26Th Annual CFBLA Seminar & State of the District

26th Annual CFBLA Seminar & State of the District

Orlando, Florida; May 17, 2018

26th Annual CFBLA Seminar & State of the District Orlando, Florida; May 17, 2018 Schedule

8:00 a.m. – 8:45 a.m. 11:00 a.m. – 11:50 a.m. REGISTRATION KEY DEVELOPMENTS IN BUSINESS BANKRUPTCY CASES 8:45 a.m. – 9:00 a.m. This panel will explore recent case law affecting business OPENING REMARKS bankruptcy practitioners in the Eleventh Circuit. Michael Nardella, President, Central Florida Bankruptcy Law Association Presented by: Bradley Saxton and C. Andrew Roy, Winderweedle, Haines, Ward & Woodman, P.A. 9:00 a.m. – 9:50 a.m. THE GREAT DEBATES/LET’S TALK ABOUT IT 12:00 p.m. – 1:00 p.m. STATE OF THE DISTRICT PRESENTATION Debate: Do Till and the “Formula” Approach Still Control Hon. Michael Williamson, Chief Bankruptcy Judge, Middle Cramdown Interest Rates in Chapter 11? District of Florida

Presented by: Elizabeth Green, Baker & Hostetler LLP; and 1:15 p.m. – 2:05 p.m. Jason Johnson, Lowndes, Drosdick, Doster, Kantor & Reed, P.A. PROTECTING CLIENT CONFIDENCES: ETHICAL OBLIGATIONS AND BEST DATA SECURITY PRACTICES Discussion: Student loans in Chapter 13 – Navigating treatment and repayment options of federal and Presented by: Nicolette Vilmos, Broad and Cassel LLP private loans. 2:05 p.m. – 2:55 p.m. Presented by: Lewis Roberts, Lewis Roberts, P.A. TANGLED IN A PREFERENCE: STRATEGIES FOR ALL STAGES OF PREFERENCE ACTIONS 9:50 a.m. – 10:40 a.m. HOT TOPICS IN THE CONSUMER BANKRUPTCY ARENA Presented by: Ryan Davis, Winderweedle, Haines, Ward & Woodman, P.A.; David Samole, Kozyak Tropin Throckmorton, This panel will explore recent case law and topics affecting LLP; Wendy Cramer Townsend, Baker & Hostetler LLP. consumer bankruptcy practitioners in Central Florida. Moderated by: Samuel J. Zusmann, Jr., Retired, Holland & Knight Presented by: Lori Patton, Law Office of Lori Patton, P.A.; and LLP L. Todd Budgen, Budgen Law 2:55 p.m. – 3:10 p.m. 10:40 a.m. – 11:00 a.m. BREAK BREAK

Schedule (continued)

3:10 p.m. – 4:00 p.m. Moderated by Scott Shuker (Latham, Shuker, Eden & Beaudine, E-DISCOVERY AND BANKRUPTCY: WHAT YOU NEED LLP) TO KNOW Honorable Cynthia Jackson Presented by: Adam Losey, Losey PLLC; Daniel Fogarty, Honorable Paul Glenn Stichter, Riedel, Blain, & Postler, P.A.; James Timko, Shutts & Honorable Michael Williamson Bowen LLP 5:00 p.m. 4:00 p.m. – 4:50 p.m. HAPPY HOUR JUDGES PANEL Join Florida Bankruptcy Judges as they discuss and encourage debate on key developments affecting consumer and business bankruptcy practice in Florida.

Sponsored By:

Presenting Level:

Sustaining Level: Sustaining Level: Sustaining Level:

LATHAM, SHUKER, EDEN & BEAUDINE, LLP

Sustaining Level: Happy Hour:

Benefactor Level: Benefactor Level: Benefactor Level:

CourtCall Congratulates the CFBLA for its Support of Florida’s Bankruptcy Practitioners

• Judges: Reduce We have facilitated millions administrative work, of remote appearances by improve caseflow. telephone and video across the United States and • Attorneys: Save client Canada since 1996. money, less wasted travel time.

www.CourtCall.com

Bankruptcy & Foreclosure Real Estate Auction Specialists • Online • Live • Sealed Bid Hybrid Solving your problems one case at a time Personal, professional service Call for references or confidential consultation www.Tranzon.com 877-374-4437

David Bradshaw, CAI, AARE Walt Driggers, CAI, AARE Jon Barber, CAI Justin McQuary, AARE, AMM

Tranzon Driggers, Lic. FL Real Estate Broker, 101 E. Silver Springs Blvd, #304, Ocala, FL

THE GREAT DEBATES/LET’S TALK ABOUT IT

Debate: Do Till and the “Formula” Approach Still Control Cramdown Interest Rates in Chapter 11?

Presented by: Elizabeth Green, Baker & Hostetler LLP; and Jason Johnson, Lowndes, Drosdick, Doster, Kantor & Reed, P.A.

Matter of MPM Silicones, L.L.C., 874 F.3d 787 (2017) Bankr. L. Rep. P 83,176

District Court, Briccetti, J., 531 B.R. 321, affirmed, and noteholders appealed. KeyCite Blue Flag – Appeal Notification Petition for Certiorari Docketed by BOKF, N.A., AS FIRST LOAN TRUSTEE v. MOMENTIVE PERFORMANCE MATERIALS, INC., ET AL., U.S., March 14, 2018 Holdings: The Court of Appeals, Barrington D. Parker, 874 F.3d 787 Circuit Judge, held that: United States Court of Appeals, Second Circuit. [1] proposed Chapter 11 plan did not violate “absolute priority” rule, by providing a partial distribution to In the MATTER OF: MPM SILICONES, L.L.C. second lien noteholders on their claims but none to holders Momentive Performance Materials of subordinated notes; Incorporated, Apollo Global ManagemenT, LLC, Ad Hoc Committee of Second [2] to determine appropriate Chapter 11 “cramdown” rate Lien Holders, Plaintiffs-Appellees, of interest, bankruptcy court should have engaged in two- v. stage process and first determined whether there existed BOKF, NA, as First Lien Trustee, Wilmington Trust, an efficient market for loans of type that secured creditors N.A., as 1.5 Lien Trustee, Defendants-Appellants. would be required to make under plan; U.S. Bank National Association, as [3] senior lien noteholders were not entitled to make- Indenture Trustee, Plaintiff-Appellant, whole premium on notes which had been accelerated v. automatically upon debtors' Chapter 11 filing; and Wilmington Savings Fund Society, FSB, as Successor Indenture Trustee, Momentive [4] appeal from district court's affirmance of bankruptcy Performance Materials Incorporated, Ad court's Chapter 11 plan confirmation order was not Hoc Committee of Second Lien Noteholders, equitably moot. Apollo Management, LLC, and Certain of its Affiliated Funds, Defendants-Appellees. Affirmed in part, reversed in part, and remanded. Nos. 15-1682 (L) | *790 Appeals from the United States District Court for 15-1824 (CON) the Southern District of New York. Vincent L. Briccetti, | Judge. No. 15-1771 | Attorneys and Law Firms August Term, 2016 | DOUGLAS HALLWARD-DRIEMEIER, Ropes & Submitted: November 9, 2016 Gray LLP, Washington D.C.; MARK R. | SOMERSTEIN, MARK I. BANE, Ropes & Gray, New Decided: October 20, 2017 York, NY, for Wilmington Trust, National Association as Indenture Trustee for the 1.5 Lien Notes. DANIELLE Synopsis SPINELLI, JOEL MILLAR, Wilmer Cutler Pickering Background: Order was entered by the United States Hale and Dorr LLP, Washington, D.C.; PHILIP D. Bankruptcy Court for the Southern District of New ANKER, ALAN E. SCHOENFELD, Wilmer Cutler York, Robert D. Drain, J., 2014 WL 4436335, confirming Pickering Hale and Dorr LLP, New York, NY; debtor's proposed Chapter 11 plan, and noteholders MICHAEL J. SAGE, BRAIN E. GREER, Dechert LLP, appealed on theory that the plan violated the “absolute New York, NY, G. ERIC BRUNSTAD, JR., Dechert priority” rule, that Chapter 11 “cramdown” interest rate LLP, Hartford, CT, for BOKF, NA as First Lien Trustee. was inadequate, and that the lower court had erroneously denied their request for make-whole premium. The

deficiency we identify with the proceedings below which is SUSHEEL KIRPALANI, Quinn Emanuel Urquhart & the process for determining the proper interest rate under Sullivan, LLP, New York, NY; ROY T. ENGLERT, the cramdown provision of Chapter 11. We decline to JR., MARK T. STANCIL, ALAN E. UNTEREINER, dismiss these appeals as equitably moot. MATTHEW M. MADDEN, Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, D.C., for These appeals by three groups of creditors challenge U.S. Bank National Association, as Indenture Trustee. various aspects of Appellee Momentive Performance Materials, Inc.'s (“MPM,”) substantially consummated IRA S. DIZENGOFF, ABID QURESHI, BRIAN T. plan of reorganization under Chapter 11 of the U.S. CARNEY, Akin Gump Strauss Hauer & Feld LLP, New 1 York, NY; PRATIK A. SHAH, JAMES E. TYSSE, Bankruptcy Code. With one exception, we conclude Z.W. JULIUS CHEN, Akin Gump Strauss Hauer & Feld that the reorganization plan (the “Plan”) confirmed by LLP, Washington, D.C., for Momentive Performance the bankruptcy court and affirmed by the district court Materials Inc. and Apollo Management, LLC, and certain comports with Chapter 11. We remand so that the of its affiliated funds. bankruptcy court can address the single deficiency we identify in the proceedings below, which is the process for JOSEPH T. BAIO, JAMES C. DUGAN, Willkie Farr determining the proper interest rate under the cramdown & Gallagher LLP, New York, NY, for Momentive provision of Chapter 11. Performance Materials Inc.

DENNIS F. DUNNE, MICHAEL L. HIRSCHFELD, Milbank, Tweed, Hadley & McCloy LLP, New York, NY, I for Ad Hoc Committee of Second Lien Noteholders. MPM, a leading producer of silicone, faced serious SETH H. LIEBERMAN, PATRICK SIBLEY, Pryor financial problems after it took on significant new debt Cashman LLP, New York, NY, for Wilmington Savings obligations beginning in the mid-2000s. 2 See 15-1771 Fund Society, FSB, as Successor Indenture Trustee. JA 286-88; 15-1682 JA 1605-06. 3 Following these debt issuances, MPM was substantially overleveraged, and RONALD J. MANN, Columbia Law School, New York, ultimately filed a petition under Chapter 11. The four NY, for Amici Curiae Loan Syndications and Trading relevant classes of notes issued by MPM are as follows: Association, the Managed Funds Association, and the Securities Industry and Financial Markets Association. Subordinated Notes. In 2006, MPM issued $500 million Before: Cabranes, Pooler, and Parker, Circuit Judges. in subordinated unsecured notes (the “Subordinated Notes”) pursuant to an indenture (the “2006 Indenture”). Opinion 15-1771 JA 303. Appellant U.S. Bank is the indenture trustee for the Subordinated Notes. In 2009 MPM issued Barrington D. Parker, Circuit Judge: secured second-lien notes and offered the Subordinated Three groups of creditors separately appeal a judgment Notes holders the option of exchanging their notes of the United States District Court of the Southern for the newly-issued second-lien notes. The second- District of New *791 York (Briccetti, J. ) affirming lien notes were offered at a 60% discount but were the confirmation of Debtors' Chapter 11 reorganization secured. 15-1771 JA 2241. Holders of $118 million of plan by the U.S. Bankruptcy Court (Drain, J.). The the Subordinated Notes accepted the offer, leaving $382 creditors argue that the plan improperly eliminated or million in unsecured Subordinated Notes outstanding. reduced the value of notes they held. Debtors argue 15-1771 JA 2241. that the plan was properly confirmed and that these appeals should be dismissed as equitably moot. With Second-Lien Notes. In 2010, MPM issued approximately one exception, we conclude that the plan confirmed by $1 billion in “springing” *792 second-lien notes (the the bankruptcy court and affirmed by the district court “Second-Lien Notes”). 15-1682 JA 1616; 15-1771 JA comports with the provisions of Chapter 11. We remand 476. The Second-Lien Notes were to be unsecured until so that the bankruptcy court can address the single the $118 million of previously exchanged Subordinated

Notes were redeemed, at which point the “spring” in the balance and accrued interest on the Senior-Lien Notes; (ii) lien would be triggered. 15-1771 JA 517, 580-81. Once an estimated 12.8%-28.1% recovery on the Second-Lien triggered, the Second-Lien Notes would then (but only Notes in the form of equity in the reorganized Debtors; then) obtain a security interest in the Debtor's collateral. but (iii) no recovery on the Subordinated Notes. 15-1771 The exchanged Subordinated Notes were redeemed in JA 271-74. November 2012, 15-1771 JA 721, at which point the trigger occurred and the Second-Lien Notes became The Plan also gave the Senior-Lien Notes holders the secured with second-priority liens junior to other pre- option of (i) accepting the Plan and immediately receiving existing liens on the Debtors' collateral. A primary issue on a cash payment of the outstanding principal and interest this appeal is whether the Second-Lien Notes have priority due on their Notes (without a make-whole premium), over the Subordinated Notes. or (ii) rejecting the Plan, receiving replacement notes “with a present value equal to the Allowed amount Senior-Lien Notes. In 2012, MPM again issued more debt, of such holder's [claim],” and then litigating in the this time in the form of two classes of senior secured notes. bankruptcy court issues including whether they were Specifically, MPM issued $1.1 billion in first-lien secured entitled to the make-whole premium and the interest rate notes (the “First-Lien Notes”), and $250 million in 1.5- on the replacement notes. 15-1771 JA 271-72; 15-1682 JA lien secured notes (the “1.5-Lien Notes,” and, with the 3873-75. The Senior-Lien Notes holders rejected the Plan, First-Lien Notes, the “Senior-Lien Notes”). 15-1682 JA and, thus, elected the latter option. 1615. Appellants BOKF and Wilmington Trust are the indenture trustees for the First-Lien Notes and 1.5-Lien The appellants here—the Subordinated Notes holders Notes, respectively. Pursuant to the governing indentures and the Senior-Lien Notes holders—opposed the Plan. (the “2012 Indentures”), the Senior-Lien Notes were to (The Second-Lien Notes holders unanimously accepted be repaid in full by their maturity date of October 15, *793 it.) The Subordinated Notes holders, who were to 2020. They carried fixed interest rates of 8.875% and receive nothing, contended that, under relevant indenture 10%, respectively. The 2012 Indentures also called for the provisions, their Notes were not subordinate to the recovery of a “make-whole” premium if MPM opted to Second-Lien Notes holders and, consequently, they were redeem the notes prior to maturity. Because the Second- entitled to some recovery. The Senior-Lien Notes holders Lien Notes and the Senior-Lien Notes are secured by the opposed the Plan on the ground that the replacement same collateral, the holders of those notes executed an notes they received did not provide for the make-whole intercreditor agreement (the “Intercreditor Agreement”), premium, and carried a largely risk-free interest rate that which provided that the Senior-Lien Notes stood in failed to comply with the Code because it was well below priority to the Second-Lien Notes as to their respective ascertainable market rates for similar debt obligations and liens, but that each was junior to pre-existing liens on thus was not fair and equitable because it failed to give MPM's collateral. 15-1771 JA 691-718. Other primary them the present value of their claim. issues on this appeal are whether the Senior-Lien Note holders are entitled to the make-whole adjustment and the Despite these objections, the bankruptcy court confirmed cramdown interest rate they are entitled to if their Notes the Plan following a four-day hearing. In re MPM are replaced under the Plan. Silicones, LLC, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014), aff'd, 531 B.R. 321 (S.D.N.Y. 2015). Confirmation was facilitated by Chapter 11's “cramdown” provision, which allows a bankruptcy court II to confirm a reorganization plan notwithstanding non- After these notes were issued, MPM experienced accepting classes if the plan “does not discriminate significant financial problems. See 15-1771 JA 284-88. unfairly, and is fair and equitable, with respect to each In April 2014, MPM filed a petition under Chapter 11 class of claims or interests that is impaired under, and has and ultimately submitted a reorganization plan to the not accepted, the plan.” 11 U.S.C. § 1129(b)(1). bankruptcy court. 15-1682 JA 3841-912. Several elements of that Plan are at issue on these appeals. The Plan The bankruptcy court concluded that the Plan was fair provided for (i) a 100% cash recovery of the principal to the Subordinated Notes holders, despite no recovery,

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 3 Matter of MPM Silicones, L.L.C., 874 F.3d 787 (2017) Bankr. L. Rep. P 83,176 because the 2006 Indenture called for their subordination Lehman Bros., Inc., 808 F.3d 942, 946 (2d Cir. 2015) to the Second-Lien Notes. In re MPM Silicones, LLC, (internal quotation marks omitted). 2014 WL 4436335, at *2-*11. It held the plan was fair to the Senior-Lien Notes holders because the 2012 Indentures did not require payment of the make-whole IV premium in the bankruptcy context and because the interest rate on the proposed replacement notes, even These appeals raise four issues. First, the Subordinated though well below a “market” rate, was determined Notes holders challenge the lower courts' conclusions that by a formula that complied with the Code's cramdown their claims are subordinate to the Second-Lien Notes provision. Id. at *11-*32. holders' claims. Second, the Senior-Lien Notes holders contend that the lower courts erroneously applied a The bankruptcy court's confirmation order triggered an below-market interest rate to their replacement notes. automatic 14-day stay during which Debtors could not Third, the Senior-Lien Notes holders challenge the lower consummate the Plan. See Fed. R. Bankr. P. 3020(e). courts' rulings that they are not entitled to a make-whole Appellants aggressively took advantage of this period premium. Finally, Debtors argue that we should dismiss and attempted to block the implementation of the Plan. these appeals as equitably moot. We find merit only in the Specifically, prior to the expiration of the automatic stay, Senior-Lien Notes holders' contention with respect to the appellants moved in the bankruptcy court to extend the method of calculating the appropriate interest rate for the stay pending their appeal of the confirmation order, which replacement notes. We reject the others. the court denied. See 15-1682 JA 4099, 4173. They then promptly moved the district court for a stay, which was also denied. See 15-1682 JA 183, 185. Appellants then appealed the denial of the stay to this Court, and we A dismissed the appeal for lack of jurisdiction. 15-1682 JA The lower courts concluded that the Plan, which 4872-73. Despite these efforts, the Debtors contend this provided no distribution to the Subordinated Notes appeal is equitably moot, a contention with which we do holders, complied with the governing 2006 Indenture. The not agree. Subordinated Notes holders argue this conclusion was erroneous because, under the terms of the 2006 Indenture, The appellants appealed the confirmation order to the their claims are not subordinate to the Second-Lien Notes, district court which affirmed the bankruptcy court's whose holders recovered under the plan. The Debtors, confirmation order. 531 B.R. 321. The district court on the other hand, contend that the 2006 Indenture gives essentially agreed with the bankruptcy court, concluding the Second-Lien Notes priority over the Subordinated that: (i) the relevant indentures unambiguously prioritize Notes. We agree with the Debtors, although for somewhat the Second-Lien Notes over the Subordinated Notes, id. at different reasons from the lower courts which found the 326-31; (ii) the below market interest rate selected by the relevant indenture provisions unambiguous. We find them bankruptcy court complied with the Code, id. at 331-34; to be ambiguous, but resolve the ambiguities in favor of and (iii) under their indentures, the Senior-Lien Notes the Debtors. holders are not entitled to the make-whole premium in the context of a bankruptcy, id. at 335-38. The Subordinated The Subordinated Notes holders' argument begins with Notes holders, the First-Lien Notes holders, and the 1.5- Section 10.01 of the 2006 Indenture, which states that 4 Lien Notes holders separately appealed. the Subordinated Notes are “subordinated in right of payment ... to the prior payment in full of all existing and future Senior Indebtedness of the Company,” and *794 III that “only Indebtedness of the Company that is Senior Indebtedness of the Company shall rank senior to the [1] “We exercise plenary review over a district court's Securities in accordance with the provisions set forth affirmance of a bankruptcy court's decisions, reviewing herein.” 15-1771 JA 404. Accordingly, the Second-Lien de novo the bankruptcy court's conclusions of law, and Notes stand in priority to the Subordinated Notes only if reviewing its findings of facts for clear error.” In re they constitute “Senior Indebtedness.”

The lower courts rejected this argument, and concluded “Senior Indebtedness” in the 2006 Indenture begins with that the Second-Lien Notes unambiguously constitute what the parties refer to as the “Baseline Definition,” Senior Indebtedness despite the Fourth Proviso. They which defines Senior Indebtedness as: did so in reliance on a distinction between “lien subordination” and “payment (or debt) subordination,” all Indebtedness ... unless the concluding that the Fourth Proviso unambiguously carves instrument creating or evidencing out from the Baseline Definition only the latter and the same or pursuant to which not the former. 5 Because the Second-Lien Notes are the same is outstanding expressly not subordinate in payment to other note classes—but provides that such obligations are rather, the liens supporting their notes are subordinate— subordinated in right of payment the lower courts concluded that the Second-Lien Notes are to any other Indebtedness of the not covered by the Fourth Proviso. Company ...

15-1771 JA 341. We do not agree with the lower courts that the Fourth Proviso unambiguously incorporates a distinction It is undisputed that the Second-Lien Notes are between lien subordination and payment subordination. not subordinated in right of payment to any other Rather, we conclude that the Fourth Proviso renders indebtedness and that therefore they satisfy the Baseline the definition of Senior Indebtedness ambiguous as to Definition of Senior Indebtedness. However, the Baseline whether it includes the Second-Lien Notes. Nevertheless, Definition is then subject to six enumerated exceptions, we conclude that this ambiguity should be resolved in the fourth of which (the “Fourth Proviso”) excepts from Debtors' favor given the plethora of evidence in the record Senior Indebtedness: that the parties intended the Second-Lien Notes to be Senior Indebtedness. *795 any Indebtedness or obligation of the Company ... that by its terms is subordinate or 1 junior in any respect to any other Indebtedness or obligation of the [2] [3] As discussed, the lower courts concluded Company ... including any Pari that the Second-Lien Notes are unambiguously Senior Passu Indebtedness. Indebtedness. Under New York law, which governs the Indenture, a fundamental objective of contract 15-1771 JA 342 (emphasis added). interpretation is to give effect to the expressed intention of the parties. The initial inquiry is whether the contractual The Subordinated Notes holders argue that the Fourth language, without reference to sources outside the text Proviso carves out the Second-Lien Notes from the of the contract, is ambiguous. Contract language is Baseline Definition, i.e., that the Second-Lien Notes are ambiguous if it is capable of more than one meaning. an “[i]ndebtedness or obligation of the Company ... that by its terms is subordinate or junior in any respect to any [4] We are not persuaded by the Debtors' (and lower other Indebtedness of the Company.” The Subordinated courts') conclusion that the Fourth Proviso's reference to Notes holders rely heavily on the “in any respect” “subordinate ... in any respect” unambiguously refers only language. They argue that the Second-Lien Notes are to payment subordination and not to lien subordination. subordinate to, for example, the First-Lien Notes— The Debtors read the Fourth Proviso as if it states because, pursuant to the Intercreditor Agreement, the “subordinate ... in right of payment,” which of course liens supporting the Second-Lien Notes are junior to it does not. In so doing, the Debtors disregard the the liens supporting the First-Lien Notes—and that they breadth of the term “in any respect,” a term which is are therefore subordinate to other Indebtedness of the generally thought *796 to be as broadly encompassing company. as possible. 6 And, as a practical matter, it seems to us illogical to believe that a second-lien holder does not possess an obligation that is meaningfully

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 5 Matter of MPM Silicones, L.L.C., 874 F.3d 787 (2017) Bankr. L. Rep. P 83,176 subordinate in some respect to a first-lien holder. These superfluous, we are not obligated to arbitrarily select one sophisticated parties knew how to cabin the type of as opposed to another. Because the 2006 Indenture is subordination to which they refer; the indenture uses the open to differing reasonable interpretations as to whether term “subordinate ... in right of payment” many times, the Second-Lien Notes constitute Senior Indebtedness, we including in the Baseline Definition itself. conclude that it is ambiguous as a matter of law.

Moreover, the Debtors' interpretation renders language in the indenture superfluous, which is a common sign 2 of ambiguity. See RJE Corp. v. Northville Indus. Corp., 329 F.3d 310, 314 (2d Cir. 2003) (in assessing ambiguity, [5] Where a contract term is ambiguous, we look to courts consider the entire contract “to safeguard against extrinsic evidence to determine the intention of the adopting an interpretation that would render any parties. That evidence can include the parties' apparent individual provision superfluous” (internal quotation intention, Walk-In Medical Centers, Inc. v. Breuer Capital marks omitted)); see also Lawyers' Fund for Client Corp., 818 F.2d 260, 264 (2d Cir. 1987), what would be Protection of State of N.Y. v. Bank Leumi Trust Co. of commercially reasonable, Fundamental Long Term Care New York, 94 N.Y.2d 398, 404, 706 N.Y.S.2d 66, 727 Holdings, LLC v. Cammeby's Funding LLC, 20 N.Y.3d N.E.2d 563 (N.Y. 2000) (concluding that an interpretation 438, 445, 962 N.Y.S.2d 583, 985 N.E.2d 893 (2013), that renders a portion of a contract superfluous is and the “parties' *797 interpretation of the contract “unsupportable: under standard principles of contract in practice, prior to litigation,” Ocean Transp., Inc. v. interpretation”). Specifically, if the Fourth Proviso only American Philippine Fiber Indus., Inc., 743 F.2d 85, 91 (2d excepts debt subordinate in right of payment, there is Cir. 1984). Applying these tools, we conclude, as did the no purpose for the “in right of payment” carve-out district court, that the parties understood that the Second- in the Baseline Definition. We disagree with the lower Lien Notes constituted Senior Indebtedness. See 531 B.R. courts' attempts to interpret away this superfluity by at 331 n.7. finding a distinction between “expressly” (in the Baseline Definition) and “by its terms” (in the Fourth Proviso). We First, MPM repeatedly represented to the Securities see no meaningful distinction between those terms. Exchange Commission and to the financial community that the Second-Lien Notes were Senior Indebtedness. It Nevertheless, we also conclude that the Subordinated did so in its prospectuses, 8-Ks and 10-Ks. For example, Notes holders' interpretation, that the Fourth Proviso it disclosed in a November 2010 8-K that the Second- unambiguously excludes the Second-Line Notes from Lien Notes are “senior indebtedness of the Company ... the definition of Senior Indebtedness, is incorrect. As and will rank ... senior in right of payment to all the lower courts correctly concluded, the Subordinated existing and future subordinated indebtedness.” 15-1771 Notes holders' interpretation renders key parts of the JA 3057; see also 15-1771 JA 2231. It went further when it Baseline Definition superfluous. Under their reading, subsequently resold certain Subordinated Notes. In a May that definition excludes from Senior Indebtedness only 2013 prospectus, MPM restated that the Subordinated obligations subordinate “in right of payment,” but Notes “are subordinated to all our existing and future the Fourth Proviso excludes all obligations that stand senior debt, including the ... Second-Priority Springing- behind any type of other obligation. If so, the Baseline Lien Notes.” MPM also specifically identified as the first Definition's more limited carve-out for debt subordinate risk related to the Subordinated Notes that those holders' “in right of payment” would be unnecessary, because all “right to receive payments on the Notes is junior to those such debt would be carved out from the definition of lenders who have a security interest in our assets.” 15-1771 Senior Indebtedness by the Fourth Proviso. JA 3007, 3010. MPM further asserted that in the event it were to file for bankruptcy and were unable to repay its As the Subordinated Notes holders correctly secured debt, “it is possible that there would be no assets acknowledge, “[f]or this indenture, it simply is not remaining from which your claims could be satisfied.” possible to avoid superfluity.” 15-1771 Br. of Appellant 15-1771 JA 3010. The Subordinated Note holders knew all 54 (internal quotation marks omitted). Where, as of this because the Debtors were contractually obligated, here, varying interpretations render contractual language pursuant to Section 4.02 of the 2006 Indenture, to provide

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 6 Matter of MPM Silicones, L.L.C., 874 F.3d 787 (2017) Bankr. L. Rep. P 83,176 copies of its 10-Ks, 10-Qs, 8-Ks, and all other required those payments must ultimately amount to the full value disclosures both to the Subordinated Note holders as of the secured creditors' claims. Id. To ensure the creditor well as to their Trustee—a highly sophisticated group receives the full present value of its secured claim, the of investors. 15-1771 JA 357. There is no dispute that deferred payments must carry an appropriate rate of these disclosures occurred. Consequently, it was widely interest. See Rake v. Wade, 508 U.S. 464, 472 n.8, 113 S.Ct. understood in the investment community that the Second- 2187, 124 L.Ed.2d 424 (1993). Lien Notes had priority. The rate selected by the lower courts for the Senior- Second, the Subordinated Notes holders' interpretation Lien Note holders' replacement notes was based on the generates the irrational outcome that the springing of the “formula” rate. The bankruptcy court selected interest Second-Lien Notes' security interest, which was meant rates of 4.1% and 4.85%, respectively, which were largely to enhance the note holders' protection, would actually risk-free rates slightly adjusted for appropriate risk strip those notes of their status as Senior Indebtedness factors. It is not disputed that this rate is below market and therefore their priority over the Subordinated Notes. in comparison with rates associated with comparable debt As the bankruptcy court concluded, “[t]here is no obligations. The Debtors defend the application of the logical reason for such a distinction, notwithstanding the “formula” method on the ground that it is required by subordinated noteholders' attempt to find one.” 2014 WL the plurality opinion in the Chapter 13 case of Till v. SCS 4436335, at *9. Credit Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004). Third, the Subordinated Notes holders' proposed interpretation that “in any respect” covers all junior liens The Senior-Lien Notes holders contend that because this would mean that no senior note classes would qualify as rate is too low, the Plan is not “fair and equitable” as Senior Indebtedness because each was secured in some required by § 1129(b). They argue that the lower courts respect by a junior lien. For example, the First-Lien should have applied a market rate of interest which is the Notes were secured in part by a second priority lien on rate MPM would pay to a contemporaneous sophisticated collateral securing a prepetition revolving credit facility. arms-length lender in the open market. The Senior-Lien See 15-1771 JA 2425-26. We think it highly improbable Notes holders argued in the bankruptcy court that such that anyone understood this interpretation to be correct. a market exists and would generate interest in the 5-6+% Certainly MPM did not. For example, in a December range. See 15-1682 JA 464, 1941. 7 2012 prospectus MPM represented to the SEC that the Senior-Lien Notes were Senior Indebtedness. 15-1771 JA The bankruptcy court rejected this approach, and 3725. Because those note classes are subordinate to pre- concluded that a cramdown interest rate should “not existing liens as to the Debtors' collateral, they, too, would take market factors into account.” 2014 WL 4436335, at seemingly not qualify as Senior Indebtedness under the *25. Viewing itself as “largely governed by the principles Subordinated Notes holders' interpretation. In light of enunciated by the plurality opinion in Till v. SCS Credit these factors, we have little trouble concluding that the Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 extrinsic evidence establishes that the most reasonable (2004),” it concluded that the proper rate was what the interpretation of the Indenture is that the Second-Lien plurality in Till referred to as the “formula” or “prime- Notes are Senior Indebtedness. The judgment of the plus” rate (discussed more fully below). Id. at *24, *26. district court on that issue is, therefore, affirmed. The district court agreed. 531 B.R. at 332-34. The Senior- Lien Notes holders argue on appeal that the lower courts erred in concluding that the Till plurality opinion is wholly *798 B applicable to this Chapter 11 proceeding. In substantial part, we agree. As a consequence of rejecting the Plan, the Senior-Lien Notes holders received replacement notes which pay out At issue in Till was a Chapter 13 debtor's sub-prime auto their claim over time. The Code permits debtors to make loan, carrying an interest rate of 21% and providing the such “deferred cash payments” to secured creditors (i.e., to creditor with a $4,000 secured claim. As with Chapter 11, “cramdown”). 11 U.S.C. § 1129(b)(2)(A)(i)(II). However, Chapter 13 allows debtors to provide secured creditors

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 7 Matter of MPM Silicones, L.L.C., 874 F.3d 787 (2017) Bankr. L. Rep. P 83,176 with future property distributions (such as deferred cash and trustees to follow essentially the same approach when payments) whose total “value, as of the effective date choosing an appropriate interest rate under any of these of the plan, ... is not less than the allowed amount of [Code] provisions.” Id. at 474 & n.10, 124 S.Ct. 1951. such claim.” 11 U.S.C. § 1325(a)(5)(B)(ii). The question became, as here, how to calculate the interest on the Despite that language, however, the plurality made no deferred payments such that the creditor would receive conclusive statement as to whether the “formula” rate the full value of its claim. No single interest-calculation was generally required in Chapter 11 cases. And, notably, method secured a majority vote on the Court, *799 the plurality went on to state, in the opinion's much- resulting in a plurality opinion endorsing the “formula” discussed footnote 14, that the approach it felt best applied method. in the Chapter 13 context may not be suited to Chapter 11. Specifically, in that footnote, the Court stated that The “formula” approach endorsed by the Till plurality in Chapter 13 cramdowns “there is no free market of instructs the bankruptcy court to begin with a largely willing cramdown lenders.” 541 U.S. at 476 n.14, 124 S.Ct. risk-free interest rate, specifically, the “national prime 1951. It continued: “[i]nterestingly, the same is not true rate ... which reflects the financial market's estimate of the in the Chapter 11 context, as numerous lenders advertise amount a commercial bank should charge a creditworthy financing for Chapter 11 debtors in possession. Thus, commercial borrower to compensate for the opportunity when picking a cramdown rate in a Chapter 11 case, it costs of the loan, the risk of inflation, and the relatively might make sense to ask what rate an efficient market slight risk of default.” 541 U.S. at 479, 124 S.Ct. 1951. would produce.” Id. (internal citations omitted) (emphasis The bankruptcy court should then hold a hearing to in original). 9 determine a proper plan-specific risk adjustment to that prime rate “at which the debtor and any creditors may [6] *800 Many courts have relied on footnote 14 to present evidence.” Id. Using this approach, “courts have conclude that efficient market rates for cramdown loans generally approved adjustments [above the prime rate] of cannot be ignored in Chapter 11 cases. Most notably, the 1% to 3%.” Id. at 480, 124 S.Ct. 1951. 8 Sixth Circuit, “tak[ing] [its] cue from Footnote 14” of the Till plurality, adopted a two-part process for selecting an The Till plurality arrived at the “formula” rate after interest rate in Chapter 11 cramdowns: rejecting a number of alternative methods relied on by the lower courts. Significantly, it rejected methods relying [T]he market rate should be applied on purported “market” rates of interest because those in Chapter 11 cases where there rates “must be high enough to cover factors, like lenders' exists an efficient market. But transactions costs and overall profits, that are no longer where no efficient market exists relevant in the context of court-administered and court- for a Chapter 11 debtor, then the supervised cramdown loans.” 541 U.S. at 477, 124 S.Ct. bankruptcy court should employ the 1951. The plurality then identified the only factors it formula approach endorsed by the viewed as relevant in properly ensuring that the sum of Till plurality. deferred payments equals present value: (i) the time-value In re American HomePatient, Inc., 420 F.3d 559, 568 (6th of money; (ii) inflation; and (iii) the risk of non-payment. Cir. 2005). In applying this rule, courts have held that Id. at 474, 124 S.Ct. 1951. The plurality concluded that markets for financing are ‘efficient’ where, for example, the “formula” or “prime-plus” method best reflects those “they offer a loan with a term, size, and collateral considerations. comparable to the forced loan contemplated under the cramdown plan.” In re Texas Grand Prairie Hotel Realty, Although Till involved a Chapter 13 petition, the plurality 10 intimated that the “formula” method might be applicable L.L.C., 710 F.3d 324, 337 (5th Cir. 2013). to rate calculations made pursuant to other similarly worded Code provisions. In fact, it cited the Chapter We adopt the Sixth Circuit's two-step approach, which, 11 cramdown provision, 11 U.S.C. § 1129(b)(2)(A)(i)(II), in our view, best aligns with the Code and relevant among many other provisions, when it noted that “[w]e precedent. We do not read the Till plurality as stating think it likely that Congress intended bankruptcy judges that efficient market rates are irrelevant in determining

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 8 Matter of MPM Silicones, L.L.C., 874 F.3d 787 (2017) Bankr. L. Rep. P 83,176 value in the Chapter 11 cramdown context. And, market may exist that generates an interest rate that is disregarding available efficient market rates would be a apparently acceptable to sophisticated parties dealing at major departure from long-standing precedent dictating arms-length, we conclude, consistent with footnote 14, that “the best way to determine value is exposure to a that such a rate is preferable to a formula improvised by market.” Bank of Am. Nat'l Trust and Sav. Ass'n v. 203 N. a court. See Bank of America, 526 U.S. at 457, 119 S.Ct. LaSalle St. P'ship, 526 U.S. 434, 457, 119 S.Ct. 1411, 143 1411; see also In re Valenti, 105 F.3d 55, 63 (2d Cir. 1997) L.Ed.2d 607 (1999) (assessing a Chapter 11 cramdown); (the goal of the cramdown rate “is to put the creditor in see also United States v. 50 Acres of Land, 469 U.S. 24, the same economic position that it would have been in had 25 & n.1, 105 S.Ct. 451, 83 L.Ed.2d 376 (1984) (“fair it received the value of its allowed claim immediately”); market value” is “what a willing buyer would pay in cash see also 15-1682 JA 3428 (First-Lien Notes holders' expert to a willing seller” (internal quotation marks omitted)). In testifying that because the First-Lien Notes holders “are Bank of America, the Court noted that “one of the Code's pricing it at the market ... they're being compensated for innovations [was] to narrow the occasions for courts to the underlying risk that they are taking,” and not for any make valuation judgments,” and expressed a “disfavor for “imbedded profit”). decisions untested by competitive choice ... when some form of market valuation may be available.” Bank of We understand that the complexity of the task of America, 526 U.S. at 457-58, 119 S.Ct. 1411. determining an appropriate market rate will vary from case to case. In some cases the task will be straightforward, The Senior-Lien Notes holders presented expert testimony in others it will be more complex. But, at the end of the in the bankruptcy court that, if credited, would have day, we have no reason to believe the task varies materially established a market rate. This evidence showed that if in difficulty from the myriad tasks which we regularly rely the Senior-Lien Noteholders were to have approved the on the expertise of our bankruptcy courts to resolve. Plan and accepted a cash-out payment for their notes, MPM would have had to secure exit financing to cover [7] We therefore conclude that the lower courts erred the lump-sum payment. In preparation for that possible in categorically dismissing the probative value of market eventuality (which did not come to pass in light of the rates of interest. We remand so that the bankruptcy court Senior-Lien Notes holders' rejection of the Plan), MPM can ascertain if an efficient market rate exists and, if so, went out into the market seeking lenders to provide that apply that rate, instead of the formula rate. 12 We arrive at financing. Those lenders quoted MPM rates of interest no conclusion with regard to the outcome of this inquiry. ranging between 5 and 6+%. See In re MPM Silicones, LLC, 2014 WL 4436335, at *29.

At these rates, the First-Lien Note holders contend that C they would have received around $150 million more than [8] The 2012 Indentures governing the Senior-Lien Notes the Plan offered, Br. of First-Lien Appellant 25, 33. The contain Optional Redemption Clauses, which provide for 1.5-Lien Note holders claim that the interest rate chosen 13 by the lower courts led them to receive notes “valued the payment of a make-whole premium (referred to by the market at less than 93 cents on the value of the as the “Applicable Premium” in the indentures) if MPM were to “redeem the Notes at its option” prior to October secured claims,” Br. of 1.5-Lien Appellant 20. 11 The Plan 14 was objectionable *801 to the Senior-Lien Notes holders 15, 2015. 15-1682 JA 2322. The make- *802 whole because, in essence, it required them to lend Debtors a premium was intended to ensure that the Senior-Lien significant sum of money and receive a much lower rate Notes holders received additional compensation to make of interest than any other lender would have received for up for the interest they would not receive if the Notes were offering the same loan to MPM on the open market. redeemed prior to their maturity date.

When dealing with a sub-prime loan in the Chapter 13 [9] In October 2014, the Debtors, pursuant to the context, “value” can be elusive because the market is Plan, issued replacement notes to the Senior-Lien Notes not necessarily efficient and the borrower is typically holders, which did not account for the make-whole unsophisticated. However, where, as here, an efficient premium. These holders contended that the failure to

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 9 Matter of MPM Silicones, L.L.C., 874 F.3d 787 (2017) Bankr. L. Rep. P 83,176 include that premium violated the 2012 Indentures. The because [p]repayment can only bankruptcy court concluded that the Senior-Lien Notes occur prior to the maturity date. holders were not entitled to the premium. It reasoned that under the 2012 Indentures the make-whole premium Id. at 103 (internal citations and quotation marks would be due only in the case of an “optional redemption” omitted). and not in the case of an acceleration brought about by a bankruptcy filing. 2014 WL 4436335, at *11-*15. The The Senior-Lien Notes holders argue AMR is inapplicable district court agreed. 531 B.R. at 335-38. We too agree. because it spoke only to “prepayment” rather than “redemption.” As the district court noted, the principle The Senior-Lien Notes holders claim entitlement to the of AMR does not turn on the distinction between make-whole premium for essentially three reasons: (i) they “prepayment” and “redemption.” 531 B.R. at 336-37. In are entitled to the make-whole under the 2012 Indentures' fact, in AMR we stated that because “American's debt was Optional Redemption Clauses; (ii) they are entitled to accelerated ... upon its bankruptcy filing [it] is not now it under the 2012 Indentures' Acceleration Clauses; and voluntarily redeeming the notes.” AMR, 730 F.3d at 109. (iii) even if the indentures did not allow for a make- whole premium upon acceleration, they should not have We also held in AMR that acceleration brought about been permanently barred from exercising their contractual by a bankruptcy filing changes the date of maturity of right to rescind acceleration and thereby obtain the make- the accelerated notes to the date of the petition. 730 whole premium. F.3d at 103. Therefore, any payment on the accelerated notes following a bankruptcy filing would be a post- maturity payment. And, as the First-Lien Notes holders *803 concede, the “plain meaning of the term ‘redeem’ 1 is to ‘repay[ ] ... a debt security ... at or before maturity.’ ” 15-1682 Br. of First-Lien Appellant 39 The Senior-Lien Notes holders' principal argument is that (emphasis added). Here, Debtors' payment was post- they are entitled to the make-whole premium because maturity, not “at or before” maturity. But see In re when MPM issued the replacement notes under the Energy Future Holdings Corp., 842 F.3d 247, 255 (3d Plan, it “redeemed” the Notes “at its option” prior to Cir. 2016). Moreover, even assuming MPM's issuance of maturity. This argument fails for the same reasons we the replacement notes was a “redemption,” it would not rejected nearly identical arguments in In re AMR Corp., have been “at [MPM's] option,” as required to trigger the 730 F.3d 88 (2d Cir. 2013). There we rejected the note Optional Redemption Clauses. Rather, the obligation to holders' argument that they were entitled to a make- issue the replacement notes came about automatically by whole premium following a debtor's bankruptcy filing. We operation of separate indenture provisions, the Automatic concluded that: Acceleration Clauses. A payment made mandatory by American's bankruptcy petition operation of an automatic acceleration clause is not one triggered a default, and this default made at MPM's option. See AMR, 730 F.3d at 100B01. automatically accelerated the debt. That acceleration changed the date of maturity from some point in 2 the future ... to an earlier date based on the debtor's default under As discussed, the 2012 Indentures each contain an the contract. ... When the event Acceleration Clause, which calls for the acceleration of default occurred and the debt of payment of the Senior-Lien Notes under certain accelerated, the new maturity for conditions constituting an Event of Default. Pursuant the debt was November 29, 2011 to Section 6.01(g), one such event is MPM's filing of a [the date of the bankruptcy petition]. voluntary bankruptcy petition. Although most Events of Consequently, American's attempt Default allow the Senior-Lien Notes holders the option of to repay the debt in October 2012 accelerating payment, a default brought about by MPM's was not a voluntary prepayment

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 10 Matter of MPM Silicones, L.L.C., 874 F.3d 787 (2017) Bankr. L. Rep. P 83,176 voluntary bankruptcy petition leads to an automatic Lien Appellant 45. This argument fails because, although acceleration under Section 6.02. 15 the provisions at issue here do not expressly disallow the make-whole premium, the Optional Redemption Clauses, The Senior-Lien Notes holders argue that the term as we have seen, achieve this result. Therefore, just as in “premium, if any” in the Acceleration Clauses requires AMR, because the right to rescind acceleration here would that the make-whole premium is due upon an automatic serve as “an end-run around their bargain by rescission,” acceleration. This argument fails in light of our conclusion the lower courts correctly concluded that the automatic that the Senior-Lien Notes holders are not entitled to stay barred rescission of the acceleration of the Notes. the make-whole premium under the Optional Redemption Clauses. In other words, the make-whole premium is not due pursuant to the Acceleration Clauses' reference to V “premium, if any,” for the simple reason that the more specific Optional Redemption Clauses which grant the [11] [12] [13] Debtors seek dismissal of these make-whole are not triggered and thus no premium has appeals under the principle of equitable mootness, a been generated. See Aramony v. United Way of Am., “prudential doctrine that is invoked to avoid disturbing a 254 F.3d 403, 413 (2d Cir. 2001) (noting that “it is a reorganization plan once implemented.” In re Metromedia fundamental rule of contract construction that specific Fiber Network, Inc., 416 F.3d 136, 144 (2d Cir. terms and exact terms are given greater weight than 2005). 17 The doctrine “allows appellate courts to dismiss general language” (internal quotation marks omitted)). bankruptcy appeals ‘when, during the pendency of an appeal, events occur’ such that ‘even though effective relief could conceivably be fashioned, implementation 3 of that relief would be inequitable.’ ” In re Motors Liquidation Co., 829 F.3d 135, 167 (2d Cir. 2016) [10] Finally, the Senior-Lien Notes holders argue that the (quoting In re Chateaugay Corp., 988 F.2d 322, 325 lower courts erred in disregarding their contractual right (2d Cir. 1993) (“Chateaugay II”)). The doctrine requires to rescind acceleration, 16 a right that if invoked would us to “carefully balance the importance of finality in have reinstated the original maturity date and thereby bankruptcy proceedings against the appellant's right to kept the Optional Redemption Clauses (and therefore the review and relief.” In re Charter Commc'ns. Inc., 691 F.3d make-whole premium) in effect. 476, 481 (2d Cir. 2012). With these principles in mind, we decline to dismiss any of these appeals as equitably moot. AMR forecloses this argument as well. There, considering nearly identical indenture language, we concluded that a [14] Where, as here, a reorganization plan has been creditor's post-petition invocation of a contractual right substantially consummated, we presume that an appeal to rescind an acceleration triggered automatically by a of that plan is equitably moot. In re BGI, Inc., 772 F.3d bankruptcy filing is barred because it would be “an 102, 104 (2d Cir. 2014). That presumption, however, gives attempt to modify contract rights and would therefore be way where five factors first identified in Chateaugay II are subject to the automatic *804 stay.” 730 F.3d at 102; met. They are, where: (i) effective relief can be ordered; see also id. at 102-03 (“any attempt by U.S. Bank to (ii) relief will not affect the debtor's re-emergence; (iii) rescind acceleration now—after the automatic stay has relief “will not unravel intricate transactions”; (iv) affected taken effect—is an effort to affect American's contract third-parties are notified and able to participate in the rights, and thus the property of the estate”). appeal; and (v) appellant diligently sought a stay of the reorganization plan. In re Charter, 691 F.3d at 482. The Senior-Lien Notes holders again attempt to distinguish AMR by relying on the fact that the [15] Although we require satisfaction of each Chateaugay acceleration provision there, unlike the one here, expressly II factor to overcome a mootness presumption, we have disavowed the make-whole premium. According to the placed significant reliance on the fifth factor, concluding 1.5-Lien Notes holders, our concern in AMR was that a “chief consideration under Chateaugay II is therefore with not allowing the creditors “an end-run whether the appellant sought a stay of confirmation.” around their bargain by rescission.” 15-1682 Br. of 1.5- In re Metromedia, 416 F.3d at 144. Along these lines,

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 11 Matter of MPM Silicones, L.L.C., 874 F.3d 787 (2017) Bankr. L. Rep. P 83,176 we concluded that “[i]f a stay was sought, we will provide relief if it is at all *805 feasible, that is, Given the scale of Debtors' reorganization, we are not unless relief would ‘knock the props out from under the persuaded that a payment of, perhaps, $32 million authorization for every transaction that has taken place in annual payments over seven years, with no other and create an unmanageable, uncontrollable situation for redistribution from other creditors or third parties, the Bankruptcy Court.’ ” Id. (quoting Chateaugay II, 10 would unravel the plan, threaten Debtors' emergence, or F.3d 944, 953 (2d Cir. 1993)). otherwise materially implicate the concerns identified in Chateaugay II. A special emphasis on this factor is sound. Equitable mootness issues only arise in earnest following a judicial Our conclusion is supported by the findings of the determination that some facet of a reorganization lower courts, which had intimate familiarity with the plan violates the Code. It is generally considered Debtors' financial condition and the transactions that inappropriately harsh to deny relief to which one is will arise from the reorganization. Although it made entitled on the purportedly equitable ground that the no determinative ruling as to equitable mootness, the unfair (or illegal) plan has been put into effect, especially bankruptcy court opined that “the risk of equitable where a creditor took all appropriate steps to secure mootness is not strong here for either set of movants judicial relief. In such a case, we have held that it is proper ... the senior secured lender set of movants and the to “provide relief if it is at all feasible.” Id. senior subordinated noteholder movants.” 15-1682 JA 4165 (emphasis added). The district court agreed. 15-1682 [16] Here, the appellants immediately objected to various JA 4837 (“I agree with Judge Drain that the risk of provisions of the Plan and promptly and consistently equitable mootness here is not very great ...”). Debtors' sought a stay in three different courts. Thus their diligence request that we dismiss these appeals as equitably moot is is not in question. Debtors nevertheless argue that these denied. appeals should be dismissed as moot because of the cascading effects of rewriting the plan were the appellants to prevail. Specifically, they argue that “granting the VI Noteholders' relief would alter a critical piece of the Plan resulting from the intense-multi-party negotiation, To summarize, we conclude as follows: thereby impact[ing] other terms of the agreement and throw[ing] into doubt the viability of the Plan,” and that 1. The Second-Lien Notes stand in priority to the according such relief “would cause debilitating financial Subordinated Notes. uncertainty” to the emergent Debtor. 15-1682 Br. of Appellees 69, 71 (internal quotation marks omitted). *806 2. The Senior-Lien Notes holders are not entitled to the make-whole premium.

In light of the limited nature of the remand we order, 3. The lower court erred in the process it used we do not believe these concerns will materialize. On to calculate the interest rate applicable to the remand, the bankruptcy court will only be called on to replacement notes received by the Senior-Lien Notes re-evaluate the interest to be received on the replacement holders. On remand, the bankruptcy court should notes held by the Senior-Lien Notes holders. The Debtors assess whether an efficient market rate can be acknowledge that this might require, at most, $32 million ascertained, and, if so, apply it to the replacement of additional annual payments over seven years. 15-1682 notes. Br. of Appellees 69. The Debtors will not have to pay out the nearly $200 million they assert would be 4. We decline to dismiss any of these appeals as required to pay the Senior-Lien Notes holders' make- equitably moot. whole premium, nor will any redistribution be required to the Subordinated Notes holders, as to which the plan For the foregoing reasons, we AFFIRM the District is fair. In fact, our judgment allows for no redistribution Court's order in part, with respect to the priority of the other than that from the Debtors to the Senior-Lien Notes Subordinated Notes and the Senior-Lien Notes holders' holders. entitlement to a make-whole premium; REVERSE the

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 12 Matter of MPM Silicones, L.L.C., 874 F.3d 787 (2017) Bankr. L. Rep. P 83,176 order in part, with respect to the method of calculating the interest rate on the Senior-Lien Notes holders' All Citations replacement notes; and REMAND the matter for further proceedings consistent with this opinion. 874 F.3d 787, Bankr. L. Rep. P 83,176

Footnotes 1 Momentive Performance Materials, Inc.'s “MPM,” and with affiliated debtors, “Debtors”. 2 The facts recounted herein derive principally from the bankruptcy court's decision confirming Debtors' reorganization plan, In re MPM Silicones, LLC, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014), aff'd 531 B.R. 321 (S.D.N.Y. 2015), as well as the public disclosures made part of the record. We rely on the facts recounted in the bankruptcy court's ruling in light of our “oblig[ation] to accept the bankruptcy court's undisturbed findings of fact unless they are clearly erroneous.” Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987). 3 As discussed, infra note 4, we resolve with this opinion three separate appeals. Our citations to the respective records will begin with the relevant docket number on appeal, and references to “JA” are to the respective joint appendices filed with that appeal. For example, our citation to “15-1771 JA 286-88” is to pages 286-88 of the joint appendix filed in the appeal brought by U.S. Bank, docketed No. 15-1771. 4 The appeals by the First-Lien Notes holders (No. 15-1682) and 1.5-Lien Notes holders (No. 15-1824) were consolidated and heard in tandem with the appeal by the Subordinated Notes holders (No. 15-1771). 5 The district court discussed in some detail the distinction between lien subordination and payment/debt subordination. 531 B.R. at 328. In short, “[l]ien subordination involves two senior creditors with security interests in the same collateral, one of which has lien priority over the other. ... By contrast, in payment subordination, the senior lender enjoys the right to be paid first from all assets of the borrower or any applicable guarantor, whether or not constituting collateral security for the senior or subordinated lenders.” Id. 6 Debtors' attempt to downplay the significance of the term “in any respect” in this context is unconvincing given that the term appears nowhere else in the indenture other than in the Fourth Proviso. 7 Debtors' reorganization plan proposed interest rates of 3.6% and 4.09%. See 2014 WL 4436335, at *24. However, the bankruptcy court concluded that those rates should be increased by 0.5% and 0.75%, respectively, in light of the fact that the base interest rate was pegged to the Treasury rate, rather than the prime rate (which reflects additional risk). Id. at *32. On appeal to the district court, the Senior-Lien Notes holders argued the bankruptcy court erred in not requiring the prime rate, an argument the district court rejected. 531 B.R. at 334-35. The Senior-Lien Notes holders do not press this argument here. 8 Here, the bankruptcy court applied risk adjustments of 2.0% and 2.75%, which it added to the Treasury rate of 2.1% to arrive at interest rates of 4.1% and 4.85%, respectively. 2014 WL 4436335, at *32. Debtors assert in their briefing that the Treasury rate dropped by approximately 0.2% between the confirmation date and the plan's effective date, which thereby further lowered their notes' interest rate. 15-1682 Br. of Appellee at 11 n.3. 9 The Supreme Court has not subsequently spoken about the interest-calculation method to be applied in a Chapter 11 case. Nor have we. 10 Numerous courts, included in this Circuit, have followed the American HomePatient approach. See, e.g., In re 20 Bayard Views, LLC, 445 B.R. 83, 108-09 (E.D.N.Y. 2011) (collecting cases and deciding to “follow the majority approach” first outlined in American HomePatient). 11 The Senior-Lien Notes holders offered evidence that the market price for their notes dropped, respectively, from 101.375% and 104.000% six days prior to the bankruptcy court's oral decision, to 94.375% and 92.563% nine days after that decision. 15-1682 JA 3991 ¶¶ 5-6, 8-9. 12 We acknowledge that the lower courts grappled with the Senior-Lien Notes holders' evidence regarding MPM's quoted exit financing, and made express their view that the rate produced by that process may not in fact have been produced by an efficient market. 2014 WL 4436335, at *26, *29; 531 B.R. at 334 n.9. Nevertheless, Judge Drain left no ambiguity that he applied the “formula” approach for Chapter 13 individual bankruptcy cases as dictated by the Till plurality and, in so doing, explicitly declined to consider market forces. See 2014 WL 4436335, at *25-*26; see also id. at *28 (“I conclude that [the American HomePatient] two-step method, generally speaking, misinterprets Till”). Judge Briccetti agreed with this approach. 531 B.R. at 334. As discussed, this was in error. The bankruptcy court should have the opportunity to engage the American HomePatient analysis in earnest.

13 A make-whole premium is a “contractual substitute for interest lost on Notes redeemed before their expected due date.” In re Energy Future Holdings Corp., 842 F.3d 247, 251 (3d Cir. 2016) (“EFH”). As stated by the bankruptcy court, its purpose “is to ensure that the lender is compensated for being paid earlier than the original maturity of the loan for the interest it will not receive ....” 2014 WL 4436335, at *15. 14 We cite in this section to the indenture for the First-Lien Notes; the indenture for the 1.5-Lien Notes is identical for relevant purposes. 15 Section 6.02 provides: “If an Event of Default specified in Section 6.01(f) or (g) with respect to MPM occurs, the principal of, premium, if any, and interest on all the Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holders.” 15-1682 JA 2260. 16 “Holders of a majority in principal amount of outstanding Notes by notice to the Trustee may rescind any such acceleration with respect to the Notes and its consequences.” 15-1682 JA 2260. 17 Debtors filed with the district court a motion to dismiss the appeal of the bankruptcy court's confirmation order on the basis of equitable mootness. 15-1771 JA 4570-88. The district court made no ruling on the motion, concluding it was “mooted by this Court's decision to affirm the Orders of the Bankruptcy Court.” 531 B.R. at 338 n.14. Debtors then filed motions to dismiss on equitable mootness grounds with this Court, 15-1682 Doc. 58; 15-1771 Doc. 62, which we summarily denied without prejudice to Debtors “rais[ing] the issue ... in their merits brief,” 15-1682 Doc. 159; 15-1771 Doc. 102.

KeyCite Yellow Flag - Negative Treatment West Headnotes (14) Distinguished by In re HWA Properties, Inc., Bankr.M.D.Fla., January 6, 2016 [1] Bankruptcy 501 B.R. 441 Confirmation; Objections United States Bankruptcy Court, M.D. Florida. Tampa Division Chapter 11 debtor had to prove confirmability of its proposed reorganization plan only by In re: J.C. Householder Land Trust # 1, Debtor. preponderance of the evidence, and not by clear and convincing evidence. 11 U.S.C.A. § Case No. 8:13–bk–07271–MGW 1129(a). | Filed October 23, 2013 1 Cases that cite this headnote

Synopsis Background: Secured lender objected to confirmation of [2] Bankruptcy debtor's proposed Chapter 11 plan, based principally Feasibility in general on its alleged lack of feasibility and on inadequacy of To prove that its proposed reorganization proposed “cramdown” rate of interest. plan was “feasible,” as required for confirmation, Chapter 11 debtor had to demonstrate that confirmation of plan was not likely to be followed by debtor's Holdings: The Bankruptcy Court, Michael G. Williamson, liquidation or by need for any further J., held that: financial reorganization. 11 U.S.C.A. § 1129(a)(11). [1] proposed plan, under which debtor would make all of its plan payments, including payments to secured lender 1 Cases that cite this headnote based on 25-year amortization schedule, out of income generated from shopping center, with a five-year balloon payment that debtor was to make by refinancing property, [3] Bankruptcy satisfied “feasibility” concerns; Feasibility in general Determination as to feasibility of proposed [2] plan was proposed in “good faith”; Chapter 11 plan must be firmly rooted in predictions based on objective facts. 11 [3] rate of 5%, consisting of prime rate of 3.25% plus risk U.S.C.A. § 1129(a)(11). adjustment of 1.75%, was appropriate cramdown rate of interest; and 1 Cases that cite this headnote

[4] court would approve provision in proposed plan [4] Bankruptcy that purported to bar debtor's major secured lender Feasibility in general from pursuing debtor's principals on their guarantees of In order for proposed Chapter 11 plan to debtor's debt to lender while debtor was current in plan be “feasible,” as required for confirmation, payments. objective facts must show that it is more likely than not that debtor will be able to make Objections overruled; plan confirmed. all payments required by plan. 11 U.S.C.A. § 1129(a)(11).

