KSB

12-20662 Cunningham (Doc. # 31)

In Re Cunningham, 12-20662 (Bankr. D. Kan. Apr. 9, 2013) Doc. # 31

Click here for the pdf document.

The relief described hereinbelow is SO ORDERED.
SIGNED this 8th day of April, 2013.

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS

In re:

CHARLES DAVID CUNNINGHAM and Case No. 12-20662
CHARITY LYNN CUNNINGHAM,
Debtors.

MEMORANDUM OPINION AND ORDER DENYING IN PART AND
GRANTING IN PART DEBTORS’ MOTION TO DETERMINE SECURITY INTEREST
OR, IN THE ALTERNATIVE, TO REDEEM (Doc. No. 15)

Comes on for hearing the Debtors’ Motion for Order Determining that Certain Personal
Property Owned by the Debtor Is Not Subject to Any Security Interest, or, in the Alternative,
Granting Debtors’ Request to Redeem Property1 (hereinafter “Motion”). Creditor Capital One,
N.A., the owner of the account previously owned by HSBC Bank Nevada, N.A. (hereinafter
“Capital One”), filed a response2 to the Motion. Debtors filed a separate brief in support3 of their

1

 Doc. No. 15.

2

 Doc. No. 21.

3

 Doc. No. 28.

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Motion to which Capital One filed a brief in opposition.4 The matter was submitted to this Court
on the parties’ briefs, including attachments thereto.

This matter constitutes a core proceeding5 and the Court has jurisdiction to decide the
matter in controversy.6

Upon review of the pleadings, the Court’s file, and the arguments of counsel, the Court is
prepared to rule.

Background

Debtors filed a joint Chapter 7 petition under the United States Bankruptcy Code.7 Prior
to the filing of the bankruptcy petition, Debtors purchased personal property in the form of
consumer goods (“Consumer Goods”) from Best Buy, N.A., a national retailer of consumer
electronics and related products and services. Some of Debtors’ purchases were made on credit
provided by Capital One. In their brief, the Debtors concede that they purchased on the Capital
One account “two ipods, a camera, a computer, and other micellaneous [sic] . . . .”8 The items
were purchased in 12 separate consumer transactions and are consumer goods. Three documents
are pertinent to the Court’s analysis. These documents are attached as exhibits to Capital One’s
brief in opposition9 to the Motion. In a footnote to its brief, Capital One describes these
documents as follows:

4

 Doc. No. 30.
5 11 U.S.C. §157(b).
6 28 U.S.C. §1334.
7 11 U.S.C. §101 et seq., hereinafter the “Code.”
8 Doc. No. 28, at 1.

9

 Doc. No. 30.
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Exhibit C [credit application] is the application signed by Debtor, which states,
“you grant the Bank a purchase money security interest in the goods purchased on
your Account.” Furthermore, the application states in that same section that the
cardholder, here the Debtors, agree to the terms and conditions of the Cardholder
Agreement (attached as Exhibit D is the Cardholder Agreement). It states in
paragraph 17 of the Cardholder Agreement entitled “Security,” “you grant us a
purchase money security interest in the goods purchased with your Card.”. [sic]
Therefore, clearly the requisite language for Debtors to grant Secured Creditor
[Capital One] a purchase money security interest exists.10

Exhibit C, the “Application,” is coincidental to Debtors’ first purchase and is dated January 16,
2010. It appears that it was signed by both Debtors. The Application provided to the Court is a
single-sided page. The Application contains the language recited above by Capital One; it is
buried in a 16-line paragraph in a small font. This Court found it necessary to use a magnifying
glass to find and read the language. The language appears in the ninth and tenth lines of the
paragraph. With the assistance of a magnifying glass, the Court also was able to find buried in
the sixth line of this Application paragraph that the Debtors agreed to the terms and conditions of
the Cardholder Agreement. The Application indicates that the Cardholder Agreement would be
sent to the Debtors after the Application and initial purchase of consumer products on January
16, 2010. The Cardholder Agreement is not signed. Buried in 41 numbered paragraphs in small
print in the Cardholder Agreement is language that refers to Debtors granting to Capital One “a
purchase money security interest in the goods purchased with your Card.”11 Exhibit B to Capital
One’s brief in opposition is comprised of 12 Best Buy receipts (“Receipts”), all but one of which
were signed by one of the Debtors. The Receipts contain basic information, such as the location
of the Best Buy store, a brief description of items purchased and the price of these items, and the

