KSB

11-20325 Buerge (Doc. # 243)

In Re Buerge, 11-20325 (Bankr. D. Kan. Mar. 8, 2013) Doc. # 243

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The relief described hereinbelow is SO ORDERED.
SIGNED this 7th day of March, 2013.

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS

In re:

AARON GRANT BUERGE, Case No. 11-20325
Debtor. Chapter 7

MEMORANDUM OPINION AND ORDER
ON JOINT MOTION FOR STAY OF JUDGMENT AND
JOINT MOTION FOR RELIEF FROM JUDGMENT

Background

The Chapter 7 Trustee, Eric C. Rajala (“Trustee”), and Prime Lending II, LLC (“Prime”),
have jointly moved for stay pending appeal1 of the Bankruptcy Court’s September 6, 2012,
judgment granting the Debtor’s motion to compel the Trustee to abandon stock and denying the
Trustee’s motion to sell stock to Prime.2 The Trustee and Prime have also jointly moved for
relief from that judgment under Federal Rule of Civil Procedure 60(b)(2), (3) and (6),3 alleging

1 Doc. No. 220.
2 The Trustee and Prime are also referred to herein as “Joint Movants.”
3 Doc. No. 221. References to sections in the Federal Rules of Civil Procedure are referred to as “Rule.”

All other statutory references are to Title 11 of the United States Code, the “Bankruptcy Code.”

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newly discovered evidence and fraud by the Debtor. Joint Movants appealed the judgment, and
that appeal is pending before the Bankruptcy Appellate Panel for the 10th Circuit.

The standards for the bankruptcy court for assessing a Rule 60(b) motion and a motion
for stay of judgment pending appeal are discussed below.

I.
Joint Motion for Relief from Judgment under Rule 60(b).
A.
Standards of Law.
A motion for relief from judgment is governed by Rule 60.4 The Trustee and Prime seek
relief from judgment under Rule 60(b), specifically, under subsections (b)(2), (b)(3), and (b)(6).
Rule 60(b) states:

(b)
Grounds for Relief from a Final Judgment, Order, or Proceeding. On motion
and just terms, the court may relieve a party . . . from a final judgment, order,
or proceeding for the following reasons:
. . . .
(2)
newly discovered evidence that, with reasonable diligence, could not
have been discovered in time to move for a new trial under Rule
59(b);
(3)
fraud (whether previously called intrinsic or extrinsic),
misrepresentation, or misconduct by an opposing party;
. . . .

(6) any other reason that justifies relief.
A motion under Rule 60(b) must be filed “within a reasonable time—and for reasons (1), (2),
and (3) no more than a year after the entry of the judgment or order or the date of the
proceeding.” The Rule 60(b) motion, however, does not itself affect the underlying order’s
finality or suspend its operation.
When an appeal of a final order divests the trial court of jurisdiction over that order, the
proper procedure for a movant seeking Rule 60 relief is to ask the trial court to issue a ruling

4 Rule 60 is applicable in bankruptcy proceedings pursuant to Federal Rule of Bankruptcy Procedure 9024.

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under Rule 62.1.5 Under Rule 62.1(a), “[i]f a timely motion is made for relief that the court lacks
authority to grant because of an appeal that has been docketed and is pending, the court may: (1)
defer considering the motion; (2) deny the motion; or (3) state either that it would grant the
motion if the court of appeals remands for that purpose or that the motion raises a substantial
issue.”6 The bankruptcy court can, therefore, proceed to consider the Rule 60(b) motion, as long
as it issues its order on the Rule 60(b) motion under the strictures of Rule 62.1(a).7

The focus of Rule 60(b) relief is to balance “the desire to preserve the finality of
judgments” against the requirement “that justice be done in light of all the facts.”8 “Rule 60(b) is
an extraordinary procedure permitting the court that entered judgment to grant relief therefrom
upon a showing of good cause within the rule.”9 The moving party under Rule 60(b) bears the
burden of demonstrating that it satisfies the prerequisites for relief.10 The matter is left to the
discretion of the bankruptcy court.11

Regarding Rule 60(b)(2), for newly discovered evidence to warrant relief the moving
party must show: “(1) the evidence was newly discovered since the trial; (2) [the moving party]
was diligent in discovering the new evidence; (3) the newly discovered evidence could not be

5 Rule 62.1 is a 2009 addition to the Federal Rules of Civil Procedure, effective December 1, 2009.
Example cases using the Rule 62.1 indicative ruling procedure are: Raley v. Hyundai Motor Co. Ltd., 642 F.3d 1271,
1274 (10th Cir. 2011) (district court obtained leave to modify its judgment from the Tenth Circuit using Rule 62.1
after noticing clerical error in the judgment); McDonald v. OneWest Bank, FSB, Case No. 10-cv-01749-RPM, 2011
WL 6012511, at *3 (D. Colo. Dec. 1, 2011) (applying Rule 62.1 to deny a Rule 60(b) motion of an order on appeal).

6 Under Rule 62.1(b), the movant under this rule must “promptly” notify the appellate court only if the trial
court decides that it will proceed under Rule 62.1(a)(3).

7 The Joint Movants also asked the BAP to either summarily remand for reconsideration by the Bankruptcy
Court or stay the appeal and allow the Bankruptcy Court to rule on the joint motion. In response, that court issued an
order in In re Buerge, KS-12-074 (B.A.P. 10th Cir. Jan. 8, 2013).

8 Cessna Fin. Corp. v. Bielenberg Masonry Contracting, Inc., 715 F.2d 1442, 1444 (10th Cir. 1983)
(quoting Seven Elves, Inc., v. Eskenazi, 635 F.2d 396, 401 (5th Cir. 1981)) (internal quotations omitted).

9 Id.

10 Servants of the Paraclete v. Does, 204 F.3d 1005, 1012 (10th Cir. 2000).

11 Greenwood Explorations, Ltd. v. Merit Gas & Oil Corp., Inc., 837 F.2d 423, 426 (10th Cir.1988) (“A
motion to vacate judgment under Rule 60(b) is left almost entirely up to the discretion of the trial court.”).

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merely cumulative or impeaching; (4) the newly discovered evidence [is] material; and (5) that a
new trial[] with the newly discovered evidence would probably produce a different result.”12

Regarding Rule 60(b)(3), relief based on fraud, misrepresentation, or misconduct by an
opposing party, the Tenth Circuit has stated that “before retrial is mandated under Rule 60(b)(3)
in consequence of discovery misconduct, the challenged behavior must substantially have
interfered with the aggrieved party’s ability fully and fairly to prepare for and proceed at trial.”13

Regarding Rule 60(b)(6), relief based on “any other reason that justifies relief,” the
bankruptcy court has the power to vacate a judgment under this subsection “whenever such
action is appropriate to accomplish justice.”14 Rule 60(b)(6) relief is narrower than the text of the
Rule may imply. A party must show “extraordinary circumstances” to justify reopening a final
judgment under Rule 60(b)(6).15 The Supreme Court has held that Rule 60(b)(6) is mutually
exclusive of the other subsections of Rule 60(b).16 Therefore, because the Joint Movants here
have sought relief under Rule 60(b)(2) and (b)(3), without arguing a separate basis under (b)(6),
there is no need to consider or analyze Rule 60(b)(6).

B. Analysis.
The Trustee and Prime, as Joint Movants, carry the burden of persuasion for their Rule
60(b) motion.

Regarding Rule 60(b)(2), relief based on newly discovered evidence, the Trustee and
Prime argue that throughout trial, the Debtor contended that the stock at issue—stock in two

12 Zurich N. Am. v. Matrix Serv., Inc., 426 F.3d 1281, 1290 (10th Cir. 2005) (quoting Graham v. Wyeth
Lab., 906 F.2d 1399, 1416 (10th Cir. 1990)) (internal quotations omitted).

13 Woodworker’s Supply, Inc. v. Principal Mut. Life Ins. Co., 170 F.3d 985, 993 (10th Cir. 1999) (quoting
Anderson v. Cryovac, Inc., 862 F.2d 910, 924 (1988)) (emphasis in original) (internal quotations omitted).

14 Klapprott v. United States, 335 U.S. 601, 614–15 (1949).

15 Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 393 (1993).

16 See id. (concluding that Rule 60(b)’s provisions are “mutually exclusive”).

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bank holding companies, Buerge Bancshares, Inc. (“BBI”) and Financial Enterprises, Inc.
(“FEI”)—had little or no value. Joint Movants assert that the Debtor, therefore, argued at trial
that the stock should be abandoned by the Trustee, rather than sold to Prime by the Trustee.17
However, this Court did not hold that the gross value of the stock was inconsequential; what the
Court held is that Prime’s offer to purchase the stock, after payment of encumbrances, costs and
fees, would generate an inconsequential dividend of $27,000 to pay on approximately $3 million
in unsecured claims. This net payment rendered the asset of inconsequential value to the estate.
As the hearing proceeded, the sale became increasingly complicated, and the inconsequential net
value to unsecured claimants did not justify the incurrence of more risk and delay by the estate.
Prime’s proposed purchase price of the Debtor’s stock, which increased with the accrual of post-
petition interest, allowable attorneys’ fees and costs, and additional costs to the estate, did not
justify approval of a transaction that would provide a pittance to pay toward unsecured claims.
While the Court considered other factors pertinent to the sale, the increasingly complicated sale
transaction,18 the risk to the estate, and a pitiful distribution to unsecured creditors were
important considerations for the Court’s ruling that the sale should not be approved and that the
stock should be abandoned to the Debtor.

