KSB

15-12107 4522 Katella Avenue, LLC (Doc. # 98)

In Re 4522 Katella Avenue, LLC, 15-12107 (Bankr. D. Kan. Jan. 6, 2016) Doc. # 98

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 SO ORDERED.
SIGNED this 6th day of January, 2016.

 

Designated for online use but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:
4522 KATELLA AVENUE, LLC, CASE NO. 15-12107
CHAPTER 11
DEBTOR.

MEMORANDUM OPINION AND JUDGMENT
GRANTING DEBTOR'S MOTION FOR TURNOVER


On December 15, 2015, trial was held on Debtor's Motion for Turnover1 which
prays for an order pursuant to 11 U.S.C. § 5432 compelling Harry Drake, a state court
receiver of real property of the Debtor, to turnover the estate property in his possession.
Debtor 4522 Katella Avenue, LLC appeared by its managing partner, James Rainboldt,

1 Doc. 3.
2 Future references to Title 11 in the text shall be to the section number only.


Case 15-12107 Doc# 98 Filed 01/06/16 Page 1 of 6


and by its attorney David G. Arst or Arst & Arst, PA. ColFin MF5 Funding, LLC, the
holder of the notes secured by mortgage liens on the property in receivership, appeared by
Matt R. Moriarity of Polsinelli PC. The Court has jurisdiction.3 Having considered the
statements of counsel, the briefs, the testimony, and the exhibits, the Court grants the
motion for turnover.

BACKGROUND FACTS

The real properties which are the subject of the motion are two apartment
complexes located in Wichita, Kansas owned by Debtor. One is a 70 unit property
known as Longfellow and the other is a 46 unit property known as Parkdale or Carter.
The apartment complexes are referred to herein as the Properties. Debtor is also the
owner of a 18 unit town house property known as Beach. Although ColFin M5 Funding
has recently acquired Debtor’s note secured by Beach, that property is in the possession
of the Debtor and not included in the turnover motion.

As of May 2015, Debtor agrees that the two notes secured by the Properties were
in default. ColFin MF5 Funding, LLC alleges that as of May 15, 2015, it was owed
$918,265.37 principal, plus interest and other charges, on the note secured by the
Longfellow mortgage and $1,248,306.54 in principal, plus interest and other charges, on

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 for turnover is a core proceeding which this Court may hear and determine as
provided in 28 U.S.C.§ 157(b)(2)(A). There is no objection to venue or jurisdiction over the parties.

2

Case 15-12107 Doc# 98 Filed 01/06/16 Page 2 of 6


the note secured by the Carter mortgage. On May 21, 2015, Secured Creditor filed two
separate foreclosure actions in the District Court of Sedgwick County, Kansas. By orders
filed on June 12, 2015, Harry Drake (Receiver) of Block Real Estate Services was
appointed receiver of the Properties. Approximately four months after the filing of the
foreclosure actions, Debtor filed a petition for relief under Chapter 11 of the Bankruptcy
Code. Debtor seeks an order requiring the Receiver to turn over the Properties, including
rents, reports, accounting records, and other property concerning the Properties.

THE EVIDENCE

The Properties serve low income individuals and were not in prime condition when
the Receiver was appointed. The actions taken by the Receiver to maintain the Properties
have been minimal, and there was no evidence of contemplated improvements.
Occupancy which was recently at approximately 90%, has dropped to approximately
60%. Revenue has declined approximately 40%, while management fees have increased
25 to 30%. The testimony as a whole evidences that the Receiver, and the management
company he has retained which is not located in Wichita, has little interest in the
Properties and that the Secured Creditor has not been involved in the management.

If the Receiver is removed, Mr. Rainboldt will move to Wichita from California,
and personally manage the Properties. He proposes rent increases for the Longfellow
units and pursuing section 8 housing at Carter. He plans to supervise the investment of
approximately $100,000 of his personal assets in each of the two Properties and
anticipates selling the Properties within a year.

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 John Greenstreet, a real estate broker who has been marketing the Properties,
testified that he had received a letter of intent to purchase the Properties for $2.4 million.
Although the letter was forwarded to the Receiver on October 31, 2015, no response has
been received. Mr. Rainboldt testified that he was interested in pursuing the offer.

The Receiver attempted but failed to prove that before the receivership Debtor had
mismanaged the Properties. Testimony by the Receiver that Debtor maintained
inadequate accounting and lease records was effectively refuted by the former onsite
manger. She entered all transactions into a computerized accounting system managed by
Mr. Rainboldt’s wife. File cabinets in the office contained copies of leases for each
rented unit, although some leases appeared to be out of date because tenants were allowed
to hold over on a month to month basis after expiration of the term of the written lease.
Before the Receivership, exterminators were called when there were infestations.
TURNOVER UNDER § 543

Generally § 543(b) requires a custodian, which is defined to include a receiver of
property of the debtor appointed in a case other than under Title 11,4 to deliver to the
trustee any property of the debtor held by a custodian and any proceeds, rents, or profits
of such property. However, § 543(d)(1) provides an exception to turnover whereby the
bankruptcy court, after notice and hearing, may excuse compliance with the turnover
required by § 543(b) “if the interests of creditors . . . would be better served by permitting

4 11 U.S.C. § 101(11).
4


Case 15-12107 Doc# 98 Filed 01/06/16 Page 4 of 6


a custodian to continue in possession, custody, or control of such property.” Bankruptcy
Judge Karlin in In re Bryant Manor, LLC5 summarized the applicable law as follows:
“Turnover is the general rule, however, and excuse
from compliance is the exception. Therefore, a party opposing
turnover must demonstrate affirmatively how creditors will be
better served if the receiver is retained.” A request for excuse
from turnover requires the Court to examine (1) the debtor’s
likelihood of reorganization; (2) the probability that funds
required for reorganization will be available; and (3) whether
the evidence shows mismanagement of the property by the

debtor.6
But the “bankruptcy court may not find mismanagement by the debtor sufficient to
warrant noncompliance by the custodian with turnover requirements, where the debtor’s
prepetition actions are within the range of reasonable business judgment and ‘not patently
unreasonable.’”7 When determining whether to excuse compliance with the section 543
turnover requirements, the bankruptcy court has significant discretion.8

In this case, Secured Creditor has not shown that creditors will be better served if
the Receiver stays in possession of the Properties. If the Receiver is removed, costs will
be reduced, funds to improve the Properties will become available, and increased rental
income is projected. Debtor did not mismanage the Properties before the Receiver was
appointed. Although liquidation is more probable rather than reorganization, the Court

5 422 B.R. 278 (Bankr. D. Kan. 2010).
6 Id., at 289(citation omitted).
7 5 Collier on Bankruptcy ¶ 543.03 at 543-17 (Alan N. Resnick & Henry J. Sommer eds.-in-chief,


16th ed. 2015)(quoting In re Donato, 170 B.R. 247, 257 (Bankr. D.N.J. 1994)).
8 Id.
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finds that Debtor will better preserve that value of the Properties and thereby benefit the
estate.

CONCLUSION

For the forgoing reasons, the Court concludes that the Motion for Turnover should
be granted.

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

Judgment is hereby entered granting Debtor’s Motion for Turnover. 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.
###


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12-06043 Redmond, Brooke Trustee v. NCMIC Finance Corporation (Doc. # 169)

Redmond, Brooke Trustee v. NCMIC Finance Corporation, 12-06043 (Bankr. D. Kan. Jan. 5, 2016) Doc. # 169

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 SO ORDERED.
SIGNED this 4th day of January, 2016.

 

Opinion Designated for Electronic Use, But Not for Print Publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In Re:

BROOKE CORPORATION, et al.,
DEBTORS.

CHRISTOPHER J. REDMOND,
Chapter 7 Trustee of Brooke
Corporation, Brooke Capital
Corporation (f/k/a Brooke Franchise
Corporation), and Brooke Investments,
Inc.,

PLAINTIFF,

v.
NCMIC FINANCE CORPORATION,

DEFENDANT.

CASE NO. 08-22786
CHAPTER 7

ADV. NO. 12-6043

MEMORANDUM OPINION AND ORDER DENYING
NCMIC FINANCE CORPORATION’S MOTION FOR SUMMARY JUDGMENT
ON THE TRUSTEE’S FRAUDULENT TRANSFER CLAIMS


Case 12-06043 Doc# 169 Filed 01/04/16 Page 1 of 20


Defendant NCMIC Finance Corporation (NCMIC)1 has moved for summary
judgment on Count IV, the remaining claim in this adversary proceeding brought by
Christopher J. Redmond, Chapter 7 Trustee (Trustee) of Brooke Corporation (Brooke
Corp), Brooke Capital Corporation f/k/a/ Brooke Franchise Corporation (Brooke
Franchise), and Brooke Investments, Inc. (BII).2

Prepetition, Brooke Franchise was a franchisor of insurance agencies. Non-debtor
Aleritas Capital Corporation f/k/a/ Brooke Credit Corporation (Aleritas) made loans to
Brooke franchisees. Aleritas then sold participation interests in these loans to various
entities, including NCMIC. Brooke Franchise would receive commissions from the sale
of insurance by the various Brooke agencies and transmit a portion of those funds for loan
payments to Aleritas, who in turn, transferred the monies to the various entities who had
purchased loan participations, including NCMIC. A large number of agencies did not
generate sufficient commissions to cover the loan payments and other expenses. Brooke
Franchise frequently used its own funds to pay or subsidize the agencies’ loan payments.
The Trustee alleges that during the four-year period preceding Brooke Franchise’s
bankruptcy filing, Brooke Franchise made a total of $4,448,511.23 in subsidized loan
payments to NCMIC. The Trustee seeks to recover these payments as constructively
fraudulent transfers under 11 U.S.C. §§ 544, 548(a)(1)(B), and 550, and under the Kansas

1 NCMIC appears by Paul D. Sinclair, Jason L. Bush, and Brendan L. McPherson of Polsinelli

PC.

2 The Trustee appears by John J. Cruciani and Michael D. Fielding of Husch Blackwell LLP.
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Case 12-06043 Doc# 169 Filed 01/04/16 Page 2 of 20


Uniform Fraudulent Transfer Act (KUFTA), K.S.A. 33-201 to -212.3

NCMIC’S Motion for Summary Judgment.

NCMIC moves for summary judgment on three grounds: (1) The Trustee may not
avoid the transfers because NCMIC has satisfied the § 548(c) good-faith affirmative
defense; (2) the Trustee may not avoid the transfers because Brooke Franchise received
reasonably equivalent value in exchange for the transfers; and (3) if the transfers may be
avoided, the Trustee may not recover the transfers from NCMIC due to the § 550 goodfaith-
transferee defense. The Trustee responds that there are material facts in controversy
regarding each of these defenses. As examined below, after careful review of NCMIC’s
supporting memorandum, the Trustee’s response, and NCMIC’s reply, the Court finds
that NCMIC is not entitled to judgment on any of the three grounds submitted.
Summary Judgment Standard.

Grounds one and three are affirmative defenses. When moving for summary
judgment under Rule 564 on these issues, NCMIC “must demonstrate that no disputed
material fact exists regarding” the defense.5 If NCMIC “meets this initial burden, the
plaintiff must then demonstrate with specificity the existence of a disputed material fact.”6
The second ground tests whether the Trustee has evidence to prove an element of his

3 Future references to Title 11 in the text are cited by section number only.
4 Fed. R. Civ. P. 56. This rule is made applicable to this proceeding by Fed. R. Bankr. P. 7056.
5 Hutchinson v. Pfeil, 105 F.3d 562, 564 (10th Cir. 1997).
6 Id.


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constructive fraudulent conveyance claim under § 548(a)(1)(B). On this issue too,
NCMIC, as the movant, has the burden to show the absence of material disputed facts. If
the motion for summary judgment is properly supported, the Trustee must make a
showing sufficient to establish that a reasonable factfinder could find the existence of the
element essential to his case which NCMIC has challenged.7 When applying the standard
of Rule 56(c), courts “view the evidence and draw all reasonable inferences therefrom in
the light most favorable to the nonmoving party.”8 Further, relief under Rule 56 “‘is
always discretionary, and in cases posing complex issues of fact and unsettled questions
of law, sound judicial administration dictates that the court withhold judgment until the
whole factual structure stands upon a solid foundation of a plenary trial where the proof
can be fully developed, questions answered, issues clearly focused and facts definitively
found.’”9

Discussion.

