- Category: Judge Karlin
- Published on 28 January 2014
- Written by Judge Karlin
- Hits: 138
Farmway Credit Union v. Eilert et al, 13-07037 (Bankr. D. Kan. Jan. 22, 2014) Doc. # 23
SIGNED this 22nd day of January, 2014.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
Henry Anthony Eilert and Case No. 13-41298-13
Betty Lynne Eilert,
Farmway Credit Union,
vs. Adversary No. 13-7037
Henry Anthony Eilert and
Betty Lynne Eilert,
Memorandum Opinion and Order Denying Plaintiff’s/Creditor’s
Motion to File an Amended Complaint and Dismissing Creditor’s
Case 13-07037 Doc# 23 Filed 01/22/14 Page 1 of 10
Farmway Credit Union (“Creditor”) filed an adversary complaint1
against Defendants Henry Anthony Eilert and Betty Lynne Eilert (“Debtors”)
in October 2013. It consisted of 10 substantive lines of text generically
claiming Debtors had obtained $9,185.18 in loans that should not be
discharged under 11 U.S.C. § 523(a)(2) [no further subsection provided].
Debtors filed a motion to dismiss,2 asserting that the complaint failed to state
a claim as required by Fed. R. Civ. P. 12(b)(6), and this Court agreed that
Creditor’s bare allegations did not state a claim.3
Rather than dismissing the complaint, this Court opted to grant
Creditor 14 days to file a motion to amend its complaint, requiring it to
attach the proposed Amended Complaint to its motion as required by D. Kan.
Rule 15.1(a), so that Debtors, and ultimately this Court, could determine
whether the amended complaint now stated a claim. Creditor filed that
motion to amend,4 but Debtors oppose it.5 Creditor has not filed any pleading
in further support of its motion, and the time to do so has expired. Because
the Court finds that the proposed amended complaint still fails to state a
1 Doc. 1.
2 Doc. 9.
3 Doc. 11.
4 Doc. 14.
5 Doc. 19.
Case 13-07037 Doc# 23 Filed 01/22/14 Page 2 of 10
claim, the Court denies Creditor’s motion to amend and dismisses the original
I. Standard for a Motion to Amend
Leave to amend a complaint is freely given when justice so requires.6 A
party is granted leave to amend unless there is “a showing of undue delay,
undue prejudice to the opposing party, bad faith or dilatory motive, failure to
cure deficiencies by amendment previously allowed, or futility of
amendment.”7 A proposed amendment is futile if the amended complaint
would be subject to dismissal.8
Debtors argue the proposed amended complaint would likewise be
subject to dismissal under Rule 12(b)(6), and therefore the Court should deny
the motion to amend. In its order granting the motion to dismiss, subject to
Creditor timely amending its complaint, this Court articulated, in great
detail, the requirements for a legally sufficient claim for the non-discharge of
a debt under 11 U.S.C. § 523(a)(2). In brief, the order stated the complaint
must contain “a short and plain statement of the claim showing that the
6 Fed. R. Civ. P. 15(a)(2).
7 Duncan v. Manager, Dep't of Safety, City & Cnty. of Denver, 397 F.3d 1300, 1315
(10th Cir. 2005) (citation and quotation marks omitted).
8 Anderson v. Merrill Lynch Pierce Fenner & Smith, Inc., 521 F.3d 1278, 1288 (10thCir. 2008).
Case 13-07037 Doc# 23 Filed 01/22/14 Page 3 of 10
pleader is entitled to relief.”9 The complaint must present factual allegations,
that when assumed to be true, “raise a right to relief above the speculative
level,”10 and the complaint must contain “enough facts to state a claim to
relief that is plausible on its face.”11 “Determining whether a complaint states
a plausible claim for relief is a context-specific task that requires the
reviewing court to draw on its judicial experience and common sense. This
contextual approach means comparing the pleading with the elements of the
cause(s) of action.”12 A plaintiff must include in the complaint “either direct or
inferential allegations respecting all the material elements necessary to
sustain a recovery under some viable legal theory.”13 “[T]he complaint must
give the court reason to believe that this plaintiff has a reasonable likelihood
of mustering factual support for these claims.”14
9 Fed. R. Civ. P. 8(a).
10 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
11 Id. at 570.
12 Burnet v. Mortg. Elec. Registration Sys., 706 F.3d 1231, 1236 (10th Cir. 2013)
(internal citations and quotation marks omitted).
13 Bryson v. Gonzales, 534 F.3d 1282, 1286 (10th Cir. 2008). See also Commonwealth
Prop. Advoc., v. Mortg. Elec., 680 F.3d 1194, 1201–02 (10th Cir. 2011) (holding that acomplaint must “sufficiently allege facts supporting all the elements necessary toestablish an entitlement to relief under the legal theory proposed”).
14 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007).
Case 13-07037 Doc# 23 Filed 01/22/14 Page 4 of 10
Creditor’s proposed amended complaint does provide some additional
factual detail and more precise citations to the bankruptcy code, clarifying the
exact subsections of § 523(a)(2) upon which it relies to argue that
[significantly smaller] portions of Debtors’ debt to it should not be
discharged.15 Creditor now argues that a loan Debtors originally sought on
July 16, 2013, in the amount of $2,495.00, is nondischargeable under 11
U.S.C. § 523(a)(2)(C); Creditor’s factual focus on luxury goods and the 90-day
period preceding the bankruptcy further clarifies that Creditor seeks a
determination that this debt is nondischargeable under § 523(a)(2)(C)(i) (I).
That subsection creates a presumption of nondischargeability for “consumer
debts owed to a single creditor and aggregating more than $600 for luxury
goods or services incurred by an individual debtor on or within 90 days” of
bankruptcy. Creditor also argues that a loan Debtors earlier sought— on May
14, 2013 in the amount of $973.91—is nondischargeable under § 523(a)(2)(A),
admitting that because this debt was incurred more than 90 days before the
bankruptcy petition, it cannot rely on the presumption of nondischargeability
contained in § 523(a)(2)(C)(i) (I) for the $973.91 debt.
15 The original complaint sought the non-discharge of $9,185.18. The proposedamended complaint seeks the non-discharge of only $2,495.
Case 13-07037 Doc# 23 Filed 01/22/14 Page 5 of 10
Taking the second argument first, Creditor fails to state a claim under
§ 523(a)(2)(A). As the Court stated in its previous opinion, a successful
§ 523(a)(2)(A) claim requires either direct or inferential allegations respecting
the following elements: (1) debtor used false pretenses, false representations,
or actual fraud; (2) which debtor knew at the time to be false or fraudulent;
(3) with the intent to deceive the creditor; (4) the creditor justifiably relied on
the representation; and 5) creditor sustained damage as a proximate result of
the debtor’s false pretenses, false representations, or actual fraud.16 Here, as
in the first complaint, Creditor fails to allege facts supporting the fourth and
fifth elements; the amended complaint remains silent on whether Creditor
relied on whatever representations Debtors are alleged to have made (and
which representations were purportedly false) and that its damages were
proximately caused by those representations or other fraud. Finally,
considering the heightened pleading standards required by Rule 9(b) when
pleading fraud, the complaint also fails to allege the first element with the
required specificity.17 Thus, Creditor fails to state a claim directly under
16 See Barenburg v. Burton (In re Burton), No. CO-10-022, 2010 WL 3422584, at *4
(10th Cir. BAP Aug. 31, 2010) and Memorandum Opinion and Order GrantingDefendants’/ Debtors’ Motion to Dismiss, but Granting Plaintiff Fourteen Days toAmend (Doc. 11).
17 Perhaps Creditor hoped that attaching an exhibit (Exhibit A referenced inparagraph 8 of the proposed amended complaint) might provide the required specificity, butif so, it didn’t assist because the Exhibit was not, in fact, attached. Debtors noted this
Case 13-07037 Doc# 23 Filed 01/22/14 Page 6 of 10
Creditor also fails to state a claim with respect to the July 16, 2013.
loan, which Creditor seeks to have declared nondischargeable pursuant to
§ 523(a)(2)(C)(i)(I). To state a claim under § 523(a)(2)(C)(i)(I), a creditor must
allege facts supporting the following elements: the debt is “(1) a consumer
debt; (2) owed to a single creditor; (3) aggregating more than $600; (4) for
luxury goods or services; (5) incurred by an individual debtor; and (6) on or
within 90 days before the filing of the petition.”18 The fourth element, that the
debt be for luxury goods or services, refers to a vendor's right to payment for
luxury goods or services sold directly to a debtor, not to a lender's right to
repayment of a cash loan that was eventually used to purchase a luxury good
or service.19 As a result, § 523(a)(2)(C)(i)(I) is inapplicable to the cash loan at
issue here. Thus, the proposed amended complaint also fails to state a claim
under § 523(a)(2)(C)(i)(I).
problem in their reply filed two weeks ago, but notwithstanding that notice, Creditor hasnever elected to provide that document or to respond to the Debtors’ reply. The "intent"
element is also not strongly plead, but the word “intent” is at least mentioned twice in theproposed amended complaint.
18 Discover Bank v. Hankins (In re Hankins), No. 12-5114, 2012 WL 5409629, at *3(Bankr. D. Kan. Nov. 5, 2012).
19 Aetna Fin. Co. v. Neal (In re Neal), 113 B.R. 607, 610 (9th Cir. 1990). See also
Beneficial of Mo., Inc. v. Shurbier (In re Shurbier), 134 B.R. 922, 927 (Bankr. W.D. Mo.
1991); Brewer Fed. Credit Union v. D’Amboise (In re D’Amboise), 232 B.R. 540, 542 (Bankr.
D. Me. 1999).
Case 13-07037 Doc# 23 Filed 01/22/14 Page 7 of 10
The Court is aware, as Creditor states, that the facts in this case have
not been fully elucidated because discovery has not been completed.
Certainly, this limits the specificity with which any creditor can make
allegations in a complaint. Nevertheless, a plaintiff must at least allege facts
that directly or indirectly support the elements underlying any given claim.
These facts may change through discovery and additional investigation, but
at a minimum, a complaint should mention each element and in good faith
suggest some way that the plaintiff can eventually muster factual support for
For example, in this case, Creditor could have alleged that it would not
have made a loan to Debtors absent whatever fraud it contends allegedly
occurred, and that Creditor examined the loan application and Debtors’ credit
history and found no reason to doubt Debtors’ fraudulent representation
(whatever that representation might have been here). Bare though it may be,
such allegation would at least minimally allege the required justifiable
reliance element of § 523(a)(2)(A). Failing to mention reliance at all, however,
does not meet this element. Similarly, by failing to mention reliance, this
Creditor also fails to allege its damages were proximately caused by whatever
fraud Debtors allegedly engaged in or misrepresentations they allegedly
Case 13-07037 Doc# 23 Filed 01/22/14 Page 8 of 10
As the Tenth Circuit has clearly noted, “[t]he burden is on the plaintiff
to frame a ‘complaint with enough factual matter (taken as true) to suggest’
that he or she is entitled to relief” and these “[f]actual allegations must be
enough to raise a right to relief above the speculative level.”20 If Creditor’s
allegations in its proposed amended complaint are taken as true, all Creditor
has demonstrated is that Debtors borrowed money to help finance a wedding
within 90 or more days of filing bankruptcy, and thus they must have
intended to defraud Creditor because they did not repay the loan. That is not
One of the principal purposes of the bankruptcy code is to grant honest
debtors a "fresh start." To further this purpose, Congress warns creditors that
if they bring a complaint seeking the non-discharge of a consumer debt and
the debtor ultimately obtains a discharge of that debt, they might well be
20 Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir.2008), quoting Twombly, 550
U.S. at 570.