The Court’s judgment of September 6, 2012, based on facts presented at a three-day trial
beginning on July 11, 2012, concluded that the Trustee had not carried his burden to prove a

17 As a clarification, the Court in its decision states that a representative of Prime neither appeared or
testified at the hearing; although Kevan Acord did appear at the hearing on this matter, he appeared as a
representative of Prime, the fictitious entity, and not as representative of the seven purchasers. Regardless, Acord
did not testify at the hearing.

18 Indeed, during the course of the three-day hearing there was indication by Prime and the Trustee that
additional amendments to the purchase agreement were necessary, as well as the possibility for a legal opinion letter
issued by a securities attorney. Instead of a relatively quick liquidation of the estate’s interest in the encumbered
stock, the facts establish an increasingly complex transaction.

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sound business reason for the sale (because of the high costs of sale with only a de minimis net
return), a fair sale price (because Prime’s offer was the Trustee’s only indication of price due to
failure to solicit other bids), and the buyer was a good faith purchaser (because the proposed sale
was not for fair value and there was no arm’s length negotiation). The judgment concluded that
the Trustee did show adequate and reasonable notice of the sale and that no other bidders or sales
interest beyond the creditor matrix had been pursued. Ultimately, this Court concluded that the
proposed sale was not based on sound business judgment. Regarding abandonment, the
judgment granted the Debtor’s motion to abandon based generally on these same facts and
because the evidence failed to show that the stock’s value was consequential to the estate.

A month after the Bankruptcy Court’s decision, on October 9, 2012, the Joint Movants
allegedly learned that the primary asset of BBI, the stock of the First State Bank of Joplin, was
being sold to Pinnacle Bank. The terms of the sale are unknown. The Sheshunoff & Co. firm, an
investment banking company (“Sheshunoff”), issued a press release announcing the sale and
advising that it had represented the First State Bank of Joplin in the transaction. When Justin
Buerge, president of BBI and the Debtor’s brother, was asked in his pre-trial deposition about a
value analysis by Sheshunoff of the First State Bank of Joplin, Justin Buerge stated that no one
had asked Sheshunoff to prepare the document. The Joint Movants allege that the pending sale
of the First State Bank of Joplin stock and the hiring of Sheshunoff were not disclosed to the
Trustee, who, as representative of the estate, was an 11 percent shareholder of BBI, the entity
that wholly-owned the First State Bank of Joplin. However, at the time of the post-trial
transaction, the Court had ordered abandonment of the stock to the Debtor. Prior to
abandonment, the Debtor notified the Trustee of the dates, times and locations of board
meetings. The Trustee did not attend any of these meetings. The Joint Movants did not file a

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joint motion for stay of execution until December 12, 2012, after the sale of the BBI stock had
occurred. It was the Debtor’s prerogative to participate in such sale as the owner of the BBI
stock since, even though it had been appealed, the Court’s Judgment was final.19

The Joint Movants argue that they were prejudiced in their prosecution of the motion to
sell and in their defense of the Debtor’s motion to abandon. The Joint Movants allege that
undisclosed facts were not discovered until October 9, 2012, and could not have been discovered
earlier because Justin Buerge’s deposition testimony regarding Sheshunoff was, at best,
incomplete and misleading. However, the Court provided ample time for discovery to be
conducted by the parties. At trial, Prime had an opportunity to examine the Debtor, his father
(Alden Buerge) and his brother (Justin) with regard to Sheshunoff’s valuations, pending contacts
and possible sales.20 Prime failed to do so. Obviously, the post-trial sale could not have been
discovered prior to the Court hearing the matter. Joint Movants argue that although it was
concluded after the hearing, that information regarding a planned sale of the stock may not have
been disclosed. However, this information was not material and would not have produced a
different result since all that was before the Court was Prime’s proposed purchase of the stock,
and this proposed purchase was not tied to the value of the stock. The post-trial sale of the stock
does not raise any evidence that the Debtor knew of a pending sale at the time of the hearing
before this Court. This Court had the opportunity to observe the Debtor’s testimony and
demeanor in this and various other hearings, and it is this Court’s unequivocal conclusion that
the Debtor’s testimony was truthful and credible. Alden Buerge’s testimony was also credible.

19 “A party who desires to appeal is not obliged to seek a stay of the judgment pending appeal. However, if
no stay is in effect, the prevailing party may treat the judgment of the bankruptcy court as final, notwithstanding that
an appeal is pending.” See 10 COLLIER ON BANKRUPTCY ¶ 8005.01 at 8005-2 (Alan N. Resnick & Henry J.
Sommer, eds., 16th ed. 2012).

20 Justin Buerge did not testify at trial and Joint Movants did not subpoena him.

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At the heart of the joint motion is that the Court would have reached different

conclusions with regard to valuation and abandonment if the alleged newly discovered evidence
were presented at trial. To the contrary, it is this Court’s observation that neither the Trustee nor
Prime undertook any efforts to perform valuations of the stock and did not have their own
witness testify at the trial as to valuation. As was previously noted, Kevan Acord was present
for the trial, but did not testify. It was the decision of the Joint Movants not to have a witness
testify regarding the important considerations of good faith, valuation of the stock, and whether
the stock was ultimately of consequential value to the bankruptcy estate. Whatever the strategic
reasons for this decision, Prime and the Trustee must live with this vacuum of evidence. Prime’s
offer to purchase the stock was not tied to valuation. Prime’s monetarily ascending offer was
calculated to pay off liens that encumbered the stock, necessary fees and costs related to the sale,
including the Chapter 7 Trustee’s fees and secured lender’s attorney’s fees, and to leave a net
distribution to unsecured claimants of approximately $27,000.

It seems inconsistent that the focus of Prime and the Trustee’s Rule 60(b) requests
pertains to valuation of the stock, when the basis for Prime’s calculation of its purchase price
was not tied to the value of the BBI stock, but was based upon a calculation to pay as little as
possible for the stock. With respect to abandonment, at the end of the day the stock is only of
consequential value if Prime were willing to pay a sufficient amount that would generate a
consequential distribution to unsecured claimants; this is something which Prime had ample time
to accomplish, but failed to do. Prime’s offer was presented to this Court as the only offer to
purchase the stock, and the Trustee did not carry his burden of proof for this Court to approve
the sale. The evidence did establish that, after this lengthy process, the stock was of
inconsequential value to the bankruptcy estate.

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To prevail under Rule 60(b)(2), the Trustee and Prime have the burden to show that

(1) the evidence was newly discovered since the trial; (2) the Trustee and Prime were diligent in
discovering the new evidence; (3) the newly discovered evidence is not merely cumulative or
impeaching; (4) the newly discovered evidence is material; and (5) a new trial with the newly
discovered evidence will probably produce a different result.
Aside from the fact that the alleged newly discovered evidence may only be useful in an
attempt to impeach testimony under the third factor, the Trustee and Prime’s biggest hurdles are
the fourth factor (whether the newly discovered evidence is material) and the fifth factor
(whether a new trial with the newly discovered evidence would probably produce a different
result). As discussed above, the ultimate sale of the BBI stock interest is not sufficiently
material. The Joint Movants focus on Alden Buerge’s testimony regarding the family business
nature of the two bank holding companies. However, Alden Buerge also testified that the year
2011 was “a tough one” in that he was diagnosed with cancer, and there was catastrophic
destruction in Joplin, Missouri, from a tornado.21 Another impetus to the sale of stock held in
BBI during 2012 was the five percent increase to the long-term capital gains tax that was
effective January 1, 2013. The purchase was one of two made by Pinnacle prior to the end of
2012.22

Assuming arguendo that when Alden Buerge testified it was his intention to sell his BBI
stock during 2012, then this evidence would not have been material to this Court’s decision.
Prime engaged in procedural machinations wherein the purchase price increased only in a
sufficient amount to insure a net dividend to unsecured claimants in the approximate sum of

21 The stock held in BBI is for the First State Bank of Joplin.
22 Doc. No. 220, Exhibit B.

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$27,000. The Trustee and Prime had an opportunity to provide information regarding valuation
of the stock and failed to do so. The burden ultimately rested with the Trustee, and he failed to
carry this burden. In its decision, this Court understood that the stock may in fact have value in
excess of the offer made by Prime; the disconnect is that Prime’s purchase price was never tied
to the value of the stock. To determine whether the sale should be approved, and the stock
ultimately abandoned, this Court considered Prime’s proposed purchase price and the attendant
monetary benefit and risk to the estate. The alleged newly discovered evidence would not have
produced a different result at trial.

