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In Re Williams, 12-21308 (Bankr. D. Kan. Apr. 1, 2015) Doc. # 110
SIGNED this 1st day of April, 2015.
Designated for publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
MONICA L. WILLIAMS, CASE NO. 12-21308
MEMORANDUM OPINION AND JUDGMENT DENYING DEBTOR’S MOTION
FOR AN ORDER UNDER 11 U.S.C. § 105 ENJOINING THE ACTIONS OF
STATE OFFICIALS IN A PENDING CRIMINAL PROSECUTION AGAINST
This controversy concerns the relationship of the Bankruptcy Court with the
Johnson County, Kansas District Court and the Johnson County District Attorney when,
on the date she filed her Chapter 13 petition, Debtor Monica Williams was a party to a
criminal Diversion Agreement which required her to pay restitution. Debtor contends
that the revocation of her criminal diversion because of her failure to pay restitution after
confirmation of her Chapter 13 plan was a violation of the automatic stay and contrary to
Case 12-21308 Doc# 110 Filed 04/01/15 Page 1 of 20
the binding effect of confirmation. She moves for an order enjoining1 the Johnson
County District Court and the Johnson County District Attorney from revoking her
diversion.2 A hearing was held on January 15, 2015. Debtor appeared by David A. Reed.
The Honorable Kevin Moriarty, Johnson County District Court Judge, appeared by
Justice B. King of Fisher, Patterson, Sayler & Smith, L.L.P. Steven M. Howe, the
Johnson County District Attorney, appeared by Brian M. Holland of Lathrop & Gage
LLP. For the reasons stated below, the Court cannot grant Debtor’s request for an
injunction under 11 U.S.C. § 105.3
On September 7, 2010, the State of Kansas, through the Johnson County District
Attorney, charged Debtor with one count of felony theft. The criminal complaint,
assigned case no. 10-CR-02241, alleged that Debtor stole more than $1,000 but less than
1 Fed. R. Bankr. P. 7001(7) provides that “a proceeding to obtain an injunction or other equitable
relief” is an adversary proceeding, and Fed. R. Bankr. P. 7003 provides that adversary proceedings are
commenced by the filing of a complaint. Rather than following this procedure, Debtor commenced this
matter by filing a motion. Because the issues have been fully briefed and argued by the Johnson County
District Attorney and the Johnson County District Court, who would have been the defendants if this
matter had been commenced as an adversary proceeding, the Court will address the merits rather than
deny the motion on procedural grounds.
2 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and § 1334(a) and (b) and the
Amended Standing Order of Reference of the United States District Court for the District of Kansas that
exercised authority conferred by § 157(a) to refer to the District’s bankruptcy judges all matters under the
Bankruptcy Code and all proceedings arising under the Code or arising in or related to a case under the
Code, effective June 24, 2013. D. Kan. Standing Order No. 13-1, printed in D. Kan. Rules of Practice
and Procedure at 168 (March 2014). A motion for an injunction under 11 U.S.C. § 105 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.
3 All future references to title 11 in the text shall be to the section number only.
Case 12-21308 Doc# 110 Filed 04/01/15 Page 2 of 20
$25,000 in cash or checks from Olathe North High School Project Graduation. On July
12, 2011, Debtor and the District Attorney entered into a 24-month Diversion Agreement
pursuant to which Debtor agreed to many conditions, including to pay a diversion fee of
$150, court costs of $200.50, restitution of $12,861.81, and fees charged by her court-
appointed attorney. The restitution payments were to be made with an initial payment of
$666.81 by September 15, 2011, and subsequent monthly payments of $610 until the
restitution was paid in full. If Debtor complied with her obligations under the Diversion
Agreement, the District Attorney’s Office agreed to dismiss the criminal case. The
Diversion Agreement was filed, and the criminal proceedings were stayed.
Debtor filed for relief under Chapter 13 on May 12, 2012. Schedule E, Creditors
Holding Unsecured Priority Claims, lists the District Attorney’s Office as the holder of a
claim for $9,240.4 Debtor filed her proposed Chapter 13 plan with her petition. The
amount owed to the District Attorney’s Office was included in the plan as a
nondischargeable priority claim with estimated monthly payments of $260. On July 9,
2012, Debtor’s counsel corresponded with Debtor’s diversion coordinator advising that a
proof of claim should be filed. No objections to the Plan were filed, and it was orally
confirmed on July 20, 2012. On August 8, 2012, Debtor’s attorney filed a proof of claim
for the District Attorney. On April 18, 2013, Debtor and the District Attorney entered
4 The classification of Debtor’s restitution obligation as an unsecured priority claim may not be
correct. See In re Bennett, 237 B.R. 918 (Bankr. N.D. Tex. 1999) (holding that federal government’s
criminal restitution claim, although nondischargeable, was not entitled to priority treatment). But the
classification has not been challenged and is not an issue in this case.
Case 12-21308 Doc# 110 Filed 04/01/15 Page 3 of 20
into an amended Diversion Agreement which extended the term of the agreement by 36
months. Payments were made on the District Attorney’s claim.
In May of 2013, Debtor was in an auto accident, and injuries she suffered
eventually forced her to leave her employment. The Chapter 13 Trustee moved to dismiss
the case for failure to make plan payments. On December 13, 2013, Debtor moved to
abate past due payments and to amend her plan by reducing her monthly payment and
surrendering two vehicles. On January 15, 2014, Debtor moved to further amend the
plan. There were no objections, and the plan as amended was confirmed on March 13,
On January 8, 2014, the District Attorney asked the Johnson County District Court
to revoke Debtor’s diversion for her breach of the Diversion Agreement by failing “to pay
the balance of $95.50 for Court Appointed Attorney fees, and finger print fees” and
failing “to pay the balance of $6,429.13 in restitution in this case.”5 District Court Judge
Moriarty entered an order setting February 18, 2014, for a hearing on the issue of the
revocation of Debtor’s diversion. At the request of Debtor at the scheduled hearing, the
matter was continued to June 24, 2014. At the rescheduled hearing, the District Court
Judge found Debtor had violated the terms of her diversion, revoked the diversion, found
Debtor guilty of the crime as charged, and ordered a pre-sentence investigation report.
5 Doc. 84-5. Although additional terms of the Diversion Agreement were also breached, they
were not listed as a basis for the revocation. Debtor has not contended that she was current on the
payments required by her Chapter 13 plan.
Case 12-21308 Doc# 110 Filed 04/01/15 Page 4 of 20
On July 3, 2014, Debtor filed in this Court her Motion for an Order to Show Cause
Why the Automatic Stay Should Not Be Enforced, and for Violating the Terms of a
Confirmed Plan.6 Service was made on the Chapter 13 Trustee, the Kansas Attorney
General, and the Johnson County District Attorney. Debtor contended that the actions in
the state court revoking the diversion because of nonpayment of restitution were in
violation of the automatic stay. A scheduled hearing was held, but there was no
appearance by the State of Kansas or the District Attorney.7 At the direction of the Court,
Debtor’s counsel submitted an order granting the motion.8 That order was entered but
later withdrawn.9 A briefing schedule was established,10 and oral argument was held on
January 15, 2015. Before the arguments were heard, the District Court set aside the
judgment of guilt and continued the criminal matters. In addition, Debtor had paid her
restitution in full sometime before that hearing.
A. The Parties’ Contentions.
The issue raised is whether the Court may enjoin the District Attorney and the
Johnson County District Court from revoking Debtor’s Diversion Agreement and
6 Doc. 70.
7 See doc. 72.
8 Doc. 73.
9 Doc. 76.
10 Doc. 85.
Case 12-21308 Doc# 110 Filed 04/01/15 Page 5 of 20
proceeding with the felony prosecution because she failed to pay her restitution
obligation. Debtor argues that the revocation of her diversion for failure to abide by her
Diversion Agreement was a violation of the § 362(a) stay, since the revocation for failing
to pay restitution is not within the exception to the stay provided by § 362(b)(1), which
applies to “the commencement or continuation of a criminal action or proceeding against
the debtor.” In addition, Debtor argues that even if the revocation did not violate the stay,
the revocation of her diversion because she failed to pay restitution was barred by her
confirmed plan. The District Attorney and the Johnson County District Court assert that
neither argument is correct, that the exception of § 362(b)(1) does apply to actions
revoking diversion for nonpayment of restitution, and that confirmation of the plan
providing for payment of the restitution is not a bar to the actions they took.
B. A bankruptcy court may enjoin state criminal proceedings only if the
requisites of Younger v. Harris are satisfied.
As the United States Supreme Court stated in Younger v. Harris, “[T]he normal
thing to do when federal courts are asked to enjoin pending proceedings in state courts is
not to issue such injunctions.”11 There is a fundamental policy against federal
interference with state criminal prosecutions.12 Younger “permits a federal court to enjoin
a state criminal prosecution only if 1) the party requesting the injunction is without
adequate remedy at law; 2) the party stands to suffer ‘irreparable injury’ that is ‘both
11 Younger v. Harris, 401 U.S. 37, 45 (1971).
12 Id. at 46.
Case 12-21308 Doc# 110 Filed 04/01/15 Page 6 of 20
great and immediate’; and 3) the threatened injury relates to his ‘federally protected rights
. . . [and] cannot be eliminated by his defense against a single criminal prosecution.”13
C. The Court will not enjoin the state criminal proceedings based upon a
violation of the bankruptcy stay because the § 362(b)(1) exception to the stay applies
to the revocation of Debtor’s diversion, even though it is based upon her
nonpayment of restitution.
The filing of a petition under Chapter 13 of the Bankruptcy Code operates as a stay
of “any act to collect, assess, or recover a claim against the debtor that arose before the
commencement of the case” under Title 11.14 But § 362(b)(1) provides that the filing of a
petition does not operate as a stay of “the commencement or continuation of a criminal
action or proceeding against the debtor.” The Court’s task is to interpret this exception to
the automatic stay to determine if Debtor has a federally protected right which could be
protected by the requested injunction under § 105.
“‘[T]he starting point in every case involving construction of a statute is the
language itself.’”15 “‘It is well established that “when the statute’s language is plain, the
sole function of the courts — at least where the disposition required by the text is not
13 Fussell v. Price (In re Fussell), 928 F.2d 712, 715 (5th Cir. 1991) (quoting parts of Younger v.
Harris, 401 U.S. at 43-46). See Barnette v. Evans, 673 F.2d 1250, 1252 (11th Cir. 1982) (“The Younger
Court held that a federal court should not enjoin a pending state criminal prosecution except under
extraordinary circumstances where there is a great and immediate danger of irreparable harm to plaintiff’s
federally protected rights that cannot be eliminated by his defense against a single prosecution”); Davis v.
Sheldon (In re Davis), 691 F.2d 176, 178-79 (3rd Cir. 1982) (affirming denial of Chapter 7 debtors’
request for permanent injunction against state court criminal prosecution for issuance of bad checks
because Younger requirements not satisfied).
14 11 U.S.C. § 362(a)(6).
15 Kelly v. Robinson, 479 U.S. 36, 43 (1986) (quoting Blue Chip Stamps v. Manor Drug Stores,
421 U.S. 723, 756 (1975) (Powell, J. concurring)).
Case 12-21308 Doc# 110 Filed 04/01/15 Page 7 of 20
absurd — is to enforce it according to its terms.”’”16 “‘When terms used in a statute are
undefined, we give them their ordinary meaning.’”17 The ordinary meaning of a criminal
proceeding is “[a] proceeding instituted to determine a person’s guilt or innocence or to
set a convicted person’s punishment.”18 A proceeding “may include in its general sense
all the steps taken or measures adopted in the prosecution or defense of an action,
including the pleadings and judgment.”19
Under the plain meaning § 362(b)(1), the exception to the stay applies to all
aspects of the criminal case instituted against Debtor. There is no doubt that the
revocation of Debtor’s diversion is part of the criminal proceedings against her. Her
prosecution was commenced by filing a complaint.20 An arrest warrant was issued.21
Debtor waived a preliminary examination and was arraigned.22 Under Kansas law,
“[a]fter a complaint has been filed charging a defendant with commission of a crime and
prior to conviction thereof,” the district attorney may propose a diversion agreement “if it
16 Lamie v. United States Trustee, 540 U.S. 526, 534 (2004) (quoting Hartford Underwriters Ins.
Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000)).
17 Hamilton v. Lanning, 560 U.S. 505, 513 (2010) (quoting Asgrow Seed Co. v. Winterboer, 513
U.S. 179, 187 (1995)).
18 Black’s Law Dictionary (9th ed. 2009) (definition of “criminal proceeding” appears under
20 See K.S.A. 22-2301(a)(1) (“Unless otherwise provided by law, a prosecution shall be
commenced by filing a complaint with a magistrate.”).
21 See K.S.A. 22-2302(1).
22 See K.S.A. 2013 Supp. 22-2902(1) and -2902(4).
Case 12-21308 Doc# 110 Filed 04/01/15 Page 8 of 20
appears to the district attorney that diversion of the defendant would be in the interests of
justice and of benefit to the defendant and the community.”23 Debtor and the District
Attorney entered into a Diversion Agreement which was filed in the criminal case. That
agreement, in accord with Kansas law, provided that “if Defendant performs the
obligations under this agreement[,] the District Attorney’s Office will dismiss the case
with prejudice, with costs to Defendant.”24 However, it also provided that “should the
District Attorney’s Office make the determination that the Defendant is not complying
with the provisions of this diversion agreement, that a motion to have prosecution
reinstated against defendant may be filed.”25 If at a hearing on the District Attorney’s
motion, the district court determines that the defendant failed to fulfill the agreement, the
court “shall resume the criminal proceedings on the complaint.”26 The proceedings
seeking to revoke Debtor’s diversion were part of the criminal proceedings against her
and therefore within the § 362(b)(1) exception to the automatic stay.
Contrary to Debtor’s position, the Court finds the fact that the revocation of the
diversion was stated to be because of Debtor’s failure to pay restitution does not remove
the District Attorney’s and the District Court’s actions from the stay exception. The
legislative history to § 362(b)(1) states that “bankruptcy laws are not a haven for criminal
23 K.S.A. 22-2907(1).
24 Doc. 82-2 at 9; see K.S.A. 2013 Supp. 22-2909.
25 Doc. 82-2 at 5; see K.S.A. 22-2911(a).
26 K.S.A. 22-2911(a) (emphasis added).
Case 12-21308 Doc# 110 Filed 04/01/15 Page 9 of 20
offenders, but are designed to give relief from financial over-extension. Thus, criminal
actions and proceedings may proceed in spite of bankruptcy.”27 Consistent with this
purpose, § 362(b)(1) has no exceptions. If Congress had intended for criminal
proceedings involving the collection of restitution to be subject to the stay of § 362(a), it
knew how to do so. For example, the exception to the stay codified at § 362(b)(4) for the
enforcement of a governmental unit’s police and regulatory power applies to the
enforcement of a judgment “other than a money judgment.”28
In accord with the foregoing meaning of the exception, courts have held that the
stay of § 362(a) does not bar the continuation of federal criminal proceedings, including
the enforcement of a probationary sentence because of nonpayment of restitution 29 and
enforcement of a criminal fine and costs imposed in a prepetition criminal contempt
proceeding.30 Likewise, numerous courts have held that various aspects of state criminal
proceedings are not stayed by the filing of a bankruptcy petition. These include the
conviction of the debtor in state criminal proceedings for failure to pay child support,31
the holding of a probation revocation hearing based upon the debtor’s failure to pay a
27 H.R. No. 95-595, 95th Cong. 1st Sess. 342 (1977); S.R. No. 95-989, 95th Cong. 2nd Sess. 51
28 11 U.S.C § 362(b)(4).