21 As Judge Nugent recently noted in In re Hankins), 2012 WL 409629 at *4,
“[t]here are several possible inferences that can be drawn from this bare allegation.
Twombly requires a plaintiff to plead ‘factual content that allows the court to draw thereasonable inference that the defendant is liable for the misconduct alleged.’ Plausibilityrequires more than a “sheer possibility” that the defendant is liable under the claimalleged.” In Hankins, the Court noted that at least that creditor alleged debtor’s schedulesshowed no ability to pay for the charges she made to her Discover credit card account.
Case 13-07037 Doc# 23 Filed 01/22/14 Page 9 of 10
liable for payment of the reasonable attorney's fee and other costs associated
with debtors having to defend such actions.22 For that reason, and because of
its desire to hear disputes on the merits, the Court gave this Creditor a
second opportunity to meet its pleading burden, even providing a roadmap
how to meet that burden in its first order, including citations to prevailing
authority. But because Creditor’s proposed amended complaint still fails to
state a claim, the motion to amend the complaint must be denied and the
original complaint is now dismissed.
It is so ordered.
# # #
22 11 U.S.C. § 523(d).
13-07037 Doc# 23 Filed 01/22/14 Page 10 of 10
- Category: Judge Karlin
- Published on 08 January 2014
- Written by Judge Karlin
- Hits: 205
Farmway Credit Union v. Eilert et al, 13-07037 (Bankr. D. Kan. Dec. 19, 2013) Doc. # 12
SIGNED this 19th day of December, 2013.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
Henry Anthony Eilert and Case No. 13-41298
Betty Lynne Eilert, Chapter 13
Farmway Credit Union,
vs. Adversary No. 13-7037
Henry Anthony Eilert and
Betty Lynne Eilert,
Memorandum Opinion and Order Granting Defendants’/ Debtors’
Motion to Dismiss, but Granting Plaintiff Fourteen Days to Amend
Farmway Credit Union (“Creditor”) filed a one and one-half page Rule
Case 13-07037 Doc# 12 Filed 12/19/13 Page 1 of 9
7001(6) adversary complaint against Defendants Henry Anthony Eilert and
Betty Lynne Eilert (“Debtors”), claiming fraud and seeking a determination
that a $9,185.18 debt it claims Debtors owe it is nondischargeable under the
false pretenses, false representation, or actual fraud provisions in 11 U.S.C. §
523(a)(2)(A). Debtors filed a motion to dismiss, asserting that Creditor’s
complaint failed to state a claim as required by Fed. R. Civ. P. 12(b)(6).
Because the Court agrees that Creditor’s bare allegations do not state a
claim, let alone meet the heightened pleading standards required in cases
alleging fraud, under Fed. R. Civ. P. 9(b), the Court will grant Creditor 14
days to amend its complaint. If Creditor fails to do so, the Court will dismiss
I. Factual Allegations in the Complaint
The Court will consider the allegations in Creditor’s complaint together
with the additional allegations in the attachment to Creditor’s response to
Debtors’ motion to dismiss.1 Creditor alleges that, within ninety (90) days of
1 Carson v. Cudd Pressure Control, Inc, 299 F. App’x. 845, 848 (10th Cir.
2008) (considering the complaint in conjunction with the response to determinewhether a plaintiff successfully stated a claim). Facts subject to judicial notice maybe considered in a Rule 12(b)(6) motion without converting the motion to dismissinto a motion for summary judgment. Tal v. Hogan, 453 F.3d 1244, 1265 (10th Cir.
2006). This allows the court to “take judicial notice of its own files and records, aswell as facts which are a matter of public record;” id. In this case, the Court takes
judicial notice of the proof of claim Creditor filed in the Debtors’ main bankruptcycase and which it attached to its response to the motion to dismiss. This was the onlyattachment to the response.
Case 13-07037 Doc# 12 Filed 12/19/13 Page 2 of 9
declaring bankruptcy, Debtors took out multiple loans from Creditor for
amounts in excess of $1000 on open and close ended loans. Creditor alleges
that Debtors stated the loans were to finance a wedding in October 2013. Due
to the time frames involved and the planning necessary to file a petition in
bankruptcy, Creditor alleges Debtors applied for the loans with the intent to
defraud the credit union. Creditor asserts Debtors were contemplating
bankruptcy when they obtained the advances or that Debtors obtained the
advances for purposes other than the stated purpose.
Creditor appears to argue that these facts raise a presumption that the
charges were fraudulent and nondischargeable under 11 U.S.C. §
523(a)(2)(C). Creditor may also be arguing that this debt is nondischargeable
more broadly under 11 U.S.C. § 523(a)(2)(A), but Creditor has not made this
clear from its pleadings.
II. Standard for a Motion to Dismiss
Rule 12(b)(6) provides a vehicle for a party to challenge the legal
sufficiency of a claim. The requirements for a legally sufficient claim stem
from Rule 8(a), which requires “a short and plain statement of the claim
showing that the pleader is entitled to relief.”2 To survive a motion to dismiss,
a complaint must present factual allegations, that when assumed to be true,
2 Fed. R. Civ. P. 8(a).
Case 13-07037 Doc# 12 Filed 12/19/13 Page 3 of 9
“raise a right to relief above the speculative level,”3 and the complaint must
contain “enough facts to state a claim to relief that is plausible on its face.”4
“[T]he complaint must give the court reason to believe that this plaintiff has a
reasonable likelihood of mustering factual support for these claims.”5 The
plausibility standard does not require a showing of probability that a
defendant has acted unlawfully, but requires more than “a sheer possibility.”6
“[M]ere ‘labels and conclusions,’ and ‘a formulaic recitation of the elements of
a cause of action’ will not suffice; a plaintiff must offer specific factual
allegations to support each claim.”7 Finally, the Court must accept the
nonmoving party’s factual allegations as true and may not dismiss on the
ground that it appears unlikely the allegations can be proven.8
Where, as here, a party alleges fraud, Federal Rule of Civil Procedure
3 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
4 Id. at 570.
5 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir.
6 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
7 Kan. Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011)
(quoting Twombly, 550 U.S. at 555).
8 Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).
Case 13-07037 Doc# 12 Filed 12/19/13 Page 4 of 9
9(b)9 requires the party to “state with particularity the circumstances
constituting fraud,” with general allegations only allowed for “malice, intent,
knowledge, and other conditions of a person’s mind.” To survive a motion to
strike, the party alleging fraud must “‘set forth the time, place, and contents
of the false representation, the identity of the party making the false
statements and the consequences thereof.’”10 In other words, the alleging
party must specify the “‘who, what, where, and when of the alleged fraud.’”11
An adversary proceeding to determine the dischargeability of particular
debts is a core proceeding under 28 U.S.C. § 157(b)(2)(I), over which this
Court may exercise subject matter jurisdiction.12
Section 523(a)(2)(A) states, “A discharge . . . does not discharge any
individual debtor from any debt for money, property, services, or an
extension, renewal, or refinancing of credit, to the extent obtained by false
9 Rule 9(b) is applicable in bankruptcy pursuant to Federal Rule of BankruptcyProcedure 7009.
10 Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir. 1997)
(quoting Lawrence Nat’l Bank v. Edmonds (In re Edmonds), 924 F.2d 982, 987 (10thCir. 1992)).
11 Jamieson v. Vatterott Educ. Ctr., Inc., 473 F. Supp. 2d 1153, 1156 (D. Kan.
2007) (quoting Plastic Packaging Corp. v. Sun Chem. Corp., 136 F. Supp. 2d 1201,1203 (D. Kan. 2001)).
12 28 U.S.C. § 157(b)(1) and § 1334(b).
Case 13-07037 Doc# 12 Filed 12/19/13 Page 5 of 9
pretenses, a false representation, or actual fraud, other than a statement
respecting the debtor’s or an insider’s financial condition.” Section
523(a)(2)(C)(I) offers creditors two avenues to raise a presumption of fraud in
the § 523(a)(2)(A) context:
[F]or purposes of subparagraph (A), (I) consumer debtsowed to a single creditor and aggregating more than$600 for luxury goods or services incurred by anindividual debtor on or within 90 days before the orderfor relief under this title are presumed to benondischargeable; and (II) cash advances aggregatingmore than $875 that are extensions of consumer credit
under an open end credit plan obtained by anindividual debtor on or within 70 days before the orderfor relief under this title, are presumed to benondischargeable.
In summary, a creditor can argue a debt is nondischargeable either directly
under § 523(a)(2)(A), in which case the creditor bears the burden of
establishing fraud, or through § 523(a)(2)(C)(I) (I) or (II), which raises a
rebuttable presumption of nondischargeability once the creditor shows that
the elements of either subsection are met.13
In this case, Creditor fails to make the short and plain statement of the
claim required by Rule 8(a). The Court—and these Debtors/Defendants—
cannot determine whether Creditor is arguing nondischargeability directly
13 Discover Bank v. Hankins (In re Hankins), No. 12-5114, 2012 WL 5409629,
at *3 (Bankr. D. Kan. Nov. 5 2012).
Case 13-07037 Doc# 12 Filed 12/19/13 Page 6 of 9
under § 523(a)(2)(A) or through either § 523(a)(2)(C)(i)(I) or (II), or even
through all three potential methods. Further, the Court cannot determine
which loans Creditor seeks to have declared nondischargeable.14 Although
Creditor has filed a proof of claim and attaches the claim to its response, the
response only refers to it generally and makes no effort to identify relevant
portions or even the particular loan(s) at issue. And it is not the Court’s role
to construct allegations out of inchoate facts. Because the nature of Creditor’s
claim is impossible to determine, Creditor fails to state a claim.
Even assuming that Creditor seeks to establish nondischargeability
through all three potential methods under § 523(a)(2)(A), Creditor still fails to
state a claim. First, under § 523(a)(2)(A), a creditor may only state a claim by
alleging facts that meet the following elements: (1) debtor used false
pretenses, false representations, or actual fraud; (2) which debtor knew at the
time to be false or fraudulent; (3) with the intent to deceive the creditor; (4)
the creditor justifiably relied on the representation; and 5) creditor sustained
damage as a proximate result of the debtor’s false pretenses, false
representations, or actual fraud.15 Here, even construing the complaint and
14 In paragraph 3 of its 6 paragraph complaint, Creditor references “multiple loans,”
but in the very next paragraph, suggests there was only one loan by using the singular:
“they took the loan out with the intent to defraud . . . .”