Regarding Rule 60(b)(3), relief based on fraud, the Trustee and Prime argue that the
answers provided by BBI in discovery were incomplete and that facts material to the Court’s
analysis were missing. The Trustee and Prime argue, therefore, that the fairness and integrity of
the judicial process requires relief.

To prevail under Rule 60(b)(3), the Trustee and Prime have the burden to show that the
failure to disclose the alleged preparations for the sale of the First State Bank of Joplin
substantially interfered with the Joint Movants’ ability to fully and fairly prepare for and proceed
at trial. The Trustee and Prime have not carried their burdens. The Joint Movants do not make
any argument, let alone a persuasive argument, for fraud on the part of the Debtor and rely only
on general assertions that they would have prepared for trial differently. The Joint Movants do
not provide enough support in this section of their motion.

The Joint Movants have not carried their burdens to show that they are entitled to relief
from the Bankruptcy Court’s final judgment under Rule 60(b)(2), (b)(3) or (b)(6). This Court is
mindful that relief under Rule 60(b) requires extraordinary circumstances that should be
employed judiciously as a scalpel and not as a bludgeon. The Joint Movants have not carried

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their burdens to demonstrate that they have satisfied the prerequisites for relief and have not
established good cause for this Court to grant relief from its prior judgment. Viewed in the light
of all facts, the alleged newly discovered evidence does not compel granting the Movants’ joint
motions. Even if this Court were aware at the trial of the possible future sale of the BBI stock
interest, this would not have changed the Court’s decision, because it would not change what
Prime brought to the table to purchase the stock and would not change that BBI was ultimately
of inconsequential value to the estate. At some point, after a lengthy sale process, if the Trustee
does not carry his requisite burden under §363 and approval of the sale is denied, and the Debtor
establishes that the stock is ultimately of inconsequential value to the estate, then abandonment
of the stock to the Debtor is warranted. Although there is frequently litigation attendant to a
Chapter 7 trustee’s administration of a bankruptcy estate, the trustee is a liquidator and not a
litigator. His role is to expeditiously administer the assets of the estate and to hopefully generate
a meaningful distribution to unsecured claimants. This has proved an elusive and unattainable
goal in the case sub judice.

II. Joint Motion for Stay of Judgment.
A. Standards of Law.
A motion for stay of a judgment or order of the bankruptcy court pending appeal is

governed by Federal Rule of Bankruptcy Procedure 8005. A ruling on the motion is a

discretionary matter for the bankruptcy court:

[T]he bankruptcy judge may suspend or order the continuation of other

proceedings in the case under the Code or make any other appropriate order

during the pendency of an appeal on such terms as will protect the rights of all

parties in interest.23

23 Emphasis added.

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The guiding principle of the Rule is to “protect the rights of all parties in interest.”24

The bankruptcy court applies a four-factor test to a motion for stay: (1) whether the party
seeking the stay has made a strong showing that it is likely to succeed on the merits; (2) whether
the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will
substantially injure the other parties interested in the proceeding; and (4) where the public
interest lies.25 “The first two factors of the traditional standard are the most critical.”26 The
moving party bears the burden of establishing the factors in order to show “that the
circumstances justify an exercise of that discretion.”27

The motion is properly addressed to the bankruptcy court, because per Bankruptcy Rule
8005, a motion for stay pending appeal should be filed with the BAP only after the bankruptcy
court has denied the motion.28 There is no timing requirement within Rule 8005.

B. Analysis.
As Joint Movants, the Trustee and Prime bear the burden of establishing that the four
factors enumerated above lie in their favor. The Joint Movants request that pending the outcome
of Joint Movants’motion for relief from judgment that this Court stay its order dated
September 6, 2012.29 The Joint Movants’ request for stay is thus limited in time until this Court
rules on their Rule 60(b) motion; since the Court rules on and denies such motion herein, the
request for stay is technically moot. However, even if the Joint Movants requested a stay of the
judgment pending appeal, this Court denies such request for the reasons set out below.

24 FED. R. BANK. P. 8005.

25 Nken v. Holder, 556 U.S. 418, 425–26 (2009) (discussing the traditional “standard for a stay”); see also
Lang v. Lang (In re Lang), 414 F.3d 1191, 1201 (10th Cir. 2005).

26 Nken, 556 U.S. at 434.

27 Id. at 433–34.

28 See also 10th Cir. BAP L.R. 8005-1.

29 Doc. No. 220.

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Regarding the first factor, likelihood of success on the merits, the Trustee and Prime
argue that they only seek a stay long enough for the Bankruptcy Court to rule on their joint
motion for relief from judgment under Rule 60(b). They argue that they are “very likely” to
succeed on their motion for relief from judgment because of the newly discovered evidenced
outlined therein.

Regarding the second factor, whether the applicant will be irreparably harmed absent a
stay, the Trustee and Prime argue that absent a stay, the Debtor may take action following the
BBI sale to render moot the appeal of the Bankruptcy Court’s order. The Joint Movants cite
Manges v. Seattle-First Nat’l Bank (Matter of Manges)30 in support. In Manges, the Fifth Circuit
discussed the importance of seeking stay relief in the bankruptcy court, because the bankruptcy
context often involves matters where “effective judicial relief is no longer available.”31 The
Manges court stressed that an appellant should diligently seek a stay in the bankruptcy court to
prevent its appeal from becoming moot, and, therefore, subject to dismissal on appeal.32 It is
questionable whether the Joint Movants complied with this duty to act diligently in that the Joint
Motion for Stay of Judgment was filed more than 90 days after this Court’s Judgment.33

Regarding the third factor, whether issuance of the stay will substantially injure the other
parties interested in the proceeding, the Trustee and Prime argue there will be no harm to the
Debtor, because the stay will maintain the status quo that currently exists between the parties and
the Joint Movants are not attempting to prevent or stay the sale of the stock to Pinnacle.

Regarding the fourth factor, where the public interest lies, the Trustee and Prime argue

30 29 F.3d 1034, 1039 (5th Cir. 1994).

31 Id.

32 Id. at 1039–40.

33 The Court’s judgment was filed on September 6, 2012, and the joint motion for stay of judgment was
filed on December 12, 2012. See Doc. Nos. 203 and 220, respectively.

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again that there will be no harm, because a stay will maintain the status quo. The Trustee and
Prime also argue that a stay will maximize judicial efficiency because the current judgment is
subject to reconsideration or reversal based on the newly discovered evidence.

The Joint Movants have not carried their burdens to show that a stay of the judgment
being appealed is necessary to protect the rights of all parties in interest to this case. It is not
proper for this Court to issue a stay as to either the order of abandonment or as to the Trustee’s
motion to sell. The stock held in BBI has been sold. The Court concludes that there is no
likelihood of success on appeal of the judgment. Under the Rule 60(b) analysis above, the newly
discovered evidence would probably not produce a different result at trial on either the Trustee’s
motion to sell or the Debtor’s motion to abandon. Regarding irreparable harm absent a stay, the
Joint Movants allege only that a stay is necessary to preserve their appeal, without stating how or
why this is the case, so this factor is particularly weak.34 The public interest lies in expeditiously
and finally resolving the parties’ disputes, rather than retrial and delay,35 and the denial of a stay
here properly balances the interests of the parties. This is particularly the case in bankruptcy
proceedings which are designed to provide the unfortunate but honest debtor relief. Despite
numerous extensions, Prime did not file a complaint to determine dischargeability under
§523(a); no party in interest has filed an objection to discharge under §727(a) or a motion to
dismiss under §707. A recalcitrant creditor should not be allowed to further delay the Debtor’s
fresh start, especially after the Debtor has battled the same creditor in related Chapter 11 cases.

34 Sunflower Racing, Inc. v. Mid-Continent Racing & Gaming Co. (In re Sunflower Racing, Inc.), 223 B.R.
222, 225 (D. Kan. 1998) (“[T]he fact that an appeal may be rendered moot without a stay does not itself constitute
irreparable harm.”).

35 Jarboe v. Yukon Nat’l Bank (In re Porter), 54 B.R. 81, 82 (Bankr. N.D. Okla. 1985) (“The public
interest, though difficult to measure in a case involving primarily private rights, is generally served by moving
forward.”).

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A stay pending appeal in the case sub judice is contrary to the policies underlying the
Bankruptcy Code and jurisprudence.

Document Filed Under Seal

Debtor filed a motion for leave to file an affidavit of Aaron Buerge under seal.36 This
motion was filed on December 19, 2012. On December 27, 2012, this Court entered an order
granting said motion.37 The Trustee and Prime filed a joint motion to modify said order.38
Debtor objected to the Trustee and Prime’s joint motion.39 The Debtor does not wish to disclose
the contents of the document, which is an affidavit executed by the Debtor; however, if counsel
for the Joint Movants are unable to review the sealed document, then it is impossible for the
Joint Movants to respond to the sealed document. Debtor may not “have his cake and eat it too”;
the Court has reviewed the affidavit and finds that the contents thereof shall remain under seal.
The Court shall not consider the affidavit or any information contained therein in these
proceedings. A separate order shall issue that denies the Trustee and Prime’s joint motion to
amend order.

