Judge Nugent

12-05038 Davis v. Sunflower Bank NA (Doc. # 61) - Document Text


SIGNED this 23rd day of July, 2013.





) Case No. 10-10379
) Chapter 7

Debtor. )
Plaintiff, )

vs. )
Adversary No. 12-5038

Defendant. )



Case 12-05038 Doc# 61 Filed 07/23/13 Page 1 of 16

Motions for leave to amend a complaint should be freely granted in the interest
of justice. But amendments proposed more than 21 days from the filing of an answer
are not always granted, particularly when they have been proposed well after the time
scheduled for amendments, discovery has closed, and pretrial order deadlines set in the
scheduling order have passed. Denial of a motion for leave to amend is appropriate
when the moving party: (1) cannot explain the delay; (2) knew or should have known
the facts underlying the amendment when the original complaint was filed; (3) makes
the complaint a moving target; (4) attempts to salvage a lost cause; or (5) knowingly
delayed raising the issue until the eve of trial.

In this case, the movant, a successor bankruptcy trustee, relies on the nondisclosure
of a document to his predecessor as the basis for adding the novel legal claim
that transfers to the defendant Sunflower Bank, already targeted as § 548(a)
fraudulent transfers, were also preferences paid to the Bank within one year of the
petition date.1 The trustee necessarily asserts, for the first time, that the Bank was “in
control” of the debtor and is, accordingly, a statutory insider.2 The insider “control”
claim is based on a supposedly elusive document. The trustee also seeks to have this
amendment relate back to the date of the original complaint, particularly important
here as more than three years have passed since the underlying bankruptcy case was

Instead of the usual 90-day look back period for preferences, § 547(b)(4)(B)
expands the look back period to 1 year preceding the date of filing where thecreditor was an insider at the time of the transfer.

See § 101(31)(B)(iii).


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filed and the § 546 statute of limitations has otherwise expired.3 After careful review
of the supposedly undisclosed document, I conclude that its contents were incorporated
verbatim into the additional terms of a promissory note signed by the debtor’s officers,
a copy of which was filed with the Bank’s first proof of claim on June 22, 2010,4 and
which was known well enough to the first trustee to fuel his request for clarification
concerning the document’s meaning from the Bank’s then counsel. Indeed, the first
trustee filed a complaint that referred to the control accounts referenced in the
document and sought to recover these same transfers as fraudulent, but did not plead
a § 547 insider preference claim. As explained below, the trustee’s motion to amend
should be denied because the estate’s delay in pleading this new claim is unexplained
and the estate knew of this agreement long before the pleading and discovery deadlines
passed (knowledge with which this trustee is charged), making the complaint a
“moving target.”5


The A-1 bankruptcy case began February 21, 2010 in chapter 11 and a
liquidating chapter 11 plan was confirmed on June 8, 2011. J. Michael Morris was

See Fed. R. Civ. P. 15(c) made applicable to adversary proceedings by Fed.

R. Bankr. P. 7015.
See Proof of Claim No. 60-1.

See Viernow v. Euripides Dev. Corp., 157 F.3d 785, 800 (10th Cir. 1998)
(leave to amend sought 19 months after filing the original complaint and after trialcourt had orally ruled on summary judgment motion termed “a moving target” bythe trial court). The trustee Davis appears by his attorney Kenneth Jack.
Sunflower Bank appears by its attorney Michael P. Alley.


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appointed liquidating trustee. He commenced administration and, on February 21,
2012, two years to the day after the case was filed, he filed this six count adversary
proceeding. In Count IV of his complaint, he alleged that on October 30, 2009, the
debtor signed note 1296 with the Bank and that the note contained an agreement by
which the debtor agreed to borrow the cash value of certain life insurance policies and
deposit them to a “[Bank] controlled account for the payment of operating expenses.”6
He further pled that some of these proceeds were applied to the debts of the debtor or
of another company affiliated with the debtor (A-1 Shoring) and sought to recover those
payments as actual fraudulent transfers under § 548(a)(1)(A). Mr. Morris sought to
avoid other transfers as preferences in other counts of the complaint, but nowhere did
he allege that Sunflower Bank “controlled” the debtor or that the Bank is an insider.

