- Category: Judge Somers
- Published on 21 May 2015
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In Re Smith, 14-21191 (Bankr. D. Kan. May 21, 2015) Doc. # 42
SIGNED this 19th day of May, 2015.
Opinion Designated for Electronic Use, But Not for Print Publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
MONIC M. SMITH, CASE NO. 14-21191-13
OPINION DENYING THE DEBTOR’S AMENDED APPLICATION FOR
ADDITIONAL ATTORNEY FEES TO BE PAID THROUGH HER PLAN
This matter is before the Court for decision following a hearing on December 19,
2014, on the Debtor’s amended application for additional attorney fees to be paid through
her confirmed Chapter 13 plan. Chapter 13 Trustee W.H. Griffin objects to the
application. The Debtor appears by counsel Hilliard L. Moore of Moore & Associates,
LLC. The Trustee appears on his own behalf. The Court has reviewed the relevant
materials, heard the parties’ arguments, and is now ready to rule.
Case 14-21191 Doc# 42 Filed 05/19/15 Page 1 of 12
In May 2014, Monic Smith signed an agreement for Moore & Associates, LLC, to
represent her in filing a Chapter 13 bankruptcy. The agreement called for the firm to be
paid a flat fee of $2,950 for providing the following pre-confirmation services:
All legal services and counseling regarding your bankruptcy case prior to
filing your case.
Advising creditors of legal representation if/when they call.
Document review/drafting of the Chapter 13 Plan, petition, schedules,
statements and related documents.
Meeting with attorney and/or case manager to review and sign your case.
Filing of the Plan, petition, schedules, statements and related documents
with the Bankruptcy Court.
Review Chapter 13 Trustee’s requests for information and assistance with
completing these requests
Review and forward all documents requested to the Chapter 13 Trustee
Preparation and legal representation at the 341 Hearing
Legal advice and counseling immediately after your hearing
Obtaining confirmation of your Chapter 13 Plan.
The agreement went on to specify certain services that might become necessary after the
case was filed, and would require the Debtor to pay additional fees. Five items were
listed as “Actions that Can Negatively Affect Your Case” and seven specific motions
were listed under “Additional services that may be necessary after confirmation of your
Chapter 13.” Those items and any other extra work that might be necessary were to be
charged at hourly rates, including $300 for Hill Moore and $250 for a staff attorney. The
agreement said the firm would file a fee application with the Court for these services, and
the Debtor could pay them directly to the firm or through her Chapter 13 plan payment,
which might need to increase due to the additional fees.
Case 14-21191 Doc# 42 Filed 05/19/15 Page 2 of 12
The Disclosure of Compensation of Attorney for Debtor form that Mr. Moore
filed, however, was not nearly as comprehensive as his fee agreement,1 and the fee
agreement itself was not filed with the Court. The Disclosure included most of the form’s
standard description of the legal services Mr. Moore had agreed to provide. Paragraph 5
of the Disclosure said:
In return for the above-disclosed fee, I have agreed to render legal service
for all aspects of the bankruptcy case, including:
Analysis of the debtor’s financial situation, and rendering
advice to the debtor in determining whether to file a petition
Preparation and filing of any petition, schedules, statement of
affairs and plan which may be required;
Representation of the debtor at the meeting of creditors and
confirmation hearing, and any adjourned hearings thereof.
Mr. Moore deleted subsection d. from the procedural form, though, which reads:
“Representation of the debtor in adversary proceedings and other contested bankruptcy
matters.” Paragraph 6 of the form provides a space for specifying services that the debtor
had agreed the attorney would not provide. There Mr. Moore inserted: “Representation
of the debtors in any dischargeability actions, judicial lien avoidances, relief from stay
actions or any other adversary proceeding.”2 This leaves out a number of services a
1The form is nearly identical to the Director’s Procedural Form 203, a suggested form created by
the Director of the Administrative Office of the U.S. Courts.
2The Court notes these exceptions seem more likely to arise in a Chapter 7 than a Chapter 13
case. If Mr. Moore intended for common Chapter 13 postpetition matters to be excluded from his initial
fee, he would be well advised to expand his paragraph 6 exclusions to list matters that are likely to arise
in a Chapter 13 case.
Case 14-21191 Doc# 42 Filed 05/19/15 Page 3 of 12
Chapter 13 debtor might be expected to need after filing bankruptcy, including such
things as modifying the plan after confirmation, abating payments, and consulting with
the attorney about how to handle things that might interfere with performing under the
plan. More specifically, as it turned out in this case, what to do about changes in the
Debtor’s mortgage payments caused by increases in the taxes and insurance for her home.
Mr. Moore’s fee agreement attempts to exclude many such items from the initial flat fee
the Debtor was being charged. But since the Disclosure provided that Mr. Moore had
agreed “to render legal service for all aspects of the bankruptcy case” except those listed
in paragraph 6, the Disclosure instead must be read to say that the fee disclosed in it
covered any services sufficiently related to the Debtor’s bankruptcy case to be considered
an “aspect” of the case, except for the services specifically described in paragraph 6. By
signing the Disclosure, Mr. Moore stated: “I certify that the foregoing is a complete
statement of any agreement or arrangement for payment to me for representation of the
debtor(s) in this bankruptcy proceeding.”
The Debtor’s bankruptcy petition was filed on May 20, 2014, and her plan was
confirmed on July 25, 2014. The plan provided for Mr. Moore’s fees of $2,950 to be paid
through the plan, and also stated: “Counsel for Debtor reserves the right to submit
additional fee applications, but payment is subject to Court approval. Debtor consents to
such increases in Plan payments as may be necessary to pay any approved additional
fees.” The order confirming the plan did not mention Mr. Moore’s fees, but approved the
plan as originally filed. The order provided that the Debtor was not to incur any
Case 14-21191 Doc# 42 Filed 05/19/15 Page 4 of 12
additional debts during the pendency of the plan without prior approval from the Court or
the Trustee except those necessary for the protection and preservation of life, health, or
property. Neither the plan nor the order make clear whether prior approval was necessary
for the Debtor to incur a debt for post-confirmation attorney fees.
On September 30, 2014, Mr. Moore filed an application for additional attorney
fees, seeking $500 for consulting with the Debtor about home mortgage changes and
credit rebuilding strategies. The application did not say when the services were provided
or how much Mr. Moore was charging for his time. The Trustee objected. He
complained that further disclosures were required, including a copy of the Debtor’s fee
agreement with the attorney and information showing that the fees were reasonable and
necessary under the circumstances, and suggested the additional fees should have been
included in the original fee request in the case.
On November 25, Mr. Moore filed an amended application for the fees, reporting
that he had met with the Debtor for one hour on September 26 and for another hour on
October 13 (two weeks after the original application was filed) to consult about home
mortgage changes and credit rebuilding strategies, and asking to have $250 per hour
allowed as postpetition administrative expenses to be paid through the Debtor’s plan. The
motion included this sentence: “While the home mortgage changes and credit rebuilding
strategies may affect Debtor’s bankruptcy, they are not an integral part of it.”
The Trustee again objected. He complained that the fee agreement had not been
provided, that the original fee disclosure provided pursuant to § 329(a) and Federal Rule
Case 14-21191 Doc# 42 Filed 05/19/15 Page 5 of 12
of Bankruptcy Procedure 2016(b) did not appear to exclude the additional services from
the scope of the original fees, and that the original fees charged should have included
discussions about the Debtor’s home mortgage and credit rebuilding strategies. He added
that the additional fees sought would extend the term of the Debtor’s plan from just over
36 months to more than 40 months. At oral argument on December 19, 2014, the Trustee
suggested an education course offered by his office would have provided the help the
Debtor obtained from Mr. Moore. A few days before that hearing, Mr. Moore had
provided the Trustee with a copy of his firm’s fee agreement with the Debtor, and he gave
the Court a copy during the hearing.
