This includes

causes of action. 5 Collier on Bankruptcy ¶ 541.08 (15th ed. rev. 2002). Whether or not an

interest falls within the scope of Section 541 is a federal question answered by reference to

the relevant nonbankruptcy law. Charles R. Hall Motors, Inc. v. Lewis (In re Lewis), 137

F.3d 1280, 1283 (11th Cir. 1998) (citing Southtrust Bank of Ala. v. Thomas (In re Thomas),

883 F.2d 991, 995 (11th Cir. 1989)). See also Butner v. United States, 440 U.S. 48, 54, 99 S.

Ct. 914, 918 (1979).

Several circuit courts have considered whether an alter ego claim is property of the

estate and have reached different results due to variations in state law. However, the courts’

reasoning begins with the same premise: If the debtor could have brought the suit outside of

bankruptcy then the claim becomes property of the estate assertable by the trustee.

5 See also Spartan Tube & Steel, Inc. v. Himmelspach (In re RCS Eng’d Prods. Co.,

Inc.), 102 F.3d 223, 227 (6th Cir. 1996) (“Since a subsidiary may not bring an alter ego

claim against its parent company under Michigan law, the claim does not become the

property of the [subsidiary’s bankruptcy] estate . . . .”). Compare Williams v. California 1st

Bank, 859 F.2d 664, 667 (9th Cir. 1988) (denying the trustee standing to pursue a securities

fraud action on behalf of creditors, in part, because the debtor “has no claim of its own that

it could press against the defendant.”).

9

For example, in Mixon v. Anderson (In re Ozark Restaurant Equipment Co., Inc.),

816 F.2d 1222 (8th Cir. 1987), a Chapter 7 case involving an Arkansas corporation, the

trustee brought an alter ego action on behalf of the creditors. Id. at 1223. The court held

that the trustee had no standing to bring the suit because it was not an interest of the debtor.

Id. at 1225-26. The court agreed that “whenever a cause of action ‘belongs’ to the debtor

corporation, the trustee has the authority to pursue it in bankruptcy proceedings.” Id. at

1225. However, Arkansas law requires that a third party be harmed by disregard of the

corporate form. Id. Because of this third party requirement, the court concluded that under

Arkansas law, a corporation could not pierce its own veil. Id. Thus, the alter ego claim did

not become property of the estate assertable by the trustee.5 Id. at 1226. However, the

court acknowledged that in other states, the law could allow a corporation to pierce its own

veil. Id. n.7.

The court reached a different result by following similar reasoning in S.I. Acquisition,

Inc. v. Eastway Delivery Service, Inc. (Matter of S.I. Acquisition, Inc.), 817 F.2d 1142 (5th

Cir. 1987). The creditor filed an alter ego suit against the principal of the debtor. After the

debtor filed a Chapter 11 petition, it claimed that the creditor’s suit violated the automatic

stay, even though the debtor had been severed from the case and was not a party to the suit.

Id. at 1144-45. The court found that under Texas law a corporation could pierce its own

6 See also Phar-Mor, Inc. v. Coopers & Lybrand, 22 F.3d 1228, 1240 n.20 (3d Cir.

1994) (“It may seem strange to allow a corporation to pierce its own veil . . . . In some

states, however, piercing the corporate veil and alter ego actions are allowed to prevent

unjust or inequitable results; they are not based solely on a policy of protecting creditors.”);

Kalb, Voorhis & Co. v. American Fin. Corp., 8 F.3d 130, 132 (2d Cir. 1993) (“If under

governing state law the debtor could have asserted an alter ego claim to pierce its own

corporate veil, that claim constitutes property of the bankrupt [sic] estate and can only be

asserted by the trustee or the debtor-in-possession.”); Steyr-Daimler-Puch of Am. Corp. v.

Pappas, 852 F.2d 132, 135 (4th Cir. 1988) (“[A]n alter ego claim, under Virginia law, is

property of the corporation so that it becomes property of the bankruptcy estate over which

the trustee has control . . . .”); Koch Refining v. Farmers Union Cent. Exch., Inc., 831 F.2d

1339, 1346 (7th Cir. 1987) (“[U]nder Illinois and Indiana law as well, a bankruptcy trustee

can bring an alter ego claim of action.”).

