- Category: Judge Somers
- Published on 14 July 2014
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13-06094 Rajala, Chapter 7 Trustee v. National Association of Postal Supervisors Branch (Bankr. D. Kan. Jul. 11, 2014) Doc. # 46
SIGNED this 11th day of July, 2014.
Opinion Designated for Print and On-Line Publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
ROSEMARY ANN KROUSE,
ERIC C. RAJALA, Chapter 7 Trustee,
NATIONAL ASSOCIATION OF
POSTAL SUPERVISORS BRANCH 458,
CASE NO. 13-20356
ADV. NO. 13-6094
MEMORANDUM OPINION AND ORDER
GRANTING THE PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND
DENYING THE DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
In this adversary proceeding, Plaintiff Eric C. Rajala, Chapter 7 Trustee (Trustee),
seeks to avoid under 11 U.S.C. § 548(a)(1)(B) and recover under § 550(a) a transfer of
Case 13-06094 Doc# 46 Filed 07/11/14 Page 1 of 13
$15,000 made by Debtor to Defendant National Association of Postal Supervisors Branch
458 (NAPS) immediately before the filing of Debtor’s bankruptcy petition. Both the
Trustee and NAPS have moved for summary judgment. The relevant facts are
uncontroverted. The motions present the legal question whether the Trustee may avoid as
a fraudulent transfer a prepetition payment of funds which Debtor could have claimed as
exempt if the transfer had not been made. For the reasons examined below, the Court
concludes that the Trustee may avoid such a transfer. The Court has jurisdiction.1
Debtor signed her voluntary petition under Chapter 7 on February 15, 2013, and
her counsel filed it on February 20, 2013, at 3:03 pm. One of the assets listed on Debtor’s
Schedule B is “life insurance proceeds US Bank” valued at $147,000.
On February 8, 2013, Debtor received a check from the Office of Federal
Employee’s Group Life Insurance for $147,670.77, representing the proceeds of Debtor’s
claim for life insurance arising from the death of her husband on December 31, 2012. On
February 8, 2013, Debtor deposited the check into her US Bank savings account. On the
morning of February 20, 2013, before the petition was filed, Debtor purchased two
1 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C.
§§ 157(a) and 1334(a) and (b), and the Amended Standing Order of Reference of the United States
District Court for the District of Kansas that exercised authority conferred by § 157(a) to refer to the
District’s bankruptcy judges all matters under the Bankruptcy Code and all proceedings arising under the
Code or arising in or related to a case under the Code, effective June 24, 2013. D. Kan. Standing Order
13-1, printed in D. Kan. Rules of Practice and Procedure at 168 (March 2014). Furthermore, this Court
may hear and finally adjudicate this matter because it is a core proceeding pursuant to 28 U.S.C.
§ 157(b)(2)(H). There is no objection to venue or jurisdiction over the parties.
Case 13-06094 Doc# 46 Filed 07/11/14 Page 2 of 13
cashier’s checks from US Bank for a total of $67,350. One cashier’s check, in the
amount of $51,750, was made payable to Wanda O’Brien for payment of Debtor’s
husband’s debt to Ms. O’Brien. Debtor delivered the check to Ms. O’Brien, who
deposited it into her US Bank checking account on February 20, 2013, at 11:45 a.m.,
several hours before Debtor’s petition was filed. The second cashier’s check, in the
amount of $15,600, was made payable to NAPS for payment of Debtor’s husband’s debt
to NAPS. Debtor delivered the check to NAPS, which deposited it into its Brotherhood
Bank checking account on February 20, 2013, at 2:30 p.m., approximately one-half hour
before Debtor’s petition was filed. Neither the transfer to Wanda O’Brien nor the transfer
to NAPS was disclosed by Debtor in her schedules or statement of financial affairs filed
on February 20, 2013. As a result of the purchases of the cashiers’ checks, when
Debtor’s petition was filed at 3:03 p.m. on February 20, 2013, she had in her US Bank
account net life insurance proceeds of $80,320.77.
On her Schedule C, Debtor claimed $147,000 to be exempt under K.S.A. 602313(
a)(7). The Trustee objected to the exemption of the portion of the life insurance
proceeds which had been transferred prepetition. The Court sustained the objection and
ruled that the exemption is limited to $80,320.77, the amount of the life insurance
proceeds in Debtor’s possession when the Chapter 7 petition was filed.
Debtor’s schedules showed $153,301 owed to creditors, real property valued at
Case 13-06094 Doc# 46 Filed 07/11/14 Page 3 of 13
$60,690 (subject to a secured claim of $52,514),2 and personal property valued at
$152,556, comprised primarily of the $147,000 life insurance proceeds,3 only $80,320.77
of which was in her possession. After investigation, the Trustee determined that as of the
filing date, Debtor’s nonexempt property consisted of nonexempt funds in her bank
accounts of $1,219.26 and a 1994 Ford Van 150 Econoline having a fair value of $750.4
In its reply brief filed out of time,5 NAPS states that the amount owed to Debtor’s
creditors and the value of Debtor’s nonexempt assets are controverted, but provides
nothing of evidentiary value in support. The Court will therefore regard as
uncontroverted that on the date Debtor filed her petition, she owed her creditors $153,301
and had non-exempt property valued at $1,969.26.
The Trustee seeks to avoid the payment to NAPS under § 548(a)(1)(B). It
(a)(1) The trustee may avoid any transfer . . . of an
interest of the debtor in property . . . that was made . . . on or
within 2 years before the date of filing of the petition, if the
debtor voluntarily or involuntarily —
. . .
(B)(i) received less than a reasonably equivalent value
in exchange for such transfer . . . ; and
2 Case no. 13-20356, Doc. 1 at 7, Schedule A.
3 Id. at 8-12, Schedule B.
4 Doc. 37 at 5.
5 Doc. 38 (filed on May 29, 2014, more than 21 days after the Trustee filed a memorandum in
support of his motion for summary judgment on April 25, 2014).
Case 13-06094 Doc# 46 Filed 07/11/14 Page 4 of 13
(ii) (I) was insolvent on the date that such transfer was
made . . . , or became insolvent as a result of such transfer.
This subsection allows a bankruptcy trustee to set aside constructively fraudulent
transfers — transfers which are not “infected by actual fraud”6 but are made by insolvent
It permits avoidance if the trustee can establish (1) that the
debtor had an interest in property; (2) that a transfer of that
interest occurred within [two years] of the filing of the
bankruptcy petition; (3) that the debtor was insolvent at the
time of the transfer or became insolvent as a result thereof;
and (4) that the debtor received ‘less than a reasonably
equivalent value in exchange for such transfer.’7
The uncontroverted facts establish these elements. On February 20, 2013, Debtor
delivered a cashier’s check in the amount of $15,600 to NAPS to pay the debt of her late
husband to NAPS. The funds used to purchase the cashier’s check were proceeds of life
insurance paid to Debtor which had been deposited in a segregated account. NAPS
deposited the check into its checking account on February 20, 2013, at 2:30 pm,
approximately one-half hour before Debtor’s petition was filed. The facts therefore
establish that Debtor made a transfer of an interest in her property to NAPS, that the
transfer occurred less than two years prepetition, and that Debtor received less than a
reasonably equivalent value in exchange, since the debt was owed by Debtor’s late
husband, not by Debtor. Further, the facts establish that Debtor was insolvent on the date
6 BFP v. Resolution Trust Corp., 511 U.S. 531, 535 (1994).
Case 13-06094 Doc# 46 Filed 07/11/14 Page 5 of 13
of the transfer because Debtor’s debts then exceeded the value of all her nonexempt
Even though all the elements of a constructively fraudulent transfer are present,
NAPS contends that the Trustee may not avoid the transfer because the funds transferred
were exempt proceeds of life insurance. NAPS argues, “Because the life insurance
proceeds received by the Debtor were exemptible property and not subject to the attacks
of creditors, the payment to NAPS could not be fraudulent as a matter of law under
§ 548(a).”8 NAPS relies on cases holding that a trustee cannot avoid such a transfer under
§ 548(a)(1)(A) because a transfer of exempt property cannot be made with the actual
intent to hinder, delay, or defraud creditors,9 and cases reasoning that to permit avoidance
“would allow the Debtor’s creditors to indirectly, through the trustee, defeat the Debtor’s
state law exemption . . . when they could not do this acting on their own.”10
The Trustee’s response is two fold.11 First, he contends that NAPS is in effect
8 Doc. 35 at 5.
9 Kepler v. Weis (In re Weis), 92 B.R. 816, 822-23 (Bankr. W.D. Wis. 1988) (transfer of exempt
property could not be avoided under § 548(a)(1) as a matter of law because transfer could not have been
made with actual intent to hinder, delay, or defraud creditors); Malone v. Short (In re Short), 188 B.R.
857 (Bankr. M.D. Fla. 1995) (transfer of homestead that was exempt at the time of transfer cannot be
avoided under § 548(a)(1) as having been made with the intent to hinder, delay, or defraud creditors).
After these cases were decided, § 548(a) was amended and § 548(a)(1) was redesignated as
§ 548(a)(1)(A). See Religious Liberty and Charitable Donation Protection Act of 1998, Pub. L. No. 105183,
§ 3(a), 112 Stat. 517 (1998), reprinted in App. F, Pt. 41(o), Collier on Bankruptcy, App. Pt. 41(o)(ii)
at App. Pt. 41-255 (Alan N. Resnick & Henry J. Sommer, eds.-in-chief, 16th ed. 2012).
10 Doc. 35 at 6 (citing Jarboe v. Treiber (In re Treiber), 92 B.R. 930, 933-34 (Bankr. N.D. Okl.
1988), Silagy v. Marzilli (In re Hunter), 2008 WL 2076750, *2 (Bankr. N.D. Ohio May 15, 2008); and
Rutledge v. Johansen, 270 F.2d 881, 882-83 (10th Cir. 1959)).
11 See doc. 37.
Case 13-06094 Doc# 46 Filed 07/11/14 Page 6 of 13
asserting Debtor’s exemption rights, that such rights are personal to Debtor, and NAPS is
therefore precluded from asserting that the exempt nature of the transferred funds bars the
Trustee’s complaint. For this position, the Trustee relies upon an unpublished decision of
the Tenth Circuit BAP.12 Second, the Trustee argues that the Court should reject those
decisions holding that Debtor’s prepetition transfer of exemptible property cannot be
avoided. The Trustee relies on case law13 and §§ 522(g)(1), 541(a)(1), and 522(b)(1) and
NAPS has failed to address the Trustee’s first argument,14 but both parties have
fully briefed the question whether prepetition transfers of exemptible property are
amenable to avoidance and recovery actions by bankruptcy trustees. The Court will
resolve this case on its merits by ruling on this issue, rather than on the issue of NAPS’s
standing to assert Debtor’s exemption rights.
One of the cases cited by NAPS in support of its position that transfers of
exemptible property cannot be the object of avoidance actions is Rutledge, 15 a 1959
decision of the Tenth Circuit Court of Appeals, which would be very persuasive in this
12 Morris v. First Nat’l Bank and Trust (In re Taylor), 1998 WL 123027 (10th Cir. BAP March
13 Id.; Tavenner v. Smoot, 257 F.3d 401 (4th Cir. 2001).
14 NAPS filed its own motion for summary judgment and brief in support (doc. 35) but failed to
timely reply to the Trustee’s response to NAPS’s motion and cross-motion for summary judgment (doc.
37). NAPS’s out-of-time reply (doc. 38) does not address Taylor, the case relied upon by the Trustee for
the proposition that NAPS is precluded from asserting the exempt nature of the funds.
15 270 F.2d 881.
Case 13-06094 Doc# 46 Filed 07/11/14 Page 7 of 13
case if it were still good law. In Rutledge, the bankruptcy trustee brought an action to
recover exempt homestead property that the debtor had transferred to a creditor for an
antecedent debt within four months preceding bankruptcy. The trial court found that all
elements of a voidable preference were present but held the transfer could not be avoided
because the property transferred was exempt under Oklahoma law. On appeal by the
trustee, the Tenth Circuit affirmed, applying the “textbook law . . . that ‘a transfer of
exempt property of a debtor, though it is to a creditor and to apply to an antecedent
indebtedness, does not give rise to a voidable preference.’”16 The Circuit noted that the
rule was “grounded in the legal concept that property exempt by law remains in the
bankrupt, does not pass to the trustee, and the bankrupt’s disposition of it prior to
bankruptcy is therefore of no concern to the trustee or the creditors he represents.”17 To
allow the avoidance of the preferential payment “would deny to the bankrupt the right to
accomplish before bankruptcy that which he could clearly do after bankruptcy. Surely, if
a bankrupt is entitled to have exempt property of which he is seized at the time of filing of
the bankruptcy set apart from the bankruptcy estate, he is entitled to make a valid transfer
of it prior to the date of the filing.”18 The Rutledge view has been referred to as the “no
harm, no foul” doctrine.19 Courts have applied the doctrine not only in preference actions
16 Id. at 882 (quoting Remington on Bankruptcy, Vol. 4, § 1678).
19 E.g., Tavenner v. Smoot, 257 F.3d at 406.
Case 13-06094 Doc# 46 Filed 07/11/14 Page 8 of 13
but also in actions to recover fraudulent conveyances of exempt property.20
This Court finds Rutledge not to be applicable. Since 1959, when Rutledge was
decided, the Bankruptcy Act that was then in effect has been repealed, and replaced with
the current Bankruptcy Code, enacted in 1978. An analysis of the Code shows the
invalidity of the “no harm, no foul” doctrine under current law. Contrary to the rationale
of Rutledge, § 541 now defines property of the estate to include all property of the debtor,
including property which the debtor may exempt. The estate also includes any interest in
property which the trustee recovers under § 550, which provides that to the extent a
transfer is avoided under §§ 544, 545, 547, 548, 553(b) or 724(a), the trustee may recover
such property or its value for the benefit of the estate. Section 522(g) allows the debtor to
exempt property so recovered by the trustee to the extent such property could have been
exempted if it had not been transferred, providing that the transfer was not a voluntary
transfer by the debtor and the debtor did not conceal such property. If transfers of
potentially exempt property could not be recovered by the trustee, no purpose would be
served by § 522(g). Under the Code, the avoidance of a debtor’s voluntary transfer of
property which the debtor could have exempted now augments the estate for the benefit
of all creditors. A voluntary transfer is in effect a waiver of the right to exempt the
property. In addition, under the Code, potentially exempt property may become available
20 Malone v. Short (In re Short), 188 B.R. 857, 859-60 (Bankr. M.D. Fla. 1995) (transfer of
homestead that was exempt at the time of transfer cannot be avoided as having been made with the intent
to hinder, delay, or defraud creditors); Kapila v. Fornabaio (In re Fornabaio), 187 B.R. 780, 782 (Bankr.
S.D. Fla. 1995) (although debtor transferred exempt property for less than reasonably equivalent value
when insolvent, the transfer could not be avoided by trustee).
Case 13-06094 Doc# 46 Filed 07/11/14 Page 9 of 13
to creditors if the debtor fails to assert the exemption. The label “no harm, no foul” is
now a misnomer; to disallow avoidance may result in the diminution of the estate and be
contrary to the goal of making an equitable distribution to creditors.
The legislative history of the Code fully supports the rejection of the “no harm, no
foul” doctrine. In 1970, Congress created the Commission on the Bankruptcy Laws of
the United States to “study, analyze, evaluate, and recommend changes to the [1898
Bankruptcy] Act.”21 The Commission’s recommendations provided the basic structure of
the new Code that was enacted in 1978. Whereas under the Act, exempt property was not
included in the estate,22 the Commission recommended that the Code should provide for
the estate to include all property of the debtor on the date of filing, including property
which the debtor claims is exempt, and also include property which the trustee recovers
under § 550.23 One of the Commission’s recommendations was to overrule the cases
holding that “a transfer of exempt property cannot be a preference.”24 The report stated:
There is no valid reason supporting the case law that is being
overruled; the mere fact that the property used to prefer a
creditor may be claimed as exempt does not establish a reason
why preference attack is not appropriate. The goals of
equality and avoidance of unwise extensions of credit would
be furthered by allowing preference attack. The only rationale
21 Joint Resolution, Pub. L. 91-354, 84 Stat. 468-469 (July 24, 1970).
22 See Rutledge, 270 F.2d at 882.
23 11 U.S.C. § 541(a)(1) and (3).
24 Report of the Commission on the Bankruptcy Laws of the United States, July 1973, 93d Cong.,
1st Sess., H.R. Doc. 93-137, pt. I, at Ch. 8(E)(3)(c), reprinted in App. B, Pt. 4(c) Collier on Bankruptcy,
at App. Pt. 4-465.
Case 13-06094 Doc# 46 Filed 07/11/14 Page 10 of 13
for the cases is that other creditors are not hurt since they are
not entitled to expect payment or security from exempt
Although cases decided since the adoption of the Code have not uniformly rejected
the “no harm, no foul” doctrine, the majority of cases has done so.26 In Tavenner 27 the
Fourth Circuit Court of Appeals noted the split of authority but found the “majority
position — that transfers of exemptible property are amenable to avoidance and recovery
actions by bankruptcy trustees — is better reasoned.”28 It did so for two reasons. First,
§ 522(g) anticipates this result, since it permits the debtor under certain circumstances to
exempt property recovered by the trustee. Second, the “no harm, no foul” approach is
misguided. “Under a statutory scheme in which all property is presumed to be part of the
bankruptcy estate, and no property is exempt until such time as the debtor claims an
exemption for it, creditors can be harmed by transfers of potentially exempt property
because it is not a foregone conclusion that such property will be exempt from the
estate.”29 The Tenth Circuit BAP, in an unpublished decision, held that the fact that the
26 Maxwell v. Barounis (In re Swiontek), 376 B.R. 851, 865 n. 8 (Bankr. N.D. Ill. 2007)
(collecting cases). One of the cases cited as adopting the majority view is Redmond v. Tuttle, 698 F.2d
414 (10th Cir. 1983), in which, without mentioning the “no harm, no foul” doctrine, the Tenth Circuit
ruled the debtors’ attempted exemption of property the trustee recovered that they had transferred
prepetition must be denied under § 522(g) because the transfer had been voluntary.
27 257 F.3d 401.
28 Id. at 406.
29 Id. at 407.
Case 13-06094 Doc# 46 Filed 07/11/14 Page 11 of 13
debtors claimed a vehicle as exempt “did not affect the Trustee’s right to avoid the
Bank’s [unperfected] lien under section 544(a).”30 It relied upon §§ 541 and 522b) but
did not cite Rutledge or any cases either accepting or rejecting the “no harm, no foul”
This Court is persuaded that the majority is correct, and prepetition transfers of
property which the debtor could have claimed as exempt are avoidable by the trustee if
the elements of constructively fraudulent transfers under § 548(a)(1)(B) are satisfied. The
construction of §§ 541 and 522(g), together with the accompanying legislative history,
compel this result.