This is a factually complex case which generally requires the application of settled
principles of bankruptcy law to unique circumstances. When moving for summary
judgment, NCMIC provided 138 paragraphs of allegedly undisputed facts. When

7 SEC v. Thompson, 732 F.3d 1151, 1157 (10th Cir. 2013) (quoting Celotex Corp. v. Catrett, 477

U.S. 317, 322 (1986)).
8 Sierra Club v. El Paso Gold Mines, Inc., 421 F.3d 1133, 1146 (10th Cir. 2005) (citing Simms v.
Oklahoma ex rel. Dep’t of Mental Health & Substance Abuse Servs., 165 F.3d 1321, 1326 (10th Cir.
1999)).

9 10A Charles Alan Wright, Arthur R. Miller, & Mary Kay Kane, Federal Practice and
Procedure: Civil 3d, § 2725 at 415 (3d ed. 1998) (quoting In re Bloomfield S.S. Co., 298 F. Supp. 1239,
1242 (S.D.N.Y. 1969)).

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responding, the Trustee admitted only 54 of these statements, and set forth 434
paragraphs of additional allegedly undisputed facts. In reply, NCMIC denied or objected
to approximately 200 of the Trustee’s statements. The Court therefore does not attempt to
set forth complete findings of uncontroverted and controverted facts, as it might do in a
less complex case. Rather, the Court will examine the legal basis for each of the three
matters asserted by NCMIC and determine if NCMIC is entitled to judgment as a matter
of law.

A. NCMIC is not entitled to summary judgment on the “for value and in
good faith” defense.
The Trustee seeks to avoid transfers made to NCMIC as constructively fraudulent

conveyances under § 548(a)(1)(B). Subsection (c) of § 548 provides the affirmative “for

value and in good faith” defense. It states:

Except to the extent that a transfer or obligation voidable
under this section is voidable under section 544, 545, or 547
of this title, a transferee or obligee of such a transfer or
obligation that takes for value and in good faith has a lien on
or may retain any interest transferred or may enforce any
obligation incurred, as the case may be, to the extent that such
transferee or obligee gave value to the debtor in exchange for
such transfer or obligation.

The Bankruptcy Code does not define good faith. In M & L Business Machine, a Ponzi

scheme case, the Tenth Circuit rejected a subjective test and ruled the lower courts

“properly held that good faith under § 548(c) should be measured objectively.”10 As

10 Jobin v. McKay (In re M & L Bus. Mach. Co., Inc ), 84 F.3d 1330, 1338 (10th Cir. 1996).
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adopted by the Tenth Circuit, the defense is not available “‘if the circumstances would
place a reasonable person on inquiry of a debtor’s fraudulent purpose, and a diligent
inquiry would have discovered the fraudulent purpose.’”11 Rather than relying on the test
as expressly stated by the Tenth Circuit, NCMIC relies upon other portions of the M&L
Business Machine opinion and states the two-part inquiry to be: “(1) Would the
circumstances place a reasonable person on inquiry of a debtor’s fraudulent purpose and
impending insolvency; and if so, (2) Would a diligent inquiry have discovered the
fraudulent purpose and insolvency.”12 This statement includes the issue of insolvency,
which is not in the two-part test as announced by the Tenth Circuit. The Court therefore
will not consider “impending insolvency” as part of the inquiry since it is mentioned in
the analysis of the facts in M &L Business Machine, but not in its formulation of the
objective test.

Under the objective test, a circumstance sufficient to put the transferee on inquiry
notice is referred to as a “red flag.”13 Since the Trustee seeks to avoid the transfers to
NCMIC as constructively fraudulent conveyances, rather than as transfers made with
actual fraudulent intent as were at issue in M & L Business Machine, the “red flags”
sufficient to trigger an obligation to make further inquiry focus on irregularities in the

11 Id. (quoting Jobin v. McKay (In re M&L Bus. Mach. Co., Inc.), 164 B.R. 657, 661 (D. Colo.
1994), which was quoting Hayes v. Palm Seedling Partners-A (In re Agric. Research & Tech. Group,
Inc., 916 F.2d at 536 (9th Cir. 1990)).

12 Doc. 123 at 3.

13 See Paul Sinclair and Brendan McPherson, Red Flags of Fraud: Background for Due
Diligence, 30 Am. Bankr. Inst. J. 34, 34 (May 2011).

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transfers rather than a fraudulent purpose or intent. The second part of the objective
good-faith test asks whether a “diligent inquiry would have discovered” facts indicating
that the loan payments were constructively fraudulent. The “reasonable person” for
purposes of the objective test is not a “generic, reasonable person,” but requires “specific
focus on the class or category of the transferee.”14 The question is whether a reasonably
prudent purchaser of the Brooke participation interests would have made inquiries, and
after a diligent investigation, have learned that the borrowers, the Brooke franchisees,
were not providing the funds for some of the payments made to NCMIC.

It is uncontroverted that although NCMIC began purchasing participation interests
in Brooke franchisee loans in the late 1990s,15 it made no independent investigation of the
quality and status of the loans, and had no concerns about its investments until it didn’t
receive its loan payments in May of 2008.16 When moving for summary judgment,
NCMIC asserts facts purporting to establish that there were no “red flags” before the
summer of 2008. Such absence is said to be evidenced by the following: NCMIC was
owed money on the Brooke franchisee loans and expected Aleritas to make payments to
it; there were no irregularities in the loan payments it received from Aleritas; the loans
were at market rates; the franchisee loans were legitimate, arms-length transactions in

14 In re Bayou Group, LLC, 439 B.R. 284, 313 (S.D.N.Y. 2010).
15 Doc. 127 at 103, T’ee SOF 244.
16 Id. at 119, T’ee SOF 319. (NCMIC objected to the SOF as immaterial and objectionable, but


the objection is directed at portions of the statement other than when Greg Cole of NCMIC became
concerned about the loans).

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which hundreds of sophisticated investors and banks purchased interests; and NCMIC
was not aware of any concerns expressed by any other purchaser of such interests.
NCMIC also asserts that if it had conducted a diligent inquiry before the summer of 2008,
it would not have discovered a “fraudulent purpose” because Brooke Franchise fully
disclosed in its SEC filings its practice of making loans to Brooke franchisees. NCMIC
also argues that a diligent inquiry would not have disclosed that Brooke Franchise was
insolvent because: Brooke Franchise’s SEC filings reported significant year-end
shareholder equity for 2004 through 2007; each year, an independent accounting firm
issued unqualified audits of Brooke Franchise’s financial statements; on August 31, 2007,
Duff & Phelps determined that the equity value of Brooke Franchise was significant; and
on November 15, 2007, CBIZ issued a favorable solvency opinion in conjunction with a
proposed transaction by Brooke Capital.17

The Trustee responds with additional facts which he contends demonstrate “that
the circumstances regarding the Brooke loan participations would have placed a
reasonable person on inquiry notice.”18 First, the Trustee points to evidence suggesting
that NCMIC’s failure to identify red flags was the result of its total reliance on Brooke for
information regarding the loans when purchasing the interests, rather than conducting an
independent evaluation, as a prudent investor would have done. Even though NCMIC

17 The Trustee has moved to exclude the admission of the Duff & Phelps and CBIZ reports. Doc.

129. Although the Court denied the motion, it also ruled that the use of these reports at trial would be
very limited. Doc. 159.
18 Doc. 127 at 155.
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personnel responsible for the participations had substantial banking experience, the facts
provided by the Trustee show that NCMIC did not apply basic lending practices to the
Brooke loan participations. NCMIC and Brooke had a long-standing relationship, and
NCMIC did not purchase loans from anyone other than Brooke. The decisions to
purchase the participation interests were made by one individual without the input of a
loan committee. Prior to 2001, Pat McNerney of NCMIC independently evaluated the
loans by getting the documentation that Brooke sent and reviewing it.19 After 2001, when
direct responsibilities for the Brooke participations were transferred to Greg Cole, Mr.
McNerney (who supervised Mr. Cole) did not know if there had been any deterioration in
the credit approval policies for purchasing Brooke participations.

The Trustee’s additional facts also evidence that NCMIC’s reliance on Brooke
continued after the purchase of the participation interests. NCMIC did not do any loan
reviews from 2004 through 2007. Aleritas sent “alert reports” (also known as
“pass/watch/fail reports”) to NCMIC on a monthly basis. The reports were used to
complete a borrowing-base report for NCMIC’s lender, Wells Fargo, for which loans
marked “fail” were ineligible, but the reports were not used as a reason for NCMIC to
evaluate the credit, even though many loans were reported to be on a watch status. Mr.
Cole was generally aware that Brooke made periodic advances to franchise agencies but
did not recall inquiring about the amount of any resulting balances that were owed to

19 Doc. 127 at 103, T’ee SOF 246.
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Case 12-06043 Doc# 169 Filed 01/04/16 Page 9 of 20


Brooke by agencies in whose loans NCMIC held participation interests.20 NCMIC began
to experience loan delinquencies with its Brooke loans in 2006. When a loan would go
past due, NCMIC would pressure Aleritas, which would then repurchase the loan (even
though the participation agreements provided they were non-recourse) or extend the due
date. Loan delinquencies began to create problems for NCMIC in staying in compliance
with its debt covenants with Wells Fargo.

The Court finds that the additional facts provided by the Trustee regarding the
purchase and servicing of the loans, when construed in his favor as required in ruling on
NCMIC’s motion for summary judgment, create issues of fact regarding the existence of
red flags which should have triggered a further inquiry by NCMIC. A reasonably prudent
purchaser of participation interests in the Brooke agency loans may have been alarmed
about Brooke’s extensions of credit to the agencies, the number of Brooke’s failed loans,
the substantial number of loans that were on watch status, and the recurring loan
delinquencies. The Trustee also asserts that NCMIC ignored red flags in Brooke’s SEC
filings. For example, he says, these filings “reported agency ‘statement balances’ for
short-term cash flow assistance,” which he contends meant Brooke had advanced money
to the agencies or extended their payment due dates to make them appear to be current on
the participated loans.21

The good-faith-transferee inquiry focuses not only on what the transferee knew but

20 Id. at 108, T’ee SOF 278.

21 Id. at 111, T’ee SOF 289.

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Case 12-06043 Doc# 169 Filed 01/04/16 Page 10 of 20


also on what the transferee should have known. “[A] transferee cannot stick its head in
the sand, clinging to its subjective belief while purporting to ignore” warning signs.22
Summary judgment therefore cannot be granted on NCMIC’s contention that there were
no “red flags” which should have triggered a diligent inquiry.

Material disputed issues of fact also preclude a finding that if NCMIC had
conducted a diligent inquiry, it would not have discovered the constructive fraud. The
simple fact refuting NCMIC’s position is that when NCMIC did make a diligent inquiry,
starting on approximately June 30, 2008, it discovered that it had been receiving loans
payments on participated loans where the agency had not made any payments to Brooke
Franchise for several months. Following Brooke’s bankruptcy filing, Mr. Cole learned
that there had been nefarious activities occurring as early as 2006, and these activities
included loan participations being carried on Brooke’s and NCMIC’s books after the
debts had been extinguished, forgiveness of debt which NCMIC was not aware of, and
double sales and double pledges of collateral. NCMIC does not even suggest that an
earlier inquiry would not have revealed these nefarious activities.

B. NCMIC is not entitled to summary judgment on the issue whether Brooke
Franchise received a reasonably equivalent value in exchange for the
transfers alleged to have been constructively fraudulent.
To recover on his constructively-fraudulent-transfer claim, the Trustee must show
that Debtor Brooke Franchise transferred an interest of the Debtor in property to NCMIC

22 Moglia v. Universal Auto., Inc. (In re First Nat’l Parts Exchange, Inc.), 2000 WL 988177 at *6

(N.D. Ill. July 12, 2000).
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and received less than a reasonably equivalent value in exchange.23 This Court

thoroughly examined reasonably equivalent value in Redmond v. SpiritBank,24 a recent

opinion filed after completion of the briefing on NCMIC’s motion for summary

judgment. That opinion states in part:

“In determining ‘reasonably equivalent value,’ courts
typically compare the value of the property transferred with
the value of what the debtor received.” Section 548(d)(2)(A)
defines “value” to mean “property, or satisfaction or securing
of a present or antecedent debt of the debtor.”

. . .

 “As a general rule, obligations incurred by a debtor
solely for the benefit of a third party are treated as not
supported by a reasonably equivalent value.” In other words,
a “payment made solely for the benefit of a third party, such
as a payment to satisfy a third party’s debt, does not furnish
reasonably-equivalent value to the debtor.” An exception to
this rule “has been recognized where a debtor receives an
indirect benefit from paying or guaranteeing the obligation of
a third party.” . . . If the Trustee proves the absence of a direct
benefit to the Debtor, the burden then shifts to SpiritBank to
show the Debtor received an indirect benefit.25

When moving for summary judgment, NCMIC does not argue that Brooke

Franchise received a direct economic benefit in exchange for the transfers it made to

Aleritas which were then transferred to NCMIC. Rather, it asserts that Brooke Franchise

received an indirect benefit with a value reasonably equivalent to or greater than the value

it transferred to NCMIC. According to NCMIC, “[b]y making the transfers (loan

23 11 U.S.C. § 548(a)(1)(B); K.S.A. 33-204(a)(2) and 33-205(a).