29 United States v. Colasuonno, 697 F.3d 164, 171-76 (2nd Cir. 2012); United States v. Caddell,
830 F.2d 36, 38-39 (5th Cir. 1987).
30 United States v. Troxler Hosiery Co., Inc., 41 B.R. 457, 459-63 (M.D.N.C. 1984).
31 Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074, 1084-87 (9th Cir. 2000) (en
Case 12-21308 Doc# 110 Filed 04/01/15 Page 10 of 20
criminal restitution obligation,32 criminal proceedings relating to the debtor’s hot check
offenses, including the enforcement of orders to pay fines and restitution,33 requiring the
debtor to post bail in order to obtain her release from jail,34 and revocation of a suspended
sentence based upon the debtor’s failure to make his monthly child support payments.35
These, and other similar decisions, are consistent with the United States Supreme Court’s
emphasis on “the fundamental policy against federal interference with state criminal
prosecutions.”36 “[T]he States’ interest in administering their criminal justice systems
free from federal interference is one of the most powerful of the considerations that
should influence a court considering equitable types of relief.”37
In an effort to remove the revocation of Debtor’s diversion from the exception to
the stay, Debtor argues that the stay of § 362(a), not the exception of § 362(b)(1), applies
when an “immune criminal prosecution incorporates a civil remedy, namely, collection of
restitution.”38 Primary reliance is placed on Barnett, 39 a 1981 decision by former District
32 Birk v. Simmons, 108 B.R. 657, 659 (Bankr. S.D. Ill. 1988).
33 In re Bibbs, 282 B.R. 876, 877-80 (Bankr. E.D. Ark. 2002).
34 In re Sori, 513 B.R. 728, 736 (Bankr. N.D. Ill. 2014).
35 Rollins v. Campbell (In re Rollins), 243 B.R. 540, 546-48 (N.D. Ga. 1997).
36 Kelly v. Robinson, 479 U.S. at 47 (quoting Younger v. Harris, 401 U.S. at 46).
37 Id. at 49.
38 Doc. 87 at 12. Debtor does not rely upon the “minority interpretation of §362(b)(1) [which]
focuses on the motive behind the criminal prosecution and refuses to apply the exception when the
primary motivation is the collection of a debt.” In re Sori, 513 B.R. at 734. Therefore, the issue before
the Court does not require a determination whether to follow this minority position or the majority
position under which “the exception in § 362(b)(1) is absolute regardless of prosecutorial purpose or
Case 12-21308 Doc# 110 Filed 04/01/15 Page 11 of 20
of Kansas Bankruptcy Judge James A. Pusateri in a case under Chapter 13. In Barnett,
the court was asked to determine if a conflict existed between the Bankruptcy Code and
state legislation addressing the consequences of the issuance of a worthless (NSF) check.
The court held that because of § 362(b)(1), there was no conflict to support enjoining the
prosecutor from commencing or continuing a criminal NSF proceedings. But the court
also held that once a bankruptcy was filed, the stay of § 362(a) barred sending a notice to
the debtor, as authorized in the NSF criminal legislation, demanding that the debtor pay
the debt caused by the NSF check or face the consequences of criminal prosecution. The
court found that this statutorily-authorized notice, which could be sent by creditors
without the assistance of the county attorney, was essentially a civil collection tool (and
therefore outside the scope of § 362(b)(1)) and conflicted with the stay of § 362(a).40 As
pointed out by Debtor, Barnett was followed in Kirk, 41 also a Kansas bankruptcy court
decision arising from a NSF criminal case. In that case, the debtor’s prepetition payment
of restitution to the clerk of the county court, who then transferred the funds to the
business to which the NSF check had been given, was held to have been a preferential
transfer. The court characterized the debtor’s restitution payment to the clerk of the
alleged bad faith.” Id. at 733.
39 Barnett v. K-Mart (In re Barnett), 15 B.R. 504 (Bankr. D. Kan. 1981).
40 Id. at 511.
41 Rajala v. Bowlus School Supply, Inc. (In re Kirk), 38 B.R. 257 (Bankr. D. Kan. 1984).
Case 12-21308 Doc# 110 Filed 04/01/15 Page 12 of 20
county court as the substitution of “a civil enforcement mechanism for the criminal
Contrary to Debtor’s arguments, the analysis of Barnett is not applicable to this
case. Unlike Barnett, this is not an NSF case. The restitution ordered as a condition of
Debtor’s diversion from further proceedings in her felony case is not a civil remedy.
Under Kansas law, “[r]estitution is not merely victim compensation but also serves the
functions of deterrence and rehabilitation of the guilty.”43 Further, under Kansas law the
consequence of the revocation of diversion, even for the nonpayment of restitution, is not
the enforcement of the restitution obligation; the revocation of diversion may lead to a
criminal conviction based upon stipulated facts. In this case, there are no facts
concerning any attempt to collect past-due restitution payments or to accelerate the
collection of restitution as a result of the failure to pay in accord with the Diversion
Agreement. This case is about the revocation of diversion because of the nonpayment of
restitution, not the collection of restitution payments. The rationale of Barnett has no
Debtor also relies upon Davenport, 44 a 1990 opinion of the United States Supreme
Court. It held that restitution obligations imposed as conditions of probation in state
criminal actions constituted debts for bankruptcy purposes, and were accordingly
42 Id. at 260.
43 State v. Applegate, 266 Kan. 1072, 1075, 976 P.2d 936, 938 (1999).
44 Pa. Dept. of Public Welfare v. Davenport, 495 U.S. 552 (1990).
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dischargeable under the then-current provisions of Chapter 13. Congress quickly
amended § 1325(a), reversing this holding by making restitution obligations
nondischargeable. Nevertheless, Debtor relies upon the Davenport majority’s rejection of
the claim that an anomaly arises when the Code is construed to allow criminal
prosecutions under § 362(b)(1) while at the same time allowing for the discharge of
criminal restitution obligations. The Court in dicta observed, “It is not an irrational or
inconsistent policy choice to permit prosecution of criminal offenses during the pendency
of a bankruptcy action and at the same time to preclude probation officials from enforcing
restitution orders while a debtor seeks relief under Chapter 13.”45 The cases cited by
Debtor as following Davenport, Walters46 and Barboza,47 both involved postpetition
efforts to collect restitution. But, as pointed out above, this case is not about the
collection of criminal restitution. It is about the continuation of a criminal proceeding.
Furthermore, as noted by the Second Circuit, the legislative overruling of Davenport and
the fact that a Chapter 13 debtor no longer has an interest in the full release of restitution
obligations are circumstances which “not only absolve us from our usual obligation to
accord great deference to Supreme Court dicta . . . ; they also suggest particular hazard in
relying on Davenport’s dictum to construe § 362(b)(1) to exempt from the automatic stay
45 Id. at 561.
46 Walters v. Sherwood Municipal Court (In re Walters), 219 B.R. 520 (Bankr. W.D. Ark. 1998).
47 In re Barboza, 211 B.R. 450 (Bankr. D.R.I. 1997).
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all revocation [of a criminal sentence of probation] proceedings except those pertaining to
nonpayment of restitution.”48
Debtor also provides a list of eleven cases from outside the Tenth Circuit which
are said to have enjoined restitution during the pendency of a Chapter 13 case.49 These
cases are either factually or legally distinguishable and therefore do not support Debtor’s
For the foregoing reasons the Court holds that the revocation of Debtor’s diversion
because she failed to fulfill her obligation under her Diversion Agreement to pay
48 United States v. Colasuonno, 697 F.3d at 178-79.
49 Doc. 70 at 4-5.
50 Holder v. Dotson (In re Holder), 26 B.R. 789 (Bankr. M.D. Tenn. 1982) (refusing to enjoin
criminal NSF prosecution but enjoining payment of restitution during Chapter 13 proceeding since
Tennessee’s bad check statute had to large extent evolved into public debt collection system); Johnson v.
Lindsey (In re Johnson),16 B.R. 211 (Bankr. M.D. Fla. 1981) (declining to enjoin NSF prosecution but
holding that state could not use criminal process to compel debtor to make restitution on dischargeable
debt); Redenbaugh v. Gahle (In re Redenbaugh), 37 B.R. 383 (Bankr. C.D. Ill. 1984) (creditor enjoined
from requesting or receiving any portion of claim which had been discharged and which creditor was
attempting to collect through restitution in criminal case); Farrell v. Shriver (In re Farrell, 43 B.R. 115
(M.D. Tenn. 1984) (bankruptcy court enjoined county district attorney from proceeding in criminal
prosecution; district court reversed bankruptcy because purpose of Bankruptcy Code would be served by
enjoining collection of discharged debt through criminal proceeding); Brown v. Shriver (In re Brown), 39
B.R. 820 (Bankr. M.D. Tenn 1984) (state prosecutor enjoined from seeking revocation of debtor’s
probation on ground that debtor discharged restitution award); In re Liss, 59 B.R. 556 (Bankr. N.D. Ill.
1986) (state government entities are not prevented from exercising their police or regulatory powers; stay
is operative to prevent enforcement of money judgment under state consumer fraud act); Brown v.
Hampton (In re Brown), 51 B.R. 51 (Bankr. E.D. Ark. 1985) (in Chapter 7 case, criminal proceeding
under hot check law would not be enjoined but instigating creditor would be temporarily enjoined from
receiving restitution as part of criminal proceeding); In re Barboza, 211 B.R. at 450 (if sole objective of
debtor’s postpetition probation hearing is to collect restitution, proceeding may violate automatic stay);
Pearce v. E.L.W. Corp. (In re Pearce), 400 B.R. 126 (Bankr. N.D. Iowa 2009) (creditor of Chapter 7
debtor violated stay by contacting prosecutor and police regarding unpaid debt); In re Storozhenko, 459
B.R. 697 (Bankr. E. D. Mich. 2011) (attempted collection of restitution ordered as part of civil contempt
was not within criminal actions exception to the stay); and In re Feingold, 730 F.3d 1268 (11th Cir. 2013)
(costs and expenses assessed against debtor in state attorney disciplinary proceeding were
nondischargable but this was not sufficient basis for granting relief from stay under § 362(d)(1)).
Case 12-21308 Doc# 110 Filed 04/01/15 Page 15 of 20
restitution as required for the suspension of the criminal proceedings against her is within
the § 362(b)(1) exception to the stay of § 362(a). Debtor has no federally protected right
which is threatened by the revocation of her diversion based upon the nonpayment of her
restitution. Debtor’s application for an injunction under § 105 based upon the alleged
violation of § 362(a) is denied.
D. The Court will not enjoin the revocation of Debtor’s diversion based upon
her nonpayment of restitution on the basis that it is contrary to the binding effect of
the confirmation of Debtor’s Chapter 13 plan because Debtor has not shown that the
Younger standard is satisfied.
As an alternative argument in support of her motion to enjoin the revocation of her
diversion, Debtor argues that the confirmation of her Chapter 13 plan, which provided for
payment of her criminal restitution, is binding on the District Attorney under § 1327 and
bars the action taken. Section 1327, “Effect of confirmation,” provides in subsection (a)
that the “provisions of a confirmed plan bind the debtor and each creditor, whether or not
the claim of such creditor is provided for by the plan, and whether or not such creditor has
objected to, has accepted, or has rejected the plan.” If notice to the holder of the
restitution claim satisfied due process, confirmation of the plan “‘represents a binding
determination of the rights and liabilities of the parties as ordained by the plan.’”51 This
means that “because ‘creditors are limited to those rights that they are afforded by the
plan, they may not take actions to collect debts that are inconsistent with the method of
51 In re Talbot, 124 F.3d 1201, 1209 (10th Cir. 1997) (quoting 8 Collier on Bankruptcy,
¶ 1327.02 (Lawrence P. King ed., 15th ed. 1996)).
Case 12-21308 Doc# 110 Filed 04/01/15 Page 16 of 20
payment provided for in the plan.’”52 In this controversy, the question is whether an
injunction should issue to protect Debtor’s rights under § 1327.
As stated above, because of the strong policy against federal court interference
with state criminal proceedings, under Younger, an injunction may issue to protect a
federal right “only if 1) the party requesting the injunction is without adequate remedy at
law; 2) the party stands to suffer ‘irreparable injury’ that is ‘both great and immediate’;
and 3) the threatened injury relates to his ‘federally protected rights . . . [and] cannot be
eliminated by his defense against a single criminal prosecution.”53 In this case, Debtor
does not address the Younger standards. Rather, Debtor relies upon Coulter. 54 In
Coulter, a Chapter 13 debtor, who before filing bankruptcy had pled guilty to a crime and
been ordered to pay restitution, filed an adversary complaint seeking a determination that
the state department of probation would violate the automatic stay by holding a scheduled
postpetition probation violation hearing for the debtor’s failure to pay restitution and fees
according to the prepetition schedule established by the state, rather than according to the
debtor’s confirmed plan. First, the court held that § 362(a) did not bar the actions which
the state had already taken. Next, the court held that under res judicata principles and
§ 1327, the debtor’s plan was binding on the state. It therefore, under § 105, enjoined the
52 Id. (quoting 8 Collier on Bankruptcy ¶ 1327.02[b]).
53 In re Fussell, 928 F.2d at 715 (quoting parts of Younger v. Harris, 401 U.S. at 43-46).
54 Coulter v. Aplin (In re Coulter), 305 B.R. 748 (Bankr. D.S.C. 2003).
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state from initiating or participating in probation violation hearings based upon the
ground that the debtor had not paid the restitution according to the state-ordered plan.
This Court declines to follow Coulter for several reasons. First, the Coulter court
issued an injunction because “this Court must have an ability to give force and effect to
its orders and maintain the integrity of the bankruptcy confirmation process.”55 Although
the state defendants contended that the Younger doctrine precluded the bankruptcy court
from enjoining the state criminal proceedings, the Coulter court did not discuss Younger
and did not find the Younger requirements for the issuance of an injunction to be satisfied.
Second, neither Perrin56 nor Gilliam57 nor Birk, 58 the three cases relied upon by Coulter
concerning the binding effect of a confirmed plan on state criminal proceedings, found
that an injunction should issue to support the supremacy of federal law. Perrin held that
neither the § 362 stay nor the res judicata effect of confirmation of the debtor’s Chapter
13 plan precluded a municipal court from vacating a fine, the payment of which was
addressed by the plan, and imposing jail time or community service.59 No injunction was
issued. In Gilliam, a Chapter 13 debtor sought to enjoin the State of Tennessee from
revoking his probation and suspended sentence based upon his failure to satisfy a
55 Id. at 758.
56 In re Perrin, 233 B.R. 71 (Bankr. D.N.J. 1999).
57 Gilliam v. Metropolitan Gov’t (In re Gilliam), 67 B.R. 83 (Bankr. M.D. Tenn. 1986).
58 Birk v. Simmons (In re Birk), 108 B.R. 657 (Bankr. S.D. Ill. 1988).
59 Perrin, 233 B.R. at 80.
Case 12-21308 Doc# 110 Filed 04/01/15 Page 18 of 20
condition of probation that he pay a criminal fine and court costs. The court held that an
injunction would not issue because the debtor had not alleged facts to bring the
proceeding within any of the exceptions allowing state criminal proceedings to be
enjoined as discussed in Younger, and noted the debtor could in the state court plead as a
defense his confirmed Chapter 13 plan and his continuing efforts to pay the fine and
costs.60 Birk is similar. After the debtor obtained confirmation of a Chapter 13 plan
providing for the full payment of a restitution obligation, a probation revocation hearing
based upon his nonpayment of the restitution was held and resulted in the extension of the
debtor’s probation for one year. The debtor brought an action alleging a violation of the
automatic stay. The court held that the stay did not bar the revocation hearing, and that
the debtor had not shown sufficient grounds for an injunction under Younger. 61 The court
said, “If probation revocation is threatened in the future, the Debtor may plead his 100%
Chapter 13 plan in defense and explain his efforts to pay his debts.”62
In this case, Debtor has not argued that she is entitled to an injunction under the
Younger standard. Like the debtors in Gilliam and Birk, she can raise her efforts to pay
her restitution under her confirmed plan as a defense at the hearing to revoke her
diversion and enter the felony conviction. The Court therefore denies Debtor’s request
60 In re Gilliam, 67 B.R. at 87.
61 In re Birk, 108 B.R. at 659-60.
62 Id. at 660 (citing In re Gilliam, 67 B.R. at 83).
Case 12-21308 Doc# 110 Filed 04/01/15 Page 19 of 20
for an injunction against the revocation of her diversion on the basis that such action is
contrary to § 1327.
CONCLUSION AND JUDGMENT.
The Court denies Debtor’s request for an injunction under § 105. This motion
presents no extraordinary circumstances which could justify this Court’s interference with
the criminal proceedings against Debtor that are pending in the District Court of Johnson
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
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 12-21308 Doc# 110 Filed 04/01/15 Page 20 of 20
- Category: Judge Somers
- Published on 27 March 2015
- Written by Judge Somers
- Hits: 121
Neighbors Investments, Inc. et al v. The Bank of Versailles et al, 14-06082 (Bankr. D. Kan. Mar. 23, 2015) Doc. # 19
SIGNED this 20th day of March, 2015.