For the foregoing reasons, the Court declines to apply the “no harm, no foul”
doctrine to this action under § 548(a)(1)(B) and holds that the Trustee’s avoidance of
Debtor’s constructively fraudulent transfer to NAPS of $15,000 before she filed her
bankruptcy petition is not precluded because the funds transferred could have been
claimed as exempt if the transfer had not been made. The Trustee’s motion for summary
judgment is therefore granted, and NAPS’s motion for summary judgment is denied. The
Trustee may avoid the transfer to NAPS under § 548(a)(1)(B) and recover the same from
NAPS for the benefit of the estate under § 550(a).
The foregoing constitute Findings of Fact and Conclusions of Law under Rule
7052 of the Federal Rules of Bankruptcy Procedure, which makes Rule 52(a) of the
30 In re Taylor, 1998 WL 123027 at *2.
Case 13-06094 Doc# 46 Filed 07/11/14 Page 12 of 13
Federal Rules of Civil Procedure applicable to this proceeding. A judgment based upon
this ruling will be entered on a separate document as required by Federal Rule of
Bankruptcy Procedure 7058, which makes Federal Rule of Civil Procedure 58 applicable
to this proceeding.
IT IS SO ORDERED.
# # #
Case 13-06094 Doc# 46 Filed 07/11/14 Page 13 of 13
- Category: Judge Somers
- Published on 24 June 2014
- Written by Judge Somers
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Posl-Bendsen et al v. Leonard et al, 09-06043 (Bankr. D. Kan. Jun. 13, 2014) Doc. # 229
SIGNED this 12th day of June, 2014.
For on-line use but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
DAVID TODD LEONARD and
MICHELLE LEIGH LEONARD,
JANICE POSL-BENDSEN, by John R.
Kurth, guardian and conservator; and
JOHN R. KURTH, Trustee of the Janice
Posl-Bendsen Revocable Living Trust,
DAVID TODD LEONARD and
MICHELLE LEIGH LEONARD,
CASE NO. 09-20190
ADV. NO. 09-6043
MEMORANDUM OPINION AND ORDER
DENYING PLAINTIFFS’ COMPLAINT
Case 09-06043 Doc# 229 Filed 06/12/14 Page 1 of 33
In this adversary proceeding, creditors Janice Posl-Bendsen, by John R. Kurth, her
guardian and conservator, and John R. Kurth as the Trustee of the Janice Posl-Bendsen
Revocable Living Trust object to the discharge of their claim against Defendants David
Todd Leonard and Michelle Leigh Leonard (Debtors or Defendants) under 11 U.S.C.
§ 523(a)(2)(A) and (a)(4), and also seek an order denying Debtors’ discharges under
§ 727(a)(4).1 Trial was held on February 28, 2014. Plaintiffs appeared by Patrick E.
Henderson, and Defendants appeared pro se. The parties stipulated to the jurisdiction of
the Court, and consented to the trial and entry of a final order by the bankruptcy court.2
For the reasons discussed below, the Court rules in favor of Defendants on all counts.
FINDINGS OF FACT.
The Court makes its findings of fact based on the stipulations in the pretrial order,
the exhibits of both Plaintiffs and Defendants which were admitted without objection, and
the testimony of John Kurth and David Leonard. The Court has also considered the posttrial
brief filed by Plaintiffs arguing their contentions.3 Defendants’ brief in response has
1 Additional claims alleged in the complaint were withdrawn by Plaintiffs in the pretrial order.
2 Doc. 218. Further, this Court has jurisdiction over the parties and the subject matter pursuant to
28 U.S.C. §§ 157(a) and 1334(a) and (b), and the Amended Standing Order of Reference of the United
States District Court for the District of Kansas that exercised authority conferred by § 157(a) to refer to
the District’s bankruptcy judges all matters under the Bankruptcy Code and all proceedings arising under
the Code or arising in or related to a case under the Code, effective June 24, 2013. D. Kan. Standing
Order 13-1, printed in D. Kan. Rules of Practice and Procedure at 168 (March 2014). Furthermore, this
Court may hear and finally adjudicate this matter because it is a core proceeding pursuant to 28 U.S.C.
§ 157(b)(2)(I) and (J).
3 Doc. 222.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 2 of 33
largely been disregarded because it is a recitation of facts not in the trial record.4 The
Court finds the testimony of both witnesses to be credible. Janice Posl-Bendsen (Janice)
was not available to testify, either in person or by deposition, because she suffers from
advanced cognitive impairment secondary to dementia, and also has medical conditions
which require 24-hour supervision and monitoring. She is residing in a care facility in
Las Vegas, Nevada. Janice’s unavailability created significant impediments to the
presentation of both Plaintiffs’ and Defendants’ cases. On January 30, 2009, after the
events which gave rise to this litigation occurred, John R. Kurth, Janice’s son, was
appointed as her guardian and conservator by order of the District Court of Atchison
Debtor David Todd Leonard (David) is Janice’s second cousin.6 He was employed
by Countrywide as a branch manager from 2002 until May 2007. David and his wife
Michelle Leigh Leonard (Michelle) have four children. Michelle was not employed
outside the home. David and Janice had occasional contact while they were children. In
2000, the relationship was re-established, and Janice began visiting Debtors and spending
time with them and their children.
In 2004 or earlier, Janice inherited over $6 million in Bank of America stock.
Also in 2004, Janice started the practice of annually giving each member of the Leonard
4 Doc. 227.
5 Doc. 1, ¶¶ 8-11.
6 Janice referred to David Todd Leonard as Todd Leonard.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 3 of 33
family $10,000, the maximum annual gift tax exclusion at that time. On May 12, 2004,
Janice wrote a letter to Michelle and Todd, stating, “I am so lucky to have all of you in
my life. I’ve needed to be an Auntie Janice for a long time. The kids are such fun and I
do enjoy them. Michelle, you were a delight to have on the trip.”7
John Kurth has not had a good relationship with his mother. During 2003 through
2005, he probably communicated with her quarterly. He did not recall discussing
Janice’s relationship with Debtors with her. John was afraid that Janice would quickly
spend her inheritance because she was not thrifty and had been waiting a long time for the
inheritance. Although John suggested she control her spending, he never directly
suggested what she should do and did not want to be involved in the management of her
In correspondence, Janice referred to herself as “Eccentric Janice.”8 David
testified that Janice was very eccentric, demanding, and volatile. John testified that she
was determined and headstrong. According to John, Janice has exhibited a pattern
throughout her life of befriending people, then getting angry at them and excluding them
from her life, only to bring them back into the picture after a year or two as if nothing had
happened. Those in Janice’s favor experienced her generosity, while those she did not
favor were the object of her vindictiveness. John testified that Janice’s relationship with
Lynda Leonard, David’s mother, exhibited the pattern of abrupt changes in relationships.
7 Exh. 56.
8 Exh. 52.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 4 of 33
In 2001, Janice executed a Last Will and Testament granting the residue of her estate to
Lynda, but in her Revocable Living Trust Agreement, executed in May 2006, she directed
that the residue should go to David and Michelle, and expressly stated that none of it
should be used for the benefit of Lynda.9
Leonard & Bendsen, LLC, a Nevada limited liability company, was formed on
September 29, 2005, for the purpose of holding and trading Janice’s assets. The articles
of organization list Janice as the only member,10 but a corporation details sheet from the
Nevada Secretary of State obtained on April 30, 2007, includes David as a member.11
David testified that Janice was the 100% owner. A MasterTrader.com account was
opened in the name of Leonard & Bendsen, LLC. David also established Fit Trade, LLC,
for the purpose of trading stocks; he was the only member of this company.
On May 31, 2006, Janice executed a Revocable Living Trust Agreement,
establishing her Trust.12 Janice was the sole trustee. Janice’s controlling and vindictive
nature is evidenced by the unusual terms in the Trust concerning John. Upon Janice’s
death, the only gift to John is accomplished by a direction to the trustee to purchase a new
bass boat for John for a total price not to exceed $40,000, reduced by the fair market
value of any bass boat owned by John at the time of Janice’s death. The Trust further
9 Exh. A at Article VII(B).
10 Exh. G at 2.
11 Id. at 5.
12 Exh. 1.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 5 of 33
directs that the funds be paid directly to the boat dealer and that before delivery of the
boat, the trustee name the boat “The Endora” and have the name professionally painted
on the boat. The Trust provides that upon Janice’s death, the balance of the tangible
personal property remaining after the payment of Trust obligations and taxes shall be
distributed to “Todd Leonard and Michelle Leonard, or the survivor of the two of them if
one of them dies before” Janice, and the residue of any real and personal property not
otherwise disposed of shall go into an education trust for Debtors’ descendants, up to
$200,000, and the balance shall be distributed to “Todd Leonard and Michelle Leonard,
or the survivor of them if one of them dies before” Janice.13 Also on May 31, 2006,
Janice executed her Last Will and Testament.14 It provides for the residue of her estate to
be transferred to her Trust, names David as the personal representative of the will, and
provides that under no circumstances shall John or any of his descendants take any assets
as a result of Janice’s death. Also on May 31, 2006, Janice executed a General Durable
Power of Attorney naming David as her attorney-in-fact.15
Janice’s inheritance was initially placed into an account with Merrill Lynch. In
2006, about one-and-one-half years after the opening of the account, the account was
frozen by Merrill Lynch. On August 1, 2006, Janice responded by letter to her Merrill
Lynch financial advisor asserting that the account was frozen because of her alleged
13 Id. at 3 & 6.
14 Exh. 57.
15 Exh. 59.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 6 of 33
“‘bad behavior’ vacillating on decisions.”16 Merrill Lynch had apparently questioned
David’s involvement in Janice’s affairs, Janice’s expenses, and her mental state. For
2004, her expenses were $416,785.39, for 2005, they were $1,487,013.10, and for 2006,
they were $436,490.28.17 On August 11, 2006, Janice executed a Durable Power of
Attorney naming David as her attorney-in-fact for the Merrill Lynch account, authorizing
him to exercise various powers with respect to the account.18
On December 14, 2006, Janice and David executed documents to open a
MasterTrader.com account in the name of the “Janice Posl-Bendsen Revocable Living
Trust” (the MasterTrader Trust account).19 David testified that the purpose of the
MasterTrader Trust account was for the investment of the funds which were initially in
the Merrill Lynch account. The application states that the initial deposit would be
$3,200,000. Janice as Trustee, Janice individually, and David are all named in the
account documentation. The first document, which appears to be the application to open
the account, names the Trust as the customer, and David as “Joint Customer (or
Additional Authorized Person).”20 The second document, labeled “New Account
Approval Form,” states the Trust is the “Primary Account Holder or Title of Account”
16 Exh. M at 5.
17 Exh. N.
18 Exh. 55.
19 Exh. O.
20 Id. at 1-10.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 7 of 33
and David is the “Secondary Acct. Holder.”21 The third document, labeled “Customer
Account, Margin and Short Account Agreement,” identifies Janice Posl-Bendsen as the
“Full Name . . . on Account,” and David signed the document as the “Second Party, If
Joint Account.”22 The fourth document, labeled “Trustee Certification,” states it applies
to the “Janice Posl-Bendsen Revocable Living Trust” and lists both Janice and David as
individuals authorized to give orders and other instructions relative to the trust account.23
Janice signed the certification as the only trustee of the trust. The fifth document, labeled
“Customer Option Agreement,” states that the account name is the “Janice Posl-Bendson
Revocable Liv.” Janice signed this document as “Trustee” in a block labeled “For use by
entity customers only,” but both Janice and David signed in a block labeled “For use by
individual.”24 Account statements were addressed as follows:
Janice Posl-Bendsen Rev Living Trust
Janice Posl-Bendsen & Todd Leonard TTEES.25
Checks for the account were imprinted:
Janice Posl-Bendsen Rev Lvg Tr
Janice Posl-Bendsen &
21 Id. at 11-12.
22 Id. at 13-15.
23 Id. at 16.
24 Id. at 17.
25 E.g., exh. 24.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 8 of 33
Todd Leonard TTEES.26
David testified that as to the MasterTrader Trust account, he was a joint customer,
not a trustee, that Janice wanted him to be on the account, that Janice had on-line access
to the account, that account statements were e-mailed to Janice, that Janice very
frequently monitored the account, and that he talked with Janice 2 or 3 times a day. In
addition, Janice frequently stayed with the Leonards, once for a couple of months. The
MasterTrader Trust account statement for the period ending January 31, 2007, shows a
portfolio value of $2,941,248.76.27 One year later, the statement for the period ending
January 31, 2008, shows the portfolio value was $147,001.55.28 There is no evidence
explaining the loss of value.
The MasterTrader Trust account agreement provided for the writing of checks on
the cash portion of the balance. David was authorized to sign the checks. Plaintiffs’
allegation that the Trust’s claim of $586,00029 against David and Michelle should be
excepted from discharge arises solely from MasterTrader Trust account withdrawals
26 E.g., exh. 41.
27 Exh. 24.
28 Exh. 46 at 10. The portfolio value stayed above $2 million from April through October 2007,
but on November 30, 2007, it was $655,464.22.
29 Doc. 222-2. The adversary complaint alleges the following transfers of Janice’s assets to
Debtors by checks signed by David or by wire transfers: Checks to David and Michelle totaling at least
$227,000; checks totaling at least $60,000 to Fitness Quest; checks totaling $195,000 and a wire transfer
of $55,000 to Fit Trade, LLC; checks totaling $48,000 to Debtors’ four children; checks totaling $500 to
Lynda Leonard; checks totaling $2,500 to Anthony Wilson; checks totaling $36,754.82 to Lori Larson;
and checks totaling $18,039.92 to various vendors. These transfers total $642,794.74. Because $586,000
is the amount of damages stated in Plaintiffs’ post-trial brief, the Court finds that to be the actual amount
sought to be excepted from discharge.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 9 of 33
which were authorized by David and were payable to David, David’s businesses, or
members of David’s family, or are otherwise questioned as not having been for Janice’s
benefit. The exhibit number, check date, payee, check memo, and amount of the transfers
which were the subject of the trial are as follows:
Exh. Payee Memo Amount
21 1/24/07 Michelle Leonard Admin. Fees $ 5,000.00
22 1/24/07 Fitness Quest $ 50,000.00
26 2/10/07 Michelle Leonard Admin. Fees $ 2,500.00
27 2/20/07 Michelle Leonard Admin. Fees $ 5,000.00
29 3/7/07 Fitness Quest $ 10,000.00
30 3/8/07 Michelle Leonard Admin. fees $ 5,000.00
31 3/28/07 Michelle Leonard admin. fees $ 5,000.00
33 4/14/07 Michelle Leonard 1st Qtr. Bonus $ 10,000.00
34 5/3/07 Todd Leonard 1st Qtr. Bonus $ 10,000.00
35 5/20/07 Lynda Leonard $ 500.00
36 5/22/07 Michelle Leonard Admin. Services $ 5,500.00
37 5/29/07 Michelle Leonard 07 Gift $ 12,000.00
38 5/29/07 Todd Leonard 07 Gift $ 12,000.00
39 6/6/07 Tate Leonard 07 Gift $ 12,000.00
39 6/6/07 Trey Leonard 07 Gift $ 12,000.00
39 6/6/07 Alyssa Leonard 07 Gift $ 12,000.00
39 6/6/07 Alec Leonard 07 Gift $ 12,000.00
40 6/7/07 Lori Larson $ 500.00
44 8/5/07 Michelle Leonard Admin fees $ 10,000.00
43 8/5/07 Todd Leonard 2nd Qtr. '07 Mg $ 25,000.00
43 8/24/07 Todd Leonard July Bonus $ 25,000.00
45 9/7/07 Fit Trade $ 90,000.00
44 9/12/07 Michelle Leonard special projects $ 10,000.00
47 9/14/07 WIRE Fit Trade LLC $ 55,000.00
45 9/18/07 Fit Trade, LLC $ 95,000.00
43 10/1/07 Todd Leonard Sept. bonus $ 35,000.00
43 11/12/07 Todd Leonard $ 10,000.00
44 11/21/07 Michelle Leonard $ 10,000.00
43 12/12/07 Todd Leonard $ 25,000.00
45 1/4/08 Fit Trade $ 10,000.00
43 1/28/08 Todd Leonard $ 5,000.00
Case 09-06043 Doc# 229 Filed 06/12/14 Page 10 of 33
Of the many checks payable to him, David testified that only the check dated May
3, 2007, for $10,000 bearing the notation “1st Qtr. Bonus”31 was intended as compensation
for services. Thereafter, it was David’s understanding that the transfers to him were gifts,
since Janice wanted to fully utilize the lifetime gift tax exemption. Under his agreement
with Janice, David was voluntarily working for Janice without payment and Janice was
voluntarily giving David money not because of his work, but because of her affection for
him. David testified that the notations on the checks stating they were for “admin.
services” or “bonuses” were mischaracterizations written by David at Janice’s direction.
The payments were not regular and were not related to performance, as one would expect
if there were a compensation-for-services arrangement. Further, some checks written to
Michelle bear the “admin. services” notation, even though there is no evidence that she
was providing investment services to Janice.
David testified that he wrote each check because he was directed to so by Janice.
According to David, not only the checks payable to him, but also the transfers payable to
his family and to his companies, Fitness Quest and Fit Trade, were intended by Janice as
gifts. David testified that a check for $10,000 payable to Michelle bearing the notation
“special projects” was drawn at Janice’s direction to pay for Michelle’s cosmetic surgery,
which Janice promoted, and that he wrote the notation “special projects” because that
30 Doc. 222-1.
31 Exh. 34.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 11 of 33
was the phrase Janice used. David testified the transfers to Fitness Quest, the fitness club
partially owned by David, were made because Janice wanted to help David with his
business. David testified that transfers to Fit Trade from Janice’s assets were intended by
Janice as gifts. David had established Fit Trade for the purpose of trading stocks. David
was the only member. David testified that the checks payable to Lori Larson, a person
who had formerly worked with David at Countrywide, were for administrative services
she performed in organizing Janice’s financial affairs.
By August 2008, Janice’s relationship with David and his family had disintegrated.
In a letter to her counsel dated August 5, 2008, she stated:
It seems I have been supporting the Leonard family since
2005. I’m in Vegas now seeing my Drs. & trying to get my
head straight. The more I dig the deeper it gets . . . Guess I
know what all those cash withdrawals are that went into their
private account which I was unaware of.
. . . I want you to throw the book at them criminal &
civil & fraud too if we can.32
Janice filed an unverified petition against David and Michelle in the District Court of
Johnson County, Kansas, on August 8, 2008.33 It alleges that on May 31, 2006, David
was granted a general durable power of attorney and pursuant to that power took control
of Janice’s funds for the alleged purpose of investing and reinvesting the funds for
Janice’s benefit but misused that power for his own benefit. Causes of action are alleged
against David for breach of fiduciary duty and gross negligence, and against David and
32 Exh. 52.
33 Exh. 103.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 12 of 33
Michelle for civil conspiracy and conversion. The prayer is for damages in the amount of
$582,377.00 and other relief. A default judgment was signed on October 8, 2008.34
Debtors were held jointly and severally liable for $582,377.00, plus interest and costs. In
addition, judgment was entered in favor of Janice against David for $550.00 plus interest,
and David was ordered to provide an accounting of his transactions regarding Janice’s
accounts from January 1, 2007, to the date of the judgment. In this action, Plaintiffs do
not rely upon any collateral estoppel effect of this default judgment.