IT IS THEREFORE ORDERED that the Trustee and Prime’s Joint Motion for Relief
from final orders under Rule 60(b)(2), (3) and (6) and for an indicative ruling under Rule 61.1 is
denied.

IT IS FURTHER ORDERED that the Joint Motion for a Stay of Judgment is denied.

###

36 Doc. No. 225.
37 Doc. No. 227.
38 Doc. No. 233.
39 Doc. No. 235.

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ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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10-06263 Marsalla v. Marsala (Doc. # 59)

Marsalla v. Marsala, 10-06263 (Bankr. D. Kan. Dec. 19, 2012) Doc. # 59

Click here for the pdf document.

The relief described hereinbelow is SO ORDERED.
SIGNED this 19th day of December, 2012.

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS

In re:

SALVATORE JOSEPH MARSALA and

LINDA JEAN MARSALA, Case No. 10-22983
Debtors. Chapter 7

FRANK A. MARSALLA,
Plaintiff,

v. Adv. No. 10-6263
SALVATORE JOSEPH MARSALA,
Defendant.

MEMORANDUM OPINION AND ORDER
ON COMPLAINT TO DETERMINE DISCHARGEABILITY

On November 28, 2012, trial was held on plaintiff’s Complaint for Determination That
Debt Is Non-Dischargeable under Bankruptcy Code §§523(a)(2), (a)(4), and (a)(6).1
Additionally, plaintiff requests of this Court a money judgment in the amount that this Court

1

Doc. No. 1.

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finds non-dischargeable. Plaintiff appeared in person and through counsel, John R. Campbell, Jr.
The defendant in this adversary proceeding, and debtor in the main bankruptcy case, Salvatore
Joseph Marsala, Sr., who also uses the first names Sam and Sal, did not appear in person but
appeared through counsel, Sam Mirabile. There were no other appearances. This is a core
proceeding and the Court has jurisdiction.2 Mr. Mirabile orally moved the Court for a
continuance of the evidentiary hearing; for the reasons stated on the record, that oral motion for
continuance was denied.

The Court, after considering the evidence and the arguments of counsel, took the matter
under advisement. The Court is now ready to rule.

Background

This is another sad tale of a family splintered by money. Plaintiff is 84 years old, and
defendant is plaintiff’s son. Defendant filed a Chapter 7 bankruptcy petition on August 30,
2010. His wife, Linda Jean Marsala, is the co-debtor; she is not a party in this adversary
proceeding. Defendant listed plaintiff as a general unsecured creditor with a disputed claim in
the amount of $465,000, with reference to an underlying state court lawsuit. The only real
property the debtor listed in his schedules is his residence, which is claimed as exempt. Plaintiff
timely filed his complaint for determination that the debt is nondischargeable pursuant to 11

U.S.C. §§523(a)(2), (a)(4), and (a)(6).3 Plaintiff also requests this Court reduce this debt to
judgment. Defendant disputes that he has any debt owed to plaintiff, his father, and if any debt is
owed, that the debt is dischargeable.
2 28 U.S.C. §157; 28 U.S.C. §1334.

3 Future references to Title 11 in the text shall be to the section number only; unless noted otherwise all
statutory references are to the Bankruptcy Code.

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The legal battle between plaintiff and defendant predates the filing of the bankruptcy
petition. Plaintiff sued defendant in the Circuit Court of Jackson County, Missouri, in 2008.
Plaintiff alleged the defendant improperly converted plaintiff’s monies totalling $737,483.54.
On the eve of a jury trial, the Jackson County lawsuit was settled by Judgment Entry docketed on
March 3, 2010.4 Under the terms of the Judgment Entry, the defendant confessed judgment in
favor of plaintiff in the amount of $465,000. Under the Judgment Entry, the defendant also
agreed to convey his interest in certain real estate and stocks to plaintiff; the value of the real
estate and the stocks would then be credited to the $465,000 judgment. These conveyances of
the real estate and stock did not occur. At trial, neither plaintiff nor defendant alleged that the
Judgment Entry has collateral estoppel effect in these proceedings as to the amount of the debt or
as to dischargeability of the debt. However, defendant requests that if the Court finds that
defendant owes a debt to plaintiff, that the amount be limited to the $465,000 settlement set out
in the Judgment Entry, and that the Court should not enter judgment for the full monetary
demand of $737,483.54. Regardless, this Court is not bound by collateral estoppel or issue
preclusion as to the amount or nature of defendant’s obligations to plaintiff since neither of these
issues was actually litigated in the underlying state court action, and the litigation was settled in
the Judgment Entry.

Plaintiff alleges that the debt owed to him by defendant should not be discharged under
§523(a)(2)(A) because the defendant obtained monies from plaintiff by the use of false
pretenses, false representations, and actual fraud. Plaintiff argues in the alternative that the debt
should not be discharged under §523(a)(4) because defendant’s actions constituted fraud or

4 See plaintiff’s Exhibit 13.

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defalcation while acting in a fiduciary capacity, or embezzlement or larceny. Plaintiff further
claims that the debt should be excepted from discharge under §523(a)(6) because it arises from a
willful and malicious injury, and more specifically, that defendant intentionally converted
plaintiff’s monies. Defendant denies all of these allegations. Defendant claims that he, not
plaintiff, was the owner of the monies allegedly converted.

Findings of Fact

Plaintiff testified at trial. Plaintiff is 84 years old, is slightly hearing impaired, and makes
use of a hearing aid. He required the assistance of a walker. However, this Court was able to
evaluate the acuity of plaintiff’s recollections and finds his testimony truthful, reliable and
accurate.

Defendant is plaintiff’s oldest son. When plaintiff’s father returned from World War II in
1945, he started a fund from his resources that is loosely referred to as the “family pie.”
Although the monies in the “family pie” fluctuated over the years, it was usually in the hundreds
of thousands of dollars. Upon the death of plaintiff’s father, plaintiff’s brother managed the
funds until his death in 1987. From 1987 through 2004, plaintiff and his sister managed the
family fund. All of the monies in the family fund were generated by plaintiff’s father, brother,
sister and plaintiff himself. Plaintiff’s sister passed away in 2004 at which time all of the funds
were owned by plaintiff and titled in his name. In September 2005, plaintiff had an operation on
his leg and was unable to walk. At that time, plaintiff decided to add defendant’s name, as his
oldest son, to plaintiff’s various accounts that aggregated the family fund. Although at times
referred to as the “family pie” or “family fund,” starting in 2004 the funds were owned
exclusively by plaintiff. The purpose of the family fund was to provide, at plaintiff’s sole
discretion, assistance to family members and an eventual inheritance to family members upon

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plaintiff’s death.

Before plaintiff added defendant to the various accounts, the accounts were in plaintiff’s
name only. Plaintiff needed defendant’s assistance to manage the funds, but use of the funds
remained within plaintiff’s sole direction. Plaintiff has four sons and two daughters. When one
of these children needed funds, then plaintiff disbursed monies to that particular child. Plaintiff
was the owner and gatekeeper to the funds, and any request for use of those funds was made to
him.

Over the years, plaintiff disbursed monies to his children for expenses such as their
education, business enterprises, and the purchase of amenities, such as vehicles. These
disbursements were seldom paid back to plaintiff, although in one situation in which one of the
sons received funds to start a business, the majority of this disbursement was repaid to plaintiff.
Plaintiff remained the sole owner of the funds, which were located in various bank accounts. It
was plaintiff’s intention that the funds be disbursed to his children and grandchildren upon his
death, and he did not gift the funds to defendant. Defendant’s name was added to the accounts
solely to assist plaintiff with management of the funds, including moving funds between
different banks to procure a better rate of return. Defendant held nothing more than bare legal
title to the funds and the attendant bank accounts. In 2006 and 2007, the funds were disbursed
from various bank accounts as reflected in plaintiff’s Exhibit 7, and summarized as follows:

Great American Bank $198,072.68
Central Bank of Kansas City $ 92,414.58
Commerce Bank of Kansas City $179,526.49
Los Padres Bank/Harrington Bank $160,500.00
Los Padres Bank/Harrington Bank $ 25,396.01
First Federal Bank $ 81,573.78

A complicating factor existed with regard to the two Los Padres Bank/Harrington Bank
accounts, which the Court will discuss later in this opinion. With that caveat, the funds were

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comprised of the above accounts. There were other assets, such as real estate, which are not
pertinent to this case. Plaintiff also may have executed a power of attorney appointing defendant
as attorney in fact; this is unclear from the record. Monthly statements for all but one of the
accounts were eventually mailed to defendant’s home address. Only the statements from the
Great American Bank were mailed to the plaintiff’s home address.

