- Category: Judge Somers
- Published: 09 February 2016
- Written by Judge Somers
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In Re Brooke Corporation, 08-22786 (Bankr. D. Kan. Feb. 8, 2016) Doc. # 5635
SIGNED this 5th day of February, 2016.
For print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
BROOKE CORPORATION, et al., CASE NO. 08-22786
DEBTORS. CHAPTER 7
MEMORANDUM OPINION AND JUDGMENT DENYING
ROBERT D. ORR’S SECOND AMENDED MOTION TO REPLACE TRUSTEE
Robert D. Orr, the founder, 32-percent owner and longtime CEO of Debtor Brooke
Corporation (Brooke Corp), moves to replace the Chapter 7 Trustee, Christopher J.
Redmond, alleging that he is not disinterested. Mr. Orr (Orr) appears pro se. Mr.
Redmond (Trustee or Redmond) appears by Bruce E. Strauss and Victor F. Weber of
Merrick, Baker & Strauss, P.C., special counsel for the Trustee. The Court has
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 1 of 22
When moving to replace the Trustee, Orr’s basic premise is that the bankruptcy
estates were financially devastated by wrongs committed prepetition by partners of
Husch Blackwell LLP (Husch Blackwell) and the postpetition actions of the Trustee, who
is a Husch Blackwell partner, in failing to pursue claims by the estates for such wrongs.
Orr alleges that the Trustee has acted for his own interests and the interests of his firm,
rather than the interests of the bankruptcy estates.
After hearing oral argument on Orr’s Motion to Replace Trustee2 and the Trustee’s
objection,3 the Court directed Orr to file an amended motion including all of his
allegations.4 Orr therefore filed his Second Amended Motion to Replace Trustee,5 which
is the motion now before the Court. In accord with the Court’s order, the Trustee filed a
pleading in support of denial of the motion on grounds other than the ultimate question of
1 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and § 1334(a) and (b) and the
Amended Standing Order of Reference of the United States District Court for the District of Kansas that
exercised authority conferred by § 157(a) to refer to the District’s bankruptcy judges all matters under the
Bankruptcy Code and all proceedings arising under the Code or arising in or related to a case under the
Code, effective June 24, 2013. D. Kan. Standing Order No. 13-1, printed in D. Kan. Rules of Practice
and Procedure at 168 (March 2014). A motion for removal of a trustee is a core proceeding which this
Court may hear and determine as provided in 28 U.S.C. § 157(b)(2)(A). There is no objection to venue or
jurisdiction over the parties.
2 Doc. 5476.
3 Doc. 5493.
4 Doc. 5535.
5 Doc. 5550.
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 2 of 22
whether the Trustee should be removed because he is not disinterested.6 The Trustee’s
pleadings are styled as a motion for summary judgment and a memorandum in support,7
and include an extensive statement of facts. Orr contends many of these facts are
controverted, but the Court finds that there is no genuine dispute about the following
background facts which are relevant to the motion to replace the Trustee.
Orr was the president of Debtor Brooke Corporation (Brooke Corp) from 1986
through 1991, the CEO from 1986 through October 1, 2007, and the chairman of the
board from 1991 through September 17, 2008. Orr also was the CEO, president, and
chairman of the board of Debtor Brooke Capital Corporation (Brooke Capital) at various
times in 2007 and 2008.
Brooke Capital, a subsidiary of Brooke Corp, was an insurance agency and finance
company that distributed insurance services through a network of franchisee-owned and
company-owned locations. To facilitate the acquisition of existing agencies and the
formation of start-up agencies, Brooke Capital developed a lending program through
which Brooke-affiliated agencies obtained loans from Aleritas Capital Corp. (Aleritas), a
6 Doc. 5599.
7 Docs. 5598 and 5599. The Trustee’s motion for summary judgment filed in response to Orr’s
Second Amended Motion to Replace Trustee, rather than addressing grounds for dismissal of Orr’s
motion, addresses defenses to the claims alleged in Orr’s draft complaint, a copy of which was attached to
the amended motion. These defenses include laches, waiver, judicial estoppel because Orr’s personal
claims against Husch Blackwell were not revealed in Orr’s personal bankruptcy schedules, and collateral
estoppel based upon Orr’s lawsuit against the Trustee’s predecessor. The Court declines to address these
defenses. Although some of these theories may provide valid defenses to at least some of the claims that
Orr wants a new trustee to pursue against Husch Blackwell, the draft complaint has not been filed. The
matter before this Court is the Second Amended Motion to Remove Trustee, not the merits of the claims
which Orr hopes will be filed.
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 3 of 22
non-debtor Brooke-related company. In 2003, Aleritas began securitizing the franchisee
loans for sale to investors. Bank of New York Mellon (BONY) acted as the trustee for
the benefit of the note-holders in some of the Brooke securitizations.
On September 11, 2008, BONY filed a complaint in the District Court against Orr
individually and a number of Brooke companies, including Brooke Corp, Brooke Capital,
and Aleritas, alleging that the Brooke Defendants had misappropriated millions of dollars
pledged to note-holders in the Brooke securitizations (District Court Action).8 It was also
alleged that Orr directed Aleritas and the Brooke Defendants to misappropriate funds, and
that at the direction of Orr, the misappropriations were intentionally concealed. With the
consent of the parties, including Orr, the Court appointed Albert Riederer as the Special
Master of the Special Master Estate, which was defined to be all monies of the Brooke
Defendants; all contract rights of the Brooke Defendants related to the securitized loans;
all records of the Brooke Defendants; and all other personal and real property of the
Brooke Defendants necessary to carry out the duties of the Special Master “to administer
and manage the Special Master Estate in a commercially reasonable manner” (the
Consent Order).9 Partners of Husch Blackwell were hired as counsel for the Special
Brooke Corp and Brooke Capital filed voluntary Chapter 11 petitions on October
28, 2008, in this Court. Brooke Investments, Inc., filed a voluntary petition on November
8 Bank of New York Mellon v. Aleritas Capital Corp., Case No. 2:08-cv-02424- JWL.
9 District Court Action, doc. 23, ¶ 6.
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3, 2008. A notice of bankruptcy filing was filed in the District Court Action.10 On
October 29, 2008, the Court entered an order appointing Albert Riederer, the Special
Master, as the Chapter 11 Trustee of Brooke Corp and Brooke Capital. He was later also
appointed as the Chapter 11 Trustee of Brooke Investments. Orr did not object to these
appointments. The Court directed the cases to be jointly administered.
On October 31, 2008, an application for the employment of Husch Blackwell as
attorneys for the Trustee was filed. There were no objections. The application was
approved by the Court on November 26, 2008. It provided for compensation for services
to be based upon time spent and hourly rates for the firm’s attorneys and paralegals.
On December 11, 2008, Orr filed a proof of claim in the amount of $14,783.68. Of
this amount, Orr claimed $10,950 was entitled to the priority for wages, salaries, or
commissions earned within 180 days before the filing of the bankruptcy petition. Orr was
listed as a creditor of Brooke Capital on Schedule E, Creditors Holding Unsecured
Priority Claims.11 On August 26, 2009, Brooke Holdings, Inc., filed a proof of claim for
$11,096,002.39, which was later transferred to Orr.12
On June 29, 2009, the Court entered an order converting the Debtors’ bankruptcy
proceedings to Chapter 7 and noting the United States Trustee’s decision to appoint
10 The Consent Order was vacated effective as of the date the Debtors’ bankruptcy cases were
converted to Chapter 7. The District Court Action was administratively closed on May 19, 2011. District
Court Action, docs. 102 and 105.
11 Case 08-22789, doc. 36 at 23.
12 Claim no. 924.
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 5 of 22
Riederer as the Chapter 7 Trustee of the Debtors upon conversion. On July 2, 2009, the
Chapter 7 Trustee filed his motion for the continued employment of Husch Blackwell as
counsel for the Trustee. The motion, as supplemented, was approved on August 22,
2009, without objection.
In the fall of 2011, Riederer found it necessary to resign as Trustee for health
reasons.13 Christopher J. Redmond, a partner at Husch Blackwell, was contacted by the
attorneys in the Office of the United States Trustee regarding his potential appointment as
the successor trustee. The United States Trustee’s office was aware that Husch Blackwell
was serving as counsel for Riederer and indicated that Redmond’s appointment would
facilitate an orderly transition and continued administration of the cases. On November
3, 2011, a notice of Riederer’s resignation and the appointment of Redmond was entered
on the docket. Prior to his appointment as the Trustee, Redmond did not perform any
services for the Debtors or for Riederer in his capacities as Special Master, Chapter 11
Trustee, or Chapter 7 Trustee.
On October 24, 2013, the Trustee filed an application to approve a revised
compensation structure, including a contingent-fee basis for specific adversary
proceedings, for Husch Blackwell, as the Trustee’s lead attorneys. On December 5, 2013,
the Court held an evidentiary hearing on a second revised compensation proposal. On
December 20, 2013, the Court approved the majority of the provisions in that proposal,
13 Riederer passed away some months later.
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 6 of 22
and requested the filing of a third revised proposal to address those matters not approved.
On January 6, 2014, the Court entered its order approving the revised application. Orr did
Starting in December 2012, the Trustee filed monthly status reports, and starting in
December 2013, he filed monthly financial reports. At the request of the United States
Trustee, on April 19, 2013, the Court approved the submission of future status reports on
a quarterly basis. The most recent status report, for the period from July through
September 2015,14 includes the following information evidencing the complexity and
magnitude of the tasks undertaken by the Trustee and his counsel. Ninety-three adversary
complaints have been filed (mostly in October 2010) against 487 defendants. Eighty-one
of these cases have resulted in settlement (307 defendants), default (55 defendants), or
dismissal (113 defendants).15 There were 10 remaining cases involving 17 defendants.
The gross claims asserted against the defendants in these outstanding cases were
$182,683,513.62. Recoveries to date were $13,617,309.91. Since the filing of the report,
the Court has approved the settlement of the Trustee’s claim against Kutak Rock for
approximately $17.5 million.16 One major adversary proceeding is ready for trial. The
14 Doc. 5564.
15 The Court has discovered two minor math errors in the report: the number of cases resolved
actually totals 83, and the number of defendants involved in the resolved cases totals 470, not 475 (307 +
55 + 113 = 475). These errors have not affected the Court’s decision.
16 The gross claim against Kutak Rock was $173 million, approximately 95% of the outstanding
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 7 of 22
total claims against the bankruptcy estates, after deducting disallowed claims, paid
claims, and withdrawn claims, are approximately $355 million for Brooke Corp, $113
million for Brooke Capital, and $1.5 million for Brooke Investments. Total professional
fees and expenses paid through December 31, 2013, were approximately $15 million.
Orr filed a voluntary petition under Chapter 11 on December 16, 2008. The case
was converted to Chapter 7 on December 7, 2009. The listing of possible claims in Orr’s
bankruptcy schedules included one against the Special Master (Riederer), but none
against Husch Blackwell.
In a letter dated June 9, 2010, addressed to the Office of the United States Trustee
in Wichita, Kansas, Orr in his capacity as the president of Brooke Holdings, Inc., advised
that he believed Riederer was obligated to Brooke Holdings, as a lender to Brooke
Corporation, as a result of Riederer’s allegedly improper acts as Special Master. Orr also
alleged that Riederer as Chapter 7 Trustee had acted in his own self-interest to avoid
claims by the bankruptcy estate against him for misconduct as Special Master.17
On August 11, 2010, Orr filed a complaint against Riederer in the District Court of
Phillips County, Kansas. The case was removed to the United States District Court for
the District of Kansas.18 Orr alleged that Riederer’s conduct when serving as Special
Master caused damage to Brooke Capital and the October 2008 collapse of the Brooke
companies. The Court dismissed Orr’s claims for gross negligence, intentional
17 Doc. 5476-3 at 2-3.
18 Orr v. Riederer, Case No. 6:10-cv-1303-CM (Riederer Suit).
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 8 of 22
misconduct, breach of fiduciary duties, and unjust enrichment, holding that Orr lacked
standing because he alleged he suffered only an indirect injury. The Court held that Orr
could serve as a representative shareholder and amend his complaint to assert the
dismissed claims as derivative claims, subject to Orr engaging an attorney to represent
him. Orr did not hire an attorney and never amended his complaint to assert any
derivative claims. On July 3, 2012, the District Court granted summary judgment against
Orr on the remaining claims, and judgment was entered in Riederer’s favor.
On May 4, 2011, the Securities and Exchange Commission filed a Complaint
against Orr alleging that in SEC filings and public statements for the year-end of 2007
and the first and second quarters of 2008, Orr and others violated securities laws by
misrepresenting the health of Brooke Capital’s business, Aleritas’s loan portfolio, and the
increasingly dire liquidity and financial conditions of the Brooke companies. On July 13,
2011, Orr consented to a judgment against him. On November 14, 2012, a federal grand
jury indicted Orr for making false statements in Securities and Exchange Commission
filings. On June 27, 2013, Orr pled guilty to knowingly making false or misleading
statements regarding material facts in Brooke Corp’s 10-K for the year ending December
On November 26, 2011, after Riederer’s resignation and the appointment of
Redmond as the successor Trustee, by a letter to Jay Befort, Assistant United States
Trustee, Orr, individually and as president of Brooke Holdings, Inc., stated his allegation
that Redmond as Chapter 7 Trustee had a conflict of interest. Orr alleged that Douglas
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 9 of 22
Schmidt, a Husch Blackwell partner who was counsel for Riederer as Special Master,
held animosity toward Orr and “that the appointment of a Husch Blackwell partner as
bankruptcy trustee will result in reprisals against [Orr] from Husch Blackwell using
bankruptcy estate assets.”19 The record contains no response from the U.S. Trustee.
By a letter dated July 22, 2013, addressed to the United States Trustee in Wichita,
Orr again alleged that Redmond had a conflict of interest. Orr requested a “complete and
thorough investigation of any appearance of conflict” and that all documents submitted by
the parties in Orr’s lawsuit against Riederer be analyzed by the United States Trustee in
performing its analysis of trustee suitability.20 The allegations in the letter included the
assertion that the “refusal of the trustee [of the Brooke cases] to fund litigation against
himself for pre-filing actions is an example of conflict, especially when analyzed in
context of the hundreds of adversary actions filed by the trustee against others for their
pre-filing actions.”21 On September 10, 2013, in another letter to the office of the United
States Trustee in Wichita, Orr focused upon alleged conflicts of interest of Husch
Blackwell resulting from actions before and while Riederer was serving as Special
Despite the concerns that Orr directed to the United States Trustee, he did not file
19 Doc. 5476-3 at 7.
20 Id. at 12-13.
21 Id. at 13.
22 Id. at 15.
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 10 of 22
with the Court any objection to the original application of Chapter 11 Trustee Riederer to
employ Husch Blackwell, to the application for the continued employment of Husch
Blackwell as attorneys for Riederer as the Chapter 7 Trustee, to the appointment of
Redmond as the successor Chapter 7 Trustee, or to the amendment of the Husch
Blackwell compensation structure in 2013.