Opinion Designated for Electronic Use, But Not for Print Publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
MARK STEPHEN NEIGHBORS,
SHELLY KAY NEIGHBORS, and
NEIGHBORS INVESTMENTS, INC.,
MARK STEPHEN NEIGHBORS,
SHELLY KAY NEIGHBORS, and
NEIGHBORS INVESTMENTS, INC.,
BANK OF VERSAILLES, and
BOV HOLDING COMPANY,
CASE NO. 11-21003-11
CASE NO. 11-21022-11
ADV. NO. 14-6082
OPINION GRANTING THE DEFENDANTS’ MOTION TO DISMISS
Case 14-06082 Doc# 19 Filed 03/20/15 Page 1 of 17
THE DEBTORS’ COMPLAINT WITH PREJUDICE
This proceeding is before the Court on the Defendants’ motion to dismiss the
Plaintiffs’ complaint.1 The Plaintiff-Debtors concede the complaint should be dismissed,
but ask that the dismissal be without prejudice. The Defendants contend the complaint
should be dismissed with prejudice. The Defendants appear by counsel Kate Whittaker of
Shook, Hardy & Bacon, L.L.P. The Plaintiff-Debtors now appear by counsel Camron
Hoorfar, although the complaint was signed only by non-attorney Mark Neighbors. The
Court has reviewed all the pleadings filed in the proceeding, and concludes the
Defendants’ request to dismiss the complaint with prejudice should be granted.
On October 14, 2014, Chapter 11 Debtors Mark and Shelly Neighbors and
Neighbors Investments, Inc. (initially all acting through Mark Neighbors), filed a
complaint against the Bank of Versailles and BOV Holding Company because the Bank
of Versailles allegedly received a check payable to Gentle Slopes Partners LLC on
September 16, 2009, and held the check until October 14, 2009, before it gave notice of
non-sufficient funds, thus failing to meet its midnight deadline for giving notice of the
dishonor of the check.2 The complaint does not say, but papers that Neighbors
2At most, the Court might infer from the complaint that BOV Holding Company is related to the
Bank of Versailles in some way so that it might conceivably have some kind of derivative liability to the
Debtors if the Bank were liable on one or more of the asserted claims. Since the Court concludes the
Bank cannot be liable on the claims at this late date, though, BOV Holding cannot possibly be liable on
Case 14-06082 Doc# 19 Filed 03/20/15 Page 2 of 17
Investments, Inc., filed in its main bankruptcy case report that Mark and Shelly Neighbors
own 60% of Neighbors Investments.
The Debtors allege Gentle Slopes held an auction on September 7, 2009, and
contracted to sell property for $925,000. The winning buyers gave a check for 10% of the
purchase price (the Check), written on an account at the Bank of Versailles, and it was
deposited at the Bank on September 16. The Bank allegedly did not pay or return the
Check until October 17, 2009, when it finally gave notice of dishonor. By holding the
Check so long, the Bank allegedly killed the sale. The Debtors claim that because
Neighbors Investments owns 50% of Gentle Slopes, its estate3 is entitled to recover half
of the $92,500 Check from the Bank for failing to meet its midnight deadline with respect
to the Check.4 The Debtors say they are bringing the action for Neighbors Investments’
bankruptcy estate “as a derivative percentage of their ownership in Gentle Slopes Partners
LLC.” The Debtor do not claim that the dishonored Check was assigned or transferred to
any of them, or that they have any rights in the Check itself except through Neighbors
Investments’ partial ownership of the payee on the Check, Gentle Slopes. The Debtors
also say they are bringing the suit “with the protection of the Doctrine of Equitable
Tolling in that Plaintiffs may sue after the statutory time period for filing a complaint has
3The complaint probably seeks to recover only on behalf of the bankruptcy estate of Neighbors
Investments, but is not completely clear on this point. If it is seeking to recover for the Neighborses’
personal bankruptcy estate, the reasons why Neighbors Investments can’t recover apply even more
strongly to the Neighborses.
4The complaint says this amount is $41,250, but one-half of $92,500 is actually $46,250.
Case 14-06082 Doc# 19 Filed 03/20/15 Page 3 of 17
expired if they have been prevented from filing in a timely manner due to sufficiently
inequitable circumstances.” They do not, however, describe any circumstances that
allegedly prevented them from filing their complaint sooner.
In addition to their claim for violation of the midnight deadline, the Debtors allege
the Bank is liable to them for negligence and lack of ordinary care. They contend the
Bank’s mismanagement of its accounts and personnel allowed the Check to be held
beyond the midnight deadline before it was dishonored. By holding the Check so the
Debtors did not receive any proceeds from it, the Bank allegedly caused the sale of Gentle
Slopes’s property to fall through. Instead, they continue, the property was sold two years
later to a company owned by Senior Executive Officer David Baumgartner for $178,000
less than the September 2009 auction price.5 They ask for “actual damages” of $42,5006
plus interest from September 10, 2009, and punitive damages of $89,0007 plus interest
from September 10, 2009. The Debtors ask for fees for attorneys, experts, and
accountants, and finally ask for “Compensatory Damages as a multiple of 3 times actual
damages for the bank[’]s negligence and failure to use ordinary care.” As far as the Court
5The complaint does not say what company Mr. Baumgartner is a Senior Executive Officer of,
although it does allege that David G. Baumgartner is on the current Board of Directors of BOV Holding
Company. In other litigation in the Debtors’ bankruptcy cases, the Court has been advised that Mr.
Baumgartner is now the president of the Bank of Versailles; perhaps he was a Senior Executive Officer of
that Bank when the Gentle Slopes Check was tardily dishonored.
6It is not clear how the Debtors arrived at this amount. Perhaps they meant to claim $46,250, one-
half of the amount of the dishonored check.
7This amount appears to be one-half of the difference ($178,000) between the price the original
buyer agreed to pay ($925,000) and the amount Baumgartner’s company allegedly paid for the property
($925,000 minus $178,000).
Case 14-06082 Doc# 19 Filed 03/20/15 Page 4 of 17
can tell, the failure to pay or return the Check payable to Gentle Slopes before the Bank’s
midnight deadline is the only action or inaction the Debtors allege constituted negligence
on the Bank’s part.
In lieu of an answer, the Bank of Versailles and BOV Holding Company filed a
motion to dismiss, raising four grounds for dismissal: (1) they were never served with
summonses; (2) Mark and Shelly Neighbors, and arguably Neighbors Investments, lack
standing to assert an action for violating the midnight deadline because they were not
payees on the Check; (3) Mark Neighbors purports to represent Neighbors Investments in
this proceeding but he is not an attorney and cannot represent that company, and without
an attorney representing it, Neighbors Investments cannot assert any claim against the
Defendants; and (4) the Debtors acknowledge in the complaint that the statute of
limitations has expired on their claims and they have not identified any grounds for
equitable tolling of the statute.
After the motion to dismiss was filed, attorney Camron Hoorfar entered his
appearance on behalf of all three Debtors. He filed a motion for additional time to
respond to the motion to dismiss, the Defendants’ counsel stated that she did not object,
and the Court granted the extension. However, Mr. Hoorfar did not file a response by the
extended deadline. Instead, a couple of days before the deadline, he emailed the
Defendants’ counsel to say the Debtors did not plan to file a response, and proposed
sending in an agreed order of dismissal without prejudice or letting the Court decide
based on the merits of the Defendants’ motion.
Case 14-06082 Doc# 19 Filed 03/20/15 Page 5 of 17
After the Debtors’ time to respond to the motion to dismiss had expired, the
Defendants filed another motion for dismissal with prejudice. They attached a copy of
Mr. Hoorfar’s email, and noted the Debtors had not filed a response to the original motion
to dismiss. District of Kansas Local Rule 7.4(b), they said, therefore provides for the
motion to be decided as an uncontested one, and the rule adds, “Ordinarily, the court will
grant the motion without further notice.” They also cited Federal Rule of Bankruptcy
Procedure 7041, adopting Civil Rule 41(b), which provides that if the plaintiff fails to
prosecute, the defendant may move to dismiss the action or any claim against it, and with
certain exceptions they say don’t apply here, a dismissal under that subsection “operates
as an adjudication on the merits.” Under either the local rule or Civil Rule 41(b), they
conclude, they are entitled to a dismissal of the Debtors’ complaint with prejudice.
The Debtors cured the lack of an attorney for Neighbors Investments when Mr.
Hoorfar entered his appearance for all three of them, so the Court will not make the
dismissal of this proceeding with prejudice based on that problem. And when a plaintiff
fails to make proper service of process on a defendant, courts usually give the plaintiff at
least one more chance to do it right, so the Court declines to rely on the service problem
as a reason to make the dismissal with prejudice, either. But two of the other grounds for
dismissal that the Defendants raised could justify such a dismissal, so the Court has
Case 14-06082 Doc# 19 Filed 03/20/15 Page 6 of 17
looked at them more thoroughly.8
1. The Debtors’ do not have standing to complain about the Bank’s failure to meet
its midnight deadline for dishonoring the $92,500 Check.
The complaint states that the Check was payable to Gentle Slopes Partners, not to
any of the Debtors, but that the Debtors can allegedly recover on the Check because of
Neighbors Investments’ ownership of 50% of Gentle Slopes. The complaint cites the
Uniform Commercial Code, saying that UCC § 4-301 required the Bank to either pay the
Check or return it by its midnight deadline, and that UCC § 400.4-104(a)(10)9 specified
the midnight deadline was midnight of the banking day following the banking day when
the Check was presented for payment. The complaint says Gentle Slopes and the
Defendants are Missouri entities, and the Defendants are both located at an address in
Versailles, Missouri. The parties have not said which state’s version of the UCC would
apply to the events in dispute, but since the Bank is located in Missouri and the Check
was allegedly deposited there, the Court believes Missouri law would apply. However,
the Court has seen nothing indicating the relevant Missouri UCC provisions differ from
the official version of the UCC, or that any other state’s version does, either.
Consequently, the Court believes case law from any jurisdiction that interprets those
provisions can be persuasive in this situation.
8The Court has decided not to rely on the Debtors’ procedural default in ruling on the
9The complaint cites § 4-401 of the UCC as specifying the “midnight deadline” for banks, but the
phrase is actually defined in § 400.4-104(a)(10) of the Missouri UCC.
Case 14-06082 Doc# 19 Filed 03/20/15 Page 7 of 17
As the Debtors contend, § 4-301 of the UCC says that a bank may either pay or
return an item before its midnight deadline, but § 4-302 is the more important provision
here because it says what happens when a bank fails to meet its midnight deadline. The
Missouri version of UCC § 4-302 provides in relevant part:
(a) If an item is presented to and received by a payor bank, the bank
is accountable for the amount of:
(1) a demand item, other than a documentary draft,
whether properly payable or not, if the bank, in any case in
which it is not also the depositary bank, retains the item
beyond midnight of the banking day of receipt without
settling for it or, whether or not it is also the depositary bank,
does not pay or return the item or send notice of dishonor
until after its midnight deadline.10
The Bank would have been the payor bank for the Check since it was written on one of its
accounts,11 so it could have been “accountable” under this provision for holding the
Check beyond its midnight deadline12 before sending the notice of insufficient funds.
This is a very short deadline: the Bank’s midnight deadline for acting on the Check
would have been midnight on its next banking day after the banking day when it received
the Check — no more than two of its usual business days. September 16, 2009, was a
10Mo. Ann. Stat. § 400.4-302 (West 2013).
11See Mo. Ann. Stat. § 400.4-105(3) (“A payor bank is a bank that is the drawee of a draft”);
§ 400.3-104(f) (“‘Check’ means (i) a draft, other than a documentary draft, payable on demand and drawn
on a bank”); § 400.3-104(e) (“An instrument is a ‘note’ if it is a promise and is a ‘draft’ if it is an order”);
§ 400.4-104(7) (“‘Draft’ means a draft as defined in Section 400.3-104”); § 400.4-104(8) (“‘Drawee’
means a person ordered in a draft to make payment”); § 400.4-104(9) (“‘Item’ means an instrument or a
promise or order to pay money handled by a bank for collection or payment”)
12See Mo. Ann. Stat. § 400.4-104(a)(10) (defining a bank’s “midnight deadline”).
Case 14-06082 Doc# 19 Filed 03/20/15 Page 8 of 17
Wednesday, so the Bank’s midnight deadline expired the next day, September 17, a
Thursday, at midnight.
The accountability § 4-302 imposes on a bank for missing this two-day deadline
can be extremely harsh, since it can make the bank liable to someone for $90,000 or
more, as the Debtors are trying to do here. The UCC does not, however, say to whom the
bank is accountable for missing its midnight deadline.13 Given the stiff penalty, it seems
sensible to limit the class of potential plaintiffs who can sue to enforce the liability. And
courts have done precisely that.
One of the earliest cases to reject a claim against a bank because the plaintiff
asserting it was not within the class § 4-302 is intended to protect, American Title
Insurance Company v. Burke & Herbert Bank & Trust Company, 14 provides an excellent
explanation why the class of plaintiffs that can sue a bank for waiting until after its
midnight deadline to dishonor a check should be limited, and who those plaintiffs can be.
In that case, a title company provided title insurance through an agent that received
money for real estate closings that it deposited in a trust account at a bank.15 The agent
issued three checks drawn on the trust account, but the first of the checks to arrive at the
bank caused the account to be overdrawn.16 It turned out that a vice president of the agent
13See Evan H. Krinick & Howard B. Kleinberg, “Who Can Sue to Enforce the Midnight
Deadline?” 118 Banking L. J. 458, 458 (2001).
14813 F.Supp. 423 (E.D. Va. 1993).
15Id. at 425.
Case 14-06082 Doc# 19 Filed 03/20/15 Page 9 of 17
had been embezzling from the trust account, but he convinced the bank not to dishonor
the checks, claiming a wire transfer that would cover them had been misdirected.17 The
bank held the first check for eight days and the other two for four days before returning
them all marked “insufficient funds.”18 The title company had promised the payees on the
checks to reimburse them for any losses caused by the agent’s fraud or dishonesty, and it
did so.19 Then it sued the bank, first asserting only an equitable subrogation claim, but
after receiving assignments of the dishonored checks from the payees, adding a claim to
recover under UCC § 4-302 for the bank’s violation of its midnight deadline with respect
to the checks.
The court ruled the title company was not an entity to which the bank was
“accountable” under § 4-302 for failing to meet its midnight deadline. Explaining why it
rejected the title company’s claims, even though the bank was clearly liable to someone
under § 4-302, the court said:
An examination of the nature of the banking industry’s check
collection and payment process supports this conclusion. For while the
scope of standing to sue under § 8.4–302 [§ 4-302 of the Virginia version of
the UCC] is not clearly delineated in the Code provisions, it is nonetheless
circumscribed by the practical and economic realities associated with the
check collection and payment process. This process, as governed by Article
4 of the U.C.C., typically begins with the payee of a check depositing this
check at a bank. From this bank, the “depositary bank,” the check is then
transferred through one or more intermediary or “collecting” banks until it
19Id. at 425-26.
Case 14-06082 Doc# 19 Filed 03/20/15 Page 10 of 17
reaches the “payor bank,” the bank upon which the check is payable as
drawn. In conjunction with each of these transfers, a collecting bank
receives a provisional credit from the transferee, with the penultimate bank
in the collection chain receiving its provisional credit from the payor bank.
Upon final payment by the payor bank, these provisional credits firm up
into a final settlement along the chain of collection. Conversely, if a payor
bank dishonors and returns a check, these provisional credits are reversed
and no final settlement is made. But whatever course of action the payor
bank elects, it must take such action within the strict time limits established
by § 4–302’s midnight deadline rule. See Clark, The Law of Bank Deposits,
Collections, and Credit Cards, ¶ 5.01 (3d ed. 1990). Without these strict
time limits, the dependent chain of credit created by presentment of a check
would threaten the efficient operation of the banking industry. Thus, it is
plain to see that § 8.4–302’s insistence on such prompt action inures to the
benefit of the general public. Yet it is equally clear that the primary
intended beneficiaries are those entities in the check collection and payment
process who are entitled to rely on the payor bank’s adherence to the
midnight deadline requirement. Given this, and given that § 8.4–302
plainly does not confer standing to the public at large, it follows that
standing to sue for a § 8.4–302 violation is limited to those entities who, by
virtue of their relation to the check transaction, either did suffer, or might
have suffered, a loss that falls within the scope of the risk of loss created by
the bank’s failure to take prompt action in accordance with the statute. In
other words, this statute confers standing to sue on a limited class
comprised of those involved in the collection and payment of the check at
issue who may be directly harmed (but are not necessarily actually harmed)
by the failure of the payor bank to adhere to the § 8.4–302 midnight
Falling squarely within this class is the payee of a check who
presents it through the collection chain to a payor bank for payment. A
payee clearly has standing to bring suit for the payor bank’s failure to pay
or return this check in a timely fashion because of its potential reliance on
the payor bank’s prompt action. Nor does any question of standing arise
where the original payee of a check assigns and/or transfers her rights in the
instrument to another entity prior to its presentment for payment. In that
event, the assignee/transferee simply steps into the shoes of the original
payee and is entitled to § 8.4–302’s protection once it initiates the collection
and payment process. The assignment and transfer of a check before its
presentment does not trigger the operation of § 8.4–302. As noted above, it
is the potential reliance on payor bank action that arises once a check is
Case 14-06082 Doc# 19 Filed 03/20/15 Page 11 of 17
actually presented that provides the basis for standing to sue under § 4–302.