15 See In re Burton, 2010 WL 3422584, at *4.
Case 13-07037 Doc# 12 Filed 12/19/13 Page 7 of 9
response generously, Creditor fails to allege facts supporting the fourth and
fifth elements. Considering the heightened pleading standards required by
Rule 9(b), the complaint also fails to allege the first element with the required
specificity. Thus, Creditor fails to state a claim directly under § 523(a)(2)(A).
Second, to state a claim under § 523(a)(2)(C)(i)(I), a creditor must allege
facts showing: “(1) a consumer debt; (2) owed to a single creditor; (3)
aggregating more than $600; (4) for luxury goods or services; (5) incurred by
an individual debtor; and (6) on or within 90 days before the filing of the
petition.”16 Here, because Creditor fails to indicate which loan or loans it
seeks to have declared nondischargeable, Creditor cannot establish any of the
Third and finally, to state a claim under § 523(a)(2)(C)(i)(II), a creditor
must allege facts showing: (1) a cash advance aggregating more than $825; (2)
obtained within seventy days of the date of the bankruptcy petition; (3) by an
individual debtor; (4) that was an extension of consumer credit under an open
end credit plan.17 Once again, because Creditor fails to indicate which loans it
seeks to have declared nondischargeable, Creditor cannot establish any of the
16 In re Hankins, 2012 WL 5409629, at *3.
17 Weiland v. Viles (In re Viles), Nos. 09-7006, 08-7077, 2010 WL 299246, at*12 (Bankr. D. Kan. Jan. 19, 2010).
Case 13-07037 Doc# 12 Filed 12/19/13 Page 8 of 9
Because Creditor fails to state a claim, the complaint could be
dismissed under Rule 12(b)(6). However, Creditor will be permitted an
additional period of 14 days from publication of this order to request leave to
amend the complaint, following D. Kan. Rule 15.1(a). If Plaintiff fails to
timely file a motion for leave to amend in strict conformance with that Rule,
including the requirement to attach a copy of the proposed amended pleading
that addresses the deficiencies identified by the Court in this Order,
Plaintiff’s complaint will be dismissed without further notice.
It is so ordered.
# # #
Case 13-07037 Doc# 12 Filed 12/19/13 Page 9 of 9
- Category: Judge Karlin
- Published on 14 November 2013
- Written by Judge Karlin
- Hits: 210
BAP WO-13-029 In Re Thomas, Nov. 13, 2013
U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
November 13, 2013
Blaine F. Bates
NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
IN RE CLARENCE THOMAS,
FEDERAL NATIONAL MORTGAGE
BAP No. WO-13-029
Bankr. No. 10-17039
Appeal from the United States Bankruptcy Courtfor the Western District of Oklahoma
Before KARLIN, ROMERO, and JACOBVITZ, Bankruptcy Judges.
KARLIN, Bankruptcy Judge.
The sole issue on appeal is whether the bankruptcy court’s finding that the
creditor presented sufficient evidence to establish it had a colorable claim to
enforce a promissory note was clearly erroneous. Because the finding is fully
supported by the evidence, we AFFIRM.1
* This unpublished opinion may be cited for its persuasive value, but is notprecedential, except under the doctrines of law of the case, claim preclusion, andissue preclusion. 10th Cir. BAP L.R. 8018-6.
The parties did not request oral argument, and after examining the briefsand appellate record, the Court has determined unanimously that oral argumentwould not materially assist in the determination of this appeal. See Fed. R.
The Appellant, Clarence Thomas (“Debtor”), appeals the bankruptcy
court’s order finding that Appellee, Federal National Mortgage Association
(“FNMA”) had standing, as “a party in interest,” to obtain an order under 11
U.S.C. § 362(j).2 This Court has jurisdiction to hear timely-filed appeals from
“final judgments, orders, and decrees” of bankruptcy courts within the Tenth
Circuit, unless one of the parties elects to have the district court hear the appeal.3
Neither party elected to have this appeal heard by the district court, thus
consenting to review by this Court.4
Debtor’s current appeal follows lengthy litigation in both Oklahoma state
court and the bankruptcy court, and it is Debtor’s second appeal in this case. Our
first order5 supplies much of the necessary background. It essentially recites that
in September 2007, Debtor executed a note and mortgage on a home. The lender
and note payee was Freedom Mortgage Corp. (“Freedom”) and the mortgagee was
Bankr. P. 8012. The case is therefore ordered submitted without oral argument.
2 When a debtor files bankruptcy, the automatic stay (11 U.S.C. § 362) stops
most collection actions against the debtor and property of the estate unless and
until a party in interest obtains relief from that stay. When Congress amended the
Bankruptcy Code in 2005, it added a provision (11 U.S.C. § 362(j)) to require
courts to issue comfort orders confirming the automatic stay had either terminated
or never arose in certain instances when successive cases were commenced by
repeat filers. “The orders are entered primarily for a third party’s benefit, often
to help a sister state court attempting to determine whether it can proceed with a
pending action, such as a foreclosure.” In re Hill, 364 B.R. 826, 828 (Bankr.
M.D. Fla. 2007).
3 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed R. Bankr. P. 8002.
4 Debtor filed a motion for leave to appeal the March 28, 2013 order on April11, 2013, 14 days after its entry, then filed an untimely notice of appeal on April12, 2013, 15 days after the entry. This Court issued an order to show cause for
timeliness, which was resolved by an order on May 29, 2013, construing themotion for leave as a timely notice of appeal, and denying the motion for leave as
5 In re Thomas, 469 B.R. 915, 917-18 (10th Cir. BAP 2012).
MERS, acting as Freedom’s nominee. Debtor defaulted on the loan after making
only 11 payments on the note. Soon thereafter, Freedom endorsed the note in
blank, making it a bearer instrument under Oklahoma law, and transferred
possession to Chase Home Finance, LLC (“Chase”). In February 2009, Chase
filed a state court foreclosure action against Debtor, resulting in a foreclosure
judgment in June 2009. Debtor did not appeal that order. Before the sheriff’s
sale could be completed, however, Debtor filed a previous Chapter 13 petition in
August 2009, but it was dismissed in August 2010.
Shortly after Debtor’s first bankruptcy case was dismissed, Chase
apparently transferred the original note and mortgage to FNMA. The assignment
of the note and mortgage to FNMA, which indicates an effective date of August
21, 2010, was recorded on September 13, 2010 (but stated the assignment was
from MERS to FNMA rather than from Chase to FNMA).
Debtor then filed the current Chapter 13 bankruptcy in November, 2010.
FNMA filed a proof of claim in the second bankruptcy and attached to its claim
copies of the note (without the endorsement by Freedom) and the recorded
assignment of mortgage from MERS to FNMA. Debtor objected to the claim and
also filed an adversary proceeding against Freedom, Chase, MERS, and FNMA,
seeking a declaration that none of the defendants had any enforceable secured
interest in the property.
Immediately after Debtor filed the adversary proceeding, FNMA sought a
comfort order verifying that the automatic stay had expired. On the same day, the
bankruptcy court entered the comfort order, “finding that [t]he stay imposed
against [FNMA] with regard to its lien on the Property terminated by operation of
law on December 22, 2010,” as Debtor had filed no motion to extend the stay.6
Debtor appealed the comfort order, arguing that the bankruptcy court
Id. at 918 (internal quotation marks omitted).
erroneously granted relief to FNMA without first establishing FNMA had
standing, and that FNMA, in fact, lacked standing to seek the comfort order.
Another panel of this Court agreed that the bankruptcy court had failed to
determine whether FNMA had standing before it issued the comfort order and
remanded the matter to the bankruptcy court to determine FNMA’s standing. In
so doing, we held that a party must be “a party in interest” under § 362(j) in order
to seek a comfort order.
Following remand, the bankruptcy court conducted an evidentiary hearing
concerning FNMA’s standing, both for the purposes of § 362(j) and with respect
to a number of other pending matters between the parties. At the hearing, FNMA
introduced into evidence the mortgage and the original note, blue ink signatures
affixed, along with testimony regarding the note’s admittedly convoluted chain of
title. Debtor argued the note might not be authentic, suggesting color copy
machines could churn out copies and maybe this was one of those. He refused to
verify that the signature on the note admitted into evidence was his signature. By
contrast, his wife testified the signatures on both the note and mortgage appeared
to be hers and her husband’s. In addition, the bankruptcy court required both
Debtor and his wife to produce their driver’s licenses for examination and, after
comparing the signatures on the licenses with the signatures on the note and
mortgage, concluded the signatures were “essentially identical.”7 The court also
compared the Debtor’s signature on pleadings he had filed in his bankruptcy case,
confirming the signatures were the same.8 Debtor produced no evidence to
suggest anyone else had the “real” original. The bankruptcy court ultimately
determined FNMA had physical possession of the original note, endorsed in
blank, and had standing to seek the comfort order. It is that determination Debtor
7 Aplt. App. at 102.
8 Id. at 103-04.
II. Issue and Standard of Review
In addressing Debtor’s last appeal, we held FNMA “must prove that it has a
colorable claim . . . in order to establish its standing to seek a § 362(j) comfort
order. Proof of the existence of a colorable claim in this case necessarily requires
[FNMA] to prove that it has a facially valid security interest under Oklahoma
law.”9 Our prior opinion also makes clear FNMA would be required to show it
had standing as of May 18, 2011, when it sought the comfort order.10
As the parties agree,11 under Oklahoma’s version of the Uniform
Commercial Code a note endorsed in blank is a bearer instrument that may be
enforced by its holder.12 The parties also agree the note submitted into evidence
at the evidentiary hearing was endorsed in blank and was held by FNMA. This
appeal, then, turns on two factual questions: 1) was the note submitted by
FNMA, which it claimed to be the original, authentic; and 2) did FNMA have
possession of the original note when it filed its pleadings on May 18, 2011.
The bankruptcy court’s factual findings underpinning a standing
determination are reviewed for clear error.13 Under the clearly erroneous
standard, we “will reverse the district court’s finding only if it is without factual
In re Thomas, 469 B.R. at 923 (internal quotation marks and footnote
10 Id. at 920.
11 Aplee. Br. at 9, Aplt. Reply Br. at 5.
12 In Oklahoma, one who is in possession of a note endorsed in blank is a
holder. Deutsche Bank Nat’l Trust Co. v. Richardson, 273 P.3d 50, 53 (Okla.
2012). See also Okla. Stat. tit. 12A, § 1-201(b)(21) (2006). The holder of a note
or a non-holder in possession of the note is entitled to enforce a note. MidFirst
Bank v. Wilson, 295 P.3d 1142, 1144 (Okla. Civ. App. 2012) (citing Okla. Stat.
tit. 12A, § 3-301 (1992)).