In October 2008, John Kurth received a phone call that his mother was
hospitalized in Las Vegas. On November 5, 2008, John Kurth agreed to serve as a
successor trustee of Janice’s Trust.35 On November 9, 2008, David executed a declination
of appointment as a successor trustee of the Trust.36 Thomas Kolbremer, the other
potential successor trustee, executed a similar declination. John Kurth is now serving as
the Trustee, but the dispositive provisions of the Trust, including those providing that the
assets shall pass to David and Michelle Leonard on the death of Janice, have not been
amended. On January 30, 2009, John Kurth was appointed as the guardian and
conservator of Janice.37
Debtors filed for relief under Chapter 7 on January 29, 2009. David met with their
34 Exh. 50.
35 Exh. X.
36 Exh. Z.
37 Exh. 101.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 13 of 33
counsel three times before the petition was filed and provided materials concerning
Debtors’ financial affairs. The schedules were presented to David and Michelle for
signing during a meeting with the attorney’s wife in the attorney’s office in the afternoon
of the day before the day they were to be filed. David skimmed the documents, but did
not read them because he trusted his attorney to have properly prepared them.
As the basis for the denial of discharge under § 727, Plaintiffs rely upon the
following alleged inaccuracies and omissions in Debtors’ bankruptcy papers: (1) the
failure to include the receipt of funds from the Trust as income in the Statement of
Financial Affairs (SOFA); (2) the omission of personal property from Schedule B and the
SOFA; and (3) the failure to disclose on the SOFA a distribution from a pension or
annuity that was allegedly reported on Debtors’ 2007 federal income tax return.38
In response to question 1 of the SOFA, which asks about income from
employment, trade, or business, Debtors listed $361,191 for 2007 and approximately
$300,000 for 2008. David testified that the 2007 income represented primarily the gross
income of his business, Fit Quest, and included the May 3, 2007, check for $10,000 from
Janice’s Trust for “1st Qtr, bonus.” For the same year, Debtors’ federal tax return shows
income from wages of $36,191 and other income totaling less than $25,000.39 There was
38 Following trial, Plaintiffs’ counsel was directed to file a post-trial brief addressing, among other
things, what is in the record to warrant the denial of discharge under § 727. Only these three items were
relied on in the brief, so the Court regards any additional contentions made at trial to have been
39 Exh. 54.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 14 of 33
no income reported in response to SOFA question 2, which asks about income from other
sources. SOFA question 18 requests information about the nature, location and names of
businesses in which the debtor was an officer, manager, partner, or owner for the six
years preceding the bankruptcy filing. Debtors’ SOFA lists Fitness Quest at question 18,
and states at question 21 that David holds a 48% interest and two other individuals own
51% and 1% respectively. The SOFA does not mention Fit Trade, LLC, which David
testified was his business, the assets of which were given to him by Janice. Computer
equipment purchased using Janice’s trust funds was in Debtors’ possession on the date of
filing of the petition, but was not included in response to SOFA question 14, which asks
about property held for another person, or on Schedule B, which requires debtors to list
all their personal property. David testified that as of the date of filing, the computers had
minimal value since they were no longer functional. In addition, although there was
testimony that funds provided by Janice were used to buy one bicycle and that David
owned an additional bicycle, the bicycles were not included in Schedule B. David
estimated that their value was $400 to $500.
Plaintiffs seek to except their claim of $586,000 from discharge under
§ 523(a)(2)(A) and (4). Plaintiffs also seek to deny Debtors discharges under
§ 727(a)(4).40 Defendants respond that Plaintiffs have not sustained their burden of proof
40 The additional claims asserted in the complaint were withdrawn in the pretrial order.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 15 of 33
as to any of their claims. Plaintiffs also contend that David’s testimony included
statements made by Janice and that they should be excluded from consideration because
they were inadmissable hearsay.
A. The Court has not relied upon any inadmissible hearsay evidence.
As mentioned above, an important factor in this litigation is that Janice was not
available to testify. At various times, counsel for Plaintiffs objected to David’s
statements concerning his interactions with Janice on the ground they were hearsay. Of
the four objections during David’s direct testimony, one was granted and the answers to
three questions were reformulated to not include hearsay. Thereafter, during David’s
cross-examination, the Court allowed Plaintiffs’ counsel to have a standing hearsay
objection, stating admissibility would be ruled on later. In their post-trial brief, Plaintiffs
argue that David’s testimony of statements alleged to have been made by Janice should
not be admitted into evidence, but fail to identify any specific testimony which should be
stricken under their standing objection.
Hearsay is a statement made by a declarant other than while testifying at trial
which is offered in evidence by a party to prove the truth of the matter asserted in the
statement.41 But when the statement is offered other than to prove the truth of the
statement, it is not hearsay. “[V]erbal conduct which is assertive but offered as a basis for
41 Fed. R. Evid. 801(c).
Case 09-06043 Doc# 229 Filed 06/12/14 Page 16 of 33
inferring something other than the matter asserted [is] . . . excluded from the definition of
hearsay.”42 Hearsay also does not include “a statement made by one person which
becomes known to another . . . [when] offered as a circumstance under which the latter
acted and as bearing on his conduct.”43 Also, documents which would be excluded from
evidence as hearsay if offered to prove the truth of their content are admissible as non-
hearsay bearing upon the motivation of the person testifying.44
The Court has examined the transcript of David’s testimony and finds that it does
not contain hearsay which should be stricken under Plaintiffs’ standing objection. The
testimony which gave rise to the standing objection was not hearsay. David was asked,
“[W]hy did you write the checks that you wrote?”45 He answered, “Because it was
discussed with Janice”;46 and “I wrote the checks as directed by Mrs. Posl-Bendsen.”47
The Court understands this to be evidence of David’s motivation, not testimony about the
truth of what Janice may have said. Similarly, in response to the question, “[W]hen you
wrote the admin fees or anything else in the memo line on the checks . . . , were you
writing those on your own or from the guidance of Janice,” David answered “I was
42Advisory Committee Notes to 1972 proposed Fed. R. of Evid. 801, reprinted in Fed. Civ.
Judicial Pro. and Rules at 437-74 (2014 ed., Thomson Reuters).
43 2 Barry Russell, Bankruptcy Evidence Manual, § 801:5 at 898 (Thomson Reuters 2013).
44 Moore v. Sears, Roebuck and Co., 683 F.2d 1321, 1322-23 (11th Cir. 1982).
45 Doc. 224, Partial transcript (part 2) at 2, ll. 17-18.
46 Id. at 2, l. 19.
47 Id. at 3, ll. 21-22.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 17 of 33
directed by Janice.”48 This is not hearsay.
This is a trial to the Court where Debtors’ motivation and intent are at issue, not
the truth of Janice’s statements as recalled by David. The Court is capable of admitting
the testimony and not regarding it as having been offered to establish the truth of what
Janice said. The Court declines to strike the questioned portions of David’s testimony as
B. Plaintiffs have not proven the elements required for excepting a debt from
discharge under § 523(a)(2)(A).
Section 523(a)(2)(A) excepts from discharge debts for money or property to the
extent obtained by “false pretenses, a false representation, or actual fraud, other than a
statement respecting the debtor’s or an insider’s financial condition.” Exceptions to
discharge are construed liberally in favor of the debtor.49 In the Tenth Circuit, to establish
a claim is nondischargeable under this subsection, the creditor must prove by a
preponderance of the evidence50 the following elements: “ The debtor made a false
representation;  the debtor made the representation with the intent to deceive the
creditor;  the creditor relied on the representation;  the creditor’s reliance was
[justifiable];51 and  the debtor’s representation caused the creditor to sustain a loss.”52
48 Id. at 15, ll. 4-8.
49 4 Collier on Bankruptcy, ¶ 523.05 at 523-21 (Alan N. Resnick & Henry J. Sommer, eds.-in
chief, 16th ed. 2014).
50 Grogan v. Garner, 498 U.S. 279, 286-91 (1991).
51 The Court has substituted “justifiable” for “reasonable” in the Tenth Circuit’s original language
because of the United States Supreme Court’s opinion Field v. Mans, 516 U.S. 59, 70-76 (1995), which
Case 09-06043 Doc# 229 Filed 06/12/14 Page 18 of 33
“If there is a duty to disclose, nondisclosure may amount to a misrepresentation.”53 “In
order to give full effect to the plain meaning of the disjunctive ‘or’ in § 523(a)(2)(A), . . .
‘actual fraud’ is an independent basis for nondischargeability under that subsection.”54
State law controls whether fraud occurred.55 Under Kansas law, the elements of an action
for fraud are: “(1) false statements were made as a statement of existing and material
fact; (2) the representations were known to be false by the party making them or were
recklessly made without knowledge concerning them; (3) the representations were
intentionally made for the purpose of inducing another party to act upon them; (4) the
other party reasonably relied and acted upon the representations made; and (5) the other
party sustained damage by relying upon them.”56
Plaintiffs’ theory of recovery under § 523(a)(2)(A) is that Janice was not aware
that Debtors made withdrawals from her checking account for their own use, that Debtors
failed to inform Janice of the withdrawals, and that Janice was justified in relying upon
Debtors to inform her of the withdrawals.
Plaintiffs’ evidence in support of their theory is scant. Plaintiffs proved that the
held that the reliance must be justifiable, but need not be reasonable.
52 Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir. 1996).
53 3 William L. Norton, Jr., and William L. Norton III, Norton Bankruptcy Law & Practice 3d,
§ 57:16 at 57-39 (Thomson Reuters 2014).
54 Diamond v. Vickery (In re Vickery), 488 B.R. 680, 691 (10th Cir. BAP 2013).
55 Id. at n. 63.
56 Kelly v. VinZant, 287 Kan. 509, 515, 197 P.3d 803, 808 (2008).
Case 09-06043 Doc# 229 Filed 06/12/14 Page 19 of 33
checks were drawn by David and were payable to him, his family, and his businesses.
But the writing of the checks is a neutral fact; what matters is whether Janice authorized
the withdrawals or otherwise knew or should have known about them. The only evidence
offered by Plaintiffs that Janice was not aware of the withdrawals for the benefit of
Debtors was her letter to her attorney dated August 6, 2008, in which she stated, “Guess I
know what all those cash withdrawals are that went into their private account which I was
unaware of” and the allegations in the state court petition. Given Janice’s personality, the
Court ascribes little credibility to this evidence as a basis to determine Janice’s
knowledge at the time the withdrawals were made.
The evidence that Janice knew, or should have known, of the withdrawals is
extensive. David testified that Janice talked with Debtors several times a day, visited
their home, and once stayed with them for several months. He further testified that
account statements were regularly sent to her, that he made the withdrawals upon
directions from Janice, that he agreed with her that she would make gifts to Debtors and
their children, and that Janice directed David to make the entries on the check notation
lines, such as “07 gift” and “admin fees.” Janice’s practice of making gifts to Debtors
and their children began in 2004 and continued through 2007. There is no evidence that
David made any attempt to conceal the transfers, which one would expect if they were
unauthorized. Rather, David testified that the transfers were made pursuant to Janice’s
desire to make gifts to fully utilize the lifetime gift tax exemption. Janice’s conduct of
being extremely close and generous to Debtors and their children, followed by an abrupt
Case 09-06043 Doc# 229 Filed 06/12/14 Page 20 of 33
change to excluding them from her life and accusing them of taking her money is
consistent with the evidence about Janice’s personality and pattern of conduct.
The Court finds that Plaintiffs have not sustained their burden of proof for their
§ 523(a)(2)(A) claim. They have not proven that Debtors made any false representations
or failed to inform Janice of facts when they had a duty to do so; that Debtors acted with
the intent to deceive Janice; or that Janice relied on the alleged misrepresentations or
concealments. The elements of fraud under Kansas law likewise have not been proven.
C. The evidence does not prove the elements required to except a debt from
discharge under § 523(a)(4).
Section 523(a)(4) excepts from discharge a debt “for fraud or defalcation while
acting in a fiduciary capacity, embezzlement, or larceny.” Plaintiffs rely upon both the
fiduciary relationship and the embezzlement and larceny arms of the subsection.
“The existence of a fiduciary relationship under § 523(a)(4) is determined under
federal law. . . . However, state law is relevant to this inquiry.”57 “For purposes of section
523(a)(4), the definition of ‘fiduciary’ is narrowly construed, meaning that the applicable
nonbankruptcy law that creates a fiduciary relationship must clearly outline the fiduciary
duties and identify the trust property.”58 “[A]n express or technical trust must be present
for a fiduciary relationship to exist under § 523(a)(4).”59 Therefore, not all fiduciary
57 Young, 91 F.3d at 1371.
58 4 Collier on Bankruptcy, ¶ 523.10[d] at 523-73.
59 Young, 91 F.3d at 1371.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 21 of 33
relationships which exist under common law or state law rise to the level that is
actionable under § 523(a)(4).
“‘Under Kansas law, the elements necessary to create an express trust are: (1) an
explicit declaration and intention to create a trust; (2) the transfer of lawful and definite
property made by a person capable of making transfer thereof; and (3) a requirement to
hold the property as trustee for the benefit of a cestui que trust with directions as to the
manner in which the trust funds are to be applied.’”60 “Neither a general fiduciary duty of
confidence, trust, loyalty, and good faith, nor an inequality between the parties’
knowledge or bargaining power is sufficient to establish a fiduciary relationship for
purposes of dischargeability.”61 “A technical trust differs from an express trust in that the
intention of the parties is not relevant, and the parties’ fiduciary obligations are imposed
by law, not implied by law.”62
The Court finds that Plaintiffs have not sustained their burden of proof to show a
fiduciary relationship. Although on May 31, 2006, Janice executed a General Durable
Power of Attorney naming David as her attorney-in-fact, there is no evidence that David
was acting pursuant to that power when he signed the checks which are alleged to have
been unauthorized. Likewise, although on August 11, 2006, Janice designated David as
60 Jenkins v. IBD, Inc., 489 B.R. 587, 597 (D. Kan. 2013) (quoting In re Foy, 2010 WL 2584193,
*3 (Bankr. D. Kan. June 21, 2010)).
61 Young, 91 F.3d at 1372 (citations omitted).
62 Jenkins v. IBD, 489 B.R. at 597.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 22 of 33
her attorney-in-fact with respect to the Merrill Lynch account, David was not exercising
powers under this agreement when he signed checks drawing on cash in the MasterTrader
Further, the agreements establishing the MasterTrader Trust account did not create
an express or technical trust. Although the account statements and the imprint on the
checks identify David as a trustee, a review of the account documentation shows that he
was a co-signor, not a trustee. The account documents consistently identify the Trust as
the owner of the account, Janice as Trustee of the Trust, and David as either “Joint
Customer” or “Additional Authorized Person.” There is no document relating to the
MasterTrader Trust account which satisfies the requirements of Kansas law for the
creation of a fiduciary relationship.
In addition, assuming a fiduciary relationship existed between Janice and one or
both Debtors, the denial of discharge requires that the debt to be excepted from discharge
be damages for fraud or defalcation while acting as a fiduciary. Fraud, for purposes of
§ 523(a)(4) “has generally been interpreted as involving intentional deceit, rather than
implied or constructive fraud.”63 Plaintiffs provided no evidence of intentional deceit.
The United States Supreme Court, in Bullock v. BankChampaign, N.A., 64 recently held
that “defalcation” for purposes of § 523(a)(4) requires an intentional wrong. It stated:
Thus, where the conduct at issue does not involve bad
63 4 Collier on Bankruptcy, ¶ 523.10[a] at 523-71.
64 Bullock v. BankChampaign, N.A., __ U.S. __, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013).
Case 09-06043 Doc# 229 Filed 06/12/14 Page 23 of 33
faith, moral turpitude, or other immoral conduct, the term
requires an intentional wrong. We include as intentional not
only conduct that the fiduciary knows is improper but also
reckless conduct of the kind that the criminal law often treats
as the equivalent.65
Plaintiffs have provided no evidence of defalcation.
Plaintiffs also have not proven the elements to except a debt from discharge under
the embezzlement or larceny arm of § 523(a)(4). “Embezzlement is the fraudulent
appropriation of property by a person to whom such property has been entrusted, or into
whose hands it has lawfully come.”66 The required elements include fraudulent intent or
deceit.67 “‘[F]raud in fact, involving moral turpitude or intentional wrong, rather than
implied or constructive fraud,’” is required.68
As discussed above, the Court finds that Janice knew or should have known of the
transfers made by David which are challenged by Plaintiffs. Further, even if Janice did
not have knowledge of each and every transfer, there is no evidence that David acted
fraudulently or deceitfully.
D. Plaintiffs’ complaint for denial of discharge under § 727(a)(4) must be
Section 727(a)(4)(A) provides that a debtor shall be granted a discharge unless
65 Id. at 1759.
66 4 Collier on Bankruptcy, ¶ 523.10 at 523-76.
67 Id. at 523-77.
68 Hill v. Putvin (In re Putvin), 332 B.R. 619, 627 (10th Cir. BAP 2005) (quoting Driggs v. Black
(In re Black), 787 F.2d 503, 507 (10th Cir. 1986)).
Case 09-06043 Doc# 229 Filed 06/12/14 Page 24 of 33
“the debtor knowingly and fraudulently, in or in connection with the case — (A) made a
false oath or account.” A false statement or omission in a debtor’s schedules may be
sufficient for the denial of a discharge.69 Neither the complaint nor the pretrial order
identify the specific false statements or omissions Plaintiffs claim are grounds for the
denial of Debtors’ discharges. In their post-trial brief, Plaintiffs argue the discharges
should be denied because (1) Debtors’ receipt of funds from the Trust was not disclosed
in response to question 1 or 2 of the SOFA, (2) computers and bicycles in Debtors’
possession were omitted from Schedule B, (3) the only business listed in response to
question 18 of the SOFA was David’s 48% interest in Fitness Quest LLC, and (4) a
distribution from a pension or annuity allegedly shown on Debtors’ 2007 federal income
tax return was not shown on the SOFA.70 The Court has examined each of these
allegations and, for the reasons stated below, concludes that Debtors’ discharges should
not be denied.
One commentator summarizes the law applicable to the denial of discharge under
§ 727(a)(4) as follows:
Under current Official Bankruptcy Forms, the debtor is
required to verify the completeness and accuracy of any
schedule of assets, debts, or affairs filed in a case. However,
since the failure to list an asset must be both knowing and
fraudulent, mere inadvertence is not sufficient to establish an
objection. Where there is a knowing failure to list a
substantial asset, an inference of fraudulent intent may be
69 6 Collier on Bankruptcy, ¶727.04[c] at 727-38.
70 Doc. 222.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 25 of 33
drawn in the absence of mitigating circumstances. The failure
to amend schedules to include omitted information concerning
assets is a reckless indifference to the truth, which is
equivalent to fraud.
The false oath or account must relate to a material
matter. The failure to list a significant asset is the most
frequently established basis for denying discharge under this
section, and certainly satisfies the materiality element.