According to an affidavit the Debtor signed on December 23, 2014, she met with
attorney Hill Moore on September 26, 2014, for one hour and again on October 13, 2014,
for another hour. She said they discussed a number of issues. They talked about
increases in her mortgage payment that were based on escrow increases for property
taxes. Mr. Moore reviewed her tax return and determined she could not take the
mortgage tax deduction because it did not exceed the standard deduction. She advised
Mr. Moore that rebuilding her credit was very important to her for future credit and
employment reasons, and he told her it could also improve the amount she paid for
property insurance. Mr. Moore told her he could help with rebuilding credit but it would
cost an additional $500 for him to do so, with those fees billed to her Chapter 13 plan. He
ran a credit report and found her bankruptcy filing had improved her credit score but not
enough to let her get competitive lending rates. Together, they identified three creditors
Case 14-21191 Doc# 42 Filed 05/19/15 Page 6 of 12
that had not updated their reporting to reflect the bankruptcy filing, and in the time
between their two meetings, Mr. Moore found information that confirmed the creditors’
reporting was not appropriate. Mr. Moore told her that her credit standing would be
helped more if she obtained a secured credit card, which would require a deposit of about
$500, and he found several lenders willing to offer her such a credit card. Mr. Moore
explained some of the factors used in credit scores, the concept of credit capacity, and the
importance of making consistent payments, continually using credit, and not carrying a
balance from month to month. He also suggested some ways she could most effectively
use her 2014 tax refund.
The Debtor’s amended fee application raises the question whether the services Mr.
Moore provided (1) should have been covered by his firm’s prepetition flat-fee agreement
with the Debtor, (2) constitute postpetition services connected with the bankruptcy case
that, “based on a consideration of the benefit and necessity of [the] services to the
debtor,” qualify as a postpetition administrative expense that is allowable under
§§ 330(a)(4)(B) and 503(b)(2), or (3) arose from a postpetition transaction that was not
sufficiently related to the Debtor’s Chapter 13 case to qualify as an administrative
expense. Before the Court can reach this interesting question, however, it must consider a
procedural problem with Mr. Moore’s request for these additional fees to be paid through
the Debtor’s plan.
Case 14-21191 Doc# 42 Filed 05/19/15 Page 7 of 12
Although the parties did not cite In re Eland,3 an opinion this Court issued a little
more than a year ago, the decision points out a fatal shortcoming in Mr. Moore’s amended
fee application. Like this case, Eland involved a Chapter 13 attorney’s post-confirmation
application for additional fees and expenses. The initial Disclosure of Compensation of
Attorney for Debtors the attorney filed was nearly identical to the one Mr. Moore filed in
this case, and no fee agreement was filed with it. The disclosure said the attorney had
agreed to accept $4,000 for representing the debtors, but his post-confirmation application
sought another $2,980 in addition to the original fee. The application included a detailed
listing of the time the attorney claimed to have spent working on the case: 20.5 hours
before filing the debtors’ bankruptcy petition, 12.4 hours from the petition date to the plan
confirmation date, and 2.0 hours after confirmation. The trustee4 objected, contending the
Disclosure limited the attorney to the initial $4,000 fee except for the types of work it
excluded, which the trustee argued covered only 5.5 of the post-petition hours claimed.
The attorney responded by filing an amended Disclosure of Compensation with his fee
agreement attached. This Court ruled the initial Disclosure controlled, and refused to
consider either the amended Disclosure or the fee agreement. Section 329 of the
Bankruptcy Code and Federal Rule of Bankruptcy Procedure 2016(b) require debtors’
attorneys to disclose their fee arrangements with the debtors. The Court said:
3Case No. 12-22394-13, 2014 WL 718264, Memorandum Opinion and Judgment Granting in Part
the Post-Confirmation Application of Debtors’ Counsel for Attorney Fees (Bankr. D. Kan. Feb. 24, 2014)
4Mr. Griffin was the Chapter 13 trustee in that case, just as he is in this one.
Case 14-21191 Doc# 42 Filed 05/19/15 Page 8 of 12
The disclosure requirements of § 329 are mandatory, not permissive. They
enable the Bankruptcy Court to carry out its traditional role of scrutinizing
carefully the compensation paid to the debtor’s attorney. The Court, the
Chapter 13 Trustee, and creditors must rely upon the completeness and
accuracy of the disclosures, since they are the only information provided
about the compensation of the debtor’s counsel. The disclosure rules are
applied literally, even if the results are sometimes harsh. A fee applicant
must disclose the precise nature of the fee arrangement.5
Mr. Moore has not provided any details concerning his post-confirmation meetings
with the Debtor beyond saying they spent two hours discussing changes in the Debtor’s
mortgage payment and her desire to rebuild her credit standing. Assuming for a moment
that these matters both concerned “aspects” of the Debtor’s bankruptcy case, the Court
finds they do not fit into the categories Mr. Moore listed in paragraph 6 of his Disclosure
as matters that were not covered by the initial $2,950 fee: “Representation of the debtors
in any dischargeability actions, judicial lien avoidances, relief from stay actions or any
other adversary proceeding.” Therefore, they would have been covered by the initial fee,
and could not be allowed as an additional administrative expense.
On the other hand, the Court is not convinced all the services concerned “aspects”
of the bankruptcy case. Because the Debtor needed to continue to pay her mortgage in
order to have a place to live while she performed under her plan, the Court believes her
discussions with Mr. Moore about the mortgage changes did constitute an aspect of her
bankruptcy case, and that portion of Mr. Moore’s services must be deemed to be covered
by the initial flat fee his firm charged the Debtor. However, while the Debtor wanted to
5Eland, slip op. at 6-7, 2014 WL 718264 at *3 (quotation marks and citations omitted).
Case 14-21191 Doc# 42 Filed 05/19/15 Page 9 of 12
rebuild her credit standing for future credit and employment purposes, she could continue
to perform and complete her plan without doing so. The Court concludes that portion of
their discussions was not sufficiently related to the Debtor’s bankruptcy case to constitute
an aspect of the case, and Mr. Moore’s charges for that portion are simply a postpetition
debt not covered by the fee stated in the Disclosure. This conclusion raises a difficult
question about this debt.
As indicated, in the Debtor’s plan, Mr. Moore reserved the right to submit
additional fee applications, with payment subject to the Court’s approval. The order
confirming the plan, however, advised the Debtor not to incur any new debts without the
prior approval of the Court or the Trustee unless the debt was one to protect and preserve
life, health, or property. Together, these provisions indicate either that any subsequent
debt the Debtor might incur to her attorney was not covered by the new-debt prohibition,
or that the Debtor might freely incur a new debt to Mr. Moore only in order to protect her
life, health, or property. As the Debtor’s attorney, Mr. Moore must be deemed to have
been aware of these provisions, and should have been careful not to help the Debtor
violate the confirmation order’s restriction. Rebuilding the Debtor’s credit standing was
concerned with her financial circumstances, just as her bankruptcy case is, but the Court
can’t accept that it was necessary to protect the Debtor’s life, health, or property.
Consequently, the debt for Mr. Moore’s services in that regard were not permissible
under the confirmation order.
But the Court is also not willing to punish Mr. Moore for failing to realize the
Case 14-21191 Doc# 42 Filed 05/19/15 Page 10 of 12
Court would conclude that something concerning the Debtor’s financial circumstances
was not sufficiently related to her bankruptcy case to be allowable as a post-confirmation
administrative expense under § 503(b)(2). As a result, the Court will allow Mr. Moore to
have a valid claim against the Debtor for the portion of his $500 in additional fees that is
attributable to his discussion with the Debtor of rebuilding her credit standing, even
though that debt cannot be paid through the Debtor’s plan. The information Mr. Moore
has provided is not sufficient, however, to enable the Court to declare how much of the
$500 in fees was attributable to that discussion.