1 Cases that cite this headnote

[5] Bankruptcy

Feasibility in general Classification of claims Proposed Chapter 11 plan, under which Bankruptcy debtor would make all of its plan payments, Good faith and legality including payments to secured lender based on That Chapter 11 debtor's proposed plan 25-year amortization schedule, out of income would make only the major secured creditor generated from shopping center located on that provided financing for debtor's shopping property securing lender's claim, with a five- center wait until final month of plan to receive year balloon payment that debtor was to make balloon payment from anticipated refinancing by refinancing property after its principals' of shopping center property presented solely a credit scores had improved, satisfied statutory claim classification issue that did not detract “feasibility” requirement, where debtor had from “good faith” of its proposed plan, which excellent payment history and had filed for debtor had filed with unusual speed in attempt bankruptcy solely to deal with maturity to deal with maturity default, and not with any default and not with any default in its default in its prepetition payments, in manner regular monthly payments, where income that consistent with objectives of the Bankruptcy shopping center generated was fully sufficient Code. 11 U.S.C.A. § 1129(a)(3). to fund plan payments if shopping center was 85% occupied and shopping center was Cases that cite this headnote currently 88% occupied, and where it was likely that debtor would be able to refinance [9] Interest given that it had substantial equity in property Computation of rate in general and that real estate values in area were rising. In absence of efficient market to provide 11 U.S.C.A. § 1129(a)(11). exit financing to borrowers such as Chapter Cases that cite this headnote 11 debtor, which operated small shopping center that lacked anchor tenant, bankruptcy court would employ the Till formula approach [6] Bankruptcy to calculate appropriate cramdown rate of Good faith and legality interest for debtor to pay to lender whose To determine whether Chapter 11 plan is claim was to paid according to 25-year proposed in “good faith,” as required for amortization schedule with five-year balloon confirmation, bankruptcy courts look to payment. 11 U.S.C.A. § 1129(b)(1)(A)(i)(II). totality of the circumstances. 11 U.S.C.A. § 1129(a)(3). Cases that cite this headnote

Cases that cite this headnote [10] Interest Computation of rate in general [7] Bankruptcy Under Till formula approach for calculating Good faith and legality appropriate cramdown rate of interest for To determine whether Chapter 11 plan is Chapter 11 debtor to pay to lender whose proposed in “good faith,” as required for claim was to paid according to 25-year confirmation, bankruptcy courts generally amortization schedule with five-year balloon focus on terms of plan and its ability to payment, rate of 5%, consisting of prime rate achieve objectives of the Bankruptcy Code. 11 of 3.25% plus risk adjustment of 1.75%, was U.S.C.A. § 1129(a)(3). appropriate, given debtor's excellent payment history, having filed for bankruptcy only in Cases that cite this headnote response to maturity default and not to any default in its payments, the substantial equity [8] Bankruptcy cushion that lender enjoyed, and likelihood

that debtor would be able to refinance at overwhelmingly voted to accept plan; (5) conclusion of five-year plan. 11 U.S.C.A. § whether plan provides mechanism to pay for 1129(b)(1)(A)(i)(II). all, or substantially all, of the class or classes affected by bar order; and (6) whether plan 2 Cases that cite this headnote provides an opportunity for those claimants who choose not to settle to recover in full. 11 [11] Bankruptcy U.S.C.A. §§ 105(a), 524(e). Provisions for satisfaction of claims; 2 Cases that cite this headnote relation to recovery in liquidation Proposed Chapter 11 plan that provided for payment of all claims in full with interest [14] Bankruptcy plainly satisfied “best interests of creditors” Carrying out provisions of code test, as required for it to be confirmed. 11 Bankruptcy U.S.C.A. § 1129(a)(7)(A)(ii). Settlement, adjustment, or enforcement of claims 1 Cases that cite this headnote Bankruptcy court would approve, in exercise of its power to issue “necessary or [12] Bankruptcy appropriate” orders, provision in debtor's Carrying out provisions of code proposed Chapter 11 plan that purported Bankruptcy to bar debtor's major secured lender Settlement, adjustment, or enforcement from pursuing debtor's principals on their of claims guarantees of debtor's debt to lender while debtor was current in its 100%-payment Bankruptcy court had authority, pursuant to plan, where there was identity of interest its power to issue “necessary or appropriate” between debtor and its principals, where orders, to confirm Chapter 11 plan that principals, by depleting their personal assets, contained provision purporting to bar lender had substantially contributed to debtor and from pursuing Chapter 11 debtor's principals would be contributing their time and effort on their guarantees of debtor's indebtedness going forward, and where entry of bar order to lender while debtor was current in its plan was essential to debtor's reorganization, as payments. 11 U.S.C.A. §§ 105(a), 524(e). allowing principals to reorder their personal Cases that cite this headnote finances without need of bankruptcy filing in manner that would facilitate debtor's obtaining the exit financing necessary to make [13] Bankruptcy final balloon payment to lender at conclusion Settlement, adjustment, or enforcement of plan's term. 11 U.S.C.A. §§ 105(a), 524(e). of claims Among factors which bankruptcy courts 1 Cases that cite this headnote consider in deciding whether to approve proposed bar order in Chapter 11 plan to prevent creditor from pursuing non- debtor third party for its liability on Attorneys and Law Firms debtor's debt, courts consider the following: (1) whether debtor and third party share Adam Lawton Alpert, Esq., Buss Ross, P.A.,Counsel for identity of interest; (2) whether non- Debtor. debtor has contributed substantial assets Gregg W. McClosky, Esq., McClosky, D'Anna & to debtor's reorganization; (3) whether bar Dieterle, LLP,Counsel for SPCP Group V, LLC. order is essential to debtor's reorganization; (4) whether impacted class, or classes,

business trust is a partnership owned by Mr. Householder and his wife (70%) and their kids (30%). The trust and Chapter 11 partnership were formed in 1986 and have jointly owned and operated the Debtor's real estate business since that FINDINGS OF FACT AND CONCLUSIONS time. OF LAW ON CONFIRMATION

Michael G. Williamson, United States Bankruptcy Judge The Property The Debtor seeks to confirm its proposed plan over the objection of its primary secured lender. Under its plan, The Debtor's real estate business consists of a 7.13– the Debtor proposes to pay the secured lender's claim acre parcel of land in Plant City, Florida, that has (approximately $1.1 million) amortized over twenty-five been improved by a 40,420 square-foot multi-tenant, years at 5% interest, with a five-year balloon payment. The retail shopping center; a small commercial office/storage secured lender principally objects to confirmation because building; and a rental house. *445 The shopping center it says the cramdown interest rate is too low and that the is sited on 3.75 acres of land, while the rental house Debtor is unable to demonstrate it will be able to make the —a 572 square-foot, 2–bedroom/1–bathroom home—is balloon payment. sited on 0.27 acres. There is 3.11 acres of excess land. All of the buildings have been adequately maintained; In overruling the secured lender's objection, the Court no significant deferred maintenance is required. The first concludes that, since there is no efficient market for buildings' appearance is average relative to the competing exit financing in this case, the appropriate method for buildings within the market. The shopping center is similar determining the cramdown interest rate in this case is in quality to other buildings in the area. the formula approach enunciated by the United States For the first sixteen years, the shopping center was Supreme Court in Till v. SCS Credit Corp. 1 Under the operated as a Foodland Grocery Store. By 2002, however, formula approach, the Court starts with the prime rate the demographics of the Plant City area had changed, with and adds a supplemental risk adjustment. Based on the migrant workers making up 50% of the local population testimony of the Debtor's expert, the Court concludes and blue-collar workers making up the other 50%. At that that a 1.75% risk adjustment is appropriate. When added point, the Debtor attempted to sell the grocery business to the prime rate, that yields a 5% cramdown interest and lease the premises to a new operator. But the Debtor rate. Next, the Court concludes that the Debtor's plan realized it needed to update the shopping center and (including the balloon payment) is feasible. Finally, the equipment. So the Debtor made a substantial investment Court concludes that the Debtor satisfies the remaining into the property. By the end of 2006, the property had confirmation elements—including that the plan was been updated. proposed in good faith, that it satisfies the best interest of the creditors test, and that the bar order in the plan From 2006 to 2011, the shopping center was successfully is appropriate. Accordingly, the Court will overrule the operated by other owners of the grocery store. The creditor's objections and confirm the Debtor's proposed recession hit the area pretty hard by 2011, however, plan. with various local plant closings. In December 2011, the Householders took the property back, only to later sell the grocery business and re-lease the grocery store space in Background the shopping center to new operators who had successfully run a grocery store in New York. The new operators have The Debtor continued to operate the grocery business successfully to this day under a five-year lease (with several options to The Debtor is a business trust established by the extend). Householder family to own and operate a shopping center and the surrounding property. Jeffrey Householder is the trustee of the business trust. The sole beneficiary of the

SPCP's Claim Plan of Reorganization When the Debtor purchased the property in 1986, it obtained financing from Bank of America. That loan was The same day the Debtor filed this case, it filed its amortized over twenty-five years, with a ten-year balloon. proposed Chapter 11 plan. 3 The Debtor's proposed plan The loan was renewed in 1996. At the time it was renewed, divided creditors into five classes: the loan had a floating interest rate that rose as high as 7%, although it was generally much lower. In 2002, a. Class 1 consists of the allowed priority claims. AmSouth Bank approached the Debtor about refinancing Under the plan, these claims will be paid in full on the Debtor's loan with Bank of America. AmSouth offered confirmation. Class 1 is unimpaired. a floating interest rate of LIBOR plus 2% points, which was less than 5% at the time. The interest rate on the b. Class 2 consists of the Hillsborough County Tax Debtor's loan later became fixed at 5.5% in 2005. When Collector's allowed secured claims. Although the plan the loan came due in 2011, the parties agreed to extend it specifies that Class 2 is impaired, it appears that taxes for one more year. are—and will remain—current under the plan. c. Class 3 consists of SPCP's allowed secured claim. On June 20, 2012, however, the Debtor received a letter Under the Debtor's plan, SPCP will be paid in full, from SPCP Group V, LLC calling the loan due. SPCP with payments amortized over twenty-five years at is an investment company that is in the business of, an interest rate of 5% and a balloon due on the 60th among other things, buying matured, performing loans. 4 It appears that AmSouth, like many banks during that month after the plan's effective date. The plan also period, sold matured loans—like the Debtor's loan—to enjoins SPCP from pursuing any claim against non- investors like SPCP rather than renewing them, even loans debtor guarantors so long as the Debtor is current on that had always performed successfully. According to Mr. its plan payments. SPCP is impaired and has voted Householder, he was completely blindsided when SPCP against the plan. called the loan due. So he asked for—and obtained—an d. Class 4 consists of BB & T's secured claim. BB & T extension through December 7, 2012. will be paid in full, plus 5% interest. BB & T will be paid over sixty months in equal monthly payments. Mr. Householder did not envision any problem with BB & T is impaired and has voted in favor of the plan. refinancing the loan because of its loan-to-value ratio (it was 50%) and the Debtor's track record of payment. e. Class 5 consists of the allowed unsecured claims. In fact, there had never been any monetary default, There are two creditors voting in this class: Thomas other than the inability to pay the loan on maturity. Murtha (the Debtor's CPA), who holds a $3,200 In other words, the Debtor's financial problems with claim; and TECO, which holds a $30,000 claim. The respect to this property relate to a maturity default—not a unsecured creditors are impaired. Murtha voted in payment default. Unfortunately, the Householders' credit favor of the plan. 5 So did TECO. 6 score became a problem because of other bad real estate investments they had made, and as a consequence, the *447 SPCP objected to the Debtor's proposed plan for Debtor was unable to refinance the SPCP loan by the four reasons: First, SPCP says the Debtor's plan is not December 7 deadline. feasible. Second, SPCP says the Debtor failed to propose its plan in good faith because it allegedly fails to pay With the Debtor unable to refinance the loan, SPCP sued SPCP the present value of its claim. Third, SPCP says to foreclose its interest in *446 the property. At the time the Debtor's proposed plan violates the best interests of SPCP sued to foreclose its mortgage, it claimed it was the creditors test. Fourth, SPCP says the Court does owed approximately $1.1 million. The Debtor's property not have jurisdiction to bar claims against non-debtor apparently was worth approximately $2 million. Given the 7 guarantors. significant equity in the property, the Debtor filed this bankruptcy case to preserve the value of its assets. 2

burden of proof in dischargeability actions. 16 According to the Supreme Court, that silence was “inconsistent with Conclusions of Law 8 the view that Congress intended to require a special, heightened standard of proof.” Because the language of § Debtor's burden of proof is the 1129, as well as its legislative history, is likewise silent as to preponderance of the evidence. the burden of proof, the Fifth Circuit held that Congress could not have intended for the “clear and convincing [1] Before addressing each of those objections, it is evidence” standard to apply on confirmation. 17 important to first consider the Debtor's burden of proof on confirmation. SPCP contends that the Debtor This Court agrees with the Fifth Circuit's conclusion must prove the confirmation elements by clear and that debtors must prove the confirmation elements by convincing evidence. The Debtor argues that its burden a preponderance of the evidence. As the Fifth Circuit is the preponderance of the evidence standard. Indeed, it pointed out, confirmation does not involve any important appears there is a split of authority regarding whether a personal interests, much less the types of personal interests debtor must prove each of the elements of confirmation by involved in cases where the Supreme Court held the a preponderance of the evidence or clear and convincing “clear and convincing evidence” standard applied. More evidence. The overwhelming majority of courts have held importantly, there is no statutory basis for applying that that a debtor need only satisfy the preponderance of the 9 heightened standard. Accordingly, the Court will now evidence standard. Nevertheless, a number of courts address each of SPCP's objections, in turn. have held that a debtor must prove the confirmation elements by clear and convincing evidence. 10 The Fifth Circuit Court of Appeals addressed the issue of the It is feasible that the Debtor can appropriate burden of proof on confirmation twenty make its current plan payments. years ago in its well-reasoned decision in In re Briscoe Enterprises. 11 [2] [3] [4] [5] Under Bankruptcy Code § 1129, the Debtor must demonstrate that confirmation of its plan is There, the Fifth Circuit, after noting a split of authority not likely to be followed by the Debtor's liquidation or regarding the burden of proof on confirmation, observed the need for any further financial reorganization. 18 That that none of the cases applying the clear and convincing determination must, as SPCP points out, be “firmly rooted standard—rather than preponderance of the evidence in predictions based on objective fact[s].” 19 And those standard—offered any justification for subjecting debtors objective facts must show that it is more likely than not 12 to a higher burden of proof. The court then looked that a debtor will be able to make all payments required to a variety of United States Supreme Court decisions by the confirmed plan. 20 The Debtor meets that standard discussing the relevant burden of proof in different here. contexts. 13 The Fifth Circuit noted that the United States Supreme Court had explained, in Addington v. Texas, that The facts presented at confirmation demonstrate that the it used the “clear and convincing standard ‘to protect current tenant mix at the shopping center is stable and particularly important individual interests,’ ” such as provides enough income at 85% occupancy to fully fund naturalization or deportation. 14 Importantly, the United the plan. And the property is currently leased at 88%. States Supreme Court, as the Fifth Circuit *448 points The Debtor's cash flow from renting the property allows out, rejected the “clear and convincing evidence” burden the Debtor to service the SPCP debt and accumulate of proof in dischargeability proceedings in Grogan v. enough cash to fund necessary property maintenance, Garner. 15 pay the insurance, and pay the property taxes, as well as accumulate additional cash to cover any unforeseen The Supreme Court's decision in Grogan was based in contingencies or shortfalls. SPCP tried to dispute this last large part on the fact that the language of Bankruptcy point by arguing that the cash flow projections differ Code § 523 (as well as its legislative history) was silent as to from the monthly operating reports. To the contrary, a review of the monthly operating reports for June and July

2013 reflect that the numbers in the cash flow projections correspond with those in the monthly operating reports, It is feasible the Debtor will be able to which are the most recent financial figures available and refinance the SPCP loan in five years. the most reasonable ones to base future projections on. The Debtor's future projections demonstrate that the SPCP's better—even if ultimately unpersuasive— shopping center generates enough revenue to allow the argument on feasibility is its claim that the Debtor will Debtor to make its plan payments. not be able to refinance its loan in five years. Under its plan, the Debtor is required to pay off SPCP's loan at the In addition to the revenue generated from the shopping end of five years. But according to SPCP, the Debtor has center, the Debtor has other sources of revenue. For failed to prove it has the financing in place to do that. The instance, *449 the residential property located on the Court, however, concludes that the Debtor will be able to property is available for rent. Likewise, the laundromat refinance the SPCP loan for two reasons. the Debtor is currently operating is also available for rent. The Debtor has ongoing discussions with a bond First, the Debtor has a reasonable “game plan” for company for the other property, and based on his years refinancing the balloon payment. The Debtor's game plan of experience in renting this property, Mr. Householder is for its principals (the Householders) to work through reasonably believes that by January 2014 this property can their ongoing real estate problems and improve their credit be leased for a $2000 per month, which is inclusive of the scores so that they can ultimately refinance the SPCP $2000 incentive to be paid for six months to cover any loan. Under the plan, they have five years to do that. Mr. broker's commission and tenant improvements. After six Householder testified he thought the Householders could months, this $2000 will be added on to the Debtor's cash work through all of their other problems in two years, flow. So the residential property and laundromat provide which would give them three years to find financing for additional revenue that allows the Debtor to not only the SPCP loan. Mr. Householder testified credibly that make its plan payments but also accumulate additional significant progress was already being made—whether cash. in terms of mortgage mediations or short sales—toward resolving the problems with the Householders' real estate While it is true, as SPCP argues, that the Debtor has investments. In addition, the Householders' daughter just not set aside specific escrow accounts to fund taxes, earned her Master's Degree, and it is reasonable to assume insurance, and maintenance, there is nothing that requires she will be able to obtain a credit score that would support the Debtor to do so. The Debtor need only show that it has the Debtor's refinancing efforts once her work situation sufficient cash flow—based on its projections—to cover stabilizes. Based on Mr. Householder's testimony, the these expenses. And the Debtor's cash flow projections Court concludes that the Householders will be able to show ample accumulation of cash to cover these expenses. resolve their ongoing real estate problems and improve Importantly, the Debtor is current on its payments to their credit scores. SPCP at a monthly payment amount calculated at the full amortization amount set forth in the loan documents. Second, there is substantial equity in the property. In Plus, all real estate taxes and property insurance have been particular, SPCP is owed *450 $1,060,000. The property paid in full. Given the Debtor's track record of payments, (including the strip shopping center, the excess land, and the current tenants operating the shopping center, and the residential home) is worth approximately $2 million. the property's loan-to-value ratio, the Court concludes the So the loan-to-value ratio is approximately 50%, which is objective facts demonstrate that the Debtor will be able to excellent by any standard. Even considering the grocery make its plan payments. Accordingly, the Court concludes store alone, the loan-to-value ratio (using a discounted the plan is feasible in terms of the Debtor's ability to make cash flow methodology to determine value) is still better its current plan payments to SPCP and the other creditors than 70%. Given the excellent loan-to-value ratio, the and, as discussed below, its ability to refinance the balloon Court concludes it will be feasible for the Debtors to payment in five years. refinance the SPCP loan once they straighten out the problems with their real estate investments and improve their credit scores.

Incidentally, the Court notes SPCP's argument (i.e., the what will happen in five years. By contrast, the Debtor's Debtor will not be able to refinance the balloon payment expert testified credibly that the Debtor could get when it comes due) is the same one it made in a previous refinancing if the Debtor hits its projections, the land chapter 11 case before this Court: In re Cypress Creek. 21 value holds, and the Debtor's principals improve their In that case, there was no efficient market for exit credit rating. And the Court has already concluded that those projections are reasonable, the land values will hold, financing in place at the time the case was confirmed. 22 and the Householders will improve their credit rating. But this Court took into consideration the time before Accordingly, the Court concludes it is feasible that the the balloon payment was due (six years in that case) Debtor will be able to refinance SPCP's loan. and noted that, while an efficient market did not exist at confirmation, markets do change over time. 23 The Court concluded in Cypress Creek that the fact that markets do turn around, coupled with the debtor's recent track record The Debtor proposed its plan in good faith. of payment, demonstrated that it was feasible the debtor [6] [7] [8] Under § 1129(a)(3), the Debtor must 24 would be able to refinance SPCP's loan. The district prove the plan was proposed in good faith. The term court affirmed this Court's feasibility determination on “good faith,” however, is not defined anywhere in the 25 appeal. Bankruptcy Code. 27 As a consequence, bankruptcy courts determine the existence of good faith in light The facts of this case are nearly identical to Cypress of the totality of the circumstances. 28 In reviewing the Creek. Like in Cypress Creek, the Debtor has a track totality of the circumstances to determine good faith, record of making its loan payments. As this Court has courts generally focus on the terms of the plan and pointed out several times, this case is a maturity-default the ability of the plan to achieve the objectives of the —not a payment-default—case. Moreover, the Debtor's 29 projections reflect it will be able to continue making Bankruptcy Code. Here, there really is no question its payments to SPCP under the plan. And it was the that the plan proposed achieves the Bankruptcy Code's opinion of Mr. Katsadouros (the Debtor's expert) that the objectives. Instead, SPCP argues that the plan has not Debtor will be able to get refinancing if the Debtor hits its been proposed in good faith because SPCP is not going to projections, the land value holds, and the Householders be paid in full, while other creditors are being paid in full improve their credit rating. over the term of the plan.

This Court finds that the Debtor's projections are SPCP's good-faith objection fails for two reasons. First, reasonable given (1) the Debtor's current performance SPCP will, in fact, be paid in full over the term of the numbers; (2) the fact the Debtor has a long-term tenant plan—albeit with a balloon payment. Balloon payments that has been operating the grocery store successfully; are typical in real estate financings, as evidenced by the and (3) the Debtor appears on the verge of obtaining testimony by both parties' expert witnesses of the type of other tenants for the shopping center property. As for financing that is available in the marketplace. In fact, the land values in this area, the Court finds—based upon majority of the examples given by the experts on both sides literally hundreds of land valuations it is called on to involved balloon payments. Since the Court has found it make or approve—land values have taken a turn for the is feasible to pay off the loan in five years, then SPCP better and that there have been substantial increases in will be paid in full. Second, there is nothing in the good- land values throughout the area. As for the Householders' faith requirement that requires everyone to be treated the credit rating, the Court concludes, as set forth above, that same. That is a classification issue, and there has been no the Householders have a plan for improving their credit objection to improper classification of claims. All that is required is that all of the claims in a particular class receive rating; and they have five years to do it. 26 the same treatment. And that is what the Debtor's plan provides for here. The real focus in bad-faith cases is on *451 The only evidence offered that obtaining financing whether the debtor intended to abuse the judicial process in five years is not feasible was the testimony of SPCP's and the purposes of the reorganization provisions. expert (David Repka). But the best that Mr. Repka could come up with is that it is “hard to speculate”

Looking at the traditional evidence bankruptcy courts effective date of the plan. 32 In other words, the deferred consider in making good-faith determinations, the Court payments, discounted to present value by applying an finds that they all weigh in favor of a finding of good appropriate interest rate, must equal the allowed amount faith here. For instance, this case was caused entirely of the secured creditor's claim. by circumstances brought about by the so-called “Great Recession.” Moreover, this is not even a payment-default The critical issue in this analysis is the appropriate interest case; it is a maturity-default case. Financial circumstances rate. The leading case discussing the interest rate for beyond the Debtor's control prevented the Debtor and cramming down a creditor is the United States Supreme its principals from renewing or refinancing the SPCP Court's 2004 decision in Till v. SCS Credit Corp. 33 In Till, loan. Neither the Debtor nor its principals have any a secured creditor objected to the cramdown interest rate track record of prior bankruptcy filings, which is typical in the debtor's proposed chapter 13 plan. Section 1325, in bad-faith cases. There were no prolonged foreclosure like § 1129, allows a chapter 13 debtor to cramdown a proceedings in state court. Nor is there any evidence the secured creditor. As in Chapter 11 cramdown under § *452 Debtor filed this case for purposes of delay. In fact, 1129, § 1325 requires bankruptcy courts to ensure that the this case was prosecuted in record time. It is very rare property to be distributed to a particular secured creditor to have a plan filed with a petition and then ready for over the life of a bankruptcy plan has a total “value, as confirmation as quickly as the Debtor did in this case. In of the effective date of the plan,” that equals or exceeds most cases, debtors buy as much time as possible to try to 34 confirm a plan. Here, the Debtor prosecuted this case very the value of the creditor's allowed secured claim. This quickly and, but for the objections by SPCP, would have requires a payment of interest over the repayment period. been out of Chapter 11 some time ago. The issue is—what is the appropriate interest rate? The Supreme Court in Till considered four possibilities for the cramdown interest rate: the coerced loan, the presumptive contract rate, the cost of funds, and the formula *453 The appropriate cramdown interest rate is 5%. approach. 35 In order for a Chapter 11 plan to be confirmed, the proponent of the plan—typically the debtor—has the The Court ultimately settled on the formula approach. burden of establishing the requirements enumerated in § According to the Supreme Court, the other three 1129(a)(1)-(16). One of those subsections—§ 1129(a)(8)— approaches should be rejected because they are complicated, impose significant evidentiary costs, and aim requires that each impaired class has accepted the plan. 30 to make creditors whole rather than ensure that creditors Here, one of the impaired classes of creditors—Class 3 are paid the present value of their claims. The formula (consisting of SPCP's secured claim)—did not accept the approach, however, does not suffer from any of those plan. Because it failed to satisfy § 1129(a)(8), the Debtor defects. Under the formula approach, the bankruptcy must look to § 1129(b) to confirm its plan. court starts with the national prime rate. 36 Under § 1129(b), the Court can confirm a plan over the objection of an impaired creditor (assuming all of the The prime rate, of course, reflects the financial market's other requirements of confirmation of § 1129(a) are met) if estimate of what a commercial bank should charge a commercial borrower who is creditworthy. So that it is “fair and equitable.” 31 This procedure is commonly takes into account, as the Court recognized, the bank's referred to as “cramdown” because the Court is imposing opportunity costs and the relatively slight risk of a plan treatment on an impaired class of creditors— 37 involuntarily—over their objection. Section 1129(b) goes default. But what about the greater risk of default posed on to provide when a plan is “fair and equitable” with by a debtor in bankruptcy? To account for a debtor's respect to different classes of creditors. With respect to a increased likelihood of default, bankruptcy courts secured claim, a debtor can satisfy the “fair and equitable” employing the formula approach add a supplemental risk requirement by providing the creditor—in this case, SPCP adjustment. 38 —with deferred payments of a “value” at least equal to the “allowed amount” of the secured claim as of the

The supplemental risk adjustment is intended to account market did not exist. In considering the issues on appeal, for factors such as the circumstances of the bankruptcy the district court in Cypress Creek considered this Court's estate, the nature of the creditor's collateral, and the application of the Daubert 49 standard (as adopted in duration and feasibility of the plan. 39 Unfortunately, the Federal Rule of Evidence 702) at confirmation. Court did not provide any specific guidance regarding the amount of the supplemental risk adjustment. That The threshold requirement for the admissibility of the issue was not before the Court. The bankruptcy court in opinion testimony under Rule 702—once it is established that case had approved a 1.5% risk adjustment, which the that a witness is qualified as an expert by knowledge, Court affirmed. 40 And the Supreme Court observed that skill, experience, training, or education and can testify in bankruptcy courts generally approve risk adjustments the form of an opinion and that the expert's specialized knowledge will help the trier of fact to understand the ranging from 1% to 3%. 41 evidence or to determine a fact in issue—is threefold: First, the testimony must be based on sufficient facts [9] Admittedly, Tillwas a chapter 13 case. That is relevant or data. Second, the testimony must be the product of because the Supreme Court, in a footnote, observed that reliable principles and methods. Third, the expert must there is no readily apparent Chapter 13 cramdown market have reliably applied the principles and methods to the interest rate. 42 By contrast, the Court observed, the same facts of the case. 50 It is the first requirement that is the is generally not true in Chapter 11 cases. The Court noted most important. that numerous lenders advertise financing for Chapter 11 debtors. 43 Because of the availability of financing in The simple ipse dixit of the expert is not enough. 51 chapter 11 cases, the Court suggested it might make sense The expert must be able to point to hard evidence—in for bankruptcy courts to ask whether an efficient market the form of facts or data—that supports the opinion. 44 exists for exit financing in a Chapter 11 case. To take an easy example, an appraiser offering opinion testimony about the value of real property must testify Nevertheless, as the Fifth Circuit recently recognized in to the comparables used by the appraiser. Without Texas Grand Prairie, the vast majority of bankruptcy the comparables, the valuation opinion is worthless. In courts have taken the Till plurality's invitation to apply Cypress Creek, Judge Lazzara—in affirming this Court's the “prime-plus” formula to Chapter 11 cases. 45 In doing determination that an efficient market did not exist— so, those bankruptcy courts first recognize they only observed that the testimony of the creditor's expert was should apply the “prime-plus” formula where an efficient lacking with respect to particular examples of loans that market does not exist, only to find—almost invariably were available for entities like the debtor in that case. —the absence of such a market. 46 Those courts have Because the creditor's expert in Cypress Creek failed to generally applied a risk adjustment ranging from 1%– give any examples of loans that were available to entities 3%, depending on the quality of the debtor's *454 like the debtor in that case, the district court concluded management, the commitment of the debtor's owners, that this Court did not abuse its discretion in crediting the health and future prospects of the debtor's business, testimony by the debtor's expert over testimony by the the quality of the lender's collateral, and the feasibility creditor's expert. and duration of the plan. 47 So the threshold issue for This case is like Cypress Creek. Here, *455 SPCP determining the appropriate cramdown interest rate is 52 whether an efficient market exists. called David Repka as its expert. Mr. Repka majored in psychology in college and had no post-graduate This issue came up in the Cypress Creek case discussed education. His credentials included being a licensed real earlier. There, the debtor's major secured creditor estate broker and holding a mortgage broker's license. appealed this Court's determination—in considering the In addition, he had previously been retained in five appropriate cramdown interest rate—that an efficient bankruptcy cases to provide opinion testimony. He has never worked for any bank or lending institution and has market did not exist. 48 On appeal, the district court never provided exit financing to a Chapter 11 debtor. considered whether this Court erred in relying on the debtor's expert witness to determine that an efficient

Mr. Repka opined that exit financing in this case would to be a very credible and competent expert on commercial require an interest rate of 10–15%, plus origination fees to lending and setting interest rates. the lender and mortgage broker. He opined that this type of lending was available in the marketplace. He based this Mr. Katsadouros testified credibly as to the availability opinion not on his own personal experience in obtaining of loans in the marketplace for the Debtor and what a exit financing, but rather on phone calls he made to a reasonable interest rate would be in this case. With *456 number of lenders who told him they would make loans to respect to the availability of loans, Mr. Katsadouros made a debtor emerging from bankruptcy where the default was a distinction between traditional and non-traditional a maturity default (rather than a payment default). The lenders. Traditional lenders are banks and life insurance lenders Mr. Repka talked to apparently gave him interest companies. Non-traditional lenders are private companies rates ranging from 4.5% to 16% for loans to entities like willing to take more risk for higher return. Non- the Debtor in this case (i.e., a company emerging from traditional lenders often take a piece of the equity and bankruptcy where the default was a maturity default). do not look at the same underwriting standards that traditional lenders do. But Mr. Repka's opinion did not meet the Daubert and Rule 702 standard. The only facts or data relied on by In Mr. Katsadouros' view, the Debtor would be unable to Mr. Repka were phone calls to people in the business obtain an institutional quality loan made by a traditional of lending money, who, in turn, gave Mr. Repka their lender. For starters, the loan in this case is too small given opinions as to what the pricing for such a loan would be. the costs involved. Besides that, the Debtor's tenants are In other words, SPCP would have this Court accept the not “credit” tenants. “Credit” tenants are anchor tenants ipse dixit opinions in these third-party hearsay statements like national grocery or retail chains—such as Publix or as a sufficient basis for Mr. Repka to opine as to the Wal–Mart. Here, the tenants are “mom and pop” grocers. appropriate cramdown interest rate. The key point here According to Mr. Katsadouros, the lack of credit tenants, is that the facts or data that are necessary to support an coupled with the fact that this Debtor is in bankruptcy expert opinion are hard numbers of actual loans being and its principals are not currently creditworthy, makes made—not conjecture or opinions or promises about what traditional loans unavailable to the Debtor. is available in the marketplace. The only option left for the Debtor, in Mr. Katsadouros' What the Court is looking for is a list of lenders actually opinion, would be a commercial mortgage-backed providing chapter 11 exit financing for debtors similar security loan (CMBS). With respect to CMBS loans, Mr. to the one in this case. And there was not one scintilla Katsadouros references the Trepp Report, which reflects of evidence introduced by SPCP of anyone actually interest rates being charged for various kinds of loans, as providing exit financing lending using real-life examples. a type of report that is regularly relied on in his industry to Mr. Repka certainly has had no experience with real- determine interest rates in actual transactions. According life exit financing, even though he has been retained in to the Trepp Report that Mr. Katsadouros relied on, bankruptcy cases before. Accordingly, his testimony fails there were seven loans to retail borrowers in the Tampa the most basic application of the Daubert standard as area in 2013. The interest rates for those loans averaged codified in Rule 702. approximately 4%. But Mr. Katsadouros did not believe that the Debtor would be able to get a CMBS loan because By contrast, the Debtor offered the expert testimony of this Debtor is still too small and “unanchored,” not to Mr. Gus Katsadouros. Mr. Katsadouros heads up the mention the pricing and expense involved. Real Estate Capital Markets Department of Glass Ratner, a well-known national firm that deals with insolvency The Court finds Mr. Katsadouros' testimony that no cases and debtor-in-possession and post-petition exit efficient market exists for exit financing here more credible financing for Chapter 11 debtors. Mr. Katsadouros has —and more persuasive—than Mr. Repka's testimony. an MBA degree and over two decades of experience Based on Mr. Katsadouros' testimony, the Court in real estate lending for national banks. His work concludes that no efficient market exists. And given that experience specifically includes interest-rate setting for no efficient market exists, it is appropriate to follow loans originated by his department. The Court found him the formula approached enunciated in Till. Under that

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 11 In re J.C. Householder Land Trust #1, 501 B.R. 441 (2013) 24 Fla. L. Weekly Fed. B 221 formula approach, the Court will start with the prime rate authorizes bankruptcy courts to bar actions against non- and add an appropriate supplemental risk adjustment. debtor third parties. 54 Mr. Katsadouros testified credibly that a 1.75% risk adjustment was appropriate under the facts of this case— The Eleventh Circuit has repeatedly recognized as much for a total interest rate of 5%. in In re Munford 55 and, more recently, In re Superior 56 [10] The Court agrees. Based on the Debtor's payment Homes & Investments, LLC. And this Court recognized history (this is not a payment-default case), the substantial the same thing in two recent cases: In re GunnAllen loan-to-value ratio, the many years of experience Mr. Financial 57 and In re Fundamental Long Term Care. 58 Householder has managing the property, and a pro forma All of those cases, however, dealt with bar orders as part that is based upon current rental numbers and expenses, of a motion to compromise. None of those cases dealt with the Court finds that the adjustment of 1.75% for risk is whether a court could approve a bar order (or third-party appropriate under the circumstances. Accordingly, 5% is injunction) as part of a confirmed plan. an appropriate cramdown interest rate. That is where § 524(e) comes in: § 524(e) provides that the discharge of a debt of the debtor under § 1141 ordinarily does not affect the liability of any other party for that The plan satisfies the best interest of the creditors test. same debt. So the discharge of the Debtor in this case [11] SPCP argues that the Debtor's plan fails the best would not extinguish any of the non-debtor guarantors' interest of the creditors test because it is in SPCP's best liability to SPCP. Since § 105 cannot be used to grant relief interest to simply get its collateral back and move on. Of inconsistent with another code section, the question arises course, that is not the standard for determining whether whether § 524(e) conflicts with § 105 and, as a consequence, the Debtor satisfies the best interest of the creditors test precludes a bankruptcy court from confirming a plan that codified in § 1129(a)(7)(A)(ii). That section only requires includes an injunction barring actions against non-debtor that creditors receive at least as much under the plan as guarantors. they would receive in a chapter 7 liquidation. A creditor obviously cannot do better than being paid in full, with This Court entered such an injunction in Safety Harbor. 59 interest. And it would be contrary to everyone's interest There, the Court's power to enter certain conditions on if additional fees and costs were incurred if this case was the injunction was challenged on the basis of jurisdiction converted and a trustee was involved *457 incurring yet in light of the Supreme Court's recent decision in additional administrative costs. Accordingly, the Court Stern v. Marshall. 60 The Court ruled that it did have finds the Debtor satisfies the best interest of the creditors jurisdiction. 61 A much more important case in this area test. is Judge Jennemann's decision in In re Transit Group. 62

As Judge Jennemann discussed in In re Transit Group, The proposed bar order is appropriate the Second, Third, Fourth, Sixth, Seventh, and Eighth under the facts of this case. Circuits have all held that injunctions (or non-debtor [12] The Debtor's plan includes a bar order enjoining releases) in confirmed plans are permissible *458 under 63 SPCP from pursuing its claims against the Householders § 105. Those courts have reasoned that §§ 105 and under personal guaranties so long as the Debtor is current 524 do not conflict since nothing in § 524 specifically on its plan payments. Whether the proposed bar order precludes a court from entering a bar order. Section 524 is permissible in a particular case hinges on the Court's simply provides that—assuming the plan does not provide interpretation of two bankruptcy code sections: §§ 105 otherwise—the discharge under § 541 does not affect and 524(e). 53 Section 105, of course, grants bankruptcy a creditor's claim against a non-debtor. The Eleventh courts broad discretion to enter any order, process, or Circuit has not specifically addressed this issue in the judgment that is necessary to carry out the provisions of context of confirmation, although it has approved bar the Bankruptcy Code. There is no question that § 105 orders in other contexts.

And bankruptcy courts in this district have approved This is the same thing that happened in Cypress Creek. bar orders (or non-debtor releases) in connection with After confirmation of the plan in that case, SPCP confirmation. Judge Paskay, for instance, in Shaw Aero continued to pursue the five family members on the Devices, approved a bar order in a confirmed plan that guaranties. So they all had to go through individual prohibited a creditor from pursuing claims against the Chapter 11 cases, resulting in this Court presiding over debtor's president (a non-debtor guarantor on the loan five additional Chapter 11 cases. The Court confirmed to the debtor) so long as the payments under the plan *459 those cases over the objection of SPCP based on were current since the debtor's president was instrumental the payments that were being made out of the corporate in the debtor's success. Likewise, Judge Jennemann, in a case. SPCP appealed that decision and Judge Bucklew well-reasoned decision, approved non-debtor releases in affirmed that decision. 65 But it took a lot of money to get Transit Group discussed above. The decisions by Judge there and nothing was really accomplished by the process. Paskay and Judge Jennemann both look to the factors An injunction here will stop that needless expenditure articulated by the other circuits approving injunctions. of time and effort and allow the Debtor to continue to reorganize and the guarantors to improve their credit [13] Those factors—which are nonexclusive—include rating. Obviously, being forced into bankruptcy would whether: (1) the debtor and the third party share an not help the credit rating at all. In fact, it would identity of interest, usually an indemnity relationship, be detrimental to the Debtor's ability to refinance in such that a suit against the non-debtor is, in essence, five years. So the bar order is absolutely necessary for a suit against the debtor or will deplete the assets of feasibility in this case. Importantly, the injunction is not a the estate; (2) the non-debtor has contributed substantial release or discharge of the debt; it simply prevents the state assets to the reorganization; (3) the injunction is essential law action from being filed while the Debtor is current on to reorganization, namely, the reorganization hinges its payments under the confirmed plan. on the debtor being free from indirect suits against parties who would have indemnity or contribution claims Moreover, the Householders have, through the depletion against the debtor; (4) the impacted class, or classes, has of their personal assets, significantly contributed to the overwhelmingly voted to accept the plan; (5) the plan Debtor's assets. And they will be contributing the time and provides a mechanism to pay for all, or substantially all, effort managing the property going forward, including of the class, or classes, affected by the injunction; and (6) rehabilitating their own personal financial circumstances the plan provides an opportunity for those claimants who so that the Debtor can be in a position to refinance choose not to settle to recover in full. 64 Here, all of those the SPCP loan in five years. If SPCP can go against factors weigh in favor of approving the bar order. the guarantors in this case, and seize control of the corporation, all of the reorganization efforts would be [14] To begin with, there is an identity of interest here wasted. And again, it is crucial to paying off the loan since the Householders (along with their children) own in five years for the individual guarantors to be free to 100% of the partnership that is the beneficiary of the rehabilitate their credit without having to go through their trust (the Debtor) that owns the subject property. As own personal bankruptcy. All that would do would be Mr. Householder testified, this is their retirement and to delay the time that they can improve their credit and sole means of livelihood. They have owned this shopping hamper the ability of the Debtor to refinance. center and surrounding property for decades. A lawsuit against the guarantors in this case would completely In addition, despite SPCP's attempt to take control of the thwart the reorganization efforts of the debtor. Inevitably, case by buying up claims, the creditors nevertheless voted the Householders would end up in individual Chapter 11 in support of the plan. Even BB & T changed its vote at the cases if the bar order is not approved, which would result last minute to go along with the Debtor's reorganization in the needless expenditure of more funds to confirm their efforts. And all of the classes of creditors will be paid cases, although there would be a high probability their 100%. In fact, there are no creditors who will not be paid (potential Chapter 11) cases would be confirmed since in full in this case. SPCP is being paid in full in this case. Finally, SPCP will not be harmed by the proposed bar order. A guarantee of secured debt typically is intended

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 13 In re J.C. Householder Land Trust #1, 501 B.R. 441 (2013) 24 Fla. L. Weekly Fed. B 221 to protect a lender from any deficiency. But there will In order to confirm its plan, the Debtor must satisfy all not be any deficiency here. If SPCP is free to go against of the elements set forth in § 1129(a). The Debtor in the Householders, however, then the Debtor will be this case has proven those elements by a preponderance irreparably injured by virtue of its inability to refinance of the evidence. Specifically, the Court finds the plan in five years. Given all of that, the Court finds that the is feasible; that it was proposed in good faith; that proposed bar order is appropriate, subject to one very 5% is the appropriate cramdown interest rate; that the important limitation: if there is a default by the Debtor plan satisfies the best interests of the creditors; and that under the plan or confirmation order, then SPCP may the bar order enjoining SPCP from pursuing its claims proceed against the Householders. In essence, SPCP is against the Householders on their personal guaranties retaining the full benefit of its bargain by having the is appropriate. Accordingly, the Court will enter a Householders available to pay the full amount of its claim, separate order overruling SPCP's confirmation objection, plus interest, if there is a default by the Debtor as the approving *460 the Debtor's disclosure statement, and primary obligor. confirming the Debtor's plan.

All Citations Conclusion 501 B.R. 441, 24 Fla. L. Weekly Fed. B 221

Footnotes 1 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2005). 2 Doc. Nos. 1 & 9. 3 Doc. No. 13. 4 Doc. No. 70. 5 After Murtha cast his ballot, SPCP bought his claim and attempted to change his vote. In fact, SPCP, as part of its strategy to take control of the votes in this case, apparently approached all of the creditors in this case with offers to buy their claims so that it could control all of the classes. SPCP, however, was only able to convince Murtha to sell his claim, and in any event, based on the reasoning set forth in In re Kellogg Square Partnership, 160 B.R. 332 (Bankr.D.Minn.1993), as well as other cases cited by the Debtor in its memorandum of law (Doc. No. 85), the Court denied SPCP's motion to change Murtha's vote. Of course, it would not have made a difference even if SPCP could have gained control of the class of unsecured creditors and voted against the plan for two reasons. First, BB & T voted in favor of the plan, and BB & T (the sole creditor in Class 4) is impaired. So BB & T's vote in favor of the plan alone—regardless of the vote of the unsecured creditor class—satisfies § 1129(a)(10)'s requirement that at least one impaired class accept the plan. Second, even if the class of unsecured creditors voted against the plan, they could still be crammed down because they are being paid in full (subject to a minor amendment to pay interest on their claims). The Debtor's cash flow reflects this could easily be done. As a result, the vote of the unsecured creditors is unnecessary. 6 The Debtor concedes that TECO's ballot was late. So the Debtor filed a motion to allow the late ballot. The Court granted that motion for the reasons stated in open court at the outset of the confirmation hearing. After the Court allowed TECO's late-filed ballot, SPCP argued that TECO's claim is actually a debt of one of the Debtor's tenants—not the Debtor. The Debtor, however, listed the TECO claim as undisputed in its schedules. More importantly, Mr. Householder testified at confirmation that the debt is owed by the Debtor since it is ultimately responsible for electric bills on the property, notwithstanding that the electric bill presumably would be a pass-through expense under the triple-net lease that the Debtor has with its tenants. 7 Doc. No. 67. 8 The Court has jurisdiction over this proceeding under 28 U.S.C. § 1334(a). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (L), and (O). The Debtor is eligible to be a Chapter 11 debtor under 11 U.S.C. §§ 109 and 101(9) (A)(v). 9 Hon. Barry Russell, Bankruptcy Evidence Manual, at § 301:76 (citing voluminous cases). 10 See, e.g.,In re New Midland Plaza Assocs., 247 B.R. 877, 883 (Bankr.S.D.Fla.2000); In re Miami Ctr. Assocs. Ltd., 144 B.R. 937, 940 (Bankr.S.D.Fla.1992). 11 Heartland Fed. Sav. & Loan Ass'n v. Briscoe Enters., Ltd. (In re Briscoe Enters.), 994 F.2d 1160, 1164–65 (5th Cir.1993).

12 Id. at 1164. 13 Id. 14 Id. (citing Addington v. Texas, 441 U.S. 418, 423, 99 S.Ct. 1804, 60 L.Ed.2d 323 (1979)). 15 Id. at 1165 (citing Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)). 16 Id. (quoting Grogan, 498 U.S. at 296, 111 S.Ct. 654). 17 Id. 18 11 U.S.C. § 1129(a)(11). 19 Doc. No. 67 at 7 (citing In re Invest. Co. of the Sw., Inc., 341 B.R. 298, 311 (10th Cir. BAP 2006)). 20 Id. 21 In re Cypress Creek Assisted Living Residence, Inc., Case No. 8:08–bk–19481–MGW. 22 SPCP Group, LLC v. Cypress Creek Assisted Living Residence, Inc., 434 B.R. 650, 656 (M.D.Fla.2010). 23 Id. 24 Id. 25 Id. 26 There were also repeated questions about the Householders' potential tax liability for forgiveness of any deficiencies they have incurred. While the Court is well aware that cancellation of debt is something that can be taxed, there is no evidence in this case that the Householders will actually incur this sort of “phantom income” in the future. In fact, the only evidence relating to this possibility was Mr. Householder's testimony that he has $890,000 of net operating losses to set off against any cancellation-of-debt income. 27 In re Proud Mary Marina Corp., 338 B.R. 114, 122–23 (Bankr.M.D.Fla.2006). 28 Id. (citing In re Bravo Enters., 331 B.R. 459, 472 (Bankr.M.D.Fla.2005)). 29 Id. 30 11 U.S.C. § 1129(a)(8). 31 11 U.S.C. § 1129(b)(1). 32 11 U.S.C. § 1129(b)(1)(A)(i)(II) (“[E]ach holder of a [secured claim must] receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property.”). 33 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2005). 34 Id. at 474, 124 S.Ct. 1951 (citing 11 U.S.C. § 1325(a)(5)(B)(ii)). 35 Id. at 477–78, 124 S.Ct. 1951. 36 Id. at 478–79, 124 S.Ct. 1951. 37 Id. at 479, 124 S.Ct. 1951. 38 Id. 39 Id. 40 Id. at 480, 124 S.Ct. 1951. 41 Id. 42 Id. at 477 n. 14, 124 S.Ct. 1951. 43 Id. 44 Id. 45 Wells Fargo Bank, N.A. v. Texas Grand Prairie Hotel Realty, LLC (In re Texas Grand Prairie Hotel Realty, LLC), 710 F.3d 324, 333 (5th Cir.2013). 46 Id. 47 Id. at 333–34. 48 SPCP Group, LLC v. Cypress Creek Assisted Living Residence, Inc., 434 B.R. 650, 656 (M.D.Fla.2010). Coincidentally, the creditor in that case was SPCP Group, LLC, which is presumably affiliate with the secured creditor here: SPCP Group V, LLC. Both entities were (or are) ably represented by the same attorney: Greg McCloskey. 49 Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993). 50 Fed.R.Evid. 702. 51 The phrase ipse dixit means “something said but not proved.” Bryan A. Garner, Garner's Dictionary of Legal Usage 482 (3d ed. 2011). The Supreme Court, in Kumho Tire Co., Ltd. v. Carmichael, recognized that “nothing in either Daubert or

the Federal Rules of Evidence requires a district court to admit opinion evidence that is connected to existing data only by the ipse dixit of the expert.” 526 U.S. 137, 157, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999) (quoting Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146, 118 S.Ct. 512, 139 L.Ed.2d 508 (1997)). 52 After Mr. Repka was tendered as an expert, the Debtor objected to his qualifications. The Court overruled the objection, in part, finding that Mr. Repka had sufficient training and experience as a mortgage broker to opine on interest rates. The Court, however, did not find that he had the expert qualifications to opine on feasibility of the Debtor's plan or anything beyond interest rates. As a consequence, the Court will only consider that portion of his testimony. 53 In re Transit Group, Inc., 286 B.R. 811, 815 (Bankr.M.D.Fla.2002). 54 Munford v. Munford, Inc. (In re Munford), 97 F.3d 449, 454–55 (11th Cir.1996); Apps v. Morrison (In re Superior Homes & Invs., LLC),521 Fed.Appx. 895, 897–99 (11th Cir.2013). 55 In re Munford, 97 F.3d at 454–55. 56 In re Superior Homes & Invs., LLC,521 Fed.Appx. at 897–99. 57 In re GunnAllen Fin., Inc., 443 B.R. 908, 915 (Bankr.M.D.Fla.2011). 58 In re Fundamental Long Term Care, Inc., 492 B.R. 571, 577 (Bankr.M.D.Fla.2013). 59 In re Safety Harbor Resort & Spa, 456 B.R. 703, 719 (Bankr.M.D.Fla.2011). 60 Id. at 707–18 (analyzing Stern v. Marshall,––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011)). 61 Id. 62 286 B.R. 811 (Bankr.M.D.Fla.2002). 63 Id. at 816. 64 Id. at 817 (citing In re Dow Corning Corp., 280 F.3d 648 (6th Cir.2002); In re Cont'l Airlines, 203 F.3d 203 (3d Cir.2000); In re Specialty Equip. Co., Inc., 3 F.3d 1043 (7th Cir.1993); In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285 (2d Cir.1992); In re A.H. Robins Co., Inc., 880 F.2d 694 (4th Cir.1989)). 65 SPCP Group, LLC v. Biggins, 465 B.R. 316 (M.D.Fla.2011).

434 B.R. 650 United States District Court, West Headnotes (10) M.D. Florida, Tampa Division. [1] Bankruptcy SPCP GROUP, LLC, Appellant, Conclusions of law; de novo review v. Bankruptcy CYPRESS CREEK ASSISTED LIVING RESIDENCE, Clear error INC., and Cypress Creek Assisted Living On appeal, district court reviews de novo the Residence Management, LLC, Appellees. legal conclusions of bankruptcy court, but reviews bankruptcy court's findings of fact No. 8:09–cv–2189–T–RAL. for clear error, keeping in mind that trial | judge is best able to assess credibility and April 9, 2010. evidentiary content of testimony of witnesses before him. Fed.Rules Bankr.Proc.Rule 8013, Synopsis 11 U.S.C.A. Background: Confirmation hearing was held on debtors' proposed balloon-payment Chapter 11 plans, and the Cases that cite this headnote Bankruptcy Court entered order confirming plans. Secured lender appealed on ground, inter alia, that plans were not feasible. [2] Bankruptcy Discretion Bankruptcy court's conclusion on admissibility of expert evidence is reviewed for Holdings: The District Court, Richard A. Lazzara, abuse of discretion. District Judge, held that: Cases that cite this headnote [1] mere fact that Chapter 11 plans provided for balloon payment on lender's $5.5 million claim, without clearly specifying how that balloon payment would be funded, [3] Bankruptcy did not render them infeasible and incapable of being Feasibility in general confirmed; Mere fact that Chapter 11 plans provided for balloon payment on lender's $5.5 million [2] debtor need not have attempted to obtain postpetition claim, without clearly specifying how that financing, in order for bankruptcy court to find that balloon payment would be funded, did not efficient market is lacking and to calculate appropriate render them infeasible and incapable of “cramdown” interest rate using Till methodology; being confirmed, where debtors, the owners and operators of assisted living facility, had [3] bankruptcy court did not abuse its discretion when, been successfully making their monthly plan as predicate for its use of Till methodology, it accepted payments, which were based on 20-year testimony of debtors' expert, a witness with 15 years amortization of lender's claim, while also experience in commercial lending, that there was no accumulating roughly $180,000 in cash since efficient market; and cases were filed, where occupancy of assisted living facility had steadily increased, and [4] bankruptcy court properly utilized Till methodology to where current lack of efficient market for calculate 5.25% “cramdown” interest rate. debtors to obtain financing did not mean that market could not turn around over plan's six- year term. 11 U.S.C.A. § 1129(a)(11). Affirmed.

4 Cases that cite this headnote [8] Bankruptcy Confirmation; Objections [4] Bankruptcy Bankruptcy court did not abuse its Feasibility in general discretion when, as predicate for its use of Till methodology to calculate appropriate In assessing feasibility of proposed Chapter Chapter 11 “cramdown” interest rate for 11 plan, bankruptcy court must consider lender holding a $5.5 million claim, it accepted earning power of debtor's business, its capital testimony of debtors' expert, a witness with structure, economic conditions of business, 15 years experience in commercial lending, whether present management will continue, that there was no efficient market for loans and efficiency of management in control of in $5 to $6 million range, and rejected business after confirmation. 11 U.S.C.A. § contrary testimony of lender's expert, based 1129(a)(11). not only on this second expert's failure to Cases that cite this headnote provide a single example of such financing, but on lack of objectivity that he displayed in making painstaking effort to cast testimony of [5] Interest debtors' expert in negative light. 11 U.S.C.A. Computation of rate in general § 1129(b). Chapter 11 “cramdown” interest rate must both compensate for present value and ensure Cases that cite this headnote the safety of principal. 11 U.S.C.A. § 1129(b). [9] Interest Cases that cite this headnote Computation of rate in general Absent evidence of any efficient market, [6] Bankruptcy bankruptcy court properly utilized Till Conclusiveness methodology to calculate 5.25% “cramdown” Bankruptcy interest rate for Chapter 11 plans proposed Modification or revocation by debtors who had been successfully Secured lender that did not object, at Chapter making their monthly payments, while also 11 plan confirmation hearing, to proposed accumulating roughly $180,000 in cash, since “cramdown” interest rate as impairing its cases were filed; bankruptcy court applied risk rights could not belatedly seek to change terms factor of 2% to prime rate of 3.25% that was of plans by arguing for higher interest rate. 11 in effect at time of confirmation hearing. 11 U.S.C.A. § 1129(b). U.S.C.A. § 1129(b).

Cases that cite this headnote 4 Cases that cite this headnote

[7] Interest [10] Bankruptcy Computation of rate in general Valuation Chapter 11 debtor need not have attempted Bankruptcy to obtain postpetition financing, in order Confirmation; Objections for bankruptcy court to find that efficient Chapter 11 debtors' principal was competent market is lacking and to calculate to testify regarding value of assisted living appropriate “cramdown” interest rate using facility that debtors owned and operated, and Till methodology. 11 U.S.C.A. § 1129(b). absent any evidence to contrary, bankruptcy court properly accepted his testimony that 4 Cases that cite this headnote

facility had value of $5.4 million for plan The renewal note is secured by a mortgage on the property confirmation purposes. that constitutes the ALF. The note was guaranteed by several of Biggins' family members. M & I transferred all Cases that cite this headnote of its interest in the note and mortgage, and all the related guaranties, to SPCP. Residence defaulted on the note, and SPCP filed a foreclosure action. The action precipitated the Debtors filing Chapter 11 petitions. 3 *651 ORDER

RICHARD A. LAZZARA, District Judge. PLANS OF REORGANIZATION

This is an appeal from a final order entered on September The plan of reorganization for Residence designates the 16, 2009, confirming *652 plans of reorganization of secured claim of SPCP as its own class and states that the the Debtors–Appellees in a Chapter 11 bankruptcy case, claim shall be “paid one hundred percent (100%) together which granted a motion for cramdown. (Dkt. 1). Before with interest as the current market rate of interest at the the Court are (1) the initial brief of SPCP Group, time of Confirmation as determined by the Bankruptcy LLC (SPCP), a secured and unsecured creditor in the Court.” The non-default contract rate of interest under bankruptcy case (Dkt. 9), (2) the Debtors–Appellees' the note held by SPCP was 5.5% before the bankruptcy answer brief (Dkt. 12), and (3) SPCP's reply brief. (Dkt. court determined otherwise pursuant to the motion for 17). After careful consideration of the briefs, the record on cramdown. The plan further provides that the full claim appeal, and the applicable law, the Court concludes that of SPCP would be “amortized over a period of 20 years the order of confirmation granting the cramdown should and payable in monthly installment, provided that the be affirmed. full balance owed together with any accrued interest will balloon and be fully due and payable 72 months following Confirmation.” 4 Neither plan provides how the *653 PARTIES and INTERESTS $4,313,686.63 balloon payment in six years will be funded.

Appellees Cypress Creek Assisted Living Residence, Inc. (Residence) and Cypress Creek Assisted Living Residence Management, LLC (Management) are the debtors in a BANKRUPTCY COURT'S RULING 1 Chapter 11 bankruptcy case, 8:08–bk–19481–MGW. The bankruptcy court made the following oral findings Residence is an assisted living facility (ALF) in Sun on the record and incorporated them into his written City, Florida, with 110 beds, with occupancy during the order on appeal. The court summarized the history bankruptcy ranging from 86 to 93 beds. Residence owns preceding the bankruptcy filing and noted that the the assets of the business and Management manages and Debtors had successfully compromised the three wrongful operates the ALF with just over forty contract employees. death claims, two each for $25,000, payable at the rate James J. Biggins, Jr., is the president of both the Residence of $1,000 per month and the third to be paid by the and Management entities. Biggins now runs the day-to- insurance company. (Dkt. 3, Vol. 82009 at p. 35). The day operations and manages the finances for both entities. court valued the ALF at $5.4 million, noting that the Each entity has the same shareholders, which are Biggins disclosure statement listed the value as $6 million and Mr. 2 and his three siblings. Biggins testified at his deposition just prior to the final hearing at $7.5 million. (Dkt. 3, Vol. 82009 at p. 36). The SPCP held an unsecured claim against Management in court noted specifically that “SPCP determined not to put the amount of $5,806,833.39, for a guaranty executed by on an expert on value.” (Dkt. 3, Vol. 82009 at p. 36). Management for the obligations of Residence to SPCP. Post-petition, the Debtors had been able to pay its post- SPCP held a secured claim against Residence in the petition obligations and adequate protection to SPCP in amount of $5,552,332.96, for a renewal note executed by the amount of $34,375 per month, which is 7.5 per cent Residence in favor of Marshal and Ilsley Bank (M & I). interest only on $5.5 million. (Dkt. 3, Vol. 82009 at p. 36).

The Debtors have also been paying the real estate taxes which are addressed at *654 length in Till v. SCS Credit through escrowing one-twelfth of the $5,800. (Dkt. 3, Vol. Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 82009 at p. 37). (2004). One of the methods, the coerced loan theory, has been criticized in In re Byrd Foods, Inc., 253 B.R. The Debtors' cash on hand as of July 31, 2009, was 196 (Bankr.E.D.Va.2000), as did the Supreme Court in $183,355. (Dkt. 3, Vol. 82009 at p. 37). The Debtor's Till. In discussing the formula, or time value of money, census had grown from 83 to 85 in December 2008 to 90 at method, the Till Court noted that the national prime rate the time of the hearing in August 2009, out of a 110–bed is adjusted to compensate for the circumstances of the ALF. The Debtors had recently hired a marketing director bankruptcy estate, the nature of the security, and the at the time of the hearing. (Dkt. 3, Vol. 82009 at p. 37). duration and feasibility of the reorganization plan. Till, The court noted that the plan provided for 100 percent 541 U.S. at 479, 124 S.Ct. 1951. The Court held that the payment of the $5.5 million claim of SPCP, using a 20– formula method, which is adding one to two percent to the year amortization with an interest rate of 5.5 percent and national prime rate, is the proper method to determine the a balloon payment in 72 months. (Dkt. 3, Vol. 82009 at interest rate in a cramdown under Chapter 13. Till, 541 p. 37). The plan had the necessary votes of all affected U.S. at 479, 124 S.Ct. 1951. Till did not answer, however, creditors but for SPCP, which required the application what method should be used to determine the interest rate of the cramdown provision, 11 U.S.C. § 1129(b). (Dkt. 3, in a Chapter 11 cramdown. Vol. 82009 at p. 39). The bankruptcy court noted the two seemingly Based on the above findings, the court first ruled that contradictory portions of the Till opinion. (Dkt. 3, Vol. the plans were feasible under 11 U.S.C. § 1129(a)(11). 82009 at pp. 46–47). While the Till opinion initially (Dkt. 3, Vol. 82009 at pp. 40–41). As part of that observes that Congress intended for bankruptcy judges determination, the court found that there is a substantial to follow the same approach—discounting a stream of likelihood that the Debtor can make the payments under deferred payments to present value—when determining the plans and therefore will likely not need to seek further interest rates, later, in a footnote, the opinion specifically reorganization. After determining that the plans were differentiates between Chapter 13 and Chapter 11 feasible, the court next made findings under the cramdown cramdowns. Till, 541 U.S. at 474, 124 S.Ct. 1951. In provision of 11 U.S.C. § 1129(b). (Dkt. 3, Vol. 82009 at Chapter 13 cases, there is no free market of willing p. 41). cramdown lenders; yet, in Chapter 11 cases, there may be an “efficient market” that would warrant an interest The court applied a present value analysis under the rate different from that calculated under the formula cases interpreting the cramdown provision applicable to approach. Till, 541 U.S. at 476 n. 14, 124 S.Ct. 1951. secured creditors, 11 U.S.C. § 1129(b)(2)(A)(i)(I). The court began its analysis of present value of the claim The bankruptcy court next discussed subsequent cases with In re Southern States Motor Inns, Inc., 709 F.2d 647 that have wrestled with the language of Till. The court (11th Cir.1983), which, although it does not deal with the cited In re American HomePatient, Inc., 420 F.3d 559 cramdown of a secured creditor, does involve construing (6th Cir.2005), In re Prussia Associates, 322 B.R. 572 the same language—“effective date of the plan”—in (Bankr.E.D.Pa.2005), and In re Winn–Dixie Stores, Inc., another statute. The Eleventh Circuit in Southern States 356 B.R. 239 (Bankr.M.D.Fla.2006) as a backdrop held that in determining the interest rate for the loan, against which to determine the proper method for the court “must consider the prevailing market rate for determining the interest rate to be applied in this particular a loan of a term equal to the payout period, with due Chapter 11 case. (Dkt. 3, Vol. 82009 at pp. 47–49). consideration of the quality of the security and the risk of The bankruptcy court would first determine whether an subsequent default.” 709 F.2d at 651. efficient market exists. If an efficient market exists, then the rate produced by the market would be the cramdown The bankruptcy court summarized the following history interest rate. If an efficient market does not exist, then of methodologies used in arriving at the market rate the bankruptcy court would use the formula approach set upon which the interest to be charged is based. Courts forth in Till. (Dkt. 3, Vol. 82009 at p. 48). in the past had developed four different methodologies,

Having interpreted the case law, the bankruptcy court found that an efficient market did not exist. (Dkt. 3, Now, there's been much made that there's been no Vol. 82009 at p. 49–56). The bankruptcy court found arrangements or explanation as to how the refinancing's the Debtors' expert, Mr. Healy, reliable under the going to be done in six years. And that's true. I'm not requirements of Daubert v. Merrell Dow Pharmaceuticals, sure what that evidence would be. If there's no market Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993), today, then what would your evidence be would be what and believed his experience in the marketplace made his the market is going to be in five years? testimony credible that the lenders are still pessimistic and I think the Debtors' game plan is that hopefully in five are taking a “wait-and-see approach.” (Dkt. 3, Vol. 82009 years the market will turn around, there will be an at p. 49). The court found Mr. Son, SPCP's expert, well- efficient market. And the Debtor, being out of Chapter qualified to testify; however, he did not find the facts and 11, with a track record, will be able to refinance, and data relied upon by Mr. Son persuasive. (Dkt. 3, Vol. also with its other management problems taken care. 82009 at pp. 51–53). Specifically, the court found that his testimony lacking with respect to particular examples (Dkt. 3, Vol. 82009 at p. 58). of loans in the categories of REIT leases, HUD–232s, and conventional bank loans, all three of which he had The court placed a value on the ALF of $5.4 million: listed as possible financing tools to structure a loan for an ALF. The bankruptcy court found that the facts and And there's one other important aspect of this, and that data relied upon by Mr. Son were wanting such that the is what is that interest rate to be applied toward. evidence did not pass the Daubert test. The court further made a finding that Mr. Son's testimony lacked objectivity And as I've indicated, there were—the value of the and became personal and negative against Mr. Healy and property has been stated differently at different times the Debtors. (Dkt. 3, Vol. *655 82009 at pp. 53–55). during this case. The most recent was the 5.5. million, I The court stated, “[n]o one testified about what's going believe, that Mr. Biggins testified to at the trial. on in the marketplace except Mr. Healy who said there's The bank made a tactical decision not to put an expert nothing going on in the marketplace.” (Dkt. 3, Vol. 82009 on, and so I can't give any weight one way or the other at pp. 55–56). The judge confirmed his experience from the to the bank's view. bench: The last evidence—given the various evidences that I [T]hat's pretty believable because I have, the last evidence I have is that of Mr. Biggins as live in the world of Chapter 11s here the owner. It's certainly competent evidence. I have to and I'm not seeing anybody getting weigh the fact that he'd given other opinions at prior exit—cramdown financing coming times. It was 9 million in the schedules. There was, I out of 11s. I used to, but I don't think, 6 million in the disclosure statement, 7.5 million anymore. And I thought that was at his deposition, and then 5.4 million he testified to frankly fairly credible. based on recent information that he had seen.