10

corporate veil because “the predominate policy of Texas alter ego law is that the control

entity that has misused the corporation form will be held accountable for the corporation’s

obligations.” Id. at 1152. As a result, the court concluded that the alter ego action was

property of the estate, and any such suits by creditors ran afoul of the automatic stay.6 Id. at

1153. In addition, the court noted that its decision furthered a policy underlying the

Bankruptcy Code because, if the creditor’s alter ego action were not stayed, it would

“promote the first-come-first-served unequal distribution dilemma that the Bankruptcy Code

. . . sought to prevent.” Id. at 1153-54.

The Eleventh Circuit Court of Appeals has applied similar reasoning in E.F. Hutton

& Co., Inc. v. Hadley, 901 F.2d 979 (11th Cir. 1990). Although Hutton did not deal with

veil piercing, it did question whether the bankruptcy trustee could assert causes of action

held by creditors. The debtor was a dealer in mortgage securities, which it purchased

through a margin account at E.F. Hutton. In the event the balance on the margin account

remained unpaid, E.F. Hutton was contractually authorized to sell the securities purchased

on margin and to apply the proceeds to the balance. The debtor engaged in a scheme in

11

which it bought securities for its customers through its margin account, but rather than

applying the money paid by the customers to its margin balance, the debtor diverted the

funds to other purposes. Because of the resulting unpaid balance on the margin account,

E.F. Hutton sold the securities for which the debtor’s customers had paid in full. After the

debtor filed for bankruptcy, the bankruptcy trustee sued E.F. Hutton for, among other things,

conversion of the securities. E.F. Hutton argued that the trustee had no standing to sue

because the debtor did not have a property right in the securities. Id. at 980-81.

The Eleventh Circuit agreed with E.F. Hutton, finding that the debtor had no interest

in the securities. Id. at 985. There was no evidence the securities were owned by the debtor

rather than its customers. Id. Thus, the debtor’s customers–not the debtor–had a cause of

action against E.F. Hutton, so that it had not become property of the bankruptcy estate. Id.

The Hutton decision is consistent with the outcome of alter ego cases in other circuits: If the

debtor could not bring a cause of action outside bankruptcy, the trustee cannot pursue that

action in bankruptcy.

In reaching its decision, the Eleventh Circuit considered the United States Supreme

Court case Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 92 S. Ct. 1678 (1972).

In Caplin, the misconduct of a third party (the indenture trustee) injured the debtor’s

debenture holders. The bankruptcy trustee sought to assert a cause of action against the

debenture trustee on behalf of the debenture holders. Id. at 418-20; 92 S. Ct. at 1680-81.

The Court denied the trustee standing to sue based on three factors: (1) nothing in the

Bankruptcy Act or other relevant law gave the trustee standing to sue third parties on behalf

of the debenture holders; (2) the debtor had no claim against the indenture trustee; and (3)

12

the trustee’s suit and subsequent actions initiated by the debenture holders could lead to

inconsistent results. Id. at 428-34; 92 S. Ct. at 1685-88.

In Hutton, the Eleventh Circuit found all three factors to be present. 901 F.2d at

986. However, when the cause of action is property of the bankruptcy estate, these

problems disappear. First, the trustee would not be suing on behalf of creditors, but on

behalf of the debtor. Second, the cause of action could only become property of the estate if

the debtor had a claim against the defendant. Third, because creditors would be enjoined by

the automatic stay from interfering with property of the estate, they would not be able to

pursue the same claim; thus, preventing inconsistent litigation results.

As the foregoing cases indicate, the Court must determine whether a corporation

could bring an alter ego action against its principal under Georgia law. None of the parties

were able to locate any Georgia cases directly on point, and the Court’s research has been

similarly fruitless. However, it is well established that, in Georgia,

in order to disregard the corporate entity because a

corporation is a mere alter ego or business conduit of a person,

it should have been used as a subterfuge so that to observe it

would work an injustice. To prevail based upon this theory it

is necessary to show that the shareholders disregarded the

corporate entity and made it a mere instrumentality for the

transaction of their own affairs; that there is such unity of

interest and ownership that the separate personalities of the

corporation and the owners no longer exist. The concept of

piercing the corporate veil is applied in Georgia to remedy

injustices which arise where a party has over extended his

privilege in the use of a corporate entity in order to defeat

justice, perpetuate fraud or to evade contractual or tort

responsibility.

Heyde v. Xtraman, Inc., 199 Ga. App. 303, 306, 404 S.E.2d 607, 610 (1991) (citations and

internal quotation marks omitted).