For these reasons, the Court finds it must deny Mr. Moore’s amended fee
application. His discussion with the Debtor about the changes in her mortgage payment
must be deemed to be an aspect of her case that was not excluded from the fee stated in
his Disclosure. Consequently, he cannot try to recover that part of his fee request from
the Debtor either as a Chapter 13 administrative expense or directly from the Debtor
outside of her bankruptcy case. However, because his discussion with the Debtor about
rebuilding her credit standing was not an aspect of her bankruptcy case, it was not
covered by the fee included in his Disclosure. Furthermore, because that discussion was
not sufficiently connected with her bankruptcy case to be allowable under § 330(a)(4)(B)
as a Chapter 13 administrative expense, he cannot collect it through her plan. On the
other hand, these circumstances do not prohibit him from seeking to collect the portion of
his fees that is attributable to the discussion of the Debtor’s desire to rebuild her credit
Case 14-21191 Doc# 42 Filed 05/19/15 Page 11 of 12
standing directly from the Debtor herself. That portion of his fee is simply a postpetition
obligation the Debtor incurred.
# # #
Case 14-21191 Doc# 42 Filed 05/19/15 Page 12 of 12
- Category: Judge Somers
- Published on 21 May 2015
- Written by Judge Somers
- Hits: 9
In Re Hall, 14-21588 (Bankr. D. Kan. Apr. 22, 2015) Doc. # 228
SIGNED this 22nd day of April, 2015.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
LEON FRANCIS HALL, CASE NO. 14-21588
MEMORANDUM OPINION AND ORDER ON DEBTOR'S MOTION FOR
TURNOVER OF HARVESTED CROPS
On July 29, 2014, Debtor filed his Motion for Turnover in which he seeks an order
compelling Debtor’s father, Leo Hall, to turnover to the estate the proceeds of 2014 crops
grown on nine tracts of farmland then owned by SEJ Farms, LLC and certain personal
property.1 Leo Hall objected.2 Trial was held on the motion for turnover on December 5,
2014. Debtor appeared in person and by his counsel, David P. Eron, of Eron Law, P.A.
Creditor Leo Hall appeared by Christopher W. O'Brien of Brown, Dengler & O'Brien,
1 Doc. 48.
2 Doc. 81.
Case 14-21588 Doc# 228 Filed 04/22/15 Page 1 of 6
LLC. The United States Trustee appeared by Joyce Owen. There were no other
appearances. The Court has jurisdiction.3
The testimony established the following facts regarding the 2014 crops. Since July
2009, Leo farmed nine tracts of farmland owned by SEJ Farms, LLC, which land is now
property of the estate. There were no written leases, and Debtor never discussed the lease
terms with his father. Although Leo made certain payments to Debtor, Debtor testified
that Leo never paid rent.
On August 22, 2013, Debtor gave written notice of termination of the leases as to
the nine tracts, effective March 1, 2014, except for that portion currently planted to a fall-
seeded grain crop. As to that portion, if the land had been prepared in conformity with
normal practices in the area, the termination date was stated to be the day following the
last day of harvesting such crop if harvested after March 1, 2014, or August 1, 2014,
which ever day comes first. After the August 22, 2013 notice, Leo planted the fall seeded
grain, harvested the grain after March 1, 2014, and sold the grain without giving Debtor
any proceeds. Debtor contends that he is entitled to turnover of the 2014 wheat proceeds
3 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and §§ 1334(a) and (b) and the Amended
Standing Order of Reference of the United States District Court for the District of Kansas that exercised
authority conferred by § 157(a) to refer to the District’s Bankruptcy judges all matters under the Bankruptcy
Code and all proceedings arising under the Code or arising in or related to a case under the Code, effective
June 24, 2013. D. Kan. Standing Order No. 13-1, printed in D. Kan. Rules of Practice and Procedure at 168
(March 2014). A motion to turnover property of the estate is a core proceedings which this Court may hear
and determine as provided in 28 U.S.C. § 157(b)(2)(A) and (E). There is no objection to venue or jurisdiction
over the parties.
Case 14-21588 Doc# 228 Filed 04/22/15 Page 2 of 6
because Leo had not undertaken preparation of the land for planting of 2014 wheat crop
as of August 22, 2013.
The termination of farm leases is addressed by K.S.A. 58-2506. The parties agree
that the effective date of the August 22, 2013 termination of the leases of the SEJ land
devoted to fall planted wheat is controlled by subsection (c), which provides:
(c) When a notice of termination is given pursuant to
subsection (a) after the 30th day preceding March 1 and prior
to the planting of a fall seeded grain crop on cropland which
has been prepared in conformance with normal practices in
the area, in any year in which a fall seeded grain crop has
been or will be harvested, the notice shall be construed as
fixing the termination of the tenancy of that part of the farm
devoted to fall seeded grain crops on the day following the
last day of harvesting such crop or crops in the succeeding
year or August 1 of such succeeding year, whichever comes
It is uncontroverted that when the notice of termination was given on August 22,
2013, Leo had not planted the fall seeded wheat which was harvested in summer of 2014.
The factual question is whether Leo had “prepared” the SEJ farmland for the 2014 fall
seeded wheat “in conformance with normal practices in the area” before the notice of
termination was given on August 22, 2013.
Frank Deines, who provided custom services for Leo for the last five years,
testified as to the preparation of the farmland for the planting of the 2014 wheat crop. In
2013, the wheat crop was harvested by July 4. Leo then immediately turned his attention
to the 2014 crop, by discussing the type of seed with the agronomist, ordering the seed in
July or August, and undertaking insuring and financing of the crop. On no-till land to be
Case 14-21588 Doc# 228 Filed 04/22/15 Page 3 of 6
fall seeded, it is the practice to spray herbicides within approximately three weeks of
harvest, to reduce weed pressure. As to the no-till SEJ farmland, spraying was conducted
between July 16 and July 24, 2013, on 228.3 acres of tract 1 (the NE1/4 and S1/2 of
NW1/4 of section 19-21-12), 156.1 acres of tract 4 (the SW1/4 of section 9-21-13), 150
acres of tract 5 (the NW1/4 of section 21-21-13), 40 acres of tract 7 (the NE1/4 of section
22-21-13), and 38 acres of tract 9 (the SW1/4 of section 24-21-13). No herbicide
spraying was undertaken as to the other farmland in July, 2013.
The question presented is whether the foregoing activities constituted preparation
of the land for purposes of K.S.A. 58-2506(c). Decisions of the Kansas Court of Appeals
are helpful. A purpose of the 1979 legislature in enacting subsection (c) was to
“accommodate the tenant who had worked the ground but not planted the fall crop at the
time notice was given.”4 When interpreting subsection (c), the court has stated that “the
purchase of personal property in the form of farm equipment is not what the legislature
contemplated when it refers to preparation in subsection . . . (c),”5 and “mere intention to
plant a crop is not sufficient to bring the tenant within the protections afforded by 582506(
c).”6 To extend the termination date from March 1 until after the harvest of the fall
seeded crop, the statute requires that when the notice is given the crop land be “prepared
in conformance with normal practices in the area.”
4 Mendenhall v. Roberts, 17 Kan. App.2d 34, 40, 831 P.2d 568, 573 (1992).
5 Buckle v. Caylor, 10 Kan. App.2d 443, 448, 700 P.2d 979, 983 (1985).
6 Orebaugh v. Leatherwood, 27 Kan. App.2d 730, 733, 8 P.3d 55. 58 (2000).
Case 14-21588 Doc# 228 Filed 04/22/15 Page 4 of 6
Based upon these authorities, Court finds that discussing the type of seed with the
agronomist, ordering the seed in July or August, and undertaking insuring and financing
of the crop do not constitute preparation of the land. They evidence intent to plant the
next year’s crop, but they are not activities preparing the land.