(Dkt. 3, Vol. 82009 at p. 56). It's not the evidence that I would give more weight to than an expert. I certainly would not consider Having found Mr. Healy's testimony more credible than Mr. Biggins as competent as an expert, but it's Mr. Son's, the bankruptcy court then applied the formula still competent evidence. Rule 702 recognizes, in approach in the face of the nonexistence of an efficient the advisory notes, that parties can still bring in market. (Dkt. 3, Vol. 82009 at p. 56). In determining qualified experts—qualified opinions through owners the interest rate at prime plus one to three percent, the or presidents of corporations. And therefore I'll accept court noted that the Debtors had ample cash flow and his last value of five point—I think it was 5.4 million had been paying the interest at 7.25 percent, although not actually. 5.4 million as being the value of the property amortized. The court set the interest rate at prime plus for purposes of confirmation. two, or 5.25 percent. (Dkt. 3, Vol. 82009 at pp. 56–57). He commented as follows: (Dkt. 3, Vol. 82009 at pp. 58–59). This timely appeal followed.

after the imposition of the plans. (Dkt. 3, Vol. 82009 at pp. 6–7). SPCP takes issue with the following specific deficiencies in the plans: (1) the absence of evidence that STANDARD OF REVIEW the Debtors will be able to pay the balloon payment in six [1] [2] The district court reviews de novo the legal years and (2) the speculative nature of the Debtors' pro conclusions of the bankruptcy court. See In re JLJ forma projections. Inc., 988 F.2d 1112, 1116 (11th Cir.1993). The district *656 court reviews a bankruptcy court's findings of Regarding the balloon payment, SPCP challenges the lack fact under the clearly erroneous standard, keeping in of a guarantor to back the balloon payment as well as the mind that the trial judge is “best able to assess the lack of pro forma projections for the year in which the note credibility and evidentiary content of the testimony of the balloons and the lack of proof of financing six years from witnesses before him.” In re Hawley, 51 F.3d 246, 248 the date of confirmation. SPCP contends that the Debtors (11th Cir.1995); Fed.R.Bankr.P. 8013. “A finding of fact must explain exactly how the balloon payment will be is clearly erroneous when, ‘although there is evidence to funded in six years, citing In re Inv. Co. of Southwest, Inc., support it, the reviewing court on the entire record is left 341 B.R. 298, 316 (10th Cir. BAP 2006), in which the court with the definite and firm conviction that a mistake has observed that a court needs some evidence to explain how been committed.’ ” Crawford v. Western Elec. Co., Inc., balloon payments are to be reasonably funded. As to the 745 F.2d 1373, 1378 (11th Cir.1984). The admissibility of lack of lack of pro forma projections beyond 2013 and expert evidence is reviewed under an abuse of discretion the speculative nature of the projections, SPCP urges that standard. See City of Tuscaloosa v. Harcros Chems., Inc., the court failed to take into consideration the rise of the 158 F.3d 548, 556 (11th Cir.1998). proportion of Medicaid or diversion patients, which do not bring in the amount of money as do private paying patients.

ISSUES ON APPEAL [4] In assessing the feasibility of a plan of reorganization, SPCP raises six issues on appeal, including (1) whether the bankruptcy court must consider the “earning power of the plans of reorganization are feasible under 11 U.S.C. the business, its capital structure, the economic conditions § 1129(a)(11) based on clear and convincing evidence, (2) of the business, the continuation of present management, whether the plans of reorganization would not impair and the efficiency of management in control of the SPCP and would be fair and equitable as mandated by business after confirmation.” In re D & G Invs. of 11 U.S.C. § 1129(b), (3) whether a debtor must attempt West Fla., Inc., 342 B.R. 882 (Bankr.M.D.Fla.2006) to obtain post-petition financing to establish an efficient (citing In re Immenhausen Corp., 172 B.R. 343, 348 market does not exist for exit financing, (4) whether expert (Bankr.M.D.Fla.1994)). While the plans in D & G and Mark Healy's testimony should have been excluded under Immenhausen were not found to be *657 feasible, the facts of those cases are distinguishable from the instant Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993), (5) whether case. In D & G, the debtor's pro forma statements of operations were based on income derived from selling the court erred in applying the formula under Till v. SCS sand and dirt on the property, activities which were Credit Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004), and (6) whether the collateral was properly unapproved by the county. D & G, 342 B.R. at 886. valued at $5.4 million. In D & G, the debtor was clearly relying on obtaining financing during the two-year life of the plan and its goal of developing the property into a subdivision with ranch- style homes was unattainable given the then-current state ANALYSIS of the undeveloped property for which rezoning had not been applied. D & G, 342 B.R. at 886–87. In Immenhausen, Feasibility of the Plans the plan was not feasible because the interest payments [3] SPCP raised in final argument that the Debtors had would have clearly placed the debtor in a negative cash failed to show by competent clear and convincing evidence flow position. Immenhausen, 172 B.R. at 348. The debtor that the proposed plans were feasible—that the Debtors there owned a shopping mall, but no operating surplus were not likely to be liquidated or further reorganized

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 6 SPCP Group, LLC v. Cypress Creek Assisted Living Residence, Inc., 434 B.R. 650 (2010) existed from which to pay the loan, and any outstanding impairment at the hearing and cannot now seek to change balance reduction was paid through third party sources. the terms of the plans through arguing for a higher interest Immenhausen, 172 B.R. at 345. rate per se. The Debtors' present management in place and the recent history of meeting its financial obligations The record supporting the bankruptcy court's ruling lend support for the bankruptcy court's implicit finding shows that the Debtors had increased the census of the that SPCP was not impaired. The formula for arriving ALF and had increased revenue during the time of the at the 5.25 percent *658 interest rate will be specifically Chapter 11 cases. The Debtors had been making monthly addressed below. payments of $34,750 to SPCP, and under the plans, SPCP was going to be paid 100 percent of its claims. The Debtors had accumulated approximately $180,000 An Efficient Market in cash over the course of the cases, and each month, [7] SPCP contends that debtors must have unsuccessfully one-twelfth of the property taxes, which was $5,800, was attempted to obtain post-petition financing in order for escrowed for annual payment. The change in management the court to make a finding that an efficient market does to Mr. Biggins exclusively, without the interference of his not exist. SPCP relies on many cases in which the debtors siblings, would appear to have been working well based had sought an exit loan. Because the Debtors did not on the Debtors' ability to pay for all operating costs and present evidence of at least trying to find exit financing, SPCP's monthly payments at the time of the final hearing. SPCP argues, the bankruptcy court erred in making its (Dkt. 3, Vol. 81409 at pp. 66 & 75). determination regarding an efficient market.

Apart from the Debtors' ability to make its payments to After reviewing the cases cited by SPCP, and Till, this all creditors at the time of the hearing, it is abundantly Court finds no absolute mandate that a Chapter 11 debtor clear from the record that the bankruptcy court took must attempt to find exit financing before the bankruptcy into consideration the time before the balloon payment court can determine whether an efficient market exists. was due, six years, and noted that historically, while an There is no error in relying on expert testimony to efficient market may not be in existence on the date a establish whether an efficient market exists for exit, or plan is confirmed, markets do change over time. The cramdown, financing. In crediting Mr. Healy's testimony, court simply acknowledged that markets do turn around, as opposed to Mr. Son's, the bankruptcy court did not and, coupled with the Debtors' recent track record of abuse its discretion. payment, the increase in the census of the ALF, its recent hiring of a marketing manager, and its management now Testimony of the Competing Experts Healy and Son under limited to Mr. Biggins alone, the court found that if Daubert the Debtors continue on its current path, then it should [8] The bankruptcy court found the following testimony be able to refinance at the time the balloon comes due, of Mark Healy credible and reliable, sufficient to if unable to cover the payment. Thus, this Court finds withstand any Daubert objections. Mr. Healy, over that the bankruptcy court did not err in finding the objection, testified regarding the existence of an efficient plans feasible when the evidence presented was not too market for Chapter 11 exit financing, and in the event he speculative regarding the Debtors' ability to make the found such market did not exist, he would then opine on balloon payment in six years. an appropriate cramdown interest rate adjustment to the loan at issue. (Dkt. 3, Vol. 81409 at p. 147). Although Impairment as to SPCP Mr. Healy has not dealt with the financing of ALFs in [5] [6] SPCP contends that the lower interest rate chosen particular, he has sixteen years of general commercial for the cramdown loan necessarily impairs SPCP because banking experience. Counsel for the Debtors stated his it is lower than the interest of the original loan. The intention to offer Mr. Healy's report and opinion for the interest rate chosen must both compensate for present current and historical prime rates and treasury bill rates, value and insure the safety of the principal. See In re the historical methodology used in the commercial loan Monnier Bros., 755 F.2d 1336 (8th Cir.1985) (citing In re market to price loans, and the current credit industry. Murel Holding Corp., 75 F.2d 941 (2d Cir.1935) and other (Dkt. 3, Vol. 81409 at pp. 144 & 146–147). The Debtors' subsequent cases). SPCP, however, did not object to their Counsel argued that Mr. Healy's experience in commercial

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 7 SPCP Group, LLC v. Cypress Creek Assisted Living Residence, Inc., 434 B.R. 650 (2010) lending enabled him to render a reliable opinion regarding regarding the particular formula to be used in setting the the interest rates in a current market. (Dkt. 3, Vol. 81409 interest rate for this particular loan. (Dkt. 3, Vol. 81409 at at p. 145). p. 171). The court clearly distinguished between testimony regarding exit financing in the “real world of post-Chapter Counsel for SPCP objected to Mr. Healy's qualifications 11, no longer a debtor-in-possession,” about which Mr. as to giving an opinion with respect to the Debtors, the Healy was permitted to testify, and debtor-in-possession loan, or the market. (Dkt. 3, Vol. 81409 at p. 143). SPCP lending, about which he was not permitted. (Dkt. 3, Vol. objected to his lack of a factual basis, specifically the lack 81409 at p. 172). of familiarity with the “historical, existing or prospective financial projections,” the “strength or lack of strength Mr. Healy testified he relied on Yahoo Finance articles of the guarantors” and “the value of the collateral” with online as well as some materials from the Wall Street respect to these particular debtors and this particular ALF Journal. (Dkt. 3, Vol. 81409 at pp. 173–74). Mr. Healy loan. (Dkt. 3, Vol. 81409 at p. 143). Counsel for SPCP opined, over objection, that an efficient market for took issue with Mr. Healy testifying as to the existence of commercial loans in the $5 million to $6 million range does an efficient market based on his lack of knowledge of the not presently exist. (Dkt. 3, Vol. 81409 at p. 175). risk factors associated with the loan at issue and his lack of knowledge of underwriting or lending to ALFs. (Dkt. SPCP contends that Mr. Son's testimony with respect to 3, Vol. 81409 at pp. 149–150 & 153). the current market rate was more reliable because Mr. Son considered all of the risk factors specific to this particular The bankruptcy court overruled SPCP's objections, loan. The interest rate he attributed to the market ranged relying on Daubert and stating that Mr. Healy “was from 6.5 percent to the high teens or twenties for distressed certainly qualified by his background, training and debt lenders. (Dkt. 2, Vol. 81409 at p. 241). Contrary to education to testify about interest rates.” (Dkt. 3, Vol. SPCP's position, the bankruptcy court's finding that Mr. 81409 at p. 151). To the extent SPCP's objection was Son's testimony was not credible, after listening to it twice, directed to whether the content of Mr. Healy's opinion is supported by the record. (Dkt. 3, Vol. 82009 at p. 52). testimony should be apply to this case, the court recited As noted by the court, Mr. Son did not base his testimony the litany of cases construing Till: Southern States, on any facts or data concerning specific loans to ALFs. American HomePatient, and Winn–Dixie. The court (Dkt. 3, Vol. 82009 at p. 52–53). Rather, he testified about permitted Mr. Healy to testify regarding the existence of the general markets for financing of ALFs through REIT an efficient market for loans. (Dkt. 3, Vol. 81409 at p. 152). leases, HUD–232s, and conventional bank loans. (Dkt. 3, The court found Mr. Healy qualified as an expert to *659 Vol. 82009 at p. 53). Mr. Son gave no examples of any testify about the interest rates in the market, regardless of deals involving any of the three of these vehicles. whether the court later would need to rely on those rates in fixing the interest rate of the loan. (Dkt. 3, Vol. 81409 at With respect to the bankruptcy court's specific finding pp. 152–154). Mr. Healy testified that the prime rate was that he found Mr. Son's testimony lacked objectivity, 3.25 percent, and the rate for treasury bills was .5 percent. the court emphasized the expert's painstaking efforts to (Dkt. 3, Vol. 81409 at pp. 159 & 177). color Mr. Healy's testimony in a negative light. (Dkt. 3, Vol. 82009 at pp. 53–54). After listing several examples, Counsel for SPCP objected again when Mr. Healy began the bankruptcy court expressed distaste with Mr. Son's to testify about the credit markets, historically and at personal attacks on Mr. Healy. (Dkt. 3, Vol. 82009 at pp. present. (Dkt. 3, Vol. 81409 at p. 166). The court overruled 54–55). Thus, the record of the testimony substantiates the objection, ruling that information about the credit the bankruptcy court's credibility determination, and no market was relevant in determining whether an efficient abuse of discretion can be attributed to the court. market exists for exit financing for Chapter 11 debtors. (Dkt. 3, Vol. 81409 at p. 166). The court emphasized Apart from the experts' respective positions, determining that Mr. Healy's testimony would be heard with a view whether an efficient market exists does not necessarily toward whether there was an efficient market place for entail consideration of the particular risks associated with exit financing, exclusive of any examination regarding the particular type of loan or property of the debtor. the particular risk factors on this particular loan and In this case, evidence was presented that established

the market for exit financing in general did not exist, commercial borrower and a reorganized debtor with a regardless of whether the debtor owned a shopping mall plan. On this record, the Debtors have established their or an ALF. Once the evidence supported the finding that current ability to financially operate the ALF and at the no efficient market existed, the bankruptcy *660 court same time accumulate cash. This Court finds no error in an interest rate of 5.25 percent. properly applied the formula approach as espoused in Till.

The Till formula Valuation of the Property [9] This Court agrees with the bankruptcy court's reading [10] SPCP contests as reversible error the court's permitting Mr. Biggins to testify at the final hearing that of Till, as supported by the subsequent decisions from the Sixth Circuit and other courts in the Middle District. The the property's value was $5.4 million after looking at bankruptcy court found, based on credible evidence, that an appraisal. As acknowledged by SPCP, the owner is no efficient market existed for Chapter 11 exit financing. permitted to testify about the value of his property because Hence, the bankruptcy court applied the formula for he has a special knowledge of its worth. Fed.R.Evid. 702; Chapter 13 debtors based on the prime rate of interest U.S. v. 68.94 Acres of Land, More or Less, 918 F.2d adjusted by a risk factor and arrived at 5.25 percent. 389, 397–98 (3rd Cir.1990). As noted by the bankruptcy court, SPCP failed to put on any evidence regarding the Till, 541 U.S. at 478–79, 124 S.Ct. 1951 (articulating the formula approach as beginning with “the national valuation of the property. Thus, this Court finds no error with regard to the valuation evidence presented at the prime rate, ... which reflects the financial market's estimate of the amount a commercial bank should charge a hearing. creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, It is therefore ORDERED AND ADJUDGED that the and the relatively slight risk of default”). Because the Order Confirming Plan of Reorganization of Cypress formula approach involves analyzing factors familiar to Creek Assisted Living Residence, Inc., and Confirming the bankruptcy court, this approach is the easiest and Plan of Reorganization of Cypress Creek Assisted Living Residence Management, LLC (Dkt. 1) is AFFIRMED. most straightforward. Till, 541 U.S. at 479, 124 S.Ct. 1951. Adjustment within the range of 1 percent to 3 The clerk is directed to close this case. percent has been approved in the past. Till, 541 U.S. at 480, 124 S.Ct. 1951. Accordingly, this Court finds DONE AND ORDERED. no error in the bankruptcy court's arrival at the 5.25 percent interest based on 3.25 prime, as supported by All Citations the testimony of Mr. Healy, and a 2 percent adjustment factor to accommodate the difference between a solvent 434 B.R. 650

Footnotes 1 Residence filed its voluntary petition under Chapter 11 in December 2008, and Management followed suit in February 2009. The cases were consolidated in March 2009. 2 One of his siblings' interest has been transferred to a trust based on his expropriation of nearly $700,000. 3 Various factors led to the filing of the bankruptcy including three wrongful death claims filed against the Debtors, one of the Biggins' family members' borrowing money from the Debtors, which debt was never repaid, Mr. Biggins' ex-wife's use of the Debtors' funds for personal purchases, and, most notably, the maturation of the note with a balloon payment owed to SPCP. 4 The plan of reorganization for Management designates the unsecured claim of SPCP as its own class and states that the “real property is owned by Residence and has a value greater than the amount owed to SPCP.”

THE GREAT DEBATES/LET’S TALK ABOUT IT

Discussion: Student loans in Chapter 13 – Navigating treatment and repayment options of federal and private loans.

Presented by: Lewis Roberts, Lewis Roberts, P.A.

5/15/2018

Student Loans and Bankruptcy

Lewis Roberts

631 Palm Springs Drive #114 Altamonte Springs, FL 32701

(407) 749-0080 [email protected]

Student Loan Overview Federal Student Loans:

– No statute of limitations on collection – Repayment options to pay in full or based on income (total household income?) – Loans must be in default and pay out about 90% to settle in full – Straight to garnishment, tax refund intercept, social security offset upon default (no judgment necessary) – Easy to obtain status of all federal student loans ever taken out in that person’s name www.nslds.ed.gov

Sample NSLDS Report

1 5/15/2018

Student Loan Overview

Private Student Loans:

– Statute of Limitations on collection applies – Pay or Don’t Pay: lender does not have to offer repayment options – Settlement usually more attractive than federal loans – Must rely on debtor to provide information to know extent of private loans (statements, credit report, collection letters, proofs of claim) – Cosigners are common – Very few collection lawsuits ever filed

What Isn’t a Student Loan?

- Tuition owed to a college – not a student loan; debtor can get school transcript and amount owed discharged - Juvenile diversion school loan signed by parents - Tutoring or private school loans through high school

Brunner Test for Dischargeability

1. Debtor cannot maintain a minimal standard of living. 2. The poor state of affairs is likely to persist for a significant portion of the repayment period. 3. Debtor made good faith efforts to repay the loans.

2 5/15/2018

Chapter 13 Bankruptcy Options

• Chapter 20 – eliminate other unsecured debt in chapter 7 before using chapter 13 to manage student loan payments • All unsecured debt lumped together receiving their pro-rata share of payments, student loans survive the bankruptcy and likely have higher balance at end of plan • Separate Classification for Federal Student Loans, Private Student Loans, and Unsecured Debts

Separate Classification: § 1322(b)(1)

Subject to subsections (a) and (c) of this section, the plan may … designate a class or classes of unsecured claims, as provided in section 1122 of this title, but may not discriminate unfairly against any class so designated…however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims…. (Emphasis added.)

Income Driven Repayment

Referred to as IDR, IBR, ICR, PAYE, and REPAYE • Until just recently, federal loans were placed into forbearance during a BK. • No collection activities, but interest accrued. • Most debtors exited a successful chapter 13 in worse shape on their federal loans. • Department of Education recently consented to Income Driven Repayments if Buchanan provisions were in the Plan.

3 5/15/2018

Example

If claims are separately classified, the Debtor cannot discriminate unfairly among the classes.

Example: Debtor has $300,000 in total unsecured debt; $200,000 in federal student loans; $50,000 in private loans; $50,000 in other unsecureds.

Disposable income of $1,000/month for 60 months

IBR on federal loans is $250/month

Traditional Chapter 13 Plan

Federal Student Loans receive $40,000

Private Student Loans receive $10,000

Remaining Unsecured receive $10,000

Debtor exits bankruptcy with large balance on federal student loans and more than $40,000 balance on private loans is likely.

Chapter 13 with Separate Classification

Federal Student loans receiving $250.00 IBR payment (Mandated by Dept of Ed regulations)

$750.00 remaining…

$583/month to private student loans = $34,980 (much lower balance on non-dischargeable private loans)

$167/month to remaining unsecureds = $10,000 (amount they would have received under traditional chapter 13)

4 5/15/2018

Advantages of IDR During Chapter 13 • 3-5 years complete towards 25 year forgiveness on federal loans. • 3-5 years complete towards 10 year Public Student Loan Forgiveness (non-profit work) (Teachers, Nurses, etc, many of which have a $0.00 IBR payment) • Low Income Driven Repayment usually results in more money for general unsecureds and private lenders. • Once out of default on federal loans, person is eligible for new student loans.

Sample Student Loan Attorney Fees

Match student loan fees to mortgage mediation fees of $2500 for:

– Consolidation and placement into IBR – Yearly recertification of IBR during chapter 13 – Objection to private loan claims (SOL?) – Separate classification of unsecured claims – Mediation of loans with private lenders? – Potential AP for Discharge

HOT TOPICS IN THE CONSUMER BANKRUPTCY ARENA

Presented by: Lori Patton, Law Office of Lori Patton, P.A.; and L. Todd Budgen, Budgen Law

5/16/2018

THE CONSUMER ARENA Beyond Thunderdome Two may enter, one shall leave

It is all about not losing your Assets

• Recent developments in Case Law affecting owning, disclosing, defending, transferring and excepting assets.

4 key areas

1) Converting from 7 to 13 Upon Post Petition Discovery of Liquidity

2) Tenancy by the Entireties

3) “Surrender” Bar to Foreclosure Defense

4) Failure to List Civil Litigation in a Bankruptcy No Longer an Automatic Bar for Civil Defendant

1 5/16/2018

Converting from 7 to 13 upon Post Petition Discovery of Liquidity

In Re: Wagner 6:17-bk-01327-KSJ Doc 33 (8/28/2017) - conversion allowed w/ Ch. 7 Trustee holding liquidity pref assets

In Re: Brtalik 6:17-bk-03555-ABB Doc 67 (3/16/2018) - conversion allowed w/ revocation of discharge upon reconversion

Post-Petition Discovered Assets

• MDFL becoming hesitant to allow straight conversion, even where absolute right of honest debtor argued

TBE Assets

Regions Bank v. Hyman USDC MDFL Tampa 8:09- cv-1841-T-17MAP (3/7/2015)

In Re. Yerian/ Pak v Webber 6:15-bk-01720-KSJ/ DC Docket No. 6:17-cv-460-ORL-37 (10/17/2017)

Jensen v. Anderson (In re Anderson), 561 B.R. 230 *; 2016 Bankr. LEXIS 3642

In re. Cole, 6:15-bk-6458, DE 594, overruling Himmelstein, 203 B.R. 1009.

2 5/16/2018

TBE Assets

• Intentions when titled

• Transfer of TBE assets

• No judgment needed to attach

“Surrender” Bar to Foreclosure Defense

In Re: Failla; Failla v. Citibank, NA DC Docket No: 9:15-cv-80328-KAM (10/4/2016)

In Re: Ayala 6:11-bk-15964-RAC (4/18/2017)

Surrender Bar?

• Statement of Intention or other intentions could lead to performance.

• What about ability to defend deficiency where possible and aggrieved party with pecuniary interest

3 5/16/2018

Failure to List Civil Litigation in a Bankruptcy No Longer an Automatic Bar for Civil Defendant

Slater v. United States Steel Corp., 871 F.3d 1174

Losing right to Non-BK Litigation

• Has the door opened to preserve litigation not disclosed in BK?

Conclusion

Case 6:11-bk-15964-RAC Doc 35 Filed 04/18/17 Page 1 of 7

ORDERED.

Dated: April 17, 2017

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF FLORIDA ORLANDO DIVISION www.flmb.uscourts.gov

In re ) ) Jose U. Ayala and ) Case No. 6:11-bk-15964-RAC Ana L. Ayala, ) Chapter 7 ) Debtors. ) )

ORDER DENYING SPACE COAST CREDIT UNION’S MOTION TO REOPEN CHAPTER 7 CASE AND TO COMPEL SURRENDER OF MORTGAGED PROPERTY

Space Coast Credit Union (“Space Coast”) filed a Motion to Reopen Chapter 7 Case and to Compel Surrender of Mortgage Property (the “Motion”). (Doc. 23). Debtors filed a response (Doc. 31), and oral argument was presented on April 6, 2017.

The issue presented is whether this 2011 case should be reopened to prevent the former debtors from contesting a foreclosure because they “surrendered” the underlying property in their long-closed chapter 7 case. Because the facts here are significantly different from those in In re Failla,1 the request to reopen this case is denied.

1 Failla v. Citibank, N.A. (In re Failla), 838 F.3d 1170 (11th Cir. 2016).

Case 6:11-bk-15964-RAC Doc 35 Filed 04/18/17 Page 2 of 7

Background

Without the assistance of counsel, Jose and Ana Ayala filed a chapter 7 petition on

October 21, 2011.2 They properly listed their home and the Space Coast mortgage on their bankruptcy schedules. Later, they filed a “Chapter 7 Individual Debtor’s Statement of

Intentions,” declaring that the property would be “surrendered.”3 The Ayalas received a bankruptcy discharge on February 1, 2012.4

For more than two and a half years after the bankruptcy case was closed, the Ayalas

did nothing to prevent Space Coast from obtaining possession of their home. In fact, the

Ayalas assert that they continued making mortgage payments to Space Coast during this time. Space Coast acknowledges that some payments were made and accepted, but the parties continue to dispute whether there was a legal default under the loan, as modified.5

Nevertheless, Space Coast filed a foreclosure action on October 16, 2014. Although

the Ayalas initially did not contest the foreclosure,6 they eventually retained counsel to defend, principally on grounds that the loan, as modified, is not in default. The state court handling the foreclosure recently tried the question of whether the Ayalas defaulted, but has yet to issue its ruling.7

After the state court trial, and after the Eleventh Circuit’s decision in Failla, Space

Coast moves to reopen the Ayalas’ old bankruptcy case to compel the Ayalas to honor their

2011 Statement of Intentions and “surrender” the mortgaged property.8 Space Coast further

requests an order preventing the Ayalas from contesting the foreclosure in any way, including

2 Doc. 1. 3 Doc. 8 (hereafter, “Statement of Intentions”). 4 Doc. 19. 5 In its Motion, Space Coast alleges that the Ayalas’ are in “default,” but is careful not to state when the alleged default occurred. (Doc. 23, ¶ 8). 6 Doc. 23, Ex. H. 7 Id. 8 Doc. 23.

Case 6:11-bk-15964-RAC Doc 35 Filed 04/18/17 Page 3 of 7

asserting that a default had not occurred.9 The Ayalas respond that the bankruptcy case should remain closed and the state court permitted to rule on the “default” issue.10

Alternatively, the Ayalas request leave to amend their Statement of Intentions to change the

“surrender” designation that they made without the assistance of counsel.11

Analysis

Once closed, a “case may be reopened . . . to administer assets, to accord relief to the

debtor, or for other cause.” 11 U.S.C. § 350(b).12 “[O]ther cause” is not defined in the bankruptcy code.13 Here the articulated “cause” is enforcement of the Ayalas’ statement of

intent to surrender the property mortgaged to Space Coast, premised on the Eleventh

Circuit’s recent decision in Failla.

Whether “other cause” exists to reopen a case is left to the discretion of the bankruptcy court.14 In making this determination, the court’s focus should be on the substance and equitable factors of the individual case.15

In Failla, the Eleventh Circuit affirmed a bankruptcy court order under section 105(a) of the Bankruptcy Code16 enjoining the debtors from defending or opposing a foreclosure and sale.17 The Faillas had “surrendered” their property in their statement of intentions filed

9 Id. 10 Doc. 31. 11 Id. 12 A motion to reopen may be filed by a party in interest such as Space Coast. Fed. R. Bankr. P. 5010. 13 In re Shondel, 950 F.2d 1301, 1304 (7th Cir. 1991). 14 Id.; see also Jester v. Wells Fargo Bank N.A. (In re Jester), 656 F. App’x 425, 427–28 (10th Cir. 2016); Zinchiak v. CIT Small Business Lending Corp. (In re Zinchiak), 406 F.3d 214, 223 (3d Cir. 2005); Curry v. Castillo (In re Castillo), 297 F.3d 940, 944 (9th Cir. 2002). 15 In re Shondel, 950 F.2d at 1304. 16 11 U.S.C. §§ 101–1532 (“Code” or “Bankruptcy Code”). Unless otherwise indicated, all sectional references are to the Bankruptcy Code. 17 In re Failla, 838 F.3d at 1179.

Case 6:11-bk-15964-RAC Doc 35 Filed 04/18/17 Page 4 of 7

pursuant to section 521(a)(2).18 Nevertheless, during and following their bankruptcy, the

Faillas continued to live in the home and fight the foreclosure, even asserting affirmative defenses.19 There is no suggestion that the Faillas made any post-bankruptcy payments to

their lender or that their defenses were based on any post-bankruptcy activities of their lender. In fact, the foreclosure action was filed against the Faillas two years before they filed their chapter 7 petition.20

The Eleventh Circuit made two important rulings. First, by stating their intent to

“surrender” the property under section 521(a)(2), the debtors were required to drop any

opposition to the pending foreclosure action.21 Second, the bankruptcy court had the

authority under section 105(a) to order the debtors to withdraw their defenses and cease any

opposition to the pending state court foreclosure action.22

The order affirmed in Failla was designed to remedy a perceived abuse of the bankruptcy laws.23 The Faillas claimed all of the benefits of bankruptcy and yet continued

to contest the pending foreclosure on all fronts.24 Presumably, the Faillas continued to live on the property without making any payments to the lender.

Nothing before the court suggests any such abuse by the Ayalas. When the Ayalas

filed their chapter 7 petition, no foreclosure was pending. Indeed, nothing in the record

18 Section 521(a)(2) requires chapter 7 debtors with secured obligations to file a statement of intentions with respect to the “retention or surrender of such property . . . .” The statement must be filed within 30 days of the chapter 7 petition, and the debtors must perform their intention within 30 days after the first date set for the meeting of creditors under section 341(a). 19 In re Failla, 529 B.R. 786, 787–88 (Bankr. S.D. Fla. 2014). 20 Id. 21 In re Failla, 838 F.3d at 1176. 22 Id. at 1179. Section 105(a) provides that the bankruptcy court “may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code].” Id. (emphasis added). The court’s discretionary authority under section 105(a) is “broad.” Failla, 838 F.3d at 1179 (quoting Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375 (2007)). 23 Id. at 1178–79. 24 In re Failla, 529 B.R. at 787–88.

Case 6:11-bk-15964-RAC Doc 35 Filed 04/18/17 Page 5 of 7

suggests that they were in even in default of the Space Coast loan.25 Space Coast certainly did not seek relief from the automatic stay in the chapter 7 case or seek to compel surrender of the property while the chapter 7 was open. Without the assistance of counsel, and under

the circumstances, it is also unclear whether the Ayalas appreciated the legal significance of

their “surrender” designation. But even if they did, they could hardly have foreseen the

Eleventh Circuit’s decision in Failla, almost five years after signing their Statement of

Intentions.

For more than two and a half years after the bankruptcy case was closed, the Ayalas

did nothing to prevent Space Coast from foreclosing on the property. To the contrary, they

made payments on the mortgage, at least some of which Space Coast admits were accepted.

Now, more than five years after the Ayalas stated their intent to “surrender” the property,

Space Coast seeks to reopen this case to enforce the “surrender.”

So what are the limits of Failla, if any? Admittedly, the Eleventh Circuit’s opinion

includes sweeping language, without any acknowledged limitations. But consider this—after

a “surrender” under section 521(a)(2), can a lender accept payments for 30 years and then

prevent the debtor from arguing that the note and mortgage were satisfied? Can a lender

wait 10 years to foreclose and then prevent the debtor from raising a statute of limitations

defense? Does it matter that the “default” at issue here is not an affirmative defense but a

component of the lender’s burden of proof in the foreclosure? Does Failla require a debtor to

stand silent if a lender presents a false affidavit to the state court? These issues were

explored extensively at oral argument without satisfactory resolution.

25 On their Statement of Financial Affairs, the Ayalas disclosed a sizeable payment to Space Coast made shortly before the bankruptcy petition was filed. The payment appears to constitute three monthly payments when compared to the Schedule J.

Case 6:11-bk-15964-RAC Doc 35 Filed 04/18/17 Page 6 of 7

In the end, common sense must dictate Failla’s application to the particular facts of

different cases. The Eleventh Circuit dealt with the facts presented to it and concluded that

the bankruptcy court’s order remedying the perceived abuse was authorized under section

105(a). Failla does not state that similar orders (under the discretionary provision of section

105(a)) are now mandatory. And certainly not all foreclosure defenses after the conclusion of a bankruptcy case reflect abuse of bankruptcy process.26 Failla should not be viewed as carte blanche for post-bankruptcy lender misconduct. Instead, each case must be evaluated on its own facts, and careful consideration should be exercised before issuing any order that impacts pending state court proceedings.

Here it is at least arguable that post-bankruptcy conduct by Space Coast may have resulted in a waiver of the Ayalas’ 2011 “surrender.” Whether such a waiver has actually occurred is not for me decide in a bankruptcy case that has been closed for five years. It is also not for me to prevent the state court from deciding this issue after a trial has already taken place. I simply cannot conclude that the Ayalas’ post-bankruptcy conduct evidences

the same “abuse of process” illustrated in Failla.

Conclusion

Based on the forgoing analysis, the court finds that the equities do not favor Space

Coast and that “cause” does not exist to reopen this case.

26 In In re Guerra, 544 B.R. 707, 711 (Bankr. M.D. Fla. 2016), a case cited favorably in Failla, the court actually concluded its analysis as follows: Here, years passed between the time the Debtor swore she would surrender her home and the first time she opposed the state court foreclosure action. Given that intervening lapse of time, the Court cannot conclude the Debtor intended to perpetrate a fraud on this Court or make a mockery of the bankruptcy system. Perhaps circumstances have since changed that would allow the Debtor to make the required mortgage payments. . . . [W]hether judicial estoppel precludes the Debtor from defending the foreclosure action based on her inconsistent statements should, under the facts of this case, be left to the state court.

Case 6:11-bk-15964-RAC Doc 35 Filed 04/18/17 Page 7 of 7

Accordingly, it is ORDERED that Space Coast’s Motion to Reopen Chapter 7 Case and to Compel Surrender of Mortgage Property is DENIED, and the remaining requests for relief in the Motion are DENIED as moot.

Attorney Michael C. Caborn directed to serve a copy of this order on interested parties who are non-CM/ECF users and file a certificate of service within 3 days.

Case 6:17-bk-03555-ABB Doc 67 Filed 03/16/18 Page 1 of 2

ORDERED.

Dated: March 16, 2018

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF FLORIDA ORLANDO DIVISION www.flmb.uscourts.gov

In re:

NATALIE ANTOINETTE BRTALIK, Case No. 6:17-bk-03555-ABB Chapter 13

Debtors. /

ORDER GRANTING TRUSTEE’S MOTION FOR CLARIFICATION

This proceeding came before the Court for Confirmation on January 10, 2018 (the “Confirmation Hearing”), and the Court having considered the Trustee’s Ore Tenus Motion to Include Additional Language in the Confirmation Order, the Trustee’s Motion for Clarification (DE 62), and the interested parties' proposed orders submitted pursuant to the Order Directing Parties to File Proposed Order (DE 65). The Court having reviewed pertinent testimony, the transcript of the Confirmation Hearing, and considering the positions of interested parties, it is Case 6:17-bk-03555-ABB Doc 67 Filed 03/16/18 Page 2 of 2

ORDERED that the additional language to the Confirmation Order be as follows:

Debtor must turn over all income tax refunds received during the pendency of this Bankruptcy case for the benefit of the general unsecured creditors. If this case is converted or dismissed and not reinstated within fourteen days, the Court orders the waiver of the Debtor’s discharge. The Court further orders the statute of limitations shall be extended to allow any causes of action that have or could have accrued in connection to any aspect of this case. This extension shall extend the time to bring any action that might have been brought by a Trustee until the case in completed in Chapter 13 or Chapter 7.

Laurie K. Weatherford, Trustee, is directed to serve a copy of this order on interested parties and file a proof of service within 3 days of entry of the order Failla v. Citibank, N.A. (In re Failla), 838 F.3d 1170 (11th Cir., 2016)

838 F.3d 1170 Before MARCUS and WILLIAM PRYOR, Circuit Judges, and LAWSON,* District In re: David A. Failla, Donna N. Failla, Judge. Debtors. WILLIAM PRYOR, Circuit Judge: David A. Failla and Donna N. Failla, Plaintiffs–Appellants, This appeal requires us to decide whether a v. person who agrees to “surrender” his house in Citibank, N.A., Defendant–Appellee. bankruptcy may oppose a foreclosure action in state court. David and Donna Failla filed No. 15-15626 for bankruptcy in 2011 and agreed that they would surrender their house to discharge United States Court of Appeals, their mortgage debt. But the Faillas continued Eleventh Circuit. to oppose a foreclosure proceeding in state court. Citibank then filed a motion to compel Date Filed: October 4, 2016 surrender in the bankruptcy court and argued that the Faillas had breached their duty to Summaries: surrender the property. The bankruptcy court granted the motion, and the district court Source: Justia affirmed. Because the word “surrender” in the bankruptcy code, 11 U.S.C. § 521(a)(2), Plaintiffs filed for bankruptcy in 2011 and requires that debtors relinquish their right to agreed that they would surrender their house possess the property, we affirm. to discharge their mortgage debt. At issue is whether a person who agrees to “surrender” I. BACKGROUND his house in bankruptcy may oppose a foreclosure action in state court. The court David and Donna Failla own a house in Boca affirmed the bankruptcy court's grant of Raton, Florida. They financed their purchase Citibank's motion to compel surrender in the with a $500,000 mortgage. The Faillas bankruptcy court because the word defaulted on that mortgage in 2009. Citibank, “surrender” in the bankruptcy code, 11 U.S.C. the owner of the mortgage and the 521(a)(2), requires that debtors relinquish promissory note, filed a foreclosure action in their right to possess the property. Therefore, a Florida court. The Faillas are opposing that the bankruptcy court had the authority to foreclosure action. compel plaintiffs to fulfill their mandatory duty under section 521(a)(2) not to oppose The Faillas filed for bankruptcy in 2011. the foreclosure action in state court. The During the bankruptcy proceedings, the court denied as moot the motion to strike. Faillas admitted that they own the house, that the house is collateral for the mortgage, that the mortgage is valid, and that the balance of Peter David Ticktin, Ticktin Law Group, PA, the mortgage exceeds the value of the house. DEERFIELD BEACH, FL, Michael E. Zapin, They also filed a statement of intention, 11 Law Offices of Michael E. Zapin, BOCA U.S.C. § 521(a)(2), to surrender the house. RATON, FL, for Plaintiffs–Appellants. Because the house had a negative value, the trustee “abandoned” it back to the Faillas, 11 John Robert Chiles, Burr & Forman, LLP, U.S.C. § 554. The Faillas continue to live in FORT LAUDERDALE, FL, Jonathan Michael the house while they contest the foreclosure Sykes, Burr & Forman, LLP, ORLANDO, FL, action. for Defendant–Appellee.

-1- Failla v. Citibank, N.A. (In re Failla), 838 F.3d 1170 (11th Cir., 2016)

Citibank filed a motion to compel surrender III. DISCUSSION in the bankruptcy court. Citibank argued that the Faillas' opposition to the foreclosure We divide our discussion in two parts. First, action contradicted their statement we explain that section 521(a)(2) prevents debtors who surrender their property from [838 F.3d 1174] opposing a foreclosure action in state court. Second, we explain that the bankruptcy court of intention to surrender the house. The had the authority to order the Faillas to stop Faillas argued that their opposition to the opposing their foreclosure action. foreclosure action is not inconsistent with surrendering the house. A. Debtors Who Surrender Their Property in Bankruptcy May Not Oppose a Foreclosure The bankruptcy court granted Citibank's Action in State Court. motion to compel surrender and ordered the Faillas to stop opposing the foreclosure Section 521(a)(2) states a bankruptcy debtor's action. See In re Failla , 529 B.R. 786, 793 responsibilities when his schedule of assets (Bankr. S.D. Fla. 2014). The bankruptcy court and liabilities includes mortgaged property: explained that if the Faillas do not comply with its order, it may “enter an order vacating (a) The debtor shall ... [their] discharge.” Id . The district court affirmed on appeal. See Failla v. Citibank, (2) if an individual debtor's N.A. , 542 B.R. 606, 612 (S.D. Fla. 2015). schedule of assets and liabilities includes debts which are The Faillas now appeal to this Court. After the secured by property of the parties filed their briefs, Citibank filed a estate— motion to strike portions of the Faillas' briefing that were raised for the first time on (A) within thirty days after the appeal. The disputed sections argue that the date of the filing of a petition only remedy available to the bankruptcy court under chapter 7 of this title or was lifting the automatic stay for Citibank, on or before the date of the which would allow Citibank to foreclose on meeting of creditors, whichever the house in the ordinary course. This Court is earlier, or within such ruled that the motion to strike should be additional time as the court, for carried with the case. cause, within such period fixes, file with the clerk a statement of II. STANDARD OF REVIEW his intention with respect to the retention or surrender of such “Because the district court functions as an property and, if applicable, appellate court in reviewing bankruptcy court specifying that such property is decisions, this court is the second appellate claimed as exempt, that the court to review bankruptcy court cases.” In re debtor intends to redeem such Glados, Inc. , 83 F.3d 1360, 1362 (11th Cir. property, or that the debtor 1996). We “assess the bankruptcy court's intends to reaffirm debts judgment anew, employing the same standard secured by such property; and of review the district court itself used.” In re Globe Mfg. Corp. , 567 F.3d 1291, 1296 (11th (B) within 30 days after the Cir. 2009). “Thus, we review the bankruptcy first date set for the meeting of court's factual findings for clear error, and its creditors under section 341(a), legal conclusions de novo .” Id. or within such additional time -2- Failla v. Citibank, N.A. (In re Failla), 838 F.3d 1170 (11th Cir., 2016)

as the court, for cause, within intent to surrender to surrender the property such 30-day period fixes, both to the trustee and to the creditor. Even if perform his intention with the trustee abandons the property, the respect to such property, as debtors' duty to surrender the property to the specified creditor remains. The text and the context of the statute compel this interpretation. [838 F.3d 1175] Reading “surrender” to refer only to the by subparagraph (A) of this trustee of the bankruptcy estate renders paragraph; section 521(a)(2) superfluous with section 521(a)(4). Under the surplusage canon, no except that nothing in provision “should needlessly be given an subparagraphs (A) and (B) of interpretation that causes it to duplicate this paragraph shall alter the another provision.” Antonin Scalia & Bryan A. debtor's or the trustee's rights Garner, Reading Law 174 (2012). See also with regard to such property Inhabitants of Montclair Twp. v. Ramsdell , under this title, except as 107 U.S. 147, 152, 2 S.Ct. 391, 27 L.Ed. 431 provided in section 362(h). (1883) (“It is the duty of the court to give effect, if possible, to every clause and word of 11 U.S.C. § 521(a)(2). Subsection (A) requires a statute....”). Section 521(a)(4) states that the debtor to file a statement of intention “[t]he debtor shall ... surrender to the trustee about what he plans to do with the collateral all property of the estate.” 11 U.S.C. § for his debts. See Fed. R. Bankr. P. 521(a)(4). Because section 521(a)(4) already 1007(b)(2). The statement of intention must requires the debtor to surrender all of his declare one of four things: the collateral is property to the trustee so the trustee can exempt, the debtor will surrender the decide, for example, whether to liquidate it or collateral, the debtor will redeem the abandon it, section 521(a)(2) must refer to collateral, or the debtor will reaffirm the debt. some other kind of surrender. See In re Taylor , 3 F.3d 1512, 1516 (11th Cir. 1993). After the debtor issues his statement of When the bankruptcy code means a debtor intention, subsection (B) requires him to must surrender his property either to the perform the option he declared. Id . creditor or the trustee, it says so. On the one hand, section 1325(a)(5)(C) states that “the The question here is whether the Faillas debtor surrenders the property securing such satisfied their declared intention to surrender claim to such holder ,” which clearly their house under section 521(a)(2)(B). To contemplates surrender to a creditor. 11 answer that question, we must decide to U.S.C. § 1325(a)(5)(C) (emphasis added). whom debtors must surrender their property Congress did not use that language here. On and whether surrender requires debtors to the other hand, section 521(a)(4) states that acquiesce to a creditor's foreclosure action. “[t]he debtor shall ... surrender to the trustee The district court and the bankruptcy court all property of the estate,” which clearly correctly concluded that the Faillas violated contemplates surrender to the trustee. Id. § section 521(a)(2) by opposing Citibank's 521(a)(4) (emphasis added). Congress did not foreclosure action after filing a statement of use that language either. intention to surrender their house. What Congress did say in section 521(a)(2) is We agree with both the district court and the “surrender,” without specifying to whom the bankruptcy court that section 521(a)(2) surrender is made. But the lack of an object requires debtors who file a statement of makes sense because a debtor who decides to -3- Failla v. Citibank, N.A. (In re Failla), 838 F.3d 1170 (11th Cir., 2016)

surrender his collateral must surrender it to appropriate adequate protection of the both the trustee and the creditor. The debtor creditor's interest.” Id. § 362(h)(2). And first surrenders section 521(d) allows a creditor to consider the debtor in default because he declared [838 F.3d 1176] bankruptcy if the debtor violates section 521(a)(2). See id. § 521(d). it to the trustee, id. § 521(a)(4), who decides whether to liquidate it, id. § 704(a)(1), or That these remedies apply only to personal abandon it, id. § 554. If the trustee abandons property is irrelevant. Section 521(a)(2) uses it, then the debtor surrenders it to the the generic word “property” and draws no creditor, id. § 521(a)(2). distinction between real and personal property. Congress provided additional The word “surrender” in section 521(a)(2) is remedies for creditors secured by personal used with reference to the words “redeem” property, but the contextual clue remains the and “reaffirm,” and those words plainly refer same. These remedies for creditors reflect an to creditors. A debtor “redeems” property by obvious point about section 521(a)(2) : it is a paying the creditor a particular amount, and provision that affects and protects the rights he “reaffirms” a debt by renegotiating it with of creditors. the creditor. See Taylor , 3 F.3d at 1514 n.2 ; see also 11 U.S.C. §§ 524(c), 722. Because We also agree with the bankruptcy court and “[c]ontext is a primary determinant of the district court that “surrender” requires meaning,” Scalia & Garner, supra , at 167, the debtors to drop their opposition to a word “surrender” likely refers to a foreclosure action. The bankruptcy code does relationship with a creditor as well. We said not define the word “surrender,” so we give it as much in dicta in Taylor. See 3 F.3d at 1514 its “contextually appropriate ordinary n.2 (“Surrender provides that a debtor meaning.” Scalia & Garner, supra , at 70; see surrender the collateral to the lienholder who also In re Piazza , 719 F.3d 1253, 1261 (11th then disposes of it pursuant to the Cir. 2013) (applying this canon to the requirements of state law.” (emphasis bankruptcy code). One meaning of added)). “surrender” is “to give or deliver up possession of (anything) upon compulsion or Other provisions of the bankruptcy code that demand.” Surrender , Webster's New provide a remedy to creditors when a debtor International Dictionary 2539 (2d ed. 1961); violates section 521(a)(2) suggest that the see also Surrender , Oxford English word “surrender” does not refer exclusively to Dictionary (online ed.) (“To give up the trustee. The Bankruptcy Abuse Prevention (something) out of one's own possession or and Consumer Protection Act of 2005, Pub. L. power into that of another who has or asserts No. 109–8, § 305, 119 Stat. 23, added two a claim to it.”) (all Internet materials as sections to the bankruptcy code that provide visited Sept. 15, 2016, and available in Clerk remedies for creditors with respect to of Court's case file). But this meaning is not personal property. 11 U.S.C. §§ 362(h), contextually appropriate. When the 521(d). Section 362(h) punishes a debtor who bankruptcy code means “physically turn over violates section 521(a)(2) by lifting the property,” it uses the word “deliver” instead automatic stay, which allows the creditor to of “surrender.” See, e.g. , 11 U.S.C. §§ 542(a), pursue other remedies against the debtor 543(b)(1) ; see also id. § 727(d)(2) (using the immediately. 11 U.S.C. § 362(h)(1). Section phrase “deliver or surrender,” which suggests 362(h) allows the trustee of the bankruptcy they are different). The presumption of estate to override this remedy, but only if the consistent usage instructs that “[a] word or trustee moves the court to “order[ ] phrase is presumed to bear the same meaning -4- Failla v. Citibank, N.A. (In re Failla), 838 F.3d 1170 (11th Cir., 2016)

throughout a text” and that “a material litigation,” they have not “relinquish[ed] ... all variation in terms suggests a variation in of their legal rights to the property, including meaning.” the rights to possess and use it.” White , 487 F.3d at 206 (emphasis omitted). The [838 F.3d 1177] “retention of property that is legally insulated from collection is inconsistent with Scalia & Garner, supra , at 170; see also surrender.” Id. at 207. Ordinarily, when Russello v. United States , 464 U.S. 16, 23, debtors surrender property to a creditor, the 104 S.Ct. 296, 78 L.Ed.2d 17 (1983). creditor obtains it immediately and is free to sell it. Assocs. Commercial Corp. v. Rash , Another meaning of “surrender” is “[t]he 520 U.S. 953, 962, 117 S.Ct. 1879, 138 L.Ed.2d giving up of a right or claim.” Surrender, 148 (1997). Granted, a creditor must take Black's Law Dictionary (10th ed. 2014); see some legal action to recover real property— also Surrender, Webster's New International namely, a foreclosure action. See Fla. Stat. Dictionary 2539 (“To give up completely; to Ann. §§ 702.01 –702.11. Foreclosure resign; relinquish; as, to surrender a right, proceedings ensure that debtors do not have privilege, or advantage.”). This meaning to determine unilaterally issues of priority if describes a legal relationship, as opposed to a there are multiple creditors or surplus if the physical action, which makes sense in the value of the property exceeds the liability. See context of section 521(a)(2) —a provision that Plummer , 513 B.R. at 144. Debtors who describes other legal relationships like surrender property must get out of the “reaffirmation” and “redemption.” This creditor's way. “[I]n order for surrender to definition is in line with existing authorities. mean anything in the context of § 521(a)(2), See In re Pratt , 462 F.3d 14, 18–19 (1st Cir. it has to mean that ... debtor[s] ... must not 2006) (“[T]he most sensible connotation of contest the efforts of the lienholder to ‘surrender’ in the ... context [of section foreclose on the property.” In re Elowitz , 550 521(a)(2) ] is that the debtor agreed to make B.R. 603, 607 (Bankr. S.D. Fla. 2016). the collateral available to the secured Otherwise, debtors could obtain a discharge creditor—viz ., to cede his possessory rights in in bankruptcy based, in part, on their sworn the collateral....”); In re White , 487 F.3d 199, statement to surrender and “enjoy possession 205 (4th Cir. 2007) (“[T]he word ‘surrender’ of the collateral indefinitely while hindering [in section 1325(a)(5)(C) ] means the and prolonging the state court process.” Id. relinquishment of all rights in property, (quoting In re Metzler , 530 B.R. 894, 900 including the possessory right, even if such (Bankr. M.D. Fla. 2015) ). relinquishment does not always require immediate physical delivery of the property to The hanging paragraph in section 521(a)(2) another.”); In re Plummer , 513 B.R. 135, also does not give the debtor the right to 143–44 (Bankr. M.D. Fla. 2014) ; 8 Collier on oppose a foreclosure action. The hanging Bankruptcy § 1325.06[4] (16th ed.) paragraph states that “nothing in (“Surrender in th[e] context [of section subparagraphs (A) and (B) of this paragraph 1325(a)(5)(C) ] means simply the shall alter the debtor's or the trustee's rights relinquishment of any rights in the with regard to such property under this title, collateral.”). except as provided in section 362(h).” 11 U.S.C. § 521(a)(2). The key words for Because “surrender” means “giving up of a purposes of this dispute are “under this title.” right or claim,” debtors who surrender their The hanging paragraph means that section property can no longer contest a foreclosure 521(a)(2) does not affect the debtor's or the action. When the debtors act to preserve their trustee's bankrupt rights to the property “by way of adversarial -5- Failla v. Citibank, N.A. (In re Failla), 838 F.3d 1170 (11th Cir., 2016)

[838 F.3d 1178] In re Guerra , 544 B.R. 707, 710 (Bankr. M.D. Fla. 2016). In bankruptcy, as in life, a person cy rights. Section 521(a)(2) does not affect the does not get to have his cake and eat it too. trustee's bankruptcy rights because a debtor must first surrender property to the trustee— Section 521(a)(2) requires a debtor to either who liquidates it or abandons it—before redeem, reaffirm, or surrender collateral to surrendering it to the creditor. See id. § the creditor. Having chosen to surrender, the 521(a)(4). And section 521(a)(2) does not debtor must drop his opposition to the affect the debtor's bankruptcy rights because creditor's subsequent foreclosure action. a creditor is still subject to the automatic stay Because the Faillas filed a statement of and cannot foreclose on the property until the intention to surrender their house, they trustee decides to abandon it. The hanging cannot contest the foreclosure action. paragraph spells out an order of operations. It does not mean that a debtor who declares he B. The Bankruptcy Court Had the Authority will surrender his property can then undo his to Order the Faillas to Stop Opposing the surrender after the bankruptcy is over and the State Foreclosure Action. creditor initiates a foreclosure action. For the first time on appeal, the Faillas argue Concerns about fairness are not in tension that even if they breached their duty to with this outcome. During the bankruptcy surrender under section 521(a)(2), the only proceedings, the Faillas declared that they remedy available to the bankruptcy court was would surrender the property, that the to lift the automatic stay for Citibank, which mortgage is valid, and that Citibank has the would allow Citibank to foreclose on the right to foreclose. Compelling them to stop house in the ordinary course. Citibank asked opposing the foreclosure action requires them us to strike this portion of the Faillas' briefs in to honor that declaration. The Faillas may not their May 25 motion to strike, which was say one thing in bankruptcy court and carried with the case. The Faillas concede that another thing in state court: they did not raise this argument below. They ask us to excuse their forfeiture because their The concern here is that the argument is an important, unsettled question Debtor is making a mockery of of law. This argument is not forfeited, but the legal system by taking fails on the merits, rendering Citibank's inconsistent positions. In an motion to strike moot. effort to obtain her chapter 7 discharge, the Debtor swears— The Faillas' new argument falls within under the penalty of perjury—an exceptions to the general rule that a circuit intention to “surrender” her court will not consider an issue not raised in property. In other words, the the district court. See Access Now, Inc. v. Sw. Debtor is representing to the Airlines Co. , 385 F.3d 1324, 1332 (11th Cir. Court that she will make her 2004) (quoting Wright v. Hanna Steel Corp. , property available to the Bank 270 F.3d 1336, 1342 (11th Cir. 2001) ). It is a by refraining from taking any “pure question of law” and its “proper overt act that impedes the resolution is beyond any doubt.” Id . Bank's ability to foreclose its Moreover, the Faillas' argument is interest in the property. Yet, intertwined with their other arguments. For once she receives her discharge, instance, part of the reason the Faillas the Debtor in fact impedes the contend the bankruptcy court cannot order Bank's ability to foreclose its them to stop opposing the foreclosure action mortgage. is that section 521(a)(2) -6- Failla v. Citibank, N.A. (In re Failla), 838 F.3d 1170 (11th Cir., 2016)

[838 F.3d 1179] Lapeyre , 544 B.R. 719, 723 (Bankr. S.D. Fla. 2016). Just as the bankruptcy court may is merely a “notice statute” that does not “order [ ] creditors who violate the automatic affect substantive property rights. stay to take corrective action in the nonbankruptcy litigation,” the bankruptcy court On the merits, however, bankruptcy courts may “order the Debtors to withdraw their are not limited to lifting the automatic stay. affirmative defenses and dismiss their Bankruptcy courts have broad powers to counterclaim in the Foreclosure Case.” Id. remedy violations of the mandatory duties The bankruptcy court had the authority to section 521(a)(2) imposes on debtors. See compel the Faillas to fulfill their mandatory Taylor , 3 F.3d at 1516. Section 105(a) states duty under section 521(a)(2) not to oppose that bankruptcy courts can “issue any order, the foreclosure action in state court. process, or judgment that is necessary or appropriate to carry out the provisions of this IV. CONCLUSION title,” 11 U.S.C. § 105(a), which includes section 521(a)(2). Bankruptcy judges also We AFFIRM the order compelling the Faillas have “broad authority ... to take any action to surrender their home to Citibank. We that is necessary or appropriate ‘to prevent an DENY AS MOOT the motion to strike. abuse of process.’ ” Marrama v. Citizens Bank of Mass. , 549 U.S. 365, 375, 127 S.Ct. ------1105, 166 L.Ed.2d 956 (2007) (quoting 11 U.S.C. § 105(a) ). A debtor who promises to Notes: surrender property in bankruptcy court and * then, once his debts are discharged, breaks Honorable Roger H. Lawson, Jr., United that promise by opposing a foreclosure action States District Judge for the Middle District of in state court has abused the bankruptcy Georgia, sitting by designation. process. See Guerra , 544 B.R. at 710. ------If a bankruptcy court could only lift the automatic stay, then debtors could violate section 521(a)(2) with impunity. The automatic stay is always lifted at the end of the bankruptcy proceedings, see 2 Bankruptcy Law Manual § 10:7 (5th ed.), so this remedy does nothing to punish debtors who lie to the bankruptcy court about their intent to surrender property. While a creditor may be able to invoke the doctrine of judicial estoppel in state court to force debtors to keep a promise made in bankruptcy court, its availability does not affect the statutory authority of bankruptcy judges to remedy abuses that occur in their courts. And there is nothing strange about bankruptcy judges entering orders that command a party to do something in a nonbankruptcy proceeding. Bankruptcy courts “regularly exercise jurisdiction to tell parties what they can or cannot do in a non-bankruptcy forum.” In re -7- Positive As of: May 15, 2018 9:43 AM Z

Jensen v. Anderson (In re Anderson)

United States Bankruptcy Court for the Middle District of Florida, Fort Myers Division October 6, 2016, Decided Case No. 9:15-bk-06985-FMD, Chapter 7, Adv. Pro. No. 9:15-ap-990-FMD

Reporter 561 B.R. 230 *; 2016 Bankr. LEXIS 3642 ** In re: Alexander Wayne Anderson, Debtor.Diane Jensen, Chapter 7 Trustee, et al., Plaintiffs, vs. LexisNexis® Headnotes Alexander W. Anderson, et al., Defendants.