Plaintiff used the funds to pay for defendant’s education. Defendant holds numerous
degrees, including one for engineering and an M.B.A. Plaintiff trusted defendant to assist in the
management of the family fund, and plaintiff was not concerned that defendant would make
improper disbursements from plaintiff’s accounts.

During the middle of September 2007, plaintiff noticed that approximately $10,000 had
been withdrawn from one of the accounts without his knowledge. Plaintiff questioned defendant
about this withdrawal, and defendant assured plaintiff that the monies would be replaced.
Plaintiff called his son on a daily basis in this regard for approximately 20 days. After plaintiff
confronted defendant about the missing monies, the defendant proceeded to withdraw all of the
monies from the various bank accounts during early October 2007.5 The relationship between
the parties quickly deteriorated. Plaintiff felt betrayed by defendant and his actions to withdraw
$737,483.54 from the various accounts--what plaintiff referred to as the “run on the banks.”

The funds deposited in the two Los Padres Bank/Harrington Bank (Los Padres accounts)
have a slightly different history. With regard to the other bank accounts, the plaintiff does not
know what defendant did with the withdrawn funds. However, the funding for the Los Padres

5 These withdrawals exclude the two Los Padres Bank accounts, which were closed with final withdrawals
during 2006. As indicated, this portion of the opinion is not pertinent to the analysis as to the Los Padres Bank
accounts.

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accounts was generated from the rehabilitation and eventual sale of a property at 533 Gillis in
Kansas City, Missouri (Gillis property), which is a 16-unit apartment building. Plaintiff assisted
with the initial purchase of the building and provided to defendant and another son $135,000 to
apply toward the purchase price. In addition to repayment of the $135,000, the defendant and
and that other son agreed to pay to plaintiff $50,000 as a return on the investment. There was
also established a $425,000 line of credit with Central Bank to fund the rehabilitation of the
Gillis property.6 During the rehabilitation, the defendant drew $900 per week in compensation,
and the plaintiff eventually confronted the defendant about these withdrawals. During 2006, the
building sold for approximately $950,000, which generated net proceeds of approximately
$500,000. Part of these proceeds was then deposited into the Los Padres accounts. Although
plaintiff received the $50,000 investment return, he was never repaid the original $135,000
investment. The Los Padres accounts also listed the defendant first as the account holder and
then the plaintiff, and the account address was the defendant’s residence. The defendant
represented to plaintiff that he would repay the $135,000 initial investment to plaintiff; this was
never done.

After the initial confrontation between plaintiff and defendant in September 2007, and
excluding the two Los Padres accounts, the accounts were closed as follows:

(1) The Great American Bank (now known as “Enterprise Bank and Trust”) account was
closed on October 5, 2007, with a final withdrawal of $35,072.68 and aggregate withdrawals
6 The Gillis property is located in an historic area of Kansas City wherein many buildings were undergoing
substantial renovation to create loft apartments. This enterprise predated the financial collapse experienced by the
financial markets in 2007 and 2008. Prior to the financial crisis, the market appreciation of these buildings was
robust.

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from October 2006 through October 5, 2007, in the amount of $198,072.68;7 (2) the Commerce
Bank account was closed on October 4, 2007, with a single withdrawal of $179,526.49;8 (3) the
First Federal Bank account was closed on October 5, 2007, with a single withdrawal of
$81,573.78;9 and (4) the Central Bank of Kansas City account was closed on October 9, 2007,10
with a single withdrawal of $92,414.58. The two Los Padres Bank accounts were closed in July
2006 and October 2006,11 and the final withdrawals from the accounts were $160,500.00 and
$25,396.01; both of these closures predated the conversation between plaintiff and defendant in
September 2007.

The Court did not find it necessary to its decision to review plaintiff’s Exhibit No. 11, the
deposition transcript of the defendant in the underlying state court action, and therefore
plaintiff’s request for admission of same as an exhibit is moot.

Analysis and Conclusions of Law
Gillis Property

The funds in the Los Padres accounts could have and should have been used to pay
plaintiff his $135,000 investment in the Gillis building. However, defendant’s failure to do so
represents a breach of contract and does not fall within the ambit of one of the exceptions to
discharge plead by plaintiff. The exceptions to discharge plead by plaintiff require more than
just a showing of the breach of contract, but require proof of a narrow class of torts.12 Otherwise,

7

Plaintiff’s Exhibit No. 2.

8

Plaintiff’s Exhibit No. 8.

9

Plaintiff’s Exhibit No. 6.

10

Plaintiff’s Exhibit No. 3.

11

Plaintiff’s Exhibit Nos. 4 and 5.
12 See, e.g., 4 COLLIER ON BANKRUPTCY ¶ 523-12[1] at 523-91 (Alan N. Resnick & Henry J. Sommer,
eds., 16th ed. 2012), discussing §523(a)(6).

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the vast majority of debts listed in consumer bankruptcies would not be discharged since the
non-payment of those obligations represents a breach of the contract. More must be proven to
establish that a debt is excepted from discharge under §§523(a)(2), (4) and (6).

Section 523(a)(4)

Since this Court has already concluded that the appropriation of the funds in the Los
Padres accounts does not give rise to a nondischargeable debt, the focus of the Court’s legal
analysis pertains only to the funds in the other accounts, which aggregate $551,587.53. Plaintiff
has carried his burdens of proof to establish that $551,587.53 is the amount of the debt owed by
the defendant to plaintiff and that this debt is nondischargeable under §523(a)(4).13 Defendant’s
name was added to these accounts as a convenience only, and it was never plaintiff’s intent or
action to convey a gift of the funds to defendant. If a gift were intended, then retention of the
plaintiff’s name on these accounts, including reference to plaintiff’s trust on one account, would
not be necessary. It is common practice for parents to add children to the title of real and
personal property to allow the child to assist with the administration and management of the
assets. This was the intent and the action of plaintiff when he added defendant’s name to the
accounts. The facts do not support, and strongly belie, defendant’s argument that the monies
were gifted from plaintiff to defendant. Plaintiff intended to retain ownership of the monies and
to be the sole director with regard to disbursement of the family fund to family members. It was
plaintiff’s intent that the family fund would eventually be distributed to his children and

13 The burden of proof to establish nondischargeability under §§523(a)(4) and (a)(6) is by a preponderance
of the evidence. See Grogan v. Garner, 498 U.S. 279, 286 (1991). Additionally, plaintiff has established the
amount of the debt under both the preponderance of the evidence standard and the clear and convincing evidence
standard.

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grandchildren, not solely to one of his sons. Defendant, by his actions, fraudulently appropriated
plaintiff’s monies that had been entrusted to defendant and had been placed into the hands of the
defendant solely to assist in the management of the monies. Defendant fraudulently appropriated
the plaintiff’s monies and converted such property to his own use. Within approximately 20
days after the confrontation between plaintiff and defendant, defendant proceeded to drain all of
the accounts. Defendant did not provide any explanation as to what he did with the monies. The
Court finds that defendant’s actions rise to a level of embezzlement as contemplated under
§523(a)(4) and the debt in the amount of $551,587.53 is not dischargeable. “‘Embezzlement is
defined under federal common law as the fraudulent appropriation of property by a person to
whom such property has been entrusted or into whose hands it has lawfully come.’”14

The evidence demonstrates that defendant intentionally misappropriated plaintiff’s
monies, did not return the monies to defendant, and did not account for the property so entrusted
to him. Defendant engaged in fraud and intentional deceit, including the withdrawal of monies
from accounts that were not his, the renaming of accounts to place his name first, the addition of
his Social Security number, and the changing of the account addresses so that statements would
go to his residence and not to the plaintiff. Defendant engaged in intentional actions when he
absconded with plaintiff’s monies and then failed to return same after he was given only
conditional authority to assist in the management of the funds for plaintiff.15

14 Columbian Nat’l Title Ins. Co. v. Utterback (In re Utterback), 2004 Bankr. LEXIS 1463, at *22 (Bankr.

D. Kan. March 3, 2004) (quoting Klemens v. Wallace (In re Wallace), 840 F.2d 762, 765 (10th Cir. 1988)). “The
amount excepted from discharge is equal to the amount misappropriated, rather than any greater amount that may be
owed to the creditor.” See 1 HENRY J. SOMMER, ET AL., CONSUMER BANKRUPTCY LAW AND PRACTICE §15.4.3.5.1,
at 487 (footnote omitted) (9th ed. 2009 & Supp. 2010).
15 See, generally, 4 COLLIER ON BANKRUPTCY ¶ 523.10[1] at 523-71 to 523-72 (Alan N. Resnick & Henry

J. Sommer, eds., 16th ed. 2012).
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The debt in the amount of $551,587.53 is not dischargeable because defendant embezzled

the monies, and this exception to discharge does not require that the defendant be acting in a

fiduciary capacity.16 This exception applies even if defendant’s name were placed on the various

accounts for the lawful purpose of assisting his father in the management of the funds.