The testimony established that the normal practice in the area for no-till land is to
apply chemical spraying within approximately three weeks of the spring/summer harvest.
As to the tracts in issue, this spraying was completed on all or portions of tracts 1, 4, 5, 7,
and 9 in July 2013, before the August 22, 2013 notice was given. The Court finds that
this spraying prepared the land for future seeding of the 2014 crop. Leo Hall had a right
to harvest and retain the proceeds of any wheat he planted on this land in the fall of 2013.
The normal practice is not to apply such chemicals to tilled land shortly after
harvest. Except for the July spraying of the no-till land described above, there is no
evidence that any preparation was undertaken on Debtor’s other farmland before the
notice of termination of leases was given on August 22, 2013, so the leases for this land
were terminated as of March 1, 2014. Leo is not entitled to retain the proceeds from the
harvest of any 2014 wheat planted on the land which was not sprayed in July 2013.
The evidence is not sufficient for the Court to determine additional, such as the
terms of the oral or implied leases or the precise land on which Leo planted and harvested
fall seeded wheat. The Court therefore cannot provide the parties with a more specific
ruling on the motion for turnover. However, based upon these findings, the Court
Case 14-21588 Doc# 228 Filed 04/22/15 Page 5 of 6
anticipates that the parties may be able to agree on the value of the 2014 wheat proceeds
owed to Debtor.7 If not, the parties may request an additional hearing.
IT IS SO ORDERED.
7 As stated at the trial, in the absence of evidence to the contrary as to the terms of the oral leases, the
Court would rule that the leases were in accord with the terms customary in the area, including division of
sale proceeds on a two-third/one-third basis.
Case 14-21588 Doc# 228 Filed 04/22/15 Page 6 of 6
- Category: Judge Somers
- Published on 21 May 2015
- Written by Judge Somers
- Hits: 10
Flex Financial Holding Company v. One Beacon Insurance Company et al, 14-06070 (Bankr. D. Kan. Apr. 13, 2015) Doc. # 38
SIGNED this 13th day of April, 2015.
For online use but not print publication.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
FLEX FINANCIAL HOLDING
FLEX FINANCIAL HOLDING
ONEBEACON INSURANCE GROUP
ATLANTIC SPECIALTY INSURANCE
CASE NO. 13-21483
ADV. NO. 14-06070
MEMORANDUM OPINION AND ORDER REJECTING PLAINTIFF'S MOTION
TO STRIKE DEFENDANTS' DEMAND FOR JURY TRIAL
Case 14-06070 Doc# 38 Filed 04/13/15 Page 1 of 8
Plaintiff Flex Financial Holding Company (Flex) has moved to strike the demand
of Defendants OneBeacon Insurance Company and Atlantic Specialty Insurance
Company for trial by jury.1 Defendants oppose the motion. No oral argument was
requested, and the matter is under advisement following the completion of briefing.2 The
Court has jurisdiction.3
Debtor/Plaintiff Flex filed this adversary proceedings on September 3, 2014. The
Complaint is titled Complaint for Declaratory Judgment. It states it was filed "to
determine and resolve the rights and obligations of the parties under the contract of
insurance issued by Defendant One Beacon Insurance Group LLC and its member
company Atlantic Specialty Insurance Company to Debtor/Plaintiff related to damage to
property owned by Debtor/Plaintiff."4 The Complaint alleges as follows. Defendants
issued a policy of insurance to Flex for two properties, one located in Merriam, Kansas
1 Doc. 15. A related matter, Defendants' motion to withdraw reference (doc. 13), is also under
advisement following briefing. A report and recommendation will be filed by separate document.
2 Plaintiff appears by Jonathan A. Margolies and Donald G. Scott, of McDowell, Rice, Smith &
Buchanan. Defendants appear by Curtis O. Roggow of Sanders,Warren & Russell, LLP.
3 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C. §§
157(a) and 1334(a) and (b), and the Amended Standing Order of Reference of the United States District
Court for the District of Kansas that exercised authority conferred by § 157(a) to refer to the District's
bankruptcy judges all matters under the Bankruptcy Code and all proceedings arising under the Code or
arising in or related to a case under the Code, effective June 24, 2013. D. Kan. Standing Order No. 13-1,
printed in D. Kan. Rules of Practice and Procedure at 168 (March 2014). Defendants have filed a motion
to withdraw reference for cause, primarily to preserve their claimed right to jury trial. Hence, the motion
to strike the demand for jury trial is addressed before consideration of the motion to withdraw reference.
4 Doc. 1, 1.
Case 14-06070 Doc# 38 Filed 04/13/15 Page 2 of 8
and the other in Gladstone, Missouri, for the period December 15, 2012 to December 15,
2013. On or about April 11, 2013, Flex reported claims for damage to two insured
buildings located on the Merriam, Kansas property from a wind and hail storm on or
about April 7, 2013.
Flex filed for relief under Chapter 11 on June 10, 2013. By letter date July 24,
2013, Defendants advised Flex that the policy provided coverage for the claim and sent a
check to Flex in the amount determined to be the net claim. Flex advised Defendants that
it believed the policy required additional compensation. The adversary proceeding was
filed on September 3, 2014. The only count is for declaratory relief. It alleges that "[a]n
actual controversy exists between Debtor/Plaintiff and Defendants concerning the
appropriate coverage, appropriate loss payments and any applicable deductible for the
claims . . .."5 The prayer requests the an entry of judgment declaring that Defendants
have a duty under the insurance policy to provide coverage for the claims as follows:
(a) Provide full replacement of the sloped and the flat
modified bitumen roof coverings, air conditioning (HVAC)
units atop the roof, metal copings and flashings, ventilation
covers, window frames and canopy covers at the estimated
expense of . . . $1,011,711.10;
(b) Provide coverage for the resulting Business Income Loss
and Extra Expense;
(c) Apply no depreciation deduction to the Replacement Cost;
(d) Apply a $25,000 deductible to each building; and
(e) For such other relief as the Court deems just and proper
under the circumstances.6
5 Id. at 11.
Case 14-06070 Doc# 38 Filed 04/13/15 Page 3 of 8
After being granted an extension of time to answer or otherwise respond to the
Compliant, Defendants filed their answer on December 1, 2014.7 The answer prays that
the Court find that Defendants have already paid the full amount owed for the loss of
April 7, 2013, and have otherwise fulfilled all their other obligations under the insurance
policy. The affirmative defenses include the allegation that Flex’s “claims are barred by
failure to comply with all policy conditions concerning timely notice of losses claimed
under the policy, cooperation with the insurance company, or making repairs or resuming
operations as quickly as possible.”8 Pursuant to Rules 38 and 39 of the Federal Rules of
Civil Procedure, the answer included a demand for jury trial.9
Flex moved to strike the jury trial demand on December 24, 2014.10 It argues that
there is no right to jury trial “because this action solely seeks relief in the form of
construction of the language of a written contract of insurance and determination of the
meaning of the written contract provisions, matters long held to be within the province of
determination by a judge rather than a jury."11 Defendants respond that there is a right to
jury trial because this action is essentially a breach of contract action. They argue that the