Core Terms transfers, tenancy by the entirety, marked, joint Bankruptcy Law > Procedural Matters > Adversary tenancy, entireties, ownership, spouse, fraudulent Proceedings > Judgments transfer, exempt, summary judgment, tenants in common, homestead, presumed, funds, right of HN1[ ] Adversary Proceedings, Judgments survivorship, unity, husband and wife, non-moving, opened, signature card, disclaim, defraud, purposes, Summary judgment is appropriate when the moving married, parties, Trusts, hinder, seeking to avoid, party shows that there is no genuine dispute as to any subject to claim, property held material fact and that it is entitled to judgment as a matter of law. Fed. R. Bankr. P. 7056 (incorporating Case Summary Fed. R. Civ. P. 56). If the non-moving party would have the burden of proof at trial to establish an essential element of its claim, the movant on summary judgment Overview can prevail either by showing that the non-moving party HOLDINGS: [1]-With respect to various properties and has no such evidence or by presenting affirmative accounts held by debtor husband and his non-debtor evidence demonstrating that the non-moving party will wife, where investment accounts were presumed to be be unable to prove its case at trial. Once the moving owned as tenants by the entireties (TBE), transfers party satisfies its initial burden on summary judgment, from these accounts were not subject to avoidance as the burden then shifts to the non-moving party to fraudulent transfers; [2]-Investment accounts owned establish with record evidence that a genuine dispute of by the debtor's and his wife's trusts were held as joint material fact exists. If the non-moving party cannot tenants and, because the Trusts were not married satisfy its shifted burden, then summary judgment must individuals, the accounts were not owned as TBE and, be rendered against it. to the extent that a transfer consisted of funds owned equally by the wife's Trust, the portion of the amount transferred that was owned by the wife's Trust was not subject to avoidance as a fraudulent transfer; [4]- Bankruptcy Law > Estate Transfer of certain real property to the wife's trust was Property > Avoidance > Fraudulent Transfers not subject to avoidance under Florida's Uniform Fraudulent Transfer Act because property held as TBE HN2[ ] Avoidance, Fraudulent Transfers was excluded. Under Fla. Stat. § 56.29, judgment creditors may Outcome examine the judgment debtor and third parties about the Defendants' Motion for Partial Summary Judgment location and disposition of the judgment debtor's granted in part and denied in part. property. Fla. Stat. § 56.29(6) provides that if the defendant held title to personal property within one year

Todd Budgen Page 2 of 12 561 B.R. 230, *230; 2016 Bankr. LEXIS 3642, **3642 before service of process upon him but, at the time of the whole versus each owning a share, if property is the examination, the defendant's spouse, relative, or held as a joint tenancy with right of survivorship, a any other person on confidential terms with him claims creditor of one of the joint tenants may attach the joint title or a right of possession to the property, the tenant's portion of the property to recover that joint defendant has the burden of proof to establish that the tenant's individual debt. However, when property is held transfer to the recipient was not made to delay, hinder, as a tenancy by the entireties, only the creditors of both or defraud creditors. the husband and wife, jointly, may attach the tenancy by the entireties property; the property is not divisible on behalf of one spouse alone, and therefore it cannot be reached to satisfy the obligation of only one spouse. Bankruptcy Law > Estate Property > Avoidance > Fraudulent Transfers

HN3[ ] Avoidance, Fraudulent Transfers Real Property Law > Estates > Concurrent Ownership > Tenancies by Entireties Relief under Fla. Stat. § 56.29(6) differs from the fraudulent transfer provisions of Chapter 726 because HN6[ ] Concurrent Ownership, Tenancies by (i) the look back period under § 56.29(6) is one year Entireties before the defendant was served with process in the underlying lawsuit rather than the four-year look back When real property is owned by husband and wife, the period afforded by Fla. Stat. § 726.110; and (ii) unlike ownership in both their names vests title in them as Fla. Stat. § 726.105, where the burden is on the creditor tenants by the entirety (TBE). to establish that the transfer was made to hinder, delay, or defraud, the burden of proof under § 56.29(6) is on the defendant to establish that the transfer was not Real Property Law > Estates > Concurrent made to delay, hinder, or defraud. Ownership > Tenancies by Entireties

HN7[ ] Concurrent Ownership, Tenancies by Real Property Law > Estates > Concurrent Entireties Ownership > Tenancies by Entireties With respect to bank accounts, if a signature card does HN4[ ] Concurrent Ownership, Tenancies by not expressly disclaim a tenancy by the entireties form Entireties of ownership, a rebuttable presumption arises that a tenancy by the entireties exists provided that all the The Florida Supreme Court has held that property held other unities necessary for a tenancy by the entireties as a tenancy by the entireties must possess six are established. However, if a signature card expressly characteristics: (1) unity of possession (joint ownership states that the account is not held as a tenancy by the and control); (2) unity of interest (the interests in the entireties and another form of legal ownership is account must be identical); (3) unity of title (the interests expressly designated, no presumption of a tenancy by must have originated in the same instrument); (4) unity the entireties arises. of time (the interests must have commenced simultaneously); (5) survivorship; and (6) unity of marriage (the parties must be married at the time the Real Property Law > Estates > Concurrent property became titled in their joint names). Ownership > Joint Tenancies

Real Property Law > Estates > Concurrent Real Property Law > Estates > Concurrent Ownership > Tenancies in Common Ownership > Tenancies by Entireties HN8[ ] Concurrent Ownership, Joint Tenancies HN5[ ] Concurrent Ownership, Tenancies by Entireties Unless stated otherwise, joint tenants and tenants in common are presumed to own their jointly held property Because of the distinction between each spouse owning in equal undivided interests.

Todd Budgen Page 3 of 12 561 B.R. 230, *230; 2016 Bankr. LEXIS 3642, **3642

excludes from treatment as a recoverable "asset" property held as a tenancy by the entireties to the extent Bankruptcy Law > Estate that such property is subject to process by a creditor Property > Avoidance > Fraudulent Transfers holding a claim against only one spouse. Fla. Stat. § 726.102(2)(c) Therefore, as between spouses still HN9[ ] Avoidance, Fraudulent Transfers married, where the original transfer into entireties status is not fraudulent, a subsequent transfer of Under both the fraudulent transfer provisions of the exempt entireties property to one spouse is not Bankruptcy Code and the Florida Uniform Fraudulent avoidable. Transfer Act (FUFTA), a transfer of property that is exempt from creditors may not be the subject of an action to avoid a fraudulent transfer. The disposition of Bankruptcy Law > Estate exempt property cannot be the result of an intent to Property > Avoidance > Fraudulent Transfers defraud creditors because the creditors had no claim to the property regardless of whether or not it was HN12[ ] Avoidance, Fraudulent Transfers transferred. FUFTA excludes property held as a tenancy by the entireties from treatment as a The transfer of nonexempt assets into an exempt recoverable asset to the extent that the TBE property is homestead with the intent to hinder, delay, or defraud subject to process by a creditor holding a claim against creditors is not one of the three exceptions to the only one spouse. Fla. Stat. § 726.102(2)(c). Therefore, homestead exemption provided in Florida. Florida courts as between spouses still married, where the original have invoked equitable principles to reach beyond the transfer into entireties status is not fraudulent, a literal language of the exceptions only where funds subsequent transfer of exempt entireties property to obtained through fraud or egregious conduct were used one spouse is not avoidable. to invest in, purchase, or improve the homestead.

Bankruptcy Law > Estate Bankruptcy Law > Individuals With Regular Property > Avoidance > Fraudulent Transfers Income > Estate Property HN10[ ] Avoidance, Fraudulent Transfers Real Property Law > Estates > Concurrent Ownership > Tenancies by Entireties Under the Florida Uniform Fraudulent Transfer Act (FUFTA), a transfer made or obligation incurred by a HN13[ ] Individuals With Regular Income, Estate debtor is fraudulent as to a creditor, whether the Property creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made 11 U.S.C.S. § 522(o) and (p) do not provide a trustee the transfer or incurred the obligation: (a) with actual with grounds to object to a debtor's homestead intent to hinder, delay, or defraud any creditor of the exemption claim and, if successful, decrease the debtor. Fla. Stat. § 726.105(1)(a). A transfer occurs amount that a debtor may claim as exempt. In order to only if assets have been disposed of or parted with. Fla. make use of subsections (o) and (p), the proper remedy Stat. § 726.102(14). is to file an objection to exemption, not to file an adversary proceeding seeking to avoid a fraudulent conveyance. And to the extent that § 522(o) is Bankruptcy Law > Estate applicable, it does not affect the ability of a debtor to Property > Avoidance > Fraudulent Transfers exempt the home as a tenancy by the entireties property. Real Property Law > Estates > Concurrent Ownership > Tenancies by Entireties Counsel: [**1] For Debtor/Defendant: Alberto F. Gomez, Jr., Esq., Tampa, Florida. HN11[ ] Avoidance, Fraudulent Transfers For Defendants: Jon D. Parrish, Esq., Donald G. Peterson, Esq., Naples, Florida. The Florida Uniform Fraudulent Transfer Act (FUFTA)

Todd Budgen Page 4 of 12 561 B.R. 230, *230; 2016 Bankr. LEXIS 3642, **1

For Diane Jensen, Chapter 7 Trustee, Plaintiff: Donald agree that "JTTEN" refers to Joint Tenants. R. Kirk, Esq., Tampa, Florida. D. On or about May 14, 2004, Debtor and Karen For BMO Harris Bank, N.A.: John D. Emmanuel, Esq., acquired title to the property at 4976 Crayton Court, Tampa, Florida. Naples, Florida (the "Crayton Court Property"). The deed by which Debtor and Karen acquired title Judges: Caryl E. Delano, United States Bankruptcy conveyed title to "Alex Anderson and Karen Anderson, Judge. husband and wife . . . , grantee."3

Opinion by: Caryl E. Delano E. On or about June 17, 2004, Debtor and Karen acquired title to the property at 1828 16th Street NW #4, Opinion Washington D.C. (the "D.C. Property"). The deed by which Karen and Debtor acquired title to the D.C. Property states that the property is conveyed to them [**3] as "Tenants by the Entirety."4 [*234] ORDER GRANTING DEFENDANTS' MOTION FOR PARTIAL SUMMARY JUDGMENT IN PART F. In November 2005, Debtor personally guaranteed the mortgage loan obligations of Lavender Hill Holdings, THIS PROCEEDING came on for hearing on April 26, LLC ("Lavender Hill") to the Bank. Lavender Hill owned 2016, on Defendants' [*235] Motion for Partial condominium units, the Bank's collateral, that it leased Summary Judgment (Doc. No. 35). The Court having to a hospital. In connection with his guaranty, Debtor considered the undisputed facts and the argument, the signed a Personal Financial Statement (the "Financial parties' written submissions (Doc. Nos. 35, 51, and 60), Statement").5 Contrary to the Bank's assertion, the and the arguments of counsel, makes the following Financial Statement contains no representation findings of fact and conclusions of law: regarding Debtor's ownership of assets in his individual name rather than jointly with Karen.

Findings of Fact G. On or about June 13, 2006, Debtor and Karen opened Account No. 17456 with Morgan Stanley. The A. This Chapter 7 bankruptcy case was commenced by account application permitted the selection of the the filing of an involuntary petition on July 6, 2015 by following forms of ownership: Joint Tenants with Right of BMO Harris Bank (the "Bank") as petitioning creditor. Survivorship, with the explanation that "[i]f one owner Diane Jensen (the "Trustee") is the duly appointed dies, his/her interest passes to the surviving owner[s];" bankruptcy trustee. Tenants by the Entirety, with the explanation that "[i]f one owner dies, his/her interest passes to the surviving B. Debtor, Alexander Wayne Anderson ("Debtor") and owner[s]. Laws vary by state. Please consult your his wife Karen Anderson ("Karen") have been married attorney;" Tenants in Common; and Community continuously since 1965. Property. Debtor and Karen selected Joint Tenants with 7 C. On or about March 1, 2004, Debtor and Karen Right of Survivorship. opened Account [**2] No. 48081 at Morgan Stanley.2 [*236] H. Also on or about June 13, 2006, Debtor and The account application allowed the applicant to select Karen opened four additional accounts with Morgan from the following ownership options: Individual/Sole Stanley, Account Nos. 1800, 1801, 1802, and 1803. Proprietorship, Corporation, Partnership, or "Specify Each account was documented by a Joint Account Other." After the words "Specify Other," "JTTEN" was Agreement with Right of Survivorship (the "Account handwritten on the account application. The parties

3 Doc. No. 35-3, marked as Exhibit C. 1 Doc. No. 35-10, marked as Exhibit J; Doc. No. 35-13, marked 4 as Exhibit M. Doc. No. 35-4, marked as Exhibit D. 5 2 This account, as with others referred to herein, were Doc. No. 49-1, p. 14. originally opened at Smith Barney. Smith Barney later merged 6 Doc. No. 48-21, [**4] Doc. No. 35-15, marked as Exhibit O. with Morgan Stanley. References herein to Smith Barney include its successor, Morgan Stanley. 7 Doc. No. 48-21.

Todd Budgen Page 5 of 12 561 B.R. 230, *236; 2016 Bankr. LEXIS 3642, **4

Agreements").8 Each of the Account Agreements thereafter, upon the merger of Smith Barney with contained the following statement: "[i]t is the express Morgan Stanley, [**6] Account No. 4462 was intention of the undersigned to create an estate or renumbered as Account No. 7609.16 account as joint tenants with right of survivorship and not as tenants in common . . . ." M. On or about January 9, 2009, Debtor formed the Crayton Trust U/A DTD 1/16/2009 (the "Crayton Trust"). I. At some point in 2008, Lavender Hill learned that its tenant, the hospital, would not be renewing its lease. N. On January 28, 2009, Karen, as the Trustee of the 17 Lavender Hill could not obtain other tenants at the same Karen Trust, opened Account No. 0232 with Smith lease rates, and defaulted on its mortgage obligation to Barney. Sometime thereafter, upon the merger of Smith the Bank. Barney with Morgan Stanley, Account No. 0232 was renumbered as Account No. 4479.18 J. On or about June 12, 2008, Karen, as Trustee of the Karen G. Anderson Revocable Living Trust 8-8-05 (the [*237] O. On March 26, 2009, the Bank sued Lavender "Karen Trust"), and Debtor, as Trustee of the Alex W. Hill and Debtor. Debtor was served with the Bank's Anderson Revocable Living Trust 8-9-05 (the "Alex summons and complaint on March 26, 2009.19 On Trust"), opened Account Numbers 02279 and 022810 February 7, 2011, the Bank obtained a final judgment in with Morgan Stanley. On the applications for both of the Circuit Court in and for Collier County, Florida, these accounts, the box marked "Individual/Joint" [**5] against Debtor for over $4,000,000.00 (the is checked. "Judgment").20

K. As of at least March 1, 2008, Debtor and Karen held P. In August 2009, Debtor and Karen sold the D.C. Account No. 5074 at Morgan Stanley.11 No later than Property. The proceeds of sale were transferred to the June 30, 2008, Debtor and Karen transferred Karen Trust. ownership of Account No. 5074 to the Karen Trust and the Alex Trust.12 Although the Court has not been Q. After entry of the Judgment, the Bank obtained [**7] provided with the signature card for this account, for consent of the Circuit Court to commence proceedings purposes of Defendants' Motion for Partial Summary supplementary under Fla. Sta. § 56.29. In November 21 Judgment, Defendants have assumed that Account No. 2014, the Bank filed its First Amended Complaint 5074, titled on the June 30, 2008 account statement in captioned M&I Marshall & Ilsley Bank, n/k/a BMO Harris the names of the Karen Trust and the Alex Trust, is Bank, N.A. v. Alexander W. Anderson, individually; owned by the Trusts as tenants in common.13 Karen Anderson, individually; Karen G. Anderson, as Trustee of the Karen G. Anderson Revocable Living L. As of at least January 1, 2005, Debtor and Karen held Trust U/A DTD 08/08/2005; Mallord Trust Services Ltd., an account with Morgan Stanley, Account No. 4462, as Trustee of the Crayton Trust U/A DTD 01/16/2009; titled as tenants in common.14 As of at least January 1, Alexander W. Anderson, as Trustee of the Alexander W. 2009, Debtor and Karen had transferred ownership of Anderson Revocable Trust; and Alexander W. Anderson Account No. 4462 to the Karen Trust.15 Sometime as Trustee of the Alex W. Anderson CGM IRA Rollover Custodian (the "State Court Complaint"). In the State Court Complaint, the Bank sought to avoid and recover

8 Doc. Nos. 35-5, 35-6, 35-7, and 35-8, marked as Exhibits E, F, G, and H, respectively. 15 Doc. No. 59-11, p. 2. 9 Doc. No. 35-11, marked as Exhibit K. 16 Doc. No. 35, p. 11, n. 4. 10 Doc. Nos. 35-12, marked as Exhibit L, and 35-14, marked as 17 Doc. No. 48-22. The Court notes that the exhibit includes a Exhibit N. fax header at the top of the document that reflects a date of May 15, 1996. However, Karen Anderson's signature is dated 11 Doc. No. 35-9, marked as Exhibit I, p. 1. January 28, 2009. 12 Doc. No. 35-9, marked as Exhibit I, p. 3. 18 Doc. No. 35, p. 11, n. 5. 13 Defendants refer to this account as Account No. 7412 in 19 Doc. No. 7, Exhibit A, p. 3. their motion for summary judgment (Doc. No. 35) and reply (Doc. No. 60). 20 Doc. No. 23-1, pp. 35-36. 14 Doc. No. 59-11, p. 1. 21 Doc. No. 2.

Todd Budgen Page 6 of 12 561 B.R. 230, *237; 2016 Bankr. LEXIS 3642, **7 alleged fraudulent transfers and fraudulent Trustee seeks to avoid total over $10,000,000.00.30 The conversions under the proceedings supplementary transfers include transfers from the Morgan Stanley provisions of Fla. Stat. § 56.29, and Fla. Stat. §§ accounts held [**9] by Debtor and Karen to the Karen 726.105, 726.106, 726.108, 222.30, and Chapter 85, Trust, the transfer of the Crayton Court Property to the Florida Statutes. Karen Trust, the transfer of the proceeds of sale of the D.C. Property to the Karen Trust, the purchase of the R. On March 30, 2015, Debtor and Karen purchased the Hawser Property, transfers from Debtor's Individual property at 368 Hawser Lane, Naples, Florida (the Retirement Account, transfers by persons other than 22 "Hawser Property") as husband and wife. Debtor and Debtor, and inter-account transfers within the Alex Karen designated the Hawser Property as their Trust, the Karen Trust, and the Crayton Trust. homestead property.23 Y. Debtor and Karen have no joint creditors. S. On or about May 6, 2015, Debtor and Karen transferred [**8] title of the Crayton Court Property to the Karen Trust. Conclusions of Law

T. Debtor maintains an Individual Retirement Account at A. HN1[ ] Summary judgment is appropriate when the Morgan Stanley, Account No. 1198, and has taken moving party shows that there is no genuine dispute as distributions from that account. to any material fact and that it is entitled to judgment as a matter of law.31 If the non-moving party would have U. After the Bank filed Debtor's involuntary bankruptcy the burden of proof at trial to establish an essential case, it removed the State Court Complaint to the element of its claim, the movant on summary judgment United States District Court. The District Court referred can prevail either by showing that the non-moving party the case to this Court.24 has no such evidence or by presenting affirmative V. Thereafter, the Trustee filed an agreed motion to evidence demonstrating that the non-moving party will 32 intervene as party plaintiff,25 which was granted.26 The be unable to prove its case at trial. Once the moving Trustee then filed a motion for leave to file a second party satisfies its initial burden on summary judgment, the burden then shifts to the non-moving party to amended complaint,27 also granted.28 establish with record evidence that a genuine dispute of 33 W. In addition to the state law claims asserted in the material fact exists. [**10] If the non-moving party State Court Complaint, the Trustee, in her second cannot satisfy its shifted burden, then summary 34 amended complaint (the "Second Amended judgment must be rendered against it. Complaint"), seeks a judicial declaration under Federal B. HN2[ ] Under Fla. Stat. § 56.29, judgment creditors Rule of Bankruptcy Procedure 7001(9) relief and 11 U.S.C. §§ 544, 548, and 550. The Trustee seeks to avoid and recover a convoluted multitude of 30 Id.; Doc. No. 35, p. 2. transactions involving at least twelve bank accounts, 29 three trusts, and three pieces of real property. 31 Fed. R. Bankr. P. 7056 (incorporating Fed. R. Civ. P. 56).

[*238] X. The dollar value of the transfers that the 32 Hammer v. Slater, 20 F.3d 1137, 1141 (11th Cir. 1994); Moton v. Cowart, 631 F.3d 1337, 1341 (11th Cir. 2001) ("The moving party may meet its burden to show that there are no genuine issues of material fact by demonstrating that there is 22 Doc. No. 35-19, marked as Exhibit S. a lack of evidence to support the essential elements that the 23 Doc. No. 35-20, marked as Exhibit T. non-moving party must prove at trial."). 24 Doc. No. 1. 33 Id. at 1141 ("Once the moving party has met its initial burden 25 Doc. No. 11. by negating an essential element of the non-moving party's case, the burden on summary judgment shifts to the non- 26 Doc. No. 14. moving party to show the existence of a genuine issue of 27 Doc. No. 23. material fact."). 28 Doc. No. 30. 34 Ayala-Gerena v. Bristol Myers-Squibb Co., 95 F.3d 86, 94 29 Doc. No. 23-1, pp. 38-44. (1st Cir. 1996).

Todd Budgen Page 7 of 12 561 B.R. 230, *238; 2016 Bankr. LEXIS 3642, **10 may examine the judgment debtor and third parties G. Joint tenancies share the unities of ownership, about the location and disposition of the judgment survivorship, interest, time and title.39 debtor's property. Section 56.29(6) provides that if the defendant held title to personal property within one year H. The difference between a joint tenancy and a before service of process upon him but, at the time of tenancy by the entireties is described in Beal Bank: the examination, the defendant's spouse, relative, or Although a tenancy by the entireties and joint any other person on confidential terms with him claims tenancy with right of survivorship share all of the title or a right of possession to the property, the same characteristics of form, there are significant defendant has the burden of proof to establish that the differences in the legal consequences between the transfer to the recipient was not made to delay, hinder, forms of ownership when creditors of one spouse or defraud creditors. seek to garnish these assets, when one spouse C. HN3[ ] Relief under § 56.29(6) differs [**11] from declares bankruptcy, or when one spouse attempts the fraudulent transfer provisions of Chapter 726 to recover monies transferred without his or her because (i) the look back period under § 56.29(6) is one permission. When a married couple holds property year before the defendant was served with process in as a tenancy by the entireties, each spouse is said the underlying lawsuit rather than the four-year look to hold it "per tout," meaning that each spouse back period afforded by § 726.110; and (ii) unlike § holds the "whole or the entirety, and not a share, 726.105, where the burden is on the creditor to establish moiety, or divisible part." Thus, property held by that the transfer was made to hinder, delay, or defraud, husband and wife as tenants by the entireties the burden of proof under § 56.29(6) is on the defendant belongs to neither spouse individually, but each to establish that the transfer was not made to delay, spouse is seized of the whole. In a joint tenancy hinder, or defraud.35 with right of survivorship, each person has only his or her own separate share ("per my"), which share [*239] D. Under Florida law, property may be jointly is presumed to be equal for purposes of alienation; owned as tenants in common, joint tenants, or tenants whereas, for purposes of survivorship, [**13] each by the entirety.36 joint tenant owns the whole ("per tout"), so that upon death the remainder of the estate passes to E. In Beal Bank, SSB v. Almand and Associates, HN4[ the survivor. ] the Florida Supreme Court held that property held as a tenancy by the entireties must possess six HN5[ ] Because of this distinction between each characteristics: spouse owning the whole versus each owning a share, if property is held as a joint tenancy with (1) unity of possession (joint ownership and right of survivorship, a creditor of one of the joint control); (2) unity of interest (the interests in the tenants may attach the joint tenant's portion of the account must be identical); (3) unity of title (the property to recover that joint tenant's individual interests must have originated in the same debt. However, when property is held as a tenancy instrument); (4) unity of time (the interests must by the entireties, only the creditors of both the have commenced simultaneously); (5) survivorship; husband and wife, jointly, may attach the tenancy and (6) unity of marriage (the parties must be by the entireties property; the property is not married at the time the property became titled in divisible on behalf of one spouse alone, and their joint names).37 therefore it cannot be reached to satisfy the obligation of only one spouse.40 F. Tenancies in common share only [**12] the unity of possession.38 I. HN6[ ] When real property is owned by husband and wife, the ownership in both their names vests title in

35 In re McCuan, 2015 Bankr. LEXIS 4047, 2015 WL 7717422, at *2 (Bankr. M.D. Fla. Nov. 30, 2015). 38 Id. 36 Beal Bank, SSB v. Almand and Associates, 780 So. 2d 45, 52-53 (Fla. 2001). 39 Beal Bank, 780 So. 2d at 52.

37 Id. at 52. 40 Id. at 53 (internal citations omitted).

Todd Budgen Page 8 of 12 561 B.R. 230, *239; 2016 Bankr. LEXIS 3642, **13 them as tenants by the entirety ("TBE").41 L. HN9[ ] Under both the fraudulent transfer provisions of the Bankruptcy Code and the Florida J. Regarding bank accounts, the Florida Supreme Court Uniform Fraudulent Transfer Act ("FUFTA"), a transfer held in Beal Bank that: of property that is exempt from creditors may not be the subject of an action to avoid a fraudulent transfer.44 [*240] . . . as between the debtor and a third-party The disposition of exempt property cannot be the result creditor (other than the financial institution into of an intent to defraud creditors because the creditors which the deposits have been made), if the had no claim to the property regardless of whether or signature card of the account does not expressly not it was transferred.45 FUFTA excludes property held disclaim the tenancy by the [**14] entireties form of as a tenancy by the entireties from treatment as a ownership, a presumption arises that a bank recoverable asset to the extent that the TBE property is account titled in the names of both spouses is held subject to process by a creditor holding a claim against as a tenancy by the entireties as long as the only one spouse.46 Therefore, as between spouses still account is established by husband and wife in married, "where the original transfer into entireties accordance with the unities of possession, interest, status is not fraudulent, a subsequent transfer of title, and time and with right of survivorship. The exempt entireties property [to one [**16] spouse] is not presumption we adopt is a presumption affecting avoidable."47 the burden of proof pursuant to section 90.304, Florida Statutes (2000), thus shifting the burden to M. HN10[ ] Under FUFTA, a "transfer made or the creditor to prove by a preponderance of obligation incurred by a debtor is [*241] fraudulent as evidence that a tenancy by the entireties was not to a creditor, whether the creditor's claim arose before created. We therefore answer the first rephrased or after the transfer was made or the obligation was certified question in the affirmative and recede from incurred, if the debtor made the transfer or incurred the Hector Supply Co., Winters, Bailey, and In re Estate obligation: (a) [w]ith actual intent to hinder, delay, or of Lyons, to the extent that these opinions are defraud any creditor of the debtor. . . ."48 A transfer inconsistent with this opinion. occurs only if assets have been disposed of or parted . . . with.49 HN7[ ] Thus, if a signature card does not N. The account application for Morgan Stanley Account expressly disclaim a tenancy by the entireties form No. 480850 specifies that the account is owned by of ownership, a rebuttable presumption arises that Debtor and Karen as joint tenants. There was no a tenancy by the entireties exists provided that all express disclaimer of ownership as tenants by the the other unities necessary for a tenancy by the entireties. Therefore, the Beal Bank presumption, that entireties are established. However, if a signature the account is owned as tenancy by the entireties, card expressly states that the account is not held as a tenancy by the entireties and another form of legal ownership is expressly designated, no [**15] presumption of a tenancy by the entireties arises.42 44 See Sneed v. Davis, 135 Fla. 271, 184 So. 865 (1938); see also In re Goldberg, 229 B.R. 877, 882-83 (Bankr. S.D. Fla. K. HN8[ ] Unless stated otherwise, joint tenants and 1998). tenants in common are presumed to own their jointly 43 held property in equal undivided interests. 45 In re Short, 188 B.R. 857, 860 (Bankr. M.D. Fla. 1995).

46 See Fla. Stat. § 726.102(2)(c).

47 Dzikowski v. Delson (In re Delson), 247 B.R. 873, 876 41 Id. (Bankr. S.D. Fla. 2000). 42 Beal Bank, 780 So. 2d at 58-59 (emphasis supplied) 48 Wiand v. Wells Fargo Bank, N.A., 86 F. Supp. 3d 1316, (internal citations and footnotes omitted). 1325 (M.D. Fla. 2015) (quoting § 726.105(1)(a), Florida Statutes). 43 Julia v. Russo, 984 So. 2d 1283, 1285 (Fla. 4th DCA 2008) ("In absence of evidence to the contrary, co-tenants are 49 See Fla. Stat. § 726.102(14). presumed to owe [sic] equal undivided interests") (quoting Levy v. Docktor, 185 B.R. 378, 381 (S.D. Fla. 1995)). 50 Doc. No. 35-10, marked as Exhibit J.

Todd Budgen Page 9 of 12 561 B.R. 230, *241; 2016 Bankr. LEXIS 3642, **16 applies and has not been rebutted. Because Debtor and preclude its depositors from establishing a tenancy Karen have no joint creditors, Account No. 4808 was not by the entireties. That agreement would be binding subject to the claims of Debtor's creditors. Transfers as between the depositor and Barnett Bank. from this account are not subject to avoidance as However, because the signature card did not fraudulent transfers. contain an express disclaimer that the account [*242] was not held as a tenancy by the entireties, O. The account application for Morgan Stanley Account the reference in the Welcome Brochure alone 51 No. 1745 provided for the selection of ownership as would not be sufficient to eliminate the presumption tenants by the entirety. But Debtor [**17] and Karen did in favor of tenancy by the entireties as between the not elect to own the Account No. 1745 as tenants by the depositor and a third party creditor.55 entirety and instead selected ownership as joint tenants with the right of survivorship. Because Debtor and The Florida Supreme Court's analysis of the legal effect Karen expressly disclaimed the tenancy by the entireties of language of Barnett Bank's Welcome Brochure form of ownership, and instead selected to own the applies equally to the language of a separately account as joint tenants, no presumption of a tenancy documented account, in this case Account No. 1745. by the entireties arises.52 As joint tenants, Debtor and Therefore, [**19] as to Account Nos. 1800, 1801, 1802, Karen are presumed to own the assets in Account No. and 1803, the Beal Bank presumption applies and has 1745 in equal shares.53 Defendants argue that if the not been rebutted. Because Debtor and Karen have no alleged transfer was for less than one-half the value of joint creditors, these accounts were not subject to the these accounts, the transfer is not subject to avoidance claims of Debtor's creditors. Accordingly, transfers from as a fraudulent transfer. But this argument overlooks Account Nos. 1800, 1801, 1802, and 1803 are not the fact that the transfers from the account were of subject to avoidance as fraudulent transfers. funds equally owned by each Trust, and that to the extent the account remained titled in the names of both Q. The accounts owned by the Karen Trust and the Alex 56 Trusts, the funds remaining in the account were likewise Trust, Morgan Stanley Account Nos. 0227 and 57 owned equally by each Trust. To the extent that a 0228, are held as joint tenants. Because the Trusts transfer consisted of funds owned equally with the are not married individuals, the accounts are not owned Karen Trust, the portion of the amount transferred that as tenants by the entirety. To the extent that the Karen was owned by the Karen Trust is not subject to Trust and Alex Trust accounts were funded from avoidance as a fraudulent transfer. accounts held as TBE, the TBE exemption was lost upon the transfer to the Trust accounts.58 However, for P. The account applications for Morgan Stanley Account purposes of alienation, the Trusts are presumed to own Nos. 1800, 1801, 1802, and 180354 did not expressly the assets in the accounts in equal shares.59 As set disclaim a tenancy by the entireties. This is so, despite forth above, to the extent that a transfer consisted of the fact that Account No. 1745, which did include such a funds owned equally by the Karen Trust, the portion of disclaimer, was opened on the same date. In Beal Bank, the amount transferred that was owned by the Karen the Florida Supreme Court held: Trust is not subject to avoidance as a fraudulent transfer. In a document separate from the signature card, Barnett Bank attempted through its rules and regulations contained in its Welcome Brochure to 55 Beal Bank, 780 So. 2d at 61.

51 Doc. No. 48-21. 56 Doc. No. 35-11, marked as Exhibit [**20] K. 57 Doc. No. 35-12, marked as Exhibit L, and 35-14, marked as 52 Beal Bank, 780 So. 2d at 59. Exhibit N. 53 Id. at 53; see also Nationsbank, N.A. v. Coastal Utilities, 58 In re Quaid, 2011 U.S. Dist. LEXIS 132299, 2011 WL Inc., 814 So. 2d 1227, 1229 (Fla. 4th DCA 2002) ("Absent 5572605, at *2 (M.D. Fla. Nov. 16, 2011); see Passalino v. other provision, however, the shares in the [**18] joint Protective Group Securities, Inc., 886 So. 2d 295, 297-98 (Fla. account are presumed to be equal for purposes of 4th DCA 2004); see also Rollins v. Alvarez, 792 So. 2d 695, alienation."). 696, n.2 (Fla. 5th DCA 2001). 54 Doc. Nos. 35-5, 35-6, 35-7, 35-8, marked as Exhibits E, F, G, and H, respectively. 59 Beal Bank, 780 So. 2d at 53.

Todd Budgen Page 10 of 12 561 B.R. 230, *242; 2016 Bankr. LEXIS 3642, **20

R. Account No. 5074,60 owned by the Karen Trust and process [**22] by a creditor holding a claim against only the Alex Trust and for which the Court has not been one spouse.63 Therefore, as between spouses still provided a signature card, is presumed to be held as married, "where the original transfer into entireties tenants in common.61 As such, the Trusts are presumed status is not fraudulent, a subsequent transfer of to own the assets in Account No. 5074 in equal shares. exempt entireties property [to one spouse] is not As set forth above, to the extent that a transfer avoidable."64 The transfer of the Crayton Court consisted of funds owned equally by the Karen Trust Property to the Karen Trust is not subject to avoidance and the Alex Trust, the portion of the amount as a fraudulent transfer. transferred that was owned by the Karen Trust is not subject to avoidance as a fraudulent transfer. V. Intra-Trust transfers between accounts held by the Crayton Trust and other Crayton Trust accounts are not S. Intra-Trust transfers between the Karen Trust avoidable as fraudulent transfers. This does not mean accounts at Morgan Stanley (transfers between that the Trustee cannot trace funds that were originally accounts owned by the Trust to other accounts owned the subject of an avoidable transfer to their ultimate by the Trust) cannot be avoided as transfers because intra-Trust transfer account. dominion and control of the accounts were never relinquished. Because the assets have not been W. The D.C. Property was acquired by Debtor and disposed of or parted with, the intra-Trust transfers do Karen as tenants by the entirety. The District of not themselves constitute [**21] fraudulent transfers Columbia recognizes the tenancy by the entireties form as contemplated by § 726.102(14).62 This does not of ownership, which still maintains most of the common 65 mean that the Trustee cannot trace funds that were law features. "[A]n interest in property . . . may be originally the subject of an avoidable transfer to an granted . . . to . . . grantees in tenancy in common, joint 66 account owned by the Karen Trust to a different account tenancy, or tenancy by the entirety." Similar to Florida owned by the Karen Trust. law, in the District of Columbia, property held in tenancy by the entireties is only liable for the joint debts of both [*243] T. For the same reason, intra-Trust transfers spouses.67 Therefore, where [**23] property is held by between the accounts at Morgan Stanley held by the the entireties, "it is unreachable by creditors of one but Alex Trust cannot be avoided as transfers. This does not of both of the tenants."68 Because Debtor and Karen not mean that the Trustee cannot trace funds that were have no joint creditors, the D.C. Property was not originally the subject of an avoidable transfer to an subject to the claims of Debtor's creditors. The transfer account owned by the Alex Trust to a different account of the D.C. Property to the Karen Trust is not subject to owned by the Alex Trust. avoidance as a fraudulent transfer.

U. The Crayton Court Property was owned by Debtor X. In his Financial Statement, Debtor made no and Karen, as husband and wife, and is presumed to be representations to the Bank regarding the form of owned as tenants by the entireties. The presumption ownership of assets that would act as an estoppel to his has not been rebutted. The Crayton Court Property assertions of ownership with Karen. Even if that were remained TBE property, even though it lost its status as the case, if Debtor made assertions in his Financial exempt homestead property when Debtor and Karen moved to the Hawser Property. Because Debtor and Karen have no joint creditors, the Crayton Court 63 Property was not subject to the claims of Debtor's See Fla. Stat. § 726.102(2)(c). creditors. HN11[ ] FUFTA excludes from treatment as 64 Dzikowski v. Delson (In re Delson), 247 B.R. at 876. a recoverable "asset" property held as a tenancy by the entireties to the extent that such property is subject to 65 Malek v. Flagstar Bank, 70 F. Supp. 3d 23, 29 (D.D.C. 2014). 60 Doc. No. 35-9, p. 3, marked as Exhibit I. 66 D.C. Code § 42-516(b)(2). 61 For purposes of summary judgment, Defendants concede that the accounts owned by the Alex Trust and the Karen Trust 67 In re Wall's Estate, 440 F.2d 215, 218, 142 U.S. App. D.C. are not held as tenants by the entireties, but rather, as tenants 187 (D.C. Cir. 1971). in common. 68 Morrison v. Potter, 764 A.2d 234, 236 (D.C. 2000) (quoting 62 Wiand v. Wells Fargo Bank, N.A., 86 F. Supp. 3d at 1325. In re Wall's Estate, 440 F.2d at 220).

Todd Budgen Page 11 of 12 561 B.R. 230, *243; 2016 Bankr. LEXIS 3642, **23

Statement that acted to estop him from now taking a And to the extent that § 522(o) is applicable, it does not contrary position, Karen would not be so estopped. Y. affect [**25] the ability of Debtor to exempt the home as Assets owned solely by the Alex Trust or the Crayton a tenancy by the entireties property.73 Trust are not exempt from the claims of Debtor's creditors. Alleged [*244] transfers of those assets BB. The Hawser Property was acquired by Debtor and may be avoided as a fraudulent transfer. Karen as husband and wife and is presumed to be owned as tenants by the entireties. The presumption Z. In Havoco of America, Ltd. v. Hill,69 the Florida has not been rebutted. Because Debtor and Karen have Supreme Court held, first, that: no joint creditors, the Hawser Property is not subject to the claims of Debtor's creditors. HN12[ ] The transfer of nonexempt assets into an exempt homestead with the intent to hinder, delay, CC. The Hawser Property is Debtor and Karen's exempt or defraud creditors is not one of the three homestead property. As such, it is immune from the exceptions to the homestead exemption provided in claims of creditors, including the claims of the Trustee. article X, section 4. Nor can we reasonably [**24] extend our equitable lien jurisprudence to except DD. Unless an objection to Debtor's claim of exemption such conduct from the exemption's protection. We under Fla. Stat. § 222.21(2) for his IRA account, Morgan have invoked equitable principles to reach beyond Stanley Account No. 1198, is sustained, transfers from the literal language of the exceptions only where that account are not subject to avoidance as fraudulent funds obtained through fraud or egregious conduct transfers. were used to invest in, purchase, or improve the EE. Although Debtor and Karen state in their affidavits homestead. that it was their intent for all accounts be held as TBE,74 And, second, the Havoco v. Hill court held that with the Court did not rely upon the affidavits in finding that respect to the applicability of Fla. Stat. §§ 726.105, the Beal Bank presumption applies. Rather, in making 222.29, and 222.30 to Florida's constitutional its determination regarding the application of the Beal homestead exemption: Bank presumption, the Court relied upon the account . . . a homestead acquired by a debtor with the opening documents and related bank statements. specific intent to hinder, delay, or defraud creditors [*245] FF. Transfers by parties other [**26] than is not excepted from the protection of article X, Debtor are not subject to avoidance except to the extent section 4.70 that the subject asset was transferred to that party as AA. The Trustee cannot rely on 11 U.S.C. § 522(o) and an initial transferee, or an immediate or mediate transferee. (p) in an action to recover a fraudulent transfer because these provisions of the Bankruptcy Code do GG. To the extent the Trustee seeks to avoid a transfer not supersede Havoco v. Hill.71 As the court stated in In that occurred before March 26, 2008, which is one year re Champalanne, HN13[ ] § 522(o) and (p) do not prior to the March 26, 2009 date of service of the Bank's provide a trustee with grounds to object to a original complaint against Debtor, the transfer falls debtor's homestead exemption claim and, if outside the look back period under Fla. Stat. § successful, decrease the amount that a debtor may 56.29(6)(a) and is not subject to avoidance. claim as exempt. In order to make use of Accordingly, for the foregoing reasons, it is subsections (o) and (p), the proper remedy is to file an objection to exemption, not to file an adversary ORDERED: proceeding seeking to avoid a fraudulent conveyance.72 1. Defendants' Motion for Partial Summary Judgment is GRANTED IN PART as set forth herein and otherwise

69 790 So. 2d 1018, 1028 (Fla. 2001). 72 Id. 70 Id. at 1030. 73 In re Davis, 403 B.R. 914 (Bankr. M.D. Fla. 2009). 71 In re Champalanne, 425 B.R. 707, 712 (Bankr. S.D. Fla. 2010). 74 Doc. Nos. 35-1 and 35-2.

Todd Budgen Page 12 of 12 561 B.R. 230, *245; 2016 Bankr. LEXIS 3642, **26

DENIED.

2. This ruling is without prejudice to the Trustee's claims for the avoidance of transfers, if any, by Debtor of his non-exempt assets to an initial transferee, or an immediate or mediate transferee, or to obtain a monetary judgment to the extent that the avoidance of a transfer would impair Debtor and Karen's homestead exemption.

3. The Court shall schedule a status conference to allow counsel to address the remaining issues in the case and schedule a trial.

4. To the extent the Court has not ruled upon an issue raised in the Motion for Partial Summary Judgment [**27] , the Motion is deemed DENIED as to that issue.

DATED: October 6, 2016.

/s/ Caryl E. Delano

Caryl E. Delano

United States Bankruptcy Judge

End of Document

Todd Budgen Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 1 of 15 PageID 6829

UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF FLORIDA ORLANDO DIVISION

In Re:

KEITH A. YERIAN,

Debtor.

Bankr. Case No. 6:15-bk-1720-KSJ

______

SUN Y PAK,

Appellant,

v. Case No. 6:17-cv-460-Orl-37

RICHARD BLACKSTONE WEBBER, II, as TRUSTEE,

Appellee. ______

ORDER

In the instant appeal, Appellant Sun Y. Pak (“Pak”) challenges the U.S. Bankruptcy

Court’s final judgment against her. (Docs. 1, 27, 28.) Appellee Richard B. Webber

(“Trustee”) opposes. (Doc. 26.) For the following reasons, the Bankruptcy Court’s final judgment is due to be vacated and the matter is due to be remanded for additional factual findings.

I. PROCEDURAL HISTORY

This action commenced when Debtor Keith A. Yerian (“Yerian”) filed a petition

for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Middle District of Florida.

-1-

Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 2 of 15 PageID 6830

(See Yerian B.R. Doc. 1, p. 1.)1 In it, Yerian sought to discharge his debts as an honest

debtor. (Id.; see also Pak B.R. Doc. 152, pp. 17, 26.) As required, he submitted personal financial information about his claimed estate, and the Bankruptcy Court appointed

Trustee as administrator. (See Yerian B.R. Docs. 1, 3.)

On review of Yerian’s claimed estate, Trustee uncovered additional items he believed qualified as part of Yerian’s bankruptcy estate. (Pak B.R. Doc. 1.) Pursuant to

11 U.S.C. §§ 105, 544, 548, 550, and 727 of the U.S. Bankruptcy Code, Trustee commenced an action against Yerian to, among other things, recover the value of these missing items.

(Id.) To accomplish this, Trustee also included Yerian’s non-debtor wife, Pak, in his action.

(See id. ¶¶ 38–48 (Counts IV–VI targeted to Pak).) Of issue here, Pak and Yerian had a joint bank account (“E-Trade Account”) whose funds were transferred into an individual account (“Transfer”) for Pak (“Pak Account”). (Pak. B.R. Doc. 152, pp. 5–6.) Trustee

sought to avoid the Transfer as fraudulent to recoup Yerian’s half of the E-Trade

Account’s balance—$128,000. (See id.)

Whether avoidance was possible depended on the type of property the E-Trade

Account constituted under Florida law—the Bankruptcy Code exempts certain types of

state-defined jointly-held property, so if exempt, subsequent transfers cannot be avoided.

(See id. at 21–23 (outlining Florida law of fraudulent transfers).) See also 11 U.S.C.

1 With a jumbled transmitted record, for clarity’s sake, citations to Yerian’s Bankruptcy Petition, Case No. 6:15-bk-1720-KSJ are labelled “Yerian B.R.” Citations to Pak’s Bankruptcy Record, Case No. 6:15-ap-64-KSJ, are titled “Pak B.R.” Citations without either notation refer to this Court’s record, Case No. 6:17-cv-460-Orl37. This Order cites the Bankruptcy Court’s Oral Ruling as Pak B.R. Doc. 152, also found at Doc. 11-8. -2-

Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 3 of 15 PageID 6831

§ 522(b)(3)(B) (defining exempt property from bankruptcy estate); Fla. Stat. § 726.102(2)(c)

(defining exempt property from which transfers cannot be avoided); Beal Bank, SSB v.

Almand & Assocs., 780 So.2d 45, 52–53 (Fla. 2001) (describing types of jointly-held property

under Florida law and their exempt status). Pak claimed that the E-Trade Account was

exempt from Yerian’s bankruptcy estate under two alternate theories: (1) she owned it

individually; or (2) the couple owned it as a tenancy by the entireties (“TBE”). (See Pak

B.R. Doc. 136, pp. 51–52.) Trustee countered that the E-Trade Account was a joint tenancy with right of survivorship (“JTWROS”). (See id. at 32–37.)

The case proceeded to trial on November 30, 2016 and December 12, 2016. (Pak

B.R. Docs. 127, 131.) The Bankruptcy Court issued an oral ruling on February 14, 2017, in favor of Trustee, finding the E-Trade Account was JTWROS and thus not exempt from

Yerian’s estate. (Pak B.R. Doc. 152.) To that end, the Bankruptcy Court entered final judgment against Pak for $128,000, avoiding the Transfer as fraudulent. (Pak B.R. Doc.

141.) Pak then timely filed a Notice of Appeal to this Court, seeking review of the final judgment. (Doc. 1.) Both parties submitted briefing, so the matter is now ripe for adjudication. (Docs. 26–28.)2

II. LEGAL STANDARDS

A. Standards of Review

District courts have jurisdiction over appeals from a bankruptcy court’s final

judgments under 28 U.S.C. § 158(a)(1). In reviewing these decisions, a district court

2 The parties filed amended briefs in compliance with the Court’s August 29 Order. (Doc. 25.) The Court cites the docket entries for these amended briefs. -3-

Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 4 of 15 PageID 6832

functions as an appellate court. In re Colortex Indus., Inc., 19 F.3d 1371, 1374

(11th Cir. 1994). Conclusions of law are reviewed de novo. In re Globe Mfg. Corp., 567 F.3d

1291, 1296 (11th Cir. 2009). Factual findings are reviewed for clear error. Id. Clear error exists if “the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed.” Jones v. Childers, 18 F.3d 899, 904 (11th Cir.

1994) (quotation omitted). District courts may not make independent factual findings. See

In re JLJ Inc., 988 F.2d 1112, 1116 (11th Cir. 1993). Therefore, “[i]f the bankruptcy court is silent or ambiguous as to an outcome determinative factual question, the case must be remanded to the bankruptcy court for the necessary factual findings.” Id.

B. Defining the Estate

Filing a petition for bankruptcy creates a bankruptcy estate. 11 U.S.C. § 541(a). This estate encompasses all of a debtor’s legal and equitable interests in real and personal property, except for items specifically authorized as excludable. Id. Such excludable items include “any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest . . . is exempt from process under applicable nonbankruptcy law.” Id. § 522(b)(3)(B). Thus defining the contours of a bankruptcy estate often turns on state law exemptions. Here, Florida law controls. See Butner v. United States, 440 U.S. 48,

55 (1979) (announcing that state property law applies in bankruptcy proceedings).

Florida exempts property held as TBE from the bankruptcy estate so long as only one spouse files for bankruptcy. Beal Bank, 780 So.2d at 53. This is because TBE is a type of property available only to married couples—it “belongs to neither spouse individually,

-4-

Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 5 of 15 PageID 6833

but each spouse is seized of the whole.” Id. As such, “only the creditors of both the husband and wife, jointly, may attach [TBE] property.” Id. This exemption is extended to transfers from TBE property under the Florida Uniform Fraudulent Transfer Act

(“FUFTA”), even if the circumstances surrounding the transfer suggest fraud. See Fla.

Stat. § 726.102(2)(c) (defining as exempt “an interest in property held in [TBE] to the extent it is not subject to process by a creditor holding a claim against only one tenant”); see also, e.g., In re Anderson, 561 B.R. 230, 240 (Bankr M.D. Fla. 2016) (under FUFTA and the

Bankruptcy Code, “a transfer of property that is exempt from creditors may not be the subject of an action to avoid a fraudulent transfer”). Consequently, only the fraudulent creation of TBE property will subject transfers from TBE property to avoidance. See, e.g.,

In re Blitstein, 105 B.R. 133, 135 (Bankr. S.D. Fla. 1989). In short, Florida is highly protective of TBE property. See Beal Bank, 780 So.2d at 57 (discussing policy considerations undergirding Florida’s special treatment of TBE).

Florida does not extend the same exemption status to other types of jointly-held property that can be proportionally divided. See id. at 52–53. This includes property held as JTWROS, where each tenant holds “only his or her separate share” to which a creditor can attach. Id. at 53. As such, Florida allows creditors of one spouse to seize both JTWROS property and transfers from such property as part of the debtor’s bankruptcy estate. Id.

And unlike TBE, a debtor’s fraudulent exclusion of such property can lead to avoidance and recovery proceedings under 11 U.S.C. § 550. Because Florida treats TBE and JTWROS oppositely in this respect, defining the bankruptcy estate for a married debtor with jointly-titled property turns on that property’s classification.

-5-

Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 6 of 15 PageID 6834

C. Classifying the Property

Under Florida law, the composition of TBE and JTWROS boils down to a single variance—marriage. Beal Bank, 780 So.2d at 52. Other than marriage, TBE and JTWROS share the same five unities: possession, interest, title, time, and survivorship. Id. But married couples may own both TBE and JTWROS property, which complicates matters when one spouse files for bankruptcy and seeks to determine which property should be exempt from the estate—particularly if the couple jointly acquired title to property after marriage without realizing TBE ownership was possible. See id. at 53–55. To avoid such complications, the Florida Supreme Court announced a presumption in favor of TBE ownership for married couples jointly owning property (“Beal Bank Presumption”). Id. at 58. Florida’s legislature then codified the Beal Bank Presumption, announcing, “[a]ny deposit or account made in the name of two persons who are husband and wife shall be considered a tenancy by the entirety unless otherwise specified in writing.” Fla. Stat.

§ 655.79. With this, courts attempting to classify joint property owned by married couples under Florida law must engage the Beal Bank Presumption. See Beal Bank, 780 So. 2d at 61;

In re Sinnreich, 391 F.3d 1295, 1297 (11th Cir. 2007.)

Applying the Beal Bank Presumption is rather straightforward. First, the property at issue must meet the six required unities of TBE. Beal Bank, 780 So.2d at 58. Joint bank accounts normally do. See id. at 61; see also In re Mathews, 307 F. App’x 266, 268–69

(11th Cir. 2009) (discussing types of personal property that the Beal Bank presumption

-6-

Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 7 of 15 PageID 6835

applies to).3 Second, the court must determine whether there was evidence of an express

disclaimer—a writing that specifies the account as TBE or otherwise and a deliberate

choice by the couple to choose a type of ownership. Id. at 60. If the couple expressly chose

TBE or JTWROS, the inquiry is over and the account is either TBE or JTWROS, respectively. Id. But if a writing merely stated that the account being opened was JTWROS without offering TBE, the Beal Bank Presumption applies and the account is presumed TBE.

Id. The Beal Bank Presumption operates in these situations—where it is unclear whether the married couple deliberately chose a type of ownership other than TBE. See id. So determining whether the Beal Bank Presumption applies is a factually-driven activity that involves scrutinizing both the types of accounts offered to the couple and the documents they signed when opening the account.4

When the Beal Bank Presumption applies, the creditor shoulders the burden to prove by a preponderance of the evidence that the property is not TBE. See id. at 58–59.

To accomplish this, the creditor can put on evidence that the couple fraudulently created the TBE property. See id. at 61; see also In re Blitstein, 105 B.R. at 135. To prove such fraud at inception, the creditor can show, among other things, that the debtor acted “with actual

3 While unpublished opinions are not binding precedent, they may be considered as persuasive authority. See 11th Cir. R. 36-2; see also United States v. Almedina, 686 F.3d 1312, 1316 n.1 (11th Cir. 2012). 4 Many courts have conducted this analysis. See, e.g., In re Anderson, 561 B.R. at 235–41; In re Benzaquen, 555 B.R. 63, 65, 68–69 (Bankr. S.D. Fla. 2016); Regions Bank v. Hyman, 91 F. Supp. 3d 1234, 1255 (M.D. Fla. 2015); In re Stephenson, No. 6:11-bk-18901- ABB, 2012 WL 4896725, at *1 (Bankr. M.D. Fla. Oct. 4, 2012); Mathews v. Cohen, 382 B.R. 526, 531–33 (Bankr. M.D. Fla. 2007), affirmed by In re Mathews, 307 F. App’x at 268; In re Robedee, 367 B.R. 901, 907–09 (Bankr. S.D. Fla. 2007); In re Wingate, 377 B.R. 687, 698–701 (Bankr. M.D. Fla. 2006). -7-

Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 8 of 15 PageID 6836

intent to hinder, delay, or defraud.” See 11 U.S.C. § 548(a)(1)(A); see also Fla. Stat. §

726.105(1)(a). Then, only if the creditor succeeds at proving the TBE property was

fraudulently created can fraudulent transfers from TBE property be avoided. See In re

Blitstein, 105 B.R. at 135; see also Sneed v. Davis, 184 So. 865, 869 (Fla. 1938). Otherwise,

property that has the six unities, no express disclaimer, and was not fraudulently created

is TBE. Beal Bank, 780 So.2d at 61. It and all subsequent transfers from it are exempt from

the reach of a single spouse’s creditors. See id.; see also In re Sinnreich, 391 F.3d at 1296; In re Wingate, 377 B.R. at 700–01.

The Florida Supreme Court has recognized one exception where the creditor does not have the burden of proof. When the financial institution does not offer TBE as a form of ownership, or expressly precludes TBE ownership, an express disclaimer is not possible, so of course the Beal Bank Presumption does not apply. Beal Bank, 780 So.2d at

61. Indeed, Florida law does not ascribe a type of ownership to an account that the financial institution expressly chooses not to offer. Nevertheless, if the debtor still maintains that the couple intended the property as TBE, he can offer such evidence. Id.

As such, the debtor shoulders the burden to show TBE ownership, still by preponderance of the evidence. Id.

Against this legal backdrop, the Court turns to the Bankruptcy proceedings below.

III. BANKRUPTCY PROCEEDINGS

On February 14, 2017, the Bankruptcy Court issued an oral ruling announcing its factual findings and legal conclusions. (Pak B.R. Doc. 152.) The Court summarizes the relevant findings below.

-8-

Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 9 of 15 PageID 6837

A. Bankruptcy Court’s Factual Findings

The story begins with Debtor Yerian. (Id. at 8.) An Ohioan, Yerian formerly enjoyed an active and successful career in software development, even conceiving a software company, ETC Computers, Inc., with his ex-wife Deborah Yerian (“Deborah”).

(Id.) Ever a factotum, Yerian also acquired skill and knowledge of stock trading. (Id. at

11.) Indeed, by the time he divorced Deborah and married Pak, “he was a well-versed stock trader and had traded stock for years,”—quite the “sophisticated businessman.”

(Id. at 10–11.)

Pak, on the other hand, had no experience “of any demonstrated kind . . . in the stock market.”(Id. at 11.) She worked at ETC Computers, Inc. for a bit and married Yerian in October 2008. (Id. at 9, 11.) Following their nuptials, they opened the E-Trade Account on October 24,5 funded with $70,000 gifted by Pak’s mother to celebrate the union. (Id. at

10–12.) Pak’s mother transferred the funds in three installments—first $50,000, then two

installments of $10,000 each. (Id. at 10–11.)

From 2008 to 2012, there were “thousands of stock trades,” and “the trading was

very successful.” (Id. at 11.) So much so that “the amount increased from $70,000 to well

over $250,000.” (Id.) Bluntly, “there was a substantial return in the investment.” (Id.)

During trial, Pak testified that she was the reason for the E-Trade Account’s

exceptional performance during an economic recession, despite never having traded

5 The E-Trade Account was titled “Keith A. Yerian & Sun Y. Pak JTWROS.” (See Doc. 13-3.) -9-

Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 10 of 15 PageID 6838

stock before.6 (Id. at 13.) Such testimony “strained” the Bankruptcy Court’s beliefs and

was deemed not credible. (Id.) Rather, the Bankruptcy Court attributed the E-Trade

Account’s substantial growth to Yerian, who evidence showed “effectuated every stock

trade.” (Id.)

While the E-Trade Account triumphed, ETC Computers, Inc. flopped. (Id. at 9.)

Matters came to a head in November 2011, when Deborah filed suit against Yerian and

others based on business-related issues. (Id.; see also Pak B.R. Doc. 121-11.) Four months

later, the Transfer occurred, whereby Pak and Yerian depleted the E-Trade Account and

moved its $257,000 to the Pak Account. (Pak B.R. Doc. 152, pp. 11–12; see also Pak B.R.

Doc. 120-24.) Pak then used $173,000 from the Pak Account to purchase a Florida home.

(Pak B.R. Doc. 152, p. 13.) The couple decamped in May, with $81,000 remaining in the

Pak Account. (Id.) This money was somehow spent, but on what and by whom remains

unknown—the Bankruptcy Court found no credibility in Pak’s testimony about the Pak

Account’s expenditures and found the money “unaccounted for.” (Id. at 14.) The

Bankruptcy Court did not state whether the Pak Account was closed.

B. Bankruptcy Court’s Legal Conclusions

After enumerating its factual findings, the Bankruptcy Court announced its legal conclusions. It concluded that Pak and Yerian owned the E-Trade Account as JTWROS

(“JTWROS Finding”), discrediting Pak’s primary argument that it was individually

6 The Bankruptcy Court also found that “during the testimony, it was clear that Ms. Pak did not understand the [account] statements or what the various matters meant.” (Pak B.R. Doc. 152, p. 13.) -10-

Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 11 of 15 PageID 6839

owned. (Pak B.R. Doc. 152, pp. 24–25.) As support, the Bankruptcy Court stated:

[T]he original [E-Trade Account] established in 2008 – October 24, 2008 – was jointly owned. The monies were jointly owned; And that Mr. Yerian was the primary stock trader. Perhaps Ms. Pak had some input, but I would not find it to be substantial, although she has and is entitled as the joint tenant with right of survivorship to have half the monies. But it was a joint gift. It was to both of them. The [E-Trade Account] was joint.

(Id.)

The Bankruptcy Court made no mention of Pak’s secondary argument that the E-

Trade Account was TBE. (See generally id.) Instead, based on the JTWROS Finding, the

Bankruptcy Court devoted its legal analysis to evaluating whether the Transfer could be

avoided as fraudulent. (Id. at 22–25.) In so doing, it looked at the suspect circumstances surrounding the Transfer—the litigation between Yerian and Deborah and other

“numerous badges of fraud”—to find “intentional fraud in the scheme to move the money away.” (Id. at 24–25.) From this, it concluded “that the Trustee [was] entitled to

avoid the fraudulent transfer and receive a judgment in the amount of [Yerian’s] interest

of $128,000.” (Id. at 25.)

IV. ANALYSIS

The Court’s task is to review the Bankruptcy Court’s final judgment against Pak.

Pak calls on the Court to vacate the judgment, while Trustee seeks affirmance. (See Docs.

26–28.) On review, the Court finds no clear error with the Bankruptcy Court’s factual findings regarding the E-Trade Account, and agrees that the couple jointly owned and opened the account after their marriage. But the Court concludes that the Bankruptcy

Court misapplied Florida law. Hence, on de novo review, its final judgment against Pak

-11-

Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 12 of 15 PageID 6840

is due to be vacated and this case is due to be remanded for additional factual findings.

See In re Sublett, 895 F.2d at 1384.

Against Beal Bank’s clearly-established framework, the Bankruptcy Court’s

JTWROS finding misses the mark. Its ruling made no mention of TBE as a form of property ownership. Instead, the Bankruptcy Court zeroed in on Pak’s primary argument that she alone owned the E-Trade Account. (See Pak B.R. Doc. 152, pp. 23–24.) Once the

Bankruptcy Court discredited this argument, it apparently thought that JTWROS was the only available alternative property form, despite Pak’s secondary position arguing exactly the opposite. (See Pak B.R. Doc. 152, p. 13 (statement of Bankruptcy Court that

“[i]t [is] undisputed that [the E-Trade Account] was JTWROS.”); see also Pak B.R. Doc.

136, pp. 51–52 (asserting argument that the E-Trade Account was alternatively TBE).)

Regardless of its reasoning, the Bankruptcy Court latched on to the notion that the E-

Trade Account was JTWROS, enabling it to avoid the Transfer. (See Pak B.R. Doc. 152, pp.

23–25.) This was error.

The Bankruptcy Court erred by not linking two key findings: (1) the E-Trade

Account was JTWROS; and (2) Pak and Yerian were married when they opened it.

Together, these findings signal that the E-Trade Account possessed all required unities

for TBE ownership. Thus Beal Bank springs into action. With this, the Bankruptcy Court

should have proceeded to examine the circumstances surrounding the opening of the

E-Trade Account, specifically whether: (1) E-Trade allowed TBE ownership; and, if so,

(2) the couple expressly disclaimed it. But the Bankruptcy Court’s ruling contained no

such factual findings, and the only record evidence that speaks to the issue of express

-12-

Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 13 of 15 PageID 6841

disclaimer was one question in Yerian’s testimony, where his attorney asked if he had

“any option to [his knowledge] to elect [the E-Trade Account] as [TBE.]” (Pak B.R. Doc.