In short, section 523(a)(4) excepts from discharge debts resulting from the
fraudulent appropriation of another’s property, whether the appropriation was
unlawful at the outset, and therefore a larceny, or whether the appropriation took
place unlawfully after the property was entrusted to the debtor’s care, and
therefore was an embezzlement.17

Section 523(a)(6)

In order to establish a debt is nondischargeable under §523(a)(6), the plaintiff must show:

(a) debtor committed a wrongful and intentional act; (b) the act necessarily caused injury to
plaintiff; (c) the act was without just cause or excuse; and (d) debtor acted with the specific
intent to cause injury to the plaintiff or knew or believed injury to the plaintiff was substantially
certain to occur as a result of his actions.18 This exception to discharge applies in instances of
intentional conversion. Plaintiff, who at the time he added defendant’s name to the accounts was
78 years old and unable to walk because of surgery, did so because his son could assist him with
the management of the funds. The defendant exceeded the limited authority for which his name
was added to the accounts and improperly diverted the monies to his own use. Defendant’s
actions resulted in the intentional conversion of plaintiff’s property by defendant. Defendant did
not suggest that he was not responsible for the withdrawal of funds from the various bank
16 Id., ¶ 523.10[1][d] at 523-72.
17 Id., ¶ 523.10[2] at 523.77.
18 In re Pasek, 983 F.2d 1524, 1527 (10th Cir. 1993); Kawaauhau v. Geiger, 523 U.S. 57 (1998).

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accounts. His argument is that he was the owner of the funds contained in the bank accounts.
This assertion is untrue. Defendant was not the owner of the funds contained in the various bank
accounts. The defendant deliberately, intentionally and wrongfully withdrew funds from the
bank accounts for his own use. He did so without plaintiff’s consent. He knew and intended that
his behavior would result in the injuries sustained by the plaintiff, that is, the financial loss
occasioned by his actions. Once found out, defendant then immediately withdrew the remaining
funds from the various accounts and fully depleted these assets owned by his father.
Defendant’s actions were without just cause or excuse and violated the bond of trust between
parent and child. Such acts could only lead to one result: a dramatic financial loss to his father.
Defendant converted plaintiff’s $551,587.53 that were held in the bank accounts of the family
fund. Defendant’s debt to plaintiff in the amount of $551,587.53 is nondischargeable as it is a
debt arising from willful and malicious injury as contemplated in §523(a)(6).

Section 523(a)(2)(A)

As to §523(a)(2)(A), the Court will not address this exception to discharge, which can
apply to the obtainment of money or property to the extent obtained by “false pretenses, a false
representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s
financial condition . . . .” This Court has already found that the debt in the amount of
$551,587.53 is not dischargeable under §§523(a)(4) and (a)(6). It is therefore unnecessary for
the Court to discern whether defendant’s actions would bring the debt within the ambit of this
exception to discharge.

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Entry of Judgment

This Court enters a monetary judgment in the amount of the nondischargeable debt,
which is $551,587.53. Liquidation of any claim that plaintiff may have against defendant arising
from the Gillis property is not necessary to this Court’s determination as to nondischargeability
of a debt, and a final judgment may be entered without liquidation of this claim. The Court
therefore abstains from adjudication of any claim the plaintiff may have arising from the Los
Padres accounts and the Gillis property. Defendant requested at closing argument that if the
Court enters a finding of nondischargeability, that such judgment be limited to the $465,000
settlement journalized in the state court action. Neither party argues that this Court is bound by
collateral estoppel. This Court is not bound by the settlement amount, a settlement with which
defendant did not comply. Therefore, the Court enters a judgment of nondischargeability and a
monetary judgment in the amount of $551,587.53 in plaintiff’s favor against the defendant, with
interest accruing thereon as of the date the state court Judgment Entry was docketed, March 3,
2010, with defendant to pay plaintiff’s costs.

It is therefore ordered by this Court that judgment shall be entered in favor of plaintiff,
Frank A. Marsalla, and against debtor and defendant Salvatore Joseph Marsala, Sr., on plaintiff’s
Complaint for Determination that Debt Is Non-Dischargeable under §§523(a)(2), (4), and (6)19 in
the amount of $551,587.53. The Court finds that the debt is not discharged under §§523(a)(4)
and (a)(6) and finds it unnecessary to consider the dischargeability of the debt under §523(a)(2).
It is further ordered that the Gillis debt in the alleged amount of $185,896.01 is hereby

19

Doc. No. 1.
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discharged, and the Court abstains from liquidation of same. It appears from the testimony at
trial the defendant may have held assets, property, or interests that were not disclosed in
defendant’s bankruptcy proceedings.

It is further ordered that the foregoing constitutes findings of fact and conclusions of law
under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal
Rules of Civil Procedure. A judgment based on this ruling will be entered on a separate
document as required by Fed. R. Bankr. P. 9021 and Fed. R. Civ. P. 58.

IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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12-21807 Stouder (Doc. # 69)

In Re Stouder, 12-21807 (Bankr. D. Kan. Feb. 12, 2013) Doc. # 69

Click here for the pdf document.

11-06154 Rajala, Chapter 7 Trustee v. US Bank (Doc. # 25)

Rajala, Chapter 7 Trustee v. US Bank, 11-06154 (Bankr. D. Kan. Dec. 18, 2012) Doc. # 25

Click here for the pdf document.

The relief described hereinbelow is SO ORDERED.
SIGNED this 18th day of December, 2012.

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS

In re: Case No. 10-20388-7

TERRY LEE CHRISTENSON and

CARMELLA MARTHA O’DWYER-CHRISTENSON,
Debtors.

ERIC C. RAJALA, CHAPTER 7 TRUSTEE,
Plaintiff,

v. Adv. No. 11-06154
US BANK,
Defendant.

MEMORANDUM OPINION AND ORDER
GRANTING DEFENDANT’S CROSS MOTION FOR SUMMARY JUDGMENT
AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT

Plaintiff Eric C. Rajala, Chapter 7 Trustee, and defendant US Bank both seek summary

judgment in this proceeding to determine whether the debtor’s return of the cash advance on

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February 2, 2010, is avoidable under 11 U.S.C. § 547(b). Plaintiff’s motion is denied.
Defendant’s motion is granted. This adversary proceeding is core and the Court has
jurisdiction.1

Findings of Fact

The material facts are not disputed. On January 15, 2010, Carmella O’Dwyer-
Christenson (Christenson or debtor) took a cash advance of $8,000 on her US Bank Visa card.
The cash advance was in the form of a check written to herself. Christenson took the cash
advance “out of desperation” because she could not pay all of her expenses. Christenson
admitted that she “felt like it was stealing” to take the funds. She attempted to correct this lapse
of judgment by returning the money to US Bank 18 days later. There is no indication
Christenson used the money to pay any other creditors or for any other purpose while it was in
her possession. On February 22, 2010, debtor filed her Chapter 7 bankruptcy petition. On May
18, 2011, trustee Eric C. Rajala initiated this adversary proceeding to avoid the transfer to US
Bank under 11 U.S.C. § 547(b).

Conclusions of Law

A. Summary Judgment Standard
Summary Judgment is appropriate if the moving party demonstrates there is no genuine
issue as to any material fact, and he is entitled to judgment as a matter of law.2 Cross-motions
for summary judgment allow the court to assume the only evidence to be considered has been
submitted with the pleadings. However, cross-motions are to be considered independently, and

1 28 U.S.C. § 157; 28 U.S.C. § 1334.
2 FED. R. BANKR. P. 7056.

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summary judgment is not appropriate if disputes remain as to any material fact.3 Summary
judgment is designed to secure the just, speedy, and inexpensive determination of an action.4

B. Preferential Transfer
Prepetition payments are avoidable as preferential transfers under 11 U.S.C. § 547(b) if:

(1) they are of an interest of the debtor in property; (2) they are to or for the benefit of a creditor;
(3) they are made for or on account of an antecedent debt owed by the debtor before such
transfer was made; (4) they are made while the debtor was insolvent; (5) they are made on or
within 90 days before the date of the filing of the petition; and (6) they allow such creditor to
receive more than such creditor would otherwise receive in a chapter 7 liquidation proceeding.5
The trustee bears the burden of proving the avoidability of a transfer under § 547(b).6 If the
trustee succeeds, he may recover the transferred property for the benefit of the estate.7
The only issue in this case is whether the transfer was of an interest of the debtor in
property. The Bankruptcy Code does not define “an interest of the debtor in property.”8 Several
cases define property of the debtor as property that would have been part of the estate had it not
been transferred before the commencement of the bankruptcy proceedings.9 Property of the
estate, defined in § 541(a)(1), includes “all legal or equitable interests of the debtor in property

3 Atlantic Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1148 (10th Cir. 2000).
4 Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
5 Brown v. Kitchenmaster, et al. (In re Hertzler Halstead Hosp.), 334 B.R. 276, 286 (Bankr. D. Kan.