By August 3, 2015, Orr had drafted a proposed complaint asserting personal and
derivative claims against Husch Blackwell and two of its partners. It is Orr’s position that
“Husch Blackwell and its partners caused the substantial losses [to the Brooke
companies] when they governed Brooke Corporation during the 2008 financial crisis
prior to the bankruptcy filing.”23 The draft complaint includes 6 counts on behalf of Orr
individually and 6 counts as derivative claims on behalf of the shareholders of Brooke
Corp, Aleritas, and Brooke Agency Services Company. A copy of the draft was
forwarded to the potential defendants and to Redmond, together with a demand that
Redmond file the complaint on behalf of the Brooke Corp bankruptcy estate.24 Redmond
responded, stating that he had not had time to review the complaint but that if Orr were to
file the complaint, it would be a violation of the automatic stay. In an e-mail Orr sent on
August 10, 2015, to an individual at the United States Department of Justice and to
Redmond, Orr requested support from the Department of Justice “if Mr. Redmond does
not (in good faith) request approval for payment of legal expenses for the derivative
23 Doc. 5476-5 at 3.
24 Doc. 5476-4 at 2.
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 11 of 22
On August 18, 2015, Orr filed his Motion to Replace Trustee.26 Attached to the
motion is a copy of the draft complaint against Husch Blackwell, Douglas Schmidt, and
John J. Cruciani, who are Husch Blackwell partners. The motion characterizes the
correspondence between Orr and Redmond in August 2015 as regarding the payment of
legal fees required to prosecute derivative claims on behalf of Brooke Corp shareholders
against the potential defendants. After the Court heard arguments on Orr’s motion, Orr
sent an e-mail to counsel for the Trustee on September 23, 2015, with respect to Orr’s
allegations, in which he stated:
My end game is not to replace the trustee. . . . My end game is
for the district court to decide if Husch Blackwell is
culpable. . . .
I am willing to withdraw my motion to replace the trustee and
my objection to Veris compensation if the trustee obtains
court approval for a $1,000,000 fees retainer to be paid into
the trust account of the attorney I have selected to represent
shareholders. . . .
The payment of a $1,000,000 retainer would be paid by the
estate and not by Husch Blackwell. As such, the only reason
for the trustee to oppose this arrangement is to protect his
employer and partners.27
The Trustee, through special counsel, responded to the Motion to Replace Trustee,
25 Doc. 5476-5 at 2-3.
26 Doc. 5476.
27 Doc. 5550-7 at 2.
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 12 of 22
contending there was no reason to replace the Trustee because there was no basis to find
that Redmond was not disinterested. According to the Trustee, the record in prior actions
by and against Orr precluded the allegations made against Husch Blackwell, which in any
event, were time-barred.28
The United States Trustee appeared at the argument on the Motion to Replace
Trustee because Orr had contacted his office “about these issues with Mr. Redmond.”29
The United States Trustee stated, “We have reviewed them. He requested that we remove
Mr. Redmond for the reasons he stated in his motion. We did not believe that there was
cause for us to take action, so we did not, which led to Mr. Orr taking his action [of filing
the Motion to Replace Trustee].”30
Orr’s Second Amended Motion to Replace Trustee was filed on November 10,
2015.31 A draft complaint identical to that attached to the first Motion to Replace Trustee
is attached. In the motion, Orr alleges Redmond should be replaced as trustee because he
is not “disinterested” as defined by 11 U.S.C. § 101(14)(C), saying:
a) due to potential causes of action against employer
Husch Blackwell, LLC, partner Douglas Schmidt and partner
John Cruciani (collectively “Husch Blackwell”) for their prebankruptcy
misconduct while counsel for the Brooke
Corporation special master estate,
28 Doc. 5493.
29 Doc. 5578, transcript of 10/27/2015 status conference at 4.
31 Doc. 5550.
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 13 of 22
b) due to potential causes of action against Husch
Blackwell for promoting interests adverse to the Brooke
Corporation bankruptcy estate while counsel for the Brooke
Corporation bankruptcy estates [sic] in order to protect Husch
Blackwell from legal liability for their pre-bankruptcy
c) due to potential causes of action against Redmond,
individually and as trustee, for promoting interests adverse to
the Brooke Corporation estate in order to protect and enrich
Orr argues that his Motion to Replace Trustee is timely because the last of the adversary
actions filed by the Trustee against Orr and his family members was concluded only a few
months ago and he relied upon the United States Trustee to supervise Redmond until
these actions were completed.33
A. Grounds for Removal.
Orr’s motion seeks an order to remove Redmond for lack of disinterestedness due
to his relationship with Husch Blackwell, the law firm alleged to have caused the collapse
of Brooke’s business. Removal of a trustee is addressed by 11 U.S.C. § 324(a), which
provides: “The court, after notice and a hearing, may remove a trustee, other than the
United States trustee, or an examiner, for cause.” The Bankruptcy “Code does not define
what constitutes sufficient cause[, and] courts must make the determination on a case by
32 Doc. 5550 at 2.
33 Doc. 5550-1 at 12.
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 14 of 22
case basis.”34 The party seeking removal has the burden of proof.35 “Under the
Bankruptcy Code, causes for removal have included situations in which the trustee was
found to be incompetent or unwilling to perform the duties of a trustee; the trustee was
not disinterested or held an interest adverse to the estate; the trustee violated the fiduciary
duty to the estate; and the trustee was guilty of misconduct in office or personal
misconduct.”36 “[A] trustee will not be removed for mistakes in judgment where the
judgment is discretionary and reasonable under the circumstances.”37 Further, “courts
should consider the best interests of the estate, rather than those of a single movant
creditor, when determining whether to remove a trustee.”38
Orr alleges that the Trustee is not disinterested and acted to protect Husch
Blackwell rather than to promote the interests of the estate. The allegations assert
grounds recognized as sufficient for removal under § 324. Nevertheless, one must look
below the surface of the motion to place the matter in proper context. The grounds for
34 In re Miller, 302 B.R. 705, 709 (10th Cir. BAP 2003).
35 Cf. In re Lundborg, 110 B.R. 106, 108 (“In general, a party seeking the removal of a trustee
must prove that there has been some actual injury or fraud.”); In re Hartley, 50 B.R. 852, 859 (Bankr.
N.D. Ohio 1985) (“Forcing the accusors [seeking removal of a trustee under § 324] to quickly come
forward and show actual harm or fraud protects not only innocent trustees but also the orderly
administration of estates which should not be disrupted because creditors are unhappy when trustees
institute actions against them pursuant to their statutory duties to recover preferences or fraudulent
36 3 Collier on Bankruptcy, ¶ 324.02 at 324-4 to 324-5 (Alan N. Resnick & Henry J. Sommer,
eds.-in-chief, 16th ed. 2015).
37 Id. at ¶ 324.02 at 324-6.
38 In re Lundborg, 110 B.R. 106, 108 (Bankr. D. Conn. 1990).
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 15 of 22
removal on first examination appear to be significant multiple offenses. However, close
examination reveals that all of the allegations are built upon the single contention that the
Trustee is not disinterested because Husch Blackwell attorneys are liable to Orr
personally and to the stockholders of various Brooke-related companies for alleged
malfeasance that supposedly caused the collapse of the Brooke enterprise during the
period when Riederer was the Special Master. The allegations of a lack of
disinterestedness after the Brooke Corp bankruptcy was filed assert that (1) Husch
Blackwell as counsel for Riederer as the Chapter 11 Trustee, (2) Redmond as the Chapter
7 Trustee, and (3) Husch Blackwell as counsel for Trustee Redmond, have acted to
protect Riederer and Husch Blackwell from being held liable to Orr and the stockholders
for these pre-petition wrongs. The multiple assertions in the Motion to Replace Trustee
have been inflated by creative pleading to appear monumental, when in reality there is
only one basic source of the alleged lack of disinterestedness arising from the alleged
liability for the collapse of the Brooke business during the Special Master period. But
this basic allegation is not a simple matter; the Court’s familiarity with the cases leads it
to conclude that whether this allegation is true could only be established by a trial on the
merits involving multiple experts, after extensive discovery.39
39 The Trustee contends that collateral estoppel bars Orr’s claim of Husch Blackwell liability
arising from events while the Special Master was in control of Brooke because of the District Court’s
dismissal of the Riederer Suit, Orr’s suit against Riederer. The Court has been provided only minimal
facts and arguments, but those facts suggest that there was no adjudication on the merits of the derivative
claims which are important here. See 13A Charles Alan Wright, Arthur R. Miller & Edward H. Cooper,
Federal Practice and Procedure: Civil 3d, § 3531 at 1-2 (3rd ed. 2008) (“Standing doctrines are
employed to refuse to determine the merits of a legal claim, on the ground that even though the claim may
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 16 of 22
B. The Motion to Replace Trustee is denied for unjustified delay.
Neither the Bankruptcy Code nor the Bankruptcy Rules provide a time limit for
filing a motion to remove a trustee. However, case law establishes that a motion to
remove a trustee or to disqualify a professional for not being disinterested may be denied
for undue delay. “An unjustified delay in bringing a motion to disqualify [a professional
under § 327(a)] provides a separate ground to deny the relief requested in the underlying
motion.”40 For example, a motion was found to be untimely where a Chapter 11 trustee
had been appointed on September 28, 2012, but the request for removal was not asserted
until March 19, 2014.41 Where the underlying basis for the disqualification of
accountants was known in April 2003 but the motion was not filed until March 2004, the
delay was held to be unjustified. 42 A delay of less than two months in contesting the
disinterestedness of counsel hired by an unsecured creditors committee has also been
found to be unjustified.43
In this case, the delay in bringing the Motion to Replace Trustee is a sufficient
reason to deny it. The predicate for Orr’s assertions of the Trustee’s lack of
be correct the litigant advancing it is not properly situated to be entitled to its judicial determination.”).
40 In re WorldCom, Inc., 311 B.R. 151, 166-167 (Bankr. S.D.N.Y. 2004) (seeking disqualification
of debtor’s accounting firm as holding adverse interest and not being disinterested).
41 In re Fletcher Int’l, Ltd., 536 B.R. 551, 560-61 (S.D.N.Y. 2015).
42 In re Worldcom, 311 B.R. at 165-68.
43 Exco Res., Inc. v. Milbank, Tweed, Hadley & McCloy LLP (In re Enron Corp.), 2003 WL
223455 at *4 n. 2 (S.D.N.Y. 2003).
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 17 of 22
disinterestedness is the allegation that the collapse of the Brooke enterprise was caused by
the actions of Riederer and his counsel, partners in Husch Blackwell, while Riederer was
serving as Special Master in 2008. Orr was a party to the BONY litigation in which the
Special Master was appointed and had knowledge of Riederer’s actions and inactions as
they occurred. By the time Brooke Corp filed for bankruptcy in October 2008, the events
giving rise to Orr’s present allegations had occurred and were known or should have been
known by him. In his response to the Trustee’s motion for summary judgment, Orr states,
“It is undisputed that Orr was aware of potential claims against Husch Blackwell for gross
negligence, intentional misconduct, breach of fiduciary duties and unjust enrichment
before filing a lawsuit against Riederer in August 2010.”44 In addition, Orr’s
correspondence with the Office of the United States Trustee conclusively shows that he
had formulated his conflict theory no later than November 26, 2011, the date of the letter
in which he alleged that Redmond had a conflict of interest because of Schmidt’s
representation of Riederer as Special Master. The very specific allegation of a conflict of
interest because Redmond would not fund litigation against Husch Blackwell for prefiling
actions is raised in Orr’s letter dated July 22, 2013, which stated that such refusal
had occurred before March 19, 2012.45
Yet Orr waited until August 18, 2015, to file his Motion to Replace Trustee. Orr
contends that this delay was justified because the Trustee’s actions against Orr’s family
44 Doc. 5611 at 11.
45 Doc. 5476-3 at 13.
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 18 of 22
members were not concluded until a few months earlier. He alleges that the pendency of
such actions created a conflict between Orr’s interest in the affairs of his family and his
interest in pursuing the Trustee, and the motion is timely because it was filed shortly after
this alleged conflict was resolved by the conclusion of the claims against his family.46 He
further alleges that “[p]rior to this last settlement, the filing of a motion to replace
Redmond would have been perceived as a strategy for personal defense in the family
adversary actions.”47 In addition, he contends that the delay was justifiable because prior
to filing the motion to replace the trustee, he relied upon the United States Trustee to
pursue the matter.48 The Court rejects these reasons as a basis to find the delay to be
justified. If a motion to remove the trustee could be delayed for personal reasons for
years until the administration of the bankruptcy estate is near completion, the very
purpose of permitting removal — to assure the independent administration of the
estate — would be defeated. Orr’s letter of July 22, 2013, indicates that by a letter dated
March 19, 2012, the United States Trustee advised him that he had analyzed Orr’s
allegations and found them wanting. Relying on the United States Trustee to pursue
disqualification after that date was not reasonable.
C. The circumstances of the present motion evidence the appropriateness of
denying the motion because of delay.
46 Doc. 5611 at 13.
47 Doc. 5550-1 at 12; see Doc. 5578, transcript, Oct. 27, of 10/27/2015, status conference at 8 &
48 Doc. 5611 at 13.
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 19 of 22
As stated above, when ruling on motions to remove trustees, “courts should
consider the best interests of the estate, rather than those of a single movant-creditor.”49
In this case, removal of the Trustee at this late stage would cause administrative chaos,
resulting in harm to the estates. These are complex cases. Only Redmond and his
counsel can efficiently bring these cases to a conclusion. The cost to the estates resulting
from the substitution of a new trustee, and presumably the appointment of substitute
counsel for the substituted trustee, more than seven years after the cases were
commenced, would be significant.
Further, whether there is cause to remove Redmond cannot be determined until an
unknown date far in the future. The basic allegation of a lack of disinterestedness, from
which Orr’s multiple allegations arise, is that Husch Blackwell attorneys, when acting as
counsel for Riederer as Special Master, controlled or perhaps facilitated Riederer’s actions
which caused the collapse of Brooke’s business. It is understating the obvious to note that
a determination of the cause of Brooke’s failure could not be made until after extensive
discovery and a lengthy trial. Riederer’s unavailability as a witness would increase the
litigation burden. Orr’s delay in moving for the replacement of the Trustee has prejudiced
the Court’s ability to resolve the merits of the conflict-of-interest allegations in a timely
manner before the administration of the estates is substantially complete.