In light of this principle, [the title company’s] acquisition of
ownership interests in the checks and written assignments from the original
payees does not, under the circumstances presented here, entitle it to bring
suit for [the bank’s] violation of the midnight deadline requirement. To be
sure, the record reflects that the original payees of the returned checks
transferred these checks to [the title company], endorsed them pursuant to a
negotiation, and subsequently executed written assignments of all rights,
title, and interest arising out of these checks in favor of [the title company].
But [the title company] became the transferee and holder of the checks, as
well as the assignee of all rights arising from these instruments, well after
their untimely return by [the bank] and with full knowledge that they had
been dishonored for insufficient funds. At the time of their presentment by
the payees, [the title company] had no vested interest in the timely payment
or return of these checks. Nor can [the title company] claim to have taken
action in reliance on the midnight deadline requirement. By the time checks
were acquired by [the title company], the untimely dishonor had already
occurred. Thus, where, as here, a party becomes a holder, transferee and
assignee of checks after their untimely return by a payor bank, that party
has no standing to bring a cause of action for the bank’s violation of
§ 4–302. Limiting standing in this manner does not, in any way, diminish
the deterrent sting of § 8.4–302’s strict liability rule, for it simply entrusts
enforcement of this rule to those with the greatest incentive to enforce
The court went on to explain that the assignment of the checks to the title company did
not give it standing to sue to enforce § 4-302 because a suit under that provision is one to
enforce a breach of a statutory duty, not one to collect on a negotiable instrument.21 The
court added that while the original payees on the checks could have sued the bank under
§ 4-302 instead of recovering their money from the title company, the bank’s statutory
liability to the payees was not related to the title company’s obligations to the payees; in
20Id. at 427-29 (footnotes omitted).
21Id. at 430.
Case 14-06082 Doc# 19 Filed 03/20/15 Page 12 of 17
fact, if the bank had timely dishonored the checks, the title company would still have had
to reimburse the payees under its agreements with them.22 In an unpublished decision, the
Fourth Circuit affirmed based on the district court’s reasoning.23 Other courts have relied
on the district court’s decision in reaching similar conclusions.24
This Court agrees with the reasoning of American Title v. Burke & Herbert Bank
and concludes it demonstrates that the Debtors have no standing to sue the Bank for its
tardy dishonor of the Check on which Gentle Slopes was the payee. The Debtors have
not suggested they were in any way involved in the check collection and payment process
before the Check was dishonored, and in fact, do not claim even now that they have
become holders of the Check who are entitled to present it for payment. And if they were
to obtain the Check now, they would take it with knowledge that it has been dishonored,
just like the title company in American Title. Under the facts the Debtors have alleged,
with respect to the Check, they are simply too far removed from the check collection and
payment process to be entitled to enforce the statutory penalty imposed by UCC § 4-302.
2. The applicable statute of limitations would bar the Debtors’ claims against the
231994 WL 224210 (4th Cir. 1994).
24Lawyers Title Ins. Corp. v. United American Bank of Memphis, 21 F.Supp.2d 785, 807-10
(W.D. Tenn. 1998) (on similar claim by title company against bank, court found American Title v. Burke
& Herbert Bank “persuasive” and rejected cause of action asserted under Tennessee’s version of § 4302);
Triffin v. Bridge View Bank, 750 A.2d 136, 137-39 (N.J. Super. Ct. App. Div. 2000) (agreeing with
American Title v. Burke & Herbert Bank and quoting it extensively, court rejected claim under New
Jersey’s version of § 4-302 asserted by man to whom check was assigned after it was dishonored); see
also Triffin v. TD Banknorth, N.A., 920 A.2d 649, 651 (N.J. 2007) (rejecting § 4-302 claim by assignee of
dishonored check for reasons stated in Triffin v. Bridge View Bank).
Case 14-06082 Doc# 19 Filed 03/20/15 Page 13 of 17
Bank, and they have not adequately described any circumstances that would make it
inequitable to apply that statute to bar their claim.
Article 4 of the Missouri UCC includes its own statute of limitations, § 400.4-111,
which provides: “An action to enforce an obligation, duty, or right arising under this
Article must be commenced within three years after the cause of action accrues, and the
statutes of limitation in chapter 516 shall not apply.” The complaint alleges the Bank did
not return the Check until October 14, 2009, making that the last possible day when the
claim under § 400.4-302 might have accrued.25 The complaint was not filed until October
14, 2014, five years after the Check was allegedly returned, and well after the § 400.4111
time limit had run.
The Debtors have also asserted a negligence claim based on the Bank’s delay in
returning the Check, although their negligence claim does not allege the Bank did or did
not do anything else other than fail to meet its midnight deadline, the circumstance
covered by UCC § 4-302. The 7th Circuit has rejected any possibility of avoiding a UCC
statute of limitations in such a way, saying:
Since [the applicable UCC section] fits the facts of the case to a T, no room
is left for recharacterizations intended to circumvent the statute of
limitations applicable to such claims. It is one thing to fill gaps in the
Uniform Commercial Code and another to contradict it by calling a UCC
claim something else.26
25As discussed below, the Debtors’ claims would actually have accrued almost a month earlier,
but for the three-year statute of limitations, that extra month makes no difference.
26Travelers Cas. & Sur. Co. of Amer., Inc., v. Northwestern Mut. Life Ins. Co., 480 F.3d 499, 505
(7th Cir. 2007).
Case 14-06082 Doc# 19 Filed 03/20/15 Page 14 of 17
Because the Debtors’ claims are all based on the liability created by § 4-302, they can’t
avoid the three-year statute of limitations set by UCC § 400.4-111 by contending the
Bank’s failure to meet its midnight deadline resulted from negligence.
The Defendants say that Missouri Rev. Statutes § 516.120(2) and (4) establish a
five-year statute of limitations for claims based on a statutory violation or on negligence.
Section 516.120(2) states that it covers a liability created by a statute, and case law from
Missouri says § 516.120 governs negligence claims.27 Missouri Annotated Statutes
§ 516.100 provides:
Civil actions . . . can only be commenced within the periods
prescribed in the following sections, after the causes of action shall have
accrued; provided, that for the purposes of section 516.100 to 516.370, the
cause of action shall not be deemed to accrue when the wrong is done or the
technical breach of contract or duty occurs, but when the damage resulting
therefrom is sustained and is capable of ascertainment, and, if more than
one item of damage, then the last item, so that all resulting damage may be
Consequently, even if UCC § 400.4-111 did not apply to bar all the Debtors’ claims, they
had no more than five years from the time their claims against the Bank accrued to bring
suit on them.
The complaint might be read to suggest that the statute of limitations did not start
to run until the Bank finally returned the Gentle Slopes Check on October 14, 2009,
exactly five years before the Debtors filed their complaint. But since the Check was
27See, e.g., May v. AC & S, Inc., 812 F.Supp. 934, 940 (E.D. Mo. 1993); Molder v. Trammell ,
309 S.W.3d 837, 840 (Mo. App. 2010).
28Mo. Ann. Stat. § 516.100 (West 2014).
Case 14-06082 Doc# 19 Filed 03/20/15 Page 15 of 17
presented to the Bank on September 16, 2009, the Bank’s midnight deadline would have
expired at midnight on September 17 (a Thursday), and the Bank’s liability for any later
dishonor of the Check would have been ascertainable immediately after that. So the five-
year statute of limitations would have commenced to run on September 18, 2009, and
expired no later than September 18, 2014, several weeks before the complaint was filed.
Since the Debtors have not alleged the existence of any circumstances that might have
tolled the running of this statute, their claims against the Bank would be barred even if
they had five years to sue on them.
The Debtors’ effort to tie the Bank’s tardy return of the Check to the sale of Gentle
Slopes’s property two years later for less money might conceivably be thought to mean
the reduced sale price was the last item of damage they suffered as a result of the Bank’s
delay. However, the Court is convinced that event is much too far removed from the
Bank’s handling of the Check to possibly be considered to be a result of the Bank’s
negligence, assuming there was any.
For these reasons, the Court concludes the facts alleged in the Debtors’ complaint,
even if accepted as true, do not show the Debtors have standing to sue the Bank under
UCC § 4-302 for failing to meet its midnight deadline with respect to the Gentle Slopes
Check. Furthermore, the facts alleged reveal that all the Debtors’ claims against the
Defendants are barred either by (1) the three-year statute of limitations established by
§ 400.4-111 of the Missouri UCC, or (2) the five-year statute of limitations established by
Case 14-06082 Doc# 19 Filed 03/20/15 Page 16 of 17
Missouri Statutes Annotated § 516.120. The Debtors have not described any
circumstances that might justify equitably tolling either statute of limitations. With
respect to BOV Holding Company, the Debtors have alleged, at most, that its liability
derives from the Bank’s liability. Since the Bank is not liable on the Debtors’ claims,
BOV Holding is not either. Consequently, the Defendants are entitled to have the
Debtors’ complaint dismissed with prejudice.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rule
7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules
of Civil Procedure. A judgment based on this ruling will be entered on a separate
document as required by FRBP 7058 and FRCP 58(a).
# # #
Case 14-06082 Doc# 19 Filed 03/20/15 Page 17 of 17
- Category: Judge Somers
- Published on 15 January 2015
- Written by Judge Somers
- Hits: 439
In Re API M&I Holding, LLC, 14-22451 (Bankr. D. Kan. Jan. 15, 2015) Doc. # 74
SIGNED this 14th day of January, 2015.
For on-line but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
API M&I HOLDING, LLC, CASE NO. 14-22451
MEMORANDUM OPINION AND JUDGMENT DENYING MOTIONS OF
LSREF3 SAPPHIRE, LLC TO DISMISS AND FOR RELIEF FROM STAY
On January 7, 2015, an evidentiary hearing was held on LSREF3 Sapphire, LLC's
Motion to Dismiss Chapter 11 Bankruptcy and Motion for Relief from the Automatic
Stay. Debtor, API M&I Holding, LLC, appeared by Colin N. Gotham of Evans &
Mullinix, P.A. LSREF3 Sapphire, LLC appeared by Bradley D. McCormack and Tracy
J. Wrisinger of Sader Law Firm, LLC. The Court has jurisdiction.1 Debtor’s exhibits 1
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
Case 14-22451 Doc# 74 Filed 01/14/15 Page 1 of 17
through 31 and LSREF3 Sapphire, LLC's exhibits A through Z, with the exception of
exhibits R, S, and W, were admitted by stipulation. Testimony of Max Dobrushkin, on
behalf of LSREF3 Sapphire, LLC, and Christina Abnos, on behalf of the Debtor, was
heard. The Court took the matter under advisement, and is now ready to rule. For the
reasons articulated below, the Court denies both motions.
FINDINGS OF FACT.
LSREF3 Sapphire, LLC's two motions rely upon identical facts, most of which are
API M&I Holding, LLC ("Debtor") filed a voluntary petition under Chapter 11 on
October 14, 2014. Debtor owns three parcels of real property, two located in Missouri
and one located in Kansas. The Missouri properties are apartment buildings, valued by
Debtor at $750,000 and $1,700,000 respectively, and the Kansas property is a shopping
center, valued by Debtor at $2,100,000. LSREF3 Sapphire, LLC ("Creditor") holds a
Note for approximately $2 million secured by the three properties.
The real properties and the Note went through various ownership transfers over the
past decade. The Note was originated by Gold Bank on September 15, 2003 in the
amount of $3,340,800. The original borrowers were Nicholas Abnos, Christina Abnos,
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)(A). There is no
objection to venue or jurisdiction over the parties.
Case 14-22451 Doc# 74 Filed 01/14/15 Page 2 of 17
and Abdiana Properties, Inc. Nicholas Abnos executed deeds of trust pledging the two
Missouri properties to Gold Bank and Abdiana Properties, Inc. executed a mortgage of
the Kansas property. M&I Marshall & Ilsley Bank acquired the Note by way of merger
with Gold Bank.
In April 2011, as part of restructure of debt negotiated by the Abnoses with their
lenders, including M&I Marshall & Isley Bank, the obligation under the Note was
assumed by three Missouri limited liability companies, Abdiana M&I, LLC, Abdiana
M&I No. II, LLC, and Abdiana M&I No. III, LLC. Each of the three limited liability
companies became the owner of one of the real properties and pledged that property to
secure the Note. Nicholas and Christina Abnos were removed as borrowers, but
personally guaranteed the Note. As a term of the restructure, the three limited liability
companies agreed that if they became the subject of a proceeding under the Bankruptcy
Code the limited liability company "intended to be and will be a debtor that owns 'single
asset real estate' (as defined in Section 101(51)(B) of the United States Bankruptcy
The maturity date of the Note was extended twice. The second modification
extended the maturity date to June 11, 2014. At the maturity date, BMO Harris Bank, as
successor by merger to M&I Marshall & Isley Bank, declined to renew the Note. On
June 19, 2014, without notice to the borrowers, BMO Harris sold the Note to LSREF 3
2 Exh. H, ¶ 9(g).
Case 14-22451 Doc# 74 Filed 01/14/15 Page 3 of 17
Sapphire, LLC (Creditor), whose business is to purchase and promptly liquidate notes, by
any means available, including prompt payment in full, liquidation of collateral, and
enforcement of guarantees.
On June 25, 2014, Creditor sent a letter to borrowers and the guarantors
demanding immediate payment. Limited negotiations were held, but no payments were
made. On September 26, 2014, Creditor sent notices of foreclosure proceedings to the
two limited liability companies holding the Missouri properties, stating the properties
would be sold through foreclosure sale on October 20, 2014. Creditor was also preparing
a foreclosure action with respect to the Kansas property.
Christina Adnos consulted with her accountant and counsel. On September 26,
2014, Christina Abnos, as Organizer, filed limited liability company articles of
organization for API M&I Holding, LLC, the Debtor. Kansas was chosen because of the
favorable tax treatment afforded income of limited liability companies. On October 8,
2014, Debtor filed its State of Kansas Certificate of Merger of Domestic Limited Liability
Companies with the Kansas Secretary of State. It recites that pursuant the K.S.A. 177681,
the three Missouri limited liability companies owning the real property which
secures the Note, Abdiana M&I, LLC, Abdiana M&I No. II, and Addiana M&I No. III,
are merged with API M&I Holding, LLC (the Debtor), the newly formed Kansas limited
liability company. Debtor was the surviving entity. This is referred to below as the
Abdiana Merger. On October 9, 2014, three quit claims deeds were filed, transferring any
interest in the real properties held by the three Missouri limited liability companies to the
Case 14-22451 Doc# 74 Filed 01/14/15 Page 4 of 17
Debtor. On October 14, 2014, a certificate of merger was filed with the Missouri
Secretary of State. The foregoing mergers and transfers were made without Creditor's
knowledge or consent.
Christina Abdos testified that the purpose of the Abdiana Merger was to
consolidate the ownership of the properties, which always had been operated as a unit,
even though M&I Marshall & Isley had required that each property be owned by a
separate limited liability company. There always was only one Note, one insurance
policy, and one bank account into which the cash of each of the three entities was swept
daily. The merger also was undertaken to save income taxes based upon current Kansas
tax law and to reduce the costs and attorney fees in the anticipated bankruptcy
Debtor filed for relief under Chapter 11 on October 14, 2014. According to
Debtor's schedules, Creditor's claim is for approximately $2.045 million and is secured by
real property worth $4.55 million. Creditor is the only secured creditor, there are no
priority unsecured claims, and unsecured nonpriority claims are approximately $35,000.
Debtor has timely paid adequate protection payments to Creditor and has filed a proposed
plan of reorganization, which it said to provide for 100% payment to creditors.
Case 14-22451 Doc# 74 Filed 01/14/15 Page 5 of 17
Creditor's two motions are based upon identical factual allegations and similar
legal theories. Both motions are predicated primarily on Creditor's argument that the
merger of three Missouri limited liability companies, each of which owned one of three
real properties securing Creditor’s claim, into the Debtor, a Kansas LLC, was invalid and
part of a bad faith scheme.
B. MOTION TO DISMISS.
1. The Parties’ Contentions.
Creditor contends the case should be dismissed for cause under 11 U.S.C.
§1112(b)(1). It alleges that because the Abdiana Merger was invalid, Debtor lacks ability
to prosecute this bankruptcy case, thereby providing grounds to dismiss the case for
cause. Further, Creditor alleges that Debtor’s conduct after the merger evidences bad
faith and that the case should be dismissed based upon the totality of the Debtor’s actions.
