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
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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
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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
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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
-5-
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.
-6-
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).
-2-
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).
-4-
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
-6-
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
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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.
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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
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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
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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)
-6-
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
-2-
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.
-6-
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
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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.
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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
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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.
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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”).
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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]
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[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
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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
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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
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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.
-17-
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
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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
-2-
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
-5-
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) (“§
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__
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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