24 Redmond v. SpiritBank (In re Brooke Corp.), 541 B.R. 492, 2015 WL 7568202 (Bankr. D. Kan.
Nov. 20, 2015).

25 Id. at 510-11 (footnoted citations omitted).

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payments), the franchise agencies’ loans were kept current and lenders such as [NCMIC]
did not declare loan defaults or initiate collection activities against the agencies, thereby
allowing the Brooke franchise agencies to continue to operate.”26 The benefits NCMIC
claims Brooke Franchise received from those continued operations include: the
continued collection of franchise fees which exceeded the subsidized loan payments; the
receipt of profit-sharing monies from policies sold by the Brooke agencies; the Brooke
agencies’ continued payment of lease obligations which would have been the
responsibility of Brooke Franchise if the agencies had closed; and Brooke Franchise’s
continued receipt of the spread between the interest owed by the Brooke franchisees and
the interest paid to the loan participants. In addition, NCMIC characterizes the loans to
the Brooke agencies, the proceeds of which were used in part to make payments to
NCMIC, as investments made with a legitimate expectation of the success of the
agencies, thereby providing value to Brooke Franchise. Finally, NCMIC argues that
Brooke Franchise received reasonably equivalent value because it had an implied
contractual obligation to make the loan payments on behalf of the franchise agencies.

The Trustee responds that whether reasonably equivalent value was received is a
question of fact, and that factual disputes preclude summary judgment in favor of NCMIC
on the theories advanced. When disputing that Brooke Franchise received the value
alleged from continued operation of the Brooke agencies, the Trustee cites evidence

26 Doc. 123 at 65.
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indicating that the cost to Brooke Franchise to maintain the Brooke agencies exceeded the
revenue it received; that more than 90% of the agency leases were in the name of Brooke
Investments, Inc., not Brooke Franchise; and that there is no evidence that Brooke
Franchise received any of the interest spread that Aleritas obtained.27 As to the argument
that the loans to Brooke agencies were “investments” providing an expectation of value to
Brooke Franchise, the Trustee provides facts allegedly showing that Brooke’s business
model was unsustainable, so there was no reasonable expectation of any benefit. Finally,
to refute NCMIC’s assertion that Brooke Franchise was obligated to make loans to cover
the Brooke agencies’ loan payments, the Trustee provides the testimony of Brooke
personnel asserting that Brooke Franchise had no such obligation.

The Court finds that NCMIC’s motion for summary judgment on the contention
that Brooke Franchise received reasonably equivalent value for the loan payments it made
to NCMIC must be denied. First, the Court emphasizes that NCMIC does not contend
that Brooke Franchise received a direct benefit of equivalent value. Second, the Court
makes no finding that the various forms of indirect benefit urged by NCMIC suffice
under § 548 (a)(1)(B). But assuming that NCMIC’s approach is acceptable under
§ 548(a)(1)(B), there are material facts in controversy about the existence of such indirect
benefits and whether their value was reasonably equivalent to value of the allegedly
fraudulent transfers made to NCMIC. NCMIC has not shown the absence of material

27 Dec. 127 at 176-77.
14


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disputed facts supporting the position that Brooke Capital received reasonably equivalent
value.

C. NCMIC is not entitled to summary judgment on the § 550(b)(1) “good
faith transferee” defense.
Section 550(a) allows the Trustee to recover transfers avoided under § 544
(incorporating the KUFTA) and § 548 from (1) the initial transferee of the avoided
transfer or the entity for whose benefit the transfer was made, or (2) any immediate or
mediate transferee of such initial transferee. However, for an immediate or mediate
transferee of the original transferee, § 550(b)(1) bars recovery if the transferee “takes for
value . . . , in good faith, and without knowledge of the voidability of the transfer
avoided.” NCMIC moves for summary judgment, asserting that (1) it was an immediate
transferee of the initial transferee, Aleritas, and (2) the good faith standard is satisfied.

The Bankruptcy Code does not define initial transferee. “Generally, the party who
receives a transfer of property directly from the debtor is the initial transferee.”28
However, many courts, including the Tenth Circuit, have found that a party acting merely
as a conduit is not an initial transferee. In Stockton, this Court found that a bank
collecting loan payments from Brooke Corporation for transfer to loan participants was a
conduit.29 The conduit exception was described as follows:

28 5 Collier on Bankruptcy, ¶ 550.02[4][a] at 550-20 (Alan N. Resnick & Henry J. Sommer, eds.in-
chief, 16th ed. 2015).

29 Northern Capital, Inc., v. Stockton Nat’l Bank (In re Brooke Corp.), 458 B.R. 579 (Bankr. D.
Kan. 2011) (hereafter “Stockton”).

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Under this theory, as authoritatively formulated by the
Seventh Circuit in Bonded which formulation has been
adopted in the Tenth Circuit, “the minimum requirement of
status as a ‘transferee’ is dominion over the money or other
asset, the right to put the money to one’s own purposes.” This
approach recognizes that the term “transferee” must mean
something different from anyone who simply touches the
money, such as a “‘possessor’ or ‘holder’ or ‘agent,’” and
provides a basis to hold that “those who act as mere ‘financial
intermediaries,’ ‘conduits’ or ‘couriers’ are not initial
transferees under § 550.” “A person or entity is not the initial
transferee under Bonded if it received no benefit from the
transferred funds, had to follow instructions on how to use the
funds, and would have been liable to the transferor if it had
used the funds for its own purposes.” The Seventh Circuit has
recently characterized the Bonded definition as an “approach
that tracks the function of the bankruptcy trustee’s avoiding
powers: to recoup money from the real recipient of
preferential transfers.” Whether a transferee is an initial
transferee or conduit is a fact intensive inquiry.30

NCMIC anticipates the Trustee’s position that because Aleritas was a conduit

when it received the funds from Brooke Franchise that it then paid to NCMIC and other

participating lenders, NCMIC has strict liability as an initial transferee and an entity for

whose benefit the transfer was made. NCMIC therefore moves for summary judgment on

the Trustee’s use of the conduit theory to strip NCMIC of the § 550 good-faith-transferee

defense. NCMIC argues: a trustee may not use conduit status offensively; Aleritas

should not be considered a mere conduit because Aleritas did not act as an innocent

participant but had first-hand knowledge of and actively participated in the making of

loans to franchisees, placing it in the best position to monitor Brooke Franchise’s

30 Id. at 584-85 (footnoted citations omitted).

16

Case 12-06043 Doc# 169 Filed 01/04/16 Page 16 of 20


operations; and the conduit doctrine does not apply under the KUFTA.

In response, the Trustee relies upon this Court’s decision in Stockton holding that
Stockton Bank was a mere conduit for the monies it received from Brooke Corporation
which were paid to other banks who had purchased loan participations in Brooke
Corporation notes. He also argues that there is no prohibition or restriction on the
offensive use of the conduit doctrine, pointing out that such use was permitted by this
Court in Stockton and by other courts in other cases. Further, the Trustee provides
authorities holding the conduit doctrine applicable to transfers avoided under other states’
versions of the Uniform Fraudulent Transfer Act.

The Court rejects NCMIC’s position that the conduit doctrine cannot be used
offensively by the Trustee. NCMIC’s position is based upon dicta regarding the origin of
the doctrine. NCMIC cites no case where such a limitation has been applied. A respected
commentator states, “The conduit theory can be used either defensively by an alleged
transferee or offensively by a trustee seeking to bypass one party in pursuit of another.”31

However, NCMIC’s position that the doctrine requires that the purported conduit
must have acted in good faith and as an innocent participant is supported by case law,
including a decision of the Eleventh Circuit.32 The conduit doctrine requires “initial

31 5 Collier on Bankruptcy, ¶ 550.02[4][b], n. 81 (citing In re Granada, Inc., 156 B.R. 303, 307

(D. Utah 1990); Senior Transeastern Lenders v. Official Comm. of Unsecured Creditors (In re Tousa,
Inc.), 680 F.3d 1298, 1314 (11th Cir. 2012); and In re Columbia Data Prods., Inc., 892 F.2d 26, 28 (4th
Cir. 1989)).
32 Doc. 123 at 57-58 (citing Martinez v. Hutton (In re Harwell), 628 F.3d 1312, 1322-23 (11th
Cir. 2010)).

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recipients of the debtor’s fraudulently transferred funds who seek to take advantage of
equitable exceptions to § 550(a)(1)’s statutory language [to] establish (1) that they did not
have control over the assets received, i.e. that they merely served as a conduit for the
assets that were under the actual control of the debtor-transferor and (2) that they acted in
good faith and as an innocent participant in the fraudulent transfer.”33

The extent to which this two-part inquiry should apply in this case is open to
question. NCMIC cites no Tenth Circuit case law even recognizing the equitable roots of
the conduit doctrine. Bonded, the Seventh Circuit opinion on which the Tenth Circuit
relied when it adopted the conduit doctrine, focused on the details of the avoided
transaction, not on equitable principles. In addition, the Eleventh Circuit’s requirement of
good faith states it is applicable where the recipient of an avoided transfer is seeking to
take advantage of the conduit doctrine. That is not the situation here.

The Court declines to rule on the relevance and importance of Aleritas’s conduct
when ruling on NCMIC’s motion for summary judgment. The motion, including the
§ 550(b)(1) defense, is being denied for other reasons. The law is uncertain and the
question is not fully developed in the briefs. Further, “[w]hether a transferee is an initial
transferee or conduit is a fact intensive inquiry.”34 Although the uncontroverted facts
establish a relationship between Brooke Franchise and Aleritas with respect to the
transfers, full development of that relationship and whether it is sufficient to distinguish

33 Martinez v. Hutton (In re Harwell), 628 F.3d 1312, 1323 (11th Cir. 2010).

34 Stockton, 458 B.R. at 585.

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this case from Stockton cannot be satisfactorily determined without the benefit of a trial.

With respect to the good faith element of the § 550(b)(1) defense, NCMIC
incorporates by reference the arguments it presented under § 548(c).35 This reliance
appears to be appropriate, as a respected commentator has remarked on the similarity of
the two good faith standards.36 But as examined above, the Court finds that disputed
issues of material fact preclude summary judgment on the good faith defense of § 548(c).
For the same reasons, the Court finds that disputed issues of material fact preclude
summary judgment on the good faith element of the § 550(b)(1) defense.

NCMIC also moves for summary judgment on the Trustee’s KUFTA claim based
upon the good-faith-transferee-for-value defense of K.S.A. 33-208(b). That subsection
provides that to the extent a transfer is voidable, it may be recovered from the “first
transferee,” “the person for whose benefit the transfer was made,” or “any subsequent
transferee other than a good faith transferee who took for value or from any subsequent
transferee.” Since there are no Kansas cases adopting the conduit doctrine, NCMIC
contends that Aleritas should be considered the “first transferee,” that NCMIC was a
subsequent transferee, and that NCMIC is protected by the good-faith-for-value defense.

The Trustee responds that the Florida UFTA, which is identical to the Kansas
version, has been construed to include the conduit doctrine.37 He also notes that NCMIC

35 Doc. 123 at 54-55.
36 5 Collier on Bankruptcy, ¶ 550.03[2] at 550-27.
37 Perlman v. Delisfort-Theodule, 2010 WL 4514249 at *2 (S.D. Fla. Nov. 2, 2010); Steinberg v.


Barclay’s Nominees (Branches) Limited, 2008 WL 4601042 at *7-8 (S.D. Fla. Sept. 30, 2008).
19

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has not cited and his own research has not revealed any cases holding that the conduit
doctrine does not apply to UFTA claims.

The Court therefore declines to hold that the conduit doctrine does not apply under
the KUFTA. Further, even if NCMIC were considered a subsequent transferee under the
KUFTA, genuine issues of material fact preclude a finding that NCMIC took the
payments in good faith for value.
CONCLUSION.

For the foregoing reasons, NCMIC’s motion for summary judgment is denied.

IT IS SO ORDERED.
# # #

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15-21309 Salazar (Doc. # 26)

In Re Salazar, 15-21309 (Bankr. D. Kan. Dec. 23, 2015) Doc. # 26

PDFClick here for the pdf document.


 

SO ORDERED.
SIGNED this 23rd day of December, 2015.

 

Opinion Designated for Electronic Use, But Not for Print Publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:
ELISA SALAZAR, CASE NO. 15-21309-13
CHAPTER 13
DEBTOR.