In addition, Orr does not purport to have brought the Motion to Replace Trustee for
49 In re Lundborg, 110 B.R. at 108.
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 20 of 22
the benefit of the estates and their creditors. Orr’s motivation is highly personal; he seeks
through litigation under his control to prove that he is not to blame for the collapse of the
Brooke enterprise. Since Redmond has not agreed to pursue litigation alleging that Husch
Blackwell is to blame or to provide Orr with $1,000,000 to do so, he seeks the removal of
Redmond. He explains the purpose of his motion as follows:
Redmond’s Memorandum inaccurately states Orr’s
litigation objective includes the replacement of Redmond with
a chapter 7 trustee who will file a complaint against Husch
Blackwell for their pre-bankruptcy misconduct. Orr, not the
chapter 7 trustee, is the most suitable party to file the
referenced complaint because the complaint includes personal
claims against Husch Blackwell that are owned by Orr and
because the complaint includes derivative claims against
Husch Blackwell in which Brooke Corporation shares
ownership with thousands of other shareholders in non-
bankrupt and publicly traded Aleritas Capital Corp
(“Aleritas”). Orr seeks to share the burden of litigation with
Brooke Corporation’s bankruptcy estate and with Aleritas’
shareholders/creditors. Orr intends to partially fund his share
of litigation expense from payment to Orr on the $12 million
promissory note claim against the Brooke Corporation
Before filing his Second Amended Motion to Replace Trustee, Orr advised special counsel
for the Trustee as follows:
My end game is not to replace the trustee. . . . My end game is
for the district court to decide if Husch Blackwell is
culpable. . . .
I am willing to withdraw my motion to replace the trustee and
my objection to Veris compensation if the trustee obtains court
50 Doc. 5611 at 1 (emphasis supplied).
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 21 of 22
approval for a $1,000,000 fees retainer to be paid into the trust
account of the attorney I have selected to represent
shareholders. . . .
The payment of a $1,000,000 retainer would be paid by the
estate and not by Husch Blackwell. As such, the only reason
for the trustee to oppose this arrangement is to protect his
employer and partners.51
To remove a trustee under § 324 under the circumstances of this case would be a misuse of
the Court’s authority.
CONCLUSION AND JUDGMENT.
For the foregoing reasons, the Court denies Orr’s Second Amended Motion to
Replace Trustee. Judgment is hereby entered denying the relief sought in that motion.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rules
7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure, which make Rule 52(a)
of the Federal Rules of Civil Procedure applicable to this matter. The judgment based on
the ruling stated above will become effective when it is entered on the docket for this case,
as provided by Federal Rule of Bankruptcy Procedure 9021.
IT IS SO ORDERED.
# # #
51 Doc. 5550-7 at 2.
Case 08-22786 Doc# 5635 Filed 02/05/16 Page 22 of 22
- Category: Judge Somers
- Published: 08 February 2016
- Written by Judge Somers
- Hits: 43
Morris v. Sigg Financial Services LLC et al, 15-05021 (Bankr. D. Kan. Feb. 3, 2016) Doc. # 24
SIGNED this 3rd day of February, 2016.
Designated for on-line use but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
ARNOLD RAY THOMAS and
SHELLY MARIE THOMAS,
J. MICHAEL MORRIS, Trustee,
SIGG FINANCIAL SERVICES, LLC
and SIGG MOTORS #1, LLC,
CASE NO. 14-12646
ADV. NO. 15-5021
MEMORANDUM OPINION AND ORDER
DENYING DEFENDANTS' MOTION TO SET ASIDE DEFAULT JUDGMENT
Case 15-05021 Doc# 24 Filed 02/03/16 Page 1 of 9
In this adversary proceeding, J. Michael Morris, the Chapter 7 Trustee of Debtors
Arnold and Shelly Thomas, seeks to set aside under 11 U.S.C. § 544(a) and preserve for
the benefit of the estate under 11 U.S.C. § 551, an allegedly unperfected lien in Debtor's
2006 Chevrolet Impala, the purchase of which was financed by Defendant Sigg Financial
Services, LLC. A default judgment was entered on May 11, 2015. Defendants filed their
Motion to Set Aside Default Judgment on May 30, 2015. Trial on the motion to set aside,
as well as the merits of the lien perfection issue, was held on August 18, 2015. Plaintiff
appeared by J. Michael Morris. Defendants appeared by David A Clark. The Court has
FINDINGS OF FACT.
On September 16, 2014, Arnold Thomas (Debtor) purchased a 2006 Chevrolet
Impala, hereafter Vehicle, from Sigg Motors, located in Iola, Kansas. The purchase was
financed by Defendant Sigg Financial, also located in Iola, Kansas. Debtor granted Sigg
Financial a security interest in the Vehicle. As a part of the sales transaction, a Notice of
Security Interest (NOSI) was prepared, signed by Debtor and Sigg Financial Services, and
mailed to the Kansas Department of Revenue two or three days later. Sigg Financial
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 No. 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)(K). There is no objection to venue or jurisdiction over the parties.
Case 15-05021 Doc# 24 Filed 02/03/16 Page 2 of 9
received from the Kansas Department of Revenue a letter regarding the Vehicle stating,
“This letter is to inform you that a security interest was perfected against the record of the
vehicle listed above executed on 10/17/2014.”2 The letter also states, “Lien Perfected
Date (Transaction Date): 10/17/2014.”3
Debtors filed for relief under Chapter 7 on November 26, 2014. Schedule D lists
Sigg Financial as the only secured creditor. Ron Sigg, who is not an attorney, handles
bankruptcy and collection matters for Defendants, including the filing and prosecution of
many limited action proceedings. He is an employee of Defendants, has no ownership
interest in the Defendants, and is not related to the owners, John M. Sigg and his father
Mitch Sigg. Ron Sigg testified that upon receiving notice of the bankruptcy filing he sent
a proposed reaffirmation agreement and enclosed a copy of the NOSI. A copy of the
letter was not offered as an exhibit at trial.
J. Michael Morris was appointed Chapter 7 Trustee. He reviewed the electronic
title records of the Kansas Department of Revenue and found no record of the NOSI. On
January 26, 2015, the Trustee sent a letter to Sigg Financial asserting that Sigg Financial's
lien on the Vehicle was unperfected as of the date of filing and demanding
acknowledgment that the lien was unperfected and therefor avoided for the benefit of the
bankruptcy estate. Ron Sigg received the letter, examined Sigg Financial's records, and
2 Exh. E.
Case 15-05021 Doc# 24 Filed 02/03/16 Page 3 of 9
determined that the lien was perfected. He therefore did not respond to the Trustee's
The Trustee filed the Complaint to Avoid and Preserve Unperfected Security
Interest on February 19, 2015. On February 25, 2015, the summons and Complaint were
served on John M. Sigg, as resident agent for Sigg Financial and Sigg Motors, by first
class mail. In accord Sigg Financial's practices, the Complaint was forwarded to Ron
Sigg. He discussed it with Mitch Sigg. Ron Sigg did not regard the summons as giving
notice of a lawsuit because it was served by first class mail, rather than by process server
or certified mail, the manners of service with which he was familiar. The summons states
that "if you fail to respond to this summons, your failure will be deemed be your consent
to entry of a judgment by the bankruptcy court and judgment by default may be taken
against you."4 Nevertheless, Ron Sigg chose to do nothing because in his opinion Sigg
Financial had a perfected lien and he did not look at the summons and complaint as a
Connie Wolken also testified. She is employed by Sigg Motors and Sigg Financial
as title clerk and prepared the sale documents, including the September 16, 2014 security
agreement and NOSI. After the sale transactions, Debtor Arnold Thomas came to Connie
Wolken because he desired to add a name to the Vehicle title. Sigg Financial therefore
executed a lien release dated December 2, 2014.5 A new title was issued listing Sigg
4 Exh. 3.
5 Exh. 11.
Case 15-05021 Doc# 24 Filed 02/03/16 Page 4 of 9
Financial as lien holder. The Title and Registration Receipt issued by the Kansas
Department of Revenue show a transaction date of December 19, 2014.6
On May 5, 2015, the Clerk of the Bankruptcy Court entered a Clerk's Entry of
Default against Defendants in accord with Federal Rule of Civil Procedure 55(a), made
applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7055. On
May 7, 2015, the Trustee filed his motion for default judgment against Defendants Sigg
Motors and Sigg Financial. The order granting the default judgment was filed on May
11, 2015. It grants judgment against Defendants avoiding their lien on the Vehicle
pursuant to 11 U.S.C. § 544(a), preserving the lien for the benefit of the estate pursuant to
11 U.S.C. §551 and also granting a $350 judgment for costs against the Defendants,
jointly and severally.
A. The Rule 60(b)(1) standard.
Defendants seek to set aside the default judgment under Federal Rule of
Bankruptcy Procedure 7055, which incorporates Federal Rule of Civil Procedure 55(c). It
provides: “The court may set aside an entry of default for good cause, and it may set aside
a final default judgment under Rule 60(b).” Defendants rely on subsection (1) of Rule
6 Exh. F.
Case 15-05021 Doc# 24 Filed 02/03/16 Page 5 of 9
60(b), which provides that upon motion and just terms the court may set aside a judgment
for the reasons of “mistake, inadvertence, surprise, or excusable neglect.”7
Rule 60(b)(1) motions premised upon mistake are intended to provide relief to a
party in only two instances: (1) when “a party has made an excusable litigation mistake or
an attorney in the litigation has acted without authority; or (2) whe[n] the judge has made
a substantive mistake of law or fact in the final judgment or order.”8
The determination of whether neglect is excusable “is at
bottom an equitable one, taking account of all relevant
circumstances surrounding the party's omission.” Relevant
factors include “the danger of prejudice to the [opposing
party], the length of the delay and its potential impact on
judicial proceedings, the reason for the delay, including
whether it was within the reasonable control of the movant,
and whether the movant acted in good faith.” “ ‘[F]ault in the
delay remains a very important factor—perhaps the most
important single factor—in determining whether neglect is
If the movant satisfies the burden of demonstrating excusable neglect, then he also has the
burden of showing a meritorious defense.10
7 In their motion, Defendants also cited subsection (3), providing a judgment may be set aside for
“fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing
party.” No evidence was offered to support this allegation and Defendants did not otherwise pursue this
ground. It is therefore deemed to have been waived.
8 Utah ex rel. Div. of Forestry, Fire & State Lands v. United States, 528 F.3d 712, 722-23 (10th
Cir. 2008) (quoting Cashner v. Freedom Stores, Inc., 98 F.3d 572, 576 (10th Cir.1996)).
9 Jennings v. Rivers, 394 F.3d 850, 856-57 (10th Cir. 2005) (citations omitted).
10 Marcus Food Co. v. DiPanfilo, 671 F.3d 1159, 1172 (10th Cir. 2011). If the Sigg parties had
shown excusable neglect, the Court would set aside the default because Defendants have also shown that
they have a meritorious defense. As stated above, trial was held on the merits of the Trustee’s motion for
lien avoidance. In order to prevail on his claim of avoidance under § 544(a), the Trustee must show that
the lien on the Vehicle was not perfected on November 26, 2014, the date the bankruptcy was filed.
Case 15-05021 Doc# 24 Filed 02/03/16 Page 6 of 9
B. Defendants’ conduct does not satisfy the definition of excusable neglect.
The definition of excusable neglect has been addressed by the Tenth Circuit Court
“[F]or purposes of Rule 60(b), ‘excusable neglect’ is
understood to encompass situations in which failure to
comply with a ... deadline is attributable to negligence. More
generally, “[t]he ordinary meaning of ‘neglect’ is ‘to give
little attention or respect to a matter, or . . . ‘to leave undone
or unattended to esp[ecially] through carelessness.’ The word
therefore encompasses both simple faultless omissions to act
and, more commonly, omissions caused by carelessness.11
But excusable neglect does not include mistakes “that were the result of a deliberate and
counseled decision by the complaining party . . .. Thus, a party who simply
misunderstands or fails to predict the legal consequences of his deliberate acts cannot
later, once the lesson is learned, turn back the clock to undo those mistakes.” 12
The Vehicle was sold to Debtor on September 16, 2014. On that date, a Notice of Security
Interest was completed. It was mailed to the Department of Revenue two or three days later, thereby
perfecting the lien in accord with K.S.A. 2014 Supp. 8-135(c)(5). The Department of Revenue provided
notice to Sigg Financial identifying the Vehicle and stating that “a security interest was perfected against
the record vehicle listed above executed on 10/17/2014.” Exhibit E. states: “Lien Perfected Date
(Transaction Date): 10/17/2014.” It appears to the Court that this date may be a typographical error, since
the evidence conclusively establishes that the sale date was 9/16/2014. But since the critical date is
November 26, 2014, the presence or absence of this possible error is not material. The release of the
purchase lien to facilitate the Debtor’s desire to add a name to the certificate of title did not occur until
December 2, 2014, after Debtors filed their bankruptcy petition on November 26, 2014. Thereafter a new
title was issued showing Sigg Financial’s lien. This is the reason why the Department of Revenue
Records when examined by the Trustee in January 2015 showed a lien perfection date of January 7, 2015
and the absence of a NOSI.
11 Jennings v. Rivers, 394 F.3d at 856 (citations omitted).
12 Yapp v. Excel Corp., 186 F.3d 1222, 1231 (10th Cir. 1999) (citations omitted).
Case 15-05021 Doc# 24 Filed 02/03/16 Page 7 of 9
The court finds that Defendants’ neglect was not excusable as so defined. Ron
Sigg, to whom Defendants delegated the responsibility to review and respond to matters
received from the bankruptcy court, acted deliberately when failing to respond to the
Trustee’s demand letter and to the summons, thereby providing the basis for the default
judgment. He had two reasons for not filing a response to the Complaint. First, he
erroneously concluded that a response was not necessary because the summons was
served on Defendants by first class mail, rather than by process server or registered mail.
Second, he erroneously concluded that a response was not necessary because Defendants’
records included evidence of perfection of their security interest in the Vehicle. Ron Sigg
misunderstood the legal consequences of service by mail and the need to respond.
C. Given the nature of Defendants’ conduct, the Court finds the other
relevant factors insufficient to support relief.
The Court turns to consideration of the additional relevant factors stated above. In
this case there is minimal prejudice to the Trustee, as he reported that in reliance on the
default he has negotiated with the Debtor to purchase the Vehicle. The delay between the
entry of the default judgment and the motion to set aside was less than two weeks. Sigg
Financial acted in good faith.