134, ¶¶ 1–3.) He said no. (Id. ¶ 4.) Such scant evidence hardly resolves the issue, so additional factual findings are needed to evaluate whether the Beal Bank presumption applies.

Therefore, because the Bankruptcy Court did not engage the Beal Bank analysis, remand is necessary to develop further factual findings on this point. If the Beal Bank presumption applies, it is Trustee’s burden to overcome by preponderance of the evidence. If he does not, then the E-Trade Account remains TBE and exempt from

Yerian’s bankruptcy estate, not avoidable, despite the Bankruptcy Court’s finding of fraud, based on FUFTA and the Bankruptcy Code.

Trustee lobs several other arguments in favor of affirmance. Although none are persuasive, the Court briefly addresses them. First, Trustee asserts that judicial estoppel bars the Court from evaluating the E-Trade Account’s legal status. (Doc. 26, pp. 19–21.)

But this bungles the doctrine, which operates only when parties take “inconsistent positions” in separate judicial proceedings—not, as here, where a party makes alternative arguments in a single proceeding. See Slater v. U.S. Steel Corp., No. 12-15548, 2017 WL

4110047, at *1 (11th Cir. Sept. 18, 2017) (en banc).

Second, Trustee maintains that the Court’s standard of review is limited to clear error by contending that the JTWROS Finding was factual, not legal. (Doc. 26, pp. 15–16.)

But the determination of what legal form of property the TBE Account constitutes is just that—a legal question that involves the application of Florida law and the Bankruptcy

-13-

Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 14 of 15 PageID 6842

Code. See In re Mathews, 307 F. App’x at 268.

Third, Trustee opines that the E-Trade Account is missing two required unities— possession and interest—so it cannot be TBE. (See id. at 21–35.) The Court is buffaloed by this argument. Because JTWROS and TBE share the same unities, apart from marriage, accepting Trustee’s argument here would not only prevent the E-Trade Account from being TBE, but also JTWROS. Trustee cannot have his cake and eat it, too.

Last, Trustee posits that remand for additional factual findings is unnecessary because the Court can presume that the Bankruptcy Court fully considered the possibility that the E-Trade Account was TBE. (Doc. 26, pp. 35–36 (citing United States v. $242,484.00,

389 F.3d 1149, 1154 (11th Cir. 2004).) Trustee asks too much, given the gap between the

Bankruptcy Court’s ruling and Florida’s TBE structure. To afford such deference to the

Bankruptcy Court’s ruling, the Court would need some indication, even a blip, that Beal

Bank or the possibility of TBE crossed the Bankruptcy Court’s radar.

Therefore, although the Court disfavors remand, it is particularly appropriate here to straighten out this misapplication of Florida law. The Bankruptcy Court is instructed to reconsider its February 14, 2017 oral ruling in light of this Order.

IV. CONCLUSION

Accordingly, it is ORDERED AND ADJUDGED as follows:

1. The U.S. Bankruptcy Court’s Final Judgment entered against Appellant Sun

Y. Pak in the amount of $128,000 is VACATED (Pak B.R. Doc. 141, p. 2, ¶2).

2. This case is REMANDED to the U.S. Bankruptcy Court for further factual

findings consistent with this Order.

-14-

Case 6:17-cv-00460-RBD Document 29 Filed 10/17/17 Page 15 of 15 PageID 6843

3. The Clerk is DIRECTED to close the file.

DONE AND ORDERED in Chambers in Orlando, Florida, on October 16, 2017.

Copies to: Counsel of Record

-15-

Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

91 F.Supp.3d 1234 judgment by garnishing Defendant Kearney's bank accounts. USAmeribank filed an Answer REGIONS BANK, etc., Plaintiff and Platinum Bank filed an Answer (Dkt. 212, v. Dkt. 249). Plaintiff Regions filed a Reply to Larry S. HYMAN, etc., et al., Platinum Bank's Answer. (Dkt. 261). Defendants. Defendant Bing Charles W. Kearney, Jr. Case No. 8:09–CV–1841–T–17MAP. (“Kearney”) moved to dissolve two writs of garnishment, (USAmeribank Writ and United States District Court, M.D. Platinum Bank Writ) (Dkt. 255). Plaintiff Florida, Tampa Division. Regions Bank opposed the Motion to Dissolve (Dkt. 273). Signed March 7, 2015. The assigned Magistrate Judge conducted a [91 F.Supp.3d 1237] Motion Hearing on July 8, 2013, and also took testimony of witnesses Bing Kearney, Allison Doucette, John A. Anthony, Stephenie Justin Rowlson, and James M. Reed.(Dkt. Biernacki Anthony, Edmund S. Whitson, III, 289). An evidentiary hearing was conducted Megan Marlowe Greene, Anthony & Partners, on August 20, 2013, at which testimony was LLC, Tampa, FL, for Regions Bank, etc. taken from Bing Kearney, William Lance Ponton, Yazmin Tolzman, Wendy Herbert Roy Donica, Donica Law Firm, PA, Blankenhorn, and Camilla Gabertini. The Tampa, FL, for Larry S. Hyman, etc. assigned Magistrate Judge has entered a Report and Recommendation in which it is ORDER recommended that the two writs of ELIZABETH A. KOVACHEVICH, District garnishment be dissolved. As to the Judge. USAmeribank Writ, the assigned Magistrate Judge found that based on Plaintiff's This cause is before the Court on: noncompliance with notice provisions of the garnishment statutes, the writs should be Dkt. 218 Claim of Exemption dissolved, applying Zivitz v. Zivitz, 16 So.3d 841, 847 (Fla. 2d DCA 2009), Cullen v. Dkt. 255 Motion to Dissolve Writs of Garnishment Marsh, 34 So.3d 235 (Fla. 3d DCA 2010) ; Dkt. 273 Response Rudd v. First Union Nat. Bank of Florida, 761 Dkt. 289 Transcript of Motion Hearing of 7/8/2013So.2d 1189, 1192 (Fla. 4th DCA 2000) Dkt. 347 Status Report (reversed ruling that motion to dissolve was Dkt. 356 Amended Status Report premature and remanding to allow debtor to Dkt. 363 Transcript of Evidentiary Hearing of 8/20/2013file motion to dissolve and assert Dkt. 382 Report and Recommendation exemptions). The assigned Magistrate Judge further found that the Answer of Dkt. 384 Objections (Regions Bank) USAmeribank was deficient and deprived the other owners of their statutorily required [91 F.Supp.3d 1238] notice. The assigned Magistrate Judge further A Final Judgment was entered in favor of found that when Plaintiff Regions was Plaintiff Regions Bank (“Regions”), and advised of the other owners of the six against Defendants. (Dkt. 177). The Final accounts, Plaintiff did not serve them, and Judgment has been affirmed on appeal. (Dkt. this failure further justifies granting the 444, 455). Regions Bank sought to collect the dissolution of the writ. Based on the recommendation to dissolve the two writs of -1- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

garnishment, the assigned Magistrate Judge In the Status Report, Plaintiff Regions Bank found it was not necessary to address the advises: Claims of Exemption, but did so in the interest of completeness. The assigned USAmeribank Magistrate Judge found that the signature card form is ambiguous and confusing as to The Writ of Garnishment remains at issue as the form of ownership, such that he could not to judgment debtor Kearney, but not as to find that the Kearneys expressly chose the judgment debtors Seeger or Harris. Kearney, joint-tenancy box. The assigned Magistrate Harris and Seeger filed Claims of Exemption, Judge further found by clear and convincing but no money is owed to Seeger or Harris. proof that when the Kearneys opened the 056 Discovery confirmed money owed to Kearney. account, they intended to open a tenancy by The Amended Status Report states that the the entireties account. Writ remains at issue as to Kearney, but not as to Seeger or Harris. As to the Platinum Bank Writ, the assigned Magistrate Judge found that Plaintiff Regions Bank of Tampa did not serve the notice required by Sec. 77.055, F.S., on the owners disclosed by the The Writ of Garnishment remains at issue as Answer of Garnishee. The assigned to Kearney, Harris and Seeger pending Magistrate Judge concluded that the account discovery; no exemption has been filed and owners disclosed in the Answer were no motion to dissolve was filed. The Amended foreclosed from timely moving States Report states that the Writ is not at issue as to Kearney, Harris and Seeger. [91 F.Supp.3d 1239] Wells Fargo to dissolve the Writ, and therefore the Platinum Bank Writ should be dissolved. See The Writ of Garnishment remains at issue as Beardsley v. Admiral Ins. Co., 647 So.2d 327 to Kearney, Harris and Seeger pending (Fla. 3d DCA 1994) (prior panel affirmed discovery. Harris filed an untimely of denial of motion to dissolve writ; the factual exemption. Seeger and Kearney have not filed dispute as to exempt status of funds should Claims of Exemption. The Amended Status proceed to trial; reversing final judgment and Report states that the Writ is not at issue as remanding for compliance with statutory to Kearney, Harris and Seeger. procedures). The accounts at Platinum Bank Platinum Bank are held in the names of Clayton Kearney and Bing Kearney. The Answer of Platinum Banks states It is indebted to Kearney, but not to Harris or Judgment Debtor Kearney moved to dissolve Seeger. Discovery confirmed the indebtedness the writ for failure to comply with the to Kearney but not to Harris and Seeger. The requirements of the garnishment statutes. Amended Status Report states that the Writ Clayton Kearney filed an Affidavit in support remains at issue as to Kearney, but not as to of the Motion to Dissolve on the same day Harris and Seeger. that the Motion was filed, stating that he is the owner of the funds in the accounts, and I. Standard of Review Bing Kearney is not. After conducting a careful and complete Plaintiff Regions Bank has filed Objections to review of the findings and recommendations, the Report and Recommendation. a district judge may accept, reject or modify

-2- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

the magistrate judge's report and Dkt. 268 Affidavit—Justin Rowlson, filed 7/3/2013 recommendation. 28 U.S.C. § 636(b)(1) ; Dkt. 270 Affidavit—Clayton Kearney, filed 7/3/2013 (302 and 020 accounts) Williams v. Wainwright, 681 F.2d 732 (11th Dkt. 272 Affidavit—Amber Proctor, filed 7/3/2013 Cir.1982), cert. denied, 459 U.S. 1112, 103 Dkt. 273 Response to Motion to Dissolve, filed 7/3/2013 S.Ct. 744, 74 L.Ed.2d 964 (1983). In the Dkt. 300 Supplemental Memorandum, filed 7/19/2013 absence of specific objections, there is no requirement that a district judge review 2. Platinum Bank Writ factual findings de novo. Garvey v. Vaughn, 993 F.2d 776, 779 n. 9 (11th Cir.1993). Dkt. 241 Order granting issuance of Writ, filed 6/11/2013 However, a district judge must make a de Dkt. 246 Writ to Platinum Bank returned executed, filed 6/12/2013 (Served 6/11/2013) novo determination of those portions of the report and recommendation to which an Dkt. 248 Certificate of Service, filed 6/12/2013 (Motion, Writ, Notice) objection is made. 28 U.S.C. § 636(b)(1)(C). Dkt. 249 Answer of Platinum Bank, filed 6/14/2013 District judges must “give fresh consideration Dkt. 252 Certificate of Service, filed 6/17/2013 (Answer, Notice) to those issues to which specific objections Dkt. 255 Motion to Dissolve of Bing Kearney, Jr., filed 6/18/2013 have been made by a party.” Jeffrey S. by Dkt. 261 Reply to Answer, filed 6/28/2013 Ernest S. v. State Bd. of Educ. of Ga., 896 Dkt. 269 Affidavit—Bing Kearney, Jr., filed 7/3/2013 (6601, 7920, 3201, 2401 accounts) F.2d 507, 512 (11th Cir.1990) (internal Dkt. 271 Affidavit—Clayton Kearney, filed 7/3/201 (6601, 7920, 3201, 2401 accounts) citations omitted). The district judge reviews Dkt. 273 Response to Motion to Dissolve, filed 7/3/2013 legal conclusions de novo, even in the absence Dkt. 281 Amended Certificate of Service, filed on 7/5/2013 of an objection. See Cooper–Houston v. S. Rwy. Co., 37 F.3d 603, 604 (11th Cir.1994) ; B. Notice Issues Castro Bobadilla v. Reno, 826 F.Supp. 1428, 1431–32 (S.D.Fla.1993), aff'd, 28 F.3d 116 Defendant Kearney moved to dissolve the (11th Cir.1994). writs because Plaintiff Regions did not comply with Florida's statutory procedure, [91 F.Supp.3d 1240] Ch. 77, Florida Statutes. As to the USAmeribank Writ, Defendant Kearney II. Discussion argued that he was deprived of the service of A. Sequence of Events the Notice to Defendants, which outlines the rights to exemptions from garnishment. As to Defendant Bing Kearney, Jr., the docket Defendant Kearney denied receipt of the for this case includes the following: notice required by Ch. 77.041(2) as of the time the Answer of USAmeribank was filed 1. USAmeribank Writ (5/24/2014). Defendant Kearney argues that the Notice to Defendant was served late, and Dkt. 199 Order granting issuance of Writ, filed 5/16/2013did not comply with Ch. 77.041(1), in that the Dkt. 206 Writ to USAmeribank returned executed, filedcategories 5/20/2013, for which (Writ a servedclaim of on exemption 5/17/2013) can Dkt. 211 Certificate of Service filed 5/28/2013 (Writ,be Motion, asserted Notice) have been updated from the previous limit of $500 to $750 or less in Dkt. 212 Answer of USAmeribank, filed 5/24/2013 earnings. Defendant Kearney further denied Dkt. 213 Certificate of Service, filed 5/28/2013 (Answer, Notice) that Defendant Kearney received a Notice Dkt. 218 Claim of Exemption and Request for Hearing, filed 6/3/2013 that Defendant could move to dissolve the Dkt. 219 Motion for Hearing on Claim of Exemption,Writ. filed Defendant6/3/2013 Kearney argued that his Dkt. 220 Verified Reply to Claim of Exemptions, filedinterest 6/4/2013 in protecting his assets will be Dkt. 255 Motion to Dissolve of Bing Kearney, Jr., filedunconstitutionally 6/18/2013 deprived without Dkt. 266 Affidavit—Bing Kearney, Jr., filed 7/3/2013dissolution (056, 3695, of 0129, the writ302, and020, the accounts) requirement Dkt. 267 Affidavit—Tonya Kearney, filed 7/3/2013 (056,that 3695,Plaintiff 0129 accounts)properly serve the writ -3- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

according to the procedure required by the diligent search, the plaintiff Florida Statutes. must mail, by first class, the documents to the defendant at [91 F.Supp.3d 1241] the defendant's place of employment. The plaintiff shall 1. Region's Objections file in the proceeding a certificate of such service. Regions does not dispute that the mailing of the notice of the USAmeribank writ and Pursuant to Fed.R.Civ.P. 69(a), in answer were not within the time periods set proceedings supplementary to and in aid of out in Sec. 77.041(2) and 77.055, Florida judgment or execution, the procedure Statutes. Regions Bank argues that the legal followed must accord with the procedure of effect accorded to Regions' delay in complying the state in which the Court is located. The with the notice requirements of Sec. 77.041(2) Court notes that, under Florida law, and 77.055, Florida Statutes, in the Report garnishment is a special statutory proceeding. and Recommendation is erroneous. Regions BNP Paribas v. Wynne, 944 So.2d 1004, characterizes the legal conclusion of the 1006 (Fla. 4th DCA 2005). In a special assigned Magistrate Judge as “automatic statutory proceeding, “the form, content, dissolution” of the writ for failure to comply procedure, and time for pleading in all special with the procedural requirements of the statutory proceedings shall be as prescribed Garnishment Statute. Regions argues that by the statutes governing the proceeding automatic dissolution of a writ of unless [the Florida Rules of Civil Procedure] garnishment is not supported by the text of specifically provide to the contrary.” Rule the Garnishment Statute and the clearly 1.010, Fla. R.C.P.; Federated Stores Realty, expressed intent of the Florida legislature. Inc. v. Burnstein, 392 So.2d 573, 574 (Fla. 4th DCA 1980). a. Ch. 77.041(2), Florida Statutes The procedures outlined in Ch. 77, Florida Ch. 77.041(2), Florida Statutes (Notice to Statutes govern this garnishment proceeding. individual defendant for claim of exemption Garnishment statutes must be strictly from garnishment; procedure for hearing) construed. Robert C. Malt & Co. v. Colvin, provides: 419 So.2d 745 (Fla. 4th DCA 1982) (acknowledging strict construction but (2) The plaintiff must mail, by looking to substance, not form, on facts of first class, a copy of the writ of case); Florida Power & Light v. Crabtree garnishment, a copy of the Construction, Inc., 283 So.2d 570 (Fla. 4th motion for writ of garnishment, DCA 1973) (permitting amendment to answer and, if the defendant is an to garnishment, where justice so requires; individual, the “Notice to reversing judgment against garnishee and Defendant” to the defendant's remanding for further proceedings). In last known address within 5 another case involving garnishment under business days after the writ is Florida law, Orix Financial Services v. Water issued or 3 business days after and Sewer Utility Construction, Inc., et al., the writ is served on the Case No. 3:06–CV–312–HES–MCR, (Dkt. 28, garnishee, whichever is later. p. 7), the Court expressed that it would be However, if such documents are better to decide the case on its merits rather returned as undeliverable by the than based on a technicality that did not post office, or if the last known affect either party. In Orix, the defendants address is not discoverable after filed Affidavits of Exemption which indicated -4- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

that defendants believed their accounts with Financial Services, Inc. v. Water & Sewer Vystar Credit Union were exempt from Utility Construction, Inc., 274 Fed.Appx. 773 garnishment because they were held as (11th Cir.2008) (unpublished). tenancies by the entireties, because monies in one of the accounts were received from Social The procedures outlined in Ch. 77.041 are Security, and because an account was designed to provide notice to a defendant of established as a Trust Account. The the available statutory and constitutional exemptions, and to provide a procedure to [91 F.Supp.3d 1242] promptly obtain a hearing. The Court notes the interplay of Ch. 222, Fla. Stat., Method of Court noted that the affidavits provided the Setting Apart Homestead and Exemptions, information required by Ch. 77.041(1), F.S., and Ch. 77, Fla. Stat. Ch. 222.12, Fla. Stat., but required the defendants to comply with Proceedings for Exemption, permitting the the technical requirements of the statute by head of family exemption to be asserted by filing a Claim of Exemption. (Case No. 3:06– affidavit, has now been repealed, effective CV–312–HES–MCR, Dkt. 21). The plaintiff July 1, 2013, leaving Ch. 77.041 the exclusive filed a response to the Answer of the procedure for asserting exemptions from garnishee, Vystar, stating objections to the garnishment. defendants' exemptions. (Dkt. 10). Defendants requested entry of summary The USAmeribank Writ was served on judgment because the plaintiff did not file a 5/17/2013. As of 5/20/2013, Defendant written objection to the Claim of Exemption, Kearney had actual notice of the Writ. (Dkt. and because plaintiff did not file a sworn 220–1). On 6/3/2013, Defendant Kearney written statement that contests defendants' filed Defendant's Claim of Exemption and Claims of Exemptions in accordance with Ch. request for hearing. Defendant Kearney did 77.041(3), F.S. (Dkt. 25). The Court chose to not assert any of the statutory or treat the defendants' affidavits of exemption constitutional exemptions under Florida law as their Claims for Exemption, and denied on the Notice. Defendant Kearney asserted defendants' motion for summary judgment, only that the accounts were held as tenancy finding that the response to garnishee's by the entireties. Under Florida law, a Answer was a timely objection to defendants' judgment against one spouse is not affidavits of exemption. The Court denied the enforceable against property owned by both plaintiff's request that all exemptions other spouses as tenants by the entireties. Each than those asserted in the Claim of spouse is “seized of the whole”, and an Exemption (Dkt. 22) be deemed waived, attempted conveyance of one spouse's noting that if the Court were to accept the interest in a tenancy by the entireties is plaintiff's arguments as to waiver, the writ ineffective. Florida law recognizes the would be dissolved pursuant to Ch. 77.041(3), common law immunity from suit as an F.S., as the plaintiff did not file a response to exemption. In re Buonopane, 359 B.R. 346, the Claim of Exemption. As to the failure of 347 (Bankr.M.D.Fla.2007) (citing Vaughn v. interested third parties (defendants' wives Mandis, 53 So.2d 704 (Fla.1951) and and Rodgers Revocable Trust) to file motions Andrews v. Andrews 155 Fla. 654, 21 So.2d to dissolve pursuant to Ch. 77.07, F.S., the 205, 206 (1945) ). Court found that defendants' motions to dissolve sufficiently put the plaintiff on notice Defendant Kearney was not prejudiced by late as to all parties having potential interests in mailing of the Ch. 77.041(2) Notice or any the accounts. (Dkt. 28). Defendants appealed incorrect format. Ch. 77.041(2), F.S., does not the decision of the Court, which was affirmed expressly require dissolution of the Writ. This by the Eleventh Circuit Court of Appeals, Orix factual scenario is distinguishable from a -5- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

factual scenario where the statute itself Mountain Brook, City, 345 F.3d 1258, 1263 requires automatic dissolution of the writ; e.g. (11th Cir.2003). In McKinney v. Pate, the Ch. 77.041(3), F.S., directing automatic Eleventh Circuit Court of Appeals notes that dissolution where a Claim of Exemption is one distinction between substantive and filed, and is not procedural due process claims is that a substantive due process claim is complete [91 F.Supp.3d 1243] when it occurs, and involves compensatory damages for the value of the deprived right, answered within the time specified by the but a procedural due process claim is not statute. complete unless and until the State fails to provide due process, and involves equitable Defendant Kearney complains that Plaintiff remedies, i.e. curing the procedural deprived Defendant of his property without deprivation by providing a later procedural due process. A claim for deprivation of remedy. McKinney at 1557–1558. “Procedural property without due process under the due process rules are meant to protect Fourteenth Amendment is not one for persons not from the deprivation, but from violation of substantive due process; rather it the mistaken or unjustified deprivation, of is a claim for violation of procedural due life, liberty, or property.” Carey v. Piphus, process. Warren v. Crawford, 927 F.2d 559, 435 U.S. 247, 259, 98 S.Ct. 1042, 55 L.Ed.2d 562 (11th Cir.1991) (citing Bd. Of Regents of 252 (1978). “In this circuit, a § 1983 claim State Colleges v. Roth, 408 U.S. 564, 92 S.Ct. alleging a denial of procedural due process 2701, 33 L.Ed.2d 548 (1972) ); cf. Silva v. requires proof of three elements: (1) a Bieluch, 351 F.3d 1045, 1047 (11th Cir.2003) ; deprivation of a constitutionally-protected McKinney v. Pate, 20 F.3d 1550, 1556 (11th liberty or property interest; (2) state action; Cir.1994) (en banc). and (3) constitutionally-inadequate process.” Arrington v. Helms, 438 F.3d 1336, 1347 In general, property rights are created by (11th Cir.2006) state law. Board of Regents v. Roth, 408 U.S. 564, 577, 92 S.Ct. 2701, 33 L.Ed.2d 548 In general, due process of law requires that a (1972). Fundamental rights are those rights deprivation of property be preceded by notice created by the Constitution. DeKalb Stone, and a hearing. This case involves a post- Inc. v. County of DeKalb, Ga., 106 F.3d 956, judgment garnishment proceeding. Florida's 959 n. 9 (11th Cir.1997). The Due Process post-judgment garnishment procedures have clause of the Fourteenth Amendment to the been held to be constitutional. Brown v. U.S. Constitution provides two different kinds Liberty Loan Corp. of Duval, 539 F.2d 1355 of constitutional protections: substantive due (5th Cir.1976). Defendants' interests in their process and procedural due process. The money and financial accounts is a protected substantive component of the Due Process property interest. Defendants and all clause protects rights that are fundamental. interested parties are entitled to due process McKinney v. Pate, 20 F.3d 1550, 1556 (11th under Fourteenth Amendment standards i.e. Cir.1994.) (executive deprivation of state- proper notice and a full and fair opportunity created right held not a substantive due to be heard, to be determined on a case-by- process claim). Procedural due process claims case basis. “Proper notice” must be involve: 1) whether there is enough of a reasonably calculated, under the property interest at stake to be “protectable”; circumstances, to apprise interested parties of 2) the amount of process that should be due the pendency of the action and afford an for that protectable right; and 3) the process opportunity them an opportunity to present actually provided, be it before or after the their objections. The notice must convey the deprivation. Greenbriar Village, LLC v. -6- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

required information, and must afford a the certificate of service in the reasonable time for those interested notice if any allegation in the plaintiff's motion for writ of [91 F.Supp.3d 1244] garnishment is untrue. The plaintiff shall serve these to make their appearance. Unless due process documents on the defendant at is accorded to all parties, the Court could not the defendant's last known enter a valid final judgment in this address and any other address garnishment proceeding. See, e.g. Patino v. El disclosed by the garnishee's Rey Del Chivito Corp., 2013 WL 6670428 answer and on any other person (S.D.Fla. Dec. 18, 2013) (citing Cruise Control disclosed in the garnishee's v. Tyler, 577 So.2d 709, 710 (Fla. 2d DCA answer to have any ownership 1991) (per curiam)). The statutory procedures interest in the deposit, account, for notice to a garnishee and interested or property controlled by the parties appear calculated to afford proper garnishee. The plaintiff shall file notice. The Court also notes that Florida law in the proceeding a certificate of recognizes a cause of action for wrongful such service. garnishment. Procedural due process violations do not exist when adequate state USAmeribank's Answer was filed on remedies are available. In this case, the issue 5/24/2013. The Court notes that Plaintiff is whether the failure to comply with available Regions included the Notice pursuant to Sec. state garnishment procedures results in the 77.055, F.S., to Defendant Kearney that denial of due process. Due process is a flexible Defendant Kearney must move to dissolve the concept, tailored to the facts of the case to writ within twenty days after the date in the which it is applied; the denial of procedural certificate of service, only within the due process can be cured by granting an Certificate of Service, and attached a Sec. equitable remedy. If there is a procedural due 77.041(1) Notice. (Dkt. 213). The Certificate of process violation in the factual scenario Service was provided to counsel for before the Court, allowing the opportunity to Defendants Kearney, Harris and Seeger on cure the alleged violation may be appropriate. 5/28/2013, not served on Defendant Kearney at his last known address. Defendant Kearney b. Sec. 77.055, Florida Statutes moved to dissolve on 6/18/2013.

Sec. 77.055, Florida Statutes (Service of Defendant Kearney timely moved to dissolve garnishee's answer and notice of right to the USAmeribank Writ. Defendant Kearney dissolve writ), provides: was not prejudiced by Regions' noncompliance with Sec. 77.055, F.S. Within 5 days after service of Defendant Kearney is entitled to procedural the garnishee's answer on the due process; the Court, by requiring plaintiff or after the time period compliance with statutory garnishment for the garnishee's answer has procedures as to notice and a hearing, Unless expired, the plaintiff shall serve, all parties to the final judgment of by mail, the following garnishment are accorded due process, the documents: a copy of the Court could not enter a valid final judgment garnishee's answer, and a notice in this garnishment proceeding. See, e.g. advising the recipient that he or Patino v. El Rey Del Chivito Corp., 2013 WL she must move to dissolve the 6670428 (S.D.Fla.12/18/2013) (citing Cruise writ of garnishment within 20 Control v. Tyler, 577 So.2d 709, 710 (Fla. 2d days after the date indicated on DCA 1991) (per curiam); T–Jett Enterprises -7- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

v. Ernest and Stewart, Inc., 543 So.2d 390 garnishment and almost all of them filed (Fla. 3d DCA 1989) (reversing and remanding affidavits to timely assert their interests, in final judgment of garnishment due to accord with their statutory obligation. F.S. § presence of factual disputes and noting 77.16. noncompliance with F.S. § 77.055 is sufficient basis for reversal)). The Court notes that Plaintiff Regions argues that the R & R there is a dispute disregards the effect of USAmeribank's Answer, and erroneously looks to the letter of [91 F.Supp.3d 1245] May 20, 2013 from Bing Kearney to Regions' counsel as additional notice that there were between Plaintiff Regions, Defendant Bing co-owners of the Kearney accounts. Regions Kearney and interested party Tonya Kearney further argues that the co-owners were on as to the ownership of the 056 account, which actual notice of the garnishment, and filed is addressed below. There are other affidavits asserting an ownership interest, but USAmeribank accounts and other interested did not file a motion to dissolve the writs, in parties as to the additional accounts. Clayton accord with F.S. § 77.07(2). Kearney has filed an Affidavit in support of the Motion to Dissolve, asserting that he is 2. Discussion the owner of the funds in the 020 and 302 accounts. The Claim of Exemption, and Reply The Court notes that, as to Defendant to Claim of Exemption show that there are Kearney, Garnishee USAmeribank's Answer disputed issues as to these accounts. The states: Affidavits of third parties Tonya Kearney and Clayton Kearney would require a trial as to 1. At the time of this Answer and the disputed claims pursuant to Sec. 77.16, at the time of the service of the F.S. Because of the recommendation to Writ of Garnishment, and at all dissolve the Writs, the assigned Magistrate times between such dates, Judge did not address the ownership of the Garnishee was and still is funds in the other accounts in the Report and indebted to the Defendant, Recommendation. Bing Charles W. Kearney, c. Notice to Co–Owners Not Disclosed in Jr., in the amount of Answers $700,022.29....

1. Region's Objections 2. Garnishee did not have in its hands, possession or control, Plaintiff Regions objects to the R & R to the any goods, monies, chattels or extent that it finds that Plaintiff Regions acted effects of Defendant other than in error by not providing notice to co-owners those set forth above in of bank accounts who were not disclosed in paragraph 1 at the time of the USAmeribank's Answer (Dkt. 212). Plaintiff services of the Writ of Regions argues that F.S. § 77.055 required Garnishment or at the time of Regions to serve notice documents on “any this Answer or at any time other person disclosed in the garnishee's between such periods, and does answer to have any ownership interest in the not know of any other persons deposit, account, or property controlled by indebted to the Defendant or the garnishee.” Regions argues that it who may have any of the effects complied with the statute, that all of the other of Defendants in its hands interest holders had actual notice of the

-8- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

(Dkt. 212). subject to disposition as provided in this chapter, any In contrast, the Answer of Platinum Bank to deposit, account, or tangible or the Writ of Garnishment reveals account intangible personal property in numbers, co-owners of each account, and the possession or control of amounts in each account (Dkt. 249). In a such garnishee; and the answer letter dated May 20, 2013, Defendant shall state the name or names Kearney advised Regions that the and addresses, if known to the USAmeribank accounts were held as tenancy garnishee, of the defendant and by the entireties (Dkt. 220–1). In response, any other persons having or on May 20, 2013, counsel for Regions appearing to have an ownership attempted to set up a conference with counsel interest in the involved for property.

[91 F.Supp.3d 1246] The signature cards as to Defendant Kearney's accounts reveal names and Defendant Kearney and the Kearneys to addresses of other persons having, or obtain more information. (Dkt. 220–2). In appearing to have, an ownership interest in filing of Defendant Kearney's Claim of the involved property. Exemption (Dkt. 218), Defendant Kearney asserted that the USAmeribank accounts were Ch. 77.07(2), Fla. Stat., contemplates notice held as tenancy by the entireties. On May 21, to other owners as disclosed in the 2013, Regions served discovery on garnishee's Answer. What USAmeribank USAmeribank to obtain information as to the included in its Answer was within Kearney accounts; in the Motion for USAmeribank's control, not Plaintiff Regions' Protective Order, USAmeribank states it did control. Until service of the Answer and not receive the discovery documents until Notice of right to move to dissolve within June 28, 2013 (Dkt. 246). Regions filed an twenty days of service, the right of the other Amended Certificate of Service to reflect owners of the garnished accounts to move to service on USAmeribank as of 5/21/2013 dissolve is not triggered. Rudd v. First Union (Dkt. 265). According to the Response to Nat. Bank of Florida, 761 So.2d 1189 (Fla. 4th Motion for Protective Order, USAmeribank DCA 2000). The Court notes that the letter of referred Regions' request for production to May 20, 2013 raises the issue of more than outside counsel, resulting in a delay in one owner of the USAmeribank accounts, and production. The Court notes that Regions did Regions subsequently attempted to obtain not receive USAmeribank's response to more information as to the USAmeribank discovery prior to the initial hearing on accounts through discovery. Eventually, 7/8/2013. The response to discovery was filed Regions obtained documentation of the on 7/9/2013. (Dkt. 286). Regions moved to ownership of the USAmeribank accounts. reopen the evidence (Dkt. 288), which was granted. Given the required strict construction of Ch. 77, Fla. Stat., Plaintiff Regions was in The Court notes that USAmeribank's Answer compliance with Sec. 77.055 in serving the does not comply with Ch. 77.06(2), Fla. Stat., statutory notice only to Defendant Kearney, which provides: as no other owner is revealed in USAmeribank's Answer. Regions argues that (2) The garnishee shall report in the other owners of the accounts had actual its answer and retain, subject to notice of the Writ, could have filed a Claim of the provisions of s. 77.19 and Exemption and moved to dissolve the Writ. In -9- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

Navon, Kopelman & O'Donnell, P.A. v. issues. To the extent that Defendant Synnex Information Technologies, Inc., 720 Kearney's Motion to Dissolve is based on the So.2d 1167 (Fla. 4th DCA 1998) (denying failure to comply with the statutory petition for writ of certiorari; reviewing procedures required by Ch. 77, Fla. Stat., the whether procedural due process was afforded Court denies the Motion to Dissolve. The and whether the court observed the essential Court recognizes that there are cases which requirements of the law), the circuit court hold that strict compliance with statutory affirmed the county court's denial of a motion garnishment procedures is required, and to dissolve the writ of garnishment, noting noncompliance requires that a writ of that the statutory right to move to dissolve is garnishment be dissolved. Cullen v. Marsh, granted only to the defendant and any other 34 So.3d 235 (Fla. 3d DCA 2010). There are person having an interest in the property, as other cases which recognize that strict disclosed by the garnishee's answer. The compliance with statutory garnishment circuit court also noted that the statutes procedures is required, but where justice contemplate that other persons who claim an requires, considering the facts of the case, ownership interest in the property in the additional proceedings to cure a technical hands of the garnishee can assert their violation have been permitted. The Court notes that courts recognize that a judgment [91 F.Supp.3d 1247] creditor has due process rights. Akerman, Senterfitt & Eidson, P.A. v. Value Seafood, claim by filing an affidavit pursuant to Ch. Inc., 121 So.3d 83 (Fla. 3d DCA 2013). The 77.16, Fla. Stat. In this case, other interested Court is reluctant to elevate form over parties Tonya Kearney and Clayton Kearney substance, but is concerned with filed affidavits that would require resolution documenting adequate notice to all interested at trial. A jury trial may be waived in favor of parties. Technical violations of the statutory a bench trial. garnishment procedures can be cured by re- serving the Writ of Garnishment on In Gigliotti Contracting North, Inc. v. Traffic USAmeribank. The filing of USAmeribank's Control Products of North Florida, Inc., 788 Answer which complies with Sec. 77.06, F.S., So.2d 1013 (2001), the Second District Court would trigger Plaintiff Regions' opportunity of Appeals found that the trial court's denial to serve Notices in accordance with Sec. of intervention without leave to comply with 77.055, F.S. The necessity of curing technical the required statutory process to a violations of service could be avoided by filing subcontractor who claimed an interest in a knowing and voluntary waiver of service of funds being garnished by a contractor's Notices. judgment creditor, but who did not file an affidavit, denied the subcontractor its due As to the Writ garnishing accounts at process right to have its meritorious claim Platinum Bank, the Answer of Platinum Bank adjudicated on the merits. The Court cannot was not deficient. The issue of the ownership enter a valid final judgment in this of the funds in those accounts will be garnishment proceeding unless all owners determined at trial, or on summary judgment. have notice and an opportunity to be heard. The Report and Recommendation did not Service of the garnishee's answer and notice include a determination as to the ownership of the right to move to dissolve establishes of the funds in the accounts. that all owners of the garnished accounts have been accorded due process. C. Claim of Exemption

The Court sustains Plaintiff's objections to the In the R & R, the assigned Magistrate Judge Report and Recommendation as to all notice concluded that the 056 account was a tenancy -10- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

by the entireties (“TBE”) account, in which 2. Statement of Facts each spouse held an indivisible interest in all funds in the account. In his Claim of Plaintiff Regions sought to garnish six Exemption, Defendant Kearney stated: Kearney accounts at USAmeribank.

Other exemptions as provided In the Affidavit (Dkt. 266) supporting his by law. Section 655.79, Florida Claim of Exemption, Defendant Kearney Statutes —tenancy by the states he serves as a “convenience signatory” entireties account with my wife. as to the accounts jointly owned with his son See also Beal Bank, SSB v. and his brother. (Dkt. 266, p. 4, par. 14). As to Almand and Associates, 780 the 056 account, Defendant Kearney asserts So.2d 45 (Fla.2001) and BB & T that the account is held jointly with wife v. Maxwell, 2012 WL 4078407 Tonya Nuhfer Kearney, and at all times the (M.D.Fla.2012). funds in the account were intended to be held by the entireties. (Dkt. 266, p. 2, par. 4). I request a hearing to decide the Defendant Kearney asserts that the 056 validity of my claim...... account (money market), 3695 account (personal checking) and 0129 account (Dkt. 218). (personal savings) were to be opened as “joint accounts tenancy by the entireties”. (Dkt. 266, 1. Regions' Objections p. 2. par. 6).

Plaintiff Regions objects to the Report and The USAmeribank accounts include: Recommendation as to application of Account 056 (money market) Owned by Bing Kearney, and wife Tonya Nuhfer Kearney [91 F.Supp.3d 1248]

Account 3695 (personal checking) Owned by Bing Kearney and wife Tonya Nuhfer Kearney the Beal Bank presumption, and failure to follow Wexler v. Rich, 80 So.3d 1097 (Fla. 4th DCA 2012). As to the 056 account, Plaintiff Account 0129 (personal savings) Owned by Bing Kearney and wife Tonya Nuhfer Kearney Regions argues that: 1) there was an express disclaimer of the TBE form of account; 2) that Account 302 Owned by son Clayton W. Kearney and Bing Kearney evidence of Defendant Kearney's intent is not relevant or sufficient to establish that a TBE Account 020 Owned by son Clayton W. Kearney and Bing Kearney account was formed; 3) that Defendant Kearney did not establish by a preponderance of the evidence that the 056 account was Account 7939 Owned by brother Bryan G. Kearney and Bing Kearney intended to be a TBE account; 4) that the Court inappropriately relies on a subsequent Plaintiff's Exhibits include the signature cards attempt to open a TBE account on July 8, for the above accounts. According to Exhibit 1 2013 at USAmeribank in its determination as (dated 10/26/2011, revised 11/13/2011), the to the 056 account opened in 2010; and 5) owners of the 3695 account are Bing Kearney, Defendant Kearney is the sole owner of all of Jr., Tonya Nuhfer Kearney, Charles Wesley the funds in the 056 account. Plaintiff Kearney, III and Clayton W. Kearney. Regions also argues that the R & R did not According to Exhibit 2 (dated 12/1/2010), the discuss the ownership of the remaining owners of the 056 account are Bing Kearney, Kearney Accounts at USAmeribank, and did Jr. and Tonya Nuhfer Kearney. According to not discuss the ownership of the Platinum Exhibit 3, the owners of the 302 account Bank Accounts. (opened 11/15/2011) are Clayton W. Kearney, Bing Kearney, Jr. and Charles Wesley -11- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

Kearney, III. According to Exhibit 4 (dated 5. The box for “Multiple–Party 2/10/2012), the owners of the 7939 account Account” was checked. The box are Bryan G. Kearney, and Bing Kearney, Jr. for “Multiple Party Account– According to Exhibit 5, the owners of the 020 Tenancy by the Entireties” was account (opened 11/15/2011) are Clayton W. not checked. When asked Kearney, Bing Kearney, Jr. and Charles whether he observed that at the Wesley Kearney, time he signed the signature card, Bing Kearney testified that [91 F.Supp.3d 1249] he did not have his glasses on, so he signed where the [bank III. According to Exhibit 6, the owners of the representative] put the X. “Said 0129 account (opened 11/23/2011) are Bing sign here. I cannot read without Kearney, Jr., Tonya Nuhfer Kearney, Charles these glasses.” (Dkt. 363, p. 54); Wesley Kearney, III and Clayton W. Kearney. 6. When asked whether he said The Court notes the following testimony as to anything to the lady he was the 056 account at the Evidentiary Hearing: dealing with at the bank, Bing Kearney testified: “Yes, it was to 1. Bing Kearney testified that, be a tenants by the entireties knowing the IRS check was account. I clearly knew I needed coming, his lawyers advised him an account tenants by the to put the check in a “tenants by entirety.” (Dkt. 363, p. 54); the entireties” (“T/E”) account. (Dkt. 363, p. 46); 7. The box for “Multiple Parties Account With Right of 2. Bing Kearney testified that he Survivorship” is checked. When went to the branch of asked whether he had any USAmeribank on Whiting understanding of why the X was Street, and told them he wanted placed there and he was asked to open a T/E account. He to initial it, Bing Kearney signed the signature card and testified: “I didn't read it. The then took it with him for Tonya bank printed out a tenants by Kearney and Chase Kearney to the entireties form, and I sign. (Dkt. 363, p. 47), (Ex. 5 at initialed where they said initial hearing); and I thought it was—I had filled out a tenants by the 3. When Bing Kearney brought entireties form.” (Dkt. 363, p. the signature card back, he was 55); told that there can't be three people on a T/E account, and 8. In a letter to Regions Bank another signature card with the dated May 20, 2013, Bing same account number was filled Kearney stated that “These out. (Dkt. 363, p. 51), (Ex. 6 at accounts were opened by us as hearing); husband and wife, tenants by the entirety” (Dkt. 363, p. 62). 4. Tonya Kearney came in to the Bing Kearney testified that, bank to sign the signature card. “after dealing with numerous (Dkt. 363, p. 53); lawyers in my vast history of recent litigation,” the tenants by -12- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

the entirety...... protects an 11. Bing Kearney testified that account that's held jointly from he did not ask for a copy of the a creditor against one of the signature card because he parties, is roughly my trusted the bank. (Dkt. 363, p. understanding.” (Dkt. 363, pp. 195); 62–63); 12. As to Exhibit 5, which Bing 9. When asked what steps he Kearney took with him for took prior to May 20, 2013 to Chase Kearney and Tonya address the issue of whether the Kearney to sign, the Court account with significant funds inquired whether Bing Kearney from the IRS check was had the opportunity to look at protected a tenants by the the boxes checked as to the type entireties account, Bing Kearney of account. Bing Kearney testified that in February, 2013, testified that “I had the he had Jim Reed and Justin opportunity to took up there, Rowlson call and verify that all but obviously I didn't or I would the accounts were tenants by [have] initialed it.” (Dkt. 363, p. the entirety. (Dkt. 363, p. 63). 197). The Court further After receiving the report, when inquired: “But in this instance asked whether he took any steps you were the subject of lawsuits to alter the manner in which the by then, December 2010?” (Dkt. 056 account was reflected on 363, p. 197). Bing Kearney the books of USAmeribank, testified that he had a Bing Kearney testified that he conversation with his counsel didn't because it was tenants by about being judgment-proof. the entirety in his mind. (Dkt. (Dkt. 363, p. 198); 363, p. 64); 13. When asked whether, as to 10. Bing Kearney testified that the particular account Bing two of his attorneys had given Kearney signed on December 1, him specific instruction as to 2010, he thought the account the IRS check, but his attorneys was tenancy by the entireties, did not accompany him to even though the box is filled out USAmeribank. When asked as a multiple party account, and whether he there is no express claim on his part on the form as tenants by [91 F.Supp.3d 1250] the entireties, Bing Kearney replied “Correct. It—exactly as showed them a copy of the though everybody that works at signature card, Bing Kearney USAmeribank thinks [it] is testified that USAmeribank did tenancy by the entireties form” not give him a copy of the (Dkt. 363, p. 199). The Court signature card. Bing Kearney stated: “But you knew the further testified that if he had difference.?..... You knew the asked for one, USAmeribank difference between ... tenants by would have given it to him. the entireties and a joint (Dkt. 363, p. 194); account?” Bing Kearney replied

-13- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

“Yes, ... I did.” (Dkt. 363, p. status of the account) to the extent that it is 199); inconsistent with the Court's

14. Bing Kearney testified that [91 F.Supp.3d 1251] the signature card, Exhibit 6, was made available to him. holding. The Florida Supreme Court further (Dkt. 363, p. 201); held that if the Bank did not allow tenancy by the entireties form of ownership, the debtors 3. Discussion could prove a tenancy by the entireties by extrinsic evidence. 056 Account—Personal Money Market In Beal Bank, supra, it was undisputed that a. Beal Bank, SSB v. Almand & Associates, the debtors' wives were not parties to the 780 So.2d 45 (Fla.2001) judgments Beal Bank was attempting to collect, or personally liable for the In Beal Bank, supra, a creditor sought to obligations. The Court used the term garnish bank accounts that debtors held with “signature card” to indicate the account their wives. The trial court dissolved the document that the depositors sign and that writs. The District Court of Appeal affirmed in sets forth the manner in which the depositors part, reversed in part, and certified questions hold the account. The Court examined the of great public importance. The Florida terms of the signature cards for the various Supreme Court held that, as between the bank accounts. As to the signature card for debtor and a third-party creditor (other than the Barnett Bank account, the Court noted the financial institution into which the that the persons signing the card deposits have been made), if the signature “acknowledge(s) receipt of and agree to the card of the account does not expressly Rules and Regulations of the Bank for the disclaim the tenancy by the entireties form of account ... not limited to ... Barnett Bank's ownership, a presumption arises that a bank Welcome Brochure.” Paragraph 16 of the account titled in the names of both spouses is Welcome Brochure provided: held as a tenancy by the entireties as long as the account is established by husband and If account is designated a wife in accordance with the unities of JOINT account, or if the names possession, interest, title, and time and with of two or more owners are right of survivorship. The Florida Supreme joined by the word “or” or “and” Court further held that the presumption on the signature card or in the adopted is one affecting the burden of proof title of the account, the pursuant to section 90.304, F.S. (2000), Customer agrees that all sums shifting to the creditor the burden to prove by now or hereafter deposited in a preponderance of the evidence that a the account are and shall be tenancy by the entireties was not created. The joint property owned by the Florida Supreme Court further held that the Customer and any co-owners of signature cards at issue did not disclaim the the account as joint tenants with tenancy by the entireties or indicate another the right of survivorship and not form of ownership, and disapproved In re as tenants in common or as Guardianship of Medley, 573 So.2d 892 (Fla. tenants by the entireties ... Even 2d DCA 1990) (signature card is for if the Bank at the Customer's protection of bank and the convenience of the request titles the Customer's parties involved; does not affect ownership account as “Tenants by the Entireties” or receives oral or -14- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

written notice that the for use to recede from our prior Customer intends to treat the case law...... funds as being held as such, the Customer agrees that as Accordingly, we hold that as between the Customer and the between the debtor and a third Bank, the Bank may treat the party creditor (other than the account like any other joint financial institution into which account and subject to all the the deposits have been made), if terms and provisions set forth the signature card does not above. expressly disclaim the tenancy by the entireties form a In Beal Bank, the Florida Supreme Court ownership, a presumption began its analysis with an overview of the arises that a bank account titled forms of legal ownership of property in in the names of both spouses is Florida. As to tenancy by the entireties, the held as a tenancy by the Court noted the six unities (possession, entireties as long as the account interest, title, time, survivorship and is established by husband and marriage), and further noted that only the wife in accordance with the creditors of both spouses may attach tenancy unities of possession, interest, by the entireties property. Property held as title and time and with right of tenancy by the entireties is not divisible on behalf of one spouse alone and cannot be [91 F.Supp.3d 1252] reached to satisfy the obligation of only one spouse. survivorship... The presumption we adopt is a presumption The Florida Supreme Court outlined the affecting the burden of proof problems arising from applying different pursuant to section 90.304, F.S. standards to personal property and real (2000), thus shifting the burden property, including much litigation as to of proof to the creditor to prove intent, and problems of proof compounded by by a preponderance of the lack of uniform documentation. The Florida evidence that a tenancy by the Supreme Court found that the adoption of a entireties was created...... ” presumption in favor of tenancy by the entireties was appropriate: The Florida Supreme Court discussed the effect of express statements of intent and “The time has come for us to express disclaimers on the signature card on recognize a presumption in the presumption adopted: favor of tenancy by the entireties arising from joint “....Although we recede from ownership of bank accounts by Hector Supply Co., we agree husband and wife. Because this with the statement in Hector issue involves one arising from Supply Co. that an express this State's common law and designation on the signature because the refusal to extend a card that the account is held as presumption to personal a tenancy by the entireties ends property was a product of this the inquiry as to the form of Court's jurisprudence, we ownership...... conclude that it is appropriate

-15- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

In addition, just as a signature by the entireties are established. card can contain an express However, if a signature card statement that a tenancy by the expressly states that the account entireties was intended, so too is not held as a tenancy by the can a signature card contain an entireties and another form of express disclaimer that a legal ownership is expressly tenancy by the entireties was designated, no presumption of a not intended. An express tenancy by the entireties arises. disclaimer can take the form of Absent evidence of fraud, this an express statement signed by express disclaimer would end the depositor that a tenancy by the inquiry as to whether a the entireties was not intended, tenancy by the entireties was coupled with an express intended. However, if the debtor designation of another form of establishes that the financial legal ownership. Alternatively, institution did not offer a an express disclaimer of an tenancy by the entireties form of intent not to hold the account as account ownership or expressly a tenancy by the entireties arises precluded that form of if the financial institution ownership, then the debtor may affirmatively provides the prove by other evidence an depositors with the option on intent that the debtor and his or the signature card to select a her spouse held the account as a tenancy by the entireties among tenancy by the entireties. In this other options, and the circumstance, no presumption depositors expressly select arises and the debtor has the another form of ownership burden of establishing a tenancy option of either a joint tenancy by the entireties by a with right of survivorship or a preponderance of the evidence. tenancy in common...... We thus disapprove of the statement in Medley, 573 So.2d ...... [A] statement on the at 900, that because a signature signature card that the bank card executed between a account titled in the name of a depositor and a bank is husband and wife is held as a exclusively for the “protection” joint tenancy with right of of the financial institution and survivorship does not alone the “convenience” of the parties constitute an express disclaimer involved, the signature card that the account is not held as a does not affect the ownership tenancy by the entireties status of the account, to the (citations omitted)...... extent that statement is inconsistent with our holding.” Thus, if a signature card does not expressly disclaim a tenancy b. Ch. 655.79, F.S. by the entireties form of ownership, a rebuttable Deposits and accounts in two or more names; presumption arises that a presumption as to vesting on death. tenancy by the entireties exists provided that all the other [91 F.Supp.3d 1253] unities necessary for a tenancy -16- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

1. Background balance would vest in the surviving account holders. The statute created a presumption Joint account statutes create a statutory right that the creator of the joint account intended of survivorship that is not dependent on that all funds become the sole property of the establishing any of the common law elements joint account holder on the death of the necessary to create a joint tenancy with right depositor. Davis v. Foulkrod, 642 So.2d 1129 of survivorship or to make a present gift. (Fla. 4th DCA 1994). Ch. 658.56, Fla. Stat., Joint account statutes relate only to the right did not apply to accounts held by husband of survivorship and bank protection, and have and wife as tenants by the entireties. First no effect on the ultimate ownership rights or National Bank of Leesburg v. Hector Supply interests of the respective parties to the Co., 254 So.2d 777 (Fla.1971), receded from particular joint account as between on other grounds, 780 So.2d 45. The statute themselves, during their lives. See Drozinski and its rebuttable presumption of v. Straub, 383 So.2d 301 (Fla. 2d DCA 1980) survivorship were applicable only when the (citing Constance v. Constance, 366 So.2d documentation contained language indicating 804 (Fla. 3d DCA 1979) ). survivorship. Merkle v. Cannata, 642 So.2d 811 (Fla. 2d DCA 1994). A. Savings Associations In exchange for the statutory burden of Prior to 1992, as to joint bank accounts, there having to prove by clear and convincing was a conclusive presumption as to the right evidence that survivorship was not intended of survivorship on death of a depositor, by the depositor, Ch. 658.56, Fla. Stat., not as to ownership rights in general, permitted the estate to introduce parol and only in actions in which the savings evidence. Even in cases in which there is no association or the survivor(s) was a party. Ch. ambiguity and the account documents clearly 665.063. Fla. Stat. (1991). Ch. 665.063, Fla. indicate that survivorship is intended, the Stat., and its conclusive presumption applied depositor's estate may introduce parol only to savings association accounts opened evidence to prove that survivorship was not in such form that the money in the account intended. Caputo v. Nouskhajian, 871 So.2d was payable to the survivor(s). Ch. 665.063, 266 (Fla. 5th DCA 2004). Fla. Stat., was repealed effective July 1, 1992. C. Consolidated Statute B. Banks In 1992, the Legislature repealed Ch. 658.56. The 1971 Legislature enacted Ch. 659.291, Fla. Stat., and Ch. 665.063, Fla. Stat., and Fla. Stat., the predecessor to Ch. 658.56, Fla. enacted Ch. 655.79. Fla. Stat., applicable to Stat. (1991), providing that, in the absence of all financial institutions. Under Ch. 655.79, proof of fraud, undue influence, or clear and any account in the names of two or more convincing proof of a contrary intent, the persons creates a presumption that such opening or maintenance of an account at a persons intended to provide that, on the bank in the names of two or more persons death of any one of them, all rights in the when the funds on deposit were payable to account vest in the surviving person or one or more of them or to the surviving persons, unless otherwise expressly account holder or holders, created a rebuttable presumption that such persons [91 F.Supp.3d 1254] intended that the account balance vest in the surviving account holders on the death of any provided in the contract, agreement, or of them. The statute further provided that, in signature card executed in connection with the absence of such proof, the account the opening or maintenance of the account.

-17- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

Mulato v. Mulato, 705 So.2d 57 (Fla. 4th DCA D. This Case 1997). The statute further provides that the presumption may be overcome only by proof The Court has examined the signature card of fraud, undue influence, or clear and for the 056 account. (Copy attached) (Exhibit convincing proof of a contrary intent and 2). The signature card is a contract. A general that, in the absence of such proof, on the deposit is a loan by the depositor to the bank. death of any such person, all rights in the The relationship created by a deposit contract account vest in the surviving person or is that of debtor (bank)-creditor (depositor), persons, notwithstanding the absence of in the absence of an agreement showing some proof of donative intent or delivery, other relationship. The debtor/creditor possession, dominion, control, or acceptance relationship is an arms-length relationship. by any person, or that the statute may cause a The Court notes that there was testimony at vesting or disposition of property or rights the Evidentiary Hearing that Bing Kearney therein which is testamentary in nature, was an established customer of which, except for the statute, would or might USAmeribank, which had opened many otherwise be voidable. accounts for Bing Kearney. Bing Kearney testified that he trusted USAmeribank as to Under Ch. 655.79, Fla. Stat., the common law the type of ownership of 056 account. A doctrine of the right of survivorship, which fiduciary relationship implied in law is was generally abolished as to real and premised on the specific factual situation personal property by Ch. 689.15, Fla. Stat., is surrounding the transaction and the reinstated as to accounts at financial relationship of the parties. Capital Bank v. institutions. A survivorship account may now MVB, 644 So.2d 515 (Fla. 3d DCA 1994). The be created by merely opening an account in evidence offered does not establish the two or more names, notwithstanding the presence of special circumstances that would absence of language indicating survivorship. transform the arms-length relationship A multiple party account is presumed to be a between debtor and creditor to a fiduciary survivorship account even though the relationship, including extra services signature card and other account rendered to a customer, the receipt of greater documentation pertaining to the account economic benefit than from a typical include no indication of that consequence. transaction, or exercise of extensive control. Ch. 655.79, Fla. Stat., substitutes a rebuttable The transaction with the bank included the presumption of survivorship for the opening of a checking account. Bank conclusive presumption of survivorship that employees testified that the customer previously governed survivorship accounts at specifies what type of account the customer savings associations, shifting the burden of wants. The customer is required to sign the proof to the estate to prove by clear and signature card which establishes the convincing evidence that survivorship was not ownership of the account. Bing Kearney intended. In re Estate of Combee, 601 So.2d testified that he signed the 1165 (Fla.1992). [91 F.Supp.3d 1255] After the Florida Supreme Court's decision in Beal Bank, SSB v. Almand & Associates, 780 signature card, and had an opportunity to So.2d 45 (Fla.2001), the Legislature amended read it. Bing Kearney further testified that Ch. 655.79(1), F.S., to provide that: “any after the account was opened he took steps to deposit or account made in the name of two determine how all the accounts were held. persons who are husband and wife shall be considered a tenancy by the entirety unless Under Florida law, contract interpretation is otherwise specified in writing.” generally a question of law. Lawyers Title -18- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

Insurance, Corp. v. JDC (America) Corp., 52 survivorship); and 2) the expectancy of a F.3d 1575, 1580 (11th Cir.1995). Florida law named beneficiary (single or multiple) not requires that a contract be construed connected to any presently vested ownership according to its clear and unambiguous or right of access to the account to become the terms. In re Construction Contractors of owner of the account balance on the death of Ocala, Inc., 196 B.R. 188, 192 all parties. If the ownership of an account is (Bankr.M.D.Fla.1996). The initial designated as multiple party—tenants by the determination of whether a contract is entireties, it is redundant to check a box in ambiguous is a question of law. Strama v. the rights at death section; as to property held Union Fid. Life Ins. Co., 793 So.2d 1129, 1132 as tenants by the entireties, the husband and (Fla. 1st DCA 2001). In the absence of an wife each have an indivisible interest in the ambiguity, the actual language used in the whole property. contract is the best evidence of the intent of the parties, and the plain meaning of that It is undisputed that Bing Kearney and Tonya language controls. In re Atkins, 228 B.R. 14, Nuhfer Kearney signed the signature card for 18 (Bankr.M.D.Fla.1998). Questions of fact the 056 account. At the outset, the Court finds arise only if there is an ambiguity in a that the signature card is not ambiguous. contract term. Lawyers Title, 52 F.3d at 1580. Many of the words in the ownership section have plain, well known meanings. The term The signature card for the 056 account is laid “tenancy by the entireties” has a certain legal out in a “menu” format. As to ownership of meaning; an explanation of the meaning of the account-consumer purpose, and rights at that phrase is not included within the death, the form includes a box to be checked signature card. Bing Kearney testified that he to indicate a selection, a blank line providing understood the meaning of “tenancy by the room for initials, then words identifying the entireties.”. Under Florida law, a party who selection, or a blank line to insert signs a contract is presumed to know its information. As to ownership of the account, contents, and he cannot avoid his obligations the choices available are: single-party thereunder by alleging he did not read the account, multiple-party account, multiple- contract, or that the terms were not explained party account-tenancy by the entireties to him, or that he did not understand the (“TBE”), trust—separate agreement dated provisions. Citibank v. Dalessio, 756 [blank ], and a nonspecified option (blank F.Supp.2d 1361 (M.D.Fla.2010). line). Defendant Kearney initialed “multiple- party account.” As to the rights at death [91 F.Supp.3d 1256] section, the menu choices in that section reflect the choices contemplated by Ch. The signature card for the 056 account 655.82, F.S., Florida's “pay-on-death” statute, includes an express disclaimer of intent to which provides a comprehensive framework own the joint account as TBE. USAmeribank for determining and regulating the right of offered Defendant Kearney the option to access of various classes or categories of select a tenancy by the entireties (“multiple- interested persons to funds on deposit in party account—tenancy by the entireties”), financial institution accounts based on among other options. Defendant Kearney specific designations made by the depositor in selected another option, a multiple party a contract of deposit. The statute provides for account, with right of survivorship, by two distinct types of survivorship rights: 1) initialing those choices. The option to select that which may exist between multiple parties “multiple-party account—tenancy by the who share present ownership and the right of entireties” is not hidden. Pursuant to Beal access to the account (equivalent to a Bank, supra, absent evidence of fraud, the common law joint tenancy with right of express disclaimer ends the inquiry as to -19- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

intent not to hold the joint account TBE. did not read it. Given that the signature card Because the signature card for the 056 was signed on more than one occasion, Bing account includes an express disclaimer, no Kearney had more than one opportunity to rebuttable presumption that the joint account read the signature card. Bing Kearney further is held TBE arises. testified that he was not provided with a copy of the signature card at the time he signed it; The “Signatures” section of the signature card Bing Kearney also acknowledged that also includes the following: USAmeribank would have provided a copy if he had requested it. Signature(s)—The undersigned certifies the accuracy of the In Beal Bank, express preclusion from information he/she has holding an account as a TBE account took the provided and acknowledges form of a statement in the “Welcome receipt of a completed copy of Brochure” that, even if the account is titled as this form. The Wundersigned a TBE account, the Customer agrees that the authorizes the financial funds in the joint account are held as joint institution to verify credit and tenants with right of survivorship. The Court employment history and/or has looked for some evidence that have a credit reporting agency USAmeribank expressly precluded Defendant prepare a credit report on the Kearney from the TBE form of ownership, but undersigned, as individuals. The has found none. Defendant Kearney did not undersigned also acknowledge argue that USAmeribank precluded the receipt of a copy and agree Defendant from holding the joint account to the terms of the following TBE by its statements in the other agreement(s) and/or agreements incorporated into the deposit disclosure(s): agreement. The Court looked for, but did not find, other agreements within the record. X. Terms & Conditions X Truth in Savings X Funds Availability In the absence of fraud, the unambiguous signature card which expressly disclaims X Electronic Funds Transfers X intent to hold the joint account TBE is Privacy X Substitute Checks conclusive evidence of intent not to hold the joint account TBE. No evidence of fraud was ___ Common Features___ offered at the evidentiary hearing. The ______signature card is sufficient to establish an ___ agreement in writing not to hold the account as TBE, as would be presumed pursuant to (1) S/Bing Kearney, Jr. Sec. 655.79, Fla. Stat., in the absence of an agreement that otherwise specifies how the I.D. # Redacted; D.O.B. account is held. Wexler v. Rich, 80 So.3d Redacted 1097 (Fla. 4th DCA 2012). (2) S/Tonya Nuhfer–Kearney The signature card for the subject account shows that USAmeribank offered I.D.# Redacted; D.O.B. Redacted [91 F.Supp.3d 1257] Bing Kearney testified that he had an the option of holding the account TBE. opportunity to read the signature card, but he Because USAmeribank offered Defendant

-20- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

Kearney the option of holding the joint As to the Platinum Bank Writ, the Court account TBE, and did not preclude Defendant denies the Motion to Dissolve on the basis of Kearney from holding the joint account TBE, failure to comply with statutory garnishment Defendant Kearney may not prove by other procedures (Dkt. 255). Bing Kearney moved evidence that the joint account was intended to dissolve for failure to comply with statutory to be held TBE. If USAmeribank had not procedures. The supporting affidavit of offered Defendant Kearney the option of a Clayton Kearney asserts that the funds in the TBE account, there would have been no accounts belong only to Clayton Kearney. The express disclaimer, and a rebuttable disputed issue of ownership of the funds in presumption of intent to hold the joint the accounts is determined at trial. Ch. 77.16, account TBE would have arisen, shifting to Fla. Stat. Plaintiff Regions Bank the burden of proving that the depositors did not intend to hold the Claims of Exemption joint account TBE. If USAmeribank had precluded Defendant Kearney from holding The Court has sustained Plaintiff's the joint account TBE, Defendant Kearney Objection to the Report and could have offered other evidence to attempt Recommendation, finding that the signature to establish intent to hold the joint account card is an unambiguous contract which TBE by a preponderance of the evidence. The contains an express disclaimer of the Court concludes that, given that all other ownership of the 056 account as tenants by unities are present, the 056 account was held the entireties. An express disclaimer ends the as a joint tenant with right of survivorship inquiry as to intent. Since the Court has account. determined that the 056 USAmeribank account is not held as TBE, the account is not The Court sustains the objections of Plaintiff exempt. Regions Bank as to whether the signature card was ambiguous, and as to the presence As to the remaining five accounts at of an express disclaimer. As a matter of law, USAmeribank, and four accounts at Platinum the date a bank account is opened is the Bank, the ownership of the funds in those operative date for establishing ownership of a accounts is disputed, and is beyond the scope financial account. In re Stephenson, 2012 WL of the Report and Recommendation. No 4896725 (Bankr.M.D.Fla.2012). Defendant Claim of Exemption was filed as to the Kearney has not shown the presence of fraud Platinum Bank accounts. The Court notes that that would cast doubt on the intent expressed a Motion for Final Judgment in Garnishment in the signature card. Based on the (Dkt. 395) is pending. Before a final judgment evidentiary hearing, the Court has resolved authorizing the judgment creditor to reach only the ownership of the 056 account. The the funds held by the garnishee is entered, the Court has determined the 056 account is not interests of the joint depositor in the funds exempt. should be conclusively determined and the applicable law applied thereto. Antuna v. Motion to Dissolve Dawson, 459 So.2d 1114 (Fla. 4th DCA 1984). Ch. 77.16, Fla. Stat. provides the As to notice issues, the Court has sustained determination is made at trial. Merriman Plaintiff's Objections to the Report and Investments, LLC v. Ujowundu, 123 So.3d Recommendation. The Court denies the 1191 (Fla. 3d DCA 2013). The Court Motion to Dissolve (Dkt. 255) as to the understands USAmeribank Writ. [91 F.Supp.3d 1258]

-21- Regions Bank v. Hyman, 91 F.Supp.3d 1234 (M.D. Fla., 2015)

this to mean that the claims can be determined on summary judgment prior to trial. The Court will rule on other pending motions in a separate Order.