Merrill Lynch Bus. Fin. Servs., Inc. v. Nudell, 363 F.3d 1072, 1074 (10thCir. 2004) (holding jurisdictional findings of fact are reviewed for clear error).
support in the record or if, after reviewing all the evidence, we are left with a
definite and firm conviction that a mistake has been made.”14
III. Legal Analysis
Debtor’s arguments essentially boil down to two. First, he argues the
bankruptcy court erred when it determined the note was authentic because he
claims FNMA did not adequately explain how it came to be in possession of the
note, and because the note should not have been admitted into evidence as self-
authenticating under Rule 902(9) of the Federal Rules of Evidence. He next
argues that, absent any additional documentation from FNMA supporting its claim
that the note presented to the Court was, in fact, the original, it might not be the
one he actually signed, so FNMA should not be allowed to enforce it. Neither of
his arguments have merit.15
Both of Debtor’s arguments essentially address the sufficiency of the
evidence received by the bankruptcy court. Although Debtor correctly notes
FNMA did not offer additional documentary evidence beyond the note itself, the
bankruptcy court’s determinations that the note FNMA submitted was authentic
and that FNMA had timely possession of it, are amply supported by the record.
The record shows FNMA produced an apparently original note with blue ink
signatures by Debtor and his wife. And Debtor never denies he signed a note that
14 United States v. Madrid, 713 F.3d 1251, 1256-57 (10th Cir. 2013).
15 Debtor makes an additional argument that the bankruptcy court erred whenit found appellee had standing even though neither the endorsed note nor the statecourt judgment was attached to the proof of claim. He seems to claim that
because the documents attached to the proof of claim did not show FNMA ownedthe note when it filed the proof of claim, FNMA is thus prevented from laterpursuing a comfort order. But this appeal concerns only whether FNMA hadestablished a colorable claim of standing to enforce the note and mortgage at thetime it sought the comfort order. That is all FNMA was required to prove toobtain its § 362(j) comfort order. Whether Debtor could ultimately prevail on hisobjection to that claim is simply immaterial to this analysis. In addition, thisargument is basically just another version of the argument we have addressed andrejected–that the existence of a convoluted chain of title for this note somehowprevents FNMA from enforcing the bearer paper it clearly now possesses.
looked just like the one admitted into evidence, only that he would never be able
to definitively agree that the exhibit is the one he actually signed because of
“sophisticated” copiers. But the bankruptcy judge reviewed the note offered into
evidence, and then carefully verified the signatures by comparing them with
Debtor’s and his wife’s drivers’ licenses and with other court documents. Based
on his careful review, he determined to his own satisfaction that the note was in
fact the original signed by Debtor.
The bankruptcy court’s decision was buttressed by the testimony from an
attorney (Michael George) who represented FNMA in some of its prior dealings
on this note. He testified he was familiar with this case and he had personally
received the original note from the custodian for Chase on or about July 16, 2010.
This extrinsic evidence, taken as a whole, also supports the bankruptcy court’s
factual determination. Nothing in the record convinces us that any error has been
made, let alone clear error.
Debtor argues the bankruptcy court erred by admitting the note into
evidence as a self-authenticating document under Rule 902(9); this argument fails
for two reasons. First, the note is a self-authenticating document. Under Rule
902(9), commercial paper, signatures on commercial paper, and related
documents are self authenticating to the extent allowed by general commercial
law.16 The relevant portion of the Oklahoma version of the Uniform Commercial
Code provides in pertinent part:
In an action with respect to an instrument, the authenticity of, andauthority to make, each signature on the instrument is admittedunless specifically denied in the pleadings. If the validity of asignature is denied in the pleadings, the burden of establishingvalidity is on the person claiming validity, but the signature ispresumed to be authentic and authorized unless the action is toenforce the liability of the purported signer and the signer is dead orincompetent at the time of trial of the issue of validity of the
Fed. R. Evid. 902(9).
The note is an instrument.18 Here, Debtor cannot point to any denial of the
authenticity of the signatures on the note in his pleadings, and so the authenticity
of the signatures to the note are deemed admitted, rendering the note itself
authentic. And second, even if the note were not self-authenticating, the record
offers ample basis for its admission under Rule 901(a). As discussed above,
FNMA”produce[d] evidence sufficient to support a finding that the item is what
the proponent claims it is.”19 Accordingly, the bankruptcy court did not err in
admitting the note.
Finally, Debtor argues the bankruptcy court’s decision relies on a chain of
title to the note that conflicted with FNMA’s evidence and past filings. In
particular, Debtor focuses on how Chase Bank fits into the evidence, contending
FNMA asserted it took possession of the note in 2007, while a 2009 state court
judgment determined Chase was the owner of the note at that time and an
assignment of the note and mortgage recorded on September 13, 2010, states
(apparently incorrectly)20 that the assignment was from MERS to FNMA.
Without a doubt, this history is convoluted, and, in some aspects, contradictory.
But nothing about the chain of title convinces us the court erred when it
determined the note admitted into evidence was the original and FNMA possessed
the original note when it sought the comfort order. Debtor simply cannot explain
how Chase’s prior involvement detracts from the fact that FNMA now holds the
original note and, as the holder of bearer paper, has the right to enforce the note.
17 Okla. Stat. tit. 12A, § 3-308(a) (1992).
18 Okla. Stat. tit. 12A, § 3-104 (1992).
19 Fed. R. Evid. 901(a).
20 In re Thomas, 469 B.R. at 918 (stating the assignment listed MERS but
should have listed Chase).
Under any of the various histories offered by FNMA, it was in possession
of the original note by, at the latest, July 2010—eleven months before it sought
the comfort order, and Debtor presented no evidence remotely suggesting any
other potential note holders have made any claim to the note or demand upon
him.21 As the Tenth Circuit has recently confirmed, FNMA need only “satisf[y]
the low threshold showing that it possessed a colorable claim of a lien on property
of the estate,”22 and the creditor’s conflicting positions regarding the note’s chain
of title does not diminish the fact that FNMA is in possession of the facially valid
original note.23 Mere physical possession of the authentic note is all that is
required for a colorable claim of standing to enforce the note and mortgage and
all that is required to seek a § 362(j) comfort order. The ambiguities in the note’s
chain of title are simply immaterial in this context.
At their core, Debtor’s arguments all assert that although the note produced
by FNMA looks real and the signature looks like his signature, and he did in fact
execute an identical note and mortgage with the same terms, and no one has
sought to collect the note from him other than FNMA (and before it, Chase), the
current note could be fake, or FNMA may have obtained it in such a way that it
cannot enforce it. But these claims, weak as they are, are more appropriately
raised in state court. As we stated in our prior decision, “stay proceedings only
determine whether the party seeking relief has a colorable claim, which is then
21 Chase, the only party that might be in a position to argue for an interest,
has specifically denied any current interest in the note and mortgage, stating ithad transferred possession of those documents to FNMA between Debtor’s 2009and 2010 bankruptcy filings. Aplt. App at 113.
22 In re Castro, 503 F. App’x 612, 615 (10th Cir. 2012) (internal quotationmarks omitted).
fully adjudicated in the state court.”24 Here, it is clear FNMA has established at
least a colorable claim of standing.
Based on the foregoing analysis, the bankruptcy court did not err in finding
FNMA had standing to seek a comfort order. Accordingly, we AFFIRM.
In re Thomas, 469 B.R. at 922-23 (internal quotation marks omitted).
- Category: Judge Karlin
- Published on 19 December 2013
- Written by Judge Karlin
- Hits: 213
In Re Robben, 04-40485 (Bankr. D. Kan. Dec. 17, 2013) Doc. # 126
SIGNED this 17th day of December, 2013.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: Case No. 04-40485
Gary Lee Robben, Chapter 7
Memorandum Opinion and Order Denying as Moot Debtor’s Motion
to Order Trustee to Abandon Debtor’s Trust Interest
The Court has heard evidence on the main issue in this case, which is
whether a debtor’s interest in a revocable trust that contains a spendthrift
clause is a part of the bankruptcy estate upon the debtor’s filing a petition in
bankruptcy. On March 10, 2004, Gary Robben (“Debtor”) filed a Chapter 7
petition. After administering other assets, the Chapter 7 Trustee filed a final
accounting1 in December 2007, and Debtor’s case was closed shortly
1 Doc. 50.
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 1 of 18
thereafter.2 In his schedules and Statement of Financial Affairs, Debtor did
not disclose that he was a named beneficiary of a revocable trust, the
Restated Robben Family Trust, which (if not earlier revoked by his mother,
the settlor) would entitle him to certain property upon her death. Debtor’s
mother died—some 6 years after Debtor filed bankruptcy—and he has
reopened his bankruptcy to seek an order requiring the Chapter 7 trustee
(“Trustee”) to officially abandon whatever interest the bankruptcy estate
might have had in the Restated Robben Family Trust. Because the Court
finds the trust contains a valid spendthrift provision under Kansas law,
Debtor’s interest in the trust was not property of the estate. The Court
therefore denies Debtor’s motion as moot because the Trustee had (and has)
no interest in the Restated Robben Family Trust to abandon.
I. Findings of Fact
Debtor was named a beneficiary of the Robben Family Trust when his
parents established it in 1991. The Robben Family Trust was a revocable
trust established for the benefit of Debtor’s parents, Bertha and Norbert B.
Robben, during their lives, with the remainder to be distributed to Debtor and
his two siblings, Paul Robben and Mary Ann Ruff. He subsequently became a
trustee of the trust after his father’s death, and this trust contained no
2 Doc. 51.
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 2 of 18
Debtor was also named as a beneficiary and trustee of the Bertha
Robben Trust, an irrevocable trust his mother created in 1997 for the sole
benefit of her children, grandchildren, and sons- and daughters-in-law.
Debtor’s motion to abandon does not relate to that trust.4
During his tenure as trustee, Debtor pledged assets of the Robben
Family Trust in violation of his fiduciary duties as a trustee. Debtor and his
family also took larger distributions than they were due from the Bertha
Robben Trust. In early December 2003, Debtor revealed these actions to the
other trust beneficiaries, including his mother, and also formally resigned as
co-Trustee of the Bertha Robben Trust. Debtor was also replaced as
co-Trustee of the Robben Family Trust upon its amendment the next month
(on January 22, 2004).
Debtor’s resignation and the publication of his failures as a trustee to
the rest of the beneficiaries brought on a host of trust-related activity. On
January, 12, 2004, for example, Debtor and his siblings entered into an
agreement entitled “ Robben Family Memo of Agreement,” agreeing that Paul
Robben would become the trustee of the Restated Robben Family Trust (with
3 Creditors’ Trial Ex. A.
4 See Pretrial Order, Doc. 116 and Creditors’ Trial Ex. C.
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 3 of 18
his mother serving as co-trustee), among other things. In addition, the Bertha
Robben Trust was terminated, purportedly effective March 10, 2004.
Effective January 22, 2004, Bertha Robben also restated the Robben
Family Trust, creating the Restated Robben Family Trust (hereafter “Trust”).
As relevant here, the restatement changed the trustee from Debtor to Paul
Robben, retained Debtor as the beneficiary of a one-third interest in all trust
assets, and added a spendthrift provision not present in the original trust.