But “fault in the delay [is] a very important factor—perhaps the most important
single factor—in determining whether neglect is excusable.”13 The failure to timely
respond was controlled solely by the Defendants. The “do nothing” response to the
13 Jennings v. Rivers, 394 F.3d at 856 (quoting United States v. Torres, 372 F.3d 1159, 1163 (10th
Case 15-05021 Doc# 24 Filed 02/03/16 Page 8 of 9
Complaint was the same as the “do nothing” response to the Trustee’s demand letter. The
default was the result of Ron Sigg’s determination that no response was needed because
of improper service and lack of merit on the lien avoidance question. At trial Ron Sigg
demonstrated indifference bordering on contemp toward the Trustee’s demand letter and
the Court’s summons. A reasonable person, particularly a reasonable person employed to
manage collections for the financing arm of a car dealership, would have responded to the
demand and the summons. The decision is harsh, but it is not grounded on a mere
technicality. The just and equitable functioning of the bankruptcy system is predicated
upon the rule of law where defenses to claims are determined by the Court, not by the
defendant. To set aside the default judgment under the circumstances of this proceeding
would sanction disregard for the judicial process. The nature of the Defendants’ conduct
requires denial of the motion to set aside; the additional relevant factors which favor
granting of the motion simply cannot overcome the effect of inexcusable conduct.
For the foregoing reasons, the Court denies Defendants’ motion to set aside
IT IS SO ORDERED.
Case 15-05021 Doc# 24 Filed 02/03/16 Page 9 of 9
- Category: Judge Somers
- Published: 07 January 2016
- Written by Judge Somers
- Hits: 135
Redmond, Brooke Trustee v. NCMIC Finance Corporation, 12-06043 (Bankr. D. Kan. Jan. 5, 2016) Doc. # 169
SIGNED this 4th day of January, 2016.
Opinion Designated for Electronic Use, But Not for Print Publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
BROOKE CORPORATION, et al.,
CHRISTOPHER J. REDMOND,
Chapter 7 Trustee of Brooke
Corporation, Brooke Capital
Corporation (f/k/a Brooke Franchise
Corporation), and Brooke Investments,
NCMIC FINANCE CORPORATION,
CASE NO. 08-22786
ADV. NO. 12-6043
MEMORANDUM OPINION AND ORDER DENYING
NCMIC FINANCE CORPORATION’S MOTION FOR SUMMARY JUDGMENT
ON THE TRUSTEE’S FRAUDULENT TRANSFER CLAIMS
Case 12-06043 Doc# 169 Filed 01/04/16 Page 1 of 20
Defendant NCMIC Finance Corporation (NCMIC)1 has moved for summary
judgment on Count IV, the remaining claim in this adversary proceeding brought by
Christopher J. Redmond, Chapter 7 Trustee (Trustee) of Brooke Corporation (Brooke
Corp), Brooke Capital Corporation f/k/a/ Brooke Franchise Corporation (Brooke
Franchise), and Brooke Investments, Inc. (BII).2
Prepetition, Brooke Franchise was a franchisor of insurance agencies. Non-debtor
Aleritas Capital Corporation f/k/a/ Brooke Credit Corporation (Aleritas) made loans to
Brooke franchisees. Aleritas then sold participation interests in these loans to various
entities, including NCMIC. Brooke Franchise would receive commissions from the sale
of insurance by the various Brooke agencies and transmit a portion of those funds for loan
payments to Aleritas, who in turn, transferred the monies to the various entities who had
purchased loan participations, including NCMIC. A large number of agencies did not
generate sufficient commissions to cover the loan payments and other expenses. Brooke
Franchise frequently used its own funds to pay or subsidize the agencies’ loan payments.
The Trustee alleges that during the four-year period preceding Brooke Franchise’s
bankruptcy filing, Brooke Franchise made a total of $4,448,511.23 in subsidized loan
payments to NCMIC. The Trustee seeks to recover these payments as constructively
fraudulent transfers under 11 U.S.C. §§ 544, 548(a)(1)(B), and 550, and under the Kansas
1 NCMIC appears by Paul D. Sinclair, Jason L. Bush, and Brendan L. McPherson of Polsinelli
2 The Trustee appears by John J. Cruciani and Michael D. Fielding of Husch Blackwell LLP.
Case 12-06043 Doc# 169 Filed 01/04/16 Page 2 of 20
Uniform Fraudulent Transfer Act (KUFTA), K.S.A. 33-201 to -212.3
NCMIC’S Motion for Summary Judgment.
NCMIC moves for summary judgment on three grounds: (1) The Trustee may not
avoid the transfers because NCMIC has satisfied the § 548(c) good-faith affirmative
defense; (2) the Trustee may not avoid the transfers because Brooke Franchise received
reasonably equivalent value in exchange for the transfers; and (3) if the transfers may be
avoided, the Trustee may not recover the transfers from NCMIC due to the § 550 goodfaith-
transferee defense. The Trustee responds that there are material facts in controversy
regarding each of these defenses. As examined below, after careful review of NCMIC’s
supporting memorandum, the Trustee’s response, and NCMIC’s reply, the Court finds
that NCMIC is not entitled to judgment on any of the three grounds submitted.
Summary Judgment Standard.
Grounds one and three are affirmative defenses. When moving for summary
judgment under Rule 564 on these issues, NCMIC “must demonstrate that no disputed
material fact exists regarding” the defense.5 If NCMIC “meets this initial burden, the
plaintiff must then demonstrate with specificity the existence of a disputed material fact.”6
The second ground tests whether the Trustee has evidence to prove an element of his
3 Future references to Title 11 in the text are cited by section number only.
4 Fed. R. Civ. P. 56. This rule is made applicable to this proceeding by Fed. R. Bankr. P. 7056.
5 Hutchinson v. Pfeil, 105 F.3d 562, 564 (10th Cir. 1997).
Case 12-06043 Doc# 169 Filed 01/04/16 Page 3 of 20
constructive fraudulent conveyance claim under § 548(a)(1)(B). On this issue too,
NCMIC, as the movant, has the burden to show the absence of material disputed facts. If
the motion for summary judgment is properly supported, the Trustee must make a
showing sufficient to establish that a reasonable factfinder could find the existence of the
element essential to his case which NCMIC has challenged.7 When applying the standard
of Rule 56(c), courts “view the evidence and draw all reasonable inferences therefrom in
the light most favorable to the nonmoving party.”8 Further, relief under Rule 56 “‘is
always discretionary, and in cases posing complex issues of fact and unsettled questions
of law, sound judicial administration dictates that the court withhold judgment until the
whole factual structure stands upon a solid foundation of a plenary trial where the proof
can be fully developed, questions answered, issues clearly focused and facts definitively
This is a factually complex case which generally requires the application of settled
principles of bankruptcy law to unique circumstances. When moving for summary
judgment, NCMIC provided 138 paragraphs of allegedly undisputed facts. When
7 SEC v. Thompson, 732 F.3d 1151, 1157 (10th Cir. 2013) (quoting Celotex Corp. v. Catrett, 477
U.S. 317, 322 (1986)).
8 Sierra Club v. El Paso Gold Mines, Inc., 421 F.3d 1133, 1146 (10th Cir. 2005) (citing Simms v.
Oklahoma ex rel. Dep’t of Mental Health & Substance Abuse Servs., 165 F.3d 1321, 1326 (10th Cir.
9 10A Charles Alan Wright, Arthur R. Miller, & Mary Kay Kane, Federal Practice and
Procedure: Civil 3d, § 2725 at 415 (3d ed. 1998) (quoting In re Bloomfield S.S. Co., 298 F. Supp. 1239,
1242 (S.D.N.Y. 1969)).
Case 12-06043 Doc# 169 Filed 01/04/16 Page 4 of 20
responding, the Trustee admitted only 54 of these statements, and set forth 434
paragraphs of additional allegedly undisputed facts. In reply, NCMIC denied or objected
to approximately 200 of the Trustee’s statements. The Court therefore does not attempt to
set forth complete findings of uncontroverted and controverted facts, as it might do in a
less complex case. Rather, the Court will examine the legal basis for each of the three
matters asserted by NCMIC and determine if NCMIC is entitled to judgment as a matter
A. NCMIC is not entitled to summary judgment on the “for value and in
good faith” defense.
The Trustee seeks to avoid transfers made to NCMIC as constructively fraudulent
conveyances under § 548(a)(1)(B). Subsection (c) of § 548 provides the affirmative “for
value and in good faith” defense. It states:
Except to the extent that a transfer or obligation voidable
under this section is voidable under section 544, 545, or 547
of this title, a transferee or obligee of such a transfer or
obligation that takes for value and in good faith has a lien on
or may retain any interest transferred or may enforce any
obligation incurred, as the case may be, to the extent that such
transferee or obligee gave value to the debtor in exchange for
such transfer or obligation.
The Bankruptcy Code does not define good faith. In M & L Business Machine, a Ponzi
scheme case, the Tenth Circuit rejected a subjective test and ruled the lower courts
“properly held that good faith under § 548(c) should be measured objectively.”10 As
10 Jobin v. McKay (In re M & L Bus. Mach. Co., Inc ), 84 F.3d 1330, 1338 (10th Cir. 1996).
Case 12-06043 Doc# 169 Filed 01/04/16 Page 5 of 20
adopted by the Tenth Circuit, the defense is not available “‘if the circumstances would
place a reasonable person on inquiry of a debtor’s fraudulent purpose, and a diligent
inquiry would have discovered the fraudulent purpose.’”11 Rather than relying on the test
as expressly stated by the Tenth Circuit, NCMIC relies upon other portions of the M&L
Business Machine opinion and states the two-part inquiry to be: “(1) Would the
circumstances place a reasonable person on inquiry of a debtor’s fraudulent purpose and
impending insolvency; and if so, (2) Would a diligent inquiry have discovered the
fraudulent purpose and insolvency.”12 This statement includes the issue of insolvency,
which is not in the two-part test as announced by the Tenth Circuit. The Court therefore
will not consider “impending insolvency” as part of the inquiry since it is mentioned in
the analysis of the facts in M &L Business Machine, but not in its formulation of the
Under the objective test, a circumstance sufficient to put the transferee on inquiry
notice is referred to as a “red flag.”13 Since the Trustee seeks to avoid the transfers to
NCMIC as constructively fraudulent conveyances, rather than as transfers made with
actual fraudulent intent as were at issue in M & L Business Machine, the “red flags”
sufficient to trigger an obligation to make further inquiry focus on irregularities in the
11 Id. (quoting Jobin v. McKay (In re M&L Bus. Mach. Co., Inc.), 164 B.R. 657, 661 (D. Colo.
1994), which was quoting Hayes v. Palm Seedling Partners-A (In re Agric. Research & Tech. Group,
Inc., 916 F.2d at 536 (9th Cir. 1990)).
12 Doc. 123 at 3.
13 See Paul Sinclair and Brendan McPherson, Red Flags of Fraud: Background for Due
Diligence, 30 Am. Bankr. Inst. J. 34, 34 (May 2011).
Case 12-06043 Doc# 169 Filed 01/04/16 Page 6 of 20
transfers rather than a fraudulent purpose or intent. The second part of the objective
good-faith test asks whether a “diligent inquiry would have discovered” facts indicating
that the loan payments were constructively fraudulent. The “reasonable person” for
purposes of the objective test is not a “generic, reasonable person,” but requires “specific
focus on the class or category of the transferee.”14 The question is whether a reasonably
prudent purchaser of the Brooke participation interests would have made inquiries, and
after a diligent investigation, have learned that the borrowers, the Brooke franchisees,
were not providing the funds for some of the payments made to NCMIC.
It is uncontroverted that although NCMIC began purchasing participation interests
in Brooke franchisee loans in the late 1990s,15 it made no independent investigation of the
quality and status of the loans, and had no concerns about its investments until it didn’t
receive its loan payments in May of 2008.16 When moving for summary judgment,
NCMIC asserts facts purporting to establish that there were no “red flags” before the
summer of 2008. Such absence is said to be evidenced by the following: NCMIC was
owed money on the Brooke franchisee loans and expected Aleritas to make payments to
it; there were no irregularities in the loan payments it received from Aleritas; the loans
were at market rates; the franchisee loans were legitimate, arms-length transactions in
14 In re Bayou Group, LLC, 439 B.R. 284, 313 (S.D.N.Y. 2010).
15 Doc. 127 at 103, T’ee SOF 244.
16 Id. at 119, T’ee SOF 319. (NCMIC objected to the SOF as immaterial and objectionable, but
the objection is directed at portions of the statement other than when Greg Cole of NCMIC became
concerned about the loans).
Case 12-06043 Doc# 169 Filed 01/04/16 Page 7 of 20
which hundreds of sophisticated investors and banks purchased interests; and NCMIC
was not aware of any concerns expressed by any other purchaser of such interests.
NCMIC also asserts that if it had conducted a diligent inquiry before the summer of 2008,
it would not have discovered a “fraudulent purpose” because Brooke Franchise fully
disclosed in its SEC filings its practice of making loans to Brooke franchisees. NCMIC
also argues that a diligent inquiry would not have disclosed that Brooke Franchise was
insolvent because: Brooke Franchise’s SEC filings reported significant year-end
shareholder equity for 2004 through 2007; each year, an independent accounting firm
issued unqualified audits of Brooke Franchise’s financial statements; on August 31, 2007,
Duff & Phelps determined that the equity value of Brooke Franchise was significant; and
on November 15, 2007, CBIZ issued a favorable solvency opinion in conjunction with a
proposed transaction by Brooke Capital.17
The Trustee responds with additional facts which he contends demonstrate “that
the circumstances regarding the Brooke loan participations would have placed a
reasonable person on inquiry notice.”18 First, the Trustee points to evidence suggesting
that NCMIC’s failure to identify red flags was the result of its total reliance on Brooke for
information regarding the loans when purchasing the interests, rather than conducting an
independent evaluation, as a prudent investor would have done. Even though NCMIC
17 The Trustee has moved to exclude the admission of the Duff & Phelps and CBIZ reports. Doc.
129. Although the Court denied the motion, it also ruled that the use of these reports at trial would be
very limited. Doc. 159.
18 Doc. 127 at 155.
Case 12-06043 Doc# 169 Filed 01/04/16 Page 8 of 20
personnel responsible for the participations had substantial banking experience, the facts
provided by the Trustee show that NCMIC did not apply basic lending practices to the
Brooke loan participations. NCMIC and Brooke had a long-standing relationship, and
NCMIC did not purchase loans from anyone other than Brooke. The decisions to
purchase the participation interests were made by one individual without the input of a
loan committee. Prior to 2001, Pat McNerney of NCMIC independently evaluated the
loans by getting the documentation that Brooke sent and reviewing it.19 After 2001, when
direct responsibilities for the Brooke participations were transferred to Greg Cole, Mr.
McNerney (who supervised Mr. Cole) did not know if there had been any deterioration in
the credit approval policies for purchasing Brooke participations.