2005).
6 11 U.S.C. § 547(g).
7 11 U.S.C. § 550(a).
8 Begier v. I.R.S., 496 U.S. 53, 58 (1990).
9 Id.; Mitsui Mfrs. Bank v. Unicom Computer Corp., 13 F.3d 321, 324 (9th Cir. 1994); Parks v. FIA Card

Services, N.A. (In re Marshall), 550 F.3d 1251, 1255 (10th Cir. 2008).

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as of the commencement of the case.”10 Property interests are created and defined by state law.11
Property held in trust for another is not property of the estate for purposes of § 547(b).12
Bankruptcy courts are courts of equity and may impose equitable remedies.13

Here, the debtor withdrew the cash advance, misrepresenting to US Bank that she would
pay them back. However, instead of using the money to pay her other creditors, debtor chose to
do the equitable thing by returning the money to US Bank. Plaintiff contends that under In re
Marshall14 this cash advance became property of the estate once the debtor exercised control
over the funds.

In Marshall, the 10th Circuit Court of Appeals held that when a debtor transfers money
from one credit card to another, and elements (2) through (6) of § 547(b) are met, then the first
element is also satisfied and the transfer is avoidable.15 In Marshall, the debtors did not place
the funds in their personal account but rather directed one credit card company to pay the
balance owed to another credit card company.16 In common parlance, the payment was a balance
transfer. The Marshall court found that the funds existed within the bankruptcy estate for an
instant of time and therefore fell under the reach of § 547(b). The court in Marshall relied on the
“dominion/control test” to determine whether funds borrowed from one creditor to pay another
are property of the estate. The court stated that the majority view holds that “when a debtor

10 11 U.S.C. § 541(a)(1).

11 Bailey v. Big Sky Motors, Ltd. (In re Ogden), 314 F.3d 1190, 1197 (10th Cir. 2002).

12 Begier, 496 U.S. at 59; see also RESTATEMENT (FIRST) OF RESTITUTION § 160 cmt. e (1937) (where a
person holds property upon a constructive trust for another, the latter has the beneficial interest therein).

13 Young v. United States (In re Young), 535 U.S. 43, 50 (2002) (Scalia, J., stating that bankruptcy courts
“are courts of equity and ‘appl[y] the principles and rules of equity jurisprudence.’”) (quoting Pepper v. Litton, 308

U.S. 295, 304 (1939)).
14 550 F.3d 1251, 1255.15 Id. at 1256.
16 Id. at 1253.

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converts an offer of credit into loan proceeds and uses those proceeds to pay another creditor, the
debtor deprives the bankruptcy estate of those proceeds.”17

C. Constructive Trust
The case sub judice is distinguishable from In re Marshall because the debtor returned
the funds to US Bank and did not use them to pay other creditors. If debtor had used the cash
advance to pay other debt, the transfer would be avoidable under § 547(b) and Marshall. Here,
the debtor borrowed the funds without any intent to pay them back, but instead of using the
money for her own benefit, she quickly realized the wrongful nature of her actions and returned
the money. In these unique and limited circumstances, the Court determines that the debtor
never acquired an equitable interest in the funds.18

In Leitner,19 the debtor embezzled from his employer approximately $1 million. A
portion of these funds was used to purchase the debtor’s residence, which at the time of the
decision, would have been fully exempt under Kansas law. Judge Flannagan imposed a
constructive trust on the debtor’s residence in favor of the beneficiary. The beneficiary of a
constructive trust is the owner of the equitable interest as well as the injured party, and in the
Leitner case, the beneficiary was debtor’s former employer from whom debtor embezzled
$1 million. The constructive trust trustee (debtor) held only a bare legal title to the property that
was in the trust, and it was only this bare legal title that entered the bankruptcy estate. Judge
Flannagan observed that a debtor holds this bare legal title subject to a duty to convey the

17 Id. at 1256 (citing Meoli v. MBNA America Bank, N.A. (In re Wells), 382 B.R. 355, 360 (B.A.P. 6th Cir.
2008); Yoppolo v. Greenwood Trust Co. (In re Spitler), 213 B.R. 995, 999 (Bankr. N.D. Ohio 1997)).

18 At most, debtor held bare legal title to the funds as the constructive trust trustee; regardless, the funds
were not an asset of the debtor’s estate, even for a nanosecond. Marshall, 550 F.3d at 1258 n.6.

19 Clark v. Wetherill (In re Leitner), 236 B.R. 420, 425 (Bankr. D. Kan. 1999).

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property to the beneficiary, who holds the equitable interest in the property. The equitable
interest of the owner does not become property of the bankruptcy estate. A constructive trust
comes into existence as of the inception of the transaction or wrongful conduct.20 Judge
Flannagan went on to hold that since the debtor held only bare legal title to the residence, the
trustee’s claim for a preferential transfer under § 547(b) must fail “because neither the trust nor
the attachment were a ‘transfer of an interest of the debtor in property.’”21 Although in Leitner
the debtor held the property of the trust on the bankruptcy petition date, the facts giving rise to
the imposition of a constructive trust on the debtor’s residence had occurred prior to the filing of
the bankruptcy. In Leitner, the property of the trust (the residence) was sold after the filing of
Leitner’s bankruptcy. In the case sub judice, all of the events, including return of the property of
the constructive trust to US Bank (the beneficiary), occurred prior to the filing of the bankruptcy.
Just as Judge Flannagan ultimately found that he could impose a constructive trust when the
events straddle the filing of the bankruptcy, this Court finds that it may impose or find a
constructive trust when all of the transactions were complete prior to the filing of the bankruptcy.

A person who holds property in trust for another does not have an equitable interest in the
property.22 “Trusts are classified with respect to the manner of their origin.”23 Property procured
by fraud may be treated as being held in constructive trust and excluded from the bankruptcy
estate.24 Determination of whether a constructive trust exists is fact sensitive. The existence of
a constructive trust may be determined by the bankruptcy court even absent a prepetition

20

Id.
21 Id. at 426 (footnote collecting cases omitted).
22 Begier, 496 U.S. at 59.
23 See GEORGE BOGERT, BOGERT’S TRUST AND TRUSTEES § 1, at 11 (2d ed. 1984).
24 See Canal Corp. v. Finnman, et al. (In re Johnson), 960 F.2d 396 (4th Cir. 1992).

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adjudication. A debtor who procures property subject to a constructive trust has a duty to repay
the debt in order to avoid unjust enrichment.25 Whether property is held in trust is determined by
applicable state law.26 In Kansas, a constructive trust may arise when “a person holding title to
property is subject to an equitable duty to convey it to another on the ground that he would be
unjustly enriched if he were permitted to retain it . . . .”27 Unjust enrichment arises when (1) a
benefit has been conferred upon a person; (2) that person retains the benefit; and (3) under the
circumstances, the retention of the benefit is unjust.28

A constructive trust can be imposed in cases where “a person by fraud, actual or
constructive, or by any form of unconscionable conduct, or questionable ethics has obtained or
holds title to property which in equity and good conscience he ought not to possess or which
justly belongs to another.”29 For example, a constructive trust can arise as a remedy for “fraud,
misrepresentation, duress, undue influence or mistake of such a character that the transferor is
entitled to restitution.”30 Fraud is not necessary for the imposition of a constructive trust.31 A
constructive trust is effective from the “inception of the transaction,” or in other words, it relates
back to the occurrence of the misconduct that caused it.32

A constructive trust requires specific property “on which the constructive trust can be

25 See 1 HENRY J. SOMMER, ET AL., CONSUMER BANKRUPTCY LAW AND PRACTICE § 18.5.2.2. at n.159 (9th
ed. 2009 & Supp. 2010). “State courts’ prepetition imposition of constructive trusts is not a transfer that can be
avoided as a preference,” citing In re Pitchford, 410 B.R. 416 (Bankr. W.D. Penn. 2009).

26 5 COLLIER ON BANKRUPTCY ¶ 547.03[2] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2012).

27 Nelson v. Nelson, 288 Kan. 570, 580 (2009) (emphasis omitted), (quoting RESTATEMENT (FIRST) OF
RESTITUTION §160).

28

See id.

29 Id. at 585 (emphasis added by Luckert, J.) (quoting In re Estate of Zimmerman, 207 Kan. 354, 357
(1971)).

30 Id. (quoting Horsley v. Hrenchir, 146 Kan. 767, 769 (1937)).

31 Id.

32 Leitner, 236 B.R. at 425.

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fastened, and such property is held by the person to be charged as constructive trustee.”33 “[A]
constructive trust is essentially a tracing remedy, allowing recovery of the specific asset or assets
taken from the plaintiff, any property substituted for it, and any gain in its value.”34 Once the
elements for a constructive trust are found, the remedy may not be imposed without determining
whether the specific property returned by debtor was the property that she held in trust. Since it
is undisputed in this case that the cash advance was returned quickly, not repaid or paid to a
third party, and was only in debtor’s possession for a short time, the Court finds that this
requirement is satisfied.