On April 30, 2012, the case was converted to chapter 7 and Mr. Morris appointed
chapter 7 trustee.7 On May 16, I entered an order in the adversary proceeding adopting
the parties report of planning meeting,8 setting three critical deadlines that figure
prominently in this Order: a Fed. R. Civ. P. Rule 26(a)(1) initial disclosures deadline
of May 25, 2012, a deadline to amend pleadings of July 13, 2012, and a discovery
deadline of September 28, 2012. Of these three deadlines, only the discovery period has
been extended and it terminated on November 29, 2012.9 Thus, for Fed. R. Civ. P. 16

See Adv. Dkt. 1, p. 4, ¶ 16.

7 Dkt. 481.

8 Adv. Dkt. 11, 12.

9 Adv. Dkt. 15.


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scheduling purposes, discovery has been closed in this case for seven months and the
pleadings have been closed for a year. On December 21, 2012, the parties jointly moved
to extend the pretrial order deadline to February 1 and the dispositive motions
deadline to February 15, 2013; the Court granted the requested extensions.10

On January 10, 2013, Mr. Morris resigned as trustee and Mr. Davis was
appointed to succeed him. The resignation may have been prompted by the Bank’s
discovery that Morris’s firm had advised it concerning a transaction unrelated to this
case, though the record is sparse concerning the details or the timing of that discovery.
On January 28, 2013, Mr. Davis’s firm was employed to represent the estate in this
and other matters. On January 30, the same day Davis was substituted as party
plaintiff, he filed a motion to extend the final pretrial order deadline to April 4 and the
dispositive motion deadline to April 18.11 He neither sought to reopen discovery or to
extend the time in which to amend the complaint, both of which had long since expired.
An order extending the dispositive motion and pretrial order deadlines was entered
without objection.12 Davis filed this motion to amend the complaint on April 3.13
Sunflower Bank filed its motion for summary judgment on April 18.14 Both parties

Adv. Dkt. 20, 21.

11 Adv. Dkt. 24.

Adv. Dkt. 26.

13 Adv. Dkt. 29.

Adv. Dkt. 33. During the pendency of this amendment motion, the partiescompleted briefing on the summary judgment motion and it was recently placedunder advisement.


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have briefed the amendment motion and the matter is ripe for decision.

The Proposed Amendment

Davis seeks to amend Count III of the complaint to add allegations that
Sunflower Bank was an insider of the debtor by virtue of a “control agreement” and
“relationship of control” between the Bank and the debtor. Because of that
relationship, Davis seeks to invoke the 1-year look back period from the petition date
and recover as a preference, the transfer of $647,397 of life insurance proceeds
borrowed by A-1, deposited in the control account, and applied to A-1's and A-1
Shoring’s debts.15 These appear to be the same transfers that Mr. Morris sought to
avoid in Count IV as fraudulent under § 548(a)(1)(A). Davis justifies the late
amendment with a series of arguments directed at the Bank’s conduct in allegedly not
disclosing the “control agreement” until it filed its summary judgment motion on April
18 and securing Morris’s resignation shortly before the previous set of deadlines were
about to expire. Davis argues that because the Bank had possession of the control
agreement and kept it from Morris, the balance of harm weighs heavily in favor of the
trustee and that the Bank will not be prejudiced by any delay that allowing the
amendment might cause. Moreover, Davis argues that without possession of the
agreement, Morris could not have known of the insider relationship and, naturally,
could not have pleaded it in the first complaint. The Bank says that Morris and it
participated in lengthy and cooperative informal discovery throughout his

See § 547(b)(4)(B).