-22- Slater v. U.S. Steel Corp. (11th Cir., 2017)

SANDRA SLATER, Plaintiff - Appellant, D.C. Docket No. 2:09-cv-01732-KOB v. UNITED STATES STEEL Appeal from the United States District Court CORPORATION, Defendant - Appellee. for the Northern District of Alabama

No. 12-15548 ON PETITION FOR REHEARING

UNITED STATES COURT OF APPEALS Page 2 FOR THE ELEVENTH CIRCUIT Before ED CARNES, Chief Judge, TJOFLAT, September 18, 2017 MARCUS, WILSON, WILLIAM PRYOR, MARTIN, JORDAN, ROSENBAUM, JULIE Summaries: CARNES, and JILL PRYOR, Circuit Judges.*

Source: Justia JILL PRYOR, Circuit Judge:

When a plaintiff takes inconsistent positions When an individual files for bankruptcy, by pursuing in district court a civil claim that he must file sworn disclosures listing his he failed to disclose as an asset in his debts and his assets, including any pending bankruptcy proceedings, a district court may civil claims, and identifying any lawsuits he apply judicial estoppel to bar the plaintiff's has filed against others. Occasionally, a civil claim if it finds that the plaintiff intended plaintiff who has a pending civil lawsuit fails to make a mockery of the judicial system. to list the claims or lawsuit in these When determining whether a plaintiff who disclosures. In omitting this information, the failed to disclose a civil lawsuit in bankruptcy plaintiff effectively takes inconsistent filings intended to make a mockery of the positions in the two judicial proceedings by judicial system, a district court should asserting in the civil lawsuit that he has a consider all the facts and circumstances of the claim against the defendant while denying case. The Eleventh Circuit reasoned that the under oath in the bankruptcy proceeding that court should look to factors such as the the claim exists. plaintiff's level of sophistication, his explanation for the omission, whether he The equitable doctrine of judicial subsequently corrected the disclosures, and estoppel is intended to protect courts against any action taken by the bankruptcy court parties who seek to manipulate the judicial concerning the nondisclosure. The court process by changing their legal positions to overruled portions of Barger v. City of suit the exigencies of the moment. Today, we Cartersville, 348 F.3d 1289 (11th Cir. 2003), address how this doctrine should be applied and Burnes v. Pemco Aeroplex, Inc., 291 F.3d when a plaintiff takes inconsistent positions 1282 (11th Cir. 2002), that permit a district by pursuing in district court a civil claim that court to infer intent to misuse the courts he failed to disclose as an asset in his without considering the individual plaintiff bankruptcy proceedings. We reaffirm our and the circumstances surrounding the precedent that when presented with this nondisclosure. Accordingly, the court scenario, a remanded for consideration of whether the district court abused its discretion in light of Page 3 this new standard. district court may apply judicial estoppel to bar the plaintiff's civil claim if it finds that the [PUBLISH]

-1-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

plaintiff intended to make a mockery of the lawsuit against her employer, U.S. Steel judicial system. Corporation, because Slater failed to disclose these civil claims as assets in her bankruptcy. But what suffices for a district court to Relying on our precedent in Burnes and find that a plaintiff who did not disclose a Barger, the district court inferred from civil lawsuit in bankruptcy filings intended to Slater's nondisclosure alone that she intended make a mockery of the judicial system? Our to manipulate the judicial process. A panel of Court has endorsed a rule that the mere fact our Court affirmed, concluding that the of the plaintiff's nondisclosure is sufficient, district court did not abuse its discretion in even if the plaintiff corrected his bankruptcy applying judicial estoppel. Because we disclosures after the omission was called to announce a new inquiry for evaluating intent his attention and the bankruptcy court to make a mockery of the judicial system, we allowed the correction without penalty. See remand to the panel so that it may decide Barger v. City of Cartersville, 348 F.3d 1289 whether the district court abused its (11th Cir. 2003); Burnes v. Pemco Aeroplex, discretion in light of this new standard. Inc., 291 F.3d 1282 (11th Cir. 2002). We granted en banc review to reconsider this I. Factual Background and Proceedings precedent. Below

We hold today that when determining Slater, a high school graduate, worked for whether a plaintiff who failed to disclose a U.S. Steel for more than 10 years performing civil lawsuit in bankruptcy filings intended to general manual labor. Slater sued U.S. Steel make a mockery of the judicial system, a for discrimination based on race and sex in district court should consider all the facts and violation of Title VII, 42 U.S.C. § 2000e et circumstances of the case. The court should seq, and 42 U.S.C. § 1981, and for retaliating look to factors such as the plaintiff's level of against her after she complained of race and sophistication, his explanation for the sex discrimination, in violation of Title VII omission, whether he subsequently corrected and § 1981. U.S. Steel moved for summary the disclosures, and any action taken by the judgment on all of Slater's claims. The district bankruptcy court concerning the court granted the motion nondisclosure. We acknowledge that in this scenario the plaintiff acted voluntarily, in the Page 5 sense that he knew of his civil claim when completing the disclosure forms. But in part and denied it in part. The court denied voluntariness alone does not necessarily summary judgment on Slater's claims that establish a calculated attempt to undermine she suffered discrimination in job the judicial process. We therefore overrule the assignments based on her sex and was fired in retaliation for complaining about racial Page 4 discrimination. Despite withstanding summary judgment, Slater never had an portions of Burnes and Barger that permit a opportunity to present these claims to a jury. district court to infer intent to misuse the courts without considering the individual About a month after the district court's plaintiff and the circumstances surrounding summary judgment ruling, Slater— the nondisclosure. represented by different counsel than in her discrimination case—filed a petition for Here, the district court applied judicial Chapter 7 bankruptcy. She did not disclose estoppel to bar plaintiff Sandra Slater's her lawsuit against U.S. Steel in her discrimination and retaliation claims in a bankruptcy petition or the schedules filed -2-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

with her petition. When asked under penalty request to employ the lawyers who were of perjury in Schedule B-Personal Property to representing Slater in her employment action identify any "contingent and unliquidated to continue to pursue the claims against U.S. claims," she answered "none." Voluntary Pet. Steel on behalf of the estate. The bankruptcy at 10, In re Slater, No. 11-02865 (Bankr. N.D. court granted the motion. Ala. June 2, 2011), ECF No. 1. And when asked under penalty of perjury in her The bankruptcy case proceeded: upon Statement of Financial Affairs to identify any Slater's petition, the court converted the case "suits and administrative proceedings to from a Chapter 7 to a Chapter 13 proceeding, which the debtor is or was a party within one and Slater filed a proposed Chapter 13 plan, year immediately preceding the filing of this which the bankruptcy court confirmed. Later, bankruptcy case," she again answered "none." though, when Slater failed to pay the trustee Id. at 29 (emphasis omitted). under the terms of the confirmed plan, the

After Slater filed her disclosures, the Page 7 bankruptcy trustee issued a Report of No Distribution, finding there was no property bankruptcy court dismissed her case, available for distribution from the estate over meaning her debts never were discharged in and above that exempted by law. In the bankruptcy. absence of any objections to Slater's civil action fared no better. The Page 6 district court granted U.S. Steel's motion for summary judgment, applying the doctrine of the report, 30 days later the estate became judicial estoppel to bar her claims. The court presumptively fully administered. See Fed. R. rejected Slater's arguments that her omission Bankr. P. 5009(a). of the civil claims in the bankruptcy proceeding was inadvertent and that she The next day, U.S. Steel again moved for never intended to thwart the judicial process. summary judgment in the employment The court explained that under our circuit discrimination case, this time on the ground precedent, a failure to disclose is that because Slater failed to disclose her civil "'inadvertent' only when . . . the debtor either claims in the bankruptcy proceeding, the lacks knowledge of the undisclosed claims or doctrine of judicial estoppel should bar her has no motive for their concealment." Order from pursuing those claims. In response, at 11 (emphasis added) (Doc. 89)1 (quoting Slater testified by declaration that she did not Barger, 348 F.3d at 1295-96). intentionally misrepresent facts to the bankruptcy court. She further explained that The district court found that Slater knew she misunderstood the question in the about her civil claims, filed in 2009, when she Statement of Financial Affairs regarding completed the bankruptcy disclosures in 2011 "suits and administrative proceedings to and that she had a motive to conceal the which the debtor is or was a party" as asking claims "to defraud creditors into accepting only about suits filed against her. her [bankruptcy] case as one involving no assets for distribution despite the real The next business day after U.S. Steel possibility with the impending trial of the filed the motion, Slater amended her discrimination case that she could soon be Statement of Financial Affairs and Schedule B receiving a money settlement or a money to her bankruptcy petition to disclose her judgment in her favor." Id. at 12. Although claims against U.S. Steel. The bankruptcy Slater corrected her disclosures immediately trustee then filed with the bankruptcy court a after U.S. Steel brought the omissions to light, -3-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

the district court found this fact irrelevant debtor[s]" the opportunity to "reorder their because "waiting until after being caught to affairs, make peace with their creditors, and rectify the omission is too little, too late." Id. enjoy a new opportunity in life with a clear Following Burnes, field for future effort, unhampered by the pressure and discouragement of preexisting Page 8 debt" (internal quotation marks omitted)). For our purposes here, the main difference Barger, and their progeny, the court drew an between a Chapter 7 and a Chapter 13 inference that Slater intended to make a proceeding is that creditors are paid primarily mockery of the judicial system based on its with the debtor's prepetition assets in finding that she had knowledge of the Chapter 7 and with his postpetition earnings undisclosed claims and a motive to conceal in Chapter 13. them. "Chapter 7 allows a debtor to make a Slater appealed. After oral argument, a clean break from his financial past, but at a panel of this Court affirmed the district steep price: prompt liquidation of the debtor's court's grant of summary judgment to U.S. assets." Harris v. Viegelahn, 135 S. Ct. 1829, Steel. In a concurring opinion, Judge Tjoflat 1835 (2015). When a debtor files a Chapter 7 urged the Court to review en banc our petition, his assets, subject to certain precedent permitting the inference on which exemptions, are immediately transferred to a the district court relied, that a plaintiff who bankruptcy estate. 11 U.S.C. § 541(a)(1). The omitted a civil claim as an asset in bankruptcy Chapter 7 trustee is responsible for selling the filings necessarily intended to make a property in the estate and distributing the mockery of the judicial system. See Slater v. proceeds to creditors.2 Id. §§ 704(a)(1), 726. U.S. Steel Corp., 820 F.3d 1193, 1235 (11th Although a Chapter 7 debtor "must forfeit Cir.) (Tjoflat, J., concurring) (explaining that virtually all his prepetition property," the our precedent validating such an inference bankruptcy laws give the debtor an "guarantees the very mockery of justice the immediate fresh start and a break from the doctrine of judicial estoppel was designed to financial past "by shielding from creditors his avoid"), reh'g en banc granted, op. vacated, postpetition earnings and acquisitions." No. 12-15548 (11th Cir. Aug. 30, 2016). We Harris, 135 S. Ct. at 1835. The debtor may agreed to rehear the case en banc and vacated keep any wages earned or assets acquired the panel opinion. after the bankruptcy filing. Id. (citing 11 U.S.C. § 541(a)(1)). II. Overview of Bankruptcy Principles Page 10 Before turning to judicial estoppel, we pause for an overview of the Chapter 7 and In contrast, a debtor who proceeds under Chapter 13 bankruptcy procedures that allow Chapter 13 may keep his prepetition property debtors to discharge their financial but must repay his creditors over time, obligations and receive a fresh start to explain generally from what he earns after filing how a debtor's pending civil claim is treated bankruptcy. The Chapter 13 debtor proposes in bankruptcy. See Grogan v. Garner, 498 a plan to repay his debts over a three- or five- U.S. 279, 286-87 (1991) (explaining that year period; the plan must be confirmed by bankruptcy is designed to give "honest but the bankruptcy court. Payments under the unfortunate plan "are usually made from a debtor's 'future earnings or other future income.'" Id. Page 9 (quoting 11 U.S.C. 1322(a)(1)). In determining the sufficiency of the proposed plan -4-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

payments, the bankruptcy court must pending action or proceeding by . . . the consider the value of the debtor's assets debtor, or commence and prosecute any because the court may confirm the plan only action or proceeding in behalf of the estate if the present value of the proposed before any tribunal."). Thus, a Chapter 13 repayments is "not less than the amount that debtor may continue to control the lawsuit would be paid" to creditors if the debtor's and the terms of any settlement. See Crosby assets were liquidated under Chapter 7. See 11 v. Monroe Cty., 394 F.3d 1328, 1331 n.2 (11th U.S.C. § 1325(a)(4). If the bankruptcy court Cir. 2004). With these bankruptcy principles confirms the plan, the trustee generally and distinctions in mind, we now turn to the collects a portion of the debtor's wages doctrine of judicial estoppel. through payroll deduction and then distributes the withheld wages to the Page 12 creditors at the plan's conclusion. See Harris, 135 S. Ct. at 1835. If the debtor completes his III. Judicial Estoppel Analysis payments under the plan, his debts are discharged.3 See id. The precise issue before us is how the doctrine of judicial estoppel should be applied When a debtor files for bankruptcy under when a plaintiff fails to identify a pending Chapter 13, his assets are transferred to the civil claim as an asset in a bankruptcy bankruptcy estate. See 11 U.S.C. § 1306(a). proceeding. To address this issue, we begin by But after the bankruptcy plan is confirmed, reaffirming that a district court may apply the property of the estate returns to the judicial estoppel when a two-part test is debtor except satisfied: the plaintiff (1) took a position under oath in the bankruptcy proceeding that Page 11 was inconsistent with the plaintiff's pursuit of the civil lawsuit and (2) intended to make a as provided in the plan or order confirming mockery of the judicial system.4 the plan. See id. § 1327(b). A Chapter 13 debtor generally is permitted to retain his We then discuss how a district court assets, such as his home or car. See Harris, should apply the second prong. Our 135 S. Ct. at 1835. precedent has, in effect, treated the fact of the plaintiff's omission as establishing the Given these differences, when a debtor's requisite intent. Today we clarify that the assets include a civil claim, the claim will be district court must consider all the facts and treated differently depending upon whether circumstances in determining whether the the bankruptcy is a Chapter 7 or a Chapter 13 plaintiff acted with the intent to make a proceeding. Because a Chapter 7 debtor mockery of the judicial system. forfeits his prepetition assets to the estate, only the Chapter 7 trustee, not the debtor, has A. To Invoke Judicial Estoppel in standing to pursue a civil legal claim unless the Bankruptcy Scenario, District the trustee abandons the asset, which then Courts Should Continue to Apply Our returns the claim to the possession and Two-Part Test. control of the debtor. See Parker v. Wendy's Int'l, Inc., 365 F.3d 1268, 1272 (11th Cir. The equitable doctrine of judicial 2004). But a Chapter 13 debtor retains estoppel is intended to "prevent the standing to continue to pursue the civil claim. perversion of the judicial process" and See 11 U.S.C. § 1303; Fed. R. Bankr. P. 6009 "protect [its] integrity . . . by prohibiting ("With or without court approval, the . . . parties from deliberately changing positions debtor in possession may prosecute . . . any according to the exigencies of the -5-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

Page 13 Before we formulated our two-part test in Burnes, the United States Supreme Court moment." New Hampshire, 532 U.S. at 749- addressed the doctrine of judicial estoppel in 50 (citations and internal quotation marks New Hampshire v. Maine, which concerned a omitted); see also 18 James Wm. Moore et al., boundary dispute between the two states. Moore's Federal Practice ¶ 131.13[6] (3d ed. Availing itself of the Supreme Court's original 2015) (explaining that doctrine of judicial jurisdiction, New Hampshire sought a estoppel is concerned with "the orderly declaration that the low water mark of a river administration of justice and regard for the on Maine's shore was the boundary between dignity of court proceedings"). When a party the two states. 532 U.S. at 745, 747. Maine does so, the doctrine of judicial estoppel moved to dismiss the case, arguing that allows a court to exercise its discretion to judicial estoppel should bar New Hampshire's dismiss the party's claims. See New action because in previous litigation between Hampshire, 532 U.S. at 750. Stated simply, the two states New Hampshire had agreed to the doctrine of judicial estoppel rests on the a consent decree that set the boundary at the principle that "absent any good explanation, a middle of the river's main channel of party should not be allowed to gain an navigation. Id. at 748. The Supreme Court advantage by litigation on one theory, and applied judicial estoppel to bar New then seek an inconsistent advantage by Hampshire's later attempt to claim more land pursuing an incompatible theory." Ryan by arguing for a different boundary. Id. at Operations G.P. v. Santiam-Midwest Lumber 749. Co., 81 F.3d 355, 358 (3d Cir. 1996) (quoting 18 Charles A. Wright, Arthur R. Miller & The Court announced a three-part test Edward H. Cooper, Federal Practice and that "typically inform[s]" the decision Procedure § 4477 (1981)). whether to apply the judicial estoppel doctrine: (1) "a party's later position must Our circuit employs a two-part test to guide district courts in applying judicial Page 15 estoppel: whether (1) the party took an inconsistent position under oath in a separate be clearly inconsistent with its earlier proceeding, and (2) these inconsistent position"; (2) the party had to "succeed[] in positions were "calculated to make a mockery persuading a court to accept that party's of the judicial system." Burnes, 291 F.3d at earlier position, so that judicial acceptance of" 1285 (internal quotation marks omitted). the party's later position "would create the Under this test, a district court considers both perception that either the first or the second the plaintiff's actions—whether he made court was misled"; and (3) the party "seeking inconsistent statements—and his motive— to assert an inconsistent position would whether he intended to make a mockery of derive an unfair advantage or impose an the judicial system. Judicial estoppel unfair detriment on the opposing party if not estopped." Id. at 750-51 (internal quotation Page 14 marks omitted). Additionally, the Court recognized that judicial estoppel should not should not be applied when the inconsistent be applied "when a party's prior position was positions were the result of "inadvertence[] or based on inadvertence or mistake." Id. at 753 mistake" because judicial estoppel "looks (internal quotation marks omitted). Although towards cold manipulation and not an the Court announced this three-part test, it unthinking or confused blunder." Johnson emphasized that it was "not establish[ing] Serv. Co. v. Transamerica Ins. Co., 485 F.2d inflexible prerequisites or an exhaustive 164, 175 (5th Cir. 1973).5 -6-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

formula for determining the applicability of Page 17 judicial estoppel." Id. at 751.6 system because the omission was not Slater argues that we must abandon our inadvertent. In effect, we treated the fact that test for applying judicial estoppel in favor of the plaintiff could potentially benefit from the the New Hampshire test. In New Hampshire, nondisclosure as sufficient to establish that though, the party seeking to apply judicial the plaintiff, in fact, intended to deceive the estoppel, Maine, was a party to the prior court and manipulate the proceedings. And lawsuit in which New Hampshire had taken we subsequently extended that reasoning to an inconsistent position. See id. at 745. The cases involving Chapter 13 debtors as well.8 Supreme Court 1. Burnes v. Pemco Aeroplex, Inc. Page 16 In Burnes, we held that a district court was not presented with—and so did not did not abuse its discretion in applying address—the question of how judicial judicial estoppel to bar plaintiff Levi Billups's estoppel should be applied when the party claims in a civil lawsuit when he failed to seeking to invoke the doctrine was not a party disclose those claims as assets in his to the other proceeding. Here, because the bankruptcy filings. See 291 F.3d at 1286-88. party seeking to invoke judicial estoppel, U.S. After Billups filed for Chapter 13 bankruptcy, Steel, was not a party to the bankruptcy case he sued his employer, Pemco, for racial and could not have been unfairly discrimination, but never amended his disadvantaged by any position Slater took in bankruptcy disclosures to identify the lawsuit. that case, we conclude that New Hampshire When Billups later sought to convert the is inapplicable. Consistent with New Chapter 13 petition into a Chapter 7, the Hampshire's recognition that its test was not bankruptcy court ordered him to update his exhaustive, we adhere to our two-part test in schedules to reflect changes since the original the scenario before us.7 filing. He nevertheless failed to report his pending lawsuit and then received a no-asset B. Under Our Precedent, a Plaintiff discharge of his debts under Chapter 7. After Who Omitted a Civil Claim in a the bankruptcy was closed, Pemco moved for Bankruptcy Filing Is Deemed to Have summary judgment based on judicial Intended to Make a Mockery of the estoppel. Id. The district court granted the Judicial System. motion, and we affirmed. Id. at 1284, 1289.

Turning back to our two-part test for Page 18 applying judicial estoppel, the first part is satisfied because Slater took an inconsistent In reviewing the district court's position under oath in her bankruptcy application of judicial estoppel, we applied proceeding. We focus today on the second our two-part test inquiring whether the part: how a court should determine whether a debtor took an inconsistent position under plaintiff intended make a mockery of the oath in another proceeding and whether the judicial system. inconsistency was calculated to make a mockery of the judicial system. Id. at 1285. In Burnes and Barger, we endorsed an Because it was beyond dispute that Billups inference that a plaintiff who failed to disclose had taken inconsistent positions about the a lawsuit in a Chapter 7 bankruptcy intended existence of his civil claims, we characterized to manipulate the judicial the issue on appeal as "one of intent." Id. at 1286. -7-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

Billups argued that he lacked the district court did not abuse its discretion requisite intent to mislead the court. Looking when it found, based solely on the debtor's to decisions of other circuits, we concluded failure to disclose her civil claims in her that the district court permissibly drew an bankruptcy proceedings, that she intended to inference that Billups had engaged in make a mockery of the judicial system. See intentional manipulation. See id. at 1287. Barger, 348 F.3d at 1297. After Barger was Obviously Billups knew about his civil claims, demoted, she brought employment which he was pursuing in a separate action. discrimination claims against her employer, And an incentive existed to hide the lawsuit the City of Cartersville, seeking money from his creditors because it was "unlikely he damages and reinstatement to her earlier would have received the benefit of . . . a no position. While her lawsuit was pending, asset, complete discharge had his creditors, Barger filed for Chapter 7 bankruptcy but the trustee, or the bankruptcy court known of omitted her civil claims from her disclosures. a lawsuit claiming millions of dollars in Id. at 1291. Barger had told both her damages." Id. at 1288. We permitted the bankruptcy attorney and the trustee that she inferential leap from Billups's potential had a pending lawsuit against the City, in motive to hide the lawsuit to the conclusion which she sought reinstatement to her former that he in fact acted with such a motive and position, thus intended to manipulate the proceedings. Page 20 Billups also argued that the doctrine of judicial estoppel should not be applied but she had failed to mention that she also because he could reopen his bankruptcy case sought damages. Id. After Barger received a and amend his filings to disclose the lawsuit. no-asset discharge of her debts, the City We rejected this argument, explaining that a moved for summary judgment based on debtor should judicial estoppel. Barger then asked the bankruptcy court to reopen her case so that Page 19 she could disclose her employment discrimination claims. Id. at 1291-92. After a not be permitted to escape judicial estoppel hearing in which the City participated, the simply by correcting his nondisclosure once it bankruptcy court permitted Barger to reopen has been discovered. Because "[t]he success and allowed the trustee to pursue the claims of our bankruptcy laws requires a debtor's full against the City, finding that Barger had and honest disclosure," we reasoned, a debtor neither intentionally concealed the cannot "back-up, re-open the bankruptcy discrimination claims nor sought to obtain an case, and amend his bankruptcy filings" after advantage for herself by failing to disclose his adversary raises judicial estoppel. Id. them. Id. Nonetheless, the district court Allowing the debtor to proceed in these applied judicial estoppel to bar the claims. Id. circumstances, we said, would "suggest[] that at 1292. a debtor should consider disclosing potential assets only if he is caught concealing them," The panel majority affirmed the district which "would only diminish the necessary court's application of judicial estoppel and, incentive to provide the bankruptcy court following Burnes, conflated the inquiry into with a truthful disclosure" of assets. Id. whether Barger had acted voluntarily with the inquiry into whether she intended to make a 2. Barger v. City of Cartersville mockery of the judicial system. See id. at 1294. To determine whether Barger had the In Barger, a 2-1 decision, the panel requisite intent, the panel majority majority followed Burnes in holding that a considered whether her nondisclosure was -8-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

"inadvertent" by looking to whether she knew Page 22 about the undisclosed claims and had a motive to conceal them. Id. at 1295-96. As to claim what was rightfully theirs." See motive, the panel majority recognized that a Robinson v. Tyson Foods, Inc., 595 F.3d debtor who omitted such a claim would be 1269, 1275-76 (11th Cir. 2010). able to "keep any proceeds for herself and not have them become part of the bankruptcy It is true that in two panel decisions after estate." Id. at 1296. Burnes and Barger we applied judicial estoppel more narrowly, but these decisions Page 21 cannot be reconciled with our prior precedent. First, in Parker, we reversed the The dissent in Barger objected to the district court's application of judicial estoppel panel majority's analysis of Barger's intent to to bar an employment discrimination claim make a mockery of the judicial system. Id. at that a debtor failed to disclose as an asset in 1298 (Barkett, J., dissenting). The dissent his Chapter 7 bankruptcy petition. 365 F.3d at argued that the majority had improperly 1269. We said that judicial estoppel should treated the fact that Barger's omission was not be applied in that case because when the not "inadvertent" as sufficient to establish debtor filed Chapter 7 bankruptcy, the that she had intended to mislead the court. trustee, as representative of the bankruptcy See id. (explaining that the "failure to meet estate, became "the proper party in interest, the specific inadvertence criteria" does not and . . . the only party with standing to "automatically impl[y] an intent to make a prosecute causes of action belonging to the mockery of the judicial system" (internal estate." Id. at 1272. We held that because the quotation marks omitted)). The dissent urged trustee was the real party in interest in the that courts should look to "all of the civil lawsuit, had never taken an inconsistent circumstances of [the] particular case" to position under oath, and had not abandoned determine whether the debtor had the the discrimination claim, the district court requisite intent. Id. at 1297-98 (internal abused its discretion in applying judicial quotation marks omitted). estoppel. Id. As the panel in the case before us recognized, Parker cannot be reconciled with 3. Cases Post Burnes and Barger our decision in Barger, in which we upheld the application of judicial estoppel to bar civil Even though Burnes and Barger both claims that the Chapter 7 debtor failed to involved Chapter 7 bankruptcies, we have disclose, even though we acknowledged that extended their reasoning to cases involving the trustee was the real party in interest. Chapter 13 debtors. See De Leon v. Comcar Indus., Inc., 321 F.3d 1289, 1292 (11th Cir. Second, in Ajaka v. Brooksamerica 2003) (holding that because Chapter 13 Mortgage Corp., 453 F.3d 1339 (11th Cir. debtor "knew about his [civil] claim and 2006), we looked beyond a Chapter 13 possessed a motive to conceal it[,] . . . we can debtor's failure to disclose a civil infer from the record his intent to make a mockery of the judicial system" (internal Page 23 quotation marks omitted)). We acknowledged that a Chapter 13 debtor would always have a lawsuit to determine whether the debtor potential motive to conceal a civil claim from actually intended to make a mockery of creditors so as to "keep the proceeds for judicial proceedings. After filing a Chapter 13 herself and den[y] the creditors a fair petition, Ajaka filed a Truth in Lending Act opportunity to claim against his mortgage lender. Id. at 1342. Ajaka directed his bankruptcy attorney to -9-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

amend his bankruptcy schedules to disclose bankruptcy attorney about the civil claims the lawsuit, but his attorney failed to do. Id. at before filing the bankruptcy disclosures, 1343. Because Ajaka had failed to disclose his whether the trustee or creditors were aware of claim to the bankruptcy court, the lender the civil lawsuit or claims before the plaintiff moved for summary judgment based on amended the disclosures, whether the judicial estoppel. Even though the record plaintiff identified other lawsuits to which he showed that all the creditors were aware of was party, and any findings or actions by the Ajaka's civil claims against the lender before bankruptcy court after the omission was the lender raised judicial estoppel, the district discovered.9 We overrule the portions of court found that Ajaka intended to make a Burnes and Barger that permitted the mockery of the judicial system. Id. We inference that a plaintiff intended to make a reversed and held that the district court mockery of the judicial system simply because abused its discretion in applying judicial he failed to disclose a civil claim.10 estoppel when there was a question of material fact about whether Ajaka had an Page 25 intention to conceal his civil claim from his creditors. We relied in part on the fact that he Three reasons lead us to reject the had subsequently amended his bankruptcy inference we accepted in Burnes and Barger schedules. Id. at 1346. in favor of a rule that a district court should look to all the circumstances of the case. First, Ajaka cannot be squared with Burnes such an inquiry ensures that judicial estoppel and Barger, which looked solely to whether is applied only when a party acted with a the debtor omitted a claim to determine the sufficiently culpable mental state. Second, it debtor's intent. Given the flaws in our allows a district court to consider any reasoning in Burnes and Barger and the proceedings that occurred in the bankruptcy inconsistencies in our precedent, we now court after the omission was discovered, address how district courts should evaluate a arguably a better way to ensure that the debtor's intent. integrity of the bankruptcy court is protected. Third, limiting judicial estoppel to those cases Page 24 in which the facts and circumstances warrant it is more consistent with the equitable C. Deciding Whether a Plaintiff principles that undergird the doctrine. By Intended to Make a Mockery of the rejecting a one-size-fits-all approach, we Judicial System Requires Review of the reduce the risk that the application of judicial Totality of the Facts and estoppel will give the civil defendant a Circumstances. windfall at the expense of innocent creditors.

We hold that to determine whether a First, a district court should look to all plaintiff's inconsistent statements were the facts and circumstances of the case to calculated to make a mockery of the judicial decide whether a plaintiff intended to mislead system, a court should look to all the facts and the court because that question is separate circumstances of the particular case. When from and not answered by whether the the plaintiff's inconsistent statement comes in plaintiff voluntarily, as opposed to the form of an omission in bankruptcy inadvertently, omitted assets. Our decisions disclosures, the court may consider such in Burnes and Barger conflated the question factors as the plaintiff's level of of whether the plaintiff's omission was sophistication, whether and under what inadvertent with the separate question of circumstances the plaintiff corrected the whether the plaintiff actually intended to disclosures, whether the plaintiff told his -10-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

manipulate the judicial system to his requires debtors to disclose all their assets, advantage. including contingent and unliquidated claims. See 11 U.S.C. § 521(a)(1)(B) (requiring debtor After all, a plaintiff may have failed to to file a schedule of assets and liabilities). But disclose a pending lawsuit because he did not Bankruptcy Rule 1009, which was proposed understand the disclosure obligations. It is by the Supreme Court and adopted by not difficult to imagine that Congress, permits a debtor to amend a schedule or statement "as a matter of course Page 26 at any time before the case is closed." Fed. R. Bankr. R. P. 1009(a). Further, the bankruptcy some debtors, particularly those proceeding court retains broad discretion to reopen a 11 pro se, may not realize that a pending closed case on a motion of the debtor or lawsuit qualifies as a "contingent and another party in interest "to administer" an unliquidated claim" that must be disclosed on asset that had not previously been scheduled. a schedule of assets. Although the question 11 U.S.C. § 350(b). It strikes us as inconsistent asking for a list of "all suits and with these principles—which recognize that administrative proceedings to which the omissions occur and liberally allow debtor is or was a party" seems more amendment and correction of disclosures—to straightforward, as Slater's testimony shows, infer that a debtor who failed to disclose a 12 it nevertheless may be misunderstood. So it lawsuit necessarily meant to manipulate the makes sense that a district court should look bankruptcy proceedings. beyond a plaintiff's omission in determining whether the plaintiff intended to misuse the We see no good reason why, when judicial process. determining whether a debtor intended to manipulate the judicial system, a district Second, a broader inquiry allows a court should not consider the bankruptcy district court to consider any findings or other court's treatment of the nondisclosure. We actions by the bankruptcy court that might reject the idea that encouraging a district help in determining whether the debtor court to blind itself to subsequent purposely intended to mislead the court and proceedings in the bankruptcy court, creditors. We have justified applying judicial particularly the bankruptcy court's decision estoppel after a debtor omitted a claim from about whether to allow the debtor to amend his bankruptcy disclosures as necessary to his disclosures or reopen his bankruptcy case, ensure full and honest disclosure to the better protects the bankruptcy bankruptcy courts and protect "the effective functioning of the federal bankruptcy Page 28 system." Burnes, 291 F.3d at 1286 (internal quotation marks omitted). But we have system. Indeed, the bankruptcy court has overlooked that bankruptcy courts do not tools of its own to punish a debtor who it necessarily view such omissions as determines purposefully tried to hide assets. establishing a debtor's intent to mislead the For example, it may revoke the discharge or bankruptcy court. deny an exemption for the proceeds from the debtor's lawsuit, see In re Barger, 279 B.R. Page 27 900, 908 (Bankr. N.D. Ga. 2002); it may even fine or imprison a debtor for contempt or To the contrary, the Bankruptcy Code refer the matter for the United States and Rules liberally permit debtors to amend Attorney's Office to consider prosecuting the their disclosures when an omission is debtor for perjury. See 18 U.S.C. §§ 401, discovered. Yes, the Bankruptcy Code 1621.13 -11-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

Third, considering all the circumstances justice, good faith, uprightness, fairness, and of the case is more consistent with the conscientiousness" from both plaintiff and equitable principles that underlie the doctrine defendant (internal quotation marks of judicial estoppel. "Equity eschews omitted)). mechanical rules" and "depends on flexibility." Holmberg v. Armbrecht, 327 U.S. What is more in this circumstance, the 392, 396 (1946).14 Requiring the district court application of judicial estoppel poses a to consider all facts and circumstances in potential risk of harm to innocent creditors. evaluating the plaintiff's intent is the more When a civil claim is dismissed on the basis of flexible, less mechanical approach that equity judicial estoppel, the asset becomes demands. In addition, this approach reduces worthless—losing any potential to increase the likelihood that an otherwise liable civil the value of the bankruptcy estate—which in defendant will receive an unjustified windfall turn harms creditors. It is easy to see why in or that innocent creditors will be harmed. Chapter 7 proceedings: the trustee is responsible for liquidating the assets in the Page 29 estate and then distributing the proceeds to creditors. When the civil claim is dismissed, When a district court applies a judicial there can be no proceeds from a recovery or estoppel bar based on nondisclosure in a settlement for distribution to creditors. See 11 bankruptcy proceeding without determining U.S.C. §§ 704(a)(1), 726.16 that the plaintiff deliberately intended to mislead, the civil defendant avoids liability on Although not as apparent for Chapter 13 an otherwise potentially meritorious civil proceedings, a risk remains that the dismissal claim while providing no corresponding will harm creditors. The amount of proceeds benefit to the court system. As an equitable that creditors receive in a Chapter 13 doctrine, judicial estoppel should apply only bankruptcy is dictated by the confirmed plan, when the plaintiff's conduct is egregious and a debtor's payments under the plan are enough that the situation "demand[s] generally based upon the debtor's expected equitable intervention." Hazel-Atlas Glass future earnings. See Harris, 135 S. Ct. at Co. v. Hartford-Empire Co., 322 U.S. 238, 1835. But a plan can be confirmed only if the 248 (1944). When a plaintiff intended no payments to the creditors are either equal to deception, judicial estoppel may not be or exceed what the creditors would have applied. If a court applies judicial estoppel to received in a bar the plaintiff's claim absent such intent, it awards the civil defendant an unjustified Page 31 windfall.15 Just as equity frowns upon a plaintiff's pursuit of a claim that he Chapter 7 bankruptcy, meaning that the value intentionally concealed in bankruptcy of a civil claim is taken into account in proceedings, equity cannot condone a formulating and reviewing the plan. See 11 defendant's avoidance of liability through a U.S.C. § 1325(a)(4). If the debtor, trustee, doctrine premised upon intentional creditors, and bankruptcy court know that a misconduct without establishing such civil claim is likely to be dismissed based on misconduct. See Coral Springs St. Sys, Inc. v. judicial estoppel, they are likely to treat the City of Sunrise, 371 F.3d 1320, claim as worthless, depriving the bankruptcy estate of what (absent judicial estoppel) might Page 30 have been a valuable asset. Because the application of judicial estoppel may harm 1340-41 (11th Cir. 2004) (explaining that a innocent creditors, equitable principles court of equity must "promote and enforce -12-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

dictate that courts proceed with care and circuits, consistent with Burnes and Barger, consider all the relevant circumstances. have endorsed the inference that a plaintiff who omitted a claim necessarily intended to In the face of these compelling reasons manipulate the judicial system.18 For the why district courts should consider the reasons we have already discussed, we totality of the facts and circumstances of the case to determine whether a plaintiff intended Page 33 to make a mockery of the judicial system, U.S. Steel urges us to adhere to Burnes and find the analysis of the Sixth, Seventh, and Barger. First, U.S. Steel argues that no Ninth Circuits to be more persuasive and change to our precedent is required because conclude that theirs is the better approach.19 even when a district court finds that the plaintiff intended to manipulate the judicial We thus overrule our prior precedent system, the court remains "entirely free to approving the inference that a plaintiff find in particular circumstances that a intended to make a mockery of the judicial debtor's omission was inadvertent." system solely because he failed to disclose his Appellee's Br. at 3. But U.S. Steel overlooks civil claim in his bankruptcy. Instead, district that under our case law an omission of a courts should consider all the facts and claim is "'inadvertent' only when a [debtor] circumstances of the case to determine either lacks knowledge of the undisclosed whether the debtor had the requisite intent. claim or has no motive for [its] concealment." Barger, 348 F.3d at 1295 (emphasis added). IV. Conclusion No plaintiff who omitted civil claims from Having identified the proper standard for bankruptcy disclosures will be able to show determining when judicial estoppel may be that he acted inadvertently because, as we applied, we remand this appeal to the panel to explained above, the consider whether the district court abused its Page 32 discretion in applying judicial estoppel and to resolve any other remaining issues. plaintiff always will have knowledge of his pending civil claim and a potential motive to REMANDED. conceal it due to the very nature of Page 34 bankruptcy. The Supreme Court has told us that judicial estoppel must not be applied to ED CARNES, Chief Judge, concurring: an inadvertent inconsistency, New Hampshire, 532 U.S. at 753, yet under our I concur in the majority opinion for the precedent inadvertence places no meaningful Court, especially in light of footnote 12, which limit on the doctrine's application. acknowledges that a district court is not required to accept the testimony of the Second, U.S. Steel argues that by plaintiff that her misstatements in the overruling Burnes and Barger, we will create bankruptcy proceeding were not made with a circuit split. In fact, a circuit split exists intent to mislead, even if that testimony is regardless. The approach we adopt today is uncontradicted. consistent with the decisions of at least three other circuits, which have recognized that This is in keeping with the long- whether a plaintiff intended to make a established law of this circuit. See, e.g., mockery of the judicial system requires Burston v. Caldwell, 506 F.2d 24, 26 (5th Cir. consideration of more than just whether the 1975) ("The district court, of course, was not plaintiff failed to disclose a claim.17 Other -13-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

required to accept [the petitioner's] only if the omission was done with the intent testimony, even if uncontradicted."); Negron to mislead. The intent behind an inaccurate v. City of Miami Beach, 113 F.3d 1563, 1570 or misleading statement or omission is a (11th Cir. 1997) (noting that the district court purely subjective fact that can seldom be as factfinder was free to reject an expert proven by objective facts alone. People who witness' testimony even if it was have defrauded others through misleading uncontradicted); Murphy v. City of Flagler bankruptcy schedules, which are signed Beach, 846 F.2d 1306, 1310 (11th Cir. 1988) under penalty of perjury, have committed a (explaining that the factfinder "was not bound crime. It is a small step from original perjury to accept the plaintiff's evidence . . . even if it to cover-up perjury. was not controverted"); see also United States v. Samples, 897 F.2d 193, 198 (5th Cir. 1990) If district courts were required to accept a ("The trier of fact need not credit any witness' plaintiff's testimony that she did not intend to testimony, even if unimpeached."). defraud her creditors by omitting a claim from her bankruptcy schedules, judicial We have taken the principle even further estoppel never would be applied in these than that. In criminal cases, "[w]e have long circumstances. The recognized that a statement by a defendant, if disbelieved by the jury, may be considered Page 36 substantive evidence of the defendant's guilt." United States v. Tobin, 676 F.3d 1264, 1287 possibility that the doctrine could apply to (11th Cir. 2012) (quotation marks omitted), claims not disclosed in bankruptcy abrogated on other grounds by United States proceedings would be purely academic and v. Davila, 569 U.S. ___, 133 S. Ct. 2139 serve no deterrent purpose. And if debtors (2013); were freed from any threat of judicial estoppel, the losers would be both honest Page 35 creditors and the integrity of the judicial process, which means we all would lose. United States v. Martinez, 83 F.3d 371, 374 (11th Cir. 1996) ("But the jury was entitled to That is why the one sentence contained reject Martinez's testimony and to consider it in footnote 12 is so important. It means that as substantive evidence of his guilt."). And in deciding whether a plaintiff intended to "this rule applies with special force," we have mislead when she omitted a claim from her stressed, "where the element to be proved is bankruptcy schedules, or failed to update a the defendant's knowledge or intent." schedule to include the claim, the district Martinez, 83 F.3d at 374-75; accord United court is not required to accept the plaintiff's States v. Vazquez, 53 F.3d 1216, 1225 (11th denial of her intent. And that is true even if Cir. 1995) (noting that the rule a factfinder, her denial is made under oath and not after observing a defendant testify, can infer contradicted by other evidence. The district that the opposite of her testimony is true court has the authority and responsibility to "applies with special force where the elements find the facts and not to blindly accept to be proved for a conviction include highly testimony. subjective elements: for example, the defendant's intent or knowledge"). ------

All of those decisions are particularly Footnotes: important in light of our holding today that *. Judge Hull recused herself and did not judicial estoppel will bar a claim not disclosed participate in these en banc proceedings. by the plaintiff in her bankruptcy proceeding -14-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

Judge Newsom joined the Court on August 4, 7. We note that other circuits have taken a 2017, and did not participate in these en banc similar approach in not rigidly adhering to proceedings. the New Hampshire test (that is, considering different factors) when the party seeking to 1. Citations to "Doc." refer to numbered invoke judicial estoppel was not a party to the docket entries in the district court record. case in which the other party took an inconsistent position. See, e.g., Stephenson v. 2. When all the debtor's assets are exempt Malloy, 700 F.3d 265, 273 (6th Cir. 2012) from the bankruptcy estate, meaning that no (considering whether debtor who omitted property is available for distribution to lawsuit in bankruptcy disclosures had acted creditors, streamlined procedures may apply. in bad faith); Krystal Cadillac-Oldsmobile See Fed. R. Bankr. P. 2002(e). GMC Truck, Inc. v. Gen. Motors Corp., 337 3. If the debtor fails to make payments F.3d 314, 325 (3d Cir. 2003) (considering, as due under a Chapter 13 plan, he may be part of judicial estoppel test, whether a lesser forced to convert to a Chapter 7 proceeding or sanction would have remedied the damage the court may dismiss his bankruptcy case done by the litigant's misconduct). entirely. See 11 U.S.C. § 1307(a)-(c). 8. See Robinson v. Tyson Foods, Inc., 595 4. Because judicial estoppel is an F.3d 1269, 1275-76 (11th Cir. 2010); De Leon equitable doctrine, we review the district v. Comcar Indus., Inc., 321 F.3d 1289, 1291- court's decision to apply the doctrine for 92 (11th Cir. 2003). abuse of discretion. See New Hampshire v. 9. We emphasize that this list is not Maine, 532 U.S. 742, 750 (2001); Talavera v. exhaustive; the district court is free to Sch. Bd. of Palm Beach Cty., 129 F.3d 1214, consider any fact or factor it deems relevant 1216 (11th Cir. 1997). to the intent inquiry. 5. Decisions of the former Fifth Circuit 10. We do not overrule these cases handed down before the close of business on entirely. Specifically, our decision today has September 30, 1981 are binding on this Court. no effect on the portion of Burnes holding See Bonner v. City of Prichard, 661 F.2d that judicial estoppel did not apply to bar the 1206, 1209 (11th Cir. 1981) (en banc). debtor's injunctive relief claims, 291 F.3d at 6. The Supreme Court concluded that all 1288-89, or the portions of Barger three parts of the test were satisfied: New addressing standing, estoppel, and the Hampshire had taken inconsistent positions application of judicial estoppel to the debtor's by changing its argument about the location claim for injunctive relief, 348 F.3d at 1292- of the boundary, it had succeeded in 93, 1297. persuading the Supreme Court to accept its 11. In 2015, 9.2% of Chapter 7 and 8.5% of earlier position when the Court accepted the Chapter 13 petitions nationwide were filed by parties' agreement about the location of the debtors proceeding pro se. Michael B. Joseph, boundary and entered a consent decree, and Consumer Pro Se Bankruptcy: Finding Hope it would gain an unfair advantage at Maine's in Hopelessness, 35 Am. Bankr. Inst. J. 32, 32 expense if permitted to seek to move the (May 2016). boundary. See New Hampshire, 532 U.S. at 751-55. And "New Hampshire's position" 12. Of course, the district court may could not "be regarded as a product of determine that a plaintiff's testimony that he inadvertence or mistake." Id. at 753. misunderstood the disclosure obligations is not credible.

-15-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

13. U.S Steel argues that judicial estoppel disclose a civil claim because the court may is also necessary to protect the integrity of apply judicial estoppel if the facts and district courts from plaintiffs who pursue civil circumstances of the case show that the claims that they implicitly admitted in their plaintiff had the requisite intent to deceive. In bankruptcy proceedings were worthless. It addition, the plaintiff's nondisclosure may posits that a plaintiff may omit a civil claim provide fodder for cross examination and from his bankruptcy disclosures because he impeachment in the civil suit. knew it was worthless, yet attempt to commit a fraud on the district court by trying to 16. As we observed above, our holding in persuade the court that the claim has value. Parker that judicial estoppel should not apply But under the rule we adopt today, a district against a Chapter 7 trustee conflicted with court may apply judicial estoppel if it decides Barger. Because we overrule that portion of that the plaintiff intended to manipulate the Barger, Parker no longer conflicts with prior judicial process in either court; it simply must panel precedent, and so there is no question consider the totality of the facts and about its continued viability. circumstances before making that 17. See Spanie v. Cmty. Contacts, Inc., 756 determination. F.3d 542, 548 (7th Cir. 2014) (reversing 14. See also DelCostello v. Int'l Bros. of application of judicial estoppel because the Teamsters, 462 U.S. 151, 162 (1983) civil defendant "needed to show more than an (explaining that principles of equity are initial nondisclosure on a bankruptcy hostile to "mechanical rules" (internal schedule"); Ah Quin v. Cty. of Kauai Dep't. of quotation marks omitted)); Baggett v. Bullitt, Transp., 733 F.3d 267, 276 (9th Cir. 2013) 377 U.S. 360, 375 (1964) (explaining that (rejecting a "presumption of deceit" where whether a court should exercise its "the plaintiff-debtor has reopened the discretionary equitable powers should not bankruptcy proceedings and has corrected the depend on an "automatic rule"). initial filing error"); Eubanks v. CBSK Fin. Grp., Inc., 385 F.3d 894, 899 (6th Cir. 2004) 15. U.S. Steel contends that civil (reversing district court's application of defendants receive no "pure windfall" if judicial estoppel where plaintiffs omitted the judicial estoppel is applied as the district claim because defendant "provide[d] no court did here because they receive only the additional evidence that Plaintiffs "incidental benefit" of escaping civil liability demonstrated fraudulent intentions towards in exchange for providing the valuable service the court"). of "exposing abuses of the bankruptcy system." Appellee's Br. at 52-53 (internal 18. See, e.g., Eastman v. Union Pac. R.R. quotation marks omitted). But only when the Co., 493 F.3d 1151, 1157-60 (10th Cir. 2007) plaintiff intended to mislead is the defendant ("Where a debtor has both knowledge of the exposing an abuse of the system. claims and a motive to conceal them, courts routinely, albeit at times sub silentio, infer In a similar vein, U.S. Steel argues that deliberate manipulations."); In re Superior unless courts apply judicial estoppel Crewboats, Inc., 374 F.3d 330, 335-36 (5th consistent with our existing precedent, civil Cir. 2004) (concluding that judicial estoppel defendants will have no incentive to uncover applied because plaintiffs knowingly omitted omissions of civil lawsuits in bankruptcy civil claim from bankruptcy disclosures). filings, and such omissions will go undetected. Not so. Civil defendants like U.S. 19. U.S. Steel also argues that stare decisis Steel will still have an incentive to research requires us to adhere to our precedent, but and discover whether the plaintiff failed to the en banc court may overrule panel

-16-

Slater v. U.S. Steel Corp. (11th Cir., 2017)

decisions. See McKinney v. Pate, 20 F.3d 1550, 1565 n.21 (11th Cir. 1994) (en banc).

------

-17-

Excerpt from Transcript, not following Himmelstein, 203 B.R. 1009, from DE 594, 6:15-bk-6458

Case 6:15-bk-06458-CCJ Doc 594 Filed 02/05/18 Page 1 of 39

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF FLORIDA ORLANDO DIVISION

CASE NO.: 6:15-bk-06458-CCJ ADV. NOS.: 6:15-ap-158 6:17-ap-45 6:17-ap-112

IN RE: WILLIAM W. COLE, JR.,

Debtor. ______DECEMBER 14, 2017 TRANSCRIPT OF PROCEEDINGS BEFORE THE HONORABLE CYNTHIA C. JACKSON UNITED STATES BANKRUPTCY JUDGE HELD AT 400 WEST WASHINGTON STREET ORLANDO, FLORIDA

A P P E A R A N C E S: KENNETH D. HERRON, JR., ESQUIRE Herron Hill Law Group, PLLC Appearing on behalf of the Debtor CHRISTOPHER THOMPSON, ESQUIRE Appearing on behalf of the Debtor

MICHAEL TESSITORE, ESQUIRE Appearing on behalf of the Chapter 7 Trustee Lori Patton Attorney for the Plaintiff

Proceedings recorded by electronic sound recording Transcript provided by ACCREDITED COURT REPORTERS (407) 443-9289 [email protected] Case 6:15-bk-06458-CCJ Doc 594 Filed 02/05/18 Page 36 of 39

36 1 local rule 50112 (sic) but that’s moot, (inaudible). So 2 the Court is going to keep the case. 3 Before I go on to the summary judgment, are 4 there any questions? 5 As for the summary judgment on the issue of 6 whether a judgment is required before on T by E property, 7 on joint liability, I already told the parties at the 8 last hearing that I’m not convinced that a judgment’s 9 needed. I’ve looked at it a little bit more and I 10 haven’t changed my mind. 11 I believe the best case on point here, and in 12 case I’m going to file it, it’s Judge Mark’s case in In 13 re: Monzon which is at 214 B.R. 38. I agree with Judge 14 Mark’s reasoning and do believe that it is the majority 15 view that a joint creditor does not have to have an 16 actual judgment as a prerequisite to administration by 17 the trustee. 18 In agreeing with Judge Mark, I’m going to quote

19 some of his language that I like. The Court finds that 20 majority view comports with the plain language of section 21 522(b)(2)(B) and avoids undue prejudice to joint 22 creditors. First, the plain language of 522(b)(2)(B) 23 allows joint creditors to reach entireties property in 24 bankruptcy if, at some point, those creditors could have 25 had process issued under nonbankruptcy law. Nothing in Case 6:15-bk-06458-CCJ Doc 594 Filed 02/05/18 Page 37 of 39

37 1 Section 522(b)(2)(B) mandates that joint creditors have 2 the ability to have process issued under Florida law at 3 the time of filing. I agree. 4 Moreover, a debtor’s property is not always 5 exempt from process under Florida law before entry of a 6 judgment. In appropriate circumstances, prejudgment 7 remedies such as replevin, attachment, or garnishment are 8 available, all of which would subject entireties property 9 to “process under applicable” law within the meaning of 10 Section 522(b)(2)(B). 11 Finally, this is another quote from Judge Mark, 12 requiring a prepetition judgment would prejudice joint 13 creditors since the entireties property would not be 14 administered for their benefit in the bankruptcy case, 15 and the debtor’s discharge would prevent the joint 16 creditor from ever obtaining a joint judgment enforceable 17 against the entireties property. 18 The other thing, I think I mentioned it before,

19 that bothers me in this area is that if that were the law 20 the debtor would simply rush out as soon as they knew 21 that a judgment was coming down, they’d rush out and file 22 bankruptcy, and then the joint creditor could never reach 23 the property. So I believe that a judgment is not 24 required, and we’re ready to go to trial on this. I 25 don’t think there’s anything else that’s going to keep us Case 6:15-bk-06458-CCJ Doc 594 Filed 02/05/18 Page 38 of 39

38 1 from going to trial, is there? Okay. And the trial 2 is -- 3 MR. HERRON: Mr. Budgen is not here but I don’t 4 think so, Judge. 5 THE COURT: I’m sorry. 6 MR. HERRON: I said Mr. Budgen’s not here to 7 raise any objection but I -- 8 THE COURT: But Mr. Tessitore wouldn’t. I 9 mean -- 10 MR. HERRON: I don’t think so. 11 MR. TESSITORE: I’ve heard none, Your Honor, 12 from Mr. Budgen. 13 THE COURT: Okay. So let’s -– when do we meet 14 again? 15 THE CLERK: February -- 16 THE COURT: Yes, so it’s just the next status 17 conference and then we’ll go forward. Okay. Anything 18 else? Court is in recess.

19 MR. HERRON: No, Judge. Thank you. 20 MR. ELKINS: Thank you, Judge. 21 (Thereupon, the taking of the proceedings were 22 concluded.) 23 Case 6:15-bk-06458-CCJ Doc 594 Filed 02/05/18 Page 39 of 39

39 C E R T I F I C A T E I certify that the foregoing is a correct transcript from the electronic sound recording of the proceedings in the above-styled matter.

______January 5, 2018 LoisLois H.H. Simonds Simonds Notary Public-State of Florida Commission Expires: 12/18/18 Commission: FF#175996 FEDERALLY CERTIFIED TRANSCRIPT AUTHENTICATED BY: /s/Antonio F. Hamilton Accredited Court Reporters Case 6:17-bk-01327-KSJ Doc 33 Filed 08/28/17 Page 1 of 2

ORDERED.

Dated: August 28, 2017

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF FLORIDA ORLANDO DIVISION

In re: ) ) April Wagner, ) CASE NO. 6:17-bk-01327-KSJ ) CHAPTER 13 Debtor. )

ORDER GRANTING IN PART CHAPTER 7 TRUSTEE’S MOTION FOR RE-HEARING OF ORDER CONVERTING CASE

This case comes before the Court on the continued hearing on the Chapter 7 Trustee’s

Motion for Rehearing of Order Converting Case (Doc. # 16) (“Motion”) filed on May 11, 2017.

The Court having heard this continued matter on August 15, 2017 at 2:00 p.m. finds the

Trustee’s Motion should be granted in part. Accordingly, it is ORDERED:

1. The Chapter 7 Trustee’s Motion for Rehearing of Order Converting Case is

GRANTED in part.

2. This case will remain a Chapter 13 case pursuant to the following terms:

a. Once the Claims Bar Date expires, Debtor shall file an amended Chapter 13 Plan which will pay 100% of all claims filed.

b. The Chapter 7 Trustee shall maintain possession of the jewelry. The jewelry is described as follows:

Case 6:17-bk-01327-KSJ Doc 33 Filed 08/28/17 Page 2 of 2

i. Engagement Ring Plat Mtg with (1) RBC Dia, TW 2.51 CTS, G, VS1, GIA Cert 10281322, with (2) Tap Bag C Dias, TW .44 CTS, E-F, VVS; ii. Ladies Ring Plat Mtg with (5) RBC Dias, TW 1.15 CTS, F-G, VS, and (16) RFC Dias, TW .32 CTS, E-F, VS; and iii. Necklace 18 KT YG Mtg with (8) Null Pearls, 8.5 MM, A+, 18”.

c. Debtor’s Amended Plan shall include a total payment of $6,635.00 to the

Chapter 7 Trustee during the first six (6) months of the Amended Plan as a Section 326(a) commission on the jewelry, which is calculated based upon the appraised value of the jewelry obtained by the Chapter 7 Trustee previously filed with the Court by Notice of Filing (Doc. #

31).

d. Upon successful completion of all payments required in Debtor’s Amended

Chapter 13 Plan, the Trustee shall return the jewelry to the Debtor.

e. If the Debtor defaults on her Amended Plan payments or any other obligation in her Chapter 13 proceeding, then in lieu of dismissal, then (1) this case shall revert to a case under Chapter 7; and (2) Chapter 7 Trustee Richard B. Webber II shall be re-appointed and is authorized to liquidate the jewelry for the benefit of Debtor’s Creditors.

Trustee, Richard B. Webber II, is directed to serve a copy of this Order on interested parties who are non-CM/ECF users and file a proof of service within 3 days of entry of the Order.

KEY DEVELOPMENTS IN BUSINESS BANKRUPTCY CASES

Presented by: Bradley Saxton and C. Andrew Roy, Winderweedle, Haines, Ward & Woodman, P.A.

Key Developments in Business Bankruptcy 2018 Annual Seminar Central Florida Bankruptcy Bar Association

May 17, 2018

Presented by

Bradley M. Saxton, Esq. Winderweedle, Haines, Ward & Woodman, P.A. [email protected] – 407-246-8672

C. Andrew Roy, Esq. Winderweedle, Haines, Ward & Woodman, P.A. [email protected] – 407-246-8808

(covering cases from March 1, 2017 through April 30, 2018)

1. Reorganization and Confirmation

U.S. Bank v. Village at Lakeridge 2018 WL 1143822 (March 5, 2018)

• The Supreme Court determined that the appropriate standard of review for “insider” status – as mixed issue of law and fact – is clear error. The opinion is limited to this issue alone.

In re Appliance Now, Inc. 568 B.R. 843 (Bankr. M.D. Fla. March 20, 2017) (Jennemann, J.)

• The bankruptcy court was called on to interpret the language of the order confirming the Chapter 11 Plan. Certain creditors argued that words in the confirmation order provided them with the right to pursue claims against the debtor. The court rejected this position, holding that the confirmed plan of reorganization is a contract, and principles of contract interpretation apply and that the words in the confirmation order must be viewed in context with the very specific provisions of the plan of reorganization which addressed the precise treatment of the creditor’s claims.