7 Doc. 8.
8 Id. at 7.
9 Id. at 8.
10 Doc. 15.
11 Id. at 2.
Case 14-06070 Doc# 38 Filed 04/13/15 Page 4 of 8
Complaint not only seeks an interpretation of the insurance contract but also clearly seeks
monetary damages beyond the repair costs that Defendants have already paid.12
"The Seventh Amendment provides that '[i]n Suits at common law, where the
value in controversy shall exceed twenty dollars, the right of trial by jury shall be
preserved...'"13 The amendment is applied using a two part historical test which asks (1)
whether the court is dealing with a cause of action that was either tried at law at the time
of the founding or is at least analogous to one that was and (2) if the action “belongs in
the law category, . . . whether the particular trial decision must fall to the jury in order to
preserve the substance of the common-law right as it existed in 1791.”14 Under the test,
the right to a jury trial “is preserved in suits in which legal rights were to be ascertained,
in contradistinction to those where equitable rights alone were recognized, and equitable
rights alone were recognized."15 Although at times it is difficult to draw the line between
legal and equitable rights, "some proceedings are unmistakably actions at law triable to a
jury. The Seventh Amendment, for example, entitled the parties to a jury trial in actions
for damages to a person or property, for liable and slander, for recovery of land, and for
12 Doc. 20, 5.
13 Markman v. Westview Instruments, Inc., 517 U.S. 370, 376 (1996) (citing U.S. Const. Amdt. 7.)
15 Ross v. Bernhard, 396 U.S. 531, 533 (1970) (quoting Parsons v. Bedford, Breedlove &
Robeson, 3 Pet. 433, 447 (1830)).
Case 14-06070 Doc# 38 Filed 04/13/15 Page 5 of 8
conversion of personal property."16 "Generally, breach of contract actions claiming
monetary damages were tried to a jury."17 "By contract, actions seeking reformation of a
contract were tried to the judge, as were actions seeking specific performance of a
contract."18 “[O]ne historian observed that it was generally the practice of judges in the
late 18th century ‘to keep the construction of writing out of the jury's hands and reserve it
The Declaratory Judgement Act,20 which Flex cites as authority for the proceeding,
"specifically preserves the right to jury trial for both parties."21 The right to a jury trial
remains unchanged.22 "Declaratory relief may be legal or equitable depending on the
'basic nature of the underlying issues.'"23 Respected commentators on federal practice
suggest that “to resolve whether there is a right to a jury trial in a declaratory judgment
action, it is necessary to determine in what kind of action the issue would have come to
17 Fischer Imaging Corp. v. Gen. Elec. Co., 187 F.3d 1165, 1169 (10th Cir. 1999); see Ross, 396
U.S. at 542.
18 Id. (citing 9 Wright & Miller, Federal Practice and Procedure Civil 2d §§ 2309 & 2316
19 Markman v. Westview Instruments, Inc., 517 U.S. at 383 n. 7 (quoting 9 J. Wigmore, Evidence
§ 2461, p. 194 (J. Chadbourn rev. ed. 1981)).
20 28 U.S.C. § 2201, et. seq.
21 Beacon Theatres v. Westover, 359 U.S. 500, 504 (1959).
22 Simler v. Conner, 372 U.S. 221, 223 (1963) ("The fact that the action is in form a declaratory
judgment case should not obscure the essentially legal nature of the action.").
23 Fischer Imaging Corp., 187 F.3d at 1168.
Case 14-06070 Doc# 38 Filed 04/13/15 Page 6 of 8
the court if there were no declaratory judgment procedure."24 This procedure has been
utilized by the Tenth Circuit Court of Appeals.25
In this case, without a declaratory judgment action, Flex, after being advised of the
insurance proceeds to be paid and concluding that more was owed under the policy,
could have sued Defendants for breach of the insurance contract. Alternatively,
Defendants could have sued Flex seeking a determination that it has fulfilled its duties
under the insurance contract, in which case Flex could have counterclaimed for damages.
In both situations, the damage claims would be triable to a jury. The Court therefore
finds that, even though this action is brought as one for declaratory relief, there is a right
to jury trial because, absent the availability of declaratory relief, the issues would have
been determined in an action for breach of contract.
The Court rejects Flex’s reliance on cases holding that there is no right to a jury
trial when the issue is construction of a written contract. As stated in SCO Group, a case
quoted by Flex, that rule applies in declaratory judgment actions when the claim “seeks
construction of a contract and no relief akin to damages.”26 Review of the relief sought
by Plaintiff reveals that it seeks relief akin to damages. Included in the prayer are
requests for declarations that Defendants have a duty under the policy to: provide full
24 9 Wright & Miller, Federal Practice and Procedure, § 2313 at 170 (3rd ed. 2008).
25 Fischer Imaging Corp., 187 F.3d at 1171.
26 The SCO Group, Inc. v. Novell, Inc., 2007 WL 2684537 *6 (D. Utah, Sept. 7, 2007) (citing
Manning v. United States, 146 F.3d 808, 813 (10th Cir. 1998) (emphasis supplied).
Case 14-06070 Doc# 38 Filed 04/13/15 Page 7 of 8
replacement on the roof and related items for a cost of $1,011,711.10; provide coverage
for business income loss and extra expense; apply no depreciation deduction to the
replacement cost; and apply a $25,000 deductible to each building. Flex's prayer is for
orders framed as declarations, but their essence is recovery of damages, dependant upon
the resolution of many issues of fact as well as construction of the insurance policy.
"[T]he right to trial by jury does not depend upon the choice of words used in
For the foregoing reasons, the Court denies Flex’s motion to strike Defendants’
demand for jury trial. The court finds that Defendants have a constitutional right to trial
by jury on claims alleged in the Complaint.
IT IS SO ORDERED.
27 Bruce v. Bohanon, 436 F.2d 733, 736 (10th Cir. 1970) (citing Dairy Queen, Inc. v. Wood, 369
U.S. 469, 478 (1962)).
Case 14-06070 Doc# 38 Filed 04/13/15 Page 8 of 8
- Category: Judge Somers
- Published on 21 May 2015
- Written by Judge Somers
- Hits: 6
In Re Cole, 13-11624 (Bankr. D. Kan. Mar. 12, 2015) Doc. # 87
SIGNED this 12th day of March, 2015.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
JAMES LESTER COLE, CASE NO. 13-11624
MEMORANDUM OPINION AND JUDGMENT
GRANTING TRUSTEE'S MOTION FOR TURNOVER
On March 3, 2015, trial was held on the Trustee's Motion for Turnover.1
The Trustee appeared by J. Michael Morris of Klenda Austerman LLC. The Debtor,
James Lester Cole, in person and by William H. Zimmerman, Jr. of Eron Law. Mr. Cole
testified, exhibits were admitted, and closing arguments were presented. The Court then
1 Doc. 57. This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and §§ 1334(a) and (b) and the
Amended Standing Order of Reference of the United States District Court for the District of Kansas that
exercised authority conferred by § 157(a) to refer to the District’s Bankruptcy judges all matters under the
Bankruptcy Code and all proceedings arising under the Code or arising in or related to a case under the Code,
effective June 24, 2013. D. Kan. Standing Order No. 13-1, printed in D. Kan. Rules of Practice and Procedure
at 168 (March 2014). A motion for turnover is a core proceeding which this Court may hear and determine
as provided in 28 U.S.C.§ 157(b)(2)(E). There is no objection to venue or jurisdiction over the parties.
Case 13-11624 Doc# 87 Filed 03/12/15 Page 1 of 3
announced on the record its findings of fact, which are incorporated herein by this
reference. The Court placed the case under advisement for the purpose of making
conclusions of law. Having further considered the matter, the Court now enters judgment
for the Trustee for the following reasons.
The Trustee’s motion contends that funds received by the Debtor post-petition,2
the source of which were sale proceeds that were “held-back” from the prepetition sale of
substantially all of the assets of JLC Investments, Inc. (JLC), are property of the estate
and should be turned over to the Trustee. Section 541 defines the estate to include “all
legal or equitable interests of the debtor in property as of the commencement of the case.”