The only issue remaining is whether, under these unique circumstances, a constructive
trust existed such that US Bank retained its equitable interest in the funds. The Court finds that a
constructive trust arose at the time of the cash advance and, consequently, the equitable interest
in the funds never transferred to debtor.

The debtor misrepresented her intentions to US Bank. When debtor wrote the US Bank
check to herself, she did not intend to repay the debt. Her initial intentions were to use the
money for her own gain by paying other creditors and then declaring bankruptcy. Under these
facts, the elements of unjust enrichment are satisfied. First, debtor obtained the benefit of the
funds. Second, she retained the benefit for nearly three weeks. Third, under these
circumstances, and according to her own conscience, the retention of the benefit was unjust. The
retention of the benefit was unjust because she did not intend to return the funds and presumably
thought that the debt would be discharged in bankruptcy. Because the elements of unjust

33 RESTATEMENT (FIRST) OF RESTITUTION § 160 cmt. i (1937).
34 Nelson, 288 Kan. at 580 (citation omitted).

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enrichment are satisfied, the Court finds that equity imposed a constructive trust on the funds
originating from the time debtor wrote the check to herself and continuing until the money was
repaid. Other facts establish a constructive trust. The debtor engaged in wrongful conduct by
procuring the cash advance from US Bank to whom she did not intend to repay the debt. It can
be argued with some vigor that debtor engaged in fraud when she first procured the cash
advance, and there is a statutory presumption of fraud in the Bankruptcy Code. A finding of a
constructive trust is also supported by the manner in which debtor incurred the debt to US Bank
when she wrote a check to herself for deposit without a concurrent intent to repay the debt; since
the debtor filed bankruptcy only 40 days after the initial cash advance, it may be safely presumed
that she also did not possess the independent financial means to repay the debt. The debtor was
subject to the equitable duty to convey the $8,000 cash advance back to US Bank, a duty upon
which she acted 18 days later when she returned the cash advance to US Bank. The facts of this
case lead to one conclusion: that a constructive trust arose prepetition and the debtor was the
trustee holding bare legal title to $8,000, property which she had a duty to convey to US Bank as
the beneficiary of the constructive trust. As a result of the constructive trust, debtor never
acquired an equitable interest in the property and therefore the cash advance never became
property of the estate under § 541. Tracing the funds in this case is not an issue. The debtor
received $8,000 from US Bank and within three weeks transferred this sum back to US Bank.
This repayment was after deposit of the $8,000 into debtor’s account, and the debtor’s ability to
repay the $8,000 shortly thereafter sufficiently establishes tracing of the funds from US Bank to
the debtor and the transfer of said funds to US Bank.

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D. Policy
This outcome not only conforms with the Bankruptcy Code and the law in Kansas, it also
best serves the underpinnings of the Bankruptcy Code. A central purpose of the Code is “to
provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with
their creditors, and enjoy ‘a new opportunity in life with a clear field for future effort,
unhampered by the pressure and discouragement of preexisting debt.’”35 This “fresh start” policy
of the Bankruptcy Code is limited, however, to “the honest but unfortunate debtor.”36

With this policy in mind, a review of §§ 547(b) and 523(a)(2)(C)(i)(II) demonstrates that
the Code does not support a finding for the trustee. The purposes of § 547(b) are “to discourage
actions by creditors that might prematurely compel the filing of a petition and to secure an equal
distribution of assets among creditors of like class.”37 Neither of these goals are hindered by this
Court’s conclusion. First, this decision will not encourage actions by creditors that might
prematurely compel the filing of a petition. Second, the concept of a constructive trust “is not
inherently incompatible with the fair treatment of creditors in bankruptcy.”38 A constructive
trust comes into existence at the time of the transaction and therefore “[t]he beneficiary’s
equitable interest does not become property of the estate.”39 This sentiment follows the idea
stated by Justice Black in a case under the 1898 Bankruptcy Act: “The Bankruptcy Act simply

35 Grogan v. Garner, 498 U.S. 279, 286 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244
(1934)).

36 Id.

37 Gillman v. Scientific Research Prods. Inc. of Del. (In re Mama D’Angelo, Inc.), 55 F.3d 552, 554 (10th
Cir. 1995).

38 In re Leitner, 236 B.R. at 423.

39

Id. at 424.
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does not authorize a trustee to distribute other people’s property among a bankrupt’s creditors.”40
Debtor did not use the borrowed money and later repay US Bank with other property prior to her
other creditors; she returned the money that she procured in order to correct her wrongful
conduct. Because debtor did not intend to repay US Bank at the time she took the cash advance,
she had a duty to return the money, which she fulfilled.

Section 523(a)(2)(C)(i)(II) of the Code is intended to prevent dishonest consumer debtors
from receiving the benefit of a discharge in bankruptcy for a particular category of debt.41 It
does so by creating a presumption of fraud when a cash advance is withdrawn within 70 days of
the filing of the petition. This provision hopefully dissuades consumer debtors from “loading
up” on debt in anticipation of bankruptcy.42 Congress was concerned that, absent this provision,
debtors would incur excessive debt within a short period prior to the filing of the petition and not
only would this “result in direct losses for the creditors that are the victims of the spree, but it
also creates a higher absolute level of debt so that all creditors receive less in liquidation.
During this period of insolvency preceding the filing of the petition, creditors would not extend
credit if they knew the true facts.”43 In the case sub judice, the debtor is a consumer and the cash
advance is a consumer debt as contemplated by this exception to discharge. This statutory
presumption of fraud is further indicia that this Court should impose a constructive trust on the
funds borrowed from defendant. In addition, Judge Flannagan’s decision In re Leitner44 supports

40 Pearlman v. Reliance Ins. Co., 371 U.S. 132, 135-36 (1962), quoted in Leitner at 425 n.13.
41 See, generally, Cohen v. de La Cruz, 523 U.S. 213, 217-18 (1998).
42 Bank One Columbus, N.A., v. Schad (In re Kountry Korner Store), 221 B.R. 265, 271 (Bankr. N.D. Okla.

1998) (citing S. REP. NO. 98-65, at 9 (1983)).

43 S. REP. NO. 98-65, at 9 (1983).

44 236 B.R. 420 (Bankr. D. Kan. 1999, Flannagan, J.).

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the notion that if the debtor “obtains property by fraud or other improper means, a court can
impose a constructive trust to protect the injured party.”45 Continuing, Judge Flannagan explains
that a constructive trust is “a legal fiction that adopts the analogy of a trust and declares that a
beneficiary owns an equitable interest in property. The constructive trust imposes a duty on the
trustee to hold the equitable property interest in trust for its owner, the beneficiary.”46 The
beneficiary of the trust is US Bank, the injured party. The property held by the debtor in a
constructive trust is held in trust for its owner (the injured party).

A finding for the trustee in this case does not serve the goals of § 523. Exceptions to
discharge reflect public policy. If the trustee prevails, it would bring the debt and the funds into
the estate, essentially causing the “loading up” that the Bankruptcy Code discourages. By
bringing the cash advance into the estate, the trustee would increase the total debt and only
provide a small increase in payments to the other creditors. Furthermore, this slight benefit to
the creditors would come at a cost. A finding for the trustee could punish the debtor by making
the $8,000, from which she never benefitted, nondischargeable. This result prevents
Christenson, the “honest but unfortunate debtor” who corrected her prepetition misjudgment,
from obtaining a “fresh start” upon completion of her bankruptcy. Despite the initial cash
advance, this debtor subsequently acted ethically and morally by repaying the funds.

The outcome urged by the trustee does not fit the central goal of the Bankruptcy Code or
the policy embodied therein. There is no question that debtor acted wrongfully by withdrawing
the cash advance. However, there is also no question that the moral and ethical act was to return

45

Id. at 424.

46

Id.

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the money, which she did. This is not an action by a debtor that this Court wishes to discourage.

E. Conclusion
For the reasons stated above, the Court finds for the defendant and holds that the return
of the cash advance is not avoidable under § 547(b) because the debtor never obtained an
equitable interest in the funds. Debtor did not transfer property of the estate to US Bank. The
recognition by this Court that the US Bank monies were held in constructive trust is limited to
the narrow facts of the case sub judice and will seldom apply to other avoidance or recovery
actions. The policy considerations only augment and do not stand alone as a basis for this
Court’s holding.

It is therefore ordered that defendant’s Cross Motion for Summary Judgment is granted
and that plaintiff’s Motion for Summary Judgment is denied and judgment will issue in
defendant’s favor on plaintiff’s Complaint.

It is further ordered that the foregoing constitutes findings of fact and conclusions of law
under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal
Rules of Civil Procedure. A separate judgment based on this ruling will be entered on a separate
document as required by Fed. R. Bankr. P. 9021 and Fed. R. Civ. P. 58.

IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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