First National Bank of Oneida v. Brandt 2018 WL 1918247 --- F.3d ---- (11th Cir. April 24, 2018)

• Although confirmed plan required secured creditors to file an unsecured claim within 30 days of the confirmation hearing, the Eleventh Circuit vacated the district court’s dismissal of bank’s complaint to recover deficiency against Chapter 11 debtor. Without getting to the effect of the plan’s language, the court primarily discussed the possible effect of the debtor dismissing his Chapter 11 case while the appeal to the Eleventh Circuit was pending, hinting to the district court that the dismissal might preclude the debtor’s defense to the bank’s deficiency claim – there are differences between a corporate Chapter 11 case and an individual Chapter 11 case, especially when it comes to discharge.

In re United States Pipe & Foundry Co. 577 B.R. 916 (Bankr. M.D. Fla. November 7, 2017) (May, J.)

• Debtor confirmed a Chapter 11 plan in 1995 in a case commenced in 1989. Certain creditors initiated recent lawsuits alleging toxic tort claims against the Debtor. Debtor sought a declaratory judgment that the claims were preconfirmation claims and discharged by the plan over 20 years earlier. The Court disagreed and granted the claimants’ motion for summary judgment. The Court discussed the Eleventh Circuit’s Piper Aircraft test and concluded that the claimants did not have contingent preconfirmation claims against the Debtor.

Spiral Direct v. Basic Sports Apparel 2017 WL 825221 (M.D. Fla. March 1, 2017)

• District Court applies the doctrine of judicial estoppel to prohibit reorganized debtor from pursuing monetary claims for trademark infringement where debtor knew of the claims during the pendency of the bankruptcy case and failed to disclose the potential asset in the case before confirmation of its plan of reorganization and where debtor had a motive to conceal the claims. Claims for injunctive relief were not barred by judicial estoppel.

BUT SEE Slater v. United States Steel 871 F.3d 1175 (11th Cir. Sept. 18, 2017)

• Upon en banc review, the Eleventh Circuit reversed itself and prior precedent concerning the application of judicial estoppel based on a debtor’s failure to schedule a cause of action. A district court shall now consider all the facts and circumstances of the case to determine whether a mockery was made of the system. The case was remanded for further evaluation under the new standard.

Business Bankruptcy (Saxton/Roy) – 2 – CFBLA 2018 Seminar In re Ferguson 2017 WL 1173664 (11th Cir. March 30, 2017)

• Eleventh Circuit discusses both equitable mootness and constitutional mootness and holds that Court has jurisdiction to hear the appeal and denies motion to dismiss appeal for lack of jurisdiction.

Sundale v. Kapila 2018 WL 1709716 (S.D. Fla. March 28, 2018)

• Appeal from final decree, a “purely ministerial” act, could not be maintained for lack of standing, and “all other appealable matters [were] timebarred.”

2. Dismissal, Conversion, and Stay Relief

In re Southside Church of Christ of Jacksonville, Inc. 572 B.R. 384 (Bankr. M.D. Fla. June 15, 2017) (Funk, J.)

• Court held that despite the existence of almost all of the Phoenix Picadilly factors, the debtors single asset case (a church) would not be dismissed as a bad faith filing under Section 1112 (b)(1). Additionally, Court held creditor not entitled to relief from stay under 362(d)(3). While an equity cushion existed, it was minimal; therefore, Court would enter a separate order requiring adequate protection payments.

In re Clinical Pet of Ocala 2018 WL 173210 (Bankr. M.D. Fla. April 10, 2018) (Funk, J.)

• Chapter 11 debtor’s critical equipment failed and could no longer support the debtor’s business model. As a result, debtor failed to make agreed adequate protection payments and had made unauthorized payments to principals. As a result, the court terminated the debtor’s authority to use cash collateral and granted stay relief in rem. However, the court refused to convert the case to Chapter 7 because avoidance of transfers for the benefit of one creditor is not in the best interests of all creditors.

In re Climate Control Mechanical Services, Inc. 2018 WL 1214475 (Bankr. M.D. Fla. March 6, 2018) (Funk, J.)

• Bankruptcy court denied United States Trustee’s motion and creditor’s motion to appoint a Chapter 11 trustee or convert Debtors’ jointly administered case. The court concluded that, although the Debtors’ principal cashed a $76,000 check and walked away with cash, that the Debtors had new management. While the principal still remained in charge, he hired a new CFO and the court found that the wrongdoing was not “current management” as required for the appointment of a Chapter 11 trustee.

Business Bankruptcy (Saxton/Roy) – 3 – CFBLA 2018 Seminar U.S. v. Whaley 2018 WL 2077871 (11th Cir. May 4, 2018)

• Eleventh Circuit upholds bankruptcy fraud convictions for concealing property of his company’s Chapter 11 estate – sentence: 72 months. Defendant concealed $271,813.84 in insurance proceeds from Chapter 11 trustee, and he used some of the money to pay gambling debts. Court rejected defendant’s argument that the prosecution had to prove that the proceeds concealed were material relative to the size of the estate.

In re Czyzewski v. Jevic Holding Corp. 2017 WL 1066259 (March 22, 2017)

• The U.S. Supreme Court decided Czyzewski v. Jevic Holding Corp., in which Petitioners were truck drivers whom Jevic terminated shortly before it filed for bankruptcy. Holding about $8.3 million in priority wage claims, these workers objected to a settlement that Jevic’s shareholders and senior lenders reached with the creditors’ committee. The settlement denied the workers their priority payment, dismissed the bankruptcy, and foreclosed the workers’ rights to challenge under state law the leveraged buyout that led to the bankruptcy. The Third Circuit concluded that such a settlement was permissible in “rare” circumstances.

• Justice Breyer’s majority opinion is notable for at least two reasons. First, it recognizes what was ultimately at stake: the integrity and efficiency of the chapter 11 process. The consequences of failing to reverse, the Court explains, “are potentially serious,” and include “risks of collusion,” “making settlement more difficult to achieve,” and eroding procedural protections that “Congress granted particular classes of creditors,” such as unpaid workers.

• Second, consider what Justice Breyer’s decision does not do. It does not, contrary to some reports, prohibit all structured dismissals: “We express no view about the legality of structured dismissals in general,” Justice Breyer noted. The decision also distinguishes the impermissible final distribution in Jevic from interim distributions, such as critical vendor orders, which might deviate from bankruptcy’s priority rules temporarily, but serve other fundamental objectives.

3. Attorneys and their Fees

In re Howard Avenue Station, LLC 568 B.R. 146 (Bankr. M.D. Fla. April 28, 2017 (McEwen, J.)

• Failure to comply with Rule 2016 disclosure requirement can result in disgorgement of payments received for services rendered. Willful failure not necessarily required. In this case, bankruptcy court did not require special counsel to disgorge fees, despite failure to comply.

Business Bankruptcy (Saxton/Roy) – 4 – CFBLA 2018 Seminar

In re Climate Control Case No. 3:15-bk-02248, Doc. No. 527 (Nov. 17, 2017) (Funk, J.)

• Bankruptcy court denied jointly administered debtors’ motion to disqualify counsel for creditor of one jointly administered debtor when counsel also represented defendant in adversary proceeding with another jointly administered debtor. Debtors filed motion to disqualify only after creditor had uncovered debtors’ undisclosed non-DIP accounts and moved to appoint a Chapter 11 trustee.

In re Aldrovandi 568 B.R. 154 (Bankr. M.D. Fla. June 1, 2017) (Jennemann, J.)

• The Court denied the attorney’s fees for secured creditor in successive Chapter 13 cases as requested and allowed an amount for less than half of the original claim. In reaching the decision to severely mitigate the total claim the court looked at the following factors: (a) the use of multiple attorneys reviewing, re-reviewing, circulating, and commenting all on the same thing, (b) attorneys doing work that would be more appropriately done by a paralegal, (c) multiple attorneys all billing for doing one simple task – i.e. filing a proof of claim, and (d) the Court also heavily scrutinized the costs that were assessed in the case.

In re Unnerstall 2018 WL 1989936 (Bankr. M.D. Fla. April 25, 2018) (Jennemann, J.)

• Court applies the lodestar analysis in connection with fees requested by oversecured creditor under § 506(b) and reduces fees requested upon review of each fee application.

Stok Folk + Kon PA v. Fusion Homes, LLC 2018 WL 1444279 (S.D. Fla. March 16, 2018)

• District court reversed bankruptcy court’s denial of firm’s motion for protection order and to quash subpoena. Firm objected to subpoena because requesting party was a former client who still owed money to the firm for services rendered, asserting a charging lien. The district court determined that the bankruptcy court should have required payment of the past due amounts or required the posting of adequate security for such payment. Also, considering the bankruptcy court refused to make a factual finding of the firm’s misconduct, there was no applicable exception to the retaining lien.

In re Health Support Network, Inc. 2018 WL 1614168 (Bankr. M.D. Fla. March 30, 2018) (Williamson, C.J.)

• Law firm represented Trustee on a contingency basis. Where law firm dissolved before the contingency occurred, the fee award is owed to the law firm where there is a Business Bankruptcy (Saxton/Roy) – 5 – CFBLA 2018 Seminar connection between the firm (that originally represented the Trustee) and the Trustee’s successor counsel.

4. Claims, Contracts, and Leases

In re Progressive Plumbing, Inc. 6:15-BK-07275 (Bankr. M.D. Fla March 2, 2017) (Jennemann, J.)

• Claim objection sustained where claim was filed four days after claims bar date. Rule 9006(b)(1) allows a claimant to file a late filed claim when (1) request is made prior to the deadline, or (2) on motion made after expiration of the deadline where the failure to act was a result of excusable neglect. To satisfy the Pioneer excusable neglect standard requires a motion.

In re Colony Beach and Tennis Club, Ltd. 578 B.R. 909 (Bankr. M.D. Fla. December 14, 2017) (May, J.)

• Despite fact that Chapter 7 Trustee filed late tax return without requesting an extension, Court finds that the IRS’ claim for administrative priority resulting from penalties for the late filing should be equitably subordinated under Section 510(c)(1).

In re Eddy 572 B.R. 774 (Bankr. M.D. Fla. June 30, 2017) (Jackson, J.)

• Equitable Subordination. Court applies the Eleventh Circuit’s Mobile Steel standard and finds that insider claim should be equitably subordinated.

In re Vegas Management, LLC 576 B.R. 883 (Bankr. M.D. Fla. October 25, 2017) (May, J.)

• Real estate broker held not entitled to an administrative claim for commission. Although he brought the property to the attention of the party that was the high bidder at a sale, he was not the “procuring cause” of the sale.

In re Kardash 573 B.R. 257 (Bankr. M.D. Fla. September 21, 2017) (May, J.)

• Transferee liability pursuant to Section 6901(a) is not a tax. Accordingly, Section 6901(a) transferee liability is not entitled to priority under Section 507(a)(8), and is, at most, a general unsecured claim.

Business Bankruptcy (Saxton/Roy) – 6 – CFBLA 2018 Seminar In re Namal Enterprises, LLC 574 B.R. 300 (Bankr. M.D. Fla. September 15, 2017) (Williamson, C.J.)

• Chapter 11 Debtor’s objection to Bank’s claim overruled as the Court declines to give preclusive effect to prior State Court judgment where it would result in a windfall to the Debtor. The Court awarded the Bank pre-petition interest, distinguishing this case from the Court’s recent Kraz opinion.

In re Jack 579 B.R. 627 (Bankr. M.D. Fla. July 31, 2017) (Delano, J.)

• “Rental-purchase agreement” was a true lease rather than a disguised security agreement. Thus, the collateral cannot be valued under 11 U.S.C. § 506 but rather the debtor must assume or reject the lease under 11 U.S.C. § 365.

In re Herrera-Edwards 580 B.R. 565 (M.D. Fla. Nov. 1, 2017)

• Debtor cannot rewrite settlement agreement by rejecting executory portion, which required the payment of a perpetual management fee on royalty income. Settlement agreement did not support Debtor’s arguments that she originally held administration rights, and that portion giving exclusive administration rights was not executory. Debtor also could not use parol evidence to alter settlement agreement based on stipulation giving her right to artist and producer royalties, as opposed to royalties only from copyrights.

In re Climate Control Mechanical Services, Inc. 570 B.R. 673 (Bankr. M.D. Fla. July 24, 2017) (Funk, J.)

• Where the construction contract was completed pre-petition, the funds owed to Debtor under the contract became property of the estate upon the Debtor’s bankruptcy filing. Court rejected the claims to equitable liens to the funds by subcontractors.

5. Adversary Proceedings and Avoidance Actions

Merit Management v. FTI 138 S.Ct. 883 (Feb. 27, 2018)

• Section 546(e) “securities safe-harbor” only applies to overarching transaction and does not save ultimate transferee from liability simply because intermediary transfers were between financial institutions. Thus, Supreme Court held that safe-harbor did not protect seller of stock that received $16.5 million as part of transaction, which trustee of litigation trustee sought to avoid as constructively fraudulent.

Business Bankruptcy (Saxton/Roy) – 7 – CFBLA 2018 Seminar

Zucker v. U.S. Specialty Insurance Co. 856 F.3d 1343 (11th Cir. May 16, 2017)

• Director/officer insurance with “prior acts” exclusion barred coverage for derivative claims against directors and officers, even though specific acts – like transfer of assets – did not occur until after the policy was purchased.

In re Health Support Network, Inc. 2018 WL 162027 (Bankr. M.D. Fla. March 30, 2018) (Williamson, C.J.)

• Bankruptcy court lacks authority under Rule 9006 to extend state law statute of limitations. Trustee sought to extend statute of limitations just four days prior to its expiration, specifically because there was not enough time to provide the pre-suit notice required for a defamation claim under Florida law. Section 108 only extends time limitations under state law, and Rule 9006 contemplates only bankruptcy-created time limits.

In re Fundamental Long Term Car 873 F.3d 1325 (11th Cir. Oct. 19, 2017)

• Trustee’s settlement of avoidance claims with a bar order was within bankruptcy court’s jurisdiction.

In re Caribbean Fuels 688 Fed. Appx. 890 (11th Cir. June 22, 2017)

• “Reasonably equivalent value” must be determined by an objective measure, “not whether the debtor subjectively benefitted from the property it received . . . .” The trustee conceded that he was not challenging the objective value of what was given to the debtor.

In re Advanced Telecommunication Network Case No. 6:05-ap-00006, Doc. No. 304 (January 31, 2018) (Jennemann, J.)

• [Doc. No. 304] Collateral estoppel does not establish debtor’s insolvency established in other litigation when defendant was not a part to that litigation.

• [Doc. No. 303] Defendant/transferee could not rely on “mere conduit” defense when facts at summary judgment indisputably demonstrated that transferee objectively had knowledge of the debtor’s unfavorable financial condition.

• [Doc. No. 300] Contractual indemnity, and disputes surrounding it, precluded summary judgment concerning reasonably equivalent value aspect of transferee’s defense.

Business Bankruptcy (Saxton/Roy) – 8 – CFBLA 2018 Seminar

In re Mongelluzzi 568 B.R. 702 (Bankr. M.D. Fla. May 8, 2017) (Delano, J.)

• Where bank asserted 548(c) good faith defense to fraudulent transfer action by trustee, Court held bank waived the attorney-client and work-product privileges as to certain documents.

In re Altier 2017 WL 1011416 (Bankr. M.D. Fla. March 15, 2017) (Jennemann, J.)

• Bankruptcy court granted summary judgment to creditor who had earlier purchased the trustee’s rights in the fraudulent transfer litigation, and avoided the transfer of the real property under the constructive fraud counts alleged in the complaint.

In re Lee 574 B.R. 286 (Bankr. M.D. Fla. June 23, 2017) (May, J.)

• Court grants summary judgment to receiver holding that all funds used to purchase home were fraudulent transfers from a ponzi scheme entitling receiver to an equitable lien and constructive trust on the debtor’s home.

Business Bankruptcy (Saxton/Roy) – 9 – CFBLA 2018 Seminar

STATE OF THE DISTRICT PRESENTATION

Presented by: Hon. Michael Williamson, Chief Bankruptcy Judge, Middle District of Florida

PROTECTING CLIENT CONFIDENCES: ETHICAL OBLIGATIONS AND BEST DATA SECURITY PRACTICES

Presented by: Nicolette Vilmos, Broad and Cassel LLP

TANGLED IN A PREFERENCE: STRATEGIES FOR ALL STAGES OF PREFERENCE ACTIONS

Presented by: Ryan Davis, Winderweedle, Haines, Ward & Woodman, P.A.; David Samole, Kozyak Tropin Throckmorton, LLP; Wendy Cramer Townsend, Baker & Hostetler LLP.

Moderated by: Samuel J. Zusmann, Jr., Retired, Holland & Knight LLP

5/15/2018

TANGLED IN A PREFERENCE: STRATEGIES FOR ALL STAGES OF PREFERENCE ACTIONS

Prepetition Planning for Vendors and Counterparties (and Preference Litigation Issues)

By: David A. Samole, Esq. Kozyak Tropin & Throckmorton, LLP

Pre-Bankruptcy Alternatives for Dealing with Financially Distressed Customers: A New Way of Life • Beware: A slow-pay customer who suddenly orders an unusually large volume may be a signal that the customer is stocking up in anticipation of a Chapter 11 filing. Have a discussion with point person at customer.

• If Vendor has large customer base – pre-bankruptcy planning tools should be maintained and developed at beginning of new commercial customer accounts.

[By David A. Samole] 2

Pre-Bankruptcy Alternatives for Dealing with Financially Distressed Customers: Menu of Options 1. Letter of credit: instrument by which a bank assures customer’s payment to vendor/counterparty. If customer does not pay, then vendor gets paid from the bank. 2. Customer deposit: customers place a deposit with vendor for the anticipated shipping orders. 3. Guaranty from Corp Affiliate/Principal 4. Cash on delivery: “pay as you go.”

• Pros & Cons of these alternatives if subsequent bankruptcy

[By David A. Samole] 3

1 5/15/2018

Records Retention – Part I

• Preserve all business records and other documents relating to your (vendor’s) relationship with the customer:

• relating to products or services supplied to the customer, products returned by the customer and payments received from the customer.

• like invoices, billing records, payment records, contracts, amendments, liens, etc.

• Create and maintain a running reconciliation of how much the customer owes vendor and, if applicable, how much vendor owes the customer.

[By David A. Samole] 4

Record Retention – Part II

• These records are important to protect and preserve vendor’s rights in a customer’s bankruptcy to get paid or defend any actions against it that we will discuss today.

• Identify the primary “Point Person” at the customer to address the vendor’s inquiries.

• Document Retention Policy.

• Keep records going back at least 1 year readily available. If bankruptcy is filed, hold on to them for 2 years and ask Legal before disposing.

[By David A. Samole] 5

Critical Vendor/Essential Shipper/ Executory Contract

• Critical vendors are those so vital to the customer’s continued operations that their refusal to continue supplying the customer might result in the termination of those operations and the inability to reorganize.

• Essential shippers provide the customer with specialized or high volume shipping services necessary to the customer’s ongoing operations, and finding another shipper and/or warehouseman would likely prove impossible.

• An executory contract is a contract in which both parties still have continuing obligations. Result would be vendor is required to continue with performance under the contract even in a bankruptcy, until rejected. But debtor needs to stay current during the bankruptcy as well.

[By David A. Samole] 6

2 5/15/2018

Critical Vendors & Essential Shipper Status (Prepetition Legwork) • this relief is typically granted first day of case, or very early on; if truly critical/essential, filing entity is going to advise you well before filing or soon thereafter and discuss business relationship and this treatment.

• try to obtain as part of critical vendor/essential shipper order a release of liability for receiving other payments prior to bankruptcy (i.e. claw backs), though trend is not to be awarded this protection, but can't hurt to ask/push.

• if negotiated with filing entity early in case and approved by the Court, no one can come back and later challenge such payments.

[By David A. Samole] 7

Executory Contract – Assumption Defense (Prepetition Legwork) • Executory contracts and counterparties are listed by the customer debtor at the beginning of the case on its bankruptcy schedules on Schedule G.

• In the world of preferences, a vendor wants on this list assuming it has good intel and communications from the debtor that its agreement will be assumed, with any outstanding debts cured.

• Practice Point: Is every agreement an executory contract – no. Can parties turn almost any agreement into an executory contract? Yes. Setting up a customer relationship properly at the outset or at first signs of financial distress is important.

[By David A. Samole] 8

Executory Contract – Assumption Defense

• Standard to assume/reject an executory contract – Customer’s/Trustee’s “business judgment” – great deference.

• Court generally agree that, having your contract assumed in a bankruptcy case with a court order, subsequently provides a complete defense to prepetition preferentrial transfer liability. Reasoning is that, as part of assuming a contract, the court approves of the “cure” of all pending obligations (pre- and post-bankruptcy obligations) such that if the pre-bankruptcy preferential payments had not been made, those amounts that were due and owing as of the petition date would have been paid as part of the bankruptcy “cure.” See “Kiwi defense” derived from Kimmelman v. Port Auth. of N.Y. & N.J. (In re Kiwi Int'l Airlines, Inc.), 344 F.3d 311 (3d Cir. 2003).

• However, case law also is pretty consistent that a creditor treated as a critical vendor is NOT necessarily a complete defense to preference liability. Cases discuss differences, but logic is unavailing.

[By David A. Samole] 9

3 5/15/2018

MOST IMPORTANT THING YOU WILL HEAR ALL DAY . . .

• “No-fault” law -- subject to many defenses, and 99.99% of cases don't go to trial but get settled; rarely an all-or-nothing proposition; pay for peace.

• When in doubt about whether to take customer’s payment…ALWAYS TAKE THE MONEY!

[By David A. Samole] 10

Litigation Issue # 1: Scope of Contemporanous Exchange in BK Code Sec. 547(c)(1) • Think: Hand shake transaction exchanging cash for goods, like at grocery store. No one would say a debt was created that wasn’t immediately addressed by the cash. • Think back to C.O.D. terms: a truck driver delivers goods and receives a check instead of cash. Contemporaneous exchange? • What if the check is a cashier’s check? • What if check delivery is delayed by truck driver? • Don’t lose sleep over quirky hypotheticals.

[By David A. Samole] 11

Litigation Issue # 1: Contemporaneous Exchange • Legislative History of BK Code Section 547(c)(1) provides that normally a check is a credit transaction. BUT, for purposes of this defense, a transfer involving a check will suffice if presented in the normal course of affairs and is “substantially contemporaneous.” R. Rep. No. 595, 95th Cong., 1st Sess. 373 (1977) [hereinafter cited as H.R. 595], U.S. Code Cong. & Admin. News 1978, pp. 5787, 6329.

• Section 547(c)(1) also codifies those decisions under the Bankruptcy Act, which held that when a cash sale was intended, the acceptance of a check (rather than cash) did not change the character of the transaction to a credit sale if the check was cashed within a reasonable period of time. See, e.g., Engstrom v. Wiley, 191 F.2d 684 (9th Cir. 1951).

[By David A. Samole] 12

4 5/15/2018

Litigation Issue # 2: Interest Allowed on a Preference Judgement? • Yes, prejudgment interest is typically awarded [discretion of court] as part of a preference judgment. Policy is that preference funds were wrongfully withheld from estate. But again, so few of these cases actually go to trial and judgment.

• Key question:from when does interest run? NOT from the date of the transfer itself or the petition date.

• Typically, prejudgment interest is calculated from the date of formal demand on the preference target detailing the transfers sought to be recovered [see In re Cybermech, 13 F.3d 818, 822 (4th Cir. 1994), though if a complaint or amended complaint adds transfers, then can run from the date of the complaint or amended complaint. See In re Sophisticated Communications, Inc. 2007 WL 3216613 (Bankr.S.D.Fla.) (Mark, J.) (Order Awarding Prejudgment Interest)

[By David A. Samole] 13

Litigation Issue #3: Attorneys’ Fees and Costs • American Rule – typically each party is responsible for paying its own fees and costs in litigation.

• Exception: if provided by statute or under parties’ contract. The preference statute in bankruptcy does NOT provide for attorneys fees and costs on a standalone basis.

• Assume a “prevailing party” provision in a contract. Let’s say a preference action is brought to recover payments made pursuant to a contract to an under-secured or fully secured lender who has language in loan document that says gets fees for enforcing its rights and collecting amounts owed under the contract. Doesn’t defending an avoidable transfer lawsuit fall within collection/enforcement rights?

• There is some case law to support this. See, e.g., In re Mac-Go Corp., 2015 WL 1372717 (Bankr.N.D.Ca.) (Novack, J.)(Memorandum Decision on Fee Clauses) (where court awarded preference target its fees and costs successfully defending the action as it needed to establish the bona fides of its secured claim as part of its preference defense)

[By David A. Samole] 14

5 In re Mac-Go Corporation, Slip Copy (2015)

to $62,480.41. The Bank contends that the attorney's fee clauses in the Mac–Go loan documents entitle it to recover KeyCite Yellow Flag - Negative Treatment the fees and costs that it incurred in defensing the Chapter Distinguished by In re Tenderloin Health, N.D.Cal., November 12, 2015 7 Trustee's Bankruptcy Code §§ 547, 548 and 549 claims 2015 WL 1372717 for relief arising from the MacGo loans. 1 The Trustee Only the Westlaw citation is currently available. disagrees. United States Bankruptcy Court, N.D. California. Procedurally, the Bank's request raises further questions. In re : Mac–Go Corporation, Debtor. After trial (and well after the claims bar date), the Bank filed a $346,745.24 proof of claim, which included a Case No. 14–44181 CN secured claim for the $62,480.41 in fees and costs at issue | herein. The Bank alternatively argues that (1) regardless Signed March 20, 2015 of its proof of claim, it is entitled to recover its attorney's fees under Travelers Cas. & Sur. Co. of Am. v. PG & E, Attorneys and Law Firms 549 U.S. 443 (U.S.2007) and its progeny, and (2) that it Mac–Go Corporation, South San Francisco, CA, pro se. is over-secured and thus entitled to reasonable fees and costs under the Mac–Go loan documents pursuant to Adam N. Barasch, Severson and Werson, San Francisco, Bankruptcy Code § 506(b). The Trustee objected to the CA, for Bank of America, N.A. Bank's proof of claim and filed an opposition to the Bank's motion. The Trustee first contends that the fee clauses Dennis D. Davis, Katherine D. Ray, Goldberg, Stinnett, are limited in scope and that the Bank's fees and costs Davis and Linchey, San Francisco, CA, for Mohamed are not covered by them under any circumstances. The Poonja. Trustee alternatively argues that even if the fees and costs do fall within the fee clauses, the Bank is undersecured Jamie P. Dreher, Kelly L. Pope, Downey Brand LLP, and that its request for fees and costs constitutes a time- Sacramento, CA, for Hunt & Sons, Inc. barred unsecured claim. While the Trustee's objection Chris D. Kuhner, Kornfield, Nyberg, Bendes and Kuhner, raises serious questions, most of his arguments will be Oakland, CA, for Elizabeth Macchia. resolved on another day. This decision only addresses whether the Bank's requested fees (analyzed under § 506(b) Dennis D. Miller, Lubin Olson & Niewiadomski LLP, or the Travelers doctrine) fall within the fee clauses in the San Francisco, CA, for First National Bank of Northern Mac–Go loan documents. California. *2 In December 2009, Mac–Go borrowed $250,000.00 Cathleen Cooper Moran, Moran Law Group, Inc., from the Bank and secured the loan by providing the Bank Mountain View, CA, Wayne A. Silver, Law Offices of with a perfected security interest encumbering all of its Wayne A. Silver, Sunnyvale, CA, for Michael J. Macchia. assets, including its inventory, chattel paper, accounts and equipment (the “Mac–Go Loan”). Mac–Go and the Bank Denette A. Mulvaney, Bisno Mulvaney, LLP, Encino, signed three documents as part of the Mac–Go Loan: CA, for First Credit Bank. the Business Loan Agreement (the “Loan Agreement”), the Promissory Note (the “Note”) and the Commercial MEMORANDUM DECISION RE: FEE CLAUSES Security Agreement (the “Security Agreement”). Each contains an attorney's fee clause. Charles Novack, U.S. Bankruptcy Judge a.) Note: Lender may hire or pay someone else to help *1 After numerous motions to dismiss, one summary collect this Note if Borrower does not pay. Borrower judgment motion, and a day long trial, First National will pay Lender that amount. This includes, subject to Bank (the “Bank”) now moves to recover some of any limits under applicable law, Lender's Attorneys' the attorney's fees and costs that it incurred in this fees and Lender's legal expenses, whether or not there adversary proceeding. While the Bank's attorney's fees are is a lawsuit, including attorneys' fees, expenses for substantial, it has (for the moment) limited its request

bankruptcy proceedings (including efforts to modify or were made). This court therefore should also examine the vacate any automatic stay or injunction), and appeals. clause in the Security Agreement. Borrower also will pay any court costs, in addition to all other sums provided by law. This court looks to California law to determine the scope of the Fee Clauses. Bankruptcy Code § 506(b) allows b.) Loan Agreement: Borrower agrees to pay upon over-secured creditors to recover “reasonable fees, costs, demand all of Lender's costs and expenses, including or charges provided for under the agreement or State Lender's attorneys' fees and Lender's legal expenses, statute under which such claim arose.” California is the incurred in connection with the enforcement of this governing law in the Note, Loan Agreement, and Security Agreement. Lender may hire or pay someone else to Agreement. Travelers Cas. & Sur. Co. of Am. v. PG & E, help enforce this Agreement, and Borrower shall pay 549 U.S. 443 (U.S.2007), which upended long-standing the costs and expenses of such enforcement. Costs Ninth Circuit law precluding the award of post-petition and expenses include Lender's Attorneys' fees and legal attorney's fees in bankruptcy litigation, also requires that expenses whether or not there is a lawsuit, including this court apply California law. In Travelers, the Supreme attorneys' fees and legal expenses for bankruptcy Court affirmed the general presumption that “claims proceedings (including efforts to modify or vacate enforceable under applicable state law will be allowed any automatic stay or injunction), appeals, and any in bankruptcy unless they are expressly disallowed.” The anticipated post-judgment collection services. Borrower Court concluded that “[t]he character of [a contractual] also shall pay all court costs and additional fees as may obligation to pay attorney's fees presents no obstacle be directed by the court. to enforcing it in bankruptcy.” Id. at 454 (citations omitted). See also, In re SNTL Corp, 380 B.R. 204, c) Commercial Security Agreement: Grantor agrees to 221 (9th Cir. B.A.P. 2007) aff'd, 571 F.3d 826 (9th Cir. pay upon demand all of Lender's costs and expenses, 2009) (“[W]e hold that attorney's fees arising out of a including Lender's attorneys' fees and Lender's legal prepetition contract but incurred postpetition fall within expenses, incurred in connection with the enforcement the Bankruptcy Code's broad definition of claim ...”). of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Grantor shall *3 The Bank contends that Cal. Civ.Code § 1717 and pay the costs and expenses of such enforcement. Costs Cal.Code of Civ. Procedure § 1021 allow it to recover fees and expenses include Lender's Attorneys' fees and legal under the Fee Clauses. Section 1717 states, in relevant expenses whether or not there is a lawsuit, including part: attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate In any action on a contract, where any automatic stay or injunction), appeals, and any the contract specifically provides anticipated post-judgment collection services. Grantor that attorney's fees and costs, shall also pay all court costs and additional fees as may which are incurred to enforce that be directed by the court. 2 contract ... then the party who is determined to be the party While the Fee Clauses are similar, they are not identical. prevailing on the contract, whether Moreover, neither the Bank nor the Trustee convincingly he or she is the party specified argued which clause governs. The court believes that it in the contract or not, shall be should utilize all three clauses. First, the Note states that entitled to reasonable attorney's fees “in addition to the terms and conditions contained in in addition to other costs.... the Note, it is also subject to the terms and conditions contained in that certain Business Loan Agreement.” Section 1717 only applies in contract actions. Santisas v. Since the Trustee sought to avoid payments made under Goodin, 17 Cal.4th 599, 615 (1998). As a result § 1717 may the Note, the court should at the very least rely on not be applicable herein, as it is unclear whether§§ 547, these two clauses. Second, the Trustee conceded summary 548, and 549 claims for relief are “action[s] on a contract ... judgment on his preference claims because the Bank was [to] enforce that contract.” The court need not, however over-secured (at least when these pre-petition payments resolve this issue, since the Bank is the explicit beneficiary

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 2 In re Mac-Go Corporation, Slip Copy (2015) of the Fee Clauses and need not rely on § 1717. See MRW, (“[I]f the meaning a layperson would ascribe to contract Inc. v. Big–O Tires, LLC, 684 F.Supp.2d 1197, 1202–1203 language is not ambiguous, we apply that meaning.”). (E.D.Cal. 2010) (when a unilateral fee-shifting provision is drafted in favor of the party relying on such provision, *4 The Bank incurred its fees defending against §§ 547, the party seeking fees need not rely on section 1717(a) 's 548 and 549 claims for relief. Since the elements of these “enforced bilateralism”). claims differ, the court must separately analyze whether the Bank may recover the fees incurred in defending them. Instead, the Bank may rely on Cal.Code of Civ. Procedure § 1021, which allows a party to recover attorney's fees in actions other than breach of contract complaints. The Fraudulent Conveyance Claims Section 1021 provides in relevant part that “[e]xcept as The Bank contends that the fee clause in the Loan attorney's fees are specifically provided for by statute, Agreement unambiguously authorizes it to recover its the measure and mode of compensation of attorneys fees, since it encompasses all fees for “bankruptcy and counselors at law is left to the agreement, express proceedings.” The Bank gives this clause too broad or implied, of the parties; but parties to actions or a swath, and ignores the preceding sentences that proceedings are entitled to their costs, as hereinafter fundamentally limit its scope. While the fee clause does provided.” Thus, under § 1021, parties may contract for allow for fees incurred in bankruptcy proceedings, such the recovery of attorney's fees regardless of whether such proceedings must have been “incurred in connection litigation is premised on contract claims, tort claims, with the enforcement of this [Loan] Agreement.” The statutory claims, or otherwise, so long as the fee clause question thus becomes whether defending against the is sufficiently broad to encompass such claims. “[P]arties Trustee's fraudulent conveyance claims required the Bank may validly agree that the prevailing party will be to “enforce” the Loan Agreement. awarded attorney fees incurred in any litigation between themselves, whether such litigation sounds in tort or In his third amended complaint, the Trustee alleged that in contract.” Xuereb 3, Cal.App. 4th at 1341; Exxess twenty-two transfers made by MacGo between February Electronixx v. Heger Realty Corp., 64 Cal.App. 4th 698, 8, 2010 and January 6, 2012 were fraudulent transfers 706 (1998). Examples of such broadly worded language under Bankruptcy Code § 548(a)(1)(B). This code section include clauses that allowed fees: “arising out of the provides in pertinent part: execution of the agreement” (Santisas, 17 Cal. 4th at “The trustee may avoid any transfer ... of an interest 607); “relating to the contract” (Moallem v. Coldwell of the debtor in property ... that was made or incurred Banker Com. Group, Inc. 25 Cal.App.4th 1827, 1831 on or within 2 years before the date of the filing of the (1994)); “to which this Agreement gives rise” (Xuereb, 3 petition, if the debtor voluntarily or involuntarily— Cal.App.4th at 1342); incurred in “any dispute under the agreement” (Thompson v. Miller, 112 Cal.App.4th 327, (B)(I) received less than a reasonably equivalent value 333 (2003)); incurred in “any dispute” (Maynard v. BTI in exchange for such transfer or obligation; and Group, Inc., 216 Cal. App. 4th 984, 993 (2013); incurred pursuant to a “civil action instituted in connection with (ii) was insolvent on the date that such transfer was this Agreement” (Cruz v. Ayromloo, 155 Cal.App. 4th made or such obligation was incurred, or became 1270, 1277 (2007)). insolvent as a result of such transfer or obligation.

This court cannot look past the express terms of the Fee The Bank obtained summary judgment on these claims Clauses (Cal. Civ.Code § 1639) if their language is “clear because it demonstrated, not surprisingly, that Mac–Go and explicit, and does not involve an absurdity” Cal. received “reasonably equivalent” value in exchange for Civ.Code § 1638. The Fee Clauses will be construed “in these transfers. Greenspan v. Orrick, Herrington & Sutcliffe their ordinary and popular sense, rather than according to LLP (In re Brobeck, Phleger & Harrison LLP), 408 their strict legal meaning” unless the parties use language B.R. 318, 341 (Bankr.N.D.Cal. 2009). Section 548(d)(2) in a “technical sense” or usage indicates the language is to (A) defines “value” as the “satisfaction or securing of a be given “special meaning.” See Santisas 17 Cal.4th at 608 present or antecedent debt of the debtor.” The twenty-two transfers were, in fact, MacGo payments on the Mac–Go

Loan. “To the extent a transfer constitutes repayment of and a related release. When one investor asserted a fraud the debtor's antecedent or present debt, the transfer is not claim against the other, the defendant successfully relied constructively fraudulent.” Official Comm. of Unsecured on the release language, and thereafter filed a motion Creditors v. Hancock Park Capital II, L.P. (In re Fitness to recover his attorney's fees. The release's fee clause Holdings Int'l, Inc.), 714 F.3d 1141, 1145–1146 (9th Cir. provided that “[i]n the event action is brought to enforce 2013). the terms of this [Release], the prevailing party shall be paid his reasonable attorney fees and costs incurred The Trustee's fraudulent conveyance claims did not therein.” The court of appeal reversed the trial court's directly question the validity of the Loan Agreement or award of attorney's fees. It determined that where “a Note. In fact, the Trustee appeared to be ignorant of defense to a tort action based on a provision of the the existence of the Mac–Go Loan and believed that the contract may have the effect of enforcing the provisions transfers had been made entirely for the Macchias' benefit. of the contract .. [t]he assertion of a defense does not The Bank's defense against these claims, however, was constitute the bringing of an action to accomplish that premised on the validity of the Loan Agreement and Note. goal.” Gil, 121 Cal.App. 4th at 744. Simply, the court held It successfully argued that the Note and Loan Agreement that the phrase “brings an action to enforce the contract” were valid, enforceable agreements that required Mac–Go was “quite narrow.” Id. to make the twenty-two payments in question. 3 Utilizing the Note and Loan Agreement in order to retain these While the Exxess and Gil decisions are distinguishable payments is the functional equivalent of relying on these by reason that the Loan Agreement is not limited to documents to pursue a collection action. Both should parties who “bring” an action, these cases also clash qualify as the “enforcement” of the Loan Agreement and with California Supreme Court caselaw (and intermediate Note. appellate decisions) which reject the proposition that California courts should narrowly interpret fee clauses. *5 There is California case law, however, that holds to The California Supreme Court has held that fee the contrary. For example, in Exxess Electronixx v. Heger provisions are subject to “the ordinary rules of contract Realty Corp., 64 Cal.App. 4th 698 (1998), the court of interpretation.” Santisas, 17 Cal.4th at 608 (emphasis appeal examined whether a real estate broker sued on added). See also Mountain Air Enterprises, LLC v. several tort claims could rely on an attorney's fee clause Sundowner Towers, LLC, 231 Cal.App. 4th 805, 818, n.7 in a lease to recover its fees. In Exxess, the plaintiff (2014). In addition, other California courts have expressly asserted tort claims against a real estate broker which rejected Exxess and Gil and hold that a defendant may had negotiated its lease. The parties settled the case, and recover attorney's fees under the terms of a contract the broker sought to recover its attorney's fees under a which formed its defense. For example, in Windsor Pacific lease provision that read that “[i]f any Party or Broker LLC v. Samwood Co., Inc., 213 Cal.App. 4th 263 (2013), brings an action or proceeding to enforce the terms hereof Windsor contended that it held prescriptive easement or declare rights hereunder, the Prevailing Party ... or rights which allowed it to use certain roads on Shadow's Broker ... shall be entitled to reasonable attorney's fees.” property. It then sued Shadow to enforce these rights. The broker argued that because its defense required that it Shadow prevailed in the litigation, and it sought attorney's assert an “as is” clause in the lease, it effectively enforced fees under a fee clause in the easement document that the lease. While the court of appeal agreed that asserting authorized the prevailing party to recover fees “[i]n any the defense may have had the effect of “enforcing the terms action or proceeding to enforce or interpret the provisions of the lease,” it refused to award fees because the real of this agreement.” The trial court denied the request estate broker had not asserted any affirmative claims and for attorney's fees but the court of appeal reversed. It thus had not ‘brought” an action or proceeding. Exxess reasoned that an “an action in which a party seeks to Electronixx, 64 Cal.App. 4th at 712. enforce or interpret a contract in connection with ... a defense alleged in an answer will constitute an action to In Gil v. Mansano, 121 Cal.App. 4th 739 (2004), the court ‘enforce or interpret’ the contract.” Id. at 275. 4 also narrowly interpreted an attorney's fees clause in a release and rejected the defendant's fee motion. Here, two In Finalco, Inc. v. Roosevelt, 235 Cal.App.3d 1301 (1991), real estate investors were parties to a purchase agreement the court similarly determined that using a contract

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 4 In re Mac-Go Corporation, Slip Copy (2015) provision as a defense to tort litigation is akin to enforcing to receive more than such creditor would receive if—(A) the contract's terms. There, a lender sued a borrower the case were a case under chapter 7 of this title; (B) to collect on its promissory note. The borrower cross- the transfer had not been made; and (C) such creditor claimed, asserting fraud and misrepresentation claims, received payment of such debt to the extent provided by along with numerous violations of federal and state the provisions of this title.” securities laws. The trial court dismissed the borrower's claims and awarded the lender its attorney's fees in The Bank successfully argued that it was fully secured defending against the cross-claims based on a fee clause when it received the payments in question, and that that required the borrower “to pay all costs of collection ... the Trustee therefore could not establish that the Bank including, without limitation, all attorney's fees and received more than it would have in a hypothetical expenses and court costs.” The court of appeal upheld Chapter 7 case. See, e.g., Batlan v. Transamerica Commer. the fee award and held that the lender's defense was Fin. Corp. (In re Smith's Home Furnishings, Inc.), 265 F.3d “inextricably intertwined” with its collection efforts and 959, 971 (9th Cir. 2001). This argument required the Bank that it had to defend against borrower's fraud claims in to establish that it had (at the relevant times) a perfected order to collect on the note. Id. at 1308. “[A] borrower's security interest in Mac–Go collateral, the value of which obligation to pay attorneys' fees incurred in the collection was equal to or exceeded the amount due under the of [a] note includes attorneys' fees incurred in defending Mac–Go Loan. The Trustee conceded these points when against a challenge to the underlying validity of the he dismissed his preference claims. The question here is obligation.” Id. See also Siligo v. Castellucci, 21 Cal. App. whether the Bank's efforts constituted the “enforcement” 4th 873 (1994); MRW, Inc. v. Big–O Tires, LLC, 684 of the Security Agreement. F.Supp.2d 1197 (E.D.Cal. 2010); Wagner v. Benson, 101 Cal.App.3d 27, 37 (1980); and Mountain Air Enterprises, Enforcement of a security agreement extends beyond LLC v. Sundowner Towers, LLC, 231 Cal.App. 4th 805 the simple foreclosure of collateral. Secured creditors 2014). frequently use security agreements to establish their priority to receive payments when a third party (such *6 This court agrees with Windsor Pacific and also as a receiver or trustee) liquidates its collateral. This believes that it must follow California Supreme Court issue is regularly litigated in bankruptcy cases, as the caselaw and apply “ordinary” rules of interpretation when Bankruptcy Code has established a firm framework analyzing a fee clause. 5 The Loan Agreement's fee clause regarding how Chapter 11 debtors and Chapter 7 trustees is not limited to the party who “brings” an action. As recover and distribute property of the bankruptcy estate. such, it must also apply to the party who successfully With rare exception, a Chapter 7 trustee cannot disburse defends an action by raising the enforceable terms of to unsecured creditors the proceeds of collateral subject the litigants' binding contract. This is an ordinary and to a perfected security agreement without first fully common sense interpretation of the Loan Agreement's satisfying the secured creditor. Similarly, a Chapter 7 fee clause. Accordingly, the Bank is entitled to recover trustee cannot avoid and recover payments made to a the (reasonable) fees and costs that it incurred defending fully secured creditor on a preference theory. The secured against the fraudulent conveyance claims for relief. creditor, by dint of its secured claim, has a right to retain the allegedly preferential payments. This argument is premised, however, on the secured creditor establishing The Preference Claims the bonafides of its secured claim. This is exactly what The Bank is also entitled to recover the fees in incurred in the Bank did to prevail on the preference claims. Windsor defending against the Trustee's preference claims for relief. Pacific, FinalCo, Siligo, and MRW are equally applicable Bankruptcy Code § 547(b) authorizes the Trustee to avoid in the preference context, and the Bank therefore can transfers of “an interest of the debtor in property (1) to or recover the (reasonable) fees and costs that it incurred in for the benefit of a creditor; (2) for or on account of an defending against the preference claims. 6 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 The Post–Petition Claims filing of the petition; ... and (5) that enables such creditor

*7 Similarly, the Bank can also recover the fees that is fully secured, postpetition payments on such debt does it incurred in successfully litigating the Trustee's § 549 not effect other creditors and the estate derives no benefit claims. A trustee may avoid a transfer under Bankruptcy from avoiding such payments. Dave Noake, Inc, 45 B.R.at Code § 549(a) “(1) that occurs after the commencement of 557. the case; and (2)(A) that is authorized only under section 303(f) or 542(c) of this title; or (B) that is not authorized Thus, for all the same reasons, the Bank can recover the under this title or by this court.” A Trustee may not, fees that it incurred in defending against the Trustee's § however, recover post-petition payments made to a fully 549 claims for relief. The Bank's defense was premised on the Loan Agreement and Security Agreement, which secured creditor. See Weiss v. People Sav. Bank (In re constituted the enforcement of these documents. Three Partners), 199 B.R. 230, 237 (Bankr.D.Mass. 1995). The purpose of § 549 “is to ensure that similarly situated pre-petition creditors are treated even-handedly.” Dave All Citations Noake, Inc. v. Harold's Garage, Inc. (In re Dave Noake, Inc.), 45 B.R. 555, 557 (Bankr.D.Vt. 1984). If a creditor Slip Copy, 2015 WL 1372717

Footnotes 1 The Trustee's claims against the Bank are described at length in the memorandum decision granting the Bank's summary judgment motion and the memorandum after trial. The court presumes that the parties are well versed in these facts, that they recognize that the loan in question was made directly by the Bank to Mac–Go, and that this memorandum does not refer to the personal Macchia loans which Mac–Go guaranteed. Accordingly, this memorandum will only address those facts necessary to make this decision coherent. 2 2 These fee clauses will collectively be referred to as the “Fee Clauses.” 3 That's why the Trustee conceded summary judgment on his fraudulent conveyance claims. 4 The Windsor court expressly acknowledged its conflict with the Exxess and Gil decisions. Id. at 275. 5 When interpreting California law, this court is bound by California Supreme Court precedent. Sec. Pacific Nat'l Bank v. Kirkland, 915 F.2d 1236, 1238 (9th Cir. 1990). In the absence of a controlling decision from the California Supreme Court, “a federal court must predict how the highest state court would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and statements as guidance.” Id. at 1239. 6 This court's research unearthed Williams v. Official Unsecured Creditors' Comm. (In re Connolly), 238 B.R. 475 (9th Cir. B.A.P. 1999), where the BAP held that a secured creditor could not recover the fees that he incurred in prevailing against the plaintiff's preference claim for relief. There, the successful creditor sought fees under the fee clause in its security agreement which authorized fees to “the prevailing party only in connection with the enforcement or interpretation of the security agreement.” Unlike this case, the plaintiff Creditors' Committee sought to avoid the security agreement itself as a preferential transfer. As a result, the BAP held that the litigation addressed the “ownership of the security interest in the promissory note, not the enforcement or the interpretation of the security agreement itself.” Id. at 479. Connolly therefore is distinguishable, as the secured creditor was forced to defend the creation of the security agreement itself.

Florida's Response (CP # 124), the Trustee's Reply (CP# 125), and the arguments of counsel at a hearing on August 2007 WL 3216613 1, 2007. For the reasons set forth below, the Court finds Only the Westlaw citation is currently available. it appropriate to award prejudgment interest on the full United States Bankruptcy Court, amount of the Preferential Transfers from the filing date S.D. Florida. of the Amended Complaint and to determine the interest In re SOPHISTICATED rate in accordance with 28 U.S.C. § 1961. COMMUNICATIONS, INC., Debtor. James Feltman, as Trustee for the Estate of Sophisticated Communications, Inc., Plaintiff, Background v. A full recitation of the procedural and factual background City National Bank of Florida, Defendant. of this adversary proceeding can be found in the Bankruptcy No. 00–17635–BKC–RAM. Memorandum Opinion. A portion of that background | relevant to the Court's decision to award prejudgment Adversary No. 02–1526 BKCRA. interest is repeated below. | Oct. 24, 2007. The Trustee's pursuit of the estate's avoidance actions against City National Bank of Florida (“City National”) Attorneys and Law Firms began with a letter dated March 7, 2002 demanding return of certain alleged preferential transfers (the “Demand Peter D. Russin, Esq., Miami, FL, for Debtor. Letter”). The Demand Letter sought recovery of transfers Brian S. Behar, Esq., Robert J. Edwards, Esq., Aventura, which were alleged to have occurred in August 2000, FL, for Plaintiff. within 90 days of the August 28, 2000 involuntary Chapter 7 bankruptcy petition. By letter dated March Charles W. Throckmorton, Esq., Robert P. Frankel, Esq., 14, 2000, City National responded that it was not Miami, FL, for Defendant. subject to preference liability for any transfers during the preference period, including the August transfers Opinion described in the Demand Letter, because it had held “a security interest in the deposits that are utilized to cover ORDER AWARDING PREJUDGMENT INTEREST the overdrafts” and in any event “payments to cover the overdrafts are not considered antecedent debts.” (Ex. ROBERT A. MARK, United States Bankruptcy Judge. B Trustee's Mem. of Law.) City National maintained and argued this position throughout this proceeding. *1 This adversary proceeding was tried on January 10, Although the Trustee ultimately established that the 2007. At issue were certain transfers from the Debtor, Preferential Transfers were avoidable and recoverable, the Sophisticated Communications, Inc., into a Debtor bank specific transfers ultimately avoided were not the subject account at the Defendant's bank which cured overdrafts in of the Demand Letter. the Debtor's account. The Court issued a Memorandum Opinion on May 25, 2007 (CP # 114) ruling that The Preferential Transfers, which occurred on July 20, these transfers, totaling $690,934.65, were avoidable as 2000, first appeared in the record in the Trustee's preferences under 11 U.S.C. § 547 (the “Preferential Complaint filed on November 12, 2002. The Complaint Transfers”), and that Plaintiff was entitled to a judgment was dismissed with leave to amend because it named in that amount under 11 U.S.C. § 550. The Court the wrong City National entity as the defendant. deferred entry of judgment pending further briefing Subsequently, the Trustee filed the Amended Complaint and argument on whether the judgment should include on December 24, 2002. The Amended Complaint sought prejudgment interest. The Court has considered the in three counts to recover in excess of $15 million from Trustee's Memorandum of Law in Support of an Award City National. Count I sought recovery of preferential of Prejudgment Interest (CP# 122), City National Bank of transfers into the Debtor's account at City National.

Count II sought to recover preferential transfers into a International Administrative Services, Inc., 408 F.3d 689, City National account in the name of a related entity, 709 (11th Cir.2005); Industrial Risk Insurers v. M.A.N. Locin, based on an alter-ego theory. Count III sought Gutehoffnungshütte GmbH, 141 F.3d 1434, 1446–47 (11th recovery of alleged fraudulent transfers from the Debtor Cir.1998). The award of prejudgment interest, however, to Locin and then into Locin's account at City National. must serve to compensate the estate, not penalize the preference defendant. See International Administrative *2 In January 2004, City National moved for summary Services, 408 F.3d at 710; Industrial Risk Insurers, judgment on all counts. The summary judgment motion 141 F.3d at 1446–47. Because prejudgment interest is presented several significant and complex issues and was an exercise of the court's discretion, the award of the subject of substantial briefing and several hearings. prejudgment interest must also be equitable. Osterneck It remained under advisement for an unusually long v. E.T. Barwick Industries, Inc., 825 F.2d 1521, 1536 period of time, nearly two and a half years. The delay, in (11th Cir.1987). No provision of the Bankruptcy Code part, arose from the pendency of an appeal in a related provides that the estate may recover prejudgment interest proceeding which included similar legal issues. In large in an action to avoid a preferential transfer. 5 Collier on part, it was simply delay by the Court in issuing its Order. Bankruptcy ¶ 550.02 [3][b] (15th ed. rev.2007). Relying Neither party was at fault. on federal common law and the authorization in § 550(a) to award the estate “value”, however, courts Ultimately, on June 26, 2006, the Court issued its 25 have awarded prejudgment interest in preference actions. page Order (the “Summary Judgment Order”) (CP# 78). In re Milwaukee Cheese Wisconsin, 112 F.3d 845, 849 The Summary Judgment Order discussed the difference (7th Cir.1997); In re Cybermech, 13 F.3d 818, 822 (4th between collected funds overdrafts and ledger balance Cir.1994); In re Investment Bankers, Inc., 4 F.3d 1556, 1566 overdrafts and ruled that the Trustee could not avoid (10th Cir.1993). transfers which simply cured collected funds overdrafts arising from provisional credits on deposits (S.J. Order 16). Moreover, in limiting the Trustee to pursuing B. Prejudgment Interest Compensates the Estate avoidance of only those transfers curing ledger balance for the Time Value of Money and Compensates the overdrafts, the Court preliminarily rejected the Trustee's Estate's Creditors by Ensuring they Receive an Equal theory that every transfer curing a ledger balance Distribution overdraft during the preference period could be avoided *3 The compensatory purpose served by an award and the amounts aggregated (S.J. Order 3, n. 1). Rather, of prejudgment interest in preference actions is to the Summary Judgment Order preliminarily ruled that compensate the estate for the time value of money only those transfers made on the “darkest day” were of the contested funds withheld by the preference subject to avoidance and recovery. This significantly defendant. Milwaukee Cheese, 112 F.3d at 849 (holding limited the estate's possible recovery since, as to the that prejudgment interest is necessary to fully compensate Debtor's account alone, the Amended Complaint sought a prevailing plaintiff because “[c]ompensation deferred to avoid 22 transfers totaling in excess of $6,000,000. is compensation reduced by the time value of money”); Cybermech, 13 F.3d at 822 (prejudgment interest In September, 2006, the Trustee abandoned Count II. At compensates the estate for the loss of the opportunity trial, he abandoned Count III. Count I of this adversary to accrue interest on the contested funds); Investment proceeding was tried on January 10, 2007. Bankers, 4 F.3d at 1566 (“[a]n award of prejudgment interest would serve to compensate the debtor's estate for [the preference defendant's] use of those funds that were wrongfully withheld from the debtor's estate during the Discussion pendency of the current suit”).

A. The Court has Discretion to Award Prejudgment An additional compensatory purpose in preference Interest in Preference Actions if the Award actions is to ensure equality among the estate's creditors. Compensates the Estate and is Equitable Not awarding prejudgment interest frustrates creditor Entitlement to and the amount of prejudgment interest equality because the preference defendant effectively are to be determined in the court's discretion. In re receives a greater distribution than the other creditors.