Under this definition, “contingent interests are property of the bankruptcy estate even if
the rights do not accrue or are uncertain until a date after the bankruptcy filing.”3
In this case, when Debtor filed for relief under Title 11 he had a contingent interest
in a $4,000 draw which he received post-petition from JLC. Debtor was the sole
stockholder of JLC, a sub-S corporation. Prepetition the assets of JLC were sold. On
June 15, 2013, JLC wrote check number 46634 payable to Debtor as a draw, with the
expectation that there would not be sufficient funds to cover the check unless “hold back”
funds from the sale of JLC’s assets were received. Debtor filed for relief under Chapter 7
on June 27, 2013. Through payment of "hold back" funds, JLC received and deposited
2 The Trustee is not contending that all of the "hold back" revenues are property of the estate. JLC,
not the Debtor, was the seller of the assets and therefore entitled to the payment.
3 In re Dittmar, 618 F.3d 1199, 1208 (10th Cir. 2010).
Case 13-11624 Doc# 87 Filed 03/12/15 Page 2 of 3
funds sufficient to cover the draw on July 10, 2013. The $4,000 check payable to Debtor
dated June 15, 2013 cleared JLC’s bank account on July 12, 2013.
The Trustee’s motion for turnover is granted in the amount of $4,000. Debtor’s
interest in the $4,000 was a contingent interest which was property of the estate.
The foregoing constitute Findings of Fact and Conclusions of Law under Rules
7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure which make Rule 52(a)
of the Federal Rules of Civil Procedure applicable to this matter.
Judgment is hereby entered granting the Trustee’s motion for turnover of $4,000.
The judgment based on this ruling will become effective when it is entered on the docket
for this case, as provided by Federal Rule of Bankruptcy Procedure 9021.
IT IS SO ORDERED.
Case 13-11624 Doc# 87 Filed 03/12/15 Page 3 of 3
- Category: Judge Somers
- Published on 21 May 2015
- Written by Judge Somers
- Hits: 11
Redmond, Brooke Trustee v. Logan Wildlife Corporation et al, 09-06070 (Bankr. D. Kan. Apr. 3, 2015) Doc. # 148
SIGNED this 3rd day of April, 2015.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
BROOKE CORPORATION, et. al.,
CHRISTOPHER J. REDMOND,
Chapter 7 Trustee of Brooke
Corporation, Brooke Capital
Corporation, and Brooke Investments,
CASE NO. 08-22786
ADV. NO. 09-06070
MEMORANDUM OPINION AND ORDER
DENYING THE TRUSTEE’S MOTION IN LIMINE
Case 09-06070 Doc# 148 Filed 04/03/15 Page 1 of 16
In the remaining counts of this adversary proceeding, the Chapter 7 Trustee of the
Debtor Brooke Corporation (Brooke Corp) seeks to avoid certain transfers from Brooke
Corp to Defendant SpiritBank under 11 U.S.C. § 548 or § 547 and to recover the avoided
transfers under § 550. Discovery has been completed. The matter before the Court is the
Trustee’s Motion in Limine to Exclude the Opinion and Report of SpiritBank’s Expert,1
Jack F. Williams. The motion was taken under advisement following oral argument held
on March 27, 2015. Plaintiff appeared by John J. Cruciani of Husch Blackwell LLP.
SpiritBank appeared by Heather S. Esau Zerger of Zerger & Mauer LLP and Kenneth E.
Wagner of Latham, Wagner, Steele & Lehman, P.C. The parties stipulated to jurisdiction
of the Court and consented to trial and entry of a final order by the Bankruptcy Court.2
Brooke Corp filed its Chapter 11 bankruptcy petition on October 28, 2008.
Brooke Corp owned approximately 62% of Aleritas Capital Corporation (Aleritas),
formerly known as Brooke Credit Corporation. On June 29, 2009, the Court entered an
order converting the Debtors’ bankruptcy proceedings to Chapter 7. Christopher J.
Redmond was appointed Chapter 7 Trustee. Aleritas has not filed for bankruptcy
protection, but its assets have been assigned to its creditors. SpiritBank does not
controvert the report of the Trustee’s expert that both Brooke Corp and Aleritas were
insolvent from December 31, 2005 and thereafter.
1 Doc. 136.
2 Doc. 124.
Case 09-06070 Doc# 148 Filed 04/03/15 Page 2 of 16
In October 2006, Brooke Credit (Aleritas) and other Brooke related entities,
including Brooke Corp, signed a Note and Warrant Purchase Agreement (NWPA),
whereby Brooke Credit acquired approximately $45 million in secured financing. This is
referred to as the Falcon-Jordan financing. Under the NWPA, Brooke Corp was liable
upon the occurrence of a Mandatory Repurchase Event with respect to the Parent (Brooke
Corp) if Aleritas did not repurchase the Notes. There is no evidence that any of the
events constituting a Mandatory Repurchase Event with respect to the Parent occurred
while the NWPA was in effect.
On March 6, 2008, Aleritas entered into a loan agreement with First State Bank of
Gothenberg, Nebraska (FSB) in the approximate amount of up to $52.5 million to replace
the Falcon-Jordan financing. FSB sold participation interests in the FSB/Aleritas loan,
but SpiritBank initially declined the offer to purchase. Before the FSB/Alertias loan was
fully subscribed, Brooke Corp approached SpiritBank with the concept Brooke Corp
providing a secured Option Agreement to induce SpiritBank to purchase a $10,000,000
participation in the FSB/Aleritas loan. SpiritBank agreed to the concept and bought a
$10,000,000 interest in the FSB/Alertias loan. The Option Agreement allowed
SpiritBank to elect to be taken out of its participation interest by Brooke Corp before
April 21, 2008. It also included Brooke Corp’s pledge of security, including a
$2,000,000 CD to be purchased as collateral for Brooke Corp’s obligation to take out
SpiritBank and purchase the participation interest. On March 7, 2008, $2,000,000 was
Case 09-06070 Doc# 148 Filed 04/03/15 Page 3 of 16
wired from a Brooke Corp account to SpiritBank for the purpose of purchasing the CD.
The Trustee seeks to avoid this transfer as a fraudulent conveyance under § 548.
On April 11, 2008, SpiritBank exercised its take-out option, but Brooke Corp
requested that the date be extended. A series of amendments extended the take-out date
to October 10, 2008. Brooke Corp conveyed additional consideration to SpiritBank in the
form of junior mortgages on real property and paid a deferral fee of $25,000 and legal
fees of $8,000. The Trustee seeks to avoid these cash transfers under § 548.
On September 4, 2008, SpiritBank liquidated the $2,000,000 CD and received
$2,012,491.67 which it applied to Brooke Corp’s obligation under the Option Agreement,
as amended. On September 10, 2008, SpiritBank and Brooke Corp executed the Third
Amended Option Agreement extending the closing date of the Brooke Purchase
Obligation to February 7, 2009.
This adversary proceeding was initiated by the filing of a Complaint against parties
other than SpiritBank on June 18, 2009. SpiritBank was added as a defendant when the
First Amended Complaint was filed on October 27, 2010.3 A pretrial order was filed on
December 16, 2014. It enumerates the relief sought by the Trustee. That relief includes a
“[f]inding that Brooke Corp’s execution of the Option Agreement (as amended), the
3 Doc. 31. One of the counts was against a different defendant. That claim has been
resolved by settlement and compromise approved by the Court. Allegations against SpiritBank
regarding transfers of real estate have also been resolved by Joint Stipulation and Order. (Doc.
Case 09-06070 Doc# 148 Filed 04/03/15 Page 4 of 16
purchase of the Brooke Corp CD and the payment of the Deferral Fees are avoidable as a
constructively fraudulent conveyance under 11 U.S.C. § 548(a)(1)(B) and UFTA.”4
THE WILLIAMS EXPERT OPINION AND REPORT AND THE TRUSTEE’S
MOTION IN LIMINE.