Materiality under Code § 727(a)(4)(A) means that the
statement must bear a relationship to the debtor’s financial
transactions or to the bankruptcy estate, concern the
disclosure of assets, or relate to the disposition of assets. If
there is a failure to list a valuable asset, materiality is
The purpose of § 727(a)(4)(A) “is to make certain that those who seek the shelter of the
bankruptcy code do not play fast and loose with their assets or with the reality of their
affairs.”72 “‘The reasons for denying a discharge must be real and substantial, not merely
technical and conjectural.’”73 The burden of proof in litigation under § 727(a)(2)(A) is on
the plaintiff to prove each element by a preponderance of the evidence.74
Once the objecting creditor establishes a prima facie
case for denying the debtor’s discharge under § 727, the
burden of going forward shifts to the debtor. The ultimate
burden, however, rests with the creditor. “Consistent with the
‘fresh start’ policy underlying the Code, [objections] to
discharge should be construed strictly against the creditor and
liberally in favor of the debtor.”75
71 4 Norton Bankruptcy Law & Practice, ¶ 86:11at 86-33 to 86-34.
72 Boroff v. Tully (In re Tully), 818 F.2d 106, 110 (1st Cir. 1987).
73 Id. (quoting Dilworth v. Boothe, 69 F.2d 621, 624 (5th Cir. 1934)).
74 Cadle Co. v. King (In re King), 272 B.R. 281, 288 (Bankr. N.D. Okla. 2002).
75 Id. (quoting In re Juzwiak, 89 F.3d 424, 427 (7th Cir. 1996) (other citations omitted)).
Case 09-06043 Doc# 229 Filed 06/12/14 Page 26 of 33
1. Debtors’ discharges should not be denied for failure to include the receipt
of funds from the Trust in their SOFA.
Plaintiffs’ primary contention is that the Debtors should be denied a discharge
because they knowingly and fraudulently failed to disclose income from the Trust they
received during the two years preceding the filing of their bankruptcy petition under
either question 1 or 2 of the SOFA. Question 1 requires a statement of income from
employment or operation of a business, and question 2 requires a statement of income
other than from employment or operation of business. “Income” is not defined for
purposes of these questions.
There is no decision of the Tenth Circuit Court of Appeals defining the term
“income.” The Tenth Circuit BAP, when asked to determine the test for income when
examining a debtor’s income for the purpose of determining what percentage of that
income is from farming, noted there are two approaches, one using the definition of gross
income from the federal Tax Code, and a more flexible approach based upon the
circumstances to reach an equitable result.76 A bankruptcy court in this circuit has
concluded that the specificity and predictability of the Tax Code definition is preferable
when the issue concerns giving “guidance to debtors regarding which receipts they must
account for in their filing documents and which they may exclude.”77 This Court agrees.
The Tax Code provides as a general rule that “[g]ross income does not include the
76 In re Sharp, 361 B.R. 559, 564 (10th Cir. BAP 2007).
77 King, 272 B.R. at 293.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 27 of 33
value of property acquired by gift, bequest, devise, or inheritance.”78 “[T]he statute does
not use the term ‘gift’ in the common-law sense, but in a more colloquial
sense. . . . A gift . . . proceeds from a ‘detached and disinterested generosity; ‘out of
affection, respect, admiration, charity, or like impulses.’ And in this regard, the most
critical consideration . . . is the transferor’s ‘intention.’”79 Under this definition, gifts do
not need to be reported under either question 1 or 2 of the SOFA.
David testified that he included the $10,000 received from the Trust by a check
dated May 3, 2007 (for research conducted for Janice) in response to question 1 of the
SOFA but did not report any of the additional receipts. The testimony is unrefuted that
David understood these additional receipts to be gifts from Janice. If this understanding
is accurate, the gifts were not required to be disclosed in response to SOFA question 1 or
If David’s understanding is not accurate and a portion of the receipts does not
qualify as a gift so that it should have been reported, Plaintiffs have not sustained their
burden to show that the omission was knowingly and fraudulently made. Plaintiffs
offered no evidence that David knew the receipts should have been included. Any
inference of fraud arising from the simple fact of omission is refuted by David’s credible
testimony that he relied upon his attorney when completing the SOFA. Assuming that
some of the receipts from the Trust should have been disclosed, Plaintiffs’ lack of
78 26 U.S.C. § 102.
79 Commissioner v. Duberstein, 363 U.S. 278, 285 (1960) (citations omitted).
Case 09-06043 Doc# 229 Filed 06/12/14 Page 28 of 33
evidence that the omission was knowing and fraudulent is fatal to Plaintiffs’
2. Debtors should not be denied discharges because of the failure to disclose
Plaintiffs also contend Debtors should be denied discharges because of their failure
to disclose in their bankruptcy filings their possession of computers purchased with Trust
funds, their ownership of two bicycles, and their interest in Fit Trade, LLC. The fact of
the omissions is established by the record. The crux of this denial of discharge claim is
therefore whether the omissions were material and whether Defendants’ omissions were
made knowingly and fraudulently.
David testified that the computers were not functional and therefore had little
value. David testified that the bicycles were valued at $400 to $500. The total value of
the assets listed on Debtors’ schedules was $260,200, which included $16,200 for
personal property. Given their insignificant value, the omission of the computers and
bicycles from the schedules was not sufficiently material to be the basis for the denial of
discharge. In addition, there is no record evidence to suggest that these omissions were
either knowing or fraudulent.
In response to question 18 of the SOFA, which asks the nature, location and name
of any business in which the debtor was involved during the 6 years before filing, Debtors
80 Plaintiffs’ arguments in their post-trial brief in support of denial of discharge based upon failure
to report the receipts from the Trust focus upon whether the receipts fall within the scope of questions 1
and 2. They fail to even acknowledge that the denial of discharge requires knowing and fraudulent
omissions, if the reporting was required.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 29 of 33
listed Fitness Quest. Plaintiffs allege that the failure to list Fit Trade, LLC, is grounds for
the denial of discharge. Fit Trade, LLC, was a trading entity owned by David “to trade
funds for Janice Posl-Bendsen’s trust account.”81 A separate MasterTrader.com account
was set up for Fit Trade.82 There is no evidence that Fit Trade engaged in any business
other than securities trading. As stated in the findings of fact, David made several
transfers of Trust funds to Fit Trade. But other than these transfers, there is no evidence
of the value of Fit Trade’s property during the period when David was managing Janice’s
assets or thereafter. David testified that he had no interest in Fit Trade when the
bankruptcy was filed and that Fit Trade was not disclosed because his counsel, on whom
he relied to prepare his schedules, wanted information only about ongoing entities. He
also testified that he intended to amend his schedules “once this is resolved, and I know
what happened in the situation.”83
The Court finds that Plaintiffs have not shown that the omission of FitTrade was
material or that the omission was knowing and fraudulent. “An oath or admission is
material when what is left out ‘bears a relationship to the debtor’s business transactions or
estate or concerns the discovery of assets, business dealings or the existence and
disposition of his property.”84 Although a debtor “cannot circumvent section
81 Doc. 218 at 7, ¶¶ 24 & 25.
82 Id. at ¶ 31.
83 Doc. 223, Partial transcript (part 1) at 53, ll. 2-4.
84 Grant v. Benjamin (In re Benjamin), 210 B.R. 203, 210 (Bankr. M.D. Fla. 1997) (quoting
Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir. 1984)).
Case 09-06043 Doc# 229 Filed 06/12/14 Page 30 of 33
727(a)(4)(A) by claiming that the omitted information has zero or little value,” value may
be considered by the Court when determining materiality and ascertaining the debtor’s
motivation and intent to deceive.85 The omission of FitTrade was not material to the
value of Debtors’ estate, since David had no interest in the company on the date of filing.
The omission was not material to Debtors’ affairs, other than being an aspect of their
relationship with Janice and her finances. But that relationship was otherwise disclosed
through the scheduling of Debtors’ liability for the judgment obtained by the Trust.
There is no evidence that the omission was knowing and fraudulent, and the record
provides no basis to infer such conduct. David testified that he relied upon his counsel
when the schedules were prepared. There is nothing from which the Court can infer that
Debtors acted otherwise than in good faith or that they had intent to conceal the existence
of Fit Trade. At trial, after having been read the directions for SOFA question 18, David
readily testified that Fit Trade should have been included in response to the question and
stated his intent to amend his schedules once this matter is resolved, when he will know
what should have been included.
The omissions of personal property from Defendants’ schedules on which
Plaintiffs rely when objecting to discharge are technical and conjectural, not real and
substantial. Creditors were not harmed. The Chapter 7 Trustee’s handling of the case
was not impaired by the omissions. The Chapter 7 trustee is not objecting to discharge.
Case 09-06043 Doc# 229 Filed 06/12/14 Page 31 of 33
To deny discharges to Debtors would be draconian — their scheduled unsecured debts,
without consideration of Plaintiffs’ claim, are $332,945.79, comprised primarily of credit
card debt. As Debtors recognize in hindsight, by accepting Janice’s largess and engaging
in a lifestyle which they could not sustain with their earnings, Debtors made unfortunate
3. Debtors should not be denied discharges because of the failure to report
pension or annuity distributions.
Finally, Plaintiffs assert as a basis for denial of discharge that Debtors reported
$31,927 of distributions from a pension or annuity on their 2007 federal income tax return
which was not disclosed in their bankruptcy schedules. Although Debtors’ 2007 federal
income tax return was admitted as an exhibit, there was no testimony regarding pension
or annuity income. The Court’s review of the exhibit shows that the $31,927 was listed
as “your total basis in traditional IRAs” on Form 8606. The Court finds no reporting of a
pension or annuity distribution. Objecting to discharge for the reason urged by Plaintiffs
has no merit.
For the foregoing reasons, the Court denies Plaintiffs’ complaint seeking to except
Debtors’ obligation to them from discharge under § 524(a)(4) and (a)(6), and to deny the
Debtors discharges under § 727(a)(4)(A).
The foregoing constitutes Findings of Fact and Conclusions of Law under Rule
7052 of the Federal Rules of Bankruptcy Procedure, which makes Rule 52(a) of the
Case 09-06043 Doc# 229 Filed 06/12/14 Page 32 of 33
Federal Rules of Civil Procedure applicable to this proceeding. A judgment based upon
this ruling will be entered on a separate document as required by Federal Rule of
Bankruptcy Procedure 7058, which makes Federal Rule of Civil Procedure 58(a)
applicable to this proceeding.
IT IS SO ORDERED.
# # #
Case 09-06043 Doc# 229 Filed 06/12/14 Page 33 of 33
- Category: Judge Somers
- Published on 11 March 2014
- Written by Judge Somers
- Hits: 581
Redmond, Brooke Trustee v. CJD & Associates a/k/a Davidson-Babcock, 11-06236 (Bankr. D. Kan. Mar. 10, 2014) Doc. # 70
SIGNED this 10th day of March, 2014.
Designated for publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
BROOKE CORPORATION, et al.,
CHRISTOPHER J. REDMOND,
Chapter 7 Trustee of Brooke
Corporation, Brooke Capital
Corporation, and Brooke Investments,
CJD & ASSOCIATES, LLC, a/k/a
CASE NO. 08-22786
ADV. NO. 11-6236
MEMORANDUM OPINION AND ORDER DENYING
DEFENDANT’S MOTION FOR LEAVE TO FILE AMENDED ANSWER
Case 11-06236 Doc# 70 Filed 03/10/14 Page 1 of 22
Defendant CJD & Associates, LLC (CJD), moves under Bankruptcy Rule 7015
and Civil Rule 15(a)(2)1 to file an amended answer denying the Plaintiff’s allegation that
CJD is an insider of Debtors, which CJD admitted in its previously filed answer.2
Plaintiff opposes the motion primarily on the ground that the amendment would be futile
since CJD satisfies the statutory definition of a per se insider.3 For the reasons examined
below, the Court denies the motion.
The background facts are undisputed and not complex. Brooke Corporation
(Brooke Corp) and Brooke Capital Corporation (Brooke Capital) filed voluntary Chapter
11 petitions on October 28, 2008. Prior to that date, CJD (a Kansas limited liability
company) was a wholly-owned subsidiary of Brooke Brokerage Corporation, which, in
turn, was wholly owned by Brooke Corp. Brooke Capital was a majority-owned
subsidiary of Brooke Corp.
On February 2, 2012, the Trustee filed his Amended Complaint against CJD. It
seeks to avoid preferential or fraudulent transfers made by Brooke Capital to CJD, and to
1 Fed. R. Bankr. P. 7015 adopts Fed. R. Civ. P. 15 for adversary proceedings.
2 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C.
§§ 157(a) and 1334(a) and (b), and the Standing Order 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 July 10, 1984. Furthermore, this Court may hear and finally adjudicate this
matter because it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(F) and (H). There is no
objection to venue or jurisdiction over the parties.
3 Plaintiff appears by John J. Cruciani and Michael D. Fielding of Husch Blackwell LLP. CJD
appears by Paul D. Sinclair, Jason L. Bush, and Brendan L. McPherson of Posinelli PC.
Case 11-06236 Doc# 70 Filed 03/10/14 Page 2 of 22
recover the value thereof. Paragraph 8 of the Amended Complaint alleged:
CJD & Associates, LLC d/b/a Davidson-Babcock (“CJD”) is
a Kansas limited liability company. Prior to Debtors’
bankruptcy filing on October 28, 2008, CJD was a wholly-
owned subsidiary of Brooke Brokerage Corporation who, in
turn, was wholly-owned by Debtor Brooke Corporation.
Thus, for all times relevant to this lawsuit, CJD was an
“insider” (as that term is defined by 11 U.S.C. § 101(31)) of
one of [sic] more of the Debtors because CJD constituted an
“affiliate” (as that term is defined by 11 U.S.C. § 101(2)).4
CJD’s answer to the Amended Complaint, filed on April 2, 2012, in response to
paragraph 8 stated,
Defendant admits that prior to the Debtors’ bankruptcy filing
on October 28, 2008, CJD was a wholly-owned subsidiary of
Brooke Brokerage Corporation who, in turn, was wholly-
owned by Debtor Brooke Corporation. As stated, Defendant
denies that it is a Kansas limited liability company as it was
administratively dissolved. The remainder of the allegations
in paragraph 8 consist of legal conclusions to which no
response should be required. To the extent a response is
required, the remaining allegations are denied.5
Paragraph 120 of the Trustee's Amended Complaint, included in Count I, which
seeks to recover preferential transfers, alleged, “At all times relevant to this matter,
Defendant was an insider of the Debtors.”6 CJD’s answer stated, “Defendants [sic]
admits paragraph 120 of the Complaint.”7 None of the affirmative defenses raised by
4 Doc. 5, 2, ¶ 8.
5 Doc. 10, 2, ¶ 8.
6 Doc. 5, 21, ¶ 120.
7 Doc. 10, 7, ¶ 120.
Case 11-06236 Doc# 70 Filed 03/10/14 Page 3 of 22
CJD alleged that it was not an insider of any of Debtors.
CJD filed its motion for leave to file an amended answer on December 19, 2013.
It proposes to amend its response to paragraph 8 by deleting the sentence, “The remainder
of the allegations in paragraph 8 consist of legal conclusions to which no response should
be required,” and adding the following sentence: “Defendant denies that it is an ‘insider’
(as that term is defined by 11 U.S.C. § 101(31)) of one or more of the Debtors because
CJD constituted an ‘affiliate’ as that term is defined by 11 U.S.C. §101(2).”8 CJD also
proposes to amend its response to the allegations of paragraph 120 of the Amended
Complaint to read, “Defendant denies paragraph 120 of the Complaint.”9 The proposed
amended answer also includes as an affirmative defense that CJD was not a insider of
A. The Applicable Standard.
Civil Rule 15(a)(2), applicable to amendments other than those permitted as a
matter of course, provides that “a party may amend its pleading only with the opposing
party’s written consent or the court’s leave. The court should freely give leave when
justice so requires.” But “[t]he liberal amendment policy prescribed by Rule 15(a) does
not mean that leave will be granted in all cases.”10 In the Tenth Circuit, leave to amend
8 Doc. 66-2, 2, ¶ 8.
9 Id., 7, ¶ 120.
10 6 Charles AlanWright, et al., Federal Practice and Procedure, § 1487 at 699 (3d ed. 2010).
Case 11-06236 Doc# 70 Filed 03/10/14 Page 4 of 22
may be refused when there is “‘a showing of undue delay, undue prejudice to the
opposing party, bad faith or dilatory motive, failure to cure deficiencies by amendments
previously allowed, or futility of amendment.’”11 The futility analysis determines
whether the proposed “claim or defense . . . is legally insufficient on its face.”12 “[I]f a
complaint as amended could not withstand a motion to dismiss or summary judgment,
then the amendment should be denied as futile.”13
B. The Parties’ Positions.
CJD argues that the Trustee is unable to show undue delay, prejudice, bad faith, or
dilatory motive. The case is in the early stages of litigation, with written discovery in
progress and no depositions having been taken. Further, according to CJD, the
amendments are not futile since the Trustee’s allegation that CJD is a statutory or per se
insider fails because insider status, on which the Trustee relies, applies to corporations,
but not to limited liability companies, such as CJD.
The Trustee first responds that leave should be refused because CJD delayed for
over 21 months before requesting leave to amend to its answer and the Trustee would be
unduly prejudiced by such amendment. In addition, and as his primary objection, the
Trustee argues that the amendment would be futile as a matter of law because CJD is a
11 Duncan v. Manager, Dep’t of Safety, 397 F.3d 1300, 1315 (10th Cir. 2005) (quoting Frank v.
U.S. West, Inc., 3 F.3d 1357, 1365 (10th Cir. 1993)).
12 6 Wright, et al., Federal Practice and Procedure, § 1487 at 733.
13 Id. at 743 (citing Bauchman ex rel. Bauchman v. West High School, 132 F.3d 542 (10th Cir.
1997) and other cases).
Case 11-06236 Doc# 70 Filed 03/10/14 Page 5 of 22
statutory insider of Brooke Corp and Brooke Capital.14
C. The Court Rejects the Trustee’s Contention that Leave Should Be Denied
Because of Undue Delay or Undue Prejudice.
Although over 21 months passed since CJD filed the answer which it now seeks to
amend, undue delay is not measured by time alone. The circumstances of the case must
be considered. This litigation has not progressed significantly. If the defense to the
insider allegation is allowed at this time, the course of the litigation will not be
significantly different from what it would have been if CJD had denied insider status in
its original answer. For the same reason, the Trustee’s contention that he would be
unduly prejudiced by the amendment is unpersuasive. It is true that allowing the defense
would cause the Trustee to spend additional time and incur additional expense. But CJD
should not be bound by an admission because the other party relied upon it when the
litigation was in its early stages.
D. The Court Finds that the Proposed Amendment Would Be Futile.
The parties agree that the motion for leave should be denied if the defense to be
added by the amended answer could not survive a motion for summary judgment. In
support of his futility contention, the Trustee argues that CJD is a per se insider of Brooke
Corp under § 101(31)(E) because it constitutes an “affiliate” under § 101(2)(B) and (C).
CJD responds that because it is a limited liability company (LLC) rather than a
14 The Trustee also objected that CJD’s addition of an affirmative defense denying insider status
would be futile, since the assertion that a defendant is not an “insider” is not an affirmative defense but
rather simply an attack on a prima facie element of the Trustee’s case. Doc. 67, 11-12. In its rely brief,
CJD agreed with this position and no longer seeks leave for this particular amendment. Doc. 68, 9.