10 Doc. No. 30, at 2 n.1.
11 See Doc. No. 30, Exhibit D ¶ 17.

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date and time of the sale. The Receipts also state “Payment Type: BBY CARD/HSBC.” The

following language appears below the place of signature:

KEEP YOUR RECEIPT!
I HAVE READ AND AGREE TO ALL
RETURN AND REFUND POLICIES
PRINTED ON THE BACK OF THIS
RECEIPT AND POSTED IN THE
STORE. I HAVE RECEIVED GOODS
AND/OR SERVICES IN THE AMOUNT
SHOWN ABOVE.
BESTBUY.COM RETURN AND EXCHANGE
INFORMATION AND PRICE MATCH POLICY
MAY VARY SLIGHTLY FROM IN-STORE POLICY.
PLEASE LOG ONTO WWW.BESTBUY.COM
FOR COMPLETE DETAILS

Only the front of the Receipts were provided to the Court. Whatever is contained on the

reverse side of the Receipts was not provided. Regardless, it appears that the reverse side of the

Receipts only contain language pertinent to the return and refund policies of Best Buy. There is

no reference on the Receipts to security interests, purchase money or otherwise, retained by

anyone. The Receipts also do not contain a reference to the Application or the Cardholder

Agreement.

Analysis

Debtors request a determination by this Court that Capital One does not hold a security
interest, purchase money or otherwise, in the Consumer Goods purchased by Debtors at Best
Buy. If the Court does find that such a security interest exists, then the Debtors plead in the
alternative that this Court grant the Debtors’ redemption of the Consumer Goods and approve a
redemption value in the amount of $130.00. Capital One argues that it does hold a purchase

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money security interest in the Consumer Goods and that if the Debtors were to redeem the
Consumer Goods under Code §722, the Consumer Goods have a value of $2,100. The Debtors
assert that the balance on the Capital One account is $1,556.49.

Capital One does not dispute that the transactions in question are “consumer
transactions” or that the products purchased by the Debtors are “consumer goods.”12 A security
agreement is simply “an agreement that creates or provides for a security interest.”13 One
alternative to authenticate a security agreement is for the debtors to sign it.14 With regard to the
descriptions of the collateral in which the secured party takes an interest, Kansas law provides:

84-9-108. (a) Sufficiency of description. Except as otherwise provided in
subsections (c), (d), and (e), a description of personal or real property is
sufficient, whether or not it is specific, if it reasonably identifies what is
described.

. . .

(e) When description by type insufficient. A description only by type of
collateral defined in the uniform commercial code is an insufficient description
of: . . .
(2) in a consumer transaction, consumer goods, a security
entitlement, a securities account, or a commodity account.
With respect to the sufficiency of the collateral description for consumer transactions contained

in a security agreement, it has been observed:

Revised Article 9 continues the requirement that a security agreement or
financing statement contain a description of the collateral that reasonably
identifies the collateral. The use of categories or types of collateral defined under
the UCC (i.e., inventory) is still permitted. However, in consumer transactions
and a limited number of other situations, a description by type or class of

12 See K.S.A. 84-9-102(a)(23) and (a)(26) defining the terms.
13 See K.S.A. 84-9-102(a)(72).
14 See K.S.A. 84-9-102(a)(7)(A).