SpiritBank has designated Jack F. Williams as an expert witness. He has prepared
a report5 on two elements of the Trustee’s § 548 claim: (1) whether Brooke received
reasonably equivalent value for its transfers to SpiritBank; and (2) whether Brooke had an
interest in the $2 million CD pledged to SpirirtBank. The Trustee’s motion in limine
seeks to exclude the report and the opinions of Jack Williams from consideration at trial.
A. Controlling Law.
Federal Rule of Evidence 702 provides that a qualified expert may testify in the
form of opinion if:
(a) the expert’s . . . specialized knowledge will help the trier
of fact to understand the evidence or to determine a fact in
(b) the testimony is based upon sufficient facts or data;
(c) the testimony is the product of reliable principles and
(d) the expert has reliably applied the principles and methods
to the facts of the case.
Rule 703 provides in part that “[a]n expert may base an opinion of facts or data in the
case that the expert has been made aware of or personally observed.” Rule 704 provides
4 Doc. 124, 7.
5 Doc. 136-1.
Case 09-06070 Doc# 148 Filed 04/03/15 Page 5 of 16
that in general “[a]n opinion is not objectionable just because it embraces an ultimate
issue,” except in certain circumstances in criminal cases.
Under the Supreme Court’s decision in Daubert,6 Rule 702 imposes upon the trial
judge the gatekeeping function of ensuring that expert opinion evidence is both relevant
and reliable. This function applies whether the testimony is based upon scientific,
technical, or other specialized knowledge.7 Performing this function “entails a
preliminary assessment of whether the reasoning or methodology underlying the
testimony is scientifically valid and of whether that reasoning or methodology properly
can be applied to the facts in issue.”8 “The focus, of course, must be on principles and
methodology, not on the conclusions that they generate.”9 “But conclusions and
methodology are not entirely distinct from one another.”10 In the Tenth Circuit, “any step
that renders the expert’s testimony unreliable renders the expert’s testimony
inadmissible.”11 A judge has “considerable leeway in deciding in a particular case how to
go about determining whether particular expert testimony is reliable.”12 Magistrate
6 Daubert v. Merrell Dow Pharm. Inc., 509 U.S. 579 (1993)
7 Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137 (1999).
8 Daubert, at 592-93.
9 Id. at 595.
10 Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997).
11 Attorney Gen. of Okla. v. Tyson Foods, Inc., 565 F.3d 769, 780 (10th Cir. 2009).
12 Kumho Tire, 526 U.S. at 152.
Case 09-06070 Doc# 148 Filed 04/03/15 Page 6 of 16
O’Hara summarizes the law as follows: “Reliability analysis applies to all aspects of the
expert’s testimony, including the facts underlying the opinion, the methodology, and the
link between the facts and the conclusions made. Consequently, the court must make a
practical, flexible analysis of the reliability of the testimony, considering relevant factors
and the circumstances of the case.”13
B. The Williams Report.
The Williams report concludes, based upon Jack Williams examination of
documents, that “Brooke Corp received substantial value, reasonably equivalent from an
economic perspective, in exchange for the incurrence of the Brooke Corp Obligations . . .
and the first priority security interest in the $2 million certificate of deposit (“CD”).”14
13 Starling v. Union Pacific R. Co., 203 F.R.D. 468, 475 (D. Kan. 2001).
14 Doc. 136-1, 47. The elements of value are identified as follows:
(1) Benefit to Aleritas and benefit to Brooke Corp, as its parent,
from the decrease in interest expense totaling approximately $21.4
million resulting from the retirement of the Secured 12% Notes
(2) Benefit to Brooke Corp from the replacement of the mandatory
repurchase obligation liability of approximately $51.7 million [in the
NWPA] with the $10 million Brooke Corp Obligations;
(3) Benefits to Brooke Corp resulting from the opportunity to retire the
Secured 12% Notes [NWPA] outside of the contractual prepayment
window and at a reduced premium, resulting in savings of not less than
approximately $1.02 million;
(4) Benefit to Brooke Corp from SpiritBank’s acceptance of alternative
forms of collateral in lieu of cash collateral as required under the
Option Agreement [with Spirit] totaling approximately $5.125 million
to $7.73 million;
(5) Benefit to Brooke Corp from forbearance in the form of extensions
of the closing date for the Brooke Corp Purchase Obligation [under the
Spirit Option Agreement]; and
(6) Benefit to Brooke Corp from forbearance in the form of a
Case 09-06070 Doc# 148 Filed 04/03/15 Page 7 of 16
The Williams opinion also concludes, from an economic and forensic perspective, that
Brooke Corp did not appear to be the funding source of the $2 million used to purchase
C. The Trustee’s Position.
The Trustee in his initial brief in support of his motion in limine argues that the
Williams report is based upon incorrect facts and is thus unreliable and should be
excluded. Two categories of facts are identified: (1) Brooke Corp’s liability with respect
to the NWPA; and (2) the flow of cash used to purchase the CD. In addition, the Trustee
argues that the Court need not consider the opinions and conclusions of Jack Williams
because they invade the province of the Court as both fact finder and arbiter of the law.
The Trustee’s reply brief includes new arguments; it asserts that the opinion is unreliable
deferral of the exercise of SpiritBank’s right to realize on collateral
upon default. (Id.).
15 Id. at 47-48. The reasons for this opinion are the following:
(1) Brooke Corp operated through four operating
subsidiaries—Brooke Capital, Brooke Bancshares, Brooke
Brokerage, and Aleritas—and did not have its own operating
assets. Therefore, the source of the funds was not Brooke Corp
(2) The source of funds appears to be (a) the non-Debtor
depositors at Brooke Savings Bank; or (b) funds obtained through
a $2 million loan from Aleritas on March 3, 2008, in
contemplation of the FSB Loan and SpiritBank Participation. (Id.
Case 09-06070 Doc# 148 Filed 04/03/15 Page 8 of 16
because it ignores the stipulation that Aleritas and Brooke were insolvent and fails to
evaluate the likelihood of Brooke’s contingent liability on the NWPA.
As to Brooke’s liability under the NWPA, the Trustee argues that “the central
assumption of Williams’ report is that Brooke Corp had an obligation to pay off
Falcon/Jordan loan in the event that Aleritas was unable to do so . . .” and this
“assumption is factually and legally incorrect.”16 According to the Trustee, Brooke Corp’s
liability was so contingent that it “was an obligation that Brooke Corp never would have
actually realized or experienced because the probability of the contingency occurring was
zero because it was a contingency that Brooke Corp fully controlled.”17 As to the failure
of the Williams report to acknowledge the insolvency of Brooke and Aleritas, the Trustee
notes that Jack Williams, in published articles, has recognized that a parent company does
not receive reasonably equivalent value when guarantying the debt of an insolvent
As to the purchase of the CD, the Trustee argues that the undisputed facts in the
record show that Brooke Corp was the source of the cash used to purchase the CD. In his
reply brief, the Trustee argues that SpiritBank has admitted the facts which evidence that
Brooke was the source of the funds.
16 Doc. 136, 14.
17 Doc. 136, 15.
18 Doc. 145, 7.
Case 09-06070 Doc# 148 Filed 04/03/15 Page 9 of 16
The Trustee also argues that the “touchstone” of admissibility of expert opinion
evidence is it helpfulness to the trier of fact. He asserts that in this case the Court does
not need help to understand the facts.