The Restated Robben Family Trust spendthrift provision states:
To the extent permitted by law, none of the
beneficiaries hereunder shall have any power to disposeof or to charge by way of anticipation or otherwise anyinterest given to such beneficiary; all sums payable toany beneficiary hereunder shall be free and clear ofdebts, contracts, alienations and anticipations of suchbeneficiary, and of all liabilities for levies andattachments and proceedings of any kind, at law or inequity.5
Both the original and the Restated Robben Family Trust granted Bertha
Robben the right to amend her trust until her death. The Restated Robben
Family Trust also included a second provision that could have resulted in
Debtor never receiving any Trust assets: it provided that Debtor’s share
would be divested and distributed to his siblings should he predecease his
5 Debtor’s Trial Ex. 2, at 8. Unfortunately, the copy of this Trust provided byCreditors in their Exhibit G omitted this relevant page 8, without explanation.
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 4 of 18
In addition to the Robben Family Memo of Agreement and the
restatement of the Robben Family Trust, the parties executed the Robben
Family Settlement Agreement (“Settlement Agreement”). The Settlement
Agreement was ultimately signed by all interested family members, both
individually and by Paul and Bertha as trustees of the two trusts. Bertha
Robben and Debtor signed the Settlement Agreement on January 22, 2004.
Mary Ann Ruff signed the Settlement Agreement February 20, 2004, and
Paul Robben signed March 1, 2004. The exact date the remaining
beneficiaries signed the agreement is unclear, but that date is not relevant to
Under the Settlement Agreement, all parties acknowledged that Debtor
had performed actions inconsistent with the trust terms. Notwithstanding
those action, however, the parties agreed:
[t]hat all Parties to this Family Settlement Agreementhereby relinquish any claim in any capacity they mighthave against Gary L. Robben individually and/or asTrustee and/or otherwise regarding any and all matters
6 Whether or not the Settlement Agreement was signed by all the partiesbefore Debtor entered bankruptcy does not affect the Court’s reasoning on the keyissue before it, which deals exclusively with the Restated Robben Family Trust. Noone disputes that Trust was executed before he filed bankruptcy.
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 5 of 18
Finally, Bertha Robben also amended her will, executing a new Last Will and
Testament, also dated January 22, 2004. This will essentially poured her
assets over to the restated trust and incorporated that trust’s provisions.
When Debtor filed his Chapter 7 petition on March 10, 2004, he did not
disclose on Schedule B his future or contingent interest in the Trust. The
Trustee now claims he should have revealed his interest in the Trust by
affirmatively describing the Trust in response to Question 18 [“equitable or
future interests, life estates, and rights or powers exercisable for the benefit
of the debtor other than those listed in Schedule of Real Property”] and
Question 19 [“contingent and noncontingent interests in estate or a decedent,
death benefit plan, life insurance policy, or trust”]. In addition, he did not list
his mother or the Trust as creditors, although he did list his siblings and the
other adult beneficiaries as possible unsecured creditors in Schedule F, all on
advice of bankruptcy counsel.8
Although Debtor received his discharge on August 6, 2004, the Trustee
kept the estate open and administered assets unrelated to the Trust until late
2007. The only asset in question here—Debtor's interest in the Restated
7 Debtor Trial Ex. 3, at 8.
8 The only description of their claim was “Consideration: Trust Deficiency.”
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 6 of 18
Robben Family Trust— was specifically noted as Ref. # 21 in the Trustee's
final (and interim) accounting, and the Trustee testified at trial that she was
generally aware of the existence of both trusts throughout her administration
of the estate. When she sought to be discharged of her responsibilities, she
certified that "this estate has been fully administered pursuant to the
Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the
District of Kansas Bankruptcy Rules. A Trustee's Final Report has been filed
and proper disbursements completed. No funds or assets of the estate
remain."9 Previously, on July 8, 2004, the Trustee had also approved an order
finding that the "Trustee's interest or right to the collateral [pledged to Gold
Bank, which included certain interests of Gary Robben in the Robben Family
Trust] is abandoned."10
The present controversy began after Bertha Robben died on January
28, 2010, almost 6 full years after Debtor filed his bankruptcy petition and 3
years after the Trustee had elected not to seek additional information to help
her decide whether to pursue Debtor’s interest in the identified trusts, if any.
Bertha never revoked the Trust, and after she died, Paul Robben, as trustee,
agreed with his sister, Mary Ann, to divide the remaining Restated Robben
9 Doc. 50.
10 Doc. 18, p.7.
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 7 of 18
Family Trust assets between themselves, making no distribution to Debtor.
Paul Robben testified he, as trustee, based this action on his understanding of
the terms of the Trust, although Debtor argues the Trust instead required
distribution of one-third of Trust assets to each of the three siblings.
In 2011, Debtor asked his siblings for an accounting of the Trust assets.
When they did not provide it, he filed suit in state court seeking to remove
them as co-trustees of the Trust. The state court dismissed his action on his
siblings’ motion to dismiss, finding that because he had not disclosed the
Trust as an asset in his bankruptcy, the bankruptcy trustee had not expressly
abandoned her interest in the Trust and thus Debtor lacked standing to bring
the action. The decision noted that the case was “not about the argument that
eventually will prevail in bankruptcy court, but allowing that forum the first
opportunity to consider whether the equitable right to property first comes
within the bankruptcy estate.”11 The decision ended with the prediction that
some party would likely seek to reopen the bankruptcy case so this Court
could make that determination.
Soon thereafter, Debtor moved to reopen the Chapter 7 case pursuant
to 11 U.S.C. § 350(b), which motion was granted.12 After the case was
11 Trustee Ex. KK, p.8.
12 Doc. 56.
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 8 of 18
reopened, Debtor filed a motion seeking an order directing the Trustee to
abandon any interest in the Trust pursuant to § 554(b)13 “to the extent such
interest may constitute an asset of the estate.”14 He further argues the
interest was never part of his bankruptcy estate. Both the Trustee and Mary
Ann Ruff and Paul Robben objected to his motion for abandonment.15
II. Conclusions of Law
Debtor argues his interest in the Restated Robben Family Trust did not
constitute property of his bankruptcy estate created when he filed his
Chapter 7 Petition because the Trust contained a spendthrift provision,
preventing its inclusion in the estate under 11 U.S.C. § 541(c)(2).16 Under §
541(a)(1), a bankruptcy estate is created upon a debtor’s filing for bankruptcy,
and the bankruptcy estate includes, “[e]xcept as provided in . . . (c)(2) of this
section, all legal or equitable interests of the debtor in property as of the
commencement of the case.” Section 541(c)(2) provides “a restriction on the
transfer of a beneficial interest of the debtor in a trust that is enforceable
13 Doc. 61.
15 Doc. 68.
16 Debtor also argues that his interest was of inconsequential value andshould therefore be abandoned by the Trustee; because the Court agrees withDebtor’s first argument, it does not reach his alternative argument.
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 9 of 18
under applicable nonbankruptcy law is enforceable in a case under this title,”
and the Tenth Circuit BAP has interpreted § 541(c)(2) to mean that a debtor’s
beneficial interest in a spendthrift trust is entirely excluded from the
The Sixth Circuit BAP has held that “[d]ebtors bear the burden of
demonstrating that all the requirements of § 541(c)(2) have been met before
the property in question can be effectively excluded from the estate.”18 This
Court adopted the same standard in In re McDonald, 19 stating that
[t]o exclude property from the bankruptcy estate under
§ 541(c)(2), Debtors must satisfy three criteria. First,
they must show that they have a beneficial interest ina trust. Second, they must show that there is arestriction on the transfer of that interest. Third, theymust show that the restriction is enforceable under
This Court has previously had the opportunity to consider the parameters of
the § 541(c)(2) exclusion for spendthrift trusts in In re Roth. 21 In Roth, the
17 See Case v. Hilgers (In re Hilgers), 371 B.R. 465, 468 (10th Cir. BAP 2007)
(“Section 541(c)(2) of the Bankruptcy Code excludes from property of the estate adebtor’s beneficial interest in a spendthrift trust.”).
18 Rhiel v. Adams (In re Adams), 302 B.R. 535, 540 (6th Cir. BAP 2003).
19 In re McDonald, 353 B.R. 287, 293 (Bankr. D. Kan. 2006).
20 Id. (citing In re Adams, 302 B.R. at 540).
21 289 B.R. 161, 165 (Bankr. D. Kan. 2003).
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 10 of 18
debtor contended that because the trust contained language preventing the
voluntary or involuntary alienation by a beneficiary of the trust assets, that it
was a spendthrift trust, and that such trusts are excluded from the
bankruptcy estate under § 541(c)(2).
Roth noted that spendthrift trusts have long been held valid under
Kansas law. In addition, the decision noted that “[a]n examination of the
legislative history of § 541(c)(2) indicates that Congress meant to exclude
from the estate those assets of “spendthrift trusts” traditionally beyond the
reach of creditors under State trust law.
Thus, as it was in Roth, a resolution of this initial issue turns on
whether the Trust qualifies as a “spendthrift trust.” If so, the Debtor’s
interest in the trust is immune from creditors’ claims as an asset of the estate
under § 541(a)(1). Whether an asset is estate property is determined by
examining the nature of the asset on the date the bankruptcy petition was
filed.22 Although federal law identifies the property interests that are to be
included in a debtor’s bankruptcy estate, such property interests themselves
are created and defined by state law.23 Thus, in this case, if the Trust was a
22 In re Hilgers, 371 B.R. at 468 (holding “to determine whether the Debtor'sinterests in the Trusts were excluded from his estate, we must analyze the natureof that interest, under applicable state law, as of the time of his bankruptcy filing.”
23 In re Roth 289 B.R. at 165 (internal citations omitted).
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 11 of 18
valid spendthrift trust under Kansas law, then the Trust never became part
of the bankruptcy estate.
Under Kansas law, a spendthrift trust is a trust with a provision that
“secure[s] the fund against [a beneficiary’s] improvidence or incapacity.
Provisions against alienation of the trust fund by the voluntary act of the
beneficiary or by his creditors are its usual incidents.”24 As noted in Roth,
“because of the provisions of this . . . spendthrift clause, neither [the debtor’s]
creditors nor transferees had any right to rely upon the Trust for satisfaction
of their claims.”25
There are no magic words required to create a spendthrift trust under
Kansas law; “a spendthrift trust is created when ‘the trustor clearly
manifest[s] the intention not only to create a trust, but to create it with the
spendthrift effect.’”26 “The intent need not be stated in express terms but may
come from construction of the trust instrument as a whole.”27 A court’s
inference of such intent need only be made with reasonable certainty.28
24 Matter of Sowers’ Estate,1 Kan.App.2d 675, 680 (Kan. Ct. App. 1977).
25 In re Roth, 289 B.R. at 165.
26 In re Semmel, Case No. 01–14433, 2003 WL 23838130, at *3 (Bankr. D
Kan. Feb. 27, 2003) (quoting Matter of Sowers’ Estate, 1 Kan.App.2d at 680).