7 See supra note 6 and accompanying text.

13

Thus, the law appears to hinge on the types of equitable concerns that affected the

outcome in the S.I. Acquisition, Koch Refining, Phar-Mor, American Financial, and Steyr-

Daimler-Puch cases.7 So, a cause of action invoking the alter ego theory likely would

become property of the debtor’s bankruptcy estate. Moore v. Kumer (In re Adam Furniture

Ind., Inc.), 191 B.R. 249, 257 (Bankr. S.D. Ga. 1996) (“Georgia law supports an alter ego

action by the debtor, and … the trustee succeeds to the right to institute such an action ….”);

Stamps v. Knobloch (In re City Communications, Ltd.), 105 B.R. 1018, 1022 (Bankr. N.D.

Ga. 1989) (“[U]nder Georgia law, an alter ego claim is property of the estate under § 541

and can be asserted by the Trustee.”).

One bankruptcy court has rejected an interpretation of Georgia law that would

permit a corporation to pierce its own veil. Ellenberg v. Waliagha (In re Mattress N More,

Inc.), 231 B.R. 104 (Bankr. N.D. Ga. 1998). While acknowledging that “[i]t is difficult to

predict what the state law is or would be when there is no state court case on point,” the

court said it was “not persuaded that a trustee can destroy the corporate fiction to make

shareholders and related entities liable for all the debtor’s debts and the trustee’s

administrative expenses.” Id. at 109, n.3. The court reached this decision after reviewing

“principles of corporate jurisprudence and dozens of Georgia cases involving veil-piercing

claims.” Id. at 109. It concluded that veil piercing is really a debt collection device for

creditors, and stated that there “is something anomalous about a corporation, which is

created to protect its shareholders from the liability of the enterprise, asserting a claim to

destroy the very protection for which it was created.” Id. Thus, the court held that the alter

14

ego claim was not property of the estate and could not be asserted by the trustee. Id. at 109-

10.

The Georgia Court of Appeals has since decided a case that casts doubt on the

rationale of Mattress N More. In Paul v. Destito, 250 Ga. App. 631, 550 S.E.2d 739 (2001),

the defendants argued that “Georgia law does not allow a person who is a shareholder,

director, and officer of a corporation to ‘pierce the veil’ of his own corporation.” Id. at 638,

550 S.E.2d at 747. The court disagreed, noting that it previously had allowed a 50 percent

shareholder and director of a corporation to pursue a claim for piercing the corporate veil.

Id. at 639, 550 S.E.2d at 747 (citing Cheney v. Moore, 193 Ga. App. 312, 312-13, 387

S.E.2d 575, 576 (1989)). Thus, the court rejected the “sweeping assertion that, in all cases,

Georgia law prohibits a director, officer, or shareholder from piercing the corporate veil.”

Id. The court, instead, focused on the standard in Georgia for piercing the veil, which it

emphasized is rooted in equity concerns: “Georgia courts pierce the corporate veil ‘to

remedy injustices which arise where a party has overextended his privilege in the use of a

corporate entity in order to defeat justice, perpetrate fraud or evade contractual or tort

responsibility.’” Id. (quoting Cheney, 193 Ga. App. at 312-13, 387 S.E.2d at 576). Paul

indicates that the scope of potential plaintiffs in an alter ego action is not limited to creditors;

rather it can include those who enjoy the protections of the corporate form. Thus, Georgia

law does not require harm to a third party. Rather, it looks to whether there has been any

abuse of the corporate form that has resulted in inequities. In light of the Paul case, the

Court finds the reasoning in Mattress N More unpersuasive.

Some courts have made a distinction between general claims, belonging to all

8 “(a) [A] petition filed under section 301 . . . of this title . . . 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.A. §

362(a)(3) (West 1993 & Supp. 2002).

15

creditors, and personal claims, which are specific to one creditor. See, e.g., St. Paul Fire &

Marine Ins. Co. v. Pepsico, Inc., 884 F.2d 688, 701 (2d Cir. 1989); Koch Refining, 831 F.3d

at 1348-49; City Communications, 105 B.R. at 1022-23. Under this distinction, the trustee

has standing to pursue general but not personal claims. The Court finds this distinction

irrelevant to the inquiry at hand. See Adam Furniture, 191 B.R. at 257 n.6. The alter ego

theory is one that could be used by any creditor seeking to recover money, and the path to

the principal’s pockets must go through the debtor corporation. The Court is unable to

hypothesize any set of circumstances in this case in which the principal’s disregard of the

corporate form would create a particularized injury to one creditor. Furthermore, no such

creditor-specific claim has been raised in this case. Once the corporate form has been

disregarded, any unpaid creditor could argue for piercing the corporate veil. In bankruptcy,

if the alter ego claim is property of the estate, all creditors are barred from prosecuting such

a claim by the automatic stay. “[A] section 362(a)(3)8 stay applies to a cause of action that

under state (or federal) law belongs to the debtor[.]” S.I. Acquisition, 817 F.2d at 1150

(footnote added). As a result, a creditor cannot pursue the claim unless the trustee has

abandoned it. Steyr-Daimler-Puch, 852 F.2d at 136.