Debtor opposes the motion, contending that the merger complied with Kansas law, that its
actions do not evidence bad faith, that case law supports denial of the motion, and that
Debtor is operating with the intent to satisfy its creditors.3
3 Doc. 43, pp. 5-12.
Case 14-22451 Doc# 74 Filed 01/14/15 Page 6 of 17
2. The Court Finds the Merger Was Valid and Therefore the Case Should Not
Be Dismissed Because Debtor Lacks the Ability to Prosecute the Case.4
The Court finds that the Abdiana Merger was not invalid. The Certificate of
Merger filed in Kansas states that the merger was pursuant to K.S.A. 17-7681. That
statute provides in part:
(a) Pursuant to an agreement of merger or consolidation, one
or more domestic limited liability companies may merge or
consolidate with or into one or more limited liability
companies formed under the laws of the state of Kansas or
any other state or any foreign country or other foreign
jurisdiction, or any combination thereof, with such limited
liability company as the agreement shall provide being the
surviving or resulting limited liability company.
Creditor's argument that the merger did not comply with the foregoing Kansas statute is
“Domestic limited liability company” is defined in K.S.A. §
17-7663(f) as “a limited liability company formed under the
laws of the state of Kansas and having one or more
members.” Therefore for the Debtor to utilize the merger
doctrine of K.S.A. § 17-7681, the merger had to occur
between one or more domestic, i.e. Kansas, limited liability
companies. That did not occur in the instant case. The
Abdiana companies were all Missouri limited liability
companies. The only Kansas limited liability company in the
Abdiana Merger was the Debtor, formed 11 days before the
Certificate of Merger was filed with the Kansas Secretary of
State’s Office. Because of the lack of domestic LLC’s, it was
4 This section (B)(2) of this memorandum addressing the validity of the Abdiana Merger is
incorporated by reference into the oral ruling announced on the record on January 8, 2015, in adversary
proceeding in this case, API M&I Holding, Inc. v. LSREF3 Sapphire, LLC, adversary no. 14-6089.
Case 14-22451 Doc# 74 Filed 01/14/15 Page 7 of 17
impossible for the three existing companies to merge into a
Kansas LLC pursuant to K.S.A. § 17-7681.5
Creditor cites no case law or additional statutes which support its position.
K.S.A. § 17-7681(a) provides that a domestic limited liability
company may “merge or consolidate with or into one or more
limited liability companies formed under the laws of the
state of Kansas or any other state[.]” (emphasis added). The
statute expressly authorizes the merger in the present case
between one Kansas and three Missouri limited liability
companies. Debtor was a duly formed domestic limited
liability company authorized to merge with limited liability
companies formed under Missouri law. Therefore, the
Abdiana Merger complied with all aspects of K.S.A. §
17-7681 and the Abdiana entities were successfully merged
The Court finds that Debtor’s argument is correct. A plain reading of the statute,
with the elimination of the provisions not applicable to this case, is the following:
Pursuant to an agreement of merger or consolidation, one or
more domestic limited liability companies may merge or
consolidate with . . . one or more limited liability companies
formed under the laws of . . . any other state . . . with such
limited liability company as the agreement shall provide being
the surviving or resulting limited liability company.
There is no statutory requirement in K.S.A. 17-7681(a) that all of the limited liability
companies involved be Kansas entities; rather the statute requires that only one of the
entities involved be a domestic (Kansas) company.
5 Doc. 29, p. 10 (motion to dismiss); doc. 32, p. 9 (motion for relief).
6 Doc. 43, p. 6; doc. 42, p. 6.
Case 14-22451 Doc# 74 Filed 01/14/15 Page 8 of 17
This construction of K.S.A. 17-7681(a) was expressly recognized by the Kansas
legislature when, in 2009, it adopted the Business Entity Transactions Act, K.S.A 17-78201
through 17-78-206. That Act provides for conversions and mergers among different
forms of business entities, such as a merger of a corporation and a partnership and a
merger of a corporation and a limited liability company. The Act expressly excepts from
the new statutory scheme mergers under K.S.A. 17-7681 and describes mergers under that
statute as involving both domestic and foreign limited liability companies. It does so by
providing in K.S.A. 17-78-201(c) that the Act does not apply to “a merger between any
two or more domestic limited liability companies or one or more domestic liability
companies and one or more foreign limited liability companies pursuant to K.S.A. 177681,
and amendments thereto.”7 A commentator observed that the exception of mergers
between domestic and foreign limited liability companies from the new act was because
the organic laws governing limited liability companies already provide for such mergers.8
The Court therefore concludes that the merger of the three Abdiana Missouri
limited liability companies into Debtor, a Kansas limited liability company, was valid.
Creditor's argument that this case must be dismissed because Debtor lacks ability to
prosecute this bankruptcy case, thereby providing grounds to dismiss the case for cause,
7 K.S.A. 17-78-201(c)(3).
8 Edwin W. Hecker, Jr., The Kansas Business Entity Transactions Act, 80 J. Kan. B. Ass'n. 20, 23
Case 14-22451 Doc# 74 Filed 01/14/15 Page 9 of 17
C. The Court Rejects Creditor's Alternative Argument that the Case Should
be Dismissed Because it was Filed in Bad Faith.
Creditor's alternative arguments are that Debtor's conduct after the merger
evidences bad faith and the case should be dismissed based as a bad faith filing evidenced
upon the totality of the Debtor’s actions.
Section 1112(b) addresses dismissal of a Chapter 11 case for cause. Subsection
(b)(4) provides a nonexclusive list of circumstances constituting cause, such as gross
mismanagement of the estate and failure to comply with an order of the court. "In
addition to granting relief for one of the reasons enumerated in section 1112(b), the court
may also dismiss a chapter 11 case for lack of good faith."9 "It is well established under
the Bankruptcy Code, as it was under the Bankruptcy Act, that a Chapter 11 Petition must
be filed in good faith, and if not, dismissal of the case is an appropriate remedy."10 When
considering dismissal for lack of good faith, the matter “[a]t issue is whether the
bankruptcy filing contravened the purposes of the Bankruptcy Code under its good faith
requirements.”11 “The protection of the automatic stay is not per se a valid justification
9 7 Collier on Bankruptcy ¶1112.07, 1112-48 (Alan N. Resnick & Henry J. Sommer eds.-in-chief,
16th ed. rev. 2014).
10 Pacific Rim Inv., LLP v. Oriam (In re Pacific Rim Inv., LLP), 243 B.R. 768, 771 (D. Colo. 2000)
(citing Udall v. FDIC (In re Nursery Land Dev., Inc.), 91 F.3d 1414, 1416 (10th Cir. 1996) (affirming
sanctions for bad faith filing of Chapter 11 case)).
11 Solow v. PPI Ente. (U.S.), Inc. (In re PPI Enter. (U.S.), Inc.), 324 F.3d 197, 210 (3rd Cir. 2003).
Case 14-22451 Doc# 74 Filed 01/14/15 Page 10 of 17
for a Chapter 11 filing; rather, it is a consequential benefit of an otherwise good faith
A good faith determination requires consideration of the totality of the
circumstances and must be based upon a “fact-intensive, case-by-case inquiry.”13 When a
Chapter 11 Debtor’s good faith is challenged by a motion to dismiss, the moving party
must make a prima facie showing of the Debtor’s lack of good faith. The burden then
shifts to the Debtor to show good faith.14
The actions which Creditor alleges evidence bad faith are: Creation of the Kansas
limited liability company on the date that notice of foreclosure was received; creation of a
new limited liability company in Kansas, even though the existing limited liability
companies were organized in Missouri; transfer of the real property securing Creditor’s
claim by quit claim deeds with no consideration and no notice to Creditor; avoiding the
single assets real estate requirement by creating a new limited liability company that owns
three parcels of real property; and filing for Chapter 11 relief in order to stop the
foreclosures.15 According to Creditor, “[t]he end result of Debtor’s scheme was to take
12 NMSBPCSLDHB, L.P. v. Integrated Telecon Express, Inc. (In re Integrated Telecom Express.,
Inc.), 384 F.3d 108, 128 (3d Cir. 2004) (quoting In re HBA East, Inc., 87 B.R. 248, 262 (Bankr. E.D. N.Y.
13 In re PPI Enter. (U.S.), Inc., 324 F.3d at 210.
14 In re Muskogee Envt’l Conservation Co., 236 B.R. 57, 59 (Bankr. N.D. Okl. 1999); In re Fox, 232
B.R. 229, 233 (Bankr. D. Kan. 1999).
15 Doc. 29, p. 11.
Case 14-22451 Doc# 74 Filed 01/14/15 Page 11 of 17
three unrelated properties owned by separate companies and file a single Chapter 11
Bankruptcy in a preferred forum to prevent foreclosure.”16
Debtor responds that its actions were taken for valid business reasons and do not
evidence bad faith. The purpose of the Abdiana Merger, which the Court has found to
have been in accord with Kansas law, was to restructure the ownership and operation
of the three parcels of real estate into a single company. This legal structure had been
in place prior to April 2011, when creditors required a separate limited liability
company for each property. Despite this legal structure, the companies continued to be
operated as a single unit. The restructure allowed the legal structure to be in
conformity with the businesses’ operations. The restructure also reduced the
anticipated costs of bankruptcy. Kansas, the state where Debtor’s most valuable asset
is located, was chosen as the state of creation of the new company to take advantage of
the recently enacted Kansas income taxation exemption for pass through income.
Further, the ownership of the three properties was not changed in substance. Debtor is
solely owned by Abdiana, Inc., and Abdiana, Inc. was also the sole owner of the three
Missouri limited liability companies merged into Debtor. Debtor does not dispute its
liability for the debts of its predecessors.
The Court finds that the actions identified by Creditor do not evidence bad faith.
Valid business purposes supported the Abdiana Merger. The filing of a single Chapter
Case 14-22451 Doc# 74 Filed 01/14/15 Page 12 of 17
11 case, rather than three related cases, has benefitted all creditors because it resulted
in the saving of bankruptcy related costs, including filing fees, attorney fees, and
monthly trustee fees. As a result of the merger, only one monthly report must be
prepared. The new limited liability company was created under Kansas law rather than
Missouri law to take advantage of the recently enacted Kansas income tax exemption.
The real property owned by each of the three Missouri limited liability companies was
transferred to the Debtor as a result of the Abdiana Merger, under which the Kansas
limited liability became the successor to all of the liabilities and assets of the Missouri
companies. The filing of the quit claim deeds properly reflected this transfer in the real
estate records. As to the contention that bad faith is evidenced by Debtor’s avoidance
of the single asset real estate requirements, Debtor argued at the hearing that it has
complied with these requirements, even though the Code did not obligate it to do so.
Creditor did not refute this position. Filing of the bankruptcy gives Debtor an
opportunity to restructure the Note.
For the foregoing reasons, the Court finds that this bankruptcy case should not
be dismissed because it was not filed in good faith.
D. CREDITOR’S MOTION FOR RELIEF FROM STAY.
1. The Parties’ Positions.
Creditor moves for relief from stay based upon the same facts and for the
essentially the same reasons as it moved to dismiss. It argues that the alleged invalidity
of the Abdiana Merger constitutes “cause” for stay relief under §362(d)(1) and that
Case 14-22451 Doc# 74 Filed 01/14/15 Page 13 of 17
Debtor’s actions were allegedly part of a bad faith scheme to delay, hinder, or defraud
creditors, providing grounds for stay relief under §362(d)(4). Creditor opposes the
motion, contending that the Abdiana Merger was valid and its actions do not evidence
2. The Court Finds the Abdiana Merger was Valid and Does not Provide a
Reason to Grant Relief From Stay.
Section 362(d)(1) provides:
(d) On request of a party in interest and after notice and a
hearing, the court shall grant relief from stay provided
under subsection (a) of this section, . . .
(1) for cause, including the lack of adequate
protection of an interest in property of such party in
interest; . . .
The “[u]se of the word ‘cause’ suggests an intention that the bases for relief from stay
should be broader than merely lack of adequate protection. Thus, relief might be
granted when the court finds that the debtor commenced the case in bad faith.”17 “It
has been held that there is no substantive difference between the cause requirement for
dismissal of a petition under Section 1112(b) and the cause requirement for relief from
an automatic stay under Section 362(d)(1).”18
As discussed above, the Court finds that the Abdiana Merger complied with
Kansas law and that Debtor did not act in bad faith for purposes of §1112(b). The
17 3 Collier on Bankruptcy ¶ 362.07[a], 362-107.
18 Id. at ¶362.07[b], 362-125.
Case 14-22451 Doc# 74 Filed 01/14/15 Page 14 of 17
Court therefore denies Creditor’s motion to grant relief from stay for cause under
3. The Transfer of Real Property to Debtor was not Part of a Scheme to
Delay, Hinder, or Defraud Creditors Within the Meaning of § 362(d)(4)(A).
Creditor contends it is entitled to relief from stay under §362(d)(4), which
(d) On request of a party in interest and after notice and a
hearing, the court shall grant relief from stay provided
under subsection (a) of this section, . . .
(4) with respect to a stay of an act against real
property under subsection (a), by a creditor whose
claim is secured by an interest in such real property,
if the court finds that the filing of the petition was
part of a scheme to delay, hinder, or defraud
creditors that involved either –
(A) transfer of all or part ownership of, or
other interest in, such real property without
the consent of the secured creditor or court
approval; or . . .
Subsection (d)(4) provides a “particularized basis for stay relief for creditors holding a
claim or interest in the debtor’s real property. The ‘good faith’ test is now a specific
basis for stay relief with respect to real property.”19 The following explicit findings are
required for relief under this subsection: “(i) the bankruptcy case is part of a scheme,
(ii) the object of the scheme was to hinder, delay or defraud creditors, (iii) the scheme
involved either (a) a transfer of some interest in real property without the secured
19 2 William L. Norton, Jr., and William L. Norton III, Norton Bankruptcy Law & Practice
3d, § 43:49 at 43-109 (Thomson Reuters 2014).
Case 14-22451 Doc# 74 Filed 01/14/15 Page 15 of 17
creditor’s consent or (b) multiple bankruptcy filings affecting the property.”20 The
subsection “addresses conduct that could be indicative of an abusive filing in relation
to real property foreclosure.”21
The Court finds that this bankruptcy case is not part of scheme to hinder, delay,
or defraud creditors. As found above with respect to Creditor’s motion to dismiss the
case because it was allegedly filed in bad faith, the actions of Debtor were taken in
good faith for valid business reasons.
Creditor’s motion to dismiss under §1112 and for relief from stay under § 362
are denied for the reasons discussed above.
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 denying Creditor’s Motion to Dismiss Chapter 11
Bankruptcy22 and Creditor’s Motion for Relief from the Automatic Stay.23 The
21 3 Collier on Bankruptcy ¶ 362.05[a], 362-84.
22 Doc. 29.
23 Doc. 32.
Case 14-22451 Doc# 74 Filed 01/14/15 Page 16 of 17
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 14-22451 Doc# 74 Filed 01/14/15 Page 17 of 17
- Category: Judge Somers
- Published on 09 March 2015
- Written by Judge Somers
- Hits: 154
In Re D.J. Christie, Inc., 11-40764 (Bankr. D. Kan. Mar. 4, 2015) Doc. # 341
SIGNED this 4th day of March, 2015.
For online use, but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
D.J. CHRISTIE, INC.,
CASE NO. 11-40764
MEMORANDUM OPINION AND JUDGMENT
APPROVING SETTLEMENT AFTER REMAND
This matter is before the Court following an appellate remand for further
consideration of the propriety of a settlement involving Debtor D.J. Christie, Inc. (Debtor)
and various other parties (the Settlement Agreement). In a Memorandum Opinion and
Judgment Approving Compromise and Settlement signed on May 17, 2013, this Court
approved the settlement of the disputes between (1) the Christie Parties, comprised of
Debtor, David J. Christie, and Alexander Glenn, and (2) Alan E. Meyer and John R.
Case 11-40764 Doc# 341 Filed 03/04/15 Page 1 of 22
Pratt.1 Liberty Bank, F.S.B., opposed the Settlement Agreement and appealed the Court’s
In a Memorandum and Order dated December 19, 2013, District Judge Carlos
Murguia reversed in part the approval of the Settlement Agreement and remanded the
matter to this Court for further proceedings.2 Specifically, he reversed the holding that
Liberty Bank did not hold valid garnishment liens in the Federal Judgment and held that
additional findings of fact were required addressing the priority of Liberty Bank’s liens.