27 Matter of Sowers’ Estate, 1 Kan.App.2d at 680.
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 12 of 18
The spendthrift provision in the instant Trust unequivocally strips “the
beneficiaries [of] any power to dispose of or to charge by way of anticipation or
otherwise any interest given to such beneficiary” and requires that “all sums
payable to any beneficiary hereunder shall be free and clear of debts,
contracts, alienations and anticipations of such beneficiary.”29 This language
contains the usual incidents of a spendthrift trust and requires a finding that
the Restated Robben Family Trust was intended to be a spendthrift trust. No
party seriously argues otherwise.
The Trustee nevertheless makes four counter arguments why the
spendthrift provision should not be enforced.30 First, she argues that,
because the Trust provides for Debtor’s one third interest to pass to him in
trust upon his mother’s death, the trust effectively contains a provision that
allows a beneficiary to control and withdraw the entire principal for his own
benefit while serving as his own trustee, rendering the restraint on the
29 Debtor’s Trial Ex. 2, at 8.
30 At oral argument, Trustee suggested that, absent a spendthrift provision, a debtor’s
equitable interest in a revocable trust is part of the bankruptcy estate and must be disclosed. For
this argument, Trustee relies on Redmond v. Kester, 284 Kan. 209 (2007), wherein the Kansas
Supreme Court held that a trust beneficiary possesses an equitable interest in the real estate held
by the trust. Likewise, she argued that if a debtor happens to know he or she is listed as a
beneficiary in a will, that the debtor is also required to list that interest in question 18 or 19 of
Schedule B. Because the Court determines that the Restated Robben Family Trust contained a
valid spendthrift provision, the Court does not address what property interests thedebtor held that the bankruptcy estate might have possessed or that the Debtorwould be required to disclose, absent the spendthrift provision.
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 13 of 18
transfer invalid. While the Trustee is correct that, after the interest passed to
Debtor, it would no longer be protected by the spendthrift provision, this fact
has no effect on the validity of the spendthrift provision while Debtor’s
mother was alive, as she was when Debtor filed his bankruptcy petition (and
for six more years).
Second, the Trustee highlights certain provisions of the Trust related to
age-based restrictions on transfer that would only become effective after
Debtor’s mother died and argues that these provisions rendered the
spendthrift provisions unenforceable. This argument shares the same defect
as the Trustee’s first argument, and further fails because the provision
applies only to the children of Debtor, Mary Ann Ruff, and Paul Robben, not
to the siblings or Debtor, himself.
Third, the Trustee agues that the spendthrift provision does not apply
because the assets have now been dispersed, again, over 6 years after the
bankruptcy was filed. This argument similarly fails because—as the Tenth
Circuit BAP has confirmed—whether an asset is estate property is
determined by examining the nature of the asset on the date the bankruptcy
petition was filed, not at some later time.31
31 In re Roth, 289 B.R. at 165 (holding that “[w]hether an asset is estateproperty is determined by examining the nature of the asset on the date thebankruptcy petition was filed”) (internal citations omitted), cited favorably for this
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 14 of 18
The Trustee’s fourth argument is that Debtor invalidated the
spendthrift provisions when he exercised control over then existing trust
assets by pledging some of those assets to secure a personal loan to Gold
Bank in 2003, prior to filing bankruptcy. But this argument overlooks an
important fact—there was no spendthrift provision in the original Robben
Family Trust from which he pledged assets. As a result, Debtor’s actions in
pledging trust assets as trustee, before the spendthrift provision was added
and before Debtor was concomitantly removed as trustee, do not invalidate
the later-added spendthrift provision.
The Trustee appears to allege that because Debtor earlier abused his
discretion as trustee and failed to comply with any standard for distribution,
he should not now be able to use as a shield the spendthrift provision his
mother apparently intentionally inserted into the Restated Trust in 2004. But
as noted, this argument overlooks the sequence of events in this case. Here,
the spendthrift provision that the Trustee argues was invalidated by pre-
bankruptcy dealings with Gold Bank was added in 2004 at the same time
Debtor was removed as trustee of the Restated Robben Family Trust. As a
result, Debtor’s actions pledging trust assets as trustee did not violate any
spendthrift provision. Those actions, therefore, do not invalidate the later-
proposition in In re Hillgers, 371 B.R. at 468 n.8.
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 15 of 18
added spendthrift provision, and there was no evidence at trial that Debtor
ever pledged assets of the Restated Robben Family Trust after he was
removed as trustee. It was the apparent intent of the settlor, Bertha Robben,
that from January 22, 2004 forward, Debtor no longer be able to use her
assets to pay his creditors. It is her intention that this Court is now required
Finally, the Trustee argues that, regardless of the spendthrift
provision, Debtor is judicially estopped from now claiming an interest in the
Restated Robben Family Trust assets. This argument is based on her
contention that Debtor’s decision not to clearly disclose his interest in this
Trust somehow proves that he believed he had no interest in the Trust. She
argues that his “denial” of an interest in the Trust contradicts his later state
court action against his siblings where he sought an accounting and inventory
of the Restated Robben Family Trust assets.
Three factors typically inform a court’s decision whether to apply the
doctrine of judicial estoppel: (1) whether the party’s subsequent position is
clearly inconsistent with its former position; (2) whether the suspect party
succeeded in persuading a court to accept that party’s former position, so that
judicial acceptance of an inconsistent position in a later proceeding would
create the perception that either the first or the second court was misled; and
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 16 of 18
(3) whether the party seeking to assert an inconsistent position would gain an
unfair advantage in the litigation if not estopped.32 But Debtor does not meet
even the first criteria; Debtor’s position that the interest now has value is not
inconsistent with his argument that it was not part of the estate, or had no
value to the estate in 2004 when Debtor entered bankruptcy (some six years
before his mother died and his interest became choate).
In addition to echoing the theories advanced by the Trustee, Mary Ann
Ruff and Paul Robben also contend that § 541(c)(2) does not exclude Debtor’s
interest in the Trust from the bankruptcy estate, but rather only prevents the
Trustee from forcing distributions from the estate to pay creditors. They cite
no case law in support of this position, and such interpretation contravenes
both Tenth Circuit BAP precedent33 and this Court’s holding in In re Roth. 34
These counter arguments are unavailing. Having reviewed the
language in the Trust and the facts of the case at the time Debtor filed his
bankruptcy petition, the Court finds that Debtor had a beneficial interest in
the Restated Robben Family Trust when he filed bankruptcy, the Restated
32 Queen v. TA Operating, LLC, ___ F.3d ___, 2013 WL 4419322, at *4 (10thCir. Aug. 20, 2013).
33 In re Hilgers, 371 B.R. at 468 (“Section 541(c)(2) of the Bankruptcy Codeexcludes from property of the estate a debtor’s beneficial interest in a spendthriftTrust.”).
34 289 B.R. at 165.
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 17 of 18
Robben Family Trust restricts him from transferring that beneficial interest,
and the restriction is a facially valid spendthrift provision under Kansas law.
As a result, Debtor satisfies the three criteria required to exclude property
from the bankruptcy estate under § 541(c)(2). The parties cannot successfully
contest these criteria, and the Court finds no other fact in this case that
differentiates it from In re Roth. Debtor’s interest in the Restated Robben
Family Trust was never a part of the bankruptcy estate.
Because Debtor’s interest in the Restated Robben Family Trust did not
become part of the bankruptcy estate, Debtor’s motion seeking for the Trustee
to abandon that asset is denied, as moot.
It is so ordered.
Case 04-40485 Doc# 126-1 Filed 12/17/13 Page 18 of 18
- Category: Judge Karlin
- Published on 08 November 2013
- Written by Judge Karlin
- Hits: 274
BAP UT-13-026 In Re C.W. Mining Company, Nov. 5, 2013
U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
November 5, 2013
Blaine F. Bates
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
IN RE C.W. MINING COMPANY,
KENNETH A. RUSHTON, Trustee,
Plaintiff – Appellant,
SMC ELECTRICAL PRODUCTS, INC.
and BECKER MINING AMERICA,
Defendants – Appellees.
BAP No. UT-13-026
Bankr. No. 08-20105
Adv. No. 10-02758
Appeal from the United States Bankruptcy Courtfor the District of Utah
Michael N. Zundel (Daniel C. Dansie and Callie Buys with him on the brief) ofPrince, Yeates & Geldzahler, Salt Lake City, Utah, for Plaintiff – Appellant.
Jeffrey L. Shields (Jacob D. Lyons with him on the brief) of Callister Nebeker &
McCullough, Salt Lake City, Utah, for Defendants – Appellees.
Before CORNISH, KARLIN, and ROMERO, Bankruptcy Judges.
KARLIN, Bankruptcy Judge.
This case poses the question, “how ordinary is ordinary?” The ordinary
course of business defense, set out in 11 U.S.C. § 547(c)(2)(A), protects the
creditor of a debtor who has filed bankruptcy from an action by a trustee to
recover, as a preference, payments made by the debtor prior to bankruptcy as long
as the creditor can meet two requirements. First, the creditor must show that the
alleged preferential payment was made “in payment of a debt incurred by the
debtor in the ordinary course of business” of the debtor and the creditor. The
creditor must then also show that the payment itself was “made in the ordinary
course of business” of the debtor and the creditor.
This appeal is from a bankruptcy court order applying the ordinary course
of business defense to a payment made by Debtor C.W. Mining Company (“C.W.
Mining”) to Creditor SMC Electrical Products, Inc. (“SMC”) within 90 days of
C.W. Mining being placed in involuntary bankruptcy. The Chapter 7 Trustee
challenged the payment as a preferential transfer, but after full discovery, the
bankruptcy court granted SMC’s motion for summary judgment based on
unchallenged material facts that it held demonstrated SMC was entitled to the
ordinary course of business defense.
The Trustee/Appellant argues that the bankruptcy court erred in both its
conclusions that: (1) the debt between SMC and C.W. Mining was incurred in the
ordinary course of business of SMC and C.W. Mining, and (2) the debt payment
that the Trustee seeks to avoid was a payment made in the ordinary course of
these two businesses. We conclude both that C.W. Mining incurred the debt from
SMC in an effort to increase the production of its coal mining operations, which
was C.W. Mining’s primary business, and that the transaction was a typical arms-
length creation of debt on the open market. The bankruptcy court did not err
when it found that the debt was incurred in the ordinary course of business. In
addition, the evidence supports the bankruptcy court’s finding that the challenged
debt payment was made in the ordinary course of both businesses. Applying the
clearly erroneous standard of review, the bankruptcy court had adequate factual
support in the record to conclude that SMC carried its burden of proof to show
that the debt payment was incurred and made in the ordinary course of both
businesses. As a result, we AFFIRM.
I. Background Facts and Procedural History
The following facts were established by an affidavit filed by SMC, which
the Trustee essentially elected not to challenge. In mid-2007, C.W. Mining
sought to purchase a longwall electrical system from SMC. 1 Before then, C.W.
Mining had engaged in continuous mining, a form of coal mining that is different
from the longwall mining method. 2 Presumably to reduce its costs of engaging in
this new method of coal mining, C.W. Mining elected to purchase previously
scrapped equipment and to then refurbish that equipment for a new longwall
system. C.W. Mining anticipated that the longwall system would increase its coal
production by four or five times.