Based on the foregoing the Court concludes as follows: A trustee has the exclusive

right to bring an alter ego action if it is property of the bankruptcy estate. Any suits seeking

an alter ego remedy filed by creditors are subject to the automatic stay unless the cause of

9 Section 1452 reads, in relevant part, as follows:

(a) A party may remove any claim or cause of action in a civil

action other than a proceeding before the United States Tax

16

action is abandoned by the trustee. Based on the Paul case, this Court predicts that under

Georgia law, an alter ego claim may be asserted by the corporation and, thus, becomes

property of the estate. Therefore, the alter ego claim against Thompson at issue here

became property of the estate upon Debtor’s bankruptcy filing. As a result, Debtor in

Possession has exclusive standing to pursue an alter ego claim against Thompson. Any suits

initiated by the Creditors to recover unpaid debt on the theory that Thompson is the alter ego

of Debtor violate the automatic stay.

Because the Court has held that the alter ego claim is property of the estate, it need

not consider Thompson’s argument that Debtor in Possession may enforce the Creditors’

alter ego claims pursuant to Section 544. Furthermore, because the Court has concluded

that the automatic stay applies to the Edwards and Baillie cases, it need not consider

whether to stay those cases pursuant to Section 105(a).

In light of the procedural posture of these cases, the Court will rule as follows: With

respect to the Baillie case, Thompson and Debtor filed a complaint for injunctive relief to

prevent Baillie from proceeding with an alter ego claim against Thompson. Because the

Court has found that Baillie’s suit is subject to the automatic stay, a separate injunction is

unnecessary. Therefore, the Court will grant Baillie’s motion for summary judgment and

deny Thompson’s and Debtor’s motions for summary judgment. In the Edwards case,

Edwards’ motion to remand remains outstanding. The Court will grant the motion for

remand pursuant to 28 U.S.C. § 1452(b), which allows remand on equitable grounds.9 The

Court or a civil action by a governmental unit to enforce such

governmental unit’s police or regulatory power, to the district

court for the district where such civil action is pending, if such

district court has jurisdiction of such claim or cause of action

under section 1334 of this title.

(b) The court to which such claim or cause of action is

removed may remand such claim or cause of action on any

equitable ground.

28 U.S.C.A. § 1452 (West 1994).

17

Court finds sufficient equitable grounds to remand the case. First, the Baillie case already is

pending in state court with no chance of removal. Should the automatic stay be modified to

allow the cases to proceed, it would be more efficient and would lessen the possibility of

inconsistent results to allow the same issue to be tried in a single forum. Second, as an issue

of state law, the most appropriate forum for the case is the state court. See Wilson v. Alfa

Cos. (In re Wilson), 207 B.R. 241, 249 (Bankr. N.D. Ala. 1996) (listing factors for

consideration in a remand decision). However, like the Baillie case, the Edwards case is

subject to the automatic stay.

An Order in accordance with this Opinion will be entered on this date.

Dated this ____ day of October, 2002.

________________________________

James D. Walker, Jr.

United States Bankruptcy Judge

CERTIFICATE OF SERVICE

I, Cheryl L. Spilman, certify that the attached and foregoing have been served on the

following:

Grant T. Stein

Sean C. Kulka

120 West Peachtree Street

Atlanta, Georgia 30309-3424

Hubert C. Lovein, Jr.

P.O. Box 6437

Macon, Georgia 31208-6437

J. Ellsworth Hall, IV

John F. Kennedy

P.O. Box 5088

Macon, Georgia 31208-5088

Ed S. Sell, III

Tilman E. Self, III

P.O. Box 229

Macon, Georgia 31202

Ward Stone, Jr.

577 Mulberry Street, Suite 800

Macon, Georgia 31201

Mark W. Roadarmel

433 Cherry Street, Suite 510

Macon, Georgia 31201

This _______ day of October, 2002.

_______________________________

Cheryl L. Spilman

Deputy Clerk

United States Bankruptcy Court

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

MACON DIVISION

IN RE: ) CHAPTER 11

) CASE NO. 01-55662-JDW