The District Court stated:
Although the bankruptcy court made findings regarding the
priorities of different lien holders in the settlement funds (i.e.,
the $1.825 million), it made no findings regarding priorities in
the $7,170,703.00 affirmed by the Tenth Circuit. It likewise
did not make any findings that the over $7.1 million was
insufficient to cover all of the competing claims. By failing to
make these findings, the bankruptcy court could not assess the
impact of the “offset in full” language to Liberty Bank. In
other words, by failing to analyze the priorities in those funds,
the bankruptcy court essentially made a de facto
determination that all of the Iowa Judgments had priority over
Liberty Bank. The record does not clearly support this
finding. Nor does the record make clear the amount of the
Iowa Judgments that had priority to Liberty Bank’s
garnishment liens (particularly the lien against Christie).
Without this factual foundation, neither the bankruptcy court
nor this court can determine the impact to Liberty Bank of the
“offset in full” language. Similarly, absent these findings,
both courts lack a sufficient factual foundation to determine
whether the Settlement Agreement is fair and equitable.
The court also disagrees with the bankruptcy court’s
1 Doc. 246, available on Westlaw at 2013 WL 2153188.
2 Doc. 283, available on Westlaw at 2013 WL 6729830.
Case 11-40764 Doc# 341 Filed 03/04/15 Page 2 of 22
rationale that Liberty Bank is not impacted by the “offset in
full” language because it lacks the right to interfere with the
relationship between Meyer, Debtor, and the Christie Parties.
Assuming the bankruptcy court is correct that Liberty Bank
lacks the right to interfere, this fact does not necessarily mean
those parties can rearrange the priority of valid liens to settle
claims. The court therefore reverses in part, vacates the
bankruptcy court’s order approving the Settlement
Agreement, and remands for further proceedings consistent
with this order. Specifically, the bankruptcy court should
consider Liberty Bank’s priority in the $7,170,703.00
affirmed by the Tenth Circuit in deciding whether to approve
the Settlement Agreement.3
This Court held a status conference on January 27, 2014, and set deadlines for the
parties to files briefs addressing what issues were to be determined on remand. After
reviewing the District Court’s Order and those briefs, the Court concluded that it had
been directed by the District Court (1) to make detailed findings of fact as to the priority
of interests in the Federal Judgment and (2) to determine, in light of those priorities, the
impact on Liberty Bank of the “offset in full” provision of the Settlement Agreement and
whether the Settlement Agreement is fair and equitable. The parties conducted discovery,
filed joint Stipulations of Fact, and briefed the foregoing two issues. The Court heard
argument on February 23, 2015. In accord with the Scheduling Order filed on January 5,
2015,4 the matter is under consideration without a trial or further hearings.
DETAILED FINDINGS OF FACT RELATING TO THE PRIORITY OF
LIBERTY BANK’S LIENS.
3 Doc. 283 at 8-9.
4 Doc. 329.
Case 11-40764 Doc# 341 Filed 03/04/15 Page 3 of 22
The Stipulations of Fact5 are incorporated herein by reference. They provide the
basis for determining the priority of Liberty Bank’s liens. For purposes of the following
discussion, the Court summarizes those stipulations, augmented by undisputed
background facts, as follows.
A failed joint venture to build an apartment complex in Junction City, Kansas gave
rise to litigation, Alan E. Meyer, et al., v. David J. Christie, et al., Case no. 07-CV-2230,
in the United States District Court for the District of Kansas (the Federal Litigation).
Meyer and Pratt, plaintiffs in the Federal Litigation, entered into contingency fee
agreements with Bickel & Brewer on or about March 5, 2009, and with Gaddy Geiger &
Brown, P.C., on or about August 10, 2009. Plaintiffs prevailed at trial. Defendants
appealed, and the Tenth Circuit affirmed an actual damages award6 and a $100 punitive
damages award, resulting in a judgment for $7,170,703, plus post-judgment interest (the
Federal Judgment) in favor of Meyer and Pratt against the Christie Parties. The mandate
issued on April 25, 2011. Remanded issues were resolved by the District Court and a
final judgment was entered.
Prior to April 11, 2011, Meyer assigned a total of $723,508.71 of his interest in the
Federal Judgment to third-party creditors. Prior to April 11, 2011, Pratt assigned a total
of $2,286,000 of his interest in the Federal Judgment to third-party creditors.
5 Doc. 323.
6 The jury found that Meyer and Pratt “lost $7,170,603 in connection with their interest in the
joint venture.” Meyer v. Christie, 634 F.3d 1152, 1156 (10th Cir. 2011).
Case 11-40764 Doc# 341 Filed 03/04/15 Page 4 of 22
Liberty Bank obtained two judgments against Meyer (but not Pratt) in two
different Iowa state courts. The first was entered on June 30, 2010, in the amount of
$811,959.66 plus interest from and after May 11, 2010, at $326.8822 per day. The
second judgment was entered on September 15, 2010, in the amount of $136,124.45 plus
interest from and after September 3, 2010, at the rate of $32.40 per day. On April 13,
2011, both of the judgments in favor of Liberty Bank were registered in the District Court
of Johnson County, Kansas. On May 16, 2011, orders of garnishment for both judgments
were served on David J. Christie. On May 19, 2011, orders of garnishment for both
judgments were served on Debtor.
Between April 29, 2011, and May 18, 2011, the Christie Parties obtained
assignments of six judgments entered in various Iowa state court proceedings against
Meyer. As of May 16, 2011, the amount Meyer owed on the five judgments which were
assigned to the Christie Parties was $6,883,706.03. As of May 19, 2011, after the
assignment of the sixth judgment on May 18, 2011, the amount Meyer owed was
$7,505,183.85. Interest accrued on the judgments so that as of May 31, 2011, the amount
Meyer owed was $7,543,500.43.
On May 20, 2011, Debtor commenced this bankruptcy case. Eleven days later, on
May 31, 2011, David J. Christie and Debtor filed separate answers to the garnishments by
Liberty Bank, denying that any money was owed to Meyer. Christie’s answer stated:
I hold no money and am not indebted to the judgment debtor,
rather the judgment debtor is indebted to me. As of May 31,
2011, Alan E. Meyer and John R. Pratt hold a non-final claim
Case 11-40764 Doc# 341 Filed 03/04/15 Page 5 of 22
for $7,244,300.80 against D.J. Christie, Inc., Alexander W.
Glenn, and me. As of May 31, 2011, D.J. Christie, Inc,
Alexander W. Glenn and I hold judgments against Alan E.
Meyer and John R. Pratt in the amount of $7,543,500.43,
which when offset against the $7,244,300.80 results in
$299,199.63 owed by Alan E. Meyer and John R. Pratt to D.J.
Christie, Inc., Alexander W. Glenn and me.7
Debtor’s answer was essentially the same.8 The record does not contain any reply by
Liberty to the answers of the garnishees.
On July 29, 2011, Debtor commenced an adversary proceeding against Meyer,
Pratt, Christie, Glenn, and the insurance carrier who had provided a bond pending the
appeal to the Tenth Circuit (Adversary Proceeding).9 Debtor alleged it was entitled to an
offset of its liability on the Federal Judgment against the Iowa Judgments. Christie and
Glenn answered Debtor’s complaint, and filed a similar offset crossclaim against Meyer
and Pratt based on the Iowa Judgments. On January 9, 2012, the Court granted Liberty
Bank’s motion to intervene in the Adversary Proceeding based upon the bank’s position
that the Christie Parties’ assertion that they may offset their liability on the Federal
Judgment against the Iowa Judgments impacted Liberty Bank’s garnishment liens. On
January 17, 2012, Meyer and Pratt filed counterclaims against Debtor and crossclaims
against Christie and Glenn for, among other things, a declaration that the Christie Parties
were not entitled to an offset based on the Iowa Judgments. Contentious discovery on the
7 Doc. 323-13.
8 Doc. 323-14.
9 Adversary no. 11-7043, doc. 1.
Case 11-40764 Doc# 341 Filed 03/04/15 Page 6 of 22
offset issue commenced.
Effective December 6, 2012, Meyer, Pratt, and the Christie Parties (the Settlement
Parties) agreed to the Settlement Agreement, this Court’s approval of which was reversed
in part by the District Court. Liberty Bank is not a party to the Settlement Agreement and
was excluded from the settlement negotiations. The essence of the agreement is the full
offset of the Iowa Judgments against the Federal Judgment, a payment by the Christie
Parties of $1.825 million in cash to Meyer and Pratt, the release of all liabilities of the
Christie Parties to Meyer and Pratt, and the release of all liabilities of Meyer and Pratt to
the Christie Parties.
ANALYSIS OF THE PRIORITY OF LIBERTY BANK’S INTEREST IN THE
The Court will first address the priority of Liberty Bank’s interest, as the garnishor
of Christie and Debtor, in the Federal Judgment before the Settlement Agreement was
reached. At least for purposes of this issue, all the parties agree that the first two
priorities in the Federal Judgment are held by (1) Plaintiffs’ attorneys by virtue of the
2009 contingency fee agreements and (2) the third-party creditors of Meyer and Pratt to
whom they assigned interests prior to April 11, 2011. Liberty Bank estimates that the
amount remaining due to Meyer and Pratt under the Federal Judgment after payment of
these two claims is $1,292,913.09, considering both Meyer’s and Pratt’s interests.
Alternatively, the amount due to Meyer, considering only Meyer’s one-half interest in the
judgment, one-half of the attorneys’ fees, and the assignments by Meyer, but not Pratt, the
Case 11-40764 Doc# 341 Filed 03/04/15 Page 7 of 22
amount is estimated to be $1,427,702.19.10 The dispute is whether Liberty Bank, the
holder of two judgments against Meyer, as the May 16, 2011 garnishor of David J.
Christie and the May 19, 2011 garnishor of Debtor has priority as to the remainder of the
Federal Judgment over the Christie Parties, as the assignees of the Iowa Judgments
against Meyer and others.
The Settlement Parties (the Christie Parties11 and Meyer and Pratt12) support the
offset of the amount Meyer owes to the Christie Parties under the Iowa Judgments against
the amount the Christie Parties owe to Meyer under the Federal Judgment. Relying upon
Kansas garnishment statutes and case law, the Settlement Parties assert that their right to
offset the Iowa Judgments against the Federal Judgment has priority over the interest of
Liberty Bank in the Federal Judgment under its garnishments.
K.S.A. 60-732 applies when a garnishment is to attach intangible property other
than earnings of the judgment debtor. Assuming an order of garnishment in the proper
form is served on the garnishee, it attaches “[a]ll intangible property, funds, credits or
other indebtedness belonging to or owing the judgment debtor, other than earnings, which
is in the possession or under the control of the garnishee, and all such credits and
indebtedness due from the garnishee to the judgment debtor at the time of service of the
10 When making these estimates, Liberty Bank calculates the attorneys’ fees as 40% of the
Federal Judgment. Doc. 332 at 7.
11 Doc. 333.
12 Doc. 335.
Case 11-40764 Doc# 341 Filed 03/04/15 Page 8 of 22
order.”13 It also attaches all such property coming into the possession or control of the
garnishee between the date of service and the date of the garnishee’s answer.14 But, as
pointed out by the Christie Parties:
Proceedings in garnishment do not change the legal
relations and rights existing between the defendant and the
garnishee, nor place the plaintiff in a more favorable position,
for the enforcement of a claim against the garnishee, than
would be the defendant in an action brought by him for the
same cause; nor can any one be held in such proceedings to
the payment of a liability which the defendant could not
himself enforce, because of existing equities and set-offs.15
According to the Settlement Parties, because when the garnishment orders were served on
Debtor and Christie, the Iowa Judgments against Meyer had already been acquired by the
Christie Parties, the garnishees’ liability to Meyer under the Federal Judgment was
already reduced by the amount Meyer owed to the Christie Parties under the Iowa
Judgments. In other words, when Liberty Bank stepped into the shoes of Meyer, the
priority of Liberty Bank’s rights as a garnishor were subject to the availability of offset.
The Settlement Parties find support for the priority of the right of offset in two
13 K.S.A. 60-723(c)(1).
14 K.S.A. 60-723(c)(2).
15 Investment Co. v. Jones, 2 Kan. App. 638, Syl. ¶ 1, 42 P. 935 (1895). This language was
quoted with approval in Harpster v. Reynolds, 215 Kan. 327, 330, 524 P.2d 212 (1974), and Curiel v.
Quinn, 17 Kan. App. 2d 125, 129, 832 P.2d 1206, 1209 (1992), quoted Harpster’s quotation of
Investment Co. v. Jones, calling it Harpster’s holding.
Case 11-40764 Doc# 341 Filed 03/04/15 Page 9 of 22
cases, Turner16 and Harpster. 17 Turner arose after a judgment for $511.95 had been
entered in 1870 in favor of Crawford against Turner and two judgments totaling $261.65
had been entered in 1871 in favor of Turner against Crawford. Crawford brought an
action to have the Turner judgments applied in partial satisfaction of Crawford’s
judgment. Turner claimed he had assigned his judgments to Hadley & Glick, but the
court ruled the assignment did not make any difference. The Kansas Supreme Court
Crawford’s claim and judgment existed prior to the Turner
judgments, [and] prior to the said assignment to Hadley &
Glick . . . . Turner could therefore not assign his judgments,
nor the claims upon which they were rendered, nor incumber
such claims or such judgments with attorney’s liens, or any
other kind of liens, so as to defeat Crawford’s right to have
his judgment or his claim compensate and pay the Turner
judgments or claims. A judgment is not like negotiable paper.
It may be assigned, but will still be subject to all the defenses,
counter-claims, or set-offs which the judgment debtor might,
at the time of the assignment, have against it. This right of
Crawford to have his judgment compensate and pay the
Turner claims and judgments existed from the time the
Crawford judgment was rendered down to the present time,
and still exists.18
Harpster arose when a judgment creditor of Reynolds sought to attach Reynolds’s
wages by garnishing his employer, a trucking company. The evidence established that
the employer advanced money to a driver such as Reynolds before each trip. When the
16 Turner v. Crawford, 14 Kan. 499, 1875 WL 1384 (1875).
17 Harpster v. Reynolds, 215 Kan. 327, 524 P.2d 212 (1974).
18 Turner, 14 Kan. at 503, 1875 WL 1384 at *2.
Case 11-40764 Doc# 341 Filed 03/04/15 Page 10 of 22
driver returned, he made a full accounting of his expenses and his wages were determined
on a mileage basis. If after the accounting, there was a balance due the driver, he was
paid by check. If there was a balance in favor of the employer, the driver was paid
nothing and stood indebted to the trucking company. At the time the garnishment was
served on the employer and on the date of its answer, it claimed that it did not owe
Reynolds any wages, and that Reynolds owed money to the trucking company. The
district court held that no money was attached by the garnishment. The garnishing
creditor appealed, raising the issue of whether the trial court erred in allowing the
garnishee-employer to set off the defendant’s indebtedness to the garnishee-employer that
was incurred after the garnishment was served and before the answer was filed. The
Supreme Court affirmed because the evidence showed the employer owed no money to
Reynolds. Reliance was placed on K.S.A. 60-719, which the court noted provides “that
when the garnishee claims that he is not indebted to the defendant for the reason that the
defendant is indebted to the garnishee, or that the indebtedness due to the defendant is
reduced thereby, the garnishee is not discharged unless and until he applies the amount of
his indebtedness to the defendant to the liquidation of his claim against the defendant.”19
The court reasoned that “[t]he employer should be permitted to claim the usual offsets in
the usual way where the offsets are actually applied against the employee’s wages as
19 Harpster, 215 Kan. at 332, 524 P.2d at 216. Note: The statute, unchanged since it took effect
in 1964, actually says “he or she” at each place where the court used “he.”
Case 11-40764 Doc# 341 Filed 03/04/15 Page 11 of 22
required by K.S.A. 60-719.”20
On the other hand, Liberty Bank contends that under Kansas law, the assignment
of the Iowa Judgments against Meyer did not give the Christie Parties an interest in the
Federal Judgment. According to Liberty Bank, the Iowa Judgments represent nothing
more than a right to pursue Meyer and Pratt; the assignments of the judgments did not
provide the Christie Parties with either a lien in the assets of Meyer or a right to set the
Iowa Judgments off against the amounts the Christie Parties owed to Meyer under the
Federal Judgment.21 The Court agrees that under Kansas law, the entry of a judgment
does not give the judgment creditor a lien on the personal property of the judgment
debtor. But the Settlement Parties are not claiming a judgment lien.
As authority for the proposition that the Christie Parties may not offset the Iowa
Judgments against the Federal Judgment, Liberty Bank relies on the principle of Kansas
law that offset is an equitable doctrine; “[o]ffset of one judgment against another is
simply not a right but is a matter of grace.”22 Three Kansas cases where offset was denied
are cited in support, but they are factually so different from Liberty Bank’s situation that
they suggest no reason why offset should be denied in this case.