OPINION DENYING CONFIRMATION OF THE DEBTOR’S CHAPTER 13
PLAN BECAUSE IT UNFAIRLY DISCRIMINATES IN FAVOR OF
HER STUDENT LOAN CREDITOR


In this case, the Court must determine whether the Debtor’s proposed Chapter 13
plan can be confirmed. The plan places the Debtor’s unsecured student loan creditors in a
special class that will receive distributions while her other unsecured creditors will
receive nothing. The Debtor appears by counsel David A. Reed. Chapter 13 Trustee
William H. Griffin objects to the plan, and he appears by counsel Karie L. Fahrenholz.

Case 15-21309 Doc# 26 Filed 12/23/15 Page 1 of 14


The Court has reviewed the relevant materials and is now ready to rule.

This case concerns a rather strange intersection in Chapter 13 practice. Congress
has been sufficiently concerned about student loan debts to make them usually not
dischargeable in Chapter 13, but not concerned enough to give them payment priority
over other unsecured debts. Because interest on nondischargeable debts continues to
accrue while a debtor is performing under a Chapter 13 plan but cannot be paid unless the
debtor is paying all the unsecured claims in full, a debtor with student loan debts runs a
very real risk of paying into a plan for three to five years only to find that she finishes her
plan owing more on those debts than she did when she filed for bankruptcy. In this case,
the Debtor hopes to reduce that risk by creating one class for student loan creditor and
another class for all her other unsecured creditors, and directing to the student loan class
alone all the money she pays into her plan that would otherwise be divided pro rata
among all her unsecured creditors. Whether she can do that depends on whether the
Court can find that her proposal does not discriminate unfairly against her non-studentloan
unsecured creditors.
Facts

The Debtor filed her Chapter 13 bankruptcy petition on June 20, 2015. She
reported owing no secured debts and no unsecured priority debts. She listed a total of
$31,394.78 in general unsecured debts, including two student loan debts totaling $6,119
that she owes to the same creditor. The deadline for non-governmental creditors to file
proof of their claims was October 13, 2015, but governmental creditors have until

2

Case 15-21309 Doc# 26 Filed 12/23/15 Page 2 of 14


December 21, 2015, to file theirs. By October 13, the Debtor’s student loan creditor had
filed a claim for $6,136.66, and four other claims (all unsecured) were filed, one for
$3,845.07, one for $99.34, one for $881.19, and one for $22.03. The sum of the nonstudent-
loan debts is $4,847.63, and the sum of all the filed claims is $10,984.29. The
Court notes that none of the creditors the Debtor listed appear to be governmental units,
except perhaps the student loan creditor. The Debtor reports that she owns no real
property and the personal property she owns is worth $3,728. She claims exemptions for
$3,606 worth of that personal property.

The Debtor reported that she is single, has no dependents, and has gross income of
$2,891 per month from her work as a machine operator. As shown on the Official Form
22C-1 she filed, her average monthly income during the 6 full months before she filed
bankruptcy (her “Current Monthly Income”) was also $2,891, making her annualized
Current Monthly Income for the year before she filed $34,692. At the time she filed, the
applicable median family income for a household of one in her home state, Kansas, was
$45,980. Since the Debtor is a below-median-income debtor, her disposable income is
not controlled by the Chapter 7 means test as incorporated by § 1325(b)(3).

Along with her bankruptcy petition, the Debtor filed a proposed Chapter 13 plan.
In it, she reported that she is a below-median debtor and her Applicable Commitment
Period under the Bankruptcy Code is three years. She proposed that she would pay $185
per month into her plan for 36 months, providing a total of $6,660. The plan provided for
distributions to pay the Debtor’s attorney fee of $3,000, the Chapter 13 filing fee of $310,

3

Case 15-21309 Doc# 26 Filed 12/23/15 Page 3 of 14


and the Chapter 13 Trustee’s fee of 5.25%, or $349.65 (a total of $3,659.65). Since she
listed no secured or unsecured priority creditors, the Debtor expected $3,000.35 to be
available for paying her unsecured creditors. But the Debtor did not propose to have that
money distributed pro rata among all her unsecured creditors. Instead, she wanted to
place her student loan creditor in a special class and have all the $3,000.35 distributed to
it. The Trustee objected to this part of the Debtor’s plan, contending it was not a
permissible proposal, so the plan could not be confirmed.

In their briefs, the parties have asserted certain additional facts, mainly about the
Debtor’s past and present circumstances, that they contend should affect the Court’s
analysis here. According to the Trustee, assuming the Debtor makes all her payments
timely and she incurs no additional attorney fees, her attorney’s fees will not be paid until
17 months into her plan, and the first distribution to her student loan creditor will
therefore not be made until the month after that. The Trustee added that the Debtor
previously filed a Chapter 13 case in February 2007 and received a discharge, so she was
eligible to receive a Chapter 7 discharge when she filed her current case.1 The Trustee
also asserted that during 2015, the Debtor’s attorney had filed five Chapter 7 cases by the
end of September and had charged a fee of $1,200 in each, as opposed to the $3,000 fee
he is charging in this case. In Chapter 7 then, the Trustee concludes, the Debtor would
have paid $1,200 in attorney fees plus a filing fee, and her case would likely have been

1See § 727(a)(9) (debtor not eligible for Chapter 7 discharge in case filed within six years of
commencement of Chapter 13 case in which debtor received discharge).

4

Case 15-21309 Doc# 26 Filed 12/23/15 Page 4 of 14


completed in 90 to 120 days. Immediately after filing under Chapter 7, the Debtor could
have devoted the same monthly amount she proposed to pay into her plan to paying the
student loan creditor alone, and that creditor could therefore have begun to receive
payments almost immediately and could be paid in full in approximately 36 months.
Under the Debtor’s Chapter 13 plan, by contrast, the creditor must wait for 18 months to
receive its first distribution and would ultimately receive only a 48% dividend, while
interest would continue to accrue, and possibly fees and late charges. Finally, the Trustee
pointed out that the Debtor’s student loans totaled over $10,000 in her prior case but had
been reduced by approximately 40% by the time she filed this case.

In response, the Debtor does not dispute any of the Trustee’s asserted facts, but
contends other facts show Chapter 13 was an appropriate choice for her bankruptcy filing.
She noted that fifty-nine days before she filed bankruptcy, she refinanced a loan with a
creditor her attorney suspected might file a § 523 or § 727 complaint if she filed a
Chapter 7 case. Her attorney suggested his effective hourly rate of compensation
typically turns out to be lower for a $3,000 flat-fee Chapter 13 than it does for a $1,200
flat-fee Chapter 7 case. The Debtor’s choice of Chapter 13 was also influenced by the
fact she experiences recurring medical expenses she is unable to pay for in full, so she is
likely to need bankruptcy again in the future, probably sooner than the eight-year delay
that must pass between Chapter 7 discharges. A successful Chapter 13 now, rather than a
Chapter 7, will also leave Chapter 7 available to her sooner if she should suffer a
catastrophic reversal of fortune in the future. The Debtor said the reduction in her student

5

Case 15-21309 Doc# 26 Filed 12/23/15 Page 5 of 14


loan debts since her prior case occurred because her son (who had been the primary
beneficiary of at least one of the loans) made some payments on them, and she acted as
the caretaker for her son’s son during 2014 and became entitled to large tax refunds that
were taken by government intercepts and applied to the debts. Now, though, her
grandson has resumed living with her son, and her son has stopped making payments on
her student loans, so the principal is not likely to be further reduced anytime soon. The
Chapter 13 automatic stay will protect her from the student loan creditor’s collection
efforts for the duration of her case. The Debtor added that being in Chapter 13 will
provide a structure that improves her chances of sticking to her tight budget. The Debtor
pointed out how difficult it would have been for her to come up with the money to pay a
Chapter 7 attorney fee because she has no savings, no anticipated tax refunds, and no help
from her family, and Lamie v. United States Trustee, 540 U.S. 526 (2004), requires the
fee to be paid in full before filing bankruptcy.

Discussion

As the proponent of her plan, the Debtor has the burden to prove the plan may be
confirmed. Because the Trustee objected, the plan may not be confirmed unless “the plan
provides that all of the debtor’s projected disposable income to be received in the
applicable commitment period beginning on the date that the first payment is due under
the plan will be applied to make payments to unsecured creditors under the plan.”2 Under

2§ 1325(b)(1)(B)
6


Case 15-21309 Doc# 26 Filed 12/23/15 Page 6 of 14


§ 1325(b)(2), “disposable income” means “current monthly income received by the
debtor less amounts reasonably necessary to be expended — (A)(i) for the maintenance or
support of the debtor.” The Debtor’s Current Monthly Income during the six months
before she filed bankruptcy was the same as her actual monthly income as of the date she
filed, so her Current Monthly Income minus her reasonably necessary expenses is no
different than her actual income minus those expenses. Because her Current Monthly
Income is less than the median income for a one-person household in Kansas, her
reasonably necessary expenses are not explicitly specified by the Chapter 7 means test.
While some debtors (usually above-median-income debtors) turn out to have actual
discretionary income that exceeds the “disposable income” the Code declares them to
have, the Debtor in this case does not.

Section 1322 of the Bankruptcy Code specifies various provisions that a Chapter
13 plan may contain. Subsection (b)(1) allows a plan to designate one or more classes of
unsecured claims, but says the plan “may not discriminate unfairly against any class so
designated.” The Code contains no express guidance about what makes discrimination
“unfair,” and bankruptcy courts have broad discretion to determine whether proposed
discrimination is permissible.3 The Debtor contends it is not unfair for her plan to pay her
student loan creditor all the money that is available for her unsecured creditors, but the
Trustee contends it is unfair.

3In re Knowles, 501 B.R. 409, 415 (Bankr. D. Kan. 2013).
7


Case 15-21309 Doc# 26 Filed 12/23/15 Page 7 of 14


Courts have adopted two main tests for determining whether proposed
discrimination in a Chapter 13 plan is unfair. One test, adopted by the Eighth Circuit in
Leser and by the Ninth Circuit Bankruptcy Appellate Panel in Wolff, asks:

(1) whether the discrimination has a reasonable basis; (2) whether the debtor can
carry out a plan without the discrimination; (3) whether the discrimination is
proposed in good faith; and (4) whether the degree of discrimination is directly
related to the basis or rationale for the discrimination.4
This test was roundly criticized by the First Circuit Bankruptcy Appellate Panel in
Bentley, where the court said (among other things), “[I]nsofar as the test relies upon
abstract, undefined notions of ‘reasonableness,’ ‘legitimacy,’ and ‘good faith,’ it fails to
direct a court’s analysis and instead creates a vacuum that the court itself must fill.”5 This
Court must agree that the test does not appear to supply any firm guidance for
determining when discrimination proposed by a Chapter 13 plan crosses the line between
fairness and unfairness.

In a case that dealt specifically with a debtor-couples’ effort to pay more through
their Chapter 13 plan to their student loan creditors than to their other unsecured
creditors, the Bentley court adopted the second main test for determining whether a plan
discriminates unfairly. This test is not quite as simple to summarize as the Leser-Wolff
test is.6 Another bankruptcy judge in this District, Judge Karlin, explained the test this

4Mickelson v. Leser (In re Leser), 939 F.2d 669, 672 (8th Cir. 1991); AMFAC Distribution Corp.

v. Wolff (In re Wolff), 22 B.R. 510, 512 (9th Cir. BAP 1982).
5Inre Bentley, 266 B.R. 229, 238 (1st Cir. 2001).
6In re Bentley, 266 B.R. 229 (1st Cir. 2001).
8

Case 15-21309 Doc# 26 Filed 12/23/15 Page 8 of 14


way:

[Bentley] directed courts to look to “the principles and structure of Chapter 13
itself” for “the baseline against which to evaluate discriminatory provisions for
fairness.” Specifically, the Bentley court looked at (1) equality of distribution;

(2) nonpriority of student loans; (3) mandatory versus optional contributions (a
comparison of what the dischargeable unsecured creditors would receive in a pro
rata distribution of the mandatory contribution under chapter 13); and (4) the
debtor’s fresh start. Under this analysis:
When a plan prescribes different treatment for two classes but, despite the
differences, offers to each class benefits and burdens that are equivalent to
those it would receive at the [statutory] baseline, then the discrimination is
fair. On the other hand, when the discrimination alters the allocation of
benefits and burdens to the detriment of one class, the discrimination is
unfair and prohibited.7

In 2003, in Mason, Chief Judge Nugent considered these tests and concluded the
Bentley test was the better one.8 More recently, in Stull, he determined that even after the
passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
which made significant changes to Chapter 13, the Bentley test remained the one that best
reflected the aims of the Bankruptcy Code.9 In Stull, the debtor had what Judge Nugent
called “discretionary income” in addition to the “projected disposable income” the Code
required him to pay into his plan, and the debtor proposed to use that discretionary
income to pay his student loan debt in full while paying his other unsecured creditors only

7In re Knowles, 501 B.R. 409, 415-16 (Bankr. D. Kan. 2013) (Karlin, J.) (quoting Bentley, 266

B.R. at 240).
8300 B.R. 379, 387 (Bankr. D. Kan. 2003).
9489 B.R. 217, 220-21 (Bankr. D. Kan. 2013).
9

Case 15-21309 Doc# 26 Filed 12/23/15 Page 9 of 14


about one-half of their claims.10 It appears the debtor’s discretionary income came about
because his actual expenses were not as high as those specified in the means test that
applies to above-median debtors, although the opinion did not make that completely clear.
Judge Nugent noted that a below-median debtor can only have discretionary income if his
or her actual monthly income is greater than the historical Current Monthly Income the
Code normally requires courts to use to determine a Chapter 13 debtor’s projected
disposable income.11 The discrimination was not unfair because the debtor was paying
his non-student-loan creditors all of his projected disposable income, as required by the
Code, and paying more to his student loan creditor only out of additional income he had.12

In Knowles, Judge Karlin similarly concluded the Bentley test, rather than the
Leser-Wolff test, more accurately reflected the statutory scheme established by Chapter 13
and the spirit of the Bankruptcy Code.13 Like Stull, Knowles involved above-median
debtors who proposed to discriminate in favor of their student loan creditors by making
direct payments from discretionary income the Bankruptcy Code did not require them to
pay into their plan.14 Because student loans are nondischargeable and making direct

10Id. at 218-23.