Case 11-06236 Doc# 70 Filed 03/10/14 Page 6 of 22
corporation, it is not an “affiliate” and therefore not an “insider.” The legal issue
presented by the Trustee’s opposition to the motion is therefore whether CJD is a
corporation for purposes of the definition of “affiliate,” and therefore an “insider” of
Brooke Corp and Brooke Capital.
1. CJD is an “affiliate” of Brooke Corp under § 101(2)(B), and therefore an
“insider” of Debtors Brooke Corp and Brooke Capital under § 101(31)(E).
a. Arguments and authorities supporting the Trustee’s position.
Section 101(31) states the term “insider” “includes” those categories of persons
enumerated in the definition, such as a director, officer, or other person in control of a
corporate debtor, and a relative or general partner of an individual debtor. Courts agree
that the use of the word “includes” in the definition indicates that Congress did not intend
for the statutory list to be exclusive, and that there are two types of insiders: (1) those
entities specifically mentioned in the definition, and (2) those not listed but who have a
sufficiently close relationship with the debtor that their conduct is made subject to close
scrutiny.15 The first category constitutes statutory or per se insiders, those “‘whose
affinity or consanguinity gives rise to a conclusive presumption that the individual or
entity commands preferential treatment by the debtor.’”16 The second category is present
when it is shown “that the person or entity in fact had a relationship with the debtor that
15 Rupp v. United Security Bank (In re Kunz), 489 F.3d 1072, 1078-79 (10th Cir. 2007) (quoting
Miller Avenue Prof'l & Promotional Servs. v. Brady (In re Enterprise Acquisition Partners), 319 B.R.
626, 631 (9th Cir. BAP 2004)).
16 Id., 489 F.3d at 1079 (quoting Enterprise Acquisition Partners, 319 B.R. at 631).
Case 11-06236 Doc# 70 Filed 03/10/14 Page 7 of 22
was sufficiently close that the two were not dealing at arm’s length.”17
Even though an LLC controlled by a corporate debtor is not included in the list of
persons in § 101(31)(B), the Trustee contends that CJD is a per se insider of Brooke Corp
and Brooke Capital under § 101(31)(E), which defines “insider” to include an “affiliate,
or insider of an affiliate as if such affiliate were the debtor.” “Affiliate” is defined by
§ 101(2)(B) to mean a “corporation 20 percent or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or held with power to vote, by the
debtor.” The Trustee contends, and CJD does not dispute, that if CJD were a corporation,
under these definitions, it would be an insider of Debtors Brooke Corp and Brooke
Capital. This is because before Debtors’ bankruptcies, CJD was a wholly-owned
subsidiary of Brooke Brokerage Corporation (Brooke Brokerage) and Brooke Brokerage
was majority owned by Brooke Corp. Thus, if it were a corporation, CJD would have
been an “affiliate” of Brooke Corp, since 100% of its securities would have been
indirectly owned or controlled by Brooke Corp because of Brooke Corp’s majority
ownership of Brooke Brokerage. Moreover, since Brooke Capital was a majority-owned
subsidiary of Brooke Corp, Brooke Capital was an “affiliate” of Brooke Corp under
§ 101(2)(B), and CJD (as a corporate “insider” of Brooke Corp) would also have been an
“affiliate” and therefore a per se insider of Brooke Capital under § 101(31)(E).
The Trustee further contends, but CJD disputes, that although CJD was in fact a
17 Id., 489 F.3d at 1079.
Case 11-06236 Doc# 70 Filed 03/10/14 Page 8 of 22
limited liability company, it was nevertheless a “corporation” as defined by § 101(9) for
purposes of the definition of “affiliate.” Section 101(9) provides:
The term “corporation” —
(A) includes —
(i) association having a power or privilege that a
private corporation, but not an individual or a
(ii) partnership association organized under a
law that makes only the capital subscribed
responsible for the debts of such association;
(iii) joint-stock company;
(iv) unincorporated company or association; or
(v) business trust; but
(B) does not include limited partnership.
Although LLCs are not included in the enumerated entities, this omission does not
preclude finding that LLCs are “corporations” for purposes of the Code. The term
“corporation” only “includes” the entities enumerated in the statute. Under the Code’s
rules of construction as stated in § 102(3), the terms “‘include’ and ‘including’ are not
limiting.” The clear meaning of the definition of “corporation” is that entities not
enumerated in the statute may also be considered “corporations.”
Although the construction of the definition of “corporation” is a matter of federal
law, applicable state law defines the powers and privileges of the entity. Under Kansas
law, an LLC is a business organization “which offers the possibility of combining the
limitation on individual liability normally associated with the corporate form with the
conduit tax treatment of items of income, gain, loss, deduction and credit normally
Case 11-06236 Doc# 70 Filed 03/10/14 Page 9 of 22
associated with the partnership form.”18 Like a corporation, a “limited-liability company
may own property in its own name, and members have no ownership interest in specific
limited-liability company property.”19 Like a corporation, an LLC’s “liabilities in tort are
solely those of the LLC and . . . no member or manager may be liable solely based on
their status as a member or manager.”20 Members of LLCs, like stockholders of
corporations, are authorized to bring derivative suits.21 The Court concludes that a
Kansas LLC has powers and privileges that a corporation, but not an individual or
In the bankruptcy context, an LLC has been found to fit within the definition of a
“corporation” for purposes other than the definition of an “affiliate.” There is no question
that an LLC may file a petition under Title 11.22 As one court has stated, this is because
“an LLC, by virtue of its structure and limited liability features, fits comfortably within
the Bankruptcy Code’s definition of ‘corporation’ and, hence, is a ‘person’ eligible to be a
18 Edwin W. Hecker Jr., Limited Liability Companies in Kansas, 63 J. Kan. B. Ass’n 40, 40
19 In re App. for Tax Exemption of Kouri Place, L.L.C., 44 Kan. App. 2d 467, 470, 239 P.3d 96,
99 (2010) (citing K.S.A. 17-76,111).
20 University of Kansas v. Sinks, 565 F. Supp. 2d 1216, 1239 (D. Kan. 2008).
21 Halley v. Barnabe, 271 Kan. 652, 661-62, 24 P.3d 140, 146-47 (2001).
22 See In re Midpoint Development, L.L.C., 466 F.3d 1201, 1203-07 (10th Cir. 2006) (upholding
dismissal of Oklahoma LLC’s Chapter 11 petition because under Oklahoma law, debtor ceased to exist
when it filed articles of dissolution several months prior to filing bankruptcy); In re Lovell’s Amer. Car
Care, LLC, 438 B.R. 355 (table), unpub. op. available at 2010 WL 2769056, *3-6 (10th Cir. BAP 2010)
(Wyoming LLC eligible to file bankruptcy when certificate of dissolution had not been filed before date
of filing of bankruptcy petition).
Case 11-06236 Doc# 70 Filed 03/10/14 Page 10 of 22
debtor.”23 An LLC is considered a “corporation” under Bankruptcy Rule 7007.1, which
requires a corporation that is a party to an adversary proceeding to file an ownership
Several courts considering per se insider status have held that LLCs fit within the
definition of a “corporation.” These include Longview Aluminum, L.L.C., 25 a decision by
the Seventh Circuit Court of Appeals. In that case, the Chapter 11 trustee brought an
adversary proceeding to set aside, as preferential transfers, prepetition payments that the
debtor LLC had made to one of its managing members, who was alleged to be an insider.
The court noted that “[t]he Bankruptcy Code’s definition of a corporation includes
unincorporated limited liability companies.”26 The court then analogized the position of a
member of an LLC to the director of a corporation and concluded that “a member of an
LLC can be a statutory insider within the meaning of 11 U.S.C. § 101(31)(B).”27
In Barman, 28 the court sustained the Trustee’s objection to discharge of the
debtors, Harold and Evelyn Barman, on the ground that they had refused to obey a court
23 Gilliam v. Speier (In re KRSM Props., LLC), 318 B.R. 712, 717 (9th Cir. BAP 2004). Section
109 provides that only certain “persons” may be debtors under Chapters 7 and 11. “The term ‘person’
includes individual, partnership and corporation.” 11 U.S.C. § 101(41).
24 See Fed. R. Bankr. P. 7007.1, Advisory Committee Note (2003).
25 In re Longview Aluminum, L.L.C., 657 F.3d 507 (7th Cir. 2011).
26 Id. at 509, n.1.
27 Id. at 510.
28 Solomon v. Barman (In re Barman), 237 B.R. 342 (Bankr. E.D. Mich. 1999).
Case 11-06236 Doc# 70 Filed 03/10/14 Page 11 of 22
order in another bankruptcy case concerning an insider, BHB Enterprises, LLC (BHB),
organized under South Carolina law. Harold Barman was a member of BHB. The
debtors admitted that they were insiders of BHB, but denied that BHB was an insider of
theirs. The court examined § 101(31), which provides that an “insider includes [,] . . . if
the debtor is an individual[,] . . . [a] corporation of which the debtor is a director, officer,
or person in control . . . [and an] affiliate, or insider of an affiliate as if such affiliate were
the debtor.”29 It also examined § 101(2)(B), which defines “affiliate” to mean a
“corporation 20 percent or more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held with power to vote, by the debtor.” It then
concluded, based upon an examination of the characteristics of limited liability companies
under South Carolina law, “that a limited liability company, such as BHB, is sufficiently
analogous to a corporation” for purposes of determining insider status.30 The court held
that “BHB is an ‘affiliate’ (and thus an insider) of Harold Barman because he owned, or
directly or indirectly controlled, one third of the voting rights in BHB [and that] BHB is
also within the statutory definition of an ‘insider’ of Harold Barman because he is one of
its three members and thus holds a position that is analogous to that of a ‘director, officer
or person in control’ of BHB.”31
29 Id. at 348 (quoting 11 U.S.C. § 101(31)(A)(iv) and (E)) (emphasis added by the court).
30 Id. at 348.
31 Id. at 349.
Case 11-06236 Doc# 70 Filed 03/10/14 Page 12 of 22
In Lull, 32 a 2009 decision, the court relied on KRSM Properties and Barman to
hold that a member-managed Hawaii LLC should be treated as a corporation for purposes
of the definition of “insider.” In that case, the debtor and Zapara were each 50% owners
of interests in JWL, LLC. More than 90 days prepetition, the debtor made transfers to
Zapara which the trustee sought to recover as preferential transfers. The court held:
Under the Barman reasoning, and because an LLC is within
the Code’s definition of “corporation” under § 101(9)(A),
JWL may be treated like a corporation for the purposes of
insider analysis, and under 11 U.S.C. § 101(31)(A)(iv) its
insiders include “director(s), officer(s) or person(s) in
. . . As the only members of an LLC, Debtor and
Zapara had co-equal rights in the management and conduct of
the company’s business as a matter of law. . . . JWL is an
“affiliate” of Debtor because Debtor controlled or held fifty
percent of the “voting securities” of JWL (and because an
LLC fits within the Code’s definition of “corporation” under
§ 101(9)(A)). Zapara is also an “insider” of JWL and thus an
insider [of] the debtor under § 101(31)(E) because she also
controlled or held 50% of the “voting securities” of JWL.33
Very recently, the Parks34 court thoroughly examined the question of whether an
LLC, organized under Washington law, was a “corporation” for purposes of the definition
of “insider.” The court began its analysis with the principles of statutory construction. It
noted that the definition of “corporation” uses the expansive word “includes,” and was
32 Kotoshirodo v. Zapara (In re Lull), 2009 WL 3853210 (Bankr. D. Haw. Nov. 17, 2009).
33 Id. at *4.
34 Sherron Assocs. Loan Fund XXI (Lacey) L.L.C. v. Thomas (In re Parks), 503 B.R. 820 (Bank.
W.D. Wash. 2013).
Case 11-06236 Doc# 70 Filed 03/10/14 Page 13 of 22
“persuaded that ‘corporation’ as used in § 101(9)(A) is not limited to those entities
specifically itemized in statute.”35 It found this approach to be consistent with that taken
by the Seventh Circuit in Longview Aluminum, discussed above, when it held that “a
member of an L.L.C. was equivalent in relationship to a director of a corporation, thereby
expanding the definition of ‘director’ in § 101(31) [defining insider] to include other
L.L.C. members.”36 Next, the court applied the “presumption that equivalent words have
equivalent meaning when repeated in same statute,”37 and observed that in the non-insider
context it has been “found that an L.L.C. ‘fits comfortably within the Bankruptcy Code’s
definition of “corporation.”’”38 The state law treatment of LLCs further supported the
court’s conclusion that an LLC was included in the broad definition of “corporation” for
purposes of the definition of “insider.”39
b. Authorities supporting CJD’s position.
In support of it motion to amend, CJD anticipates the Trustee’s argument that the
amendment would be futile and asserts that the “problem with the Trustee’s allegations as
to the insider status of CJD is that CJD was not a corporation, but a limited liability
35 Id. at 827-28.
36 Id. at 828.
37 Id. (citing Cohen v. de la Cruz, 523 U.S. 213, 220 (1998)).
38 Id. (quoting Gilliam v. Speier (In re KRSM Props., L.L.C.), 318 B.R. 712, 717 (9th Cir. BAP
2004) (considering whether LLC was a “person” for purposes of the Code and therefore eligible to file a
petition) and also citing Fed. R. Bankr. P. 7007.1, Advisory Committee Note (2003)).
39 Id. at 828-29.
Case 11-06236 Doc# 70 Filed 03/10/14 Page 14 of 22
company.”40 It then discusses several cases to support its argument.
The first case is Enterprise Acquisition Partners, a decision of the Ninth Circuit
BAP, which did not concern the status of an LLC, but observed that “[p]articularly in
light of the conclusive presumption of preferential treatment that arises from a
determination that an entity is a per se insider, there is no justification for expanding the
definition of per se insider beyond what is plainly contained in the statute.”41 CJD then
relies upon several cases which apply the Enterprise caution.
The first cited case relying on Enterprise is Weddle, 42 in which the Chapter 7
trustee brought an adversary action to avoid the recording of a judgment against the
individual debtors that was done more than 90 days prepetition by a limited liability
company controlled by the father of one of the debtors. The debtors were members of the
LLC and each held a 5% ownership interest in 100 common units. Because neither
membership in, nor management or control of an LLC is specifically addressed in the
definition of “insider” in § 101(31), the plaintiff, relying on Barman, argued that
“insider” status should be found because the debtors were persons in control of the LLC,
and the “insider” definition concerning “corporations” found in § 101(31)(A)(iv)
applied.43 The court cited the Enterprise instruction not to enlarge the list of per se
40 Doc. 66, 4.
41 Enterprise Acquisition Partners, 319 B.R. at 632.
42 Elsaesser v. Cougar Crest Lodge, L.L.C. (In re Weddle), 353 B.R. 892 (Bankr. D. Idaho 2006).
43 Id. at 897.
Case 11-06236 Doc# 70 Filed 03/10/14 Page 15 of 22
insiders beyond those in the statute, and held that “[s]ince a[n] LLC of which debtor is a
member, director, officer or person in control is not among the list of per se, statutory
insiders, Plaintiff’s argument fails.”44
Next, CJD relies upon Lull, 45 a 2008 bankruptcy decision from the District of
Hawaii. In this preference action, the bankruptcy trustee contended that Tipaldi had
received an avoidable transfer from debtor Lull more than 90 days prepetition. Both Lull
and Tipaldi were members and managers of Tower Creek, LLC. The trustee (like the
Plaintiff-Trustee in this case) contended that Tipaldi was a per se insider of the debtor
because § 101(31)(E) defines “insider” to include an “affiliate, or insider of an affiliate as
if such affiliate were the debtor,” and the LLC was an “affiliate” of the debtor under the
corporate portion of § 101(2)(B). Although acknowledging that some courts have found
that an LLC is “sufficiently analogous to a corporation to permit a court to apply the
corporate provisions of § 101(31) to a LLC,”46 the court noted that the Ninth Circuit had
not decided the question, but the Ninth Circuit BAP had instructed that the definitions
should not be expanded. The court therefore concluded that the “Weddle court’s holding
that a limited liability company is not a per se insider of a debtor who is a member of the
company is the more sound result.”47
45 Kotoshirodo v. Dorland and Assocs., Inc. (In re Lull), 2008 WL 3895561 (Bankr. D. Haw.
46 Id. at *8.
47 Id. at *9.
Case 11-06236 Doc# 70 Filed 03/10/14 Page 16 of 22
In its reply brief, CJD argues that the Tenth Circuit would adopt its argument over
that of the Trustee. The case relied on is Kunz, 48 where the court held that the debtor’s
title of “director emeritus” of a bank did not make him a “director” of the bank or a per se
insider of the debtor, for the purpose of avoidance of allegedly preferential transfers from
the debtor to the bank. The court determined that the meaning of “director” as used in the
definition of “insider” is “a person who is a member of the governing board of the
corporation and participates in corporate governance.”49 This meaning was found to
contrast with that of “emeritus,” which refers to a person “‘holding after retirement . . . an
honorary title corresponding to that held last during active service’” or “‘retired from an
office or profession.’”50 The court therefore held that the debtor was not an “insider” of
the bank, and that a director emeritus was not equivalent to a director for the purposes of
insider status. The court rejected the trustee’s argument that the term “director” must be
construed to included any kind of director, which would equate a managing director with
a former director. The court’s construction was found to be more consistent with the
“overall understanding of the function of the statutory definition of ‘insider’ — as well as
true to the actual language.”51 According to CJD, this analysis demonstrates that “the
Tenth Circuit understands, like the Enterprise line of cases, that an expansion of the
48 In re Kunz, 489 F.3d 1072.
49 Id. at 1077.
50 Id. at 1078 (quoting Webster's Third New Internat'l Dictionary 741).
51 Id. at 1079.
Case 11-06236 Doc# 70 Filed 03/10/14 Page 17 of 22
definition of an insider beyond what is plainly stated in the statute is unnecessary.”52
c. The Court finds the Trustee’s arguments and authorities to be more
persuasive than CJD’s.
The Court finds that the Trustee’s position is fully supported by the plain meaning
of the applicable definitions. The cases cited by the Trustee holding that an LLC is
within the statutory definition of a “corporation” for purposes of the definition of
“affiliate” are persuasive. The Code defines a “corporation” to include an “association
having a power or privilege that a private corporation, but not an individual or a
partnership, possesses.”53 A Kansas LLC has such powers and privileges, and CJD does
not argue to the contrary.
Once it is determined that a Kansas LLC fits within the Code’s definition of
“corporation,” CJD’s status as an “insider” of both Debtors Brooke Corp and Brooke
Capital follows from the definitions of “affiliate” and “insider.” An “affiliate” is defined
to mean a corporation “20 percent or more of whose outstanding voting securities are
directly or indirectly owned [or] controlled . . . by the debtor.” Debtor Brooke Corp
owned Brooke Brokerage Corporation, which in turn owned CJD. Brooke Corp therefore
indirectly controlled CJD, making CJD an “affiliate” of Brooke Corp, and therefore an
“insider” of Brooke Corp since “insider” is defined by § 101(31)(e) to include an
“affiliate.” Further, Debtor Brooke Capital was a majority-owned subsidiary of Brooke
52 Doc. 68, at 7.
53 11 U.S.C. § 101(9).