In June 2007, SMC and C.W. Mining agreed that SMC would provide C.W.
Mining the equipment, service, and training for a longwall electrical system. The
provision of longwall electrical controls, and the service and training on longwall
electrical systems, are within the normal scope of products and services that SMC
provides. In July 2007, SMC provided C.W. Mining with a quotation (Quotation
70312.3) that reflected the June 2007 agreement. Prior to the 2007 purchase,
C.W. Mining had no relationship of any kind with SMC.
Quotation 70312.3 did not specify due dates for payments by C.W. Mining,
but it did provide that additional charges could be applied to any amount not paid
within thirty days of the invoice date. In addition, Quotation 70312.3 required
progress payments as follows: 15% due within 7 days, 25% due upon issuance of
submittals, 25% due upon release of manufacturing, 25% due upon completion of
1 A longwall electrical system is part of the implementation of a longwall
mining system, a form of underground coal mining where a long wall of coal ismined in a single seam. See Plateau Mining Corp. v. Fed. Mine Safety & Health
Review Comm’n, 519 F.3d 1176, 1178 (10th Cir. 2008) (describing operation of a
2 The Trustee freely admitted at oral argument that both methods of mining
result in the production of coal.
testing, and 10% due upon completion of commissioning. The payment terms
between SMC and C.W. Mining were typical of the progress payment terms SMC
had with its other customers. This “pay as you go” or “progress payment”
schedule was typical for longwall system purchases at the time.
On September 18, 2007, SMC issued to C.W. Mining an invoice for
$805,539.75, representing the cost of the majority of the equipment and services
it had provided or was to provide. That invoice, as well as other invoices SMC
issued to C.W. Mining, indicated the terms of payment as “special,” to reflect the
fact that C.W. Mining was to make progress payments as it received invoices
from SMC. Although the Trustee argues the term “special” is itself reflective that
this transaction was not “ordinary,” he introduced no expert or other testimony in
opposition to demonstrate that this term meant anything other than what SMC
For its customers, like C.W. Mining, who were making progress payments,
SMC prepared and maintained two different sets of invoices, one internal and one
external. The internal invoices were used for internal accounting purposes only,
and were not typically issued to a customer. On October 16, 2007, C.W. Mining
made payment by wire transfer, in the amount of $200,000, on the September 18,
2007 external invoice. SMC credited this payment to its internal invoice.
The October 2007 payment was one of five wire transfer payments made
between September 27, 2007 and October 23, 2007, and applied to the September
18, 2007 invoice. The five payments came from three different sources: C.W.
Mining’s own account, the account of C.W. Mining’s accounts payable service
provider, and the account of Standard Industries, another company doing business
with C.W. Mining, using proceeds from the coal mined by C.W. Mining. It was
not unusual for SMC’s customers to make multiple payments on a single invoice,
particularly when an invoice exceeded $250,000. It was also not unusual for
SMC to receive payment from entities affiliated with or directed by its customers.
Other than the terms of the purchase contract between SMC and C.W. Mining,
SMC was not aware of how or why C.W. Mining decided to make multiple
payments on the September 18, 2007 invoice. Further, SMC had no knowledge of
how or why C.W. Mining decided to have payments made to SMC from multiple
The payment C.W. Mining made in October 2007 was made twenty-eight
days after SMC issued the September 18, 2007 invoice. In SMC’s experience,
payment within this time frame was typical for its customers. Further, other than
its original agreement with C.W. Mining, SMC did not provide any instructions to
C.W. Mining or its representatives or affiliates regarding the form, manner, or
time of payments on the longwall electrical system. SMC also made no demands
upon C.W. Mining of any kind related to payment. In addition, SMC is not aware
why or how decisions were made by C.W. Mining regarding the manner, form,
and timing of payments to SMC.
The bankruptcy court specifically found that neither early payment nor
partial payment was inconsistent with the agreement SMC and C.W. Mining had
made. The bankruptcy court also found that the October 2007 payment was made
in accordance with the longwall system purchase agreement between SMC and
C.W. Mining. Finally, the bankruptcy court found that SMC did not engage in
any coercive collection activity with regard to the October 2007 payment.
On January 8, 2008, several months after C.W. Mining had purchased the
longwall electrical system from SMC and just under 90 days since it made the
October 2007 payment, C.W. Mining was involuntarily placed into bankruptcy.
The involuntary bankruptcy was precipitated by a judgment obtained by Aquila,
Inc. against C.W. Mining on October 30, 2007. 3 Although C.W. Mining remained
The October 30, 2007 judgment stemmed from a July 5, 2005 lawsuit by
Aquila against C.W. Mining for breach of a coal supply agreement.
in the Chapter 11 bankruptcy for some time, the case was later converted to
The parties have never disputed that the transfer was a preference, instead
only disputing whether the § 547(c)(2) ordinary course of business defense
applied. 4 After the lengthy period of discovery, the bankruptcy court granted
summary judgment to SMC and dismissed the adversary proceeding.
II. Jurisdiction and Standard of Review
This Court has jurisdiction to hear timely filed appeals from “final
judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit,
unless one of the parties elects to have the district court hear the appeal. 5 Neither
party elected to have this appeal heard by the United States District Court for the
District of Utah. The parties have therefore consented to appellate review by this
Court. The Trustee timely appealed the decision, and the bankruptcy court’s
order is an appealable, final order.6
This Court reviews the bankruptcy court’s legal conclusions de novo and its
findings of fact under the “clearly erroneous” standard of review. 7 The Tenth
Circuit has assessed the application of the ordinary course of business defense as
4 “The ‘ordinary course’ of business exception in § 547(c)(2) is an
affirmative defense to an avoidance procedure.” Jagow v. Grunwald (In re Allied
Carriers’ Exch., Inc.), 375 B.R. 610, 615 (10th Cir. BAP 2007).
5 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr. P. 8001, 8002;
10th Cir. BAP L.R. 8001-3.
6 See Elec. Metal Prods., Inc. v. Bittman (In re Elec. Metal Prods., Inc.), 916
F.2d 1502, 1503 (10th Cir. 1990) (appeal of summary judgment in adversaryproceeding to recover a preference); Gonzales v. Conagra Grocery Prods. Co. (In
re Furr’s Supermarkets, Inc.), 373 B.R. 691, 697 (10th Cir. BAP 2007) (holdingthat an order of a bankruptcy court concluding a preference action was a final,
7 In re Robinson, 295 B.R. 147, 149 (10th Cir. BAP 2003).
“primarily factual” and applied the clearly erroneous standard of review. 8 A
factual finding is clearly erroneous only “if it is without factual support in the
record or if, after reviewing all the evidence, we are left with the definite and
firm conviction that a mistake has been made.”9
A. Burden of Proof
SMC, as the transferee of the payment from C.W. Mining, bears the burden
of proving the ordinary course of business defense. 10 The ordinary course of
business defense should be narrowly construed.11
B. Application of Ordinary Course of Business Defense
The sole issue on appeal is the application of the ordinary course of
business defense of 11 U.S.C. § 547(c)(2). That subsection states:
(c) The trustee may not avoid under this section a transfer–
. . .
(2) to the extent that such transfer was in payment of a debtincurred by the debtor in the ordinary course of business orfinancial affairs of the debtor and the transferee, and suchtransfer was–
8 Clark v. Balcor Real Estate Fin., Inc. (In re Meridith Hoffman Partners),
12 F.3d 1549, 1553 (10th Cir. 1993); see also Jobin v. McKay (In re M & L Bus.
Mach. Co.), 84 F.3d 1330, 1339 (10th Cir. 1996) (“On this factual question[concerning application of § 547(c)(2)], we must accept the conclusions of thebankruptcy court unless they are clearly erroneous.”); In re Allied Carriers’
Exch., Inc., 375 B.R. at 616 (“The bankruptcy court’s determination that thetransaction at issue fell within the ordinary course of business exception of
§ 547(c)(2) is a question of fact, reversible only if clearly erroneous.”).
9 In re Miniscribe Corp, 309 F.3d 1234, 1240 (10th Cir. 2002) (internal
quotation marks omitted); see also Fed. R. Bankr. P. 8013 (“Findings of fact,
whether based on oral or documentary evidence, shall not be set aside unlessclearly erroneous[.]”).
10 In re M & L Bus. Mach. Co., 84 F.3d at 1339; see also 11 U.S.C. § 547(g)
(“For the purposes of this section, . . . the creditor or party in interest againstwhom recovery or avoidance is sought has the burden of proving thenonavoidability of a transfer under subsection (c) of this section.”).
11 In re M & L Bus. Mach. Co., 84 F.3d at 1339.
(A) made in the ordinary course of business or financialaffairs of the debtor and the transferee; or
(B) made according to ordinary business terms[.]12
The purpose of the preference statute is to both “prevent creditors from exerting
undue pressure on struggling debtors” and to “discourage ‘unusual action’ that
might ‘favor certain creditors or hasten bankruptcy by alarming other creditors
and motivating them to force the debtor into bankruptcy to avoid being left
out.’” 13 The “general purpose of the § 547(c)(2) defense” to the preference
action, however, is “‘to leave undisturbed normal financial relations, because it
does not detract from the general policy of the preference section to discourage
unusual action by either the debtor or his creditors during the debtor’s slide into
bankruptcy.’” 14 The fact that there is no prior history between the parties –the
parties here had not engaged in business prior to the longwall electrical system
purchase in mid-2007– does not preclude the application of § 547(c)(2).15
Although “ordinary course of business” is not defined in the Bankruptcy
12 SMC elected to proceed exclusively under § 547(c)(2)(A), and therefore
subsection (c)(2)(B) of § 547 is not relevant to this appeal.
13 Milk Palace Dairy LLC v. L & N Pump, Inc. (In re Milk Palace Dairy
LLC), 385 B.R. 765, 771 (10th Cir. BAP 2008) (quoting In re Meridith Hoffman
Partners, 12 F.3d at 1553).
14 In re M & L Bus. Mach. Co., 84 F.3d at 1339-40 (quoting In re Meridith
Hoffman Partners, 12 F.3d at 1553). See also Barnhill v. Johnson, 503 U.S. 393,402 (1992) (stating that § 547(c) was “designed to encourage creditors to continueto deal with troubled debtors on normal business terms by obviating any worrythat a subsequent bankruptcy filing might require the creditor to disgorge as apreference an earlier received payment”).
15 See In re Hedged-Invs. Assocs., Inc., 48 F.3d 470, 471-72, 475-76 (10th
Cir. 1995) (applying § 547(c)(2) when the only payment made to the creditor wasa single payment during the preference period, and concluding that the one-timetransfer to creditor/investor in Ponzi scheme was not made in ordinary course ofbusiness); see also Kleven v. Household Bank F.S.B., 334 F.3d 638, 642 (7th Cir.