11Id. at 222, n. 24. An above-median Chapter 13 debtor can also have discretionary income
because his or her actual monthly income exceeds his or her historical Current Monthly Income.

12The debtor’s plan could not be confirmed, however, because it violated § 1322(b)(10) by
proposing to pay interest on the student loan debt even though the other unsecured claims were not to be

paid in full.

13501 B.R. at 415-17.

14Id. at 413-14.

10

Case 15-21309 Doc# 26 Filed 12/23/15 Page 10 of 14


payments to them would reduce the chances the debtors would owe more on them after
completing their plan than they did when they filed bankruptcy, and the debtors were
paying the student loan creditors only from money they were not required to pay into
their plan, Judge Karlin ruled the discrimination the plan called for in favor of the student
loan creditors was not unfair.15 However, she ruled the debtors could not pay more on a
claim to reimburse a state agency for an overpayment of unemployment compensation
benefits because that claim was not entitled to priority status, it was not nondischargeable,
and the debtors presented no evidence to show they needed to pay the claim in full to
further their fresh start.16

Under the circumstances of this case, the Court concludes the Debtor’s plan
unfairly discriminates against her non-student-loan creditors and therefore cannot be
confirmed. Unlike the debtors in Stull and Knowles, the Debtor has no discretionary
income but only the projected disposable income that § 1325(b)(1)(B) requires her to pay
into her plan. The Debtor’s plan fails each step of the Bentley test. It does not honor the
Code’s requirement of equality of distribution among her unsecured creditors. She does
not suggest her student loans are entitled to priority under § 507(a), or that equitable
subordination should be applied to her other unsecured claims under § 510(c). Her
student loans are most likely excepted from discharge, but that fact does not mean they
have priority over her other unsecured claims and nothing else in the Bankruptcy Code

15Id. at 418-21.

16Id. at 422.

11

Case 15-21309 Doc# 26 Filed 12/23/15 Page 11 of 14


justifies treating them more favorably than those other claims. The Debtor proposes to
pay her student loans out of her projected disposable income, the money that
§ 1325(b)(1)(B) fixes as the minimum she must devote to a plan before the plan can be
confirmed, and she has not suggested she has any additional income beyond her projected
disposable income that she can voluntarily pay on her student loans. Although the
Debtor’s potential fresh start would be improved if she were allowed to direct all the
unsecured creditors’ share of her projected disposable income to her student loan creditor
alone, a Chapter 13 fresh start does not guarantee that a debtor will emerge from Chapter
13 free from all debts, but only from those that are not entitled to priority and are not
excepted from discharge.

The Debtor concedes her plan does not satisfy the Code’s principle of equality of
distribution among unsecured creditors of equal priority, but suggests this is okay because
her student loans comprise the majority of the claims, almost 56% by the Court’s
calculation. She cites In re Jackson,17 saying the student loan percentage here “is close to
the same percentage” involved there. But as the student loans there were nearly 90% of
the unsecured debts and the debtor was going to pay them as long-term debts under
§ 1322(b)(5), the case is distinguishable from the one before this Court. The Debtor also
concedes her student loans are not entitled to priority under § 507(a). With regard to
mandatory versus optional contributions, the Debtor suggests Bentley requires comparing

172006 Bankr. LEXIS 4327 at *4-12 (Bankr. N.D. Ga. 2006).
12


Case 15-21309 Doc# 26 Filed 12/23/15 Page 12 of 14


what her plan would give her non-student-loan creditors to what they would receive in a
Chapter 7 liquidation. This is wrong. Bentley directs the Court to consider what the
unsecured creditors would receive if the Debtor’s mandatory contributions to her Chapter
13 plan were distributed pro rata among all of them, not what they would receive in a
Chapter 7 liquidation. A plan like the Debtor’s will probably always fail this part of the
test because the plan tries to impose a distribution scheme for the mandatory contributions
that is different than the scheme imposed by the Bankruptcy Code. It tries to rearrange
the priorities Congress established in Chapter 13, and that is simply not permissible. The
Debtor argues that her proposed discrimination is not unfair because without it, she will
owe a larger student loan debt when she completes her plan than she did when she filed
bankruptcy. While it is true that the requirement for the Debtor’s other nonpriority
unsecured creditors to share pro rata with her student loan creditor in any distributions
that may be available from the contributions Chapter 13 requires her to make to her plan
will leave her owing a larger student loan debt if she completes her plan than she would
owe if her proposal were accepted, this is a consequence of Congress’s clear decision to
make student loans nondischargeable, but to not make them priority claims. Finally, the
Debtor argues it is bad policy not to permit the discrimination she proposes in her plan.
While the Court feels sympathy for the points she makes, this is an argument that must be
directed to Congress, which makes the laws, and not to a bankruptcy court, which can
only interpret and enforce the law as Congress has made it.

13

Case 15-21309 Doc# 26 Filed 12/23/15 Page 13 of 14


Conclusion

For these reasons, the Court concludes that the discrimination proposed by the
Debtor’s plan is unfair, and that her plan therefore cannot be confirmed. The Court
appreciates the effort the Debtor’s attorney made here to cleanly present and forcefully
argue the question whether a debtor in this Debtor’s predicament can deal with the
nondischargeable student loan problem in the manner proposed. Unfortunately, the Court
is convinced that Congress has barred the relief the Debtor seeks. The Debtor is hereby
given twenty-eight days to file an amended plan that removes the unfair discrimination, or
to ask to have her case dismissed or converted to Chapter 7.

# # #

14

Case 15-21309 Doc# 26 Filed 12/23/15 Page 14 of 14

11-21003 Neighbors (Doc. # 460)

In Re Neighbors, 11-21003 (Bankr. D. Kan. Dec. 22, 2015) Doc. # 460

PDFClick here for the pdf document.


 

SO ORDERED.
SIGNED this 21st day of December, 2015.

 

Designated for online distribution but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:
MARK STEPHEN NEIGHBORS and CASE NO. 11-21003
SHELLY KAY NEIGHBORS, CHAPTER 11
DEBTORS.

MEMORANDUM OPINION AND JUDGMENT
CONVERTING CASE TO CHAPTER 7


On October 29, 2015, trial was held on the motion of creditor CitiMortgage (Citi)
to convert this Chapter 11 case to a Chapter 7 case.1 Debtors appeared in person2 and by

1 Doc. 416. Trial of this motion was combined with trial on Debtors’ Motion to Reimpose
the Automatic Stay as to 16961 and 16959 Gentle Slopes Drive. Doc. 186. That issue is
addressed by a separate memorandum and judgment. Doc. 448.

2 Debtor Shelly Neighbors did not testify.

Case 11-21003 Doc# 460 Filed 12/21/15 Page 1 of 24


their counsel, Camron Hoorfar. Citi appeared by Eric L. Johnson and Kersten L.
Holzhueter of Spencer Fane Britt & Brown, LLP. The Court has jurisdiction.3

FINDINGS OF FACT.

A. PROCEDURAL HISTORY.
Debtors, with the assistance of counsel, filed a voluntary petition for relief under
Chapter 11 on April 12, 2011. One day later the Chapter 11 case of Neighbors
Investments, Inc., owned by Debtors, was filed.4 A plan has been confirmed in that case.

Prepetition, Debtor Mark Neighbors, through various entities, was a real estate
developer, contractor, and real estate agent. Debtors’ schedules were filed approximately
one month after the filing of the petition. The meeting of creditors was held on May 19,
2011.

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). This is a core
proceeding which this Court may hear and determine as provided in 28 U.S.C.§ 157(b)(2)(A).
There is no objection to venue or jurisdiction over the parties.

4 Case no. 11-21022.

2

Case 11-21003 Doc# 460 Filed 12/21/15 Page 2 of 24


1. Adversary proceedings.5
Litigation of state law claims has been a significant factor in this case. In
September, 2011, Debtors filed a motion to approve the employment of special counsel to
prosecute or settle Debtors’ potential claims against David Baumgartner, Linda Beadle,
James Troutman, David Imhoff, Central Bank, Cornerstone Bank, the Bank of Versailles,
and other persons or entities responsible for losses incurred by Debtors as a result of
fraud, negligence, recklessness, violations of statutory laws, and other wrongful conduct.6
The application and similar subsequent applications were approved.7 At least five
adversary proceedings have been filed. The first was filed in 2012 against Linda Beadle,
a former employee of Debtors and Debtors’ businesses, for conversion of property.8
Mark Neighbors testified at trial that the proceeding was recently settled, although the
settlement documents had not been prepared.

5 The following examination of the case history and the estate as of the date of trial is
based upon the testimony of Mark Neighbors. See Doc. 453 (October 29, 2015 transcript).
Generally Mark Neighbors seemed confident that his testimony was accurate, and the Court has
made findings in accord with his statements, even though in many instances his testimony cannot
be verified from the available record and docket information.

6 Doc. 64.

7 Doc. 101. In June of 2013, Debtors’ again moved to employ special counsel to
prosecute the claim against Linda Beadle, to prosecute Debtor Shelly Neighbor’s personal injury
claim, and to “assist debtors with discovery against David Imoff, David and Marsha
Baumgartner, Bank of Versailles, Central Bank and others persons and entities responsible for
losses incurred by debtors.” Doc. 245. The motion was granted. Doc. 249. In February, 2014,
Debtors moved to employ different counsel for the same purposes, except the prosecution of the
personal injury claim. Doc. 277. The application was also approved. Doc. 287.

8 Adversary case no. 12-06097.

3

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Three adversaries were filed in 2014. They have been closed. One was against
secured creditor Nationstar Mortgage, LLC,9 contesting the amount of its secured claim.
After a difficult mediation, the case was settled. Debtors pro se filed two proceedings
against secured creditor Bank of Versailles,10 challenging the bank’s handling of a check
received from the 2009 auction sale of property in which Debtors claimed an interest.
These adversary proceedings have been closed. One was dismissed with prejudice upon
motion of the bank based upon lack of standing and expiration of the statute of
limitations. The second was dismissed for failure to pay the filing fee.

The fifth adversary, against Citi, was filed recently, on October 15, 2015. It seeks
damages for alleged violations of the Missouri Merchandising Practices Act and negligent
misrepresentation relating to Citi’s prepetition loans to Debtors.11 At the time of trial,
applications were pending to employ counsel licensed to practice in Washington and
Michigan, but not Missouri and Kansas,12 and an attorney licensed to practice in
Missouri13 to prosecute claims against Citi for “mortgage fraud, violation of mortgage

9 Case no. 14-06025.
10 Case nos. 14-06082 and 14-06083.
11 Case no. 15-06106.
12 Doc. 378.
13 Doc. 380.


4

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and/or banking laws, and other wrongful conduct.”14 A similar suit against Citi was
simultaneously filed in Missouri state court.

2. Reorganization plans.
After several extensions of the exclusivity period, Debtors filed a proposed plan of
reorganization and a disclosure statement on December 30, 2011. Citi objected and no
confirmation hearing was held. An amended plan and disclosure statement were filed on
June 15, 2012.15 After objections were withdrawn, the amended disclosure statement was
approved on November 16, 2012,16 but a confirmation hearing was never held.