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collateral is ineffective as to after-acquired property. Note that Revised

Article 9 permits “supergeneric” descriptions in the financing statement such as

“all assets” or “all personal property” but not in the security agreement.15

Property “type” descriptions of collateral are not sufficient for consumer goods.16 The
essence of the Debtors’ argument is that the description of the Consumer Goods in which Capital
One asserts a security interest is insufficient as it only refers to the type of collateral, and Capital
One therefore does not have a security interest in the Consumer Goods. Debtors argue that any
security interest that Capital One may have never attached to the Consumer Goods because an
insufficient description is fatal to the attachment of Capital One’s security interest to the
Consumer Goods. In response, Capital One argues that the description is sufficient if one
combines the language contained in the Application, the Receipts, and the Cardholder
Agreement. The issue before the Court is whether the description is sufficient as required by

K.S.A. 84-9-108(e)(2) to allow attachment and enforceability under K.S.A. 84-9-203(b)(3)(A).
Aside from an insufficient description of the collateral, Debtors do not argue that Capital One
did not comply with the other prerequisites of a security interest with respect to enforceability
and attachment. As to these terms, K.S.A. 84-9-203 provides in pertinent part:
84-9-203. (a) Attachment. A security interest attaches to collateral when
it becomes enforceable against the debtor with respect to the collateral, unless
an agreement expressly postpones the time of attachment.

(b) Enforceability. Except as otherwise provided in subsections (c)
through (i), a security interest is enforceable against the debtor and third parties
with respect to the collateral only if:
(1) Value has been given;
15 John K. Pearson and J. Scott Pohl, A Brief Overview of Revised Article 9 in Kansas, J. KANSAS BAR
ASS’N, Sept. 2003, at 24 (footnotes omitted) (emphasis added).

16 Id. at 29, citing K.S.A. 84-9-108(e) in n.110.

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(2) the debtor has rights in the collateral or the power to transfer
rights in the collateral to a secured party; and
(3) one of the following conditions is met:
(A) The debtor has authenticated a security agreement that
provides a description of the collateral and, if the security
interest covers timber to be cut, a description of the land
concerned; . . . .17
Capital One directs this Court to Baldwin v. Hays Asphalt Constr., Inc., 18 for the
proposition that the entire security agreement may be contained in more than one document. The
Baldwin case involved a commercial transaction and by definition was not a consumer
transaction. The facts in Baldwin are interesting. A security agreement was signed between the
parties in 1990, the purpose of which was to collateralize the debtor’s performance under a lease
that was executed two years later. Also, the debtor as a fictitious entity was not formed until two
years after execution of the security agreement. Under the 1994 version of the Uniform
Commercial Code (“U.C.C.”), the Baldwin court found that the original security agreement did
not need to identify the debt that was secured.19 The Baldwin court observed: “In determining
whether a security interest exists, the intent of the parties controls, and that intent may best be
determined by examining the language used and considering the conditions and circumstances
confronting the parties when the contract was made.”20 The Baldwin court observed that under
the U.C.C., timing and sequence were not relevant as to the execution of more than one
document to establish a security agreement.

17 Emphasis added.
18 20 Kan. App. 2d 853, 855 (1995).
19 Baldwin, 20 Kan. App. 2d at 856.
20 Id. at 857. However, under the revised U.C.C., intent may no longer be controlling. See Hitchin Post

Steak Co. v. Gen. Elec. Capital Corp. (In re HP Distrib., LLP), 436 B.R. 679, 695 (Bankr. D. Kan. 2010) (discussing
leases, disguised security agreements, and the economic realities test under K.S.A. 84-1-203(c)).

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A case not cited by the parties that is somewhat instructive is In re McLeod. 21 Citing to
the Michigan version of the U.C.C., the court observed: “Attachment of a security interest occurs
when (1) debtor has signed a security agreement which contains a description of the collateral;

(2) Value has been given; and (3) The debtor has rights in the collateral.”22 The description of
the collateral is sufficient “if it reasonably identifies what is described.”23 Under Michigan law,
a retail charge agreement was considered signed and accepted by the buyer if the charge account
were used by the applicant.24 In McLeod, the debtor or his wife signed each of the sales slips.
“The sales slips identified the item(s) purchased, incorporated the SearsCharge Agreement, and
granted Defendant [Sears] a security interest.”25 The McLeod court ultimately found that Sears
enjoyed a purchase money security interest in the consumer goods purchased on the retail charge
account. This “composite-document theory” has found a home with other courts.26 The deciding
factor that underpins these decisions is that the Sears sales slips contained simple and clear
purchase money security interest language. Courts have treated the Sears sales slips as security
agreements when “(1) the sales slip incorporates a long-form security agreement by reference,
(2) the retailer is prepared to present evidence of its general documentation practices, and (3) the
sales slip contains solid ‘granting’ language and a transaction-specific description of the
merchandise.”27
21 245 B.R. 518 (Bankr. E.D. Mich. 2000).
22 McLeod, 245 B.R. at 522 (internal quotations and statutory citation omitted).
23 Id. (internal quotations omitted).