2003) (observing that most courts “side with the view that a first-time transactionis not per se ineligible for protection from avoidance under § 547(c)(2)”); Gosch
v. Burns (In re Finn), 909 F.2d 903, 908 (6th Cir. 1990) (stating that the issuanceof a debt “can be in the ordinary course of financial affairs even if it is the firstsuch transaction undertaken by the [parties]”).
Code, the statute clearly has two prongs: whether the debt was incurred in the
ordinary course of business of the debtor and creditor, and whether the debt
payment was made in the ordinary course of business of the debtor and creditor.
The first prong is focused on the original transaction between C.W. Mining and
SMC when the debt was created. Regarding the “incurred” part of the § 547(c)(2)
question, a leading bankruptcy treatise states:
[C]ourts generally are interested in whether the debt was incurred ina typical, arms-length commercial transaction that occurred in themarketplace . . . . If the debt were incurred in the routine operation ofthe debtor and the creditor, then it can be said to have been incurredin the ordinary course of each party’s business . . . . [A] debt will notbe considered incurred in the ordinary course of business if creationof the debt is atypical, fraudulent or not consistent with an arms-
length commercial transaction.16
This Court must decide, therefore, whether the bankruptcy court was correct to
conclude that the debt for the longwall electrical system was incurred by C.W.
Mining in the ordinary course of both the business of C.W. Mining and of SMC.
The Trustee argues that because the debt arose from C.W. Mining’s
purchase from SMC of a longwall electrical system of mining –a type of mining
different from the type of mining C.W. Mining had previously used– the debt
could not have been incurred in the ordinary course of business. In other words,
the Trustee argues that the debt could not have been incurred in the ordinary
course of C.W. Mining’s coal mining business because the debt was for a
longwall coal mining system, not to support a continuous coal mining system.
The Trustee also argues that the longwall electrical system purchase was itself
extraordinary, because C.W. Mining sought to build the longwall system from
refurbished parts –a task for which it had no prior experience.
Decisions from the Tenth Circuit Court of Appeals have not discussed the
“incurred” prong of the ordinary course of business defense. However, in an oft
5 Collier on Bankruptcy ¶ 547.04[a][i] (Alan N. Resnick & Henry J.
Sommer eds., 16th ed. 2013).
cited bankruptcy court opinion addressing this prong, Huffman v. New Jersey
Steel Corp. (In re Valley Steel Corp.), 17 the bankruptcy court stated: “courts
generally are interested in whether or not the debt was incurred in a typical, arms-
length commercial transaction that occurred in the marketplace, or whether it
occurred as an insider arrangement with a closely-held entity.” 18 The Valley Steel
Corp court specifically noted that the “transaction need not have been common; it
need only be ordinary.”19
The decisions of those circuits addressing the “incurred” prong of the
ordinary course of business defense have used similar reasoning to that expressed
in Valley Steel Corp. The Sixth Circuit concluded that the “incurring of long-
term consumer debt that is a ‘normal financial relation’ and that is not ‘unusual
action’” met the requirement that debt be incurred in the ordinary course of
business. 20 The Ninth Circuit has similarly focused on “whether the debt [was
incurred] similar to what we would expect of similarly situated parties.” 21 On the
other side of the coin, the Eighth Circuit found that a gambling debt was not
incurred in the ordinary course of business because the debt was not incurred to
“preserve ‘normal financial relations,’” but, rather, was “a desperate debtor’s
irresponsible accumulation of gambling debts in an ill-fated attempt to cover
fraud and embezzlement losses.”22
The Trustee does not dispute either that C.W. Mining was a mining
company or that SMC is a mining equipment vendor. The Trustee also does not
17 182 B.R. 728 (Bankr. W.D. Va. 1995).
18 Id. at 735.
19 Id. (internal quotation marks omitted).
20 In re Finn, 909 F.2d at 907.
21 In re Ahaza Sys., Inc., 482 F.3d 1118, 1126 (9th Cir. 2007).
22 In re Armstrong, 291 F.3d 517, 527 (8th Cir. 2002).
dispute that C.W. Mining incurred the debt from SMC in an effort to increase its
coal mining production, i.e., its primary business purpose. Although we
acknowledge that the ordinary course of business defense “should be narrowly
construed,” 23 the Trustee’s focus is misplaced. The bankruptcy court was not
tasked with judging the business decisions of C.W. Mining in determining
whether debt was incurred in the ordinary course of business. Rather, the
bankruptcy court only had to determine whether the debt was incurred ordinarily
between C.W. Mining and SMC. As a result, the bankruptcy court properly
focused on the creation of the debt at issue, asking whether the transaction was a
typical arms-length creation of debt in the open market. The Trustee challenged
none of the facts that demonstrated it was such an arms-length transaction in the
open market by previously unrelated companies.
The second prong of the ordinary course of business defense –whether a
debt payment is made in the ordinary course of business –requires that the
creditor asserting that the payment was made in the ordinary course of business
“establish that the disputed payment was ‘ordinary’ . . . as between the parties.”24
In Milk Palace Dairy, we analyzed four factors: “1) the length of time involved
in the preference period transaction; 2) whether the amount or the form of that
payment differed from previous practice; 3) whether that transaction involved any
unusual collection or payment activity; and 4) the circumstances under which the
23 Jobin v. McKay (In re M & L Bus. Mach. Co.), 84 F.3d 1330, 1339 (10th
24 Milk Palace Dairy LLC v. L & N Pump, Inc. (In re Milk Palace Dairy
LLC), 385 B.R. 765, 769 (10th Cir. BAP 2008). Prior to the 2005 amendments to
the Bankruptcy Code (oft-referred to as “BAPCPA,”), a creditor was required toshow that a transfer was ordinary both subjectively and objectively. The
BAPCPA amendments to § 547(c)(2) changed the requirements so that thecreditor could show either subjective ordinariness or objective ordinariness, but
need not show both. See id. at 769 n.6 (explaining BAPCPA’s amendments).
SMC proceeded with the subjective prong of ordinariness, under § 547(c)(2)(A),
rather than (c)(2)(B) –focusing only on whether the transfer was made in theordinary course of business of C.W. Mining and SMC.
transfer was made.” 25 Ordinariness is judged both from the perspective of the
debtor and the transferee. 26 Ordinary business terms “are those used in ‘normal
financing relations’: the kinds of terms that creditors and debtors use in ordinary
circumstances, when debtors are healthy.”27
Here, the Trustee asserts the payment was not ordinary because the five
payments made from C.W. Mining to SMC came from different C.W. Mining-
related accounts. The Trustee also asserts error because the amounts that were
paid from C.W. Mining to SMC did not precisely correspond to an invoice
amount or a progress payment. The Trustee claims these facts show that the
amounts and sources of tender differed from past practice, and that as a result,
C.W. Mining engaged in unusual payment activity. Finally, the Trustee claims
the bankruptcy court erred in not considering that shortly after C.W. Mining made
the October, 2007 payment to SMC, Aquila received a substantial money
judgment against C.W. Mining. 28 The Trustee argues that the existence of that
judgment supports a finding that the circumstances under which the October,
2007 payment was made were unusual.
We must again note that the Trustee did not challenge the affidavit SMC
used to support the facts upon which it based its claim for summary judgment.
That affidavit established that the payment terms between SMC and C.W. Mining
were typical of SMC’s progress payment terms with other customers, and that the
“pay as you go” schedule was typical for longwall electrical system purchases.
25 Id. at 769.
26 Gonzales v. Amplex Corp. (In re Furr’s Supermarkets, Inc.), NM-06-109,
2007 WL 2827459, at *9 (10th Cir. BAP Sept. 26, 2007).
27 Clark v. Balcor Real Estate Fin., Inc. (In re Meridith Hoffman Partners),
12 F.3d 1549, 1553 (10th Cir. 1993).
28 The $24 million judgment for Aquila was entered against C.W. Mining on
October 30, 2007.
The invoice from SMC to C.W. Mining was large, and SMC established that it
was not at all unusual for its customers to make multiple payments on a single
invoice, particularly with invoices over $250,000. Further, SMC’s affidavit
established that the payments by C.W. Mining from multiple accounts were not
unique; SMC specifically stated that it was not unusual to receive payment from
entities affiliated with or directed by its customers. SMC’s affidavit also
established that the October 2007 payment was made 28 days after receiving the
invoice upon which it was based, and that in SMC’s experience, payment within
this time frame was typical for its customers.
It is also important that SMC established it did nothing to solicit the
October 2007 payment from C.W. Mining. The bankruptcy court specifically
found that other than negotiate the original contract terms reflected in Quotation
70312.3, SMC did not provide any instructions to C.W. Mining or its
representatives or affiliates regarding the form, manner, or time of payments, nor
did SMC make demands of any kind upon C.W. Mining related to payment. The
bankruptcy court specifically found that SMC did not engage in coercive
collection activity with regard to the October 2007 payment. The Trustee points
to no evidence to contradict these facts; he simply would prefer a different
conclusion be drawn from those facts. There is no basis, however, to do so.
We have previously noted that although a payment for “significantly less
than the total due” was an indication that a transaction was not subjectively
ordinary, the facts that “[t]here was no collection activity with respect to the
disputed payment, no pressure put on Debtor to pay, nor any other apparent
change in the parties’ dealings with respect to [the] payment” indicated a
transaction was subjectively ordinary. 29 We have also previously held that
payment by cashier’s check in an attempt to maintain friendly relations with
In re Milk Palace Dairy, LLC, 385 B.R. at 769, 770.
creditors was not unusual, because it was not unusual for the transferee to receive
payment by cashier’s check, and because the transferee did nothing to solicit the
payment. 30 The payment from C.W. Mining to SMC was similar to the payments
in these cited cases; it was a payment made shortly before bankruptcy, but with
no other unusual factor surrounding it.
The evidence clearly supports the bankruptcy court’s finding that the
October 2007 payment was made in the ordinary course of business of C.W.
Mining and of SMC. There is nothing about the terms of that payment, or the
parties’ interactions surrounding the payment, that make the October 2007
payment unusual or extraordinary. Further, there was no implicit or explicit
pressure put on C.W. Mining by SMC. Applying the clearly erroneous standard
of review, the factual record supports the bankruptcy court’s conclusion that SMC
carried its burden of proof to show that the October 16, 2007 payment was
incurred and made in the ordinary course of business of C.W. Mining and SMC.31
Because we conclude that the bankruptcy court properly applied the
ordinary course of business defense of 11 U.S.C. § 547(c)(2)(A) to the facts of
this case, we affirm the bankruptcy court’s order entering judgment for SMC.
30 Tomlins v. BRW Paper Co., Inc. (In re Tulsa Litho Co.), 229 B.R. 806, 81011
(10th Cir. BAP 1999).
31 Jobin v. McKay (In re M & L Bus. Mach. Co.), 84 F.3d 1330, 1339 (10th
Cir. 1996) (transferee has burden of proof); In re Miniscribe Corp, 309 F.3d1234, 1240 (10th Cir. 2002) (finding is clearly erroneous only when “it is withoutfactual support in the record or if, after reviewing all the evidence, we are leftwith the definite and firm conviction that a mistake has been made” (internalquotation marks omitted)).