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administration. Indeed, the Bank says it gave Morris over 3,400 pages of documents.
Davis says that when he received Morris’s file, it contained over 7,600 pages of
documents. Curiously, neither party takes a definitive position on whether the control
agreement was contained in these behemoth files.16 But before we dispose of that issue,
we should first address what the “control agreement” is and whether Morris had notice
of its content in time to allege anything about it in the original February 21, 2012
complaint or to amend it by the July 13, 2012 amendment deadline.

The “Seven Party Agreement” and Promissory Note 1296

Resting in the bankruptcy clerk’s safe are the sealed exhibits to the Bank’s
summary judgment motion, all 896 pages of them. Among them is Exhibit 39, a
document titled “A-1 Plank & Scaffold Mfg. Inc/A-1 Scaffold & Shoring,
LLC/Allenbaugh Family, L.P. Memo Agreement October 9, 2009.”17 We will refer to this
agreement as the trustee does, the “Seven Party Agreement” or “7PA.” In the 7PA, the
Bank agrees to “cover the payroll expenses for” the A-1 entities and the family

It is not apparent that the documents produced by the Bank to Mr. Morrisduring informal discovery were bate-stamped or indexed in some fashion to identifythose documents produced by the Bank in discovery. Nor is it apparent that Mr.
Morris indexed the documents he received in discovery from the Bank to identifythe documents produced by the Bank. The Court observes that the summaryjudgment exhibits are paginated with a letter/6 digit number stamp. For example,
Exhibit 39 (the so-called “control agreement”) is marked SFBMSJ000418-422,
presumably identifying it as a Sunflower Bank Motion for Summary Judgmentdocument. The parties’ identification or indexing of documents produced andreceived in discovery is a common and prudent litigation practice that eliminatesany confusion or dispute whether a particular document was produced, particularlyin a document-intensive case.

Dkt. 36, Ex. 39, pp. 419-422 (sealed).


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partnership for October 9, 2009 in exchange for, among other things, the two A-1
entities and the Allenbaugh family (their owners) agreeing to borrow the cash value
of life insurance policies owned by A-1 Plank, pay a second mortgage of Dwight and
Jenny Allenbaugh, and deposit the balance in the “Sunflower Bank controlled
operating account.”18 The policies were also to be assigned to the Bank as collateral.
Under another part of the agreement, other cash generated by the entities was to be
deposited in the controlled accounts with 70% being applied to the entities’ respective
bank debt and the remainder retained by the entities for the payment of current
expenses as specifically approved by the Bank. The 7PA contains a number of other
very typical workout agreement terms and conditions, all of which are quite favorable
to the Bank. The 7PA specified that it was “in force for no more than 90 days.”

The claims register in this case contains Claim 60-1 of Sunflower Bank, filed in
June of 2010. Attached to that document is a copy of promissory note 1296, the “Note,”
which incorporates the 7PA by reference and verbatim at paragraph 11 nearly the
entire text of the 7PA,19 except that the provisions for the collateral assignment of the
insurance policies and several other matters not germane to this motion have been
stricken through and initialed by the makers, A-1's officers and guarantors. So the
substance of the 7PA has been of record in this case since June 2010 – before Morris’s
appointment as liquidating trustee.

Id. at ¶ 2.

19 Paragraph 11, Additional Terms, recites ¶ 2-10 of the 7PA and thereporting requirements, but omits ¶ 1, not relevant here. Cf. Ex. 39 and Note, ¶ 1.