Case 11-06236 Doc# 70 Filed 03/10/14 Page 18 of 22
Corp and therefore an “affiliate” of Brooke Corp under § 101(2)(B). Since CJD is an
“insider” of Brooke Corp, which is an “affiliate” of Brooke Capital, CJD also is an
“insider” of Brooke Capital under § 101(31)(E).
Contrary to the Enterprise line of cases relied upon by CJD, the foregoing analysis
is not an expansion of the definition of per se insider by analogizing an LLC to a
corporation; it is a straightforward application of the Code definitions. The Weddle
decision on which CJD relies characterized the plaintiff’s argument in support of insider
status as requesting the court to “apply by analogy the insider definition concerning
corporations found in § 101(31)(A)(iv).”54 Rather than examining whether the LLC
satisfied the Code’s definition of “corporation,” which is the linchpin of the Trustee’s
argument in this case, the Weddle court followed the Ninth Circuit BAP’s admonition not
to expand the definition of per se insider. Further, the 2008 Lull decision, also relied
upon by CJD and which followed Weddle, arose in the same bankruptcy proceeding and
was decided by the same judge as the 2009 Lull decision which supports the Trustee’s
argument, a development that casts doubt upon that judge’s earlier analysis.
The Court finds the Trustee’s analysis to be consistent with the Tenth Circuit’s
decision in Kunz, which, contrary to CJD’s implication, did not adopt the Enterprise
directive to limit per se insiders to those enumerated in § 101(31) without regard to the
Code’s statutory definition of “corporation.” Rather Kunz was decided, as is this case,
54 Weddle, 353 B.R. at 897.
Case 11-06236 Doc# 70 Filed 03/10/14 Page 19 of 22
upon the plain meaning of the statutory definitions. As observed by the Kunz court, “it
was the legislative intent that a person with a relationship designated in the statute be
treated as an insider because of the high potential for control inherent in those
relationships.”55 For purposes of per se insider status in preferential transfer litigation,
this Court sees no relevant distinction between a corporate and an LLC subsidiary of a
debtor; there is an equally high potential for control inherent in both relationships. If the
presumption of preferential treatment applies to a corporation, it should also apply to a
2. CJD is not a per se insider of Brooke Corp under § 101(31)(E) because of
the operating agreement between CJD and Brooke Brokerage.
In addition to the foregoing argument, the Trustee argues that CJD is an insider of
Brooke Corp based upon the allegation that CJD was being operated under an operating
agreement with Brooke Brokerage.56 Section 101(2)(C) defines an “affiliate” an a
“person whose business is operated under a lease or operating agreement by a debtor.”
The Court agrees with the Trustee that an LLC is a “person” for purposes of this
55 Kunz, 489 F.3d at 1079.
56 A Certificate of Amendment and Restatement of the Operating Agreement of CJD &
Associates, L.L.C. dated December 31, 2004 (Doc. 67-1) is included in the record with a supporting
affidavit of the Trustee (Doc. 67-2). The Operating Agreement provides that the business and affairs of
the company shall be managed by its manager, which for purposes of the agreement is referred to as the
board of directors. Doc. 67-1, 1. The directors are elected by the members, (Doc. 67-1, 7), and Brooke
Brokerage Corporation is named as holding 100% of the membership interests (Doc. 67-1, 5). CJD’s
objection to the Trustee’s arguments premised upon the Operating Agreement relies in part upon the fact
that there is no evidence that the Operating Agreement was in effect when the transfers in issue were
made. Although the Court agrees there is no such evidence, it prefers to address the Trustee’s arguments
based upon the construction of the Bankruptcy Code, rather than the fact-question of the effective dates of
the Operating Agreement.
Case 11-06236 Doc# 70 Filed 03/10/14 Page 20 of 22
definition. The Code defines “person” to include an “individual, partnership, and
corporation.”57 Although an LLC is not included in the list, courts find an LLC is a
“person” for purposes of determining its eligibility under § 109 to file a petition.58
But the Court finds that the operating agreement relied upon by the Trustee does
not satisfy the “affiliate” definition. To qualify as the basis for “affiliate” status, the
operating agreement must be with a debtor; here the operating agreement was with
Brooke Brokerage, a non-debtor. To overcome this deficiency, the Trustee argues that
the “debtor” means Brooke Brokerage because “[i]n applying § 101(31)(E) [which
defines “insider” to mean “affiliate, or insider of an affiliate as if such affiliate were the
debtor]” to § 101(2)(C) [defining “affiliate” to mean a “person whose business is operated
under a lease or an operating agreement by a debtor”], the term ‘debtor’ means Brooke
Brokerage because it is ‘as if’ Brooke Brokerage (i.e., “such affiliate’) ‘were the
debtor.’”59 But this argument misconstrues § 101(31)(E), which provides for two routes
to “insider” status: (1) being an “affiliate” of the debtor; and (2) being an “insider” of an
“affiliate” of the debtor, as if such affiliate were the debtor. For purposes of the first
route, CJD is not an “affiliate” of a debtor based upon the operating agreement with non-
debtor Brooke Brokerage. For purposes of the second route, there is no Bankruptcy Code
definition providing that CJD is an “insider” of Brooke Brokerage, an affiliate of Brooke
57 11 U.S.C. § 101(41).
58 See note 22.
59 Doc. 67, at 10.
Case 11-06236 Doc# 70 Filed 03/10/14 Page 21 of 22
Corp, because of the operating agreement. Under the Code definitions, an “insider” of an
“affiliate” of the debtor is treated the same as an “insider” of the debtor. This does not
mean that the “affiliate” is a debtor. The Trustee’s argument misconstrues the phrase “as
if such affiliate were the debtor” in the definition of “insider.” The Court therefore finds
that CJD cannot be an “affiliate” of Brooke Corp under § 101(2)(C) based upon an
operating agreement with Brooke Brokerage.
For the foregoing reasons, the Court denies CJD’s motion to file an amended
answer denying the Trustee’s allegations that CJD is a per se insider of Debtors Brooke
Corp and Brooke Capital. The proposed amendment would be futile because, under the
uncontroverted facts as to the relationship of CJD with the Brooke entities, CJD is a
statutory or pe se insider.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rule
7052 of the Federal Rules of Bankruptcy Procedure, which makes Rule 52(a) of the
Federal Rules of Civil Procedure applicable to this proceeding.
IT IS SO ORDERED.
# # #
Case 11-06236 Doc# 70 Filed 03/10/14 Page 22 of 22
- Category: Judge Somers
- Published on 13 June 2014
- Written by Judge Somers
- Hits: 202
In Re Auld, 14-20424 (Bankr. D. Kan. Jun. 11, 2014) Doc. # 90
SIGNED this 11th day of June, 2014.
Designated for on-line use but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
STUART AULD, CASE NO. 14-20424
MEMORANDUM OPINION AND ORDER FOLLOWING TRIAL ON
MOTION FOR DISMISSAL AND FOR RELIEF FROM STAY
ORDERING ADDITIONAL BRIEFING ON DISMISSAL AND
GRANTING RELIEF FROM STAY
On May 29, 2014, trial was held on the Motion to Dismiss and Motion for Order
Granting Relief from the Automatic Stay filed by Sun West Mortgage Company, Inc.
(Sun West); John W. Auld, Jr., as Trustee of the John William Auld, Sr. Revocable Trust
Agreement dated November 30, 2007 (Auld, Sr. Trust); Sheila D. Verduzco (Verduzco);
Summers Law Firm, LC (Summers Law Firm); Charles Hammond (Hammond); and
Case 14-20424 Doc# 90 Filed 06/11/14 Page 1 of 32
Charles Hammond Law Firm (Hammond Law Firm) (collectively Movants).1 Debtor
Stuart Auld opposes the motion.2 The Court has jurisdiction.3
At trial, Sun West appeared by Erlene Krigel and Paul K. Hentzen, of Krigel &
Krigel, P.C. The Auld, Sr. Trust appeared by Robert Andrews, of Johnson, Ballweg &
Modrcin, L.C. Verduzco appeared by Erlene Krigel and Paul Hentzen. The Summers
Law Firm appeared by Erlene Krigel, Paul Hentzen, and Kim Summers. Hammond and
the Hammond Law Firm appeared by Charles Hammond. The Debtor appeared pro se.
Following close of the evidence record, the Court heard the arguments of counsel
and of the Debtor, and then placed the motion under advisement, subject to receipt of two
additional exhibits.4 It is now ready to rule, and for the reasons stated below finds: (1)
1 Doc. 24. The Movants’ motion also seeks sanctions. The Court will address that matter after ruling
on the merits of the motion to dismiss and for stay relief.
2 Docs. 36 and 40.
3 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and §§ 1334(a) and (b) and the Amended
Standing Order 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.
Motions for dismissal and relief from stay are core proceedings which this Court may hear and determine as
provided in 28 U.S.C. § 157(b)(2)(A) and (G). There is no objection to venue or jurisdiction over the parties.
4 The Auld, Sr. Trust, in accord with the Court’s request when leaving the record open, has provided
the clerk with the original of Trust exh. 18.
Debtor was granted leave to file an additional exhibit which he described as being a memorandum
order filed in Johnson County, Kansas District court, case number 11CV4594, in which a page numbered
“12" contained an important finding about the 1995 Trust’s interest in the Property. Instead of providing the
additional exhibit, Debtor filed 26 page affidavit with 37 pages of attachments. Doc. 84. One of the
attachments is an unnumbered page from the Journal Entry filed on November 19, 2013, which is already in
the record as Sun West exh. 1 and Trust exh. 5. That page bears a notation at the top stating “Case 2:13-cv-
02031-JTM-DJW Document 7-1 Filed 1/23/13 Page 12 of 14.” The Court will consider this page to be the
additional exhibit which Debtor was granted leave to file, but shall disregard the remainder of document 84,
since the record was closed, subject to only the submission of two exhibits, one by Debtor and one by the
Case 14-20424 Doc# 90 Filed 06/11/14 Page 2 of 32
this case was not filed in good faith, but an order of dismissal will not be entered until
after consideration of briefs on the question of whether dismissal should be with or
without prejudice; (2) if the case were not dismissed, the Court would lack jurisdiction to
rule on Debtor’s claim of right to possession of the property where he resides and
conducts his business; and (3) Movants are entitled to relief from stay to pursue state
court litigation involving the Debtor.
FINDINGS OF FACT.
A. THE CHAPTER 11 CASE.
Debtor filed a voluntary petition under Chapter 11 pro se on March 6, 2014.
Debtor’s Statement of Financial Affairs (SOFA) and schedules were filed on March 21,
2014.5 The SOFA reports income from employment or operation of business of $9,000 in
2014 and $65,000 in 2013, and “unknown” in 2012. The nature of Debtor’s business,
conducted from 1985 to the present, is stated to be “Real Estate Sole Proprietor; NV
Corp.”, operated under the name “Stuart Auld Corporate Real Estate Services.” The
business address is 9135 Manor Road, Leawood, KS. (Property), where Debtor resides.
Debtor’s Monthly Operating Report for the month of March6 reports total income of
$4,431.82 and total expenses of $2,468.69 (excluding taxes and retirement). The
expenses appear to be personal, such as food and utilities; none appear to be uniquely
Auld, Sr. Trust.
5 Doc. 19; Auld Trust exh. 16 (schedules only).
6 Doc. 41.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 3 of 32
Schedule A, real property, has three entries.7 First it describes Debtor’s interest in
the Property as “Tenant in Common; Life Estate; Mortgage and Note lien;
uncompensated ownership interest due to fraud upon the court and unlawful orders.” The
value is stated to be “Unknown,” and the amount of secured claim is stated as follows:
“Debtor lien superior in time; Sun West lien disputed.” Schedule A also lists lots in
Kansas City, Missouri valued at $3,500 held by Debtor’s Roth IRA. The third entry is
Debtor’s former marital residence, in which he states his interest to be an “Inherited
Mortgage and Note Lien; uncompensated ownership interest due to fraud upon the court
and unlawful order.”
Schedule B, personal property,8 states the current value is $15,186. This value
includes $500 cash and an e-trade account valued at $1,586. Schedule C claims
exemptions under Kansas law, but no values are stated. Schedule D lists three creditors
holding secured claims. The first is GSA Federal Credit Union holding a $33,000 claim
secured by a purchase money lien in a vehicle having value of $5,500 less than the claim.
The second is stated to be “Assigned Note; Original Noteholder Stuart Auld,” secured by
the Property, in the amount of $425,000, with $225,000 unsecured. As stated in the
schedule and confirmed at trial, this is a note which was held by the Debtor on the date of
filing, not a note owed by the Debtor. It should not have been listed as a secured claim.
7 Trust exh. 16, 1.
8 Id., 2.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 4 of 32
The third secured creditor listed is Sun West, which is said to be the holder of “Invalid
and Void Mortgage” on the Property securing a $200,000 claim. At trial Debtor
acknowledged that he did not sign the note secured by the Sun West mortgage, did not
sign the mortgage held by Sun West, and agreed that he has no liability to Sun West.
GSA Federal Credit Union is therefore the only secured creditor. Schedule E states there
are no unsecured priority claims. There are three unsecured nonpriority claims listed on
Schedule F; all three claims are for legal fees and total $5,471, not substantially more
than Debtor’s cash on hand when he filed for relief. No executory contracts or unexpired
leases are listed on Schedule G.
The SOFA lists three suits in which Debtor was a party within the year
immediately preceding filing. The first of these suits, pending in Johnson County, Kansas
District Court, is the consolidation of two cases, 11CV4594, an action in which Sun West
seeks to foreclose its mortgage on the Property, and 11LA6470, an action in which the
Auld Sr. Trust seeks to evict Debtor from the Property. These two cases, consolidated
under case number 11CV4594, are hereafter referred to as the Property Litigation. Before
the bankruptcy was filed, the state court granted both Sun West’s and the trust’s motions
for summary judgment. As examined below, the trial in this Court focused upon Debtor’s
interest in the Property and the Property Litigation. The second suit listed on the SOFA is
a suit filed by Debtor after the adverse rulings in the Property Litigation.9 Defedants are
9 Trust exh. 19.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 5 of 32
the parties to the Property Litigation, their counsel, and the trial judge. The third suit is a
claim by Debtor against an insurance company, but that action is not relevant to the
matters before the Court.
B. THE MOTION TO DISMISS AND FOR RELIEF FROM STAY.
The Movants’ motion to dismiss is for cause under § 1112(b)(1). Although they
argue that some of the statutory factors which constitute cause are present, their strongest
argument is that this Chapter 11 case was not filed in good faith, since Debtor has no
business to reorganize and filed this case to thwart his eviction from the Property, as
ordered in the Property Litigation.
The Movants also move for relief from stay under § 362(d)(1) and (d)(2) so they
can continue with the Property Litigation foreclosing Sun West’s mortgage on the
Property and eviction of Debtor from the Property and fully defend Debtor’s action
against them. They also argue the Rooker-Feldman doctrine precludes this Court from
reconsidering the rulings of the Johnson County, Kansas District Court in the Property
Litigation regarding Debtor’s interest. They then argue that their interest in the Property
is not adequately protected, that the Debtor has no equity in the Property, and that the
Property is not necessary for an effective reorganization.
Debtor opposes both motions. He contends that he has a right to reorganize his
real estate business and that reorganization is dependent upon conducting the business
from the Property. Highly summarized, it is Debtor’s position that the adverse rulings in
the Property Litigation do not foreclose his position that he has an interest in the Property
Case 14-20424 Doc# 90 Filed 06/11/14 Page 6 of 32
sufficient to maintain possession because the Movants committed fraud on the Johnson
County, Kansas District Court and that such fraud deprives them of standing to pursue the
motions and makes the Rooker Feldman doctrine inapplicable.
C. THE EVIDENCE.
1. The Property Title.10
Debtor’s parents acquired the Property in 1957, and Debtor has lived in the
Property on and off since his childhood. It currently has a value of approximately
$300,000. He last moved back to the Property in April 2005 and currently occupies the
“mother in law” apartment in the basement level. Debtor operates his real estate
consulting business from the Property. He keeps his records there, but there is no
evidence that clients ever visit the premises.
In November, 1986 John W. Auld, Sr., Debtor’s father, signed a promissory note
promising to pay Debtor $10,000 (1986 Note).11 It provided for periodic payments with
the balance due on November 1, 1989. The interest rates was 15% per year. The 1986
Note recites that it is secured by a mortgage on the Property inferior to a mortgage then
held by a bank, but the mortgage allegedly securing the 1986 Note was not signed by
either Debtor’s father or his wife, Nancy Auld, and was not recorded.12 On March 17,
10 Except as otherwise noted, these findings of fact are supported by testimony and Trust Exh. 14,
2-7 and documents attached thereto.
11 Exh. M, 1.
12 Exh. M, 2-4.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 7 of 32
2011, a “Notice of Lis Pendens and Lien due to Note & Mortgage” was filed by Debtor
with the Johnson County Register of Deeds, to which a copy of the 1986 Note was
John Auld, Sr. and Nancy Auld were divorced in 1987. The decree of divorce,
entered in Johnson County, Kansas District Court case number 87C1481, awarded the
Property to Nancy Auld and included a provision that John Auld, Sr. “shall be responsible
for any debt incurred to the parties’ son, Stuart Auld.”14
Debtor’s exhibits include a document entitled “Agreement of the Auld Living
Trust” of Nancy Auld executed on April 27, 1995 (1995 Trust).15 The assets transferred
to the 1995 Trust, as listed on schedule A to the document, include “all my interest in any
real estate no matter how titled, including any cemetery plots.”16 Debtor testified that at
the time the 1995 Trust was executed, Nancy Auld believed that she was dying and that
she made very clear to Debtor that as long as the family owned the Property, Debtor
could live in the basement. Debtor contends that this constituted the granting of a life
estate which remains valid. Debtor asserted in the Property Litigation that the 1995 Trust
is the holder of legal title to the Property. On November 30, 2000, Nancy Auld signed an
affidavit stating the 1995 Trust was forged, and she completely disavowed and/or revoked
13 Exh. N.
14 Trust exh. 14, bate stamp AUL 0096.
15 Exh. G.
16 Id., 8.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 8 of 32
the 1995 Trust.17 Debtor testified that, although the signature on the document appears to
be that of his mother, in his opinion the affidavit bears a false notarization and that his
mother would not have executed such an affidavit because it contradicts her wishes as
stated in a prenuptial agreement executed when she remarried John Auld, Sr. in 2005.18
On August 8, 1997, the “Nancy Nichols Auld Revocable Trust Agreement” was
established by Nancy Auld (1997 Trust). On the same date, Nancy Auld executed a
Kansas Warranty Deed conveying the Property from herself to herself as trustee of the
1997 Trust. The deed was properly recorded. On January 29, 2005, Nancy Auld, as
Trustee of the 1997 Trust, conveyed the Property to Nancy Auld. The deed was properly
recorded. In 2005, John Auld and Nancy Auld were remarried,19 and on April 18, 2005,
John Auld and Nancy Auld executed a warranty deed conveying the Property to
themselves as husband and wife “and the survivor of them, as joint tenants, and not as
tenants in common.”20 On May 11, 2005, Nancy Auld died.