24

Id.

25

Id. at 523.
26 2 BARKLEY CLARK & BARBARA CLARK, THE LAW OF SECURED TRANSACTIONS UNDER THE UNIFORM
COMMERCIAL CODE ¶ 12.2[2] at 12-8 to 12-11 (3d ed. 2013).

27

Id. at 12-9.
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The difference between McLeod, the cases cited by Clark,28 and the case sub judice is that
the receipts signed by debtors in those cases specifically stated that Sears retained a purchase
money security interest in the goods that were purchased in the transaction. Michigan law cited
in McLeod also provided that a retail customer assumed and agreed to the terms of the credit
agreement upon use of the account. In the case sub judice, the Capital One Receipts do not
contain a reference to a purchase money security interest or any other security interest. The only
caution contained on the Capital One Receipts refers to the return and refund policies printed on
the back of the Receipts and posted in the store. There is no reference to the Cardholder
Agreement or the original Application on the Receipts. In McLeod, Sears was both the seller and
the lienholder; in contrast, in the case sub judice, Best Buy is listed at the top of the Receipts,
and the only reference to Capital One’s predecessor-in-interest HSBC is: “Payment Type: BBY
CARD/HSBC.” Capital One’s argument is that the description of the Consumer Goods is
sufficient when one considers the three documents as a single security agreement. Remove any
one of these legs and its argument, as with the metaphorical table, does not stand.

Is it enough to string together a signed Application that has buried within it purchase
money security interest language; a Cardholder Agreement that was not signed by the Debtors
that was mailed to them after the Application and buried within which is also purchase money
security interest language; and 12 Receipts which, except for one, were signed but did not
contain a reference to a security interest, the Application or the Cardholder Agreement? The
answer is no: An enforceable security agreement has never existed between these parties as to

28 Id. at ¶ 12.2[2] at 12-8 to 12-11 (3d ed. 2012)
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the Consumer Goods. If Baldwin is followed, and it is the intent of the parties that must be
discerned, then it is difficult to imagine that under these facts the Debtors intended to grant a
security interest in the Consumer Goods purchased by the Debtors. However, this Court need
not address the intent of the parties since the documentation is facially insufficient to have
created a security interest in the Consumer Goods. Capital One may not rely upon the
description of the Consumer Goods purchased on the Receipts because the Receipts are not a
component of a security agreement between the parties. The type of collateral referenced in the
“goods purchased on your Account” contained in the original Application is not sufficiently
descriptive to allow attachment and enforceability under K.S.A. 84-9-108(e) and K.S.A. 84-9203(
b)(3)(A). For the same reason, the language in the Cardholder Agreement is insufficient in
that it only grants a purchase money security interest “in the goods purchased with your Card.”
Although the Court need not reach this issue, one might ponder whether an account agreement
that is referred to in a credit application but that is later mailed to the debtors should be
considered to establish a security agreement. The U.C.C. requires that a security agreement be
authenticated, which in the Capital One situation means signed by the Debtors, and the
Agreement was never signed by the Debtors. It appears that in Baldwin, all of the documents
were signed by the debtor.

Conclusion

Although Capital One argues that a security agreement may be established with reference
to more than one form or document, in the case sub judice, the Receipts are the only documents
that contain a sufficient description of the Consumer Goods, and the Receipts are not a

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component of the security agreement. The security agreement is not enforceable under Kansas
law as to consumer goods and Capital One’s security interest never attached to the Consumer
Goods purchased by the Debtors. The security agreement is not enforceable in a consumer
transaction because, excluding the Receipts, the collateral is only described by type or class.

IT IS THEREFORE the finding of this Court that Capital One does not hold a security
interest in the Consumer Goods. The Debtors’ Motion to redeem and for valuation is denied as
moot.

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.

11-20325 Buerge (Doc. # 243)

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

Click here for the pdf document.

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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