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Davis implies that neither he nor Morris ever got the 7PA in disclosure or
discovery. He notes that Sunflower never filed a certificate of compliance with the
initial disclosure deadline as our local rules require. Indeed, neither party filed any
certificates concerning discovery matters. And, neither ever complained to the Court
about the other’s failure to comply with discovery requirements of any kind. Sunflower
suggests in its brief that all pre-complaint investigation as well as post-complaint
discovery was done informally and cooperatively among counsel. Davis’s brief contains
a copy of a correspondence thread between Morris and Linda S. Parks, Esq., another
of the Bank’s counsel, in which Morris asks specific questions about the existence of
a control agreement or arrangement that can only have been prompted by his review
of the Note, if not the 7PA itself. This correspondence took place in July of 2011, well
before the complaint was filed.20 In a letter dated July 12, Morris asks about the
insurance policies, the borrowing against them, and how those proceeds were spent.
He notes –

Beginning in October, 2009, it appears SFB [Bank] “controlled” the A1Paccounts at SFB. . . Did anyone at the Debtor have any control ordiscretion over these transfers? *** Also there are several disbursements
for “expenses approved” and “debit force post.” Explain the process forobtaining “approval” of an “expense.” Were any “expenses” presented anddenied “approval?”21

Attorney Parks responded that “SFB had the type of control contemplated by KSA 849-
312(b) . . . in that there [sic] it had a security interest in a deposit account perfected

Adv. Dkt. 53, Ex. C and D.
21 Adv. Dkt. 53, Ex. C.


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by control . . . [b]ut we cannot say that the debtor had no control or discretion.”22 She
went on to note that “[a]s a part of these negotiations, the parties entered into a memo
agreement with A1 Plank and their respective guarantors.”23 Even if Morris didn’t
know about the 7PA before he wrote his letter of July 12, Parks’s response placed him
on notice of its existence shortly thereafter. And, as noted above, even if Morris didn’t
have possession of the 7PA then, he certainly knew of its provisions, likely from his
review of the Bank’s proof of claim and the contents of the Note.24

Morris’s original complaint also demonstrates that he knew of the existence of
the contents of the 7PA as they were quoted in the Note. He referred to the payment
of the insurance loan proceeds into the “bank controlled” account and asserted that the
application of those funds to A-1 debts was an avoidable fraudulent transfer. He had
no less information at hand about the matter of control than does Davis today. That
allows me to conclude that Morris, for whatever reason, opted not to assert that the
Bank was an insider of the debtor or that these payments were avoidable preferences.

Applying Rule 15's Standards for Allowing or Denying an Amendment

Fed. R. Civ. P. 15(a)(2) provides that, after a responsive pleading has been filed,
“a party may amend its pleading only with the opposing party’s written consent or the

Adv. Dkt. 53, Ex. D.

Id. Emphasis added.

24 As noted previously, paragraph 11 Additional Terms of Note 1296 attachedto the Bank’s proof of claim incorporates by reference “THE TERMS,
OCTOBER 9, 2009.”


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court’s leave.”25 Leave to amend is to be “freely given when justice so requires.”26

Granting leave to amend rests in the sound discretion of the court.27 Although Rule 15

should be interpreted with extreme liberality, leave to amend is not to be granted

automatically. In Foman v. Davis, 28 the Supreme Court held:

If the underlying facts or circumstances relied upon by a plaintiff may bea proper subject of relief, he ought to be afforded an opportunity to testhis claim on the merits. In the absence of any apparent or declaredreason-such as undue delay, bad faith or dilatory motive on the part ofthe movant, repeated failure to cure deficiencies by amendmentspreviously allowed, undue prejudice to the opposing party by virtue ofallowance of the amendment, futility of amendment, etc.-the leave soughtshould, as the rules require, be ‘freely given.’29

The Tenth Circuit Court of Appeals has held that denial of leave to amend is

appropriate when the amending party: (1) has no adequate explanation for the delay;30

(2) knows or should have known of the facts upon which the proposed amendment is
Fed. R. Bankr. P. 7015 applies Rule 15 to adversary proceedings.

Fed. R. Civ. P. 15(a)(2).

27 Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 330 (1971).

371 U.S. 178 (1962).

Id. at 182, quoting Fed. R. Civ. P. 15(a).