3. Dismissal and conversion motions.
On July 2, 2015, the Court held a telephonic status conference on the pending
amended plan and other matters. On August 4, 2015, Debtors filed their Motion to
Dismiss Chapter 11 Bankruptcy Case17 for cause under § 1112(b)(2), stating in part that
there is no reasonable likelihood of rehabilitation because Debtors have been unable to
reach agreement with Citi concerning the mortgage on their personal residence and the
liens on two lots in Gravois Mills, Missouri; Debtors believe that they will not be able to
confirm a plan within the time fixed due to disputes with Citi; and Debtors do not have

14 Id.

15 Docs. 166 & 167.
16 Doc. 218.
17 Doc. 402 (Doc. 402 was later withdrawn and Doc. 404 with minor changes was filed in


its place).
5

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sufficient source of income to sustain a Chapter 11 Plan or reorganize. Bank of Versailles
filed a limited objection.18 Citi objected to the motion.19

On August 31, 2015, Citi filed the motion to convert case to Chapter 7 which is the
subject of this memorandum.20 Citi contends that conversion, rather than dismissal,
would be in the best interests of creditors. On the eve of the scheduled hearing on
Debtors’ motion to dismiss and Citi’s motion to convert, Debtors moved to withdraw
their motion to dismiss.21 That motion was granted.22

B. DEBTORS’ SCHEDULES AND CURRENT CIRCUMSTANCES.
1. Real property.
Debtors’ Schedule A listed 7 parcels of real property.23 Mark Neighbors testified
that Debtors currently claim an interest in only two of them. The first scheduled property,
a lot in Gravois Mills, Missouri, was surrendered to the secured creditor, Bank of
Versailles in full satisfaction of the secured debt. The second property, an improved lot
in Gravois Mills, Missouri, was also surrendered to Bank of Versailles in full satisfaction

18 Doc. 405.
19 Doc. 407.
20Doc. 416.
21 Doc. 438.
22 Doc. 440.
23 Mark Neighbors testified that some of the real property listed on Schedule A was


owned by limited liability companies, not the Debtors. No amended Schedule A has been filed.
For purposes of this opinion the Court will assume the ownership as stated on Schedule A.

6

Case 11-21003 Doc# 460 Filed 12/21/15 Page 6 of 24


of the secured debt. The third property, 16961 Gentle Slopes Drive, Gravois Mills,
Missouri was sold on a short sale to a third party for $275,000 and the lien of Citi
released.

The fourth property, which is still held by Debtors, is their homestead, located in
Overland Park, Kansas. Citi is the holder of the only lien on the homestead. Although no
payments have been made to Citi since 2011, the taxes are current. Debtors claim that the
value is significantly in excess of the lien amount.

Debtors still own the fifth property, 16959 Gentle Slopes Drive, Gravois Mills.
Schedule A lists the value as $259,600.00, but Mark Neighbors testified that the value has
increased since filing to $450,000, and he recently received an offer to purchase for
$300,000. Citi’s proof of claim states it holds a lien for $401,397.94 principal, plus
interest and other charges.24 The deed of trust granting the lien was mistakeningly
released by Citi, and the Court by separate order has found that Debtors agreed to
reinstatement of the lien and ordered that the lien be reinstated.25

The sixth property, 16963 Gentle Slopes Drive, Gravois Mills, Missouri, was sold
by the Debtors a couple of months ago, but there is no order approving the sale. Mark
Neighbors testified that he no longer owns the seventh property, undeveloped land
located on West 151st Street, but the docket does not include an order approving the sale.

24 Claim 7-2, filed May 26, 2011.

25 Memorandum Opinion and Judgment Denying Debtors' Motion to Reimpose Stay and
Finding that Debtors Agreed that the Deed of Trust Mistakenly Released by CitiMortgage be
Reinstated. Doc. 448.

7

Case 11-21003 Doc# 460 Filed 12/21/15 Page 7 of 24


2. Business Interests.
The testimony concerning the business interests listed on Schedule B was as
follows. Debtors currently have a 100% interest in Neighbors Investments, Inc. It filed
for relief under Chapter 11 one day after Debtors filed this case and is operating under a
confirmed Chapter 11 plan. Its principal asset is real property which Debtor Mark
Neighbors testified is worth $900,000 subject to a lien of $450,000. Neighbors
Investments, Inc. has no employees, but does hire professionals.

The operating report for Neighbors Investments, Inc. for August, 201526 reports
income from the sale of property other than inventory of $177,496.03. Mark Neighbors
testified that this was the proceeds from the sale of property located at 16963 Gentle
Slopes Drive, Gravois Mills, Missouri, which is listed as an asset of the Debtors on their
Schedule A. At the end of August 2015, after the payment of expenses, Neighbors
Investments, Inc. had cash on hand of $165,368.72. The September operating report,27
reports income of $3,320, but Mark Neighbors could not recall the source. At the end of
September, cash on hand was reduced to $104,522.06, approximately $60,00 less than at
the start of the month, but the reported expenses were only approximately $30,000. Mark
Neighbors testified that these expenses included attorneys fees for “the whole mess,”
meaning both the corporate and individual bankruptcies. He could not account for the
$30,000 difference between the reduction of cash on hand and the reported expenses.

26 Exh. L, 156.
27 Id. at 161.
8


Case 11-21003 Doc# 460 Filed 12/21/15 Page 8 of 24


Debtors’ Schedule B also includes as a business interest 100% of Neighbors Realty
Co., Inc. It presently has no assets and no debt. It has 13 to 14 vacant Kansas City
residential lot listings. It will receive commissions as the lots are improved, but there are
no homes under construction.

The next business interest is a 50% interest in Gentle Slopes Partners LLC. It is a
Missouri limited liability company which is not currently operating, has no creditors, and
no assets. Litigation asserting breach of contract and fraud against a partner is
either pending or contemplated. The claims are alleged to be in excess of $100,000.

Metcalf 211, Inc. previously owned vacant real property, but the property has been
returned to the financing bank in exchange for a release. Metcalf 211 has been dissolved.
Stillwell Industrial, LLC owned developed industrial lots when the case was filed. The
property was returned to the secured lender, and the limited liability company dissolved.

Debtors continue to own a 100% interest in Gentle Slopes Builders. It is a
construction company which previously built homes at the Lake of the Ozarks. Presently
it has no assets, no debts, and no construction projects.

Schedule B includes a 50% interest in M & D Partnership. It owned property on
West 151st Street in Stanley, Kansas. This is the seventh tract listed on Schedule A. The
property has been transferred to Cornerstone Bank, and the partnership has no assets and
no debt. Mark Neighbors testified that he has claims against Cornerstone worth more
than $100,000.

9

Case 11-21003 Doc# 460 Filed 12/21/15 Page 9 of 24


3. Personal Property.
The personal property listed on Schedule B includes accounts receivable owed by
Neighbors Investments, Inc., the related Chapter 11 debtor, in an unknown amount. The
loan is not documented by a note. Additional loans to Neighbors Investments were made
post-petition, but are documented only in the monthly reports prepared by Debtors’
bookkeeper.28 Court approval was not obtained. Mark Neighbors does not know the
amount, but would not be surprised if the loans exceed $150,000. Mark Neighbors also
testified that some of the loans to Neighbors Investments could have been made by
Neighbors Realty, which had accounts separate from Debtors, and money could also have
been loaned by Neighbors Realty to Debtors.

Debtors’ assets include two boats, which according to Mark Neighbors are
presently valued at $2000 and $50,000 respectively. The boats are unencumbered.

Schedule B lists 11 contingent and unliquidated claims, resolution of which would
require litigation. Debtors would like to pursue five of them. The first is a claim against
an auction company which allegedly wrongfully failed to collect a $92,500 check in
2009. The company was contacted about the allegations, and counsel was retained by
Debtors in 2011. But there is no lawsuit pending, and litigation counsel is not presently
retained.

28 E.g., exh. E at 20 (Monthly operating report signed July 15, 2011 by Mark Neighbors,
reporting “Loan to business $9,000.”).

10

Case 11-21003 Doc# 460 Filed 12/21/15 Page 10 of 24


The second claim is against “Bank of Versailles and Baumgartners.” The claim
against the bank is alleged to be for about $500,000. Debtors have been trying to bring
the actions. One was commenced pro se, but Mark Neighbors does not know the status.
Debtors attempted to have counsel appointed to pursue the Baumgartners, but the request
was opposed.

The third is against the Central Bank of the Lake of the Ozarks relating to
allegedly unauthorized loans made to a partnership. Mark Neighbors is trying to retain
counsel to pursue the matter. The fourth and fifth claims are against Cornerstone Bank.
Mark Neighbors asserts he has a claim worth more than $500,000 for forgery and
manipulation of records, but there is no pending litigation. Mark Neighbors also testified
about a potential claim against David Imoff and Cornerstone CPA regarding records
manipulation.

The listed claim against Linda L. Beadle recently settled. It was estimated that the
estate would receive $40,000 to $45,000. Although included in Schedule B, Mark
Neighbors testified that he no longer has claims against James Troutman or Safeco
Insurance, and no interest in class action suits against Citi and Toyota, which are also
listed. However, a foreclosure action filed prepetition by Citi against Debtors remains
pending.

In summary, of the 11 claims listed as unliquidated contingent claims on Schedule
B, Mark Neighbors testified that he wishes to pursue five, one has settled, four have
been abandoned, and one, the foreclosure against Debtors, is pending.
11

Case 11-21003 Doc# 460 Filed 12/21/15 Page 11 of 24


Since the preparation of the schedules, Mark Neighbors has become aware of
additional unliquidated claims. One is a claim against bankruptcy counsel related to his
representation of Debtors in the action against Linda Beadle. The others are two claims
against Citi, one filed in Missouri state court and the other as an adversary proceeding in
this Court.29 The adversary complaint alleges three violations of the Missouri
Merchandising Practices Act regarding Citi’s financing of the Gentle Slopes properties
and negligent misrepresentation claims concerning Citi’s loan modification program
with respect to the loans secured by their residence and the Gentle Slopes properties.

4. Claims against the estate.
Debtors’ Schedule D lists 8 secured claims. Mark Neighbors testified that the liens
securing all except two have been released, and Citi is the holder of the only secured
claim. Citi has filed three proofs of claim: (1) $401,397.94 secured by 16959 Gentle
Slopes Drive, Gravois Mills, Missouri; (2) $401,331.70 secured by 16961 Gentle Slopes Drive,
Gravois Mills, Missouri; and (3) $725,618.03 secured by Debtors’ homestead. If the property
securing the first claim is sold, a deficiency is likely.30 The collateral securing the second
proof of claim has been sold, and Citi is claiming a deficiency of $150,000 to $175,000,
but Mark Neighbors doesn’t believe any deficiency is owed. Mark Neighbors testified
that the homestead is worth more than Citi’s claim.

29 Adversary case no. 15-06106.
30 Debtors’ Schedule A lists the value of this property to be $259,600.
12


Case 11-21003 Doc# 460 Filed 12/21/15 Page 12 of 24


The only unsecured priority claim has been paid, without the benefit of a plan or
appropriate motion and approval of the Court.

The schedule of unsecured claims include 12 personal guaranties. Mark Neighbors
testified that eight of the guaranties have been released. The remaining four guaranties
secure claims of Neighbors Investments, Inc., which are being paid through the
Neighbors Investments, Inc.’s Chapter 11 plan. Mark Neighbors does not expect that
these guarantees will be pursued.

According to Mark Neighbors, the remaining scheduled unsecured claims, apart
from the guaranties and any deficiencies of Citi, are approximately $10,600 for which
proofs of claim have been filed and $24,631 for which no proof of claim have been filed.
Testimony concerning the claims register generally confirms this analysis.

In summary, the claims against the Debtors, other than on the personal guaranties
of the allegedly oversecured debts of Neighbors Investments, Inc. being paid through the
corporate Chapter 11 plan, are: (1) unsecured claims of approximately $10,000; (2) Citi's
claim secured by the homestead, which Mark Neighbors contends is oversecured; (3)
Citi’s claim secured by 16959 Gentle Slopes Drive, Gravois Mills, Missouri, which will
probably result in an unsecured deficiency if the property is sold; and (4) Citi’s deficiency
claim following the sale of 16961 Gentle Slopes Drive, Gravois Mills, Missouri.

5. Estate income.
There is no evidence that Debtors plan to resume their real estate development and
building businesses. At the time of trial, Debtor Mark Neighbors was employed by
13

Case 11-21003 Doc# 460 Filed 12/21/15 Page 13 of 24


Platinum Realty as a realtor, for which he received irregular, commission based income.
Debtors’ principal income is $9,338 monthly disability income, which will terminate at
either age 62 or 65, which is two or five years in the future. Debtor Shelly Neighbors
works with Mark Neighbors on real estate sales and has no other income.