The Trustee’s additional facts also evidence that NCMIC’s reliance on Brooke
continued after the purchase of the participation interests. NCMIC did not do any loan
reviews from 2004 through 2007. Aleritas sent “alert reports” (also known as
“pass/watch/fail reports”) to NCMIC on a monthly basis. The reports were used to
complete a borrowing-base report for NCMIC’s lender, Wells Fargo, for which loans
marked “fail” were ineligible, but the reports were not used as a reason for NCMIC to
evaluate the credit, even though many loans were reported to be on a watch status. Mr.
Cole was generally aware that Brooke made periodic advances to franchise agencies but
did not recall inquiring about the amount of any resulting balances that were owed to
19 Doc. 127 at 103, T’ee SOF 246.
Case 12-06043 Doc# 169 Filed 01/04/16 Page 9 of 20
Brooke by agencies in whose loans NCMIC held participation interests.20 NCMIC began
to experience loan delinquencies with its Brooke loans in 2006. When a loan would go
past due, NCMIC would pressure Aleritas, which would then repurchase the loan (even
though the participation agreements provided they were non-recourse) or extend the due
date. Loan delinquencies began to create problems for NCMIC in staying in compliance
with its debt covenants with Wells Fargo.
The Court finds that the additional facts provided by the Trustee regarding the
purchase and servicing of the loans, when construed in his favor as required in ruling on
NCMIC’s motion for summary judgment, create issues of fact regarding the existence of
red flags which should have triggered a further inquiry by NCMIC. A reasonably prudent
purchaser of participation interests in the Brooke agency loans may have been alarmed
about Brooke’s extensions of credit to the agencies, the number of Brooke’s failed loans,
the substantial number of loans that were on watch status, and the recurring loan
delinquencies. The Trustee also asserts that NCMIC ignored red flags in Brooke’s SEC
filings. For example, he says, these filings “reported agency ‘statement balances’ for
short-term cash flow assistance,” which he contends meant Brooke had advanced money
to the agencies or extended their payment due dates to make them appear to be current on
the participated loans.21
The good-faith-transferee inquiry focuses not only on what the transferee knew but
20 Id. at 108, T’ee SOF 278.
21 Id. at 111, T’ee SOF 289.
Case 12-06043 Doc# 169 Filed 01/04/16 Page 10 of 20
also on what the transferee should have known. “[A] transferee cannot stick its head in
the sand, clinging to its subjective belief while purporting to ignore” warning signs.22
Summary judgment therefore cannot be granted on NCMIC’s contention that there were
no “red flags” which should have triggered a diligent inquiry.
Material disputed issues of fact also preclude a finding that if NCMIC had
conducted a diligent inquiry, it would not have discovered the constructive fraud. The
simple fact refuting NCMIC’s position is that when NCMIC did make a diligent inquiry,
starting on approximately June 30, 2008, it discovered that it had been receiving loans
payments on participated loans where the agency had not made any payments to Brooke
Franchise for several months. Following Brooke’s bankruptcy filing, Mr. Cole learned
that there had been nefarious activities occurring as early as 2006, and these activities
included loan participations being carried on Brooke’s and NCMIC’s books after the
debts had been extinguished, forgiveness of debt which NCMIC was not aware of, and
double sales and double pledges of collateral. NCMIC does not even suggest that an
earlier inquiry would not have revealed these nefarious activities.
B. NCMIC is not entitled to summary judgment on the issue whether Brooke
Franchise received a reasonably equivalent value in exchange for the
transfers alleged to have been constructively fraudulent.
To recover on his constructively-fraudulent-transfer claim, the Trustee must show
that Debtor Brooke Franchise transferred an interest of the Debtor in property to NCMIC
22 Moglia v. Universal Auto., Inc. (In re First Nat’l Parts Exchange, Inc.), 2000 WL 988177 at *6
(N.D. Ill. July 12, 2000).
Case 12-06043 Doc# 169 Filed 01/04/16 Page 11 of 20
and received less than a reasonably equivalent value in exchange.23 This Court
thoroughly examined reasonably equivalent value in Redmond v. SpiritBank,24 a recent
opinion filed after completion of the briefing on NCMIC’s motion for summary
judgment. That opinion states in part:
“In determining ‘reasonably equivalent value,’ courts
typically compare the value of the property transferred with
the value of what the debtor received.” Section 548(d)(2)(A)
defines “value” to mean “property, or satisfaction or securing
of a present or antecedent debt of the debtor.”
. . .
“As a general rule, obligations incurred by a debtor
solely for the benefit of a third party are treated as not
supported by a reasonably equivalent value.” In other words,
a “payment made solely for the benefit of a third party, such
as a payment to satisfy a third party’s debt, does not furnish
reasonably-equivalent value to the debtor.” An exception to
this rule “has been recognized where a debtor receives an
indirect benefit from paying or guaranteeing the obligation of
a third party.” . . . If the Trustee proves the absence of a direct
benefit to the Debtor, the burden then shifts to SpiritBank to
show the Debtor received an indirect benefit.25
When moving for summary judgment, NCMIC does not argue that Brooke
Franchise received a direct economic benefit in exchange for the transfers it made to
Aleritas which were then transferred to NCMIC. Rather, it asserts that Brooke Franchise
received an indirect benefit with a value reasonably equivalent to or greater than the value
it transferred to NCMIC. According to NCMIC, “[b]y making the transfers (loan
23 11 U.S.C. § 548(a)(1)(B); K.S.A. 33-204(a)(2) and 33-205(a).
24 Redmond v. SpiritBank (In re Brooke Corp.), 541 B.R. 492, 2015 WL 7568202 (Bankr. D. Kan.
Nov. 20, 2015).
25 Id. at 510-11 (footnoted citations omitted).
Case 12-06043 Doc# 169 Filed 01/04/16 Page 12 of 20
payments), the franchise agencies’ loans were kept current and lenders such as [NCMIC]
did not declare loan defaults or initiate collection activities against the agencies, thereby
allowing the Brooke franchise agencies to continue to operate.”26 The benefits NCMIC
claims Brooke Franchise received from those continued operations include: the
continued collection of franchise fees which exceeded the subsidized loan payments; the
receipt of profit-sharing monies from policies sold by the Brooke agencies; the Brooke
agencies’ continued payment of lease obligations which would have been the
responsibility of Brooke Franchise if the agencies had closed; and Brooke Franchise’s
continued receipt of the spread between the interest owed by the Brooke franchisees and
the interest paid to the loan participants. In addition, NCMIC characterizes the loans to
the Brooke agencies, the proceeds of which were used in part to make payments to
NCMIC, as investments made with a legitimate expectation of the success of the
agencies, thereby providing value to Brooke Franchise. Finally, NCMIC argues that
Brooke Franchise received reasonably equivalent value because it had an implied
contractual obligation to make the loan payments on behalf of the franchise agencies.
The Trustee responds that whether reasonably equivalent value was received is a
question of fact, and that factual disputes preclude summary judgment in favor of NCMIC
on the theories advanced. When disputing that Brooke Franchise received the value
alleged from continued operation of the Brooke agencies, the Trustee cites evidence
26 Doc. 123 at 65.
Case 12-06043 Doc# 169 Filed 01/04/16 Page 13 of 20
indicating that the cost to Brooke Franchise to maintain the Brooke agencies exceeded the
revenue it received; that more than 90% of the agency leases were in the name of Brooke
Investments, Inc., not Brooke Franchise; and that there is no evidence that Brooke
Franchise received any of the interest spread that Aleritas obtained.27 As to the argument
that the loans to Brooke agencies were “investments” providing an expectation of value to
Brooke Franchise, the Trustee provides facts allegedly showing that Brooke’s business
model was unsustainable, so there was no reasonable expectation of any benefit. Finally,
to refute NCMIC’s assertion that Brooke Franchise was obligated to make loans to cover
the Brooke agencies’ loan payments, the Trustee provides the testimony of Brooke
personnel asserting that Brooke Franchise had no such obligation.
The Court finds that NCMIC’s motion for summary judgment on the contention
that Brooke Franchise received reasonably equivalent value for the loan payments it made
to NCMIC must be denied. First, the Court emphasizes that NCMIC does not contend
that Brooke Franchise received a direct benefit of equivalent value. Second, the Court
makes no finding that the various forms of indirect benefit urged by NCMIC suffice
under § 548 (a)(1)(B). But assuming that NCMIC’s approach is acceptable under
§ 548(a)(1)(B), there are material facts in controversy about the existence of such indirect
benefits and whether their value was reasonably equivalent to value of the allegedly
fraudulent transfers made to NCMIC. NCMIC has not shown the absence of material
27 Dec. 127 at 176-77.
Case 12-06043 Doc# 169 Filed 01/04/16 Page 14 of 20
disputed facts supporting the position that Brooke Capital received reasonably equivalent
C. NCMIC is not entitled to summary judgment on the § 550(b)(1) “good
faith transferee” defense.
Section 550(a) allows the Trustee to recover transfers avoided under § 544
(incorporating the KUFTA) and § 548 from (1) the initial transferee of the avoided
transfer or the entity for whose benefit the transfer was made, or (2) any immediate or
mediate transferee of such initial transferee. However, for an immediate or mediate
transferee of the original transferee, § 550(b)(1) bars recovery if the transferee “takes for
value . . . , in good faith, and without knowledge of the voidability of the transfer
avoided.” NCMIC moves for summary judgment, asserting that (1) it was an immediate
transferee of the initial transferee, Aleritas, and (2) the good faith standard is satisfied.
The Bankruptcy Code does not define initial transferee. “Generally, the party who
receives a transfer of property directly from the debtor is the initial transferee.”28
However, many courts, including the Tenth Circuit, have found that a party acting merely
as a conduit is not an initial transferee. In Stockton, this Court found that a bank
collecting loan payments from Brooke Corporation for transfer to loan participants was a
conduit.29 The conduit exception was described as follows:
28 5 Collier on Bankruptcy, ¶ 550.02[a] at 550-20 (Alan N. Resnick & Henry J. Sommer, eds.in-
chief, 16th ed. 2015).
29 Northern Capital, Inc., v. Stockton Nat’l Bank (In re Brooke Corp.), 458 B.R. 579 (Bankr. D.
Kan. 2011) (hereafter “Stockton”).
Case 12-06043 Doc# 169 Filed 01/04/16 Page 15 of 20
Under this theory, as authoritatively formulated by the
Seventh Circuit in Bonded which formulation has been
adopted in the Tenth Circuit, “the minimum requirement of
status as a ‘transferee’ is dominion over the money or other
asset, the right to put the money to one’s own purposes.” This
approach recognizes that the term “transferee” must mean
something different from anyone who simply touches the
money, such as a “‘possessor’ or ‘holder’ or ‘agent,’” and
provides a basis to hold that “those who act as mere ‘financial
intermediaries,’ ‘conduits’ or ‘couriers’ are not initial
transferees under § 550.” “A person or entity is not the initial
transferee under Bonded if it received no benefit from the
transferred funds, had to follow instructions on how to use the
funds, and would have been liable to the transferor if it had
used the funds for its own purposes.” The Seventh Circuit has
recently characterized the Bonded definition as an “approach
that tracks the function of the bankruptcy trustee’s avoiding
powers: to recoup money from the real recipient of
preferential transfers.” Whether a transferee is an initial
transferee or conduit is a fact intensive inquiry.30
NCMIC anticipates the Trustee’s position that because Aleritas was a conduit
when it received the funds from Brooke Franchise that it then paid to NCMIC and other
participating lenders, NCMIC has strict liability as an initial transferee and an entity for
whose benefit the transfer was made. NCMIC therefore moves for summary judgment on
the Trustee’s use of the conduit theory to strip NCMIC of the § 550 good-faith-transferee
defense. NCMIC argues: a trustee may not use conduit status offensively; Aleritas
should not be considered a mere conduit because Aleritas did not act as an innocent
participant but had first-hand knowledge of and actively participated in the making of
loans to franchisees, placing it in the best position to monitor Brooke Franchise’s
30 Id. at 584-85 (footnoted citations omitted).
Case 12-06043 Doc# 169 Filed 01/04/16 Page 16 of 20
operations; and the conduit doctrine does not apply under the KUFTA.
In response, the Trustee relies upon this Court’s decision in Stockton holding that
Stockton Bank was a mere conduit for the monies it received from Brooke Corporation
which were paid to other banks who had purchased loan participations in Brooke
Corporation notes. He also argues that there is no prohibition or restriction on the
offensive use of the conduit doctrine, pointing out that such use was permitted by this
Court in Stockton and by other courts in other cases. Further, the Trustee provides
authorities holding the conduit doctrine applicable to transfers avoided under other states’
versions of the Uniform Fraudulent Transfer Act.
The Court rejects NCMIC’s position that the conduit doctrine cannot be used
offensively by the Trustee. NCMIC’s position is based upon dicta regarding the origin of
the doctrine. NCMIC cites no case where such a limitation has been applied. A respected
commentator states, “The conduit theory can be used either defensively by an alleged
transferee or offensively by a trustee seeking to bypass one party in pursuit of another.”31
However, NCMIC’s position that the doctrine requires that the purported conduit
must have acted in good faith and as an innocent participant is supported by case law,
including a decision of the Eleventh Circuit.32 The conduit doctrine requires “initial
31 5 Collier on Bankruptcy, ¶ 550.02[b], n. 81 (citing In re Granada, Inc., 156 B.R. 303, 307
(D. Utah 1990); Senior Transeastern Lenders v. Official Comm. of Unsecured Creditors (In re Tousa,
Inc.), 680 F.3d 1298, 1314 (11th Cir. 2012); and In re Columbia Data Prods., Inc., 892 F.2d 26, 28 (4th
32 Doc. 123 at 57-58 (citing Martinez v. Hutton (In re Harwell), 628 F.3d 1312, 1322-23 (11th
Case 12-06043 Doc# 169 Filed 01/04/16 Page 17 of 20
recipients of the debtor’s fraudulently transferred funds who seek to take advantage of
equitable exceptions to § 550(a)(1)’s statutory language [to] establish (1) that they did not
have control over the assets received, i.e. that they merely served as a conduit for the
assets that were under the actual control of the debtor-transferor and (2) that they acted in
good faith and as an innocent participant in the fraudulent transfer.”33
The extent to which this two-part inquiry should apply in this case is open to
question. NCMIC cites no Tenth Circuit case law even recognizing the equitable roots of
the conduit doctrine. Bonded, the Seventh Circuit opinion on which the Tenth Circuit
relied when it adopted the conduit doctrine, focused on the details of the avoided
transaction, not on equitable principles. In addition, the Eleventh Circuit’s requirement of
good faith states it is applicable where the recipient of an avoided transfer is seeking to
take advantage of the conduit doctrine. That is not the situation here.