The first case is Mynatt. 23 With respect to the issue of offset, the question on
20 Id., 215 Kan. at 333, 524 P.2d at 216.
21 Doc. 332.
22 Doc. 332 at 4.
23 Mynatt v. Collis, 274 Kan. 850, 57 P.3d 513 (2002).
Case 11-40764 Doc# 341 Filed 03/04/15 Page 12 of 22
appeal was whether the trial court erred in denying equitable offset when the judgments
were not mutual, since one was against corporate officers and the other was against the
corporation. The court found that the district court properly denied setoff based upon the
lack of strict mutuality.24 Mutuality is not an issue in this case.
The second case is New Dimensions Products, 25 where the trial court found in
favor of a licensor which brought suit against a licensee for breach of a licensing
agreement, and denied the licensee’s request for offset of the amount that the licensee
claimed the licensor owed it for the cost of inventory. The court had found that the
licensee should not benefit from its own breach of the licensing contract. The appellate
court affirmed under the clean hands doctrine. The Stipulated Facts in the case before
this Court provide no basis to find that the Christie Parties lack clean hands.
The third case is Carson. 26 In that case, in July of 1978 Johnson had assigned
to Collingwood a $5,000 interest in a potential future judgment. In 1980, a judgment was
entered for Johnson against Waits for $5,000 and for Waits on its counterclaim against
Johnson for $3,336. Waits contended that the judgments should be offset against one
another, but the court denied the request, finding that Collingwood as the assignee of
$5,000 of the judgment Waits owed to Johnson should be given priority. This case
24 Id. at 873-82.
25 New Dimensions Prods., Inc. v. Flambeau Corp., 17 Kan. App.2d 852, 861-62, 844 P.2d 768
26 Carson v. Chevron Chem. Co., 6 Kan. App.2d 776, 792-93, 635 P.2d 1248 (1981).
Case 11-40764 Doc# 341 Filed 03/04/15 Page 13 of 22
supports the position that the third-party assignments made by Meyer and Pratt prior to
April 11, 2011, could be given priority over the setoff of the Iowa Judgments, but the
Settlement Parties agreed to that result in the Settlement Agreement and Liberty Bank has
not challenged this priority.
To summarize, Liberty Bank’s position is that under settled Kansas law, setoff is
not allowed as a matter of right. In its briefs, Liberty Bank does not state why setoff
should not be allowed in this case, or otherwise address the question of priority. At oral
argument, Liberty Bank argued that as a garnishor, it stepped into the shoes of its
judgment debtor, Meyer, and in that capacity, had the right to challenge the offset on the
ground that the Federal Judgment against the Christie Parties was based upon fraud,
making offset inequitable. But after reviewing the Tenth Circuit’s opinion27 affirming in
part the District Court’s judgment in Case no. 07-CV-2230, and the District Court’s
opinion28 following remand, the Court does not find that the Federal Judgment was based
upon fraud committed by the Christie Parties. Further, the Stipulated Facts do not include
evidence relating to inequitable conduct by the Christie Parties.
During oral argument, Liberty Bank’s counsel also contended that K.S.A. 2011
Supp. 60-73829 supports the bank’s position that offset should not be allowed because that
27 Meyer v. Christie, 634 F.3d 1152.
28 Meyer v. Christie, 2011 WL 2847463 (D. Kan. July 15, 2011).
29 The Court is considering here the version of this statute that was in effect in May 2011 when
the garnishments occurred, not the current version, which was enacted in 2012, see 2012 Kan. Sess. Laws
465-66 (ch. 68, § 3).
Case 11-40764 Doc# 341 Filed 03/04/15 Page 14 of 22
garnishment statute places upon the garnishee (Christie and Debtor) the burden to prove
offset, which they allegedly have not done. K.S.A. 2011 Supp. 60-738 provides in
(a) No later than 14 days after the garnishee makes the
answer and the clerk or the garnishee sends it to the judgment
creditor and judgment debtor, the judgment creditor or
judgment debtor, or both, may file a reply disputing any
statement in the answer of garnishee. . . . The party filing the
reply shall notify the court and schedule a hearing on the
reply to be held within 30 days after filing the reply.
(b) At the hearing, the court shall determine and rule
on all issues related to the reply. The burden of proof shall be
upon the party filing the reply to disprove the statements of
the answer, except that the garnishee shall have the burden of
proving offsets or indebtedness claimed to be due from the
judgment debtor to the garnishee.
In this case, Christie and Debtor filed answers to Liberty Bank’s garnishments stating
they were not indebted to Meyer because of offset. Under K.S.A. 2011 Supp. 60-738,
Liberty Bank had 14 days after the garnishees’ answers were made and sent to it to file a
reply challenging the availability of offset under the Kansas garnishment procedure.
There is no reply by Liberty Bank in the record. Liberty Bank’s reliance on K.S.A. 2011
Supp. 60-738 comes too late.
The Court finds the position of the Settlement Parties to be fully supported by
Kansas law. Under those authorities, because the Iowa Judgments were assigned prior to
Liberty Bank’s garnishments and because Kansas law provides that offsets must be
satisfied before the discharge of the garnishee can occur under K.S.A. 60-719, the offsets
of the Iowa Judgments against the Federal Judgment had priority over Liberty Bank’s
Case 11-40764 Doc# 341 Filed 03/04/15 Page 15 of 22
rights as a garnishor. On the other hand, the Court finds Liberty Bank’s arguments
establish that offset is a discretionary equitable remedy, but without showing why offset
should not be allowed in this case.
The Court’s additional research provides further support for the position of the
Settlement Parties. The Mynatt case, cited by Liberty Bank, includes the following
summary of Kansas case law regarding the setoff of judgments.
From the Kansas cases cited by the parties, we are able
to synthesize the following general precepts are applied by
Kansas courts. First, setoff requires mutuality, meaning that
the same parties owe a sum of money to each other. There
must be at least two distinct debts or judgments that have
matured at the time of the motion for setoff. The entities
indebted to one another must both be parties to the litigation.
In addition, the parties’ judgments or debts must coexist, i.e.,
both must be determined, presently due, and owing at the time
of setoff. A district court need not conduct a postjudgment
evidentiary hearing unless it is clear mutual coexisting
judgments are involved. Further, the party seeking equitable
setoff must demonstrate equitable grounds for its application.
The setoff must not prejudice intervening rights. Moreover,
an equitable setoff will not be upheld on appeal where it
contradicts public policy. Finally, equitable setoff is not a
legal right, but is a matter of grace, and the question whether a
setoff should be decreed rests in the sound discretion of the
court to which the application is made.30
In this case there are none of the circumstances identified above which would preclude
offset. There is mutuality. The Christie parties owe money to Meyer under the Federal
Judgment and Meyer owes money to the Christie Parties under the Iowa Judgments. All
30 Mynatt, 274 Kan. at 881, 57 P.3d at 534-35.
Case 11-40764 Doc# 341 Filed 03/04/15 Page 16 of 22
of the judgments are mature and owing at the time of setoff. The parties holding the
offsetting judgments are parties to both the Federal Litigation and the Settlement
There are equitable grounds to allow the setoffs. Setoff is the heart of the
Settlement Agreement. All the parties holding and having liability under the offsetting
judgments have agreed to offset in full as a means to settle their disputes. Debtor moved
for approval of the Settlement Agreement, and this Court has found the Settlement
Agreement to be fair and equitable.31 Kansas public policy encourages settlements,32 and
settlements are favored in bankruptcy.33
Liberty Bank is essentially claiming that it has an intervening right which bars the
setoff. The meaning of intervening rights that preclude setoff is illustrated by
Alexander. 34 In that case, Clarkson obtained a judgment against Alexander, and assigned
it to Cowley National Bank, subject to an attorney’s lien. Thereafter, First National Bank
obtained a judgment against Clarkson, and the bank assigned the judgment to Alexander.
Alexander then sought to offset the judgment assigned to him against the Clarkson
judgment. The Kansas Supreme Court held that offset would not be allowed. The
judgments were not mutual; although the judgment against Clarkson had been assigned to
31 Doc. 246 at 10-13.
32 Bright v. LSI Corp., 254 Kan. 853, 858, 869 P.2d 686 (1994).
33 10 Collier on Bankruptcy ¶ 9019.01 at 9019-2 (Alan N. Resnick & Henry J. Sommer, eds.-in
chief, 16th ed. 2014).
34 Alexander v. Clarkson, 100 Kan. 294, 164 P. 294 (1917).
Case 11-40764 Doc# 341 Filed 03/04/15 Page 17 of 22
Alexander, Clarkson had assigned his judgment against Alexander to Cowley National
Bank. The rights of third parties — Cowley County National Bank, the assignee of the
judgment against Alexander, and the attorneys who held a lien on that judgment — had
attached before the setoff was requested.35 These third-party interests were the
intervening rights which precluded setoff.
Liberty Bank is not the holder of intervening rights which would preclude setoff of
the Iowa Judgments against the Federal Judgment. Liberty Bank’s rights are against
Debtor and Christie as the garnishor of their obligations to Meyer. When the
garnishments were served, Christie and Debtor answered that they owed nothing to
Meyer because their obligation to him under the Federal Judgment was subject to setoff.
That setoff right arose from the acquisitions of the Iowa Judgments before the
garnishments were served. The Harpster case, discussed above, and K.S.A. 60-719,
discussed in Harpster, establish that this right to satisfy the Federal Judgment by setoff
has priority over Liberty Bank’s interest as a garnishor.
The Court therefore concludes that Liberty Bank’s interest in the Federal Judgment
resulting from its garnishments was subject to the offset of the Iowa Judgments against
the Federal Judgment.
SINCE LIBERTY BANK’S INTEREST IN THE FEDERAL JUDGMENT IS
SUBJECT TO THE OFFSET OF THE IOWA JUDGMENTS, LIBERTY BANK’S
INTEREST IS NOT IMPAIRED BY THE “OFFSET IN FULL” PROVISION OF
THE SETTLEMENT AGREEMENT.
35 Id., 100 Kan. at 296.
Case 11-40764 Doc# 341 Filed 03/04/15 Page 18 of 22
The second issue to be determined is whether, in light of the priority of Liberty
Bank’s interest in the Federal Judgment as determined by this Court, Liberty Bank’s
interest is impaired by the Settlement Agreement. The Court concludes that it is not.
As of May 16, 2011, the date Liberty Bank’s garnishments were served on
Christie, Meyer owed $6,883,706.03 on the Iowa Judgments. By May 19, 2011, when the
garnishments were served on Debtor, that amount had increased to $7,505,183.85, and by
May 31, 2011, the date the answers to the garnishments were filed, the amount was
$7,543,500.43. The amount of the Federal Judgment that was affirmed by the Tenth
Circuit’s mandate on April 25, 2011, was $7,170,703. The parties agree that the Federal
Judgment was subject to the following interests that were superior to the Christie Parties’
offset rights: (1) attorney liens, estimated by Liberty Bank to be approximately $2.9
million; (2) assignments by Pratt of $2,286,000; and (3) assignments by Meyer of
$723,508.71. When these interests are subtracted from the Federal Judgment, the balance
is approximately $1.3 million. If Meyer’s half of the Federal Judgment is considered
separately, with only one-half of the attorneys fees and only Meyer’s assignment
subtracted, the remaining balance is approximately $1.4 million. Under either scenario,
the value of the Iowa Judgments, $6,883,706.33 as of May 16, 2011, and $7,505,183.85
as of May 19, 2011, greatly exceeded the amount remaining due on the Federal Judgment
after payment of the higher priority claims for attorneys’ fees and the third party
assignments. Consequently, Liberty Bank’s garnishees, Debtor and Christie, owed
Case 11-40764 Doc# 341 Filed 03/04/15 Page 19 of 22
nothing to Meyer when the garnishments occurred, and therefore owed nothing to Liberty
Bank as a result of the garnishments.
The “offset in full” language appears to have been included in the Settlement
Agreement to provide a basis for full cross-releases of the Settlement Parties, even though
the total face amounts of the Iowa Judgments exceeded the interests of Meyer and Pratt in
the Federal Judgment after the superior interests were paid. Liberty Bank’s argument is
that the Settlement Parties cannot agree that Christie’s and Debtor’s obligations to Meyer
under the Federal Judgment were satisfied by offset. But, as shown above, Liberty
Bank’s rights as the garnishor of Christie and Debtor were subject to prior rights,
including Christie’s and Debtor’s rights to set off their liability under the Federal
Judgment. Since Liberty Bank’s garnishments were served after the assignment of Iowa
Judgments having a value in excess of the garnishees’ liability to Meyer under the Federal
Judgment, Liberty Bank’s interest is not an intervening right which limits the garnishees’
offset rights. Liberty Bank as garnishor did not acquire rights in the Federal Judgment
which are impaired by the “offset in full” provisions of the Settlement Agreement.
THE COURT FINDS THE SETTLEMENT TO BE FAIR AND EQUITABLE.
In its Memorandum Opinion and Judgment Approving Compromise and
Settlement,36 the Court previously found the Settlement Agreement to be fair and
equitable. The only portions of that ruling that were reversed on appeal related to Liberty
36 Doc. 246.
Case 11-40764 Doc# 341 Filed 03/04/15 Page 20 of 22
Bank: the District Court reversed the finding that Liberty Bank did not have valid
garnishment liens and remanded for the purpose of determining the priority of those liens.
Otherwise, the District Court found no error in this Court’s ruling that the Settlement
Agreement was fair and equitable.
When initially finding the Settlement Agreement to be fair and equitable, the Court
relied upon findings that Liberty Bank’s interests were not impaired for certain reasons
that were rejected on appeal. The Court has now concluded that Liberty Bank’s interests
were not impaired for a different reason. The authorities and rationale supporting the
Court’s conclusion that the Settlement Agreement is fair and equitable remain valid.
For the foregoing reasons, the Court approves the Settlement Agreement. The
Court adopts and incorporates herein by reference its previous analysis of the fairness of
the Settlement Agreement as stated in the Memorandum Opinion and Judgment
Approving Compromise and Settlement that was filed on May 17, 2013,37 as modified by
the District Court’s holding that Liberty Bank is the holder of valid garnishment liens,
and as supplemented by the findings of fact and conclusion of law stated herein.
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)
37 Doc. 246.
Case 11-40764 Doc# 341 Filed 03/04/15 Page 21 of 22
of the Federal Rules of Civil Procedure applicable to this matter. Based on those findings
and conclusions, judgment is hereby entered granting the Motion of D.J. Christie, Inc. to
Approve Compromise and Settlement.38 As provided by Bankruptcy Rule 9021, this
judgment will become effective when it is entered in the docket under Bankruptcy Rule
IT IS SO ORDERED.
# # #
38 Doc. 212.
Case 11-40764 Doc# 341 Filed 03/04/15 Page 22 of 22
- Category: Judge Somers
- Published on 04 December 2014
- Written by Judge Somers
- Hits: 753
Gepner v. Kidd, 11-05291 (Bankr. D. Kan. Dec. 2, 2014) Doc. # 104
SIGNED this 2nd day of December, 2014.
For on-line use but not for print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IRMA EILEEN KIDD,
PATRICIA A. GEPNER,
IRMA EILEEN KIDD,
CASE NO. 11-12357
ADV. NO. 11-5291
MEMORANDUM OPINION AND ORDER
On July 28, 2005, Debtor Irma Kidd signed a loan agreement in which Debtor’s
husband, Terry Kidd, promised to pay Patricia A. Gepner (Plaintiff) $34,647.89, plus
interest. That agreement further provided that “[i]n the event of my [Terry’s] death prior
Case 11-05291 Doc# 104 Filed 12/02/14 Page 1 of 27
to completion of payment of this debt in full, the balance of the debt still outstanding will
be assumed by Irma Kidd.” Terry died before the debt was paid in full. The first
question before the Court is whether, outside the bankruptcy arena, Debtor was legally
obligated to pay Plaintiff the unpaid balance. If the answer to that question is yes, the
next question is whether Debtor engaged in conduct covered by either § 727(a)(2)(A) or
(a)(4)(A) so that her discharge should be denied.
While Plaintiff’s claim against Debtor was pending in state court, Debtor filed a
petition for relief under Chapter 7. Plaintiff filed a proof of claim for $49,772.75, to
which Debtor objected.1 Plaintiff also filed this adversary proceeding objecting to the
discharge of Debtor under 11 U.S.C. § 727(a)(2) and (a)(4). Debtor’s objection to
Plaintiff’s claim was consolidated with the adversary proceeding for purposes of trial,
which was held on May 6 and 7, 2014.2 Plaintiff appeared by Edward J. Nazar of
Redmond & Nazar, L.L.P. Debtor appeared by Ryan Hodge of Ray Hodge & Associates,
L.L.C. For the reasons stated below, the Court overrules Debtor’s objection to Plaintiff’s
proof of claim and denies Plaintiff’s objections to Debtor’s discharge.