6. Events subsequent to trial.
Consistent with the trial testimony, on November 16, 2015, counsel for the
Debtors filed a motion to approve the negotiated settlement of the Beadle litigation.31
Under the settlement, Beadle was to pay the Debtors $45,000 and provide “a truthful and
accurate financial statement.” Debtors and Beadle executed a Mutual Release and
Settlement Agreement.32

But on December 8, 2015, Debtors pro se filed an objection to the settlement, for
the reasons stated in three attached letters, one from the Debtors, one from the Debtors’
son, and one from the Debtors’ sister-in-law. These last two individuals are not listed as
creditors. The reasons stated by Debtors for disapproval of the settlement include the
allegations that the notarization on Beadle’s financial statement is torn and that public
records evidence that Beadle has not obtained the full $45,000 settlement funds from a
mortgage on her home. Multiple additional objections relate to the amount of the
settlement and events which occurred prior to the settlement, such as alleged undisclosed

31 Doc. 444. The settlement was the result of mediation conducted by Bankruptcy Judge

Karlin.
32 Id. The agreement is attached to the motion.
14

Case 11-21003 Doc# 460 Filed 12/21/15 Page 14 of 24


conflicts of interest and discovery issues, which were known but not mentioned during
the trial on the motion to convert.

POSITIONS OF THE PARTIES.

When moving for conversion to Chapter 7, Citi relies in part upon Debtors’
statements in support of their motion to dismiss that cause for dismissal or conversion
exists under § 1112(b). It then argues that conversion rather than dismissal would be in
the best interests of creditors and the estate because it appears that Debtors have nonexempt
assets, dismissal would make it much more difficult for creditors to realize the
value of those assets, and a Chapter 7 case would provide for an orderly liquidation based
upon established priorities.33 Debtors respond that because they have withdrawn their
motion to dismiss, Citi has failed to show cause exists and that should cause exist, Citi
has failed to show that conversion is in the best interests of creditors and the estate
because the unsecured claims of creditors other than Citi are approximately $10,000 and
Citi has failed to show it has an unsecured claims and in what amount.34
DISCUSSION.

A. DISMISSAL OR CONVERSION FOR CAUSE.
Section 1112(b)(1) is the controlling statute. It provides:

Except as provided in paragraph (2) and subsection (c), on
request of a party in interest, and after notice and a hearing,

33 Doc. 416.

34 Doc. 439.

15

Case 11-21003 Doc# 460 Filed 12/21/15 Page 15 of 24


the court shall convert a case under this chapter to a case
under chapter 7 or dismiss the case, which ever is in the best
interests of creditors and the estate, for cause unless the court
determines that the appointment under section 1104(a) of a
trustee or an examiner is in the best interests of creditors and
the estate.

Because neither paragraph (2) nor subsection (c) are applicable, Citi is a party in interest
as defined by § 1109(b), and the Court has given notice and held a hearing, the first issue
to be decided is whether there is cause. For purposes of conversion or dismissal, cause is
defined by § 1112(b)(4), which sets forth a non-exhaustive list of items which constitute
cause. The list is read in the disjunctive.35 This means that cause is established when the
existence of any of the items is proven, or the Court otherwise finds cause. Citi as the
movant has the initial burden of demonstrating by a preponderance of the evidence that
cause exists.36

B. CAUSE EXISTS.
1. There has been substantial loss to the estate and there is an absence of a
reasonable likelihood of rehabilitation.
The first item in the list of cause is “substantial or continuing loss to or diminution
of the estate and the absence of a reasonable likelihood of rehabilitation.”37 Debtors’
business, as reported on their Statement of Financial Affairs, was real estate development,

35 7 Colliers on Bankruptcy ¶ 1112.04[6] at 1122-27 (Alan N. Resnick & Henry J.
Sommer Eds.-in-chief, 16th ed. 2015) (citing In re Products Int’l Co., 395 B.R. 101, 110 (Bankr.

D. Ariz. 2008)).
36 7 Colliers on Bankruptcy ¶ 1112.04[4] at 1112-22.
37 11 U.S.C. § 1112(b)(4)(A).
16

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sales, and rental. During the pendency of the case, the Debtors’ real estate assets have
declined significantly. Only one Gentle Slopes property and their residence remain.
Debtors are not engaged in construction. The estate’s cash has been depleted by transfers
to Neighbors Investments Inc., without Court approval, the execution of a promissory
note, and an expectation of repayment.

Mark Neighbors is employed as a real estate agent, with compensation on a
commission basis. Debtors’ income is primarily from disability payments. There is no
evidence of plans to revitalize Debtors’ businesses.

 When moving to dismiss, Debtors stated that “their overall financial situation has
drastically declined” and “[due to the decease in income and loss of real estate, Debtors
believe they do not have sufficient sources of income to sustain a Chapter 11 Plan or
reorganization.”38 Trial testimony confirmed this assessment. The only change in
Debtors’ finances since the filing of the motion to dismiss is the negotiated settlement of
the Beadle law suit, which was expected to provide income to the estate of approximately
$45,000. But now Debtors have objected to the settlement. Even assuming that the
settlement is approved, receipt of $45,000 would not be a basis on which to find that
rehabilitation is likely. If this Chapter 11 case were to continue, administrative expenses,
particularly professional fees, would continue to accrue rapidly, not only for services

38 Doc. 404, 4.

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related to plan development but also for litigation services, including the lawsuit recently
filed against Citi. Debtors have no on going business to generate the needed funds.

2. Additional circumstances which evidence cause.
“Because the list of grounds [in § 1112(b)(4)] is not all-inclusive, the court may
consider other grounds as they arise, and may use its equitable powers to reach an
appropriate result.”39 As an additional ground for cause, the Court considers the Debtors’
failure to obtain a confirmed plan. Section § 1112(b)(4)(J) provides that cause is present
when there is “failure to file a disclosure statement, or to file or confirm a plan, within the
time fixed by this title or by court order.” 40 In this case, August 11, 2011, was the
original deadline for Debtors to file a plan within the exclusivity period of § 1121(b).
Debtors filed three motions to extend the exclusivity period41 which were granted, such
that the exclusivity period expired on December 30, 2011. Debtors filed their original
plan on that date, and Citi objected. Citi also objected to Debtors’ first amended plan,
filed on June 15, 2012. Thereafter, Debtors made no serious efforts to obtain a confirmed
plan.

Although these circumstances do not strictly constitute cause as defined by
§1112(b)(4)(J) because no deadline for filing a plan was fixed by the Court, these

39 5 William L. Norton, Jr., and William L. Norton III, Norton Bankruptcy Law &
Practice 3d, § 103.6 at 103-14 (Thomson Reuters 2014).
40 11 U.S.C. § 1112(b)(4)(J).
41 Docs. 55, 76, & 106.
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circumstances clearly point to cause. This case has been on file for four and one-half
years, but Debtors are not pursuing confirmation. It is clear that a confirmed plan cannot
be obtained without the consent of Citi, which is the only secured creditor and holds the
largest unsecured claim. But Debtors and Citi are at loggerheads. The Court is puzzled
as to why the United States Trustee’s office did not file a motion to convert this case at
least two years ago. The Court is also puzzled as to why the United States Trustee’s
office did not take a position on Citi’s motion to convert this case to Chapter 7.

When filing their motion to dismiss, Debtors stated that they “believe that they will
not be able to confirm a plan within the time fixed” because of unresolved issues with
Citi.42 Once Citi filed its motion to convert the case, and it became clear that the dispute
between Citi and the Debtors over the reinstatement on the lien on 16959 Gentle Slopes
Drive, Gravois Mills, Missouri, was going to be resolved prior to any dismissal, Debtors
withdrew their motion to dismiss. They now attempt to use the withdrawal as a basis for
asserting that the statements in their motion to dismiss as to cause cannot be considered in
conjunction with Citi’s motion to convert. The Court finds the withdrawal of the motion
to dismiss was an attempt by the Debtors to manipulate the bankruptcy system and delay
creditor action. Debtors’ statement that they will not be able to confirm a plan because of
unresolved issues with Citi will be considered.

42 Doc. 404, 2.

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At the hearing on Citi’s motion to convert, Debtors’ counsel argued that the
evidence shows circumstances have changed since Debtors’ motion to dismiss was filed
and Debtors are working toward a second amended plan. The changed circumstances
counsel identified are Citi’s retention of new counsel with whom Debtors’ counsel is
having conversations and the filings of the adversary proceeding and the state court case
against Citi.

The Court finds there are no changed circumstances indicating that Debtors can
obtain a confirmed plan in a reasonable time. The adversary proceeding and the state
court action against Citi are complex and will likely take years to resolve through
litigation. Using litigation asserting state law claims only indirectly related to the amount
of Citi’s claims as leverage to achieve agreement to confirmation is not condoned and is
not likely to achieve the desired result. Citi’s past conduct and its filing of this motion
evidence its decision not to consent to a plan. “Dismissal under § 1112(b)(2) is
appropriate where the debtor’s failure to file an acceptable plan after a reasonable time
indicates its inability to do so whether the reason for the debtor’s inability to file is its
poor financial condition, the structure of the claims against it, or some other reason.”43

In addition, as circumstances constituting cause, the Court considers Debtors’
overall conduct during the pendency of this case and concludes that Debtors have not
adhered to the minimum standard of conduct required of Chapter 11 Debtors. They have

43 Hall v. Vance, 887 F.2d 1041, 1044 (10th Cir. 1989).
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taken advantage of the bankruptcy stay to prevent their creditors from taking action
against them, yet they have not seriously attempted to confirm a plan. Rather they filed
litigation, disposed of assets, and dealt with debt through stay relief actions. Mark
Neighbors has transferred estate property to Neighbors Investments, Inc. without Court
approval and without receiving a promissory note. Debtors have not corrected their
schedules, although Mark Neighbors testified at trial that they were not accurate.

Debtors are litigious and have used the bankruptcy case to hire professionals, to
preserve the timeliness of prepetition state law claims for fraud and similar claims, and to
file adversary proceedings. Debtors would like to file additional adversary proceedings
for fraud and other alleged misconduct. But Debtors’ modus operandi is not to litigate for
the purpose of ending disputes, but to obtain leverage over creditors. Part of Debtors’
settlement with the Bank of Versailles involved an agreement for the production of
documents. This led to seemingly endless motions to compel requiring Court
involvement. When Citi made an honest mistake releasing lien in conjunction with the
sale of estate property, it took years and an evidentiary hearing to reinstate the lien over
Debtors’ objection. A judge of this Court devoted a full day to mediation of the Beadle
litigation, a resolution was finally reached, but now Debtors seek to avoid the settlement.

For the forgoing reasons the Court concludes that there is ample cause to dismiss
or convert this case.

C. THERE ARE NO UNUSUAL CIRCUMSTANCES INDICATING THAT
CONVERTING OR DISMISSING THE CASE IS NOT IN THE BEST INTEREST
OF CREDITORS.
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Subsection (b)(2) of § 1112 provides that even if cause exists, the court may not
convert or dismiss a case “if the court finds and specifically identifies unusual
circumstances establishing that converting or dismissing the case is not in the best
interests of creditors and the estate, and the debtor or any other party” establishes one of
two things: (1) there is a reasonable likelihood that a plan will be confirmed within a
reasonable time; or (2) the grounds for converting or dismissing the case include an act or
omission of the debtor other than under subsection (4)(A), for which there exists a
reasonable justification which will be cured within a reasonable time set by the court.

There is no evidence of unreasonable circumstances evidencing that conversion or
dismissal is not in the best interests of the creditors and the estate. Further, even if there
were such circumstances, as discussed above, Debtors have not shown that there is a
reasonable likelihood that a plan will be confirmed in a reasonable time. In addition, as to
the cause other than that defined by § 1112(b)(4)(A), the finding is not based upon acts of
the Debtors which are reasonably justified and which can be cured in a reasonable time.

D. THE COURT FINDS THAT CONVERSION WOULD BE IN THE BEST
INTERESTS OF CREDITORS AND THE ESTATE.
Having found cause and the absence of special circumstances, the Court next
considers whether dismissal or conversion is in the best interests of creditors and the
estate.44 “[A]s a result of the 2005 Amendments, Code § 1112(b)(1) is no longer

44 The Court also notes that, if in the best interest of creditors and the estate, the Court
may appoint a trustee or examiner, as an alternative to dismissal or conversion. The Court finds
the estate does not have the cash flow necessary to support the appointment of a trustee.