If prejudgment interest is not awarded, the estate's other trustee may in exercise of his or her business judgment creditors are under compensated because the preference decide not to pursue preference actions. Only once defendant keeps the interest accrued on the preference the bankruptcy petition is filed, the preference cause to the detriment of the other creditors. Awarding the of action accrues, and the trustee demands return of prejudgment interest allows all the estate's creditors to the preference is the preference defendant wrongfully share equally in both the preference amount and the holding funds of the estate. At that point the preference accrued interest. See Milwaukee Cheese, 112 F.3d at defendant is on notice that it is holding the preference 849 (“the longer the case lasts, the more of the stakes funds in contravention of the Bankruptcy Code and the [preferential creditor] keeps even if it loses (and the is obligated to return those funds to the bankruptcy less the victorious [estate] receives), unless interest is estate. Id. Judgment for the plaintiff determines that the added”); Cybermech, 13 F.3d at 823 (prejudgment interest defendant wrongfully withheld the preference funds from “ensur[es] that all similarly-situated creditors will receive the date of demand. Neponset River Paper, 219 B.R. at the same pro rata share of the interest”). 921 (preference defendant's liability arises upon demand); Investment Bankers, 135 B.R. at 668 (judgment deems preference defendant wrongfully withheld contested funds C. A Judgment Avoiding a Preferential Transfer from the date of demand). Determines that the Contested Funds were Withheld Wrongfully The Court finds it appropriate to begin calculating the Language in the Eleventh Circuit's Administrative Services prejudgment interest not from the date of the Demand decision suggests that the contested funds must be Letter but rather from the date the Amended Complaint wrongfully withheld. 408 F.3d at 710 (“[w]e think that was filed. The Demand Letter identified transfers that policy [of compensation to the plaintiff] is appropriate were not ultimately avoided and did not identify the here, to compensate ‘the debtor's entire estate for the use transfers that were ultimately avoided. Because the of the funds for the period of time in which they were Preferential Transfers were not identified in the Demand wrongfully withheld’ ”) (emphasis added). A judgment Letter, City National was not on notice with respect avoiding a preferential transfer determines the prior to these transfers. It would be inequitable to find that existence of liability under §§ 547 and 550, and the City National was wrongfully withholding the avoided preference defendant's retention of the contested funds transfers as of the Demand Date. The Preferential after the Trustee has elected to avoid the transfer is Transfers were identified upon the filing of the Complaint. wrongful. In re Neponset River Paper Company, 219 Although the Complaint named the wrong City National B.R. 918, 921 (Bankr.D.Mass.1998) (“a judgment on entity, there is no question that at the time of the the [preference] claim does not create liability; it merely Complaint City National had actual notice that it held recognizes and determines the prior existence of the funds of the estate. However, the need to amend the liability”); In re Investment Bankers, Inc., 135 B.R. 659, Complaint to name the correct City National entity 668 (Bankr.D.Colo.1991); In re Independent Clearing caused a delay of approximately one month until the House Co., 41 B.R. 985, 1015 (Bankr.D.Utah 1984), aff'd Amended Complaint was filed. Because this delay is in part and rev'd in part, 62 B.R. 316 (D.Utah 1986). chargeable to the Trustee, it would be inequitable to start calculating prejudgment interest until the date of the Amended Complaint. D. Timing and Calculation Issues *4 The majority of courts awarding prejudgment interest The majority of courts have determined the prejudgment in preference actions start calculating the interest from interest rate in preference actions in accordance with the date of demand. Cybermech, 13 F.3d at 822. Absent 28 U.S.C. § 1961, which provides for postjudgment special circumstances, it would be inequitable to impose interest in federal actions at the Treasury bill rate. See, prejudgment interest from the date of transfer because the e.g., Investment Bankers, Inc., 135 B.R. at 669–670. estate's funds are not wrongfully held as of the transfer The compensatory purpose of prejudgment interest may date. At that time the transfer is simply payment of suggest a higher interest rate in certain circumstances. In a debt. Independent Clearing House, 41 B.R. at 1015. re NETtel Corp., Inc., 327 B.R. 8, 13 (Bankr.D.D.C.2005) Nor is the petition date generally an appropriate date (applying prime rate in a reorganizing Chapter 11 to from which to begin calculating prejudgment interest. A

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 3 In re Sophisticated Communications, Inc., Not Reported in B.R. (2007) compensate the estate for the cost of borrowed funds). 517, 528 (8th Cir.2002) and In re Bellanca Aircraft However, where the estate's opportunity to utilize the Corp., 850 F.2d 1275, 1281 (8th Cir.1988), City National contested funds is limited to accruing interest, the § 1961 argues that prejudgment interest is inappropriate because rate appropriately reflects that opportunity. the Trustee's claims could not be resolved without judicial determination. In both cases, the Eighth Circuit *5 The Court concludes that calculating the prejudgment affirmed each bankruptcy court's exercise of its discretion interest by applying the rates applicable under 28 U.S.C. to deny prejudgment interest. In Armstrong, a good- § 1961 is equitable and appropriate. At the hearing, faith dispute as to liability existed. 291 F.3d at 528. City National acquiesced to this calculation method. The In Bellanca, the amount of the preference payment Trustee in his briefing and at the hearing sought a higher was not ascertainable without a judicial determination. interest rate based on the prime rate and semi-annual 850 F.2d at 1281. Neither case announced a rule compounding. The Trustee, however, did not point to that prejudgment is inappropriate where a judicial any facts in this case which establish that the damage to determination is necessary as to either liability or amount. the estate for the loss of the opportunity to utilize the They simply affirmed the bankruptcy court's exercise of contested funds was greater than a conservative, savings- discretion to deny prejudgment. The decisions are not based utilization of the preference funds. particularly instructive since they do not describe or analyze what circumstances or reasons in those cases led In doing the calculation, the Court finds it appropriate those bankruptcy courts to deny prejudgment interest. to compute the interest in yearly increments utilizing the federal rate under 28 U.S.C. § 1961, applicable for each *6 To the extent Armstrong suggests that prejudgment yearly increment. See Odom v. Frank, 782 F. Supp 50 interest should not be awarded where liability is (N.D.Tex.1991). This calculation method approximates contested, this Court disagrees. Instead, it finds persuasive the Trustee's lost opportunity to utilize the funds. Thus, the holding and analysis in Neponset River Paper the federal rate of 1.43% applicable on December 24, Co. v. Travelers Insurance Co., 219 B.R. 918, 921 2002, is used to calculate interest of $9,880.37 for the (Bankr.D.Mass.1998), aff'd, 231 B.R. 829 (B.A.P. 1st period of December 24, 2002, through December 23, Cir.1998). That court awarded prejudgment interest even 2003. This interest component for year one is added to though preference liability was disputed. The court the Judgment, and interest for year two (December 24, reasoned that regardless of the potential merits of the 2003, to December 23, 2004) is then calculated against the defenses, once a judgment is entered the estate is entitled to new total, applying the 1.27% federal rate applicable on a complete recovery, which includes prejudgment interest December 24, 2003, the start of the second year. The same to compensate the estate for the time value of money. methodology is used for the remaining period through the Neponset River Paper, 219 B.R. at 921. The judgment date of this Order and the yearly calculations are provided determining liability on the preference claim “does not at the end of this Order. create liability; it merely recognizes and determines the prior existence of the liability.” Id. Preference defendants can mitigate any perceived unfairness or hardship by E. Awarding Prejudgment Interest is Equitable reasonably investing the contested funds during the course Because prejudgment interest is awarded in the court's of the litigation. Milwaukee Cheese, 112 F.3d at 849. discretion, the court must examine the facts and More importantly, vis-a-vis the estate and its creditors, the circumstances of each particular case to ensure that an preference defendant-because it actually has the contested award of prejudgment interest is equitable. See Osterneck, funds and the opportunity to invest them-is the most 825 F.2d at 1536. The Court's discretion, however, is appropriate party to bear the risk and it is therefore fair not a license to decide which party deserves the money to impose that risk. Thus, it is not inequitable to impose more. Milwaukee Cheese, 112 F.3d at 849. “[P]rejudgment prejudgment interest in this case even though liability was interest should be awarded unless there is a sound reason disputed. not to do so.” Id. Second, City National argues that the Court should City National makes three arguments that it would be exercise its discretion to deny prejudgment interest inequitable to impose prejudgment interest. First, relying because of the difference between the scope of the initial on two Eighth Circuit cases, In re Armstrong, 291 F.3d

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 4 In re Sophisticated Communications, Inc., Not Reported in B.R. (2007) claims plead in the Amended Complaint and the scope interest, the Court does not find that the delay renders the of the Trustee's ultimate victory. For the proposition award inequitable, where, as here, it was not the Plaintiff's that inflated claims alone are sufficient reason to deny conduct which caused the delay. prejudgment interest City National cites two cases. The first, Osterneck v. E.T. Barwick Industries, Inc., 825 Delay is essentially the loss for which the estate is F.2d 1521 (11th Cir.1987), is inapposite. In Osterneck, being compensated. Milwaukee Cheese, 112 F.3d at 849 the Eleventh Circuit affirmed a district court order (“[d]elay is a reason to award interest, not to avoid reducing the initial award of prejudgment interest by two- interest”). It is not enough to point to some circumstance thirds. However, the district court's reason for reducing that increased the length of the litigation; rather, the the award was that the award of prejudgment interest delaying circumstance must have prolonged the length of exceeded the plaintiff's actual damages and was therefore the litigation in a way that is unfair to the preference punitive. Id. at 1536. The decision had nothing to do defendant. To apply unfairness in a principled manner it with the issue raised here, namely, whether prejudgment must be measured against the compensatory purpose of interest should be disallowed where the initial claim prejudgment interest. For example, where the litigation is greatly exceeds the damages ultimately awarded. delayed because of the plaintiff's error or strategy it may be appropriate to reduce, or in drastic circumstances to City National's second case does relate to inflated damage deny, the award of prejudgment interest. Id. (“Gratuitous claims. In re Windsor Communications Group, Inc., 80 B.R. delay by the party seeking the award—delay that injures 712 (Bankr.E.D.Pa.1987). In Windsor the bankruptcy the other side by forcing it to act as an uncompensated court declined to award prejudgment interest where trustee or investment manager—might be a reason to limit the plaintiff's claims were “overblown,” approximately an award of interest.”) $1.5 million sought contrasted with less than $38,000 recovered. Id. at 724. However, the magnitude of the In this case, the greatest part of the delay resulted from difference between the Trustee's initial claims and ultimate the length of time in which the Court had the Summary victory was not the issue. The reason the court found Judgment Motion under advisement. Delay attributable it appropriate to deny prejudgment interest was that to the judicial branch is neutral as between the parties. the overblown claims caused delay that prejudiced the Milwaukee Cheese, 112 F.3d at 849. Delay attributable defendant. to the judicial branch increases the harm—the loss of the opportunity to invest the contested funds—through no *7 Turning to the issue of delay, City National's fault of either party. It is nevertheless equitable, or at third argument is that it is inequitable to charge it for least not inequitable, to impose prejudgment interest on prejudgment interest for the full length of this litigation. the preference defendant because the preference defendant It argues that it should not be charged for the delay has possession of the contested funds, and therefore, as caused by the necessity to resolve the complex legal issues between the parties, it is in the best position to minimize in this proceeding, by the various motions and Orders or eliminate the loss. which winnowed down the number of transfers at issue in the Trustee's Amended Complaint, by waiting for the In this case, the fact that the Trustee's initial claims were Summary Judgment Order, and by the Trustee failing subject to some winnowing did not create an equitable to identify the Preferential Transfers in the Demand reason to reduce or deny prejudgment interest. To the Letter and failing to name the proper defendant in the extent that this winnowing was attributable to the difficult Complaint. legal issues presented, that is a circumstance inherent in the judicial process. The winnowing of the factual The Court acknowledges that this proceeding was pending allegations from numerous transfers to City National an unusually long time before trial and entry of the throughout the preference period to only the Preferential Memorandum Opinion determining liability. The Court Transfers either was necessary to the “darkest day” also acknowledges that a significant portion of the delay defense and City National's other defenses or followed in ruling on the Summary Judgment Motion was solely naturally once the legal issue was resolved. Moreover, the Court's responsibility. Nevertheless, in reviewing the the inclusion of Count II and III did not unduly delay case law and the purposes served in awarding prejudgment this proceeding. From the record, there was a good-faith

basis to allege that Locin was an alter-ego of the Debtor that awarding prejudgment interest is equitable and (Count II) and to allege that certain transfers from the appropriate to compensate the Plaintiff for the time Debtor through Locin to City National were fraudulent value of the funds constituting the Preferential Transfers. (Count III). Nor can a negative inference be drawn from Therefore, it is— the fact that Counts II and III are inconsistent because it is permissible to plead for alternative, inconsistent relief. ORDERED as follows:

1. The Trustee is awarded prejudgment interest for the period from December 24, 2002, to October 24, 2007, the Conclusion date of this Order, and the Final Judgment being entered separately this day. *8 Resolution of this adversary proceeding took an unusually long time and required analysis of 2. Applying the calculation methodology described in several complex legal issues relating to bank deposits, Section D. above, the Court is awarding prejudgment overdrafts and the application of preference law. interest in the amount of $101,401.77, calculated as Moreover, the ultimate judgment in Plaintiff's favor follows: avoids only a fraction of the transfers subject of the Amended Complaint. Nevertheless, the Court concludes YEAR RATE 1 ANNUAL INTEREST TOTAL

24 Dec. #02 1.43 $9,880.37 $700,815.02 to 23 Dec. #03 %

24 Dec. #03 1.27 $8,900.35 $709,715.37 to 23 Dec. #04 %

24 Dec. #04 2.71 $19,233.29 $728,948.65 to 23 Dec. #05 %

24 Dec. #05 4.37 $31,855.06 $760,803.71 to 23 Dec. #06 %

24 Dec. #06 4.96 $31,532.71 $792,336.42 to 24 Oct. #07 %

3. The Court's Final Judgment, entered this day, will include the prejudgment interest awarded in this Order. All Citations

ORDERED. Not Reported in B.R., 2007 WL 3216613

Footnotes 1 Source: http://www.fede ralreserve.gov/releases/H15/data/weekly_ friday_/H15_TCMNOM_Y1.TXT

Cases that cite this headnote 298 B.R. 37 United States Bankruptcy Court, E.D. New York. [2] Bankruptcy Frivolity or bad faith; sanctions In re BERGER INDUSTRIES, INC., Debtor. Regardless of whether motion to reopen Berger Industries, Inc., Plaintiff, a concluded preference proceeding was v. necessary prerequisite to the filing of sanctions Artmark Products Corp., Defendant. motion by prevailing party, bankruptcy court would consider motion to reopen as Bankruptcy No. 193–19648–353. prerequisite to consideration of the sanctions | motion, where preference proceeding was not Adversary No. 195–1632–353. only dismissed, but formally closed on court's | docket. Aug. 27, 2003. 3 Cases that cite this headnote Synopsis Following entry of order dismissing preference proceeding, defendant moved to reopen proceeding in [3] Bankruptcy order to seek award of sanctions against Chapter 11 Frivolity or bad faith; sanctions debtor's attorneys, and debtor and attorneys' cross- Preference proceeding would be reopened to moved for award of sanctions. The Bankruptcy Court, allow prevailing party to seek award of Rule Jerome Feller, J., held that: (1) no Rule 9011 sanctions 9011 sanctions, where motion to reopen was could be imposed on debtor's attorneys for pursuing filed only four months after the swift closing of preference claims which were prima facie valid, based preference proceeding by clerk of court; four- on attorneys' failure to investigate “ordinary course month delay was not unreasonable under the of business” defense on which preference defendant circumstances. Fed.Rules Bankr.Proc.Rule ultimately prevailed; (2) mere fact that, during course 9011, 11 U.S.C.A. of preference proceeding, debtor had reduced amount Cases that cite this headnote of its preference claims in recognition of supplier's “new value” defense was insufficient to show that preference claims were brought without adequate investigation; but [4] Bankruptcy (3)bankruptcy court, in interests of closing dispute that Frivolity or bad faith; sanctions had lingered for nearly eight years, would not grant Rule 9011 sanctions may not be employed debtor's and its attorneys' cross-motion for sanctions. as automatic penalty against attorney or party advocating the losing side of Motion and cross-motion denied. dispute. Fed.Rules Bankr.Proc.Rule 9011, 11 U.S.C.A.

Cases that cite this headnote West Headnotes (11)

[5] Bankruptcy [1] Federal Courts Frivolity or bad faith; sanctions Ancillary and incidental jurisdiction in In ruling on motion for award of Rule 9011 general sanctions, courts must strive to avoid the Federal courts retain jurisdiction to consider wisdom of hindsight in determining whether ancillary matters, such as sanctions, after pleading was valid when signed, and any and underlying litigation has been finalized. all doubts must be resolved in favor of the

signer. Fed.Rules Bankr.Proc.Rule 9011, 11 U.S.C.A. [9] Bankruptcy Frivolity or bad faith; sanctions Cases that cite this headnote Mere fact that, during course of preference proceeding, Chapter 11 debtor had reduced [6] Bankruptcy amount of its preference claims in Frivolity or bad faith; sanctions recognition of supplier's “new value” defense was insufficient to show that preference Rule 9011 has been violated, and sanctions claims had been initiated without adequate are authorized, where it is patently clear investigation, so as to support award that claim has absolutely no chance of of Rule 9011 sanctions against debtor's success. Fed.Rules Bankr.Proc.Rule 9011, 11 attorneys. Fed.Rules Bankr.Proc.Rule 9011, U.S.C.A. 11 U.S.C.A. Cases that cite this headnote Cases that cite this headnote

[7] Bankruptcy [10] Bankruptcy Frivolity or bad faith; sanctions Frivolity or bad faith; sanctions Ordinarily, in order for plaintiff's counsel Bankruptcy court's conclusion as to to fulfill his obligations under Bankruptcy unreliability of affidavit that Chapter 11 Rule 9011, it will not be necessary for debtor had offered in response to preference him to make a pre-filing investigation into defendant's “ordinary course of business” potential affirmative defenses; however, at defense was not determination that debtor's times, attorney may have responsibility to former director of operations, in offering examine whether there are any obvious opinion in this affidavit as to unusual nature affirmative defenses which bar plaintiff's of preference defendant's collection activity, claims. Fed.Rules Bankr.Proc.Rule 8013, 11 had perjured himself, so as to permit award U.S.C.A. of sanctions against debtor's attorney for 1 Cases that cite this headnote unreasonably and vexatiously multiplying proceedings by relying on perjured affidavit. 28 U.S.C.A. § 1927. [8] Bankruptcy Frivolity or bad faith; sanctions Cases that cite this headnote No Rule 9011 sanctions could be imposed on debtor's attorneys for pursuing preference [11] Bankruptcy claims which were prima facie valid, Frivolity or bad faith; sanctions based on attorneys' failure to investigate While preference defendant, in moving for “ordinary course of business” defense award of Rule 9011 sanctions against debtor's on which preference defendant ultimately attorney for pursuing what it perceived as prevailed, where this potential defense meritless preference claims, failed to present was factually complex and the necessary any evidence substantiating its allegations facts, including relevant industry norms, of perjury, subornation of perjury or were not available to attorneys or their fabrication of evidence, bankruptcy court, in client. Bankr.Code, 11 U.S.C.A. § 547(c) interests of closing dispute that had lingered (2); Fed.Rules Bankr.Proc.Rule 9011, 11 for nearly eight years, would not grant U.S.C.A. debtor's and its attorneys' cross-motion for Cases that cite this headnote sanctions. Fed.Rules Bankr.Proc.Rule 9011, 11 U.S.C.A.

1 Cases that cite this headnote I.

The Debtor was a manufacturer of electric couplings and connectors, steel tubing and conduits. Artmark is Attorneys and Law Firms an importer of industrial components that were crucial to the Debtor in its manufacturing operations. Artmark *39 Angel & Frankel, P.C., By Laurence May, Esq., New supplied product needed by the Debtor to continue York City, for Debtor. operations prior to and after commencement of the Brown & Fox, P.C., By Rodney A. Brown, Esq., New Debtor's bankruptcy case. An involuntary Chapter 7 York City, for Defendant. petition was filed against the Debtor on November 16, 1993 by several steel suppliers. Two days later, an order was entered converting the case to chapter 11 on request MEMORANDUM OPINION AND of the Debtor. On November 13, 1995, the Debtor filed ORDER ON MOTIONS FOR SANCTIONS the complaint which initiated the Preference Action. The JEROME FELLER, Bankruptcy Judge. complaint sought recovery of $177, 631.36 in alleged preferential payments *40 to Artmark made during the Artmark Products Corp. (“Artmark”), the prevailing ninety days preceding commencement of the Debtor's party in the above-captioned preference action involuntary case (“Preference Period”). (“Preference Action”) instituted by Berger Industries, Inc. (“Debtor”), requests the imposition of sanctions The Preference Action was long, bitter and hotly (“Sanctions Motion”) upon Angel & Frankel, P.C., contested. It endured for close to 6 ½ years. There was counsel for the Debtor (“A & F”), for commencing the never any serious dispute as to the existence of the Preference Action on behalf of the Debtor. Artmark elements constituting preferential transfers contained in seeks an order directing payment by A & F of attorneys' 11 U.S.C. § 547(b). At issue throughout the litigation fees, costs and disbursements in the sum of $99, 511.39, were certain affirmative defenses to preferential transfers that it incurred in defending the Preference Action. The contained in 11 U.S.C. § 547(c). Specifically, Artmark Sanctions Motion is brought by Artmark pursuant to asserted from the outset that the challenged transfers FED. R. BANKR. P. 9011 (“Bankruptcy Rule 9011”), were not avoidable on the grounds of the new value FED. R. CIV. P. 11 (“Rule 11”) and 28 U.S.C. § 1927. and/or ordinary course of business affirmative defenses, Having been advised by the Clerk's Office that it was i.e., 11 U.S.C. § 547(c)(1) and 11 U.S.C. § 547(c)(2). necessary to reopen the adversary proceeding to file the Recurring efforts to settle the matter proved futile and Sanctions Motion, Artmark also moves to reopen the discovery disputes were common fare. Artmark filed a Preference Action. A & F opposes reopening of the pre-trial motion requesting sanctions for commencing adversary proceeding and cross moves with the Debtor for the Preference Action, which motion was denied without sanctions against Artmark and its counsel, Brown & Fox, prejudice, as premature. Acknowledging, in part, the P.C., for filing the Sanctions Motion (“Cross–Motion”). new value defense, the Debtor reduced its claim for preferential payments to $77,000.00 and $68,735.00 in Having studied the motion papers, affidavits and January 1997 and July 1998, respectively. Ultimately, exhibits annexed thereto, memoranda of law, considered the Preference Action was the subject of a two day the parties' arguments and reviewed our decision in trial which took place in July 1999. At the outset of the Preference Action, Berger Indus. Inc. v. Artmark the trial, the Debtor, giving some further credence to Products Corp. (In re Berger Indus., Inc.), 260 B.R. 639 the new value defense, reduced its claim for preferential (Bankr.E.D.N.Y.2001), and for the reasons hereinafter set payments to $55,029.37. The entire trial centered on the forth, we grant the motion to reopen and deny both the ordinary course of business affirmative defense asserted Sanctions Motion and the Cross–Motion. by Artmark. Post-trial submissions were filed and post- trial arguments were heard and, on April 12, 2001, we issued our decision sustaining Artmark's ordinary

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 3 In re Berger Industries, Inc., 298 B.R. 37 (2003) 41 Bankr.Ct.Dec. 238 course of business affirmative defense and dismissing the court are well grounded in fact, legally tenable, and not Preference Action. interposed for an improper purpose.

Two weeks after dismissal of the Preference Action, [4] [5] [6] Sanctions may not be employed as in usual course, the adversary proceeding was closed. an automatic penalty against an attorney or a party Approximately four months later, Artmark filed its advocating the losing side of a dispute. Gaiardo v. Ethyl Sanctions Motion and related motion to reopen. A & F Corp., 835 F.2d 479, 482 (3rd Cir.1987). However, it is countered with its Cross–Motion. The parties declined an sometimes difficult to divine the point at which litigation evidentiary hearing. Instead, they opted to rely on oral turns from merely losing to losing and sanctions. To argument and the papers submitted for and against their assist in such determination, lower courts are instructed respective motions. to “resolve all doubts in favor of the signer.” Oliveri v. Thompson, 803 F.2d 1265, 1275 (2d Cir.1986), cert. denied, 480 U.S. 918, 107 S.Ct. 1373, 94 L.Ed.2d 689 (1987). As more fully articulated in an earlier decision of the Second II. Circuit: [1] [2] Whether a motion to reopen a Courts must strive to avoid the concluded adversary proceeding is procedurally necessary wisdom of hindsight in determining preliminary to the filing of a sanctions motion is uncertain. whether a pleading was valid when Federal courts do retain jurisdiction to consider ancillary signed, and any and all doubts must matters, such as sanctions, after the underlying litigation be resolved in favor of the signer. has been finalized. Cooter & Gell v. Hartmarx Corp., But where it is patently clear that 496 U.S. 384, 394–96, 110 S.Ct. 2447, 110 L.Ed.2d 359 a claim has absolutely no chance of (1990). On the other hand, since the Preference Action success..., Rule 11 has been violated. was not only dismissed but also formally closed on the Such a construction serves to punish Court's docket, it is probably the wiser course to consider only those who would manipulate reopening it as a prerequisite to consideration of the the federal court system for ends motions for sanctions. inimicable to those for which it was created. [3] Artmark's Sanctions Motion was filed timely. “[I]t is anticipated that in the case of pleadings the sanctions issue Eastway Constr. Corp. v. City of New York, 762 F.2d 243, under Rule 11 normally will be determined at the end of 254 (2d Cir.1985), cert. denied, 484 U.S. 918, 108 S.Ct. the litigation, and in the case of motions at the time the 269, 98 L.Ed.2d 226 (1987), cert. denied, 488 U.S. 852, 109 motion is decided or shortly thereafter.” FED. R. CIV. S.Ct. 137, 102 L.Ed.2d 109 (1988); accord Rodick v. City of P. 11 advisory committee note on the 1983 amendment. Schenectady, 1 F.3d 1341, 1350 (2d Cir.1993); Associated The filing of the motion to reopen four months after Indem. Corp. v. Fairchild Indus. Inc., 961 F.2d 32, 34–35 the swift closing of the Preference Action by the Court (2d Cir.1992); Stern v. Leucadia Nat'l Corp., 844 F.2d 997, Clerk is not unreasonable under the circumstances at bar. 1005 (2d Cir.1988). Accordingly, we grant Artmark's motion to reopen for the limited purpose of considering the charges that A & F abused the judicial process and, in turn, the charges of A & F that Artmark did likewise. IV. Artmark proclaims that sanctions are mandated because the complaint in the Preference Action was filed absent III. any inquiry or investigation by A & F of the validity of the Debtor's claims. This charge necessarily assumes some Bankruptcy Rule 9011, analogous to Rule 11 under the factual investigation by Artmark. Yet, Artmark fails to Federal Rules of Civil *41 Procedure, imposes a duty on proffer any evidentiary proof that A & F did not conduct attorneys to certify that they have conducted a reasonable an inquiry. Instead, Artmark argues that since it was so inquiry and have determined that any papers filed with the clear from the inception of the Preference Action that it

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 4 In re Berger Industries, Inc., 298 B.R. 37 (2003) 41 Bankr.Ct.Dec. 238 would prevail, A & F could not have possibly conducted circumstances of the case. The Seventh Circuit articulated any pre-filing investigation. this perspective as follows:

It is interesting that Artmark does not claim that A & F Thus how much investigation is reasonable in a given failed to conduct a proper inquiry as to the existence of case is a question of line-drawing. Ordinarily, it will the elements of a preferential transfer before commencing be reasonable for a plaintiff's counsel not to make a the Preference Action. Rather, Artmark contends the A & pre-filing investigation regarding affirmative defenses. F failed to investigate whether affirmative defenses were See In re Western Die Casting Co. 106 B.R. 645, 649 available to prevent recovery of what would otherwise (Bankr.N.D.Cal.1989). However, at times an attorney constitute prima facie preferential transfers under 11 may have a responsibility to examine ‘whether any U.S.C. § 547(b). Thus, the issue presented by Artmark obvious affirmative defenses bar the case.’ (quoting is whether Bankruptcy Rule 9011 places a duty upon White v. Gen. Motors Corp., 908 F.2d 675, 682 (10th a plaintiff to make inquiry into possible affirmative Cir.1990)), (emphasis added) cert. denied, 498 U.S. defenses. 1069, 111 S.Ct. 788 112 L.Ed.2d 850.

In re Excello Press, Inc., 967 F.2d at 1113; Leeds Bldg. Artmark argues that because the affirmative defenses to Prod. Inc. v. Moore–Handley, Inc., 181 B.R. 1006, 1010 preference actions are contained in 11 U.S.C. § 547(c), (Bankr.N.D.Ga.1995) (“Rule 9011, and likewise Rule 11, i.e., the statute itself, the pre-filing duty of inquiry or places no pre-filing duty upon a plaintiff to conduct an investigation by a plaintiff as to affirmative defenses is no inquiry into possible affirmative defenses, except in those different than that required for a prima facia case under unusual or extreme circumstances where such a defense is 11 U.S.C. § 547(b). This proposition does not withstand obvious and needs no discovery to establish.”). analysis and, we believe, must be rejected. Requiring a plaintiff to anticipate affirmative defenses to avoid [8] The success of Artmark's ordinary course of business Bankruptcy Rule 9011 sanctions reorders traditional defense was hardly obvious at the time the complaint was burdens of pleading and would, in effect, impermissibly filed. A & F had information from its client, on which it change the requirement for a reasonable pre-filing inquiry was entitled to rely, which suggested that the payments into pre-filing discovery. See In re Excello Press, Inc., made by the Debtor during the Preference Period were 967 F.2d 1109, 1115 (7th Cir.1992). Indeed, there is not made in the ordinary course. See FED R. CIV. authority suggesting that Bankruptcy Rule 9011 and P. 11 advisory committee's note on 1983 amendment. *42 Rule 11 do not require a plaintiff to conduct an Moreover, in order to prevail on this defense, not only investigation concerning the merits of any affirmative did Artmark have to prove that the payments were made defenses before the case is filed. Nolden v. Athearn, in the ordinary course of business between the Debtor Chandler & Hoffman (In re W. Die Casting Co.), 106 and Artmark, but also according to ordinary business B.R. 645, 649 (Bankr.N.D.Cal.1989) (“Bankruptcy Rule terms. 11 U.S.C. § 547(c)(2)(C). This provision required 9011 does not impose a burden on a plaintiff to conduct objective proof by Artmark that the subject payments pre-filing discovery of an asserted defense. By it terms, were ordinary in relation to the prevailing practices in Bankruptcy Rule 9011 requires a plaintiff only to make its industry, i.e., the industrial components industry. In a reasonable inquiry concerning the factual and legal re Berger Indus., Inc., 260 B.R. at 648; See Lawson v. basis for the plaintiff's own claim.”); Togut v. Sun Bank/ Ford Motor Co. (In re Roblin Indus., Inc.) 78 F.3d 30, 41– Miami, N.A. (In re Concorde Nopal Agency, Inc.), 92 43 (2d Cir.1996). A & F did not have such information B.R. 956, 958 (Bankr.S.D.Fla.1988) (“A Plaintiff is not and could not have been expected to obtain such data required by Rule 11 to determine at his peril, before he prior to commencement of the Preference Action. In sum, files suit, that there is no affirmative defense available to sanctions are not appropriate where, as here, the potential the defendant.”). defense is factually complex and all necessary facts are not available to the plaintiff. [7] A per se rule negating any requirement for a prefiling investigation of affirmative defenses is unacceptable to this Court. The better view, we believe, would make any duty of pre-filing inquiry contingent upon the V.

[9] Payments to Artmark by the Debtor during the We would emphasize that Artmark presented no evidence Preference Period exceeded $190,000. The complaint whatsoever of perjury or subornation of perjury within filed in the Preference Action sought the recovery of the meaning of the federal criminal statutes. A person $177,631.36 in preferential payments. As indicated above, testifying under oath violates the perjury statute, 18 during the course of the lawsuit, the Debtor gave increased U.S.C. § 1621, if he gives false testimony relating to recognition *43 to the new value defense and reduced a material matter with the willful intent to give false its claim, first to $77,000, then to $60,735 and finally, at testimony and not because of confusion, mistake or faulty trial, to $55,029.77. Artmark contends that this changing memory. United States v. Dunnigan, 507 U.S. 87, 94, 113 amount demonstrates that A & F failed to properly S.Ct. 1111, 1116, 122 L.Ed.2d 445 (1993). Subornation of investigate the Debtor's claim. This argument is without perjury is perpetrated when a person “procures another to merit. Artmark cites no authority for the proposition commit perjury”. 18 U.S.C. § 1622. that Bankruptcy Rule 9011 or Rule 11 sanctions are warranted against a law firm on the grounds that it and It is true that the Glusky Affidavit, a subsequent its clients agree during the course of litigation to reduce deposition of Glusky taken by Artmark and Glusky's trial the amount of a claim. On the contrary, abandoning testimony do contain inconsistencies. Overall, however, a claim that appears unlikely to succeed is responsible Glusky's statements were marked by a common thread advocacy to be commended and not an abuse of the which, absent proof to contrary, we must assume were court's process to be deterred. The judicial process benefits declared in good faith and therefore do not rise to the when counsel reduces claims in dispute by objectively level of warranting sanctions under *44 28 U.S.C. § 1927. reappraising the strengths of its position throughout the Whether in his affidavit, deposition or trial testimony, course of litigation. Bankruptcy Rule 9011 and Rule 11 albeit with certain disparities, Glusky stated that, during were not intended to inhibit such activity by permitting it the Preference Period, Artmark departed from prior to be characterized by an adversary as an admission of a collection practices in various ways and threatened to fatal defect in a lawsuit. withhold delivery of new product, unless the Debtor took steps to reduce its outstanding obligations to Artmark for prior product deliveries. Glusky was steadfast in his perception that Artmark exploited the economic leverage VI. it possessed over the Debtor. [10] In July 1998, A & F delivered to Artmark for settlement purposes an affidavit of Steven Glusky, We concluded, after trial, that Glusky's statements lacked the Debtor's former director of operations (“Glusky credibility and reliability. The absence of testimonial Affidavit”). The substance of the Glusky Affidavit was credibility and reliability must not be confused with that there was a change in the pattern of collection perjury and subornation of perjury within the meaning activity by Artmark during the Preference Period. These of 11 U.S.C. § 1621 and 1622. And, we hereby admonish changes included increased monitoring of the Debtor's both Artmark and its counsel for their loose usage of account and altering or threatened altering of an existing such technical terms that have far reaching consequences, business relationship. Artmark labels the Glusky Affidavit particularly on the plight of law firms. It might be recalled as perjurious and charges that A & F was complicit that one of Artmark's key witnesses at trial, Alan Meltzer, in the preparation, proffer and reliance upon that Artmark's former import sales manager, was also found perjurious affidavit. Artmark further asserts that the to lack credibility and reliability. See In re Berger Indus., purpose of the Glusky Affidavit was to fabricate facts Inc., 260 B.R. at 647 n. 10. to rebut Artmark's ordinary course of business defense. Accordingly, Artmarks seeks sanctions pursuant to 28 U.S.C. § 1927, 1 alleging that A & F vexatiously caused the VII. Preference Action to be multiplied, in a misguided attempt to defeat the ordinary course of business defense, as a [11] As indicated above, before the Court is also a Cross– Motion for sanctions filed by A & F and the Debtor. A & F result of its involvement with the Glusky Affidavit. 2 is rightfully critical of the semantics employed by Artmark in its Sanctions Motion. A & F argues that because

Artmark “embroidered its claims with scurrilous charges lingered for almost 8 years; it is time for closure. This of criminality, denial of the motion alone is too lenient memorandum opinion should achieve for A & F what it sought to obtain via the Cross–Motion, a vindication of a result.” 3 Accordingly, A & F requests the Court to i) its name. direct Artmark and its counsel to file a written retraction, reasonably acceptable to the Debtor and A & F, of their charges of perjury, subornation of perjury, fabrication of evidence and extortion; ii) impose monetary sanctions; VIII. and iii) grant whatever relief the Court, in the proper For the forgoing reasons, it is hereby exercise of its discretion, deems just and appropriate. At oral argument on the sanction motions A & F clarified it ORDERED, that the motion to reopen the above- request, advising that the retraction is what is important to captioned adversary proceeding is granted for the limited the firm and that is what A & F really seeks, stressing that, purpose of determining the motions for sanctions; and it “he who steals my purse takes money but he who steals my is further good name takes something more valuable than that.” 4 *45 ORDERED, that the Sanctions Motion filed by Artmark has presented no proof of perjury, subornation Artmark Products Corp. is denied; and it is further of perjury, fabrication of evidence or extortion. To be sure, having been sued by the Debtor in what ORDERED, that the Cross–Motion filed by Berger Artmark considered a meritless lawsuit invited some Industries, Inc. and Angel & Frankel is denied. disappointment, but hardly such strident and extreme remarks. Nonetheless, to direct a written retraction by Artmark and its counsel will only invite more pointless All Citations litigation and incur a further waste of judicial time. The Preference Action, including the sanctions phase, has now 298 B.R. 37, 41 Bankr.Ct.Dec. 238

Footnotes 1 In relevant part, 28 U.S.C. § 1927 provides as follows: Any attorney ... who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses and attorneys' fees incurred because of such conduct. 2 Artmark also argues that the Glusky affidavit warrants sanctions under Bankruptcy Rule 9011. Bankruptcy Rule 9011 is inapplicable to the Glusky Affidavit. The Glusky Affidavit was not presented to the Court by A & F; it was Artmark and not A & F that submitted the Glusky affidavit to the Court. 3 Affidavit of Laurence May, Esq., sworn to October 21, 2001, in opposition to Sanctions Motion and in support of Cross– Motion at P. 17. 4 Hearing transcript of December 11, 2001, at p. 33.

1 Cases that cite this headnote 181 B.R. 1006 United States Bankruptcy Court, N.D. Georgia, [2] Bankruptcy Atlanta Division. Frivolity or Bad Faith; Sanctions Once violation of Bankruptcy Rule 9011 In The Matter of LEEDS BUILDING has been found, bankruptcy court must PRODUCTS, INC., Debtor. impose Rule 9011 sanctions. Fed.Rules LEEDS BUILDING PRODUCTS, INC., Plaintiff, Bankr.Proc.Rule 9011, 11 U.S.C.A. v. 1 Cases that cite this headnote MOORE–HANDLEY, INC., Defendant.

Bankruptcy No. A91–81896–WHD. [3] Bankruptcy | Frivolity or Bad Faith; Sanctions Adv. No. 93–6826A. Bankruptcy court uses objective standard in | deciding whether pleading was filed without May 9, 1995. legal or factual basis or for improper basis Synopsis so as to require award of Rule 9011 Following entry of summary judgment for supplier on sanctions. Fed.Rules Bankr.Proc.Rule 9011, its ordinary-course-of-business defense to Chapter 11 11 U.S.C.A. debtor's preference complaint, supplier moved for award Cases that cite this headnote of Rule 9011 sanctions against Chapter 11 debtor and debtor's attorney. The Bankruptcy Court, W. Homer Drake, Jr., J., held that: (1) debtor's duty under Rule [4] Bankruptcy 9011 to make reasonable prefiling inquiry did not obligate Frivolity or Bad Faith; Sanctions debtor, prior to the filing of its preference complaint, to In deciding whether pleading was filed investigate ordinary-course-of-business defense on which without legal or factual basis or for improper supplier had burden of proof, and (2) supplier failed to purpose in violation of Bankruptcy Rule 9011, establish that preference complaint was filed for improper bankruptcy court may not utilize benefit of purpose of forcing settlement on baseless claim. hindsight, but must focus upon facts and circumstances as they existed at time of Motion denied. filing. Fed.Rules Bankr.Proc.Rule 9011, 11 U.S.C.A.

Cases that cite this headnote West Headnotes (9)

[5] Bankruptcy [1] Bankruptcy Frivolity or Bad Faith; Sanctions Frivolity or Bad Faith; Sanctions To satisfy his prefiling duty of inquiry under Determination as to whether party has Bankruptcy Rule 9011, it is not necessary violated Bankruptcy Rule 9011, by filing for complainant to inquire into possible a pleading without legal or factual basis affirmative defenses to his complaint, except or for improper purpose, is determination in those unusual or extreme circumstances committed to discretion of bankruptcy in which such a defense is obvious and court. Fed.Rules Bankr.Proc.Rule 9011, 11 needs no discovery to establish. Fed.Rules U.S.C.A. Bankr.Proc.Rule 9011, 11 U.S.C.A.

2 Cases that cite this headnote 1 Cases that cite this headnote

[6] Bankruptcy [9] Bankruptcy Frivolity or Bad Faith; Sanctions Frivolity or Bad Faith; Sanctions Chapter 11 debtor's failure to inquire, prior Supplier failed to show that, at time preference to the filing of its preference complaint, into complaint was filed, Chapter 11 debtor had no ordinary-course-of-business defense asserted colorable argument that transfers in question by supplier in precomplaint correspondence were preferential, or that proceeding was between parties was not failure to conduct commenced solely in hopes of extracting reasonable precomplaint inquiry, and did settlement on objectively baseless claim, not subject debtor or its attorney to Rule though supplier had notified debtor, prior to 9011 sanctions when summary judgment was commencement of proceeding, of ordinary- later entered on supplier's ordinary-course- course-of-business defense on which supplier of-business defense; supplier had failed to ultimately prevailed; supplier did not provide provide any evidence in support of its claimed any evidence to support its claimed defense defense prior to commencement of preference until after the filing of debtor's preference proceeding, and defense was not so obvious complaint. Bankr.Code, 11 U.S.C.A. § 547(c) as to make debtor's preference complaint a (2); Fed.Rules Bankr.Proc.Rule 9011, 11 bad-faith filing. Bankr.Code, 11 U.S.C.A. § U.S.C.A. 547(c)(2); Fed.Rules Bankr.Proc.Rule 9011, 11 U.S.C.A. Cases that cite this headnote

1 Cases that cite this headnote

[7] Bankruptcy Attorneys and Law Firms Frivolity or Bad Faith; Sanctions *1007 David B. Kurzweil, Macey, Wilensky, Cohen, Under the right circumstances, filing of Wittner & Kessler, Atlanta, GA, for debtor/plaintiff. complaint to force settlement may qualify as improper conduct prohibited by Bankruptcy William L. Kidd, William L. Kidd, P.C., Duluth, GA, for Rule 9011. Fed.Rules Bankr.Proc.Rule 9011, defendant. 11 U.S.C.A.

1 Cases that cite this headnote ORDER W. HOMER DRAKE, Jr., Bankruptcy Judge. [8] Bankruptcy Frivolity or Bad Faith; Sanctions This matter comes before the Court on the Motion for Sanctions filed on December 27, 1994, by the defendant Complaint is not filed for improper Moore–Handley, Inc. (hereinafter “Moore–Handley”). purpose, so as to subject complainant Moore–Handley's Motion arises in an adversary to Rule 9011 sanctions, simply because proceeding commenced by the debtor Leeds Building claimant seeks settlement after proceeding Products, Inc., (hereinafter “Leeds”) against Moore– has been commenced; complainant's desire Handley to recover allegedly preferential transfers. As for settlement becomes sanctionable only such, the matters involved herein are part of a core when complainant files proceeding which is proceeding over which this Court has jurisdiction. See objectively baseless and lacking in merit in 28 U.S.C. § 157(b)(2)(F). By its Motion, Moore–Handley hopes that other party will settle to cut its requests that this Court impose sanctions upon Leeds litigation costs. Fed.Rules Bankr.Proc.Rule and its counsel pursuant to FED.R.BANKR.P. 9011 for 9011, 11 U.S.C.A. the wrongful filing and prosecution of this action. Both

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 2 Matter of Leeds Bldg. Products, Inc., 181 B.R. 1006 (1995) 27 Bankr.Ct.Dec. 239 parties have briefed the pertinent issues and a hearing was however, Leeds had retained the accounting firm of conducted on March 1, 1995. After careful consideration Bankruptcy Examiners, Inc., to review Leeds' records and of the applicable law and the arguments as presented, the conduct a preference analysis. This analysis revealed that, Court will deny the Motion for the reasons set forth below. during the 90 days immediately preceding the bankruptcy, 235 creditors received aggregate payments in excess of $10,000.00 each from Leeds, and these payments totalled 1 FACTUAL BACKGROUND more than $20.8 million. Based upon the information provided by the Bankruptcy Examiners analysis, Leeds Beginning in August of 1990, the parties to this adversary commenced its action against Moore–Handley, claiming proceeding entered into a commercial relationship. that $185,145.15 in prepetition payments were preferential During that time, Moore–Handley was engaged in the transfers pursuant to 11 U.S.C. § 547(b). 2 Moore– business of distributing wholesale hardware goods, with Handley answered the complaint, asserting once again Leeds as one of its customers purchasing hardware and that any transfers made were protected by the ordinary building materials on an open account. According to an course of business exception of 11 U.S.C. § 547(c)(2). 3 agreement between the two parties, payments from Leeds for its purchases were due either thirty days after the Moore–Handley eventually filed a motion for summary date of the invoice or on the tenth day of the month judgment in this proceeding based upon its ordinary following the date of the invoice. During the course of course of business argument. Accompanying the motion their relationship, Moore–Handley received 176 checks were several pages of financial and accounting statements from Leeds for payment of over 800 invoices. This and spreadsheets pertaining to the transfers in question. business relationship ended, however, on November 22, Upon receiving Moore–Handley's motion, Leeds asked 1991, when Leeds filed a voluntary petition in this Court for and received an extended response time in order to for protection under Chapter 11 of the Bankruptcy Code. allow it to review the documentation provided by Moore– Handley. Once it had the opportunity to consider Moore– Leeds' Chapter 11 plan of reorganization was confirmed Handley's evidence, Leeds filed a response to the motion, by this Court on December 8, 1992. According to the virtually conceding that all transfers were subject to the provisions of the plan, Leeds was charged with the ordinary course of business exception. Shortly thereafter, prosecution and collection of all preference actions. Even the Court entered an order and judgment dated November prior to plan confirmation, however, Leeds conducted 22, 1994, granting Moore–Handley's motion for summary an internal review of its records to identify possible judgment. preference claims. As a result of this review, Leeds sent approximately 60 demand letters, including one to Having prevailed, Moore–Handley filed the Motion sub Moore–Handley dated August 4, 1992, seeking return of judice, arguing that Leeds and its counsel should be allegedly preferential transfers. Utilizing its legal counsel, sanctioned under FED.R.BANKR.P. 9011 for filing and Moore–Handley responded to Leeds' demand letter by pursuing this preference action. Moore–Handley argues claiming all transfers in question were not recoverable that it was improper for Leeds to bring this action after as they were made in the ordinary course of business being advised that the payments in question were within and were in exchange for new value. Almost a year the ordinary course of business. Had Leeds adequately passed before Leeds sent Moore–Handley a supplemental conducted a prefiling inquiry into the ordinary course of demand letter, dated June 10, 1993. Once again, Moore– business exception, contends Moore–Handley, it would Handley responded *1008 by arguing that the transfers have discovered that its claim lacked merit. Instead, were not recoverable and advised Leeds to abandon any Moore–Handley contends that Leeds filed the complaint possible preference action. simply to extract a quick settlement. Leeds opposes the Motion, claiming that it presented a colorable argument On November 12, 1993, Leeds filed in this Court the to the Court *1009 in this proceeding and denying any present adversary proceeding seeking to recover allegedly allegations of improper conduct. preferential transfers. This proceeding was just one of approximately 115 such actions Leeds filed at that time. Prior to filing any of these adversary proceedings,

Donaldson v. Clark, 819 F.2d 1551, 1556 (11th Cir.1987); California Fed. Bank v. Douglas (In re Douglas), 141 DISCUSSION B.R. 252, 256 (Bankr.N.D.Ga.1992) (Cotton, J.). 4 It [1] [2] In bringing this Motion before the Court, is not proper, however, to judge the conduct of a Moore–Handley argues that the conduct of Leeds and party by utilizing the benefit of hindsight. Instead, it is its counsel in this proceeding violates Rule 9011, which important to focus upon the facts and circumstances as provides in pertinent part as follows: they existed at the time of the filing. The rule sets out two separate requirements, the violations of which give rise The signature of an attorney or to sanctions: (1) the court filing must be well grounded a party constitutes a certificate in fact and law and not frivolous; and (2) the document that the attorney or party has must not be filed for improper purposes. See Armwood, read the document; that to the 175 B.R. at 788; see also Phillips v. Burt (In re Burt), best of the attorney's or party's 179 B.R. 297, 300 (Bankr.M.D.Fla.1995); cf. Marsch v. knowledge, information, and belief Marsch (In re Marsch), 36 F.3d 825, 830 (9th Cir.1994) formed after reasonable inquiry it (noting that the two requirements are often overlapping). is well grounded in fact and is Since the allegations made by Moore–Handley suggest warranted by existing law or a good violations of both requirements, the Court will consider faith argument for the extension, them separately below. modification, or reversal of existing law; and that it is not interposed for any improper purpose, such as to harass, or to cause unnecessary A. Legal or Factual Basis to Pleading delay, or needless increase in the [5] In order to ensure that a court pleading is well cost of litigation or administration grounded in fact or law, Rule 9011 imposes upon an of the case.... If a document is attorney a duty of reasonable inquiry before filing. signed in violation of this rule, the Moore–Handley argues here that Leeds failed to make court on motion or on its own such a prefiling inquiry into the facts, otherwise it initiative, shall impose on the person would have known that its preferential transfer action who signed it, the represented party, was completely devoid of merit. In considering Leeds' or both, an appropriate sanction, complaint, the Court notes that it sets forth allegations which may include an order to pay containing the necessary elements of a preferential to the other party or parties the transfer under 11 U.S.C. § 547(b). Moore–Handley does amount of the reasonable expenses not claim that Leeds failed to conduct a proper inquiry incurred because of the filing of the as to the elements of a preferential transfer. Instead, document, including a reasonable it contends that Leeds failed to investigate whether the attorney's fee. ordinary course of business defense applied to prevent the FED.R.BANKR.P. 9011(a). A determination of whether recovery of these preferences. Thus, the issue presented by Leeds has violated Rule 9011 is left to the discretion of this Moore–Handley is whether Rule 9011 places a duty upon Court as the trial court. Skandinaviska–Enskilda Banken a plaintiff to make a reasonable *1010 factual and legal v. C.L.C. Marine Servs., Ltd. (In re SeaEscape Cruises, inquiry into any affirmative defenses that may exist. Ltd.), 172 B.R. 1002, 1014 (S.D.Fla.1994); In re Brown, 152 B.R. 563, 567 (Bankr.E.D.Ark.1993). Once a violation Unusual a position as it seems, case authority exists to has been found, however, the mandatory language of lend arguable support to Moore–Handley's view point. Rule 9011 requires this Court to impose sanctions. In In discussing the general obligations under Rule 11, one re Armwood, 175 B.R. 779, 788 (Bankr.N.D.Ga.1994) court has stated that “[p]art of a reasonable attorney's (Murphy, J.). prefiling investigation must include determining whether any obvious affirmative defenses bar the case.” White [3] [4] The Court must use an objective standard to v. General Motors Corp., 908 F.2d 675, 682 (10th determine if the requirements of Rule 9011 have been met. Cir.1990), cert. denied, 498 U.S. 1069, 111 S.Ct. 788,

112 L.Ed.2d 850 (1991); see also Babb v. Bridgestone/ is a brief pre-filing investigation, not Firestone, 861 F.Supp. 50, 53 (M.D.Tenn.1993) (noting pre-filing discovery. that plaintiff would be justified in filing complaint if it had nonfrivolous argument that known affirmative defense Excello Press, 967 F.2d at 1115 (citation omitted). This was inapplicable). Citing to White as support, the Seventh passage from Excello Press is particularly enlightening Circuit has issued a similar statement within the context of in that it identifies an important practical problem Rule 9011. In re Excello Press, Inc., 967 F.2d 1109, 1113 in requiring any meaningful investigation into possible (7th Cir.1992); see also Lawrence Nat'l Bank v. Edmonds affirmative defenses. Affirmative defenses normally are (In re Edmonds), 924 F.2d 176, 181 (10th Cir.1991). While raised after an action is commenced, and the evidence this Court does not totally reject the views espoused in needed to establish the merits of such a defense is sought White and Excello Press, it is uncomfortable with making through the discovery process. To accept the argument such a general statement pertaining to affirmative defenses Moore–Handley currently is asserting, however, would, and will not do so here. in effect, require a plaintiff to conduct discovery prior to filing a complaint. Such a requirement contravenes the The Court, however, does not find it necessary to take purpose of notice pleading embodied in the Federal Rules a position inconsistent with that expressed by the Tenth of Civil and Bankruptcy Procedure. Therefore, this Court and Seventh Circuits. Read in their narrowest sense, declines to find a general requirement in Rule 9011 that a White and Excello Press stand for the proposition that plaintiff has to make a prefiling investigation into possible there is no per se rule that courts can never impose affirmative defenses. Instead, the Court concludes that sanctions for a party's failure to investigate affirmative Rule 9011, and likewise Rule 11, places no prefiling defenses. See, e.g., Excello Press, 967 F.2d at 1112; see duty upon a plaintiff to conduct an inquiry into possible also F.D.I.C. v. Calhoun, 34 F.3d 1291, 1299 (5th Cir.1994) affirmative defenses, except in those unusual or extreme (applying Rule 11 and citing to Excello Press ). The Court circumstances where such a defense is obvious and needs does not disagree with such a proposition. Nevertheless, no discovery to establish. 5 it seems clear that there is no obligation under Rule 9011 to factually inquire into any and all affirmative *1011 In considering the facts and circumstances of this defenses a party might possibly assert after the filing of adversary proceeding, the Court finds nothing improper the complaint, particularly where the party asserting the in the prefiling conduct of Leeds or its counsel. Within the defense carries the burden of proof. context of a preferential transfer action, the Bankruptcy Code clearly assigns the burden of proof. The debtor This having been said, however, the question remains as carries the burden of proving that the transfers in question to what extent Rule 9011 requires a plaintiff to make were preferential under the terms of 11 U.S.C. § 547(b), an inquiry. In White, the Tenth Circuit said that such a but the creditor has the burden of establishing the requirement exists only where the affirmative defense is an existence of one of the exceptions found in section 547(c), “obvious” one. White, 908 F.2d at 682. In Excello Press, including the ordinary course of business exception. the Seventh Circuit further limited any prefiling duty to 11 U.S.C. § 547(g). Therefore, the Code placed upon investigate defenses by stating the following: Leeds the burden of presenting its case that the transfers in question were preferential transfers, and Rule 9011 A reasonable pre-filing inquiry does required that such an argument be well grounded in fact not require pre-filing investigation and law. There is no question that Leeds did as much when of an affirmative defense when it filed its complaint. subsequent discovery would be beneficial to the development of the In contrast, Moore–Handley carried the burden of underlying facts and to evaluation of establishing the ordinary course of business defense. It the legal validity of that affirmative was not incumbent upon Leeds to conduct a prefiling defense. Rule 9011, like Rule 11, investigation into this defense unless it was so obvious should not be read to conflict with and needed no discovery to establish. Such unusual Rule 8, which authorizes notice circumstances did not exist in this case. In fact, the Court pleading with discovery to follow. finds it hard to imagine any preference action in which the The inquiry required by those rules

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 5 Matter of Leeds Bldg. Products, Inc., 181 B.R. 1006 (1995) 27 Bankr.Ct.Dec. 239 ordinary course of business defense would be so obvious such as to harass, or to cause unnecessary delay, or as to make a preference complaint a bad faith filing. needless increase in the cost of litigation or administration It was proper in this proceeding for Leeds to first file of the case.” FED.R.BANKR.P. 9011(a); see Baker its complaint and then utilize the discovery process to v. Latham Sparrowbush Assocs. (In re Cohoes Indus. determine the validity of Moore–Handley's defense. Terminal, Inc.), 931 F.2d 222, 230 (2d Cir.1991); Valley Nat'l Bank v. Needler (In re Grantham Bros.), 922 F.2d [6] Moore–Handley points out that it had notified 1438, 1443 (9th Cir.1991), cert. denied 502 U.S. 826, 112 Leeds prior to the commencement of the case of its S.Ct. 94, 116 L.Ed.2d 66. In this proceeding, Moore– ordinary course of business defense. The mere fact, Handley contends that Leeds' complaint was filed for the however, that a plaintiff is aware that an affirmative improper purpose of trying to extract a quick settlement. defense may be asserted does not require it to make a The Court notes that the language of Rule 9011 does prefiling investigation into the merits of the defense. This not list an attempt to force a settlement as an improper is particularly true where, as here, the defendant fails to purpose. Nevertheless, the use of the phrase “such as” provide any evidence to support its claimed defense prior signifies that courts may find other conduct sanctionable to the filing. 6 Also, the Court notes that the ordinary even though it is not expressly listed in the Rule. See, e.g., course of business defense is the most common exception Citizens Bank & Trust Co. v. Case (In re Case), 937 F.2d asserted in a preference action. Such an argument is 1014, 1023 (5th Cir.1991) (raising claim simply to delay virtually expected as a matter of course to a preferential collection on note was improper purpose). Therefore, transfer claim. In other words, the fact that Moore– under the right circumstances, filing a complaint to force Handley notified Leeds that it would assert such a a settlement may qualify as improper conduct prohibited common defense did not make the defense an obvious one. by Rule 9011.

In this proceeding, Leeds conducted an inquiry into [8] Nevertheless, seeking a settlement after filing a its own records and recognized that it had sufficient complaint is not sanctionable conduct in and of itself. In evidence to pursue a preferential transfer claim against fact, such conduct is not at all unusual, since more often Moore–Handley. Leeds chose to do so despite being than not civil actions are settled before being presented advised of a possible affirmative defense which Moore– to a court for judgment on the merits. The reason that Handley had the burden of establishing. Once Leeds had settlement often occurs is because the parties find it more the opportunity to review the defense evidence Moore– desirable to reach some sort of agreement early on to avoid Handley provided through discovery, Leeds conceded the high costs of protracted litigation. 8 The Court finds defeat. Such evidence was provided, however, after Leeds nothing objectionable about this practice. The practice commenced its preference action. 7 After objectively does become objectionable and sanctionable, however, viewing all the facts and circumstances as they existed when one party files an action that is objectively baseless at the time of filing, the Court finds that Leeds' and lacking in merit with the hope that the other party will complaint was sufficiently well grounded in law and fact in settle to cut its litigation costs. accordance with Rule 9011. Leeds did enough to learn that it had a colorable preference action, one not defeated by [9] In considering the objective facts and circumstances obvious affirmative defenses. See Excello Press, 967 F.2d of this proceeding, the Court does not find any improper at 1115; cf. White, 908 F.2d at 682 (noting that sanctions conduct on the part of Leeds. Leeds' claim against Moore– are not required where party “has a colorable argument as Handley was not objectively baseless or lacking in merit. to why an otherwise affirmative defense is inapplicable in Leeds had a colorable argument that the transfers in a given situation”). As such, sanctions are not warranted. question were preferential, and the success of Moore– Handley's ordinary course of business defense was not obvious at the time the complaint was filed. It was neither unusual nor objectionable for Leeds to attempt to reach B. Filing for Improper Purpose a settlement with Moore–Handley on the claim in order 9 [7] The second basis by which Leeds may be sanctioned to reduce litigation costs. Therefore, the Court finds under Rule 9011 is in a situation *1012 in which a that Leeds did not file its complaint or any pleadings for document has been “interposed for any improper purpose, improper purposes in violation of Rule 9011.

against Moore–Handley. Furthermore, Leeds did not file its complaint for any improper purposes, even though it attempted to settle its claim with Moore–Handley prior CONCLUSION to an adjudication on the merits. Accordingly, Moore– Handley's Motion for Sanctions is hereby DENIED. Rule 9011 of the Federal Rules of Bankruptcy Procedure places no prefiling duty upon a plaintiff to conduct IT IS SO ORDERED. an inquiry into possible affirmative defenses, except in those unusual or extreme circumstances where such a defense is obvious and needs no discovery to establish. All Citations In this proceeding, Leeds did not violate its prefiling duty under Rule 9011 when it filed its preference action 181 B.R. 1006, 27 Bankr.Ct.Dec. 239

Footnotes 1 The analysis performed by Bankruptcy Examiners revealed that Leeds disbursed approximately $22,872,935.87 during the 90 day preference period. The transfers made to the 235 creditors who received over $10,000.00 each represented 91.27% of the total amount of disbursements Leeds made during that time. 2 This provision provides as follows: 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 (C) such creditor received payment of such debt to the extent provided by the provisions of this title. 11 U.S.C. § 547(b). 3 This provision provides as follows: The trustee may not avoid under this section a transfer— . . . . . (2) to the extent that such transfer was— (A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and transferee; (B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and (C) made according to ordinary business terms. 11 U.S.C. § 547(c)(2). 4 The Court notes that Donaldson is a case interpreting FED.R.CIV.P. 11 and not Rule 9011. Nevertheless, since the bankruptcy rule closely tracks the language of Rule 11 regarding the signing and verification of papers, case law interpreting Rule 11 is applicable to Rule 9011 cases. See Grunewaldt v. Mutual Life Ins. Co. (In re Coones Ranch, Inc.), 7 F.3d 740, 742 n. 4 (8th Cir.1993); Whitney Apartments Assocs. v. McGlamry (In re Whitney Place Partners), 123 B.R. 117, 120–21 (Bankr.N.D.Ga.1991) (Murphy, J.). 5 The Tenth Circuit in White appears to be the source of case authority suggesting that there is a duty on the plaintiff to investigate into possible obvious affirmative defenses. In making this statement, the Tenth Circuit cites as support William W. Schwarzer, Rule 11 Revisited, 101 HARV.L.REV. 1013, 1023–24 (1988). Interestingly, the Court finds nothing within the cited pages which directly supports the Tenth Circuit's statement. 6 Even if Moore–Handley had provided some documentation to support its claim of a defense, it would have been proper for Leeds to commence this proceeding nonetheless. Due to the varying degrees by which courts have applied the exception

of 11 U.S.C. § 547(c)(2), Leeds had a colorable argument that some or all of the transfers at issue were outside the ordinary course of business. 7 By the time Leeds had a chance to review the evidence supplied by Moore–Handley, the Court already had ruled on the ordinary course of business defense in some of the other preference actions commenced by Leeds. Admittedly, the Court applied the defense rather broadly to the benefit of creditors. Leeds, however, was not aware of what kind of approach the Court would take until after it commenced this proceeding. 8 This case provides a good example of how expensive litigation costs can become. The Court notes that Moore–Handley's counsel has amassed a surprisingly high bill amounting to over $23,000. 9 The Court notes that Leeds has settled and dismissed most of the over 100 preference actions it commenced in the fall of 1993. Not only has such settlement reduced litigation costs to the parties involved, it has saved this Court a considerable amount of time and judicial resources.

I. Payments involving Secured Creditors

An issue is whether payments to secured creditors are subject to Section 547, and if so, does it matter whether the creditor is under-secured creditors or whether the source of funds originated from the creditor’s collateral.

a. Over-Secured versus Under-Secured Creditors

i. Over-secured Creditors

“The general rule appears to be established that transfers to secured creditors are not preferential, at least to the extent that the property transferred does not exceed the value of their collateral.” In re Villamont-Oxford Assocs. Ltd. P'ship, 236 B.R. 467, 476–77 (Bankr. M.D. Fla. 1999).

[A] creditor that receives payment attributable to a secured claim is not usually “preferred” because secured creditors generally receive 100% of the value of their collateral upon distribution in a Chapter 7 case.... Transfers to a secured creditor within 90 days of bankruptcy do not ordinarily exceed the value of the collateral, and thus do not deplete the debtor's estate or deprive similarly situated creditors of their fair share of the creditor's collateral, because the secured creditor has an identifiable property interest in its collateral or the proceeds derived from the sale of it.

Id. at 478 (quoting In re Schwinn Bicycle Co., 200 B.R. 980, 988 (Bankr. N.D. Ill. 1996)).

ii. Under-secured Creditors

“As a general rule, the question is whether other creditors holding unsecured claims are prejudiced.” Id. (citing Smith v. Associates Commercial Corporation (In re Clark Pipe and Supply Co., Inc.), 893 F.2d 693, 696 (5th Cir. 1990)). “Whether prejudice exists is determined by whether the general unsecured claimants will receive less than 100 percent recovery of their claims.” Id. (citing Kellman v. P.S.E. & G (In re Jolly “N”, Inc.), 122 B.R. 897, 904 (Bankr. D. N.J. 1991)). In this case, the southern district court found that a debt was partially secured by the debtor’s property, and therefore, the creditor held, in part, an unsecured claim. Id. Finding that the other unsecured creditors would not receive 100% of their claim, the court held that because this creditor received funds in application of its unsecured claim within the 90 day preference window, that the creditor did receive “more than it would were this a case under chapter 7.” Id. See Union Bank v. Wolas, 502 U.S. 151, 112 S.Ct. 527, 116 L.Ed.2d 514 (1991) (“When a debtor is insolvent, a transfer to one creditor necessarily impairs the claims of the debtor's other unsecured and undersecured creditors.”). The court then found that “the debtor has carried its burden under section 547(b)(5).” Id.

However, transfers of funds from a debtor’s bank account prior to bankruptcy do not constitute preferential transfers where there is no improvement of position of the creditor. See In re Sys. Interchange Corp., 28 B.R. 157, 158 (Bankr. S.D. Fla. 1983). The court in this case held that where a creditor has a general lien extending to property of the debtor in the creditor’s possession or custody, when the debtor transferred funds from their bank account to a creditor who was undersecured by collateral presently held by the debtor, this payment is not preferential. Id.

II. Payments involving Leases

Trustee unlikely to recover payments under assumed lease under the “new life” theory and due to no improvement.

“Like the creditors in Derritt, GATX occupies a special position by virtue of Section 1110 and by virtue of the “new life” conferred on the subject debt by the bankruptcy court’s approval of the stipulation. Moreover, here it is clear that GATX did not profit at the expense of the estate by receiving payments which would, in any event, have to have been made at the time of the stipulation. Accordingly, even under traditional preference analysis, Plaintiff’s claim must fail.” In re Seidle v. GATX Leasing Corp., 45 B.R. 327 (1984).

“Neither Palmer Clay nor In re Tenna Corp. prohibit the court from considering the actual facts of the case in ascertaining Lincoln’s classification. As Bankruptcy Judge Perris noted, “The hypothetical liquidation under section 547(b)(5) should not ... be conducted in a vacuum.” In re LCO Enters., 137 B.R. at 959 (Perris, J., concurring). Here, the lease was assumed. That assumption fixed Lincoln’s right to immediate payment in full of the prepetition rent in exchange for LCO’s continued possession of the property. The legal effect of that assumption is that the rent payments of $92,007.46 made within the preference period did not operate to improve Lincoln’s position.” In re LCO Enterprises, 12 F.3d 938 (1993).

III. Whether payments are “on account of an antecedent debt.”

Courts are split as to the issue of whether early payments are “on account of an antecedent debt.”

In the David Jones Builder case, there was a note requiring interest to be paid on the 11th of each month. Id. at 688. “One payment was made on January 9, 1989 and one on May 8, 1989.” Id. The court held that “[a]ssuming that the January 9 and May 8 payments were the payments due for January 11 and May 11, 1989, they were paid two and three days early, respectively, and therefore could not be payments on an antecedent debt.” In re David Jones Builder, Inc., 129 B.R. 682, (Bankr. S.D. Fla. 1991).

For purposes of Section 547, an installment loan is not considered a new debt as each installment becomes due, but the entire debt is deemed to have been incurred on the date of the original loan. Barash v. Public Finance Corp., 658 F.2d 504 7 B.C.D. 1438 (7th Cir. 1981). See In re: Anders, 20 B.R. 468 (Bank. M.D. Fla. 1982).

E-DISCOVERY AND BANKRUPTCY: WHAT YOU NEED TO KNOW

Presented by: Adam Losey, Losey PLLC; Daniel Fogarty, Stichter, Riedel, Blain, & Postler, P.A.; James Timko, Shutts & Bowen LLP