D. SpiritBank’s Position.
As to Brooke’s liability under the NWPA repurchase obligation, SpiritBank
argues that the Williams report recognizes that the obligation was contingent and that the
contingency had not occurred prior to Brooke entering into the Option Agreement with
SpiritBank. “Prof. Williams’ conclusion that Brooke Corp benefitted from the
replacement of the mandatory repurchase obligation liability . . . with the . . . Option
Agreement obligation does not require a default, or even a threat of default, of the Falcon
As to Brooke’s interest in the cash used to purchase the CD, SpiritBank
emphasizes that Williams performed an analysis to determine if Brooke had an economic
interest in the CD, not whether the purchase funds were provided from an account in the
name of Brooke.
As to the argument that the report invades the province of the Court, SpiritBank
argues that “Williams’ opinion does not seek to define the legal parameters of avoidable
transfers under applicable law, and the mere fact the Prof. Williams’ opinion may include
an economic or financial assessment of legal documents and concepts is not
19 Doc. 137, 22.
Case 09-06070 Doc# 148 Filed 04/03/15 Page 10 of 16
problematic.”20 Rather, according the SpiritBank, “Williams’ opinion offers insight and
context into complex series of underlying transactions and a forensic and economic
assessment of the value transferred and received by Brooke Corp.”21 SpiritBank also
relies upon the principle that the gatekeeping function of Daubert is less important when
the trial is to the court rather than to a jury.
A. The Court rejects the Trustee’s position that the Williams report and Jack
William’s testimony should be excluded because they are unreliable.
1. The Williams report and opinion testimony will not be excluded from
evidence as unreliable because based upon the assumption that Brooke was
obligated to pay the Falcon/Jordan note in the event of monetary default by
The Trustee challenges the reliability of the Williams report based upon the
contention that Jack Williams assumed that “Brooke Corp was obligated to pay-off the
Falcon/Jordan loan in the event of a monetary default by Aleritas.”22 Spirit refutes this
premise stating that Williams’ conclusions regarding benefit to Brooke from the
replacement of Brooke’s contingent liability under the Falcon/Jordan with the $10 million
obligation under the Spirit Option Agreement does not require such an assumption.
Review of the Williams report convinces the Court that the assumption alleged by
the Trustee was not made. The report states in part, “The Note Purchase Agreement [the
20 Doc. 137, 29.
21 Doc. 137, 28-29.
22 Doc. 136, 14.
Case 09-06070 Doc# 148 Filed 04/03/15 Page 11 of 16
NWPA] included a mandatory repurchase provision triggered by certain ‘change of
control’ events (The Mandatory Repurchase Event).”23 The Williams report does not
state that Brooke’s repurchase obligation is triggered by a monetary default in the
payment terms of the Falcon/Jordan loan. When discussing the value received by Brooke
from the transaction with SpiritBank, Williams’ opinion states,
The retirement of the Secured 12% Notes resulted in
interest savings of approximately $21.4 million over the term
of the FSB Loan. As the majority owner of Aleritas, Brooke
Corp benefited (sic) from this savings to its subsidiary.
Furthermore, Brooke Corp provided a guaranty of certain
mandatory repurchase provisions under the Note Purchase
Agreement (as discussed in more detail above). Retirement of
the Secured 12% Notes released Brooke Corp from this
The Williams report does not erroneously assume that under the NWPA Brooke Corp was
liable in the event of monetary default by Aleritas.
The Trustee also questions the reliability of the William report’s conclusion that
Brooke received reasonably equivalent value because Jack Williams failed to evaluate the
probability that a Mandatory Repurchase Event would occur and did not acknowledge the
stipulation that Brooke and Aleritas were insolvent at the time of the events in issue.
Such deficiencies in the report, if proven at trial, would be a basis going to the weight of
Jack William’s opinion. They are not sufficient grounds to exclude the opinion from
evidence, particularly when the trial will be to the Court.
23 Doc. 136-1, 25.
24 Id. at 32.
Case 09-06070 Doc# 148 Filed 04/03/15 Page 12 of 16
2. The Williams report and opinion testimony will not be excluded from
evidence based upon unreliability because of the conclusion that Brooke was
not the source of funds used to purchase the $2 million CD.
The Trustee contends that the Williams report is wrong because it ignores the
actual facts of the case regarding the purchase of the CD. According to the Trustee, those
facts show that the $2 million used to purchase the pledged CD came from Brooke Corp’s
banking account and that the funds were not traceable to a contemporaneous deposit by
another Brooke entity.
William’s report concludes, “from an economic and forensic perspective, and
based on the facts and circumstances known to me as of the date of this Report, it does
not appear that Brooke Corp was the funding source of the $2 million used to purchase
the $2 Million CD”25 because (1) Brooke operated through four subsidiaries and did not
own its own operating assets and (2) the source of the funds were nondebtor depositors or
a loan from Aleritas.
The Court finds that the apparent conflict about the source of funds is because the
Trustee and Mr. Williams are addressing two different matters. The Trustee relies upon
tracing from bank accounts and concludes that Brooke controlled the funds. The
Williams report makes a determination of Brooke’s interest in the funds based upon an
economic and forensic perspective. Which perspective is the proper one to apply in a
25 Id. at 47-48.
Case 09-06070 Doc# 148 Filed 04/03/15 Page 13 of 16
fraudulent conveyance action is a question of law which will be determined following
The Court denies the Trustee’s motion to exclude the Williams report as to the
source of the funds used to purchase the CD. The disagreement is about how to define
the source of the funds. Williams’ report is not unreliable if the question is the economic
source of the funds, rather that a tracing of money through bank accounts.
B. The Williams report and opinion testimony will not be excluded because
the opinions invade the province of the Court as fact finder and arbiter of the law.
Expert opinion evidence should be admitted only when it will be helpful to the
trier of fact.26 The Trustee argues that because the material facts are undisputed and the
factual issues are easy to understand, an expert is not required. SpiritBank responds that
the Williams report offers insight and context into a complex series of transactions and a
forensic and economic analysis of the value transferred and received. SpiritBank also
argues that the gatekeeping function is relaxed when trial is to the court.
In the Tenth Circuit, when trial is to the court, the Daubert analysis must be
undertaken if there is an objection to expert testimony, but the “usual concerns regarding
unreliable expert testimony reaching a jury obviously do not arise.”27 It follows that the
concern about an expert opinion invading the province of the finder of fact is also of less
concern when a jury is not involved. As stated in Daubert, “[v]igorous cross
26 Fed. R. Evid. 702(a).
27 Attorney Gen. of Okla., 562 F.3d at 779.
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examination, presentation of contrary evidence, and careful instruction on the burden of
proof are the traditional and appropriate means of attacking shaky but admissible
The Court is capable of evaluating the appropriate weight to be given the Williams
report and Jack Williams’ testimony. Neither party cites Rule 704, which provides that
opinion evidence is not automatically objectionable because it “embraces an ultimate
issue.” The Williams report addresses the two ultimate factual issues in the Trustee’s §
548 claim: (1) Whether Brooke Corp transferred an interest in property (2) for less than
equivalent value. If the trial were to be to a jury, there would be a serious concern that
the Williams report and Jack Williams’ testimony could invade the province of the finder
of fact. But, since this case will be tried to the Court and the Williams report and opinion
testimony address matters within the Court’s experience as both a lawyer and a judge, it
need not be excluded to avoid invasion of the province of the fact finder.
Based upon the foregoing, the Court denies the Trustee’s motion in limine and
finds that the Williams report and Jack Williams’ opinion testimony shall be not be
excluded from evidence at trial on the grounds asserted by the Trustee. Although the
Trustee’s arguments as to reliability and intrusion into the Court’s fact finding role raise
legitimate concerns about the opinions, they are concerns which can be better evaluated at
28 Daubert, 509 U.S. at 596.
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trial, rather than by the blunt instrument of the granting of a motion in limine. At trial, the
Court will evaluate the trustworthiness of the opinion evidence and determine its
IT IS SO ORDERED.
Case 09-06070 Doc# 148 Filed 04/03/15 Page 16 of 16