22

Case 11-21003 Doc# 460 Filed 12/21/15 Page 22 of 24


permissive, but instead mandates conversion or dismissal if the movant establishes
exclusive cause, and no unusual circumstances establish that conversion or dismissal is
not in the best interests of creditors.”45

“The Code does not define the phrase ‘best interests of creditors and the estate.’”46
The standard “implies a balancing test to be applied through case-by-case analysis. In the
end the determination is a matter for sound judicial discretion.”47 The Court must
consider the impact of each of the options.48

Counsel for the Debtors suggests that when considering the options the Court
evaluate the ten factors enumerated by Bankruptcy Judge Nugent in L&T Machining.49
But those factors are suitable for use in a business reorganization case and have little
relevancy in an individual Chapter 11 case such as this. Of the ten, only two are
applicable here. The first relevant factor is “the ability of the trustee in a chapter 7 case to
reach assets for the benefit of creditors.”50 In this case, a Chapter 7 Trustee could reach
Debtors’ assets having a value, but these assets could also be reached by creditors outside of

45 5 Norton Bankruptcy Law & Practice, § 103:6 at 103-14.

46 7 Collier on Bankruptcy, ¶ 1112.04[7] at 1112-40.

47 In re Staff Inv. Co., 146 B.R. 256, 260 (Bankr. E.D. Ca. 1992).

48 Rollex Corp. v. Associated Materials, Inc. (In re Superior Siding & Window, Inc.), 14

F.3d 240, 243 (4th Cir. 1994).
49 In re L & T Machining, Inc., Memorandum Opinion, case no. 11-11045, doc. 259
(Bankr. D. Kan. July 3, 2013).
50 Id. at 10.
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bankruptcy. There are no Chapter 5 actions or other sources of recovery unique to
bankruptcy. However, a Chapter 7 Trustee could bring to conclusion any of Debtor’s
unliquidated claims which have value.

The second relevant factor is “whether any remaining issues would be better
resolved outside the bankruptcy forum.”51 In this case the unresolved issues are primarily
the approval of the compromise of the Beadle litigation, the Missouri Merchandising
Practices Act and negligent misrepresentation claims against Citi, and the unliquidated
claims held by the estate which Mark Neighbors wishes to pursue. A Chapter 7 Trustee
could impose order evaluating the unliquidated claims and pursuing appropriate
dispositions. Mark Neighbors has demonstrated that he is incapable of making decisions
that would bring these matters to an orderly conclusion.

Citi is the only significant unsecured creditor acknowledged by Debtors, and it
clearly would be benefitted by conversion. The Court is not as confident as is Mark
Neighbors that all of the claims of unsecured guarantors have been resolved, so these may
also need to be addressed by a Chapter 7 Trustee.

CONCLUSION.

For the foregoing reasons, the Court converts this case to Chapter 7 for cause.

IT IS SO ORDERED.

###

51 Id.

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Case 11-21003 Doc# 460 Filed 12/21/15 Page 24 of 24

11-21003 Neighbors (Doc. # 449)

In Re Neighbors, 11-21003 (Bankr D. Kan. Dec. 3, 2015) Doc. # 449

PDFClick here for the pdf document.


 

SO ORDERED.
SIGNED this 2nd day of December, 2015.

 

Designated for online distribution but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:
MARK STEPHEN NEIGHBORS and CASE NO. 11-21003
SHELLY KAY NEIGHBORS, CHAPTER 11
DEBTORS.

MEMORANDUM OPINION AND JUDGMENT
DENYING DEBTORS' MOTION TO REIMPOSE STAY AND
FINDING THAT DEBTORS AGREED THAT THE DEED OF TRUST
MISTAKENLY RELEASED BY CITIMORTGAGE BE REINSTATED


On October 29, 2015, trial was held on a long-standing dispute between Debtors
Mark and Shelly Neighbors (Debtors) and CitiMortgage (Citi) concerning a deed of trust
securing Citi's loan on real property located in Gravois Mills, Missouri, which the
Debtors listed on their Schedule A as property of the estate.1 Citi contends that it released

1 The issue is raised by Debtors’ Motion to Reimpose Automatic Stay on 16961 and 16959 Gentle
Slopes Drive. Doc. 186. The hearing on the stay motion was combined with the hearing on Citi’s Motion to
Convert. Doc. 416. The ruling on the motion to convert is made by separate Memorandum and Judgment.

Case 11-21003 Doc# 449 Filed 12/02/15 Page 1 of 8


its deed of trust by mistake during the pendency of this case, that Debtors agreed to
reinstate the lien, and that the Court should order the lien to be reinstated. Debtors
contend they did not agree to reinstate the lien and refuse to do so. Debtors appeared in
person and by their counsel, Camron Hoorfar. Citi appeared by Eric L. Johnson and
Kersten L. Holzhueter of Spencer Fane Britt & Browne, LLP. The Court has
jurisdiction.2 For the reasons discussed below, the Court finds that Debtors agreed to
reinstate the deed of trust and order counsel for Citi to prepare an order of this court to be
recorded in Missouri to accomplish the reinstatement.

BACKGROUND FACTS.

Debtors with the assistance of their counsel Erlene Krigel filed for relief under
Chapter 11 on April 12, 2011. Debtors' Schedule A includes as real property owned by
the Debtors two parcels commonly known as 16959 (Tract E5) and 16961 (Tract E4)
Gentle Slopes Drive, Gravois Mills, Missouri. Each tract secures a loan held by Citi.
The deeds of trust contained the correct legal description for Tract E4 and Tract E5, but
each deed of trust contained the street address for the other property. The deed of trust

2 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). This is a core proceeding which this Court may hear and determine as provided in 28 U.S.C.§
157(b)(2)(K). There is no objection to venue or jurisdiction over the parties.

2

Case 11-21003 Doc# 449 Filed 12/02/15 Page 2 of 8


for Tract E4 listed the street address as 16959 Gentle Slopes Drive and the deed of trust
for Tract E5 listed the street address as 16961 Gentle Slopes Drive.

On September 19, 2011, Citi moved for relief from stay as to Tract E4.3 The
motion was granted on November 3, 2011.4 Citi moved for relief from stay as to Tract E5
on October 14, 2011,5 and the motion was granted in November 15, 2011.6

On December 14, 2011, Debtors filed a motion to sell Tracts E4 and E5 for less
than Citi's lien.7 The motion was not opposed and was granted January 5, 2012. Tract E4
was sold, and the proceeds were distributed to Citi. Although intending to release its
deed of trust on Tract E4, Citi mistakenly released its deed of Trust on Tract E5.

After learning of the erroneous release and the failure of Citi to release its lien on
Tract E4 which had been sold and becoming fearful that Citi might attempt to foreclose
its deeds of trust, Debtors filed their Motion to Reimpose the Automatic Stay as to 16961
and 16959 Gentle Slopes Drive (Motion).8 Citi opposed the Motion.

3 Doc. 67.
4 Doc. 90.
5 Doc. 80.
6 Doc. 102.
7 Doc. 109.
8 Doc. 186.

3

Case 11-21003 Doc# 449 Filed 12/02/15 Page 3 of 8


THE ALLEGED AGREEMENT.

This dispute is about whether Debtors agreed to resolve the Motion by (1) Citi’s
release of its deed of trust on Tract E4 and (2) Debtors’ execution of the appropriate
documents to reinstate the lien on Tract E5.

The record reveals that immediately after the filing of the Motion, Citi and
Debtors, through their counsel, were attempting to resolve the matter by agreement. An
expedited hearing on the Motion was held on August 17, 2012. The courtroom minute
sheet reflects that the stay was reimposed until September 21, 2012 and the “parties are
attempting to resolve issues."9 By agreement of the parties, the September hearing was
continued to October 19, 2012, and that hearing was continued to November because
"Attempting to Resolve Issues."10

On December 21, 2012, during the continued hearing on the Motion, Debtors'
counsel reported to the Court that it could
overrule the motion because I think we’ve resolved the issue
related to the motion. The lender has released the mortgage,
deed of trust, on the property that it should have released the
mortgage on and consequently can't foreclose on that
property, so we don't need to reimpose the stay for that
property.
The other property where it was mistakenly released,
we are working on getting that corrected. 11

9 Doc. 194.

10 Doc. 209.

11 Doc. 372-2, 2 (Tr. Dec. 21, 2012).

4

Case 11-21003 Doc# 449 Filed 12/02/15 Page 4 of 8


Citi's counsel agreed with the statement.

Former counsel for Citi testified that on October 24, 2012, before the December
hearing, a proposed affidavit of mistaken release as to Tract E5 was e-mailed to Debtors'
counsel. On November 20, 2012, also before the December hearing, Citi filed in the
Missouri real estate records a Full Deed of Release as to Tract E4. After the December
hearing, Debtors' counsel drafted and submitted to Citi’s counsel a proposed order
overruling the Motion. After reciting the background facts, the proposed order provided:

CitiMortgage, Inc. has now released its Deed of Trust against
the real property at 16961 Gentle Slopes Drive, Gravois Mills,
Missouri and the Debtors have agreed that they will execute
the appropriate documents to allow the Deed of Trust which
was mistakenly released to be filed against the real property at
16959 Gentle Slopes Drive, Gravois Mills, Missouri.12

The proposed order has not been entered, and an affidavit of mistaken release has
not been executed by Debtors. Debtors contend that they did not agree to the resolution
of the dispute in the manner stated on the record by their counsel. Debtors currently
refuse to authorize the filing of the proposed order and to sign an affidavit.

DISCUSSION.

The evidence in support of there having been an agreed resolution of the problems
created by Citi’s mistaken release of the deed of trust on Tract E5 is convincing. The
docket entries on August 12 and October 19, 2012, when the hearing on the Motion was
continued, reflect that parties were attempting to settle the issue. When a hearing was

12 Doc. 372-1, 6.
5


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held on December 21, 2012, Debtors’ counsel recited the terms of an agreement on the
record, and Citi’s counsel stated that he agreed with the statement. Following the
hearing, Debtors’ counsel prepared and provided to Citi’s counsel a proposed order
resolving the Motion, in which the terms of the agreement were stated.

The attorney representing Citi from the fall of 2012 to early 2015 filed an affidavit
stating that "[p]rior to the Court hearing on the motion, Debtors' counsel, Erlene Krigel,
and I negotiated how to resolve the issues. The parties agreed that Citi would release its
lien on Tract E4 and Debtors agreed to execute the appropriate documents to reinstate the
lien on Tract E5."13 His testimony was consistent with his affidavit. He also testified that
Citi released its deed of trust on Tract E4 in reliance on the agreement, but Debtors’ have
not provided the affidavit to reinstate the lien.

The testimony of Debtor Mark Neighbors is the only evidence that the agreement
to release the deed of trust on Tract E4 in exchange for an affidavit of mistaken release of
lien on Tract E5 was not made. He testified that he did not authorize his bankruptcy
counsel to make the alleged agreement with Citi that was announced on the record on
December 21, 2012, and that hearing was one of only two which he has not attended.14
The Court’s minute sheet confirms that Mark Neighbors was not present at the December
21, 2012 hearing.

13 Doc. 372-1, 1.
14 The other hearing which Debtor Mark Neighbors testified he did not attend was the hearing on the
motion of Erlene Krigel, Debtors’ original bankruptcy counsel, to withdraw.
6

Case 11-21003 Doc# 449 Filed 12/02/15 Page 6 of 8


The Court finds Mark Neighbors’ testimony that he did not authorize his counsel
to represent that he had agreed to reinstate the deed of trust on E5 not credible. He was
quick to answer any question when the answer appeared to provide no information
adverse to his interests, but at other times, when a question was directed at any matter
where the answer could be adverse to him, he was evasive, testified that he did not know,
or that he had forgotten. When possible errors in his schedules, disclosure statement, and
proposed plan were revealed, he attributed the errors to his former counsel, denied that he
had discussed the filings with his counsel, questioned whether he had reviewed the
pleadings, and even questioned whether he had signed the documents. In addition,
Debtor testified that one of his present reasons for not agreeing to the settlement was
because the continuation of the dispute provides leverage in his attempts to force Citi to
agree to modification to the terms of his home mortgage loan.
CONCLUSION.

For the forgoing reasons, the Court denies the Motion and finds that Debtors and
Citi agreed to settle the issues raised by Debtors’ Motion by (1) Citi’s release of its deed
of trust on Tract E4 and (2) Debtors’ execution of appropriate documents to reinstate the
lien of the mistakenly released deed of trust on Tract E5. Citi has completed its
obligation, but Debtors have not. To accomplish the Debtors’ obligation, the Court
directs counsel for Citi to prepare and submit for this Court’s signature an order
accomplishing the reinstatement of the mistakenly released lien on Tract E5, in a form
appropriate for recording in Missouri.

7

Case 11-21003 Doc# 449 Filed 12/02/15 Page 7 of 8


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.

Judgment is hereby entered denying the relief sought in the Debtors’ motion to
reimpose the stay on Tracts E4 and E5. 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.
###


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