On April 27, 2007, John Auld, Sr. signed a home equity note in favor of James B.
Nutter & Company (Nutter) promising to pay all loan advances up to $306,375.00 (2007
Note). On the same date, John Auld, Sr. executed a mortgage on the Property as
17 Trust exh. 15, 3.
18 The alleged prenuptial agreement was offered as Exhibit L, but was not admitted into evidence.
19 Trust Exh. 14, 5. This exhibit states that the remarriage was on February 1, 2005. Debtor’s exhibit
L, which was not admitted into evidence, includes a copy of a marriage certificate dated April 15, 2005. That
exhibit also includes a copy of an “Agreement” purporting to be a premarital agreement between John Auld,
Sr. and Nancy Auld, but the copy does not bear the signature of Nancy Auld.
20 Exh. K.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 9 of 32
collateral for the 2007 Note. The mortgage was properly recorded. In November 2007,
the John William Auld, Sr. Revocable Trust under Agreement dated November 30, 2007
was established. (2007 Trust). On the same date, a deed was executed conveying the
Property to the 2007 Trust, but on August 31, 2009, the trustee of the 2007 Trust executed
a deed conveying the Property to John Auld, Sr. On August 31, 2009, John Auld, Sr.
executed a Transfer-on-Death Deed transferring the Property on his death to the trustee of
the 2007 Trust. John Auld, Sr. died on October 16, 2011.
On January 17, 2012, Nutter assigned the 2007 Note and Mortgage to Sun West.
The assignment of the mortgage was recorded.
2. The Litigation Regarding Ownership and Occupancy of the Property.
In the spring of 2011, Debtor lived in the basement of the Property, which had a
separate entrance, and Debtor’s father, John Auld, Sr., lived in upstairs. On April 30,
2011, a Notice to Vacate Premises was posted at the entrance of the basement portion of
the Property.21 On May 27, 2011, Debtor filed a petition pro se in the District Court of
Johnson County, Kansas, case number 11CV4594, against his father John Auld, Sr. and
“unknown parties.”22 Debtor alleged that his father was a secured creditor by virtue of his
father’s execution of the 1986 Note, on which the amount of $415,441.20 in principal and
interest was due, and his father’s assumption of sole liability for the 1986 Note in the
decree of divorce entered in case 87C1481. Further, Debtor alleged a judgment lien on
21 Trust exh. 15, 6.
22 Sun West exh. 15.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 10 of 32
the Property resulting from his parent’s 1987 divorce decree and that such lien was first in
priority as to all other liens. Debtor’s requested relief included a money judgment, an
offer to accept a deed in lieu of foreclosure, and a prayer for a temporary restraining order
to stay any eviction of Debtor from the Property.
On June 22, 2011, John Auld, Sr. filed a peaceable entry and forcible detainer
action against Debtor, Johnson County, Kansas District Court case 11LA6470.23 The
plaintiff alleged that he owned the Property, that he granted the Debtor a tenancy at will
in the Property, and although Debtor had been served with notice terminating the tenancy,
Debtor refused to quit the premises. After John Auld died on October 16, 2011, the Auld
Sr. Trust continued the litigation.
On October 21, 2011, the two Johnson County, Kansas District Court cases,
11LA6470 and 11CV4594, were consolidated, and the litigation proceeded as 11CV4594
(Property Litigation).24 On February 27, 2012, Sun West was granted leave to
intervene.25 One day later, Sun West answered and asserted a counterclaim for
declaratory relief and a third party petition for foreclosure, based upon its contention that
it held a first lien on the Property.26
23 Trust exh. 1.
24 Trust exh. 3.
25 See Sun West exh. 6, 12.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 11 of 32
On August 30, 2012, Sun West filed a motion for summary judgment.27 Debtor
responded pro se. Oral argument was presented to the court. The court granted Sun
West’s motion by Journal Entry filed on November 19, 2012.28 The court concluded that
based upon the documents, “the record owner of the property in question is now the
Trustee of John’s 2007 trust,”29 subject to Sun West’s valid mortgage.30 As to Debtor’s
claims related to the 1986 Note and mortgage, the court found that even if Debtor had a
valid note and mortgage on the Property, he was “not entitled to enforce them because the
statute of limitations has run on the claim.”31 As to the claim that Nancy Auld’s 1995
Trust is the title holder, the court found Debtor had not provided evidence sufficient to
defeat a motion for summary judgment.32 A journal entry denying reconsideration was
filed on December 10, 2013.33
On November 16, 2012, the Auld, Sr. Trust moved for summary judgment, seeking
an order evicting Debtor from the Property. Debtor responded. By Journal Entry filed on
January 4, 2013, the motion was granted, and the trust’s request for “[a]n immediate
27 Trust exh. 4.
28 Sun West exh. 1.
29 Id., 9.
30 Id., 13.
31 Id., 10.
32 Id., 12.
33 See Sun West exh. 6, 5.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 12 of 32
eviction of Plaintiff” was granted.34 After reiterating its prior finding that the Auld, Sr.
Trust is the owner of the Property the court found:
Although Plaintiff [Debtor] took up residence at the property,
there has never been a written lease agreement for Plaintiff to
occupy the property. Further, proper notice has been given to
Plaintiff to vacate the premises. Plaintiff has failed to respond
to the arguments contained in Defendant’s memorandum in
support of the motion for summary judgment, with any legal
basis (given the above determined uncontroverted facts) to
deny Defendant’s request for eviction.
Plaintiff makes a one sentence assertion that the
Defendant does not have standing to bring this action.
However, the Plaintiff cites no legal authority to support this
assertion. This assertion is rejected.
Other arguments asserted by Plaintiff in his legal
argument section, appear to go to the issue of who is the
current owner of the property. However, as noted above, this
Court has already resolved that issue in favor of the
On January 14, 2013, Debtor filed a motion to reconsider on multiple grounds.36
On January 16, 2013, Debtor removed the Property Litigation to the United States
District Court for the District of Kansas. On motion of Sun West and the Auld, Sr. Trust,
the case was remanded, and attorney’s fees and costs were assessed against the Debtor to
the maximum amount of $2,500.37 Debtor appealed to the United States Court of Appeals
34 Trust exh. 7.
35 Id., 6-7.
36 See Sun West exh. 6, 4.
37 Sun West exh. 9.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 13 of 32
for the Tenth Circuit. It affirmed on January 29, 2014.38
On February 12, 2014, the Johnson County, Kansas District Court in the Property
Litigation entered an order for status conference to be held on March 7, 2014, and
advised that if “any party will be seeking an order to evict or writ of assistance, a motion
must be filed on or before February 28, 2014.”39 On February 28, 2014, the Auld, Sr.
Trust filed a motion for writ of assistance to evict Debtor from the Property.40
On February 25, 2014, Debtor filed a 38 page motion for continuance, for time to
acquire new legal counsel, to set aside recent and past orders, and other relief.41 On the
same date, he also filed a 42 page motion to vacate orders and to set aside or vacate
judgment, and other relief.42 The District Court reviewed the motions, found that they
generally contained “the same ramblings that have been asserted in numerous pleadings,”
and denied the motions, thereby sparing the other parties the “unnecessary time and effort
to respond.”43 “As a sanction for the continuous filing of spurious motions” by Debtor,
the court ordered that it would not permit him to “file any further pleadings” in the case
38 Sun West exh. 10.
39 Sun West exh. 3.
40 Trust exh. 11.
41 See Sun West exh. 6, 2.
43 Sun West exh. 4, 3.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 14 of 32
“unless they are first submitted to this Court in chambers for review and approval.”44
On February 27, 2014, Debtor and Corporate Real Estate Services, Inc. filed a
petition in Johnson County, Kansas District Court.45 It was assigned case number
14CV1395 (hereafter Debtor’s New Property Litigation). Defendants are Sun West, the
Summers Law Firm, Verduzco, the Charles Hammond Law Firm, Hammond, and
Thomas Sutherland, the Johnson County, Kansas District Court judge in the Property
Litigation. As a part of his introductory allegations, Debtor states he “vehemently
disputes the Defendant’s title and ownership claims of the real property in question (the
“Home”) [referred to by this Court as the Property], which is the subject of this action.”46
The first five of the 13 claims are: (1) Temporary restraining order; lack of standing to
foreclose; motion to compel discovery requests; breach of contract; (2) fraud in the
concealment; (3) fraud in the inducement; (4) intentional infliction of emotional distress,
and (5) quiet title; negligence; per se.47
On March 3, 2014, Debtor appealed the November 19, 2012 and January 4, 2014
journal entries, granting Sun West and the Auld, Sr. Trust summary judgment in the
Property Litigation to the Kansas Court of Appeals. No bond was posted or stay issued.
Debtor filed this Chapter 11 bankruptcy voluntary case pro se on March 6, 2014.
45 Trust exh. 19.
46 Id., 6.
47 Id., 1.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 15 of 32
A. The Motion to Dismiss.
Dismissal of a Chapter 11 case is addressed by § 1112(b)(1). It provides:
(b)(1) Except as provided in paragraph (2) [prohibiting
conversion or dismissal when there are unusual
circumstances] and subsection (c) [prohibiting conversion to
Chapter 7 as to certain debtors], on request of a party in
interest, and after notice and a hearing, the court shall convert
a case under this chapter to a case under chapter 7 or dismiss
a case under this chapter, whichever 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.
Subsection (b)(4) provides a nonexclusive list of circumstances constituting cause, such
as gross mismanagement of the estate and failure to comply with an order of the court. "In
addition to granting relief for one of the reasons enumerated in section 1112(b), the court
may also dismiss a chapter 11 case for lack of good faith."48 "It is well established under
the Bankruptcy Code, as it was under the Bankruptcy Act, that a Chapter 11 Petition must
be filed in good faith, and if not, dismissal of the case is an appropriate remedy."49
Dismissal for cause and dismissal for lack of good faith are compared by a well
recognized bankruptcy commentator as follows:
48 3 Collier on Bankruptcy ¶1112.07, 1112-48 (Alan N. Resnick & Henry J.Sommer eds.-in-chief,
16th ed. rev. 2010). See In re Winslow, 123 B.R. 641, 643 (D. Colo. 191) aff'd 949 F.2d 401 (10th Cir. 1991)
("In addition to the grounds listed in § 1112, a number of courts have permitted conversion when the debtor's
petition has not been filed in good faith").
49 Pacific Rim Inv., LLP v. Oriam (In re Pacific Rim Inv., LLP), 243 B.R. 768, 771 (D. Colo. 2000)
(citing Udall v. FDIC (In re Nursery Land Dev., Inc.), 91 F.3d 1414, 1416 (10th Cir. 1996) (affirming
sanctions for bad faith filing of Chapter 11 case)).
Case 14-20424 Doc# 90 Filed 06/11/14 Page 16 of 32
In general, a court may dismiss any case for lack of good faith
in order to prevent abuse of the chapter 11 process or in
response to misconduct that is incompatible with the
functioning of the bankruptcy system. . . .
In general terms, the cause requirement of section 1112(b)
applies at various stages in the case to test whether the
benefits of reorganization are likely to be achieved within a
reasonable amount of time and in a manner that is consistent
with the requirements and restrictions of the Code. . . .
In contrast to testing the debtor's prospects of reorganization,
the good faith standard focuses directly on the subjective
intentions of the debtor and proper use of the bankruptcy
system as a general system of equity and is designed to
prevent "abuse of the bankruptcy process, or the rights of
others, involv[ing] conduct or situations only peripherally
related to the economic interplay between the debtor and the
When considering dismissal for lack of good faith, the matter “[a]t issue is whether the
bankruptcy filing contravened the purposes of the Bankruptcy Code.”51 The United
States Supreme Court has stated that the policies underlying Chapter 11 are preservation
of going concerns and maximizing property available to satisfy creditors.52 “The
protection of the automatic stay is not per se a valid justification for a Chapter 11 filing;
rather, it is a consequential benefit of an otherwise good faith filing.”53
A good faith determination requires consideration of the totality of the
50 3 Collier on Bankruptcy ¶1112.07, 1112-48 and 1112-49.
51 Solow v. PPI Ente. (U.S.), Inc. (In re PPI Enter. (U.S.), Inc.), 324 F.3d 197, 210 (3rd Cir. 2003).
52 Bank of Am. Nat’l Trust & Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434, 453 (1999).
53 NMSBPCSLDHB, L.P. v. Integrated Telecon Express, Inc., (In re Integrated Telecom Express., Inc,
384 F.3d 108, 128 (3d Cir. 2004) (quoting In re HBA East, Inc., 87 B.R. 248, 262 (Bankr. E.D. N.Y. 1988)).
Case 14-20424 Doc# 90 Filed 06/11/14 Page 17 of 32
circumstances and must be based upon a fact-intensive, case-by-case inquiry.54 When a
Chapter 11 Debtor’s good faith is challenged by a motion to dismiss, the moving party
must make a prima facie showing of the Debtor’s lack of good faith. The burden then
shifts to the Debtor to show good faith.55
1. This case is subject to dismissal because it was not filed in good faith.
The Movants argue that bad faith filing is evidenced by Debtor's habit of frivolous
court filings, Debtor's devotion to avoidance of his eviction from the Property, the timing
of the filing of the bankruptcy petition, and the fact that Debtor has no business to
reorganize and very little debt. The record confirms the Movants’ position, and Debtor
has not proven good faith.
The evidence in this case convinces the Court that the Chapter 11 case was filed to
obtain a stay of the Property Litigation and to set aside the rulings of the state court in the
Property Litigation adverse to the Debtor’s desire of continued occupation of the
Property. This is not a Chapter 11 case filed to preserve the value of Debtor’s business or
to maximize the value for creditors.
Debtor’s motivation is convincingly evidenced by the circumstances surrounding
the filing of this case. As the findings of fact state in great detail, since 2011 Debtor,
appearing primarily pro se, has engaged in fruitless litigation to establish his right to
54 In re PPI Enter. (U.S.), Inc., 324 F.3d at 210-211.
55 In re Muskogee Envtl Conservation Co., 236 B.R. 57, 59 (Bankr. N.D. Okl. 1999); In re Fox, 232
B.R. 229, 233 (Bankr. D. Kan. 1999).
Case 14-20424 Doc# 90 Filed 06/11/14 Page 18 of 32
remain in possession of the Property. The District Court of Johnson County, Kansas
rejected Debtor’s claims of right of ownership and possession under a note and
unrecorded mortgage from his father and an unrecorded deed and oral wish of his mother.
Debtor responded by removing the Property Litigation to the United States District Court,
by appealing the remand order to the United States Circuit Court of Appeals, by filing
voluminous pleadings restating his rejected positions, by appealing the journal entries
granting summary judgment in the Property Litigation to the Kansas Court of Appeals
more than a year after their entry, by filing suit in state court against the trial judge and
the parties to the Property Litigation and their counsel, and then by filing for bankruptcy
relief. He was sanctioned by the federal court and by the state trial court. Debtor’s
bankruptcy filing was made the day before a status conference at which the state court
was to consider a motion for writ of assistance to remove Debtor from the Property. As
stated above, filing to obtain the benefit of the § 362 stay is not per se justification for a
Chapter 11 filing.
Debtor’s financial circumstances evidence that this filing is outside the purposes of
Chapter 11. Debtor’s schedules and SOFA reveal that he has no business or affairs to
reorganize. Debtor’s business is real estate consulting. He has no employees. Debtor is
solvent. His only secured debt is a vehicle loan, which he is continuing to pay. His only
unsecured debts are for attorneys fees and sanctions incurred in the state court litigation.
The one monthly operating report which he had filed as of the date of trial, shows
personal expenses, not business expenses and that his business is operating profitably.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 19 of 32
That report, together with Debtor’s Schedule B, indicate that he has sufficient assets to
pay the unsecured claims in full.
Debtor’s voluminous pleadings filed in this Court opposing dismissal and relief
from stay focus on his belief that the adverse rulings made in the Property Litigation were
the result of fraud and should be set aside.56 For example, in response to the Movants’
arguments that Debtor’s schedules are contrary to the state court rulings, Debtor
responds: “This is clearly understandable as the findings are false and based upon
concealment of evidence, false facts, improper application of laws, negligent will full
blindness of evidence and case law in the record and fraud upon the Court. . . . The
judgment is also clearly VOID as it violates KS trust laws, real estate laws, laws on
substitution of parties, laws on standing and the like.”57 Later he states, “Debtor/Trustee
denies he has no equity in the subject property. . . . Clearly, he has testified under oath he
was given a life estate by his mother.”58 In this case, Debtor has attempted to serve
subpoenas for Rule 2004 examinations of the parties to the Property Litigation and
counsel, who are also defendants in Debtor’s New Property Litigation.59 In his view,
these are appropriate because of multiple frauds upon the state court and the concealment
56 See docs. 36, 40, 77, 78, and 79.
57 Doc. 36, 6-7.
58 Id., 11.
59 See docs. 17 and 18.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 20 of 32
of evidence.60 In his pleadings, Debtor alleges that the Movants have no legal standing to
file the motion to dismiss, despite the state court judgments concerning their rights in the
Property, because “[i]t has yet to be decided by this Court if their claims are secured,
unsecured, VOID or INVALID or not, as the parties have not gone through the proof of
claim process nor any adversary proceedings.”61 Seeking reversal of state court rulings is
not a valid purpose of a Chapter 11 filing. In fact, as examined below, this Court lacks
subject matter jurisdiction to review those findings.
Debtor has not proven his good faith. He testified that this litigation stems from
the divorce of his parents and is a battle to achieve his mother’s desire that Debtor remain
in the Property as long as it is in the family. When asked what he is trying to achieve in
the bankruptcy, Debtor was evasive. When asked what would be reorganized, he
responded his business, although he acknowledged that it was not in deep financial
trouble. According to Debtor, it is necessary that he operate his business from the
Property - he has always done so, and his records are there. However, there is no
evidence that clients come to the premises or that there is any advertisement or public
information locating the business at the Property. Debtor identifies no characteristics of
the Property which make it uniquely suited for or essential for his business.
2. This case is not subject to dismissal for cause.
Movants also urge that the case should be dismissed for cause under § 1112(b)(4),
60 Doc. 36, 14-15.
61 Doc. 78, 1.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 21 of 32
subsections (A), (F), (J), (K), and (M). These subsections define cause as follows:
(B)(4) For purposes of this subsection, the term ‘cause’
(A) substantial or continuing loss to or diminution of the
estate and the absence of a reasonable likelihood of
(F) unexcused failure to satisfy timely any filing or reporting
requirement established by this title or by any rule applicable
to a case under this chapter;
(J) failure to file a disclosure statement, or to file or confirm a
plan, within the time fixed by this title or by order of the
(K) failure to pay any fees or charges required under chapter
123 of title 28;
(M) inability to effectuate substantial consummation of a
The record lacks evidence to find cause for dismissal under these subsections.