The Court declines to rule on the relevance and importance of Aleritas’s conduct
when ruling on NCMIC’s motion for summary judgment. The motion, including the
§ 550(b)(1) defense, is being denied for other reasons. The law is uncertain and the
question is not fully developed in the briefs. Further, “[w]hether a transferee is an initial
transferee or conduit is a fact intensive inquiry.”34 Although the uncontroverted facts
establish a relationship between Brooke Franchise and Aleritas with respect to the
transfers, full development of that relationship and whether it is sufficient to distinguish
33 Martinez v. Hutton (In re Harwell), 628 F.3d 1312, 1323 (11th Cir. 2010).
34 Stockton, 458 B.R. at 585.
Case 12-06043 Doc# 169 Filed 01/04/16 Page 18 of 20
this case from Stockton cannot be satisfactorily determined without the benefit of a trial.
With respect to the good faith element of the § 550(b)(1) defense, NCMIC
incorporates by reference the arguments it presented under § 548(c).35 This reliance
appears to be appropriate, as a respected commentator has remarked on the similarity of
the two good faith standards.36 But as examined above, the Court finds that disputed
issues of material fact preclude summary judgment on the good faith defense of § 548(c).
For the same reasons, the Court finds that disputed issues of material fact preclude
summary judgment on the good faith element of the § 550(b)(1) defense.
NCMIC also moves for summary judgment on the Trustee’s KUFTA claim based
upon the good-faith-transferee-for-value defense of K.S.A. 33-208(b). That subsection
provides that to the extent a transfer is voidable, it may be recovered from the “first
transferee,” “the person for whose benefit the transfer was made,” or “any subsequent
transferee other than a good faith transferee who took for value or from any subsequent
transferee.” Since there are no Kansas cases adopting the conduit doctrine, NCMIC
contends that Aleritas should be considered the “first transferee,” that NCMIC was a
subsequent transferee, and that NCMIC is protected by the good-faith-for-value defense.
The Trustee responds that the Florida UFTA, which is identical to the Kansas
version, has been construed to include the conduit doctrine.37 He also notes that NCMIC
35 Doc. 123 at 54-55.
36 5 Collier on Bankruptcy, ¶ 550.03 at 550-27.
37 Perlman v. Delisfort-Theodule, 2010 WL 4514249 at *2 (S.D. Fla. Nov. 2, 2010); Steinberg v.
Barclay’s Nominees (Branches) Limited, 2008 WL 4601042 at *7-8 (S.D. Fla. Sept. 30, 2008).
Case 12-06043 Doc# 169 Filed 01/04/16 Page 19 of 20
has not cited and his own research has not revealed any cases holding that the conduit
doctrine does not apply to UFTA claims.
The Court therefore declines to hold that the conduit doctrine does not apply under
the KUFTA. Further, even if NCMIC were considered a subsequent transferee under the
KUFTA, genuine issues of material fact preclude a finding that NCMIC took the
payments in good faith for value.
For the foregoing reasons, NCMIC’s motion for summary judgment is denied.
IT IS SO ORDERED.
# # #
Case 12-06043 Doc# 169 Filed 01/04/16 Page 20 of 20
- Category: Judge Somers
- Published: 07 January 2016
- Written by Judge Somers
- Hits: 134
In Re 4522 Katella Avenue, LLC, 15-12107 (Bankr. D. Kan. Jan. 6, 2016) Doc. # 98
SIGNED this 6th day of January, 2016.
Designated for online use but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
4522 KATELLA AVENUE, LLC, CASE NO. 15-12107
MEMORANDUM OPINION AND JUDGMENT
GRANTING DEBTOR'S MOTION FOR TURNOVER
On December 15, 2015, trial was held on Debtor's Motion for Turnover1 which
prays for an order pursuant to 11 U.S.C. § 5432 compelling Harry Drake, a state court
receiver of real property of the Debtor, to turnover the estate property in his possession.
Debtor 4522 Katella Avenue, LLC appeared by its managing partner, James Rainboldt,
1 Doc. 3.
2 Future references to Title 11 in the text shall be to the section number only.
Case 15-12107 Doc# 98 Filed 01/06/16 Page 1 of 6
and by its attorney David G. Arst or Arst & Arst, PA. ColFin MF5 Funding, LLC, the
holder of the notes secured by mortgage liens on the property in receivership, appeared by
Matt R. Moriarity of Polsinelli PC. The Court has jurisdiction.3 Having considered the
statements of counsel, the briefs, the testimony, and the exhibits, the Court grants the
motion for turnover.
The real properties which are the subject of the motion are two apartment
complexes located in Wichita, Kansas owned by Debtor. One is a 70 unit property
known as Longfellow and the other is a 46 unit property known as Parkdale or Carter.
The apartment complexes are referred to herein as the Properties. Debtor is also the
owner of a 18 unit town house property known as Beach. Although ColFin M5 Funding
has recently acquired Debtor’s note secured by Beach, that property is in the possession
of the Debtor and not included in the turnover motion.
As of May 2015, Debtor agrees that the two notes secured by the Properties were
in default. ColFin MF5 Funding, LLC alleges that as of May 15, 2015, it was owed
$918,265.37 principal, plus interest and other charges, on the note secured by the
Longfellow mortgage and $1,248,306.54 in principal, plus interest and other charges, on
3 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and §§ 1334(a) and (b) and the Amended
Standing Order of Reference of the United States District Court for the District of Kansas that exercised
authority conferred by § 157(a) to refer to the District’s Bankruptcy judges all matters under the Bankruptcy
Code and all proceedings arising under the Code or arising in or related to a case under the Code, effective
June 24, 2013. D. Kan. Standing Order No. 13-1, printed in D. Kan. Rules of Practice and Procedure at 168
(March 2014). A motion for turnover is a core proceeding which this Court may hear and determine as
provided in 28 U.S.C.§ 157(b)(2)(A). There is no objection to venue or jurisdiction over the parties.
Case 15-12107 Doc# 98 Filed 01/06/16 Page 2 of 6
the note secured by the Carter mortgage. On May 21, 2015, Secured Creditor filed two
separate foreclosure actions in the District Court of Sedgwick County, Kansas. By orders
filed on June 12, 2015, Harry Drake (Receiver) of Block Real Estate Services was
appointed receiver of the Properties. Approximately four months after the filing of the
foreclosure actions, Debtor filed a petition for relief under Chapter 11 of the Bankruptcy
Code. Debtor seeks an order requiring the Receiver to turn over the Properties, including
rents, reports, accounting records, and other property concerning the Properties.
The Properties serve low income individuals and were not in prime condition when
the Receiver was appointed. The actions taken by the Receiver to maintain the Properties
have been minimal, and there was no evidence of contemplated improvements.
Occupancy which was recently at approximately 90%, has dropped to approximately
60%. Revenue has declined approximately 40%, while management fees have increased
25 to 30%. The testimony as a whole evidences that the Receiver, and the management
company he has retained which is not located in Wichita, has little interest in the
Properties and that the Secured Creditor has not been involved in the management.
If the Receiver is removed, Mr. Rainboldt will move to Wichita from California,
and personally manage the Properties. He proposes rent increases for the Longfellow
units and pursuing section 8 housing at Carter. He plans to supervise the investment of
approximately $100,000 of his personal assets in each of the two Properties and
anticipates selling the Properties within a year.
Case 15-12107 Doc# 98 Filed 01/06/16 Page 3 of 6
John Greenstreet, a real estate broker who has been marketing the Properties,
testified that he had received a letter of intent to purchase the Properties for $2.4 million.
Although the letter was forwarded to the Receiver on October 31, 2015, no response has
been received. Mr. Rainboldt testified that he was interested in pursuing the offer.
The Receiver attempted but failed to prove that before the receivership Debtor had
mismanaged the Properties. Testimony by the Receiver that Debtor maintained
inadequate accounting and lease records was effectively refuted by the former onsite
manger. She entered all transactions into a computerized accounting system managed by
Mr. Rainboldt’s wife. File cabinets in the office contained copies of leases for each
rented unit, although some leases appeared to be out of date because tenants were allowed
to hold over on a month to month basis after expiration of the term of the written lease.
Before the Receivership, exterminators were called when there were infestations.
TURNOVER UNDER § 543
Generally § 543(b) requires a custodian, which is defined to include a receiver of
property of the debtor appointed in a case other than under Title 11,4 to deliver to the
trustee any property of the debtor held by a custodian and any proceeds, rents, or profits
of such property. However, § 543(d)(1) provides an exception to turnover whereby the
bankruptcy court, after notice and hearing, may excuse compliance with the turnover
required by § 543(b) “if the interests of creditors . . . would be better served by permitting
4 11 U.S.C. § 101(11).
Case 15-12107 Doc# 98 Filed 01/06/16 Page 4 of 6
a custodian to continue in possession, custody, or control of such property.” Bankruptcy
Judge Karlin in In re Bryant Manor, LLC5 summarized the applicable law as follows:
“Turnover is the general rule, however, and excuse
from compliance is the exception. Therefore, a party opposing
turnover must demonstrate affirmatively how creditors will be
better served if the receiver is retained.” A request for excuse
from turnover requires the Court to examine (1) the debtor’s
likelihood of reorganization; (2) the probability that funds
required for reorganization will be available; and (3) whether
the evidence shows mismanagement of the property by the
But the “bankruptcy court may not find mismanagement by the debtor sufficient to
warrant noncompliance by the custodian with turnover requirements, where the debtor’s
prepetition actions are within the range of reasonable business judgment and ‘not patently
unreasonable.’”7 When determining whether to excuse compliance with the section 543
turnover requirements, the bankruptcy court has significant discretion.8
In this case, Secured Creditor has not shown that creditors will be better served if
the Receiver stays in possession of the Properties. If the Receiver is removed, costs will
be reduced, funds to improve the Properties will become available, and increased rental
income is projected. Debtor did not mismanage the Properties before the Receiver was
appointed. Although liquidation is more probable rather than reorganization, the Court
5 422 B.R. 278 (Bankr. D. Kan. 2010).
6 Id., at 289(citation omitted).
7 5 Collier on Bankruptcy ¶ 543.03 at 543-17 (Alan N. Resnick & Henry J. Sommer eds.-in-chief,
16th ed. 2015)(quoting In re Donato, 170 B.R. 247, 257 (Bankr. D.N.J. 1994)).
Case 15-12107 Doc# 98 Filed 01/06/16 Page 5 of 6
finds that Debtor will better preserve that value of the Properties and thereby benefit the
For the forgoing reasons, the Court concludes that the Motion for Turnover should
The foregoing constitute Findings of Fact and Conclusions of Law under Rules
7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure which make Rule 52(a)
of the Federal Rules of Civil Procedure applicable to this matter.
Judgment is hereby entered granting Debtor’s Motion for Turnover. The judgment
based on this ruling will become effective when it is entered on the docket for this case,
as provided by Federal Rule of Bankruptcy Procedure 9021.
IT IS SO ORDERED.
Case 15-12107 Doc# 98 Filed 01/06/16 Page 6 of 6
- Category: Judge Somers
- Published: 28 December 2015
- Written by Judge Somers
- Hits: 203
In Re Neighbors, 11-21003 (Bankr. D. Kan. Dec. 22, 2015) Doc. # 460
SIGNED this 21st day of December, 2015.
Designated for online distribution but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
MARK STEPHEN NEIGHBORS and CASE NO. 11-21003
SHELLY KAY NEIGHBORS, CHAPTER 11
MEMORANDUM OPINION AND JUDGMENT
CONVERTING CASE TO CHAPTER 7
On October 29, 2015, trial was held on the motion of creditor CitiMortgage (Citi)
to convert this Chapter 11 case to a Chapter 7 case.1 Debtors appeared in person2 and by
1 Doc. 416. Trial of this motion was combined with trial on Debtors’ Motion to Reimpose
the Automatic Stay as to 16961 and 16959 Gentle Slopes Drive. Doc. 186. That issue is
addressed by a separate memorandum and judgment. Doc. 448.
2 Debtor Shelly Neighbors did not testify.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 1 of 24
their counsel, Camron Hoorfar. Citi appeared by Eric L. Johnson and Kersten L.
Holzhueter of Spencer Fane Britt & Brown, LLP. The Court has jurisdiction.3
FINDINGS OF FACT.
A. PROCEDURAL HISTORY.
Debtors, with the assistance of counsel, filed a voluntary petition for relief under
Chapter 11 on April 12, 2011. One day later the Chapter 11 case of Neighbors
Investments, Inc., owned by Debtors, was filed.4 A plan has been confirmed in that case.
Prepetition, Debtor Mark Neighbors, through various entities, was a real estate
developer, contractor, and real estate agent. Debtors’ schedules were filed approximately
one month after the filing of the petition. The meeting of creditors was held on May 19,
3 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and §§ 1334(a) and (b) and
the Amended Standing Order of Reference of the United States District Court for the District of
Kansas that exercised authority conferred by § 157(a) to refer to the District’s Bankruptcy judges
all matters under the Bankruptcy Code and all proceedings arising under the Code or arising in
or related to a case under the Code, effective June 24, 2013. D. Kan. Standing Order No. 13-1,
printed in D. Kan. Rules of Practice and Procedure at 168 (March 2014). This is a core
proceeding which this Court may hear and determine as provided in 28 U.S.C.§ 157(b)(2)(A).
There is no objection to venue or jurisdiction over the parties.
4 Case no. 11-21022.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 2 of 24
1. Adversary proceedings.5
Litigation of state law claims has been a significant factor in this case. In
September, 2011, Debtors filed a motion to approve the employment of special counsel to
prosecute or settle Debtors’ potential claims against David Baumgartner, Linda Beadle,
James Troutman, David Imhoff, Central Bank, Cornerstone Bank, the Bank of Versailles,
and other persons or entities responsible for losses incurred by Debtors as a result of
fraud, negligence, recklessness, violations of statutory laws, and other wrongful conduct.6
The application and similar subsequent applications were approved.7 At least five
adversary proceedings have been filed. The first was filed in 2012 against Linda Beadle,
a former employee of Debtors and Debtors’ businesses, for conversion of property.8
Mark Neighbors testified at trial that the proceeding was recently settled, although the
settlement documents had not been prepared.
5 The following examination of the case history and the estate as of the date of trial is
based upon the testimony of Mark Neighbors. See Doc. 453 (October 29, 2015 transcript).
Generally Mark Neighbors seemed confident that his testimony was accurate, and the Court has
made findings in accord with his statements, even though in many instances his testimony cannot
be verified from the available record and docket information.
6 Doc. 64.
7 Doc. 101. In June of 2013, Debtors’ again moved to employ special counsel to
prosecute the claim against Linda Beadle, to prosecute Debtor Shelly Neighbor’s personal injury
claim, and to “assist debtors with discovery against David Imoff, David and Marsha
Baumgartner, Bank of Versailles, Central Bank and others persons and entities responsible for
losses incurred by debtors.” Doc. 245. The motion was granted. Doc. 249. In February, 2014,
Debtors moved to employ different counsel for the same purposes, except the prosecution of the
personal injury claim. Doc. 277. The application was also approved. Doc. 287.