Minter v. Prime Equip. Co, 451 F.3d 1196, 1206 (10th Cir. 2006); Frank v.

U.S. West, 3 F.3d 1357, 1365-66 (10th Cir. 1993); see also Durham v. Xerox Corp., 18
F.3d 836, 840 (10th Cir. 1994) (“[U]nexplained delay alone justifies the districtcourt's discretionary decision.”); Fed. Ins. Co. v. Gates Learjet Corp., 823 F.2d 383,
387 (10th Cir. 1987) (“Courts have denied leave to amend in situations where themoving party cannot demonstrate excusable neglect. For example, courts havedenied leave to amend where the moving party was aware of the facts on which theamendment was based for some time prior to the filing of the motion to amend.”)

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based but failed to include them in the original complaint;31 (3) makes the complaint
“a moving target;”32 (4) attempts to “salvage a lost case by untimely suggestion of new
theories of recovery;”33 or (5) “knowingly delay[] raising [an] issue until the eve of
trial.”34 Several of these factors militate toward denial of the proposed amendment
while others are not implicated on the record before the Court.

As to the lack of an adequate explanation for the delay, Davis relies on the
alleged unavailability of the 7PA to Morris and himself to explain the need to amend
the petition. But as noted above, the content of the 7PA has been in the record of this
case since at least the time of the filing of the Bank’s claim. That Morris knew the facts
upon which the proposed amendment is based is shown by his specifically seeking to
recover the same transfer as a fraudulent one in count IV, based upon the same facts.
Presumably he made a prudential judgment, after his assessment of the Bank
controlled account and inquiry of Ms. Parks, not to seek avoidance of these transfers

State Distribs., Inc. v. Glenmore Distilleries Co., 738 F.2d 405, 416 (10thCir. 1984).

Viernow v. Euripides Dev. Corp., 157 F.3d 785, 800 (10th Cir. 1998) (Whereleave to amend sought 19 months after filing the original complaint and after trialcourt had orally ruled on summary judgment, trial court termed the case “a movingtarget.”).

Id.; Pallottino v. City of Rio Rancho, 31 F.3d 1023, 1027 (10th Cir. 1994)
(Trial court not required to consider theories seriatim; denial of leave to file secondamended complaint to add new theory was not an abuse of discretion whereprevious legal theory was dismissed, leave filed 8 months after original complaintand not based on newly discovered evidence previously unavailable).

Walters v. Monarch Life Ins. Co., 57 F.3d 899, 903 (10th Cir. 1995).


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as one-year preferences and nowhere in the original complaint is there an allegation
that the Bank is an insider of the debtor. Certainly adding this new allegation at a
stage in the case after the amendment period and discovery are closed, and a summary
judgment motion is pending, serves to make the complaint a “moving target.” The
trustee would still need to prove under this new insider-preference theory that merely
requiring a “control account” renders a secured creditor an insider.

A-1 was a corporation. Section 101(31)(B) defines an insider of a corporation as
a director, an officer, or a “person in control” of it. A “person” is defined as, among other
things, a corporation. The trustee would have to show that the Bank actually controlled
the debtor to prove that per se insider status. A “non-statutory” insider is one whose
relationship to the debtor is not specifically enumerated in § 101(31), but who is closely
related to the debtor and who deals with the debtor at less than arm’s length.35 To
demonstrate that, the trustee would need to show “on the evidence [that the Bank]
remained in control of the company.”36 Only if insider status could be established would
the trustee be able to avoid and recover the alleged transfers that occurred more than
90 days before the A-1 case was filed.

Given that the summary judgment motion is pending and its merit not yet
evaluated, I am unwilling to speculate whether the original claim directed at the

In re U.S. Medical, Inc., 531 F.3d 1272, 1278 (10th Cir. 2008) (Closerelationship alone is insufficient to find a non-statutory insider, not dealing at arm’slength is also required.).