Cause under § 1112(b)(4)(A) requires two elements. Although as stated above, there is
an absence of a reasonable likelihood of rehabilitation, since there is nothing to
rehabilitate, but there is no evidence of substantial or continuing loss or diminution of the
estate. The alleged violations of § 1112(b)(4)(F), such as failure to timely file operating
reports, are not sufficiently material to be grounds for dismissal at this early stage of the
Chapter 11 proceedings. Debtor is not delinquent in the filing of his disclosure statement
or plan, so § 1112(b)(4)(J) does not apply. As to § 1112(b)(4)(K), Debtor moved for and
was granted leave to pay his filing fee in installments, and his payments are not materially
delinquent. Section 1112(b)(4)(M) does not apply since there is no confirmed plan to
3. Before dismissing this case for lack of good faith filing, the Court requests
Case 14-20424 Doc# 90 Filed 06/11/14 Page 22 of 32
additional briefing on Movants’ request that the case be dismissed with prejudice.
At trial, the Movants requested that if the case is dismissed that the dismissal be
with prejudice to the refiling of a case within 180 days. This request was not briefed in
Movants’ pretrial filings. The Court’s own research has not located controlling
authorities supporting such an order under the circumstances of this case.
Rather than dismiss the case without prejudice at this time, the Court will defer
ruling on whether the dismissal is with or without prejudice until after completion of
briefing of the issue in accord with the briefing schedule stated at the end of this
4. If the case is not dismissed, the Court would lack subject matter
jurisdiction to consider Debtor’s claim of right to possession of the Property.
Under the Rooker-Feldman doctrine, this Court lacks subject matter jurisdiction to
accomplish what Debtor desires. That doctrine precludes this Court from entertaining
“cases brought by state-court losers complaining of injuries caused by state-court
judgments rendered before the [federal] court proceedings commenced and inviting
[federal] court review and rejection of those judgments.”62 As stated by the Tenth Circuit
Court of Appeals:
The Rooker–Feldman doctrine establishes, as a matter of
subject-matter jurisdiction, that only the United States
Supreme Court has appellate authority to review a state-court
decision. See 28 U.S.C. § 1257(a) (establishing Supreme
Court jurisdiction to review certain “[f]inal judgments or
62 Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284 (2005).
Case 14-20424 Doc# 90 Filed 06/11/14 Page 23 of 32
decrees rendered by the highest court of a State in which a
decision could be had”). Thus, in applying the
Rooker–Feldman doctrine, we focus on whether the lower
federal court, if it adjudicated plaintiff's claims, would
effectively act as an appellate court reviewing the state court
The doctrine does not distinguish between “temporary” and “final” orders.64 Pursuant to
Supreme Court precedent, the Tenth Circuit applies to the doctrine “(1) to those federal
claims actually decided by a state court, and (2) to those federal claims inextricable
intertwined with a state court judgment.”65
Debtor’s contention that this Court should find the state court orders concerning
interests in the Property erroneous, permeated with fraud, and void clearly falls within the
scope of the Rooker-Feldman doctrine. Debtor is asking this Court to rule contrary to the
state court - to find that Debtor is entitled to possession of the Property, when the state
court ruled that Debtor has no right of possession and the Auld, Sr. Trust is entitled to an
order of eviction. In bankruptcy, property rights are determined by state law. The
Johnson County, Kansas District Court has determined that Debtor has no right to
possession of the Property. This Court cannot review the propriety of that ruling.
To avoid the Rooker-Feldman doctrine, Debtor configures his claim for reversal of
the Property Litigation rulings as one for fraud. Debtor argues:
63 Merrill Lynch Bus. Fin. Serv., Inc. v. Nudell, 363 F.3d 1072, 1074 -1075 (10th Cir. 2004).
64 Id. at 1075.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 24 of 32
This case clearly calls in to question the many reasons at law
or in equity that decrees of foreclosure and/or eviction are
VOID and were fraudulently obtained. The parties had no
standing and can form no basis for a claim in this Court.
Again, so this Court is aware, there was no Jury trial as
demanded in the Sutherland Court [the Johnson County,
Kansas District Court]. There was no testimony or any
authentication of evidence or presentation of any evidence at
the Motion for Summary Judgment hearing. Discovery was
incomplete and evidence concealed. The Debtor/Trustee’s
attorney was new to the case and wanted time for more
discover. Mr. Hammond [attorney for the Auld, Sr. Trust]
filed no responsive pleading on behalf of the
children/beneficiaries (deliberately throwing them under the
In so doing, Debtor hopes to come within the ruling in Johnson, 67 where the Tenth Circuit
ruled that Rooker-Feldman did not apply when the plaintiff “lacked a reasonable
opportunity to litigate claims in the state court.”68 In Johnson, the plaintiff, the purported
father of a child whose adoption had been obtained in Utah state court, brought suit
against the biological mother, the adoption center, and the adoptive parents, seeking a
declaration that Utah’s adoption statutes unconstitutionally denied him notice and an
opportunity to be heard, and alleging intentional infliction of emotional distress. The
Tenth Circuit reversed the district court’s dismissal for lack of subject matter jurisdiction.
It held that Rooker-Feldman did not apply for two reasons. First, the plaintiff was not a
party to the Utah adoption proceedings, and Rooker-Feldman does not apply to non
66 Doc. 78, 16.
67 Johnson v. Rodrigues (Orozco), 226 F.3d 1103 (10th Cir. 2000).
68 Id. at 1110.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 25 of 32
parties. Second, on appeal plaintiff’s discrete challenge to the validity of the Utah
adoption laws would be considered. This distinguished the case from one challenging the
merits of the particular state ruling.69 Johnson does not apply here. Debtor was a party to
the Property Litigation and availed himself of his full and fair opportunity to oppose the
summary judgment motions. The arguments which Debtor raises concern the merits and
are issues which would be argued on a timely appeal from the state court rulings. If the
Court were to consider the arguments, it would effectively be acting as an appellate court.
B. The Motion for Relief from Stay.
Movants seek relief from stay to continue the Property Litigation against Debtor,
including Sun West’s foreclosure of its mortgage on the Property and the Ault, Sr. Trust’s
eviction of Debtor from the Property. They also seek relief from stay as to Debtor’s New
Property Litigation recently filed against the Movants. They rely upon § 362(d)(1) and
(d)(2). The Debtor opposes the motion for stay relief.
Section 362(d)(1) and (d)(2) provide:
(d) On request of a party in interest and after notice and a
hearing, the court shall grant relief from the stay provided
under subsection (a) of this section, such as by terminating,
annulling, modifying, or conditioning such stay—
(1) for cause, including the lack of adequate protection of an
interest in property of such party in interest;
(2) with respect to a stay of an act against property under
subsection (a) of this section, if—
(A) the debtor does not have an equity in such
69 Id. at 1108.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 26 of 32
(B) such property is not necessary to an effective
The Code does not define “party in interest” for purposes of § 362(d). But §
1109(b) by providing that the term includes the debtor, the trustee, a creditor, an equity
security holder, and official committees, suggests that the term is broadly construed. In
the context of a motion for relief from stay, a person or entity affected by the stay has an
interest in the stay and should be entitled to seek relief from stay.70 In this case, the
Movants are all affected by the stay because they are parties to the Property Litigation
and the Debtor’s New Property Litigation. The Court rejects the Debtors’ arguments that
the Movants lack standing to seek relief from stay.
Section 362(d)(1) does not define cause for relief from stay, other than to provide
that it includes lack of adequate protection. “Because there is no clear definition of what
constitutes ‘cause,’ discretionary relief from the stay must be determined on a case by
case basis.”71 An example of cause is “to permit litigation to be concluded in another
70 Vieland v. First Fed. Savings Bank (In re Vieland), 41 B.R. 134, 138 (Bankr. N.D. Ohio 1984)
(concluding that “‘a party in interest’ under section 362(d) must be determined on a case by case basis with
reference to the interest asserted and how said interest is affected by the automatic stay”); Evans v. The Bank
of N.Y. (In re Evans), 2013 WL 1283853 *3 (D. Colo. 2013)(quoting Vieland). 2 Collier on Bankruptcy
¶362.07, 362-106 (“ . . the better approach is to recognize that any party affected by the stay should be
entitled to move for relief.” Movants Sun West and the Auld, Sr. Trust also have standing as creditors of the
Debtor, since they have claims against the Property, and claims against the Debtor include claims against
property of the Debtor. 11 U.S.C. § 102(2).
71 Pursifull v. Eakin, 814 F.2d 1501, 1506 (10th Cir. 1987).
Case 14-20424 Doc# 90 Filed 06/11/14 Page 27 of 32
forum.”72 Twelve factors were identified in Curtis73 “as some of the issues a bankruptcy
court might consider when determining whether to lift the stay to permit pending
litigation in another forum.”74 They have been widely adopted by bankruptcy courts.75 In
addition, bad faith filing has been recognized as cause for relief from stay.76
The stay of § 362(a)(1) clearly applies to Johnson County, Kansas, case number
11CV4954. Of the twelve Curtis factors, the following are relevant to lifting the stay to
allow the continuation of that litigation:77 whether the relief would result in a partial or
complete resolution of issues; whether the litigation in another forum would prejudice the
interests of other interested parties; the interest of judicial economy and the expeditious
and economical determination of litigation; the impact of the stay on the parties and the
balance of hurt; and the stage of the foreign proceedings. These factors strongly support
relief from stay. The conclusion of the Property Litigation would result in a complete
resolution of Debtor’s claim of right to occupancy of the Property. Continuation of the
Property Litigation in the Kansas courts would not prejudice the interests of other
72 2 Collier on Bankruptcy ¶362.07[a], 362-107.
73 In re Curtis, 40 B.R. 795, 799-800 (Bankr. D. Utah 1984).
74 Busch v. Busch (In re Busch), 294 B.R. 137, 141 (10th Cir. BAP 2003).
76 E.g., Laguna Assoc. Ltd P’ship v. Aetna Casualty & Surety Co. (In re Laguna Assoc. Ltd. P’ship),
30 F.3d 734, 737-738 (6th Cir. 1994).
77 The Court has previously granted relief from stay with respect to the appeal filed by Debtor from
the summary judgment orders entered in Johnson County, Kansas case number 11CV4594. Doc. 46.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 28 of 32
interested parties. The interest of judicial economy would be well served. The Property
Litigation is close to conclusion. Motions for summary judgment have been granted.
Only post judgment matters are not resolved. Re-litigation of Debtor’s interest in the
Property in this Court would be outrageously inefficient. In addition, the Court has found
that this case was filed in bad faith. The stay should be lifted for cause under § 362(d)(1)
as to the Property Litigation.
The stay should be also lifted as to the litigation involving Debtor’s possession of
the Property under § 362(d)(2). With respect to acts against property, that subsection
allows lifting of the stay when (1) the debtor does not have equity in such property and
(2) such property is not necessary to an effective reorganization. Both conditions are
The Movants have proven, through the title documents and the journal entries in
the Property Litigation, that Debtor has no equity in the Property. The Kansas court ruled
that the Ault, Sr. Trust is the owner of the Property, that Debtor has no right of
possession, and that Debtor holds no lien in the Property by virtue of the 1987 note and
Debtor has not shown that the Property is necessary to an effective reorganization.
As to this element, the United States Supreme Court has stated:
Once the movant under § 362(d)(2) establishes that [the
Debtor has no equity in the property], it is the burden of the
debtor to establish that the collateral at issue is “necessary to
an effective reorganization.” What this requires is not merely
a showing that if there is conceivably to be an effective
Case 14-20424 Doc# 90 Filed 06/11/14 Page 29 of 32
reorganization, this property will be needed for it; but that the
property is essential for an effective reorganization that is in
prospect. This means, as many lower courts, including the en
banc court in this case, have properly said, that there must be
“a reasonable possibility of a successful reorganization within
a reasonable time.” 78
As stated previously, although Debtor conducts his business from the Property, there is no
evidence that clients visit the premises or that the Property is uniquely suited to the
conduct of the business. Also, for the reasons discussed above, the Court finds that there
is no reasonable likelihood of an effective reorganization, since there is no business which
needs to reorganize or could benefit from reorganization.
The extent to which the stay applies to Debtor’s New Property Litigation, recently
filed against the Movants and the judge who heard the Property Litigation, is less certain,
since the Debtor is the plaintiff. Nevertheless, the Court finds that to the extent that the
stay applies, it should be lifted. This recently filed case is directly related to the Property
Litigation. Since there is cause to lift the stay as to that case, the stay should also be lifted
as to the companion case. The Movant-defendants should not be hampered by the
shadow of the stay when asserting their defenses and evaluating counter claims.
For the foregoing reasons, the Court finds that the stay should be lifted to permit
the Movants to complete the Property Litigation and to fully defend the Debtor’s New
Property Litigation, including the filing of counter claims if deemed appropriate.
78 United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assoc., Ltd., 484 U.S. 365, 375-376 (1988)
Case 14-20424 Doc# 90 Filed 06/11/14 Page 30 of 32
Bankruptcy Rule 4001(a)(3) provides that an order lifting the stay shall be “stayed
until the expiration of 14 days after [its entry], unless the Court orders otherwise.” The
circumstances of this case convince the Court that immediate relief from stay is
CONCLUSION AND BRIEFING SCHEDULE.
The Court finds that this Chapter 11 case was not filed in good faith and is
therefore subject to dismissal. The Court further finds that this case is not subject to
dismissal for cause. The Court finds that if the case is not dismissed, it would lack
subject matter jurisdiction to provide the relief requested by Debtor. However, because
the Movants have requested that the dismissal for bad faith filing be with prejudice to the
filing of another case under Title 11 for 180 days and the Court is not certain it has the
authority to do so, the case will not be dismissed at this time. Movants shall within 35
days of the docket entry of this memorandum file a brief addressing the authority of the
Court to dismiss this case with prejudice to the Debtor’s filing of a new case under Title
11 within 180 days. Debtor may file a brief in response within 35 days of the filing of the
As found above, grounds to lift the automatic stay under § 362 (d)(1) and (d)(2)
are present. The Court orders that relief from stay be granted as to Johnson County,
Kansas District court case numbers 11CV4594 and 14CV1395 and that the order lifting
the stay be effective upon filing of the judgment granting the relief.
The foregoing constitute Findings of Fact and Conclusions of Law under Rules
Case 14-20424 Doc# 90 Filed 06/11/14 Page 31 of 32
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. A judgment granting
relief from stay based upon this ruling will be entered on a separate document.
IT IS SO ORDERED.
Case 14-20424 Doc# 90 Filed 06/11/14 Page 32 of 32
- Category: Judge Somers
- Published on 26 February 2014
- Written by Judge Somers
- Hits: 434
Posl-Bendsen et al v. Leonard et al, 09-06043 (Bankr. D. Kan. Feb. 3, 2014) Doc. 216
SIGNED this 3rd day of February, 2014.
For on-line use but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
DAVID TODD LEONARD and
MICHELLE LEIGH LEONARD,
JANICE POSL-BENDSEN, by John R.
Kurth, guardian and conservator; and
JOHN R. KURTH, Trustee of the Janice
Posl-Bendsen Revocable Living Trust,
DAVID TODD LEONARD and
MICHELLE LEIGH LEONARD,
CASE NO. 09-20190
ADV. NO. 09-6043
MEMORANDUM OPINION AND ORDER
DENYING DEFENDANTS’ MOTION TO DISMISS
Case 09-06043 Doc# 216 Filed 02/03/14 Page 1 of 4
In this adversary proceeding creditors Janice Posl-Bendsen, by John R. Kurth,
guardian and conservator, and the Trustee of the Janice Posl-Bendsen Revocable Living
Trust object to the discharge of their claim against Debtors David Todd Leonard and
Michelle Leigh Leonard under 11 U.S.C. §§ 523(a)(2), (a)(4), and (a)(6) and also seek an
order denying discharge under 11 U.S.C. §§ 727(a)(3), (a)(4), and (a)(5). Debtors, who
appear pro se, move to dismiss under Bankruptcy Rule 7012(b)(6). Plaintiffs, who appear
by Patrick E. Henderson, oppose the motion. The Court has jurisdiction.1 For the reasons
discussed below, the Court denies the motion.
THE MOTION TO DISMISS.
A. The applicable standard.
Defendants move to dismiss under Federal Bankruptcy Rule 7012(b), which
incorporates Federal Rule 12(b). It provides for presentation by motion of the defense of
“failure to state a claim upon which relief can be granted.” As recently stated by Judge
Karlin of this Court, that rule requires that
the complaint must contain “a short and plain statement of the
claim showing that the pleader is entitled to relief.” The
complaint must present factual allegations, that when assumed
1 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C. §§
157(a) and 1334(a) and (b), and the Standing Order 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 July 10, 1984. Furthermore, this Court may hear and finally adjudicate this
matter because it is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(I) and (J). There is no objection
to venue or jurisdiction over the parties.
Case 09-06043 Doc# 216 Filed 02/03/14 Page 2 of 4
to be true, “raise a right to relief above the speculative level,”
and the complaint must contain “enough facts to state a claim
to relief that is plausible on its face.” “Determining whether a
complaint states a plausible claim for relief is a context-
specific task that requires the reviewing court to draw on its
judicial experience and common sense. This contextual
approach means comparing the pleading with the elements of
the cause(s) of action.” A plaintiff must include in the
complaint “either direct or inferential allegations respecting
all the material elements necessary to sustain a recovery under
some viable legal theory.” “[T]he complaint must give the
court reason to believe that this plaintiff has a reasonable
likelihood of mustering factual support for these claims.”2
Defendants, in addition to relying upon this standard under Bankruptcy Rule 7012, also
cite Bankruptcy Rule 9(b) which states, “in alleging fraud or mistake, a party must state
with particularity the circumstances constituting fraud or mistake. Malice, intent,
knowledge, and other conditions of a person’s mind may be alleged generally.”
B. The motion is not granted because the Defendants’ arguments are not
After discussing the applicable standard, Defendants’ memorandum in support of
their motion includes a long section labeled “uncontroverted facts.” These facts are a
quotation of the uncontroverted facts found by the Court when denying the Plaintiffs’
motion for summary judgment.3 Next, the memorandum includes an analysis of the
elements of the various claims of the complaint, with the exception of Count I. In
2 Farmway Credit Union v. Eilert (In re Eilert), 2014 WL 23744, *1 (Bankr. D. Kan. Jan. 22,
2014) (footnotes omitted). Defendants’ statement of the applicable standard is consistent with this
quotation. See dkt. 214 at 2.
3 Dkt. 195.
Case 09-06043 Doc# 216 Filed 02/03/14 Page 3 of 4
conclusion of their argument, Defendants state, “The Plaintiffs’ adversary complaint
merely makes conclusory allegations, therefore, it fails to state a claim upon which relief
can be granted and it fails to show that the debtors discharge should be denied.”4
The Court declines to grant the motion because the arguments in support fail to
address the controlling standard. The only facts set forth are from the summary judgment
ruling.5 There is no discussion whether the allegations of the complaint contain enough
facts to state a claim to relief that is plausible on its face.
For the foregoing reasons, the motion to dismiss the complaint is denied.
IT IS SO ORDERED.
4 Dkt. 214 at 11.
5 Applicability of the findings of uncontroverted facts made by the Court when ruling on a motion
for summary judgment is limited to the specific motion under consideration when the findings were made.
Case 09-06043 Doc# 216 Filed 02/03/14 Page 4 of 4