8 Adversary case no. 12-06097.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 3 of 24
Three adversaries were filed in 2014. They have been closed. One was against
secured creditor Nationstar Mortgage, LLC,9 contesting the amount of its secured claim.
After a difficult mediation, the case was settled. Debtors pro se filed two proceedings
against secured creditor Bank of Versailles,10 challenging the bank’s handling of a check
received from the 2009 auction sale of property in which Debtors claimed an interest.
These adversary proceedings have been closed. One was dismissed with prejudice upon
motion of the bank based upon lack of standing and expiration of the statute of
limitations. The second was dismissed for failure to pay the filing fee.
The fifth adversary, against Citi, was filed recently, on October 15, 2015. It seeks
damages for alleged violations of the Missouri Merchandising Practices Act and negligent
misrepresentation relating to Citi’s prepetition loans to Debtors.11 At the time of trial,
applications were pending to employ counsel licensed to practice in Washington and
Michigan, but not Missouri and Kansas,12 and an attorney licensed to practice in
Missouri13 to prosecute claims against Citi for “mortgage fraud, violation of mortgage
9 Case no. 14-06025.
10 Case nos. 14-06082 and 14-06083.
11 Case no. 15-06106.
12 Doc. 378.
13 Doc. 380.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 4 of 24
and/or banking laws, and other wrongful conduct.”14 A similar suit against Citi was
simultaneously filed in Missouri state court.
2. Reorganization plans.
After several extensions of the exclusivity period, Debtors filed a proposed plan of
reorganization and a disclosure statement on December 30, 2011. Citi objected and no
confirmation hearing was held. An amended plan and disclosure statement were filed on
June 15, 2012.15 After objections were withdrawn, the amended disclosure statement was
approved on November 16, 2012,16 but a confirmation hearing was never held.
3. Dismissal and conversion motions.
On July 2, 2015, the Court held a telephonic status conference on the pending
amended plan and other matters. On August 4, 2015, Debtors filed their Motion to
Dismiss Chapter 11 Bankruptcy Case17 for cause under § 1112(b)(2), stating in part that
there is no reasonable likelihood of rehabilitation because Debtors have been unable to
reach agreement with Citi concerning the mortgage on their personal residence and the
liens on two lots in Gravois Mills, Missouri; Debtors believe that they will not be able to
confirm a plan within the time fixed due to disputes with Citi; and Debtors do not have
15 Docs. 166 & 167.
16 Doc. 218.
17 Doc. 402 (Doc. 402 was later withdrawn and Doc. 404 with minor changes was filed in
Case 11-21003 Doc# 460 Filed 12/21/15 Page 5 of 24
sufficient source of income to sustain a Chapter 11 Plan or reorganize. Bank of Versailles
filed a limited objection.18 Citi objected to the motion.19
On August 31, 2015, Citi filed the motion to convert case to Chapter 7 which is the
subject of this memorandum.20 Citi contends that conversion, rather than dismissal,
would be in the best interests of creditors. On the eve of the scheduled hearing on
Debtors’ motion to dismiss and Citi’s motion to convert, Debtors moved to withdraw
their motion to dismiss.21 That motion was granted.22
B. DEBTORS’ SCHEDULES AND CURRENT CIRCUMSTANCES.
1. Real property.
Debtors’ Schedule A listed 7 parcels of real property.23 Mark Neighbors testified
that Debtors currently claim an interest in only two of them. The first scheduled property,
a lot in Gravois Mills, Missouri, was surrendered to the secured creditor, Bank of
Versailles in full satisfaction of the secured debt. The second property, an improved lot
in Gravois Mills, Missouri, was also surrendered to Bank of Versailles in full satisfaction
18 Doc. 405.
19 Doc. 407.
21 Doc. 438.
22 Doc. 440.
23 Mark Neighbors testified that some of the real property listed on Schedule A was
owned by limited liability companies, not the Debtors. No amended Schedule A has been filed.
For purposes of this opinion the Court will assume the ownership as stated on Schedule A.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 6 of 24
of the secured debt. The third property, 16961 Gentle Slopes Drive, Gravois Mills,
Missouri was sold on a short sale to a third party for $275,000 and the lien of Citi
The fourth property, which is still held by Debtors, is their homestead, located in
Overland Park, Kansas. Citi is the holder of the only lien on the homestead. Although no
payments have been made to Citi since 2011, the taxes are current. Debtors claim that the
value is significantly in excess of the lien amount.
Debtors still own the fifth property, 16959 Gentle Slopes Drive, Gravois Mills.
Schedule A lists the value as $259,600.00, but Mark Neighbors testified that the value has
increased since filing to $450,000, and he recently received an offer to purchase for
$300,000. Citi’s proof of claim states it holds a lien for $401,397.94 principal, plus
interest and other charges.24 The deed of trust granting the lien was mistakeningly
released by Citi, and the Court by separate order has found that Debtors agreed to
reinstatement of the lien and ordered that the lien be reinstated.25
The sixth property, 16963 Gentle Slopes Drive, Gravois Mills, Missouri, was sold
by the Debtors a couple of months ago, but there is no order approving the sale. Mark
Neighbors testified that he no longer owns the seventh property, undeveloped land
located on West 151st Street, but the docket does not include an order approving the sale.
24 Claim 7-2, filed May 26, 2011.
25 Memorandum Opinion and Judgment Denying Debtors' Motion to Reimpose Stay and
Finding that Debtors Agreed that the Deed of Trust Mistakenly Released by CitiMortgage be
Reinstated. Doc. 448.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 7 of 24
2. Business Interests.
The testimony concerning the business interests listed on Schedule B was as
follows. Debtors currently have a 100% interest in Neighbors Investments, Inc. It filed
for relief under Chapter 11 one day after Debtors filed this case and is operating under a
confirmed Chapter 11 plan. Its principal asset is real property which Debtor Mark
Neighbors testified is worth $900,000 subject to a lien of $450,000. Neighbors
Investments, Inc. has no employees, but does hire professionals.
The operating report for Neighbors Investments, Inc. for August, 201526 reports
income from the sale of property other than inventory of $177,496.03. Mark Neighbors
testified that this was the proceeds from the sale of property located at 16963 Gentle
Slopes Drive, Gravois Mills, Missouri, which is listed as an asset of the Debtors on their
Schedule A. At the end of August 2015, after the payment of expenses, Neighbors
Investments, Inc. had cash on hand of $165,368.72. The September operating report,27
reports income of $3,320, but Mark Neighbors could not recall the source. At the end of
September, cash on hand was reduced to $104,522.06, approximately $60,00 less than at
the start of the month, but the reported expenses were only approximately $30,000. Mark
Neighbors testified that these expenses included attorneys fees for “the whole mess,”
meaning both the corporate and individual bankruptcies. He could not account for the
$30,000 difference between the reduction of cash on hand and the reported expenses.
26 Exh. L, 156.
27 Id. at 161.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 8 of 24
Debtors’ Schedule B also includes as a business interest 100% of Neighbors Realty
Co., Inc. It presently has no assets and no debt. It has 13 to 14 vacant Kansas City
residential lot listings. It will receive commissions as the lots are improved, but there are
no homes under construction.
The next business interest is a 50% interest in Gentle Slopes Partners LLC. It is a
Missouri limited liability company which is not currently operating, has no creditors, and
no assets. Litigation asserting breach of contract and fraud against a partner is
either pending or contemplated. The claims are alleged to be in excess of $100,000.
Metcalf 211, Inc. previously owned vacant real property, but the property has been
returned to the financing bank in exchange for a release. Metcalf 211 has been dissolved.
Stillwell Industrial, LLC owned developed industrial lots when the case was filed. The
property was returned to the secured lender, and the limited liability company dissolved.
Debtors continue to own a 100% interest in Gentle Slopes Builders. It is a
construction company which previously built homes at the Lake of the Ozarks. Presently
it has no assets, no debts, and no construction projects.
Schedule B includes a 50% interest in M & D Partnership. It owned property on
West 151st Street in Stanley, Kansas. This is the seventh tract listed on Schedule A. The
property has been transferred to Cornerstone Bank, and the partnership has no assets and
no debt. Mark Neighbors testified that he has claims against Cornerstone worth more
Case 11-21003 Doc# 460 Filed 12/21/15 Page 9 of 24
3. Personal Property.
The personal property listed on Schedule B includes accounts receivable owed by
Neighbors Investments, Inc., the related Chapter 11 debtor, in an unknown amount. The
loan is not documented by a note. Additional loans to Neighbors Investments were made
post-petition, but are documented only in the monthly reports prepared by Debtors’
bookkeeper.28 Court approval was not obtained. Mark Neighbors does not know the
amount, but would not be surprised if the loans exceed $150,000. Mark Neighbors also
testified that some of the loans to Neighbors Investments could have been made by
Neighbors Realty, which had accounts separate from Debtors, and money could also have
been loaned by Neighbors Realty to Debtors.
Debtors’ assets include two boats, which according to Mark Neighbors are
presently valued at $2000 and $50,000 respectively. The boats are unencumbered.
Schedule B lists 11 contingent and unliquidated claims, resolution of which would
require litigation. Debtors would like to pursue five of them. The first is a claim against
an auction company which allegedly wrongfully failed to collect a $92,500 check in
2009. The company was contacted about the allegations, and counsel was retained by
Debtors in 2011. But there is no lawsuit pending, and litigation counsel is not presently
28 E.g., exh. E at 20 (Monthly operating report signed July 15, 2011 by Mark Neighbors,
reporting “Loan to business $9,000.”).
Case 11-21003 Doc# 460 Filed 12/21/15 Page 10 of 24
The second claim is against “Bank of Versailles and Baumgartners.” The claim
against the bank is alleged to be for about $500,000. Debtors have been trying to bring
the actions. One was commenced pro se, but Mark Neighbors does not know the status.
Debtors attempted to have counsel appointed to pursue the Baumgartners, but the request
The third is against the Central Bank of the Lake of the Ozarks relating to
allegedly unauthorized loans made to a partnership. Mark Neighbors is trying to retain
counsel to pursue the matter. The fourth and fifth claims are against Cornerstone Bank.
Mark Neighbors asserts he has a claim worth more than $500,000 for forgery and
manipulation of records, but there is no pending litigation. Mark Neighbors also testified
about a potential claim against David Imoff and Cornerstone CPA regarding records
The listed claim against Linda L. Beadle recently settled. It was estimated that the
estate would receive $40,000 to $45,000. Although included in Schedule B, Mark
Neighbors testified that he no longer has claims against James Troutman or Safeco
Insurance, and no interest in class action suits against Citi and Toyota, which are also
listed. However, a foreclosure action filed prepetition by Citi against Debtors remains
In summary, of the 11 claims listed as unliquidated contingent claims on Schedule
B, Mark Neighbors testified that he wishes to pursue five, one has settled, four have
been abandoned, and one, the foreclosure against Debtors, is pending.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 11 of 24
Since the preparation of the schedules, Mark Neighbors has become aware of
additional unliquidated claims. One is a claim against bankruptcy counsel related to his
representation of Debtors in the action against Linda Beadle. The others are two claims
against Citi, one filed in Missouri state court and the other as an adversary proceeding in
this Court.29 The adversary complaint alleges three violations of the Missouri
Merchandising Practices Act regarding Citi’s financing of the Gentle Slopes properties
and negligent misrepresentation claims concerning Citi’s loan modification program
with respect to the loans secured by their residence and the Gentle Slopes properties.
4. Claims against the estate.
Debtors’ Schedule D lists 8 secured claims. Mark Neighbors testified that the liens
securing all except two have been released, and Citi is the holder of the only secured
claim. Citi has filed three proofs of claim: (1) $401,397.94 secured by 16959 Gentle
Slopes Drive, Gravois Mills, Missouri; (2) $401,331.70 secured by 16961 Gentle Slopes Drive,
Gravois Mills, Missouri; and (3) $725,618.03 secured by Debtors’ homestead. If the property
securing the first claim is sold, a deficiency is likely.30 The collateral securing the second
proof of claim has been sold, and Citi is claiming a deficiency of $150,000 to $175,000,
but Mark Neighbors doesn’t believe any deficiency is owed. Mark Neighbors testified
that the homestead is worth more than Citi’s claim.
29 Adversary case no. 15-06106.
30 Debtors’ Schedule A lists the value of this property to be $259,600.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 12 of 24
The only unsecured priority claim has been paid, without the benefit of a plan or
appropriate motion and approval of the Court.
The schedule of unsecured claims include 12 personal guaranties. Mark Neighbors
testified that eight of the guaranties have been released. The remaining four guaranties
secure claims of Neighbors Investments, Inc., which are being paid through the
Neighbors Investments, Inc.’s Chapter 11 plan. Mark Neighbors does not expect that
these guarantees will be pursued.
According to Mark Neighbors, the remaining scheduled unsecured claims, apart
from the guaranties and any deficiencies of Citi, are approximately $10,600 for which
proofs of claim have been filed and $24,631 for which no proof of claim have been filed.
Testimony concerning the claims register generally confirms this analysis.
In summary, the claims against the Debtors, other than on the personal guaranties
of the allegedly oversecured debts of Neighbors Investments, Inc. being paid through the
corporate Chapter 11 plan, are: (1) unsecured claims of approximately $10,000; (2) Citi's
claim secured by the homestead, which Mark Neighbors contends is oversecured; (3)
Citi’s claim secured by 16959 Gentle Slopes Drive, Gravois Mills, Missouri, which will
probably result in an unsecured deficiency if the property is sold; and (4) Citi’s deficiency
claim following the sale of 16961 Gentle Slopes Drive, Gravois Mills, Missouri.
5. Estate income.
There is no evidence that Debtors plan to resume their real estate development and
building businesses. At the time of trial, Debtor Mark Neighbors was employed by
Case 11-21003 Doc# 460 Filed 12/21/15 Page 13 of 24
Platinum Realty as a realtor, for which he received irregular, commission based income.
Debtors’ principal income is $9,338 monthly disability income, which will terminate at
either age 62 or 65, which is two or five years in the future. Debtor Shelly Neighbors
works with Mark Neighbors on real estate sales and has no other income.