Rupp v. United Security Bank (In re Kunz), 489 F.3d 1072, 1079 (10th Cir.


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insurance proceeds transfers (count IV) is somehow faulty, or whether Davis seeks to
add this new insider-preference claim to “salvage a lost case.” Nor is there any
suggestion that Davis has “knowingly delayed” raising the insider issue. But at this
stage of the proceedings, where a summary judgment motion has been fully briefed,
where formal discovery has been closed, and where informal discovery (albeit by
Davis’s predecessor) has been voluminous, adding an insider-preference claim that is
predicated on establishing that the Bank “controlled” the debtor would require me, in
fairness, to reopen discovery and table the summary judgment motion as well as the
final pretrial order, resulting in considerable delay to all parties.37 In so concluding, I
distinguish between affording the successor trustee some latitude in responsive
briefing and trial preparation given his relative newness to the adversary proceeding
and allowing him to restart the entire pretrial process by adding a new and potentially
contentious claim – one that his predecessor declined to plead. In short, Foman makes
clear that leave to amend is to be “freely” given, but not automatically allowed. It
should not be allowed here.

Successor Trustee Bound by Predecessor Trustee’s Acts

Section 323(a) makes trustees the representatives of the bankruptcy estate who
may sue and be sued on behalf of the estate. Avoidance claims are claims that trustees
assert (or not) on behalf of the estate. That the estate is continuous notwithstanding
the removal or resignation of a trustee is made clear by § 325 which states that a

37 Indeed, the trustee acknowledges in his motion the necessity forsupplemental discovery if his amendment is allowed. See Dkt. 29, ¶ 11.


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vacancy in the office of the trustee “does not abate any pending action or proceeding”
and the successor trustee is substituted automatically for the predecessor in any
pending matter.38 It is also clear that waivers made by a debtor in possession in
chapter 11 bar the chapter 7 trustee of the same estate from pursuing actions waived
even after conversion.39 While no express waiver occurred in this case, Trustee Morris
did not plead the insider-preference claim that Trustee Davis seeks to plead. That
claim is now barred by § 546(a). Even though Morris clearly knew about the “controlled
accounts,” he opted not to allege on behalf of the estate that the Bank was an insider
or assert a preference claim based on the insurance proceeds transfers. As a successor
representative of the same estate, Davis is bound by that decision and its

The Effect of “Disqualification”

Davis also argues that the timing of Morris’s resignation, which was apparently
prompted by the Bank’s discovery of Morris’s law firm’s prior representation of it on
an unrelated matter, operated to deprive him, as successor trustee, of an opportunity
to pursue this new legal theory. As support for that, the trustee includes transcribed
e-mail traffic between two members of the U.S. Trustee’s office setting the above
information out. Davis’s suggestion that the Bank’s refusal to consent to Morris’s

38 Fed. R. Bankr. P. 2012(b).

39 The Tenth Circuit has held that when a chapter 11 debtor in possessionwaives the right to bring an avoidance action against a secured lender, the chapter7 trustee is bound by the same waiver. See In re MS55, Inc., 477 F.3d 1131, 1135
(10th Cir. 2007).


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continuing as counsel to the estate in this action ignores Morris’s firm’s potential
ethical obligations to the Bank that could have arisen out of the prior representation
(about which we know very little). It is certainly possible that the Bank’s permission
would have been necessary to Morris continuing and, while the timing is intriguing,
that fact remains that when a lawyer is informed of a potential conflict of interest, even
one that can be waived, he must either secure a waiver or withdraw.40


Trustee Davis’s motion for leave to amend the complaint, dkt. 29, to assert an
insider-preference claim relating to transfers of life insurance proceeds is hereby

The Court will conduct a status conference in this matter on September 19,
2013 at 9:50 a.m. Counsel shall submit an agreed final Pretrial Order to the Court
by September 16, 2013 for its review.

# # #

See KAN. SUP. CT. RULE 226, KRPC 1.9.


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