6. Events subsequent to trial.
Consistent with the trial testimony, on November 16, 2015, counsel for the
Debtors filed a motion to approve the negotiated settlement of the Beadle litigation.31
Under the settlement, Beadle was to pay the Debtors $45,000 and provide “a truthful and
accurate financial statement.” Debtors and Beadle executed a Mutual Release and
But on December 8, 2015, Debtors pro se filed an objection to the settlement, for
the reasons stated in three attached letters, one from the Debtors, one from the Debtors’
son, and one from the Debtors’ sister-in-law. These last two individuals are not listed as
creditors. The reasons stated by Debtors for disapproval of the settlement include the
allegations that the notarization on Beadle’s financial statement is torn and that public
records evidence that Beadle has not obtained the full $45,000 settlement funds from a
mortgage on her home. Multiple additional objections relate to the amount of the
settlement and events which occurred prior to the settlement, such as alleged undisclosed
31 Doc. 444. The settlement was the result of mediation conducted by Bankruptcy Judge
32 Id. The agreement is attached to the motion.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 14 of 24
conflicts of interest and discovery issues, which were known but not mentioned during
the trial on the motion to convert.
POSITIONS OF THE PARTIES.
When moving for conversion to Chapter 7, Citi relies in part upon Debtors’
statements in support of their motion to dismiss that cause for dismissal or conversion
exists under § 1112(b). It then argues that conversion rather than dismissal would be in
the best interests of creditors and the estate because it appears that Debtors have nonexempt
assets, dismissal would make it much more difficult for creditors to realize the
value of those assets, and a Chapter 7 case would provide for an orderly liquidation based
upon established priorities.33 Debtors respond that because they have withdrawn their
motion to dismiss, Citi has failed to show cause exists and that should cause exist, Citi
has failed to show that conversion is in the best interests of creditors and the estate
because the unsecured claims of creditors other than Citi are approximately $10,000 and
Citi has failed to show it has an unsecured claims and in what amount.34
A. DISMISSAL OR CONVERSION FOR CAUSE.
Section 1112(b)(1) is the controlling statute. It provides:
Except as provided in paragraph (2) and subsection (c), on
request of a party in interest, and after notice and a hearing,
33 Doc. 416.
34 Doc. 439.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 15 of 24
the court shall convert a case under this chapter to a case
under chapter 7 or dismiss the case, which ever is in the best
interests of creditors and the estate, for cause unless the court
determines that the appointment under section 1104(a) of a
trustee or an examiner is in the best interests of creditors and
Because neither paragraph (2) nor subsection (c) are applicable, Citi is a party in interest
as defined by § 1109(b), and the Court has given notice and held a hearing, the first issue
to be decided is whether there is cause. For purposes of conversion or dismissal, cause is
defined by § 1112(b)(4), which sets forth a non-exhaustive list of items which constitute
cause. The list is read in the disjunctive.35 This means that cause is established when the
existence of any of the items is proven, or the Court otherwise finds cause. Citi as the
movant has the initial burden of demonstrating by a preponderance of the evidence that
B. CAUSE EXISTS.
1. There has been substantial loss to the estate and there is an absence of a
reasonable likelihood of rehabilitation.
The first item in the list of cause is “substantial or continuing loss to or diminution
of the estate and the absence of a reasonable likelihood of rehabilitation.”37 Debtors’
business, as reported on their Statement of Financial Affairs, was real estate development,
35 7 Colliers on Bankruptcy ¶ 1112.04 at 1122-27 (Alan N. Resnick & Henry J.
Sommer Eds.-in-chief, 16th ed. 2015) (citing In re Products Int’l Co., 395 B.R. 101, 110 (Bankr.
D. Ariz. 2008)).
36 7 Colliers on Bankruptcy ¶ 1112.04 at 1112-22.
37 11 U.S.C. § 1112(b)(4)(A).
Case 11-21003 Doc# 460 Filed 12/21/15 Page 16 of 24
sales, and rental. During the pendency of the case, the Debtors’ real estate assets have
declined significantly. Only one Gentle Slopes property and their residence remain.
Debtors are not engaged in construction. The estate’s cash has been depleted by transfers
to Neighbors Investments Inc., without Court approval, the execution of a promissory
note, and an expectation of repayment.
Mark Neighbors is employed as a real estate agent, with compensation on a
commission basis. Debtors’ income is primarily from disability payments. There is no
evidence of plans to revitalize Debtors’ businesses.
When moving to dismiss, Debtors stated that “their overall financial situation has
drastically declined” and “[due to the decease in income and loss of real estate, Debtors
believe they do not have sufficient sources of income to sustain a Chapter 11 Plan or
reorganization.”38 Trial testimony confirmed this assessment. The only change in
Debtors’ finances since the filing of the motion to dismiss is the negotiated settlement of
the Beadle law suit, which was expected to provide income to the estate of approximately
$45,000. But now Debtors have objected to the settlement. Even assuming that the
settlement is approved, receipt of $45,000 would not be a basis on which to find that
rehabilitation is likely. If this Chapter 11 case were to continue, administrative expenses,
particularly professional fees, would continue to accrue rapidly, not only for services
38 Doc. 404, 4.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 17 of 24
related to plan development but also for litigation services, including the lawsuit recently
filed against Citi. Debtors have no on going business to generate the needed funds.
2. Additional circumstances which evidence cause.
“Because the list of grounds [in § 1112(b)(4)] is not all-inclusive, the court may
consider other grounds as they arise, and may use its equitable powers to reach an
appropriate result.”39 As an additional ground for cause, the Court considers the Debtors’
failure to obtain a confirmed plan. Section § 1112(b)(4)(J) provides that cause is present
when there is “failure to file a disclosure statement, or to file or confirm a plan, within the
time fixed by this title or by court order.” 40 In this case, August 11, 2011, was the
original deadline for Debtors to file a plan within the exclusivity period of § 1121(b).
Debtors filed three motions to extend the exclusivity period41 which were granted, such
that the exclusivity period expired on December 30, 2011. Debtors filed their original
plan on that date, and Citi objected. Citi also objected to Debtors’ first amended plan,
filed on June 15, 2012. Thereafter, Debtors made no serious efforts to obtain a confirmed
Although these circumstances do not strictly constitute cause as defined by
§1112(b)(4)(J) because no deadline for filing a plan was fixed by the Court, these
39 5 William L. Norton, Jr., and William L. Norton III, Norton Bankruptcy Law &
Practice 3d, § 103.6 at 103-14 (Thomson Reuters 2014).
40 11 U.S.C. § 1112(b)(4)(J).
41 Docs. 55, 76, & 106.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 18 of 24
circumstances clearly point to cause. This case has been on file for four and one-half
years, but Debtors are not pursuing confirmation. It is clear that a confirmed plan cannot
be obtained without the consent of Citi, which is the only secured creditor and holds the
largest unsecured claim. But Debtors and Citi are at loggerheads. The Court is puzzled
as to why the United States Trustee’s office did not file a motion to convert this case at
least two years ago. The Court is also puzzled as to why the United States Trustee’s
office did not take a position on Citi’s motion to convert this case to Chapter 7.
When filing their motion to dismiss, Debtors stated that they “believe that they will
not be able to confirm a plan within the time fixed” because of unresolved issues with
Citi.42 Once Citi filed its motion to convert the case, and it became clear that the dispute
between Citi and the Debtors over the reinstatement on the lien on 16959 Gentle Slopes
Drive, Gravois Mills, Missouri, was going to be resolved prior to any dismissal, Debtors
withdrew their motion to dismiss. They now attempt to use the withdrawal as a basis for
asserting that the statements in their motion to dismiss as to cause cannot be considered in
conjunction with Citi’s motion to convert. The Court finds the withdrawal of the motion
to dismiss was an attempt by the Debtors to manipulate the bankruptcy system and delay
creditor action. Debtors’ statement that they will not be able to confirm a plan because of
unresolved issues with Citi will be considered.
42 Doc. 404, 2.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 19 of 24
At the hearing on Citi’s motion to convert, Debtors’ counsel argued that the
evidence shows circumstances have changed since Debtors’ motion to dismiss was filed
and Debtors are working toward a second amended plan. The changed circumstances
counsel identified are Citi’s retention of new counsel with whom Debtors’ counsel is
having conversations and the filings of the adversary proceeding and the state court case
The Court finds there are no changed circumstances indicating that Debtors can
obtain a confirmed plan in a reasonable time. The adversary proceeding and the state
court action against Citi are complex and will likely take years to resolve through
litigation. Using litigation asserting state law claims only indirectly related to the amount
of Citi’s claims as leverage to achieve agreement to confirmation is not condoned and is
not likely to achieve the desired result. Citi’s past conduct and its filing of this motion
evidence its decision not to consent to a plan. “Dismissal under § 1112(b)(2) is
appropriate where the debtor’s failure to file an acceptable plan after a reasonable time
indicates its inability to do so whether the reason for the debtor’s inability to file is its
poor financial condition, the structure of the claims against it, or some other reason.”43
In addition, as circumstances constituting cause, the Court considers Debtors’
overall conduct during the pendency of this case and concludes that Debtors have not
adhered to the minimum standard of conduct required of Chapter 11 Debtors. They have
43 Hall v. Vance, 887 F.2d 1041, 1044 (10th Cir. 1989).
Case 11-21003 Doc# 460 Filed 12/21/15 Page 20 of 24
taken advantage of the bankruptcy stay to prevent their creditors from taking action
against them, yet they have not seriously attempted to confirm a plan. Rather they filed
litigation, disposed of assets, and dealt with debt through stay relief actions. Mark
Neighbors has transferred estate property to Neighbors Investments, Inc. without Court
approval and without receiving a promissory note. Debtors have not corrected their
schedules, although Mark Neighbors testified at trial that they were not accurate.
Debtors are litigious and have used the bankruptcy case to hire professionals, to
preserve the timeliness of prepetition state law claims for fraud and similar claims, and to
file adversary proceedings. Debtors would like to file additional adversary proceedings
for fraud and other alleged misconduct. But Debtors’ modus operandi is not to litigate for
the purpose of ending disputes, but to obtain leverage over creditors. Part of Debtors’
settlement with the Bank of Versailles involved an agreement for the production of
documents. This led to seemingly endless motions to compel requiring Court
involvement. When Citi made an honest mistake releasing lien in conjunction with the
sale of estate property, it took years and an evidentiary hearing to reinstate the lien over
Debtors’ objection. A judge of this Court devoted a full day to mediation of the Beadle
litigation, a resolution was finally reached, but now Debtors seek to avoid the settlement.
For the forgoing reasons the Court concludes that there is ample cause to dismiss
or convert this case.
C. THERE ARE NO UNUSUAL CIRCUMSTANCES INDICATING THAT
CONVERTING OR DISMISSING THE CASE IS NOT IN THE BEST INTEREST
Case 11-21003 Doc# 460 Filed 12/21/15 Page 21 of 24
Subsection (b)(2) of § 1112 provides that even if cause exists, the court may not
convert or dismiss a case “if the court finds and specifically identifies unusual
circumstances establishing that converting or dismissing the case is not in the best
interests of creditors and the estate, and the debtor or any other party” establishes one of
two things: (1) there is a reasonable likelihood that a plan will be confirmed within a
reasonable time; or (2) the grounds for converting or dismissing the case include an act or
omission of the debtor other than under subsection (4)(A), for which there exists a
reasonable justification which will be cured within a reasonable time set by the court.
There is no evidence of unreasonable circumstances evidencing that conversion or
dismissal is not in the best interests of the creditors and the estate. Further, even if there
were such circumstances, as discussed above, Debtors have not shown that there is a
reasonable likelihood that a plan will be confirmed in a reasonable time. In addition, as to
the cause other than that defined by § 1112(b)(4)(A), the finding is not based upon acts of
the Debtors which are reasonably justified and which can be cured in a reasonable time.
D. THE COURT FINDS THAT CONVERSION WOULD BE IN THE BEST
INTERESTS OF CREDITORS AND THE ESTATE.
Having found cause and the absence of special circumstances, the Court next
considers whether dismissal or conversion is in the best interests of creditors and the
estate.44 “[A]s a result of the 2005 Amendments, Code § 1112(b)(1) is no longer
44 The Court also notes that, if in the best interest of creditors and the estate, the Court
may appoint a trustee or examiner, as an alternative to dismissal or conversion. The Court finds
the estate does not have the cash flow necessary to support the appointment of a trustee.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 22 of 24
permissive, but instead mandates conversion or dismissal if the movant establishes
exclusive cause, and no unusual circumstances establish that conversion or dismissal is
not in the best interests of creditors.”45
“The Code does not define the phrase ‘best interests of creditors and the estate.’”46
The standard “implies a balancing test to be applied through case-by-case analysis. In the
end the determination is a matter for sound judicial discretion.”47 The Court must
consider the impact of each of the options.48
Counsel for the Debtors suggests that when considering the options the Court
evaluate the ten factors enumerated by Bankruptcy Judge Nugent in L&T Machining.49
But those factors are suitable for use in a business reorganization case and have little
relevancy in an individual Chapter 11 case such as this. Of the ten, only two are
applicable here. The first relevant factor is “the ability of the trustee in a chapter 7 case to
reach assets for the benefit of creditors.”50 In this case, a Chapter 7 Trustee could reach
Debtors’ assets having a value, but these assets could also be reached by creditors outside of
45 5 Norton Bankruptcy Law & Practice, § 103:6 at 103-14.
46 7 Collier on Bankruptcy, ¶ 1112.04 at 1112-40.
47 In re Staff Inv. Co., 146 B.R. 256, 260 (Bankr. E.D. Ca. 1992).
48 Rollex Corp. v. Associated Materials, Inc. (In re Superior Siding & Window, Inc.), 14
F.3d 240, 243 (4th Cir. 1994).
49 In re L & T Machining, Inc., Memorandum Opinion, case no. 11-11045, doc. 259
(Bankr. D. Kan. July 3, 2013).
50 Id. at 10.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 23 of 24
bankruptcy. There are no Chapter 5 actions or other sources of recovery unique to
bankruptcy. However, a Chapter 7 Trustee could bring to conclusion any of Debtor’s
unliquidated claims which have value.
The second relevant factor is “whether any remaining issues would be better
resolved outside the bankruptcy forum.”51 In this case the unresolved issues are primarily
the approval of the compromise of the Beadle litigation, the Missouri Merchandising
Practices Act and negligent misrepresentation claims against Citi, and the unliquidated
claims held by the estate which Mark Neighbors wishes to pursue. A Chapter 7 Trustee
could impose order evaluating the unliquidated claims and pursuing appropriate
dispositions. Mark Neighbors has demonstrated that he is incapable of making decisions
that would bring these matters to an orderly conclusion.
Citi is the only significant unsecured creditor acknowledged by Debtors, and it
clearly would be benefitted by conversion. The Court is not as confident as is Mark
Neighbors that all of the claims of unsecured guarantors have been resolved, so these may
also need to be addressed by a Chapter 7 Trustee.
For the foregoing reasons, the Court converts this case to Chapter 7 for cause.
IT IS SO ORDERED.
Case 11-21003 Doc# 460 Filed 12/21/15 Page 24 of 24