1 Doc. 45.
2 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C.
§§ 157(a) and 1334(a) and (b), and the 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)(B) and (J). In the pretrial order, the parties stipulated to the jurisdiction of the Court and
consented to the entry of a final order by this Court. There is no objection to venue or jurisdiction over
Case 11-05291 Doc# 104 Filed 12/02/14 Page 2 of 27
FINDINGS OF FACT.
Witnesses at the trial were Plaintiff, Patricia Gepner (Pat); Vicki Larison (Vicki),
Pat’s daughter, who assisted her with her finances; Debtor Irma Kidd (Irma or Debtor);
David Kidd (David), Irma’s son, who assisted her with her financial affairs; Jennifer Kidd
(Jennifer), David’s wife; and Dana Milby, Debtor’s bankruptcy counsel. Although the
witnesses did not present consistent testimony about the events in issue, the Court finds
that each witness testified truthfully about his or her current recollection of events that
happened over ten years ago. Fortunately, resolution of the issues in the case does not
require the Court to accept one witness’s version over that of another witness, because the
inconsistencies related primarily to background dates and events. As to these matters, the
Court adopts the version which forms the most credible and likely scenario consistent
with the documentary evidence.
Commencing some time in the 1990’s, Terry Kidd, Debtor’s husband, was the
operator of a retail store in downtown Augusta, Kansas, known as Kidd’s Early Bird
Gifts. Pat believed that the store was a family business owned by Terry, Debtor, and their
children. Debtor was employed as a teacher and did not participate in the retail business
on a regular basis. Commencing in 1997 or 1998, Pat frequently but irregularly assisted
Terry at the store, but was not paid for her services. In 1998, the store was damaged by a
flood. Commencing on June 10, 1999, and from time to time through January 29, 2004,
Pat advanced funds to Terry for use in operating the store. On April 8, 2004, Terry
suffered a mild stroke, but Pat testified that she did not know this fact. Terry returned to
Case 11-05291 Doc# 104 Filed 12/02/14 Page 3 of 27
the store, but the store was closed on May 1, 2004, because of Terry’s health and
On July 28, 2005, Pat, Terry, and Irma executed a loan agreement which, with
handwritten changes included, provides:
I, Terry Kidd, promise to pay Patricia Gepner the sum of
$34,647.89 plus 5% interest from the date of last
disbursement on the amount borrowed from June 10, 1999
through January 29, 2004.
In the event of my death prior to completion of payment of
this debt in full, the balance of the debt still outstanding will
be assumed by Irma Kidd. The full amount of this debt shall
be paid back in full by August 1, 2010.
In the event Patricia Gepner passes before me, Terry Kidd, the
debt can’t be paid til my death.
The above loan agreement is signed by all agreeing parties
and witnesses on July 28, 2005.
This is referred to as the $34,000 Loan Agreement. The typewritten portions of the
$34,000 Loan Agreement were prepared by Vicki. When the document was presented to
the Kidds for execution, Debtor made various changes by handwritten interlineations,
including changing the amount owed from $38,147.89 to $34,647.89. That amount is
supported by a worksheet prepared by Pat entitled “Terry Owes Me.” It shows advances
by Pat to Terry in the amount of $38,147.89 from June 10, 1999, through January 29,
2004, reduced to $34,647.89 by a $3,500 payment on September 6, 2001. The record
includes cancelled checks corresponding to several of the advances. Notations on the
checks include “Loan,” “Store,” “Terry loan,” and “Terry.” The Early Bird balance sheet
Case 11-05291 Doc# 104 Filed 12/02/14 Page 4 of 27
as of December 31, 2000, includes as a liability $23,332.00 owed to Pat Gepner.
Prior to the execution of the $34,000 Loan Agreement, there was no written note,
no understanding of when payment was due, and no agreement for the payment of
interest. Pat testified that the $34,000 Loan Agreement included Debtor because Pat
thought that Debtor was an owner of the store, but this was not discussed with Debtor.
Debtor denies that (1) she owned the business, (2) she discussed the store’s finances with
Terry, (3) she knew Terry was borrowing money from Pat until the $34,000 Loan
Agreement was presented, and (4) she took money out of the store. Debtor testified that
she objected to the $34,000 Loan Agreement, but she nevertheless signed it and never did
anything to repudiate it.
On November 5, 2005, a revised loan document, the November Loan Agreement,
was executed by Terry, Debtor, and Pat. The terms of the November Loan Agreement are
identical to the terms of the $34,000 Loan Agreement; the only differences are that the
November Loan Agreement, also prepared by Vicki, incorporates the handwritten
changes on the $34,000 Loan Agreement as typewritten terms and that it was
acknowledged before a notary public. The only payment on the $34,000 Loan Agreement
was in the amount of $500 made on November 9, 2005. The payment check sent to Pat
was accompanied by a note in Debtor’s handwriting stating that the payment was to be
applied to the $34,000 Loan Agreement. Pat’s claim against Irma’s bankruptcy estate is
for $49,772.75, the principal and interest alleged to be outstanding on the $34,000 Loan
Case 11-05291 Doc# 104 Filed 12/02/14 Page 5 of 27
Agreement as of August 1, 2011, the date Irma filed for bankruptcy relief.3 Debtor denies
she owes the claim.
On or about July 20, 2000, Pat obtained a loan from Andover State Bank in the
sum of approximately $10,000, secured by her home. She in turn advanced these funds to
Terry for use in Early Bird. Sporadic payments were made from May 7, 2002, through
November 12, 2004, and monthly payments of $200 were made from January 2005
through June 2005. On November 5, 2005, the same date that the $34,000 Loan
Agreement was executed, Pat, Terry, and Debtor executed a second loan agreement for
$5,484, the balance then due on Pat’s loan from Andover State Bank. This is referred to
as the $5,484 Loan Agreement. In that agreement, Terry promised to pay Pat $200 per
month until the balance was paid in full. The $5,484 Loan Agreement contains the same
terms as the $34,000 Loan Agreement regarding Irma’s liability in the event of Terry’s
When Terry passed away on December 8, 2006, approximately $4,000 was owed
on the $5,484 Loan Agreement.5 When no payments were received in January or March,
2007, Vicki, on behalf of her mother, sent a default letter to Debtor.6 The $5,484 Loan
3 Proof of claim no. 1.
4 Exh. 9.
5 Exh. 10.
6 Exh. 12.
Case 11-05291 Doc# 104 Filed 12/02/14 Page 6 of 27
Agreement was satisfied by a payment of $2,725.21 David made in June 2007.7
Debtor received substantial funds as a result of Terry’s illness, Terry’s death, and
the death of Nina Kidd, Terry’s mother. On September 1, 2006, Terry received
$26,607.00 in disability benefits. On February 16, 2007, Debtor received $66,892.15
from Ozark National Life Insurance, and on March 1, 2007, she received $34,918.64 from
Prudential Life Insurance Company. Debtor was the only beneficiary named on the life
insurance policies. Debtor and David testified that these funds were considered “family
money.” Terry had made known his wishes that after his death, his family — consisting
of Debtor, their daughter Margo, and their son David (and his wife Jennifer) — would be
taken care of through a sharing of insurance funds and other receipts. At the time of
Terry’s death, all members of the family knew they would share approximately equally in
the “family money,” notwithstanding the name in which the money was received or later
held. Because Margo had issues concerning her handling of financial affairs, her name
was never on any of the accounts holding this “family money,” but Debtor and David
made withdrawals for her benefit.
The foregoing three items of income were initially deposited into Commerce Bank
account *7258, in the names of David or Jennifer Kidd. On December 20, 2007,
Commerce Bank account *0086 was opened. It is a joint-tenancy payable-on-death
account in the names of Irma, David, and Jennifer. Only Irma’s Social Security number
7 Exh. 10.
Case 11-05291 Doc# 104 Filed 12/02/14 Page 7 of 27
is stated on the account card. The unused portion of the “family money” which had been
deposited into Commerce Bank account *7258 was transferred to account *0086. Debtor,
as the beneficiary of the estate of Nina Kidd, Terry’s mother, thereafter received
$83,130.29, which was deposited into Commerce Bank account *0086 by Debtor, for
convenience and not to indicate ownership. The foregoing receipts total $211,548.08.
Accountings prepared by David trace the use of the “family money” deposited in
Commerce Bank accounts *7258 and *0086 for the period from 2006 through 2010.8
According to the accounting, $70,827.08 of expenditures made on or before December 2,
2009, were attributed to Debtor. They were for funeral expenses, home improvements,
debt reduction, and repayment of a loan from her sister. Debtor did not use any of the
“family money” after December 2009. Expenditures of $61,644.15 were attributed to
David, primarily for home improvements and the purchase of a vehicle. Expenditures of
$22,699.68 were attributed to Margo, primarily for debt reduction and medical expenses.
This accounting shows the amount of “family money” in Commerce Bank account *0086
in early 2011 was $56,377.17.
On August 26, 2010, Pat commenced an action against Debtor in Sedgwick
County District Court to collect the $34,000 Loan Agreement. On January 14, 2011,
without seeking Debtor’s authorization, David withdrew substantially all of the funds in
Commerce Bank account *0086. Approximately $55,000 was transferred to Commerce
8 Exhs. 72 and 73.
Case 11-05291 Doc# 104 Filed 12/02/14 Page 8 of 27
Bank account *8371 and $2,992.34 was transferred to Commerce Bank account *8370.
David and Jennifer were the joint owners and the only authorized signers of these two
accounts. Debtor’s name was not on either account. David testified that he closed the
*0086 account because he was concerned that if a judgment were entered against his
mother, collection might be attempted from Commerce Bank account *0086. As of
January 14, 2011, $70,827.08 of the previous withdrawals from account *0086 were
attributed to Debtor, so in David’s and Debtor’s views, Debtor had no interest in any of
the funds in account *0086 when David withdrew them, even though her name was on the
account. David closed the account the following month.
Irma filed for relief under Chapter 7 on August 1, 2011. She was assisted by
counsel, who testified at trial. Irma’s Schedule A lists two secured creditors, the holder of
a mortgage on her home and a mechanics lien holder, who has not participated in the
bankruptcy and whose time to foreclose has expired. Pat is the only unsecured creditor
listed on Schedule F. In response to Statement of Financial Affairs (SOFA) question 11,
inquiring about “financial accounts . . . held in the name of the debtor or for the benefit of
the debtor which were closed, sold, or otherwise transferred within one year immediately
preceding” the filing of the bankruptcy petition, Debtor listed a savings account at
Commerce Bank and stated, “Removed name from account in January, 2011. None of the
funds in the account belonged to Ms. Kidd.”9 This was a reference to David’s closing of
9 Exh. 55.
Case 11-05291 Doc# 104 Filed 12/02/14 Page 9 of 27
Commerce Bank account *0086. Irma had a long discussion with her counsel about the
“family funds” and presented her with a worksheet prepared by David which showed that
Debtor’s share of the funds was $70,516.03 and that $70,837.01 of the funds had been
spent on her behalf. Question 7 of the SOFA, “Gifts,” lists only gifts to Irma’s church.
Based upon her inquiry, counsel understood that David’s and Margo’s interests in the
“family funds” were their inheritances and not gifts from Irma. Question 10 of the SOFA,
“Other transfers,” and question 14, “Property held for another,” are both answered
“none.” Debtor’s counsel testified that based upon her inquiry regarding the “family
funds,” she believed the answers were accurate.
In August 2011, Debtor had two accounts at Rose Hill State Bank, savings account
number *8920 and checking account number *8906.10 On March 4, 2011, a tax refund of
$2,480 was deposited into account *8906, and on March 8, 2011, a telephone transfer in
the same amount was made from that account to account *8920. On the date of her
bankruptcy filing, Debtor withdrew from the Rose Hill savings account seven cashier’s
checks totaling $1,060.83 for payments to creditors. Only the payment to her mortgage
holder exceeded $600. She also withdrew funds for a $952.29 cashier’s check payable to
her former trial counsel and for a $929.00 cashier’s check payable to her bankruptcy
counsel. On Schedule B, item 2, Debtor reported a value of $2,232.54 for checking,
savings, or other financial accounts, which is the sum of the balances of the two Rose Hill
10 Additional facts concerning the title to these accounts are included in the Discussion and
incorporated into the facts by this reference.
Case 11-05291 Doc# 104 Filed 12/02/14 Page 10 of 27
accounts after the foregoing withdrawals. On question 3 of the SOFA, “Payments to
creditors,” Debtor listed the mortgage holder, who received monthly payments. Line 13
of Debtor’s Schedule B lists a “½ interest in Prudential Financial Inc Common Stock”
valued at $2,000.
On December 5, 2011, Pat filed her proof of claim, and on December 27, 2011, she
filed Adversary No. 11-5291 against Debtor, seeking to have her discharge denied under
§ 727. On April 16, 2012, the Chapter 7 Trustee, Steven L. Speth, filed a Complaint to
Avoid and Recover Fraudulent Transfer against David and Jennifer, seeking to recover
the $55,000 withdrawn by David on January 14, 2011, from Commerce Bank account
*0086, owned in part by Debtor, and deposited into accounts not owned by Debtor.11 In
March 2014, a notice of intended compromise of the claim for $14,000 was filed.12 Pat
objected to the compromise, and the parties agreed the Court would decide later whether
to approve the settlement.
A. Debtor’s objection to Pat’s proof of claim is denied.
Pat timely filed a proof of unsecured claim for $49,772.75, the amount that she
claims Debtor owed under the $34,000 Loan Agreement on July 29, 2011, three days
before Irma filed for relief under Chapter 7. Debtor objected to the claim “for multiple
reasons including but not limited to the fact that [Debtor] does not believe that this debt is
11 Adversary no. 12-5067, doc. 1.
12 Case no. 11-12357, doc. 75.
Case 11-05291 Doc# 104 Filed 12/02/14 Page 11 of 27
valid true and owing.”13 The pretrial order14 states the following defenses to the claim:
(1) The statute of limitations expired on the verbal agreement to repay the advances
before the oral agreement was reduced to writing on July 28, 2005; (2) no consideration
was given for Debtor’s promise to pay; and (3) the payments by Pat were investments, not
loans. Pat refutes these arguments.
The Court denies Debtor’s objection to the claim. The $34,000 Loan Agreement,
signed by Terry and Debtor, provides, “I, Terry Kidd promise to pay Patricia Gepner the
sum of $34,647.89.” It also provides “[i]n the event of my [Terry’s] death prior to the
completion of payment of this debt in full, the balance of the debt still outstanding will be
assumed by Irma Kidd.” Under Kansas law, “[a] guaranty involves a tripartite
relationship based on a contract between two or more persons by which one person
promises to answer for the debt of a third person.”15 “A contract of guaranty is to be
construed, as are other contracts, according to the intention of the parties as determined
by a reasonable interpretation of the language used in light of the attendant
circumstances.”16 The $34,000 Loan Agreement unambiguously states that Debtor will
assume her husband’s liability to Plaintiff if Terry dies before the debt is paid. The Court
13 Id., doc. 45.
14 Adv. no. 11-5291, doc. 81.
15 Kansas State Bank & Trust Co. v. DeLorean, 7 Kan. App.2d 246, 255, 640 P.2d 343, 350
16 Overland Park Sav. And Loan Ass’n v. Miller, 243 Kan. 730, 738, 763 P.2d 1092, 1097-98
Case 11-05291 Doc# 104 Filed 12/02/14 Page 12 of 27
therefore finds that Debtor is a guarantor of Terry’s obligation.17 The balance due when
Terry died has not been paid, and Debtor is liable for that debt.
Debtor’s testimony was simply that she did not agree she owed the debt on the
date of the $34,000 Loan Agreement or when she filed for bankruptcy relief. She was
vague about the factual basis for her position. Debtor’s counsel made several legal
arguments, none of which, for the reasons discussed below, provides a defense to
First, the Court rejects Debtor’s contention that Pat’s claim fails for lack of
consideration because the statute of limitations had run on Terry’s obligations included in
the principal of the $34,000 Loan Agreement before it was executed on July 28, 2005.
Pat testified she believed at all times before July 28, 2005, that she had a right to collect
the balance owed on the $34,000 Loan Agreement and that Terry would have honored his
obligation. All of these transactions transpired without the assistance of counsel.
Under Kansas law, forbearing to sue is good consideration for a promise, so long
as the one who forbears has a reasonable and sincere belief in the validity of his or her
claim.18 “‘Any forbearance to prosecute or defend a claim or action, or to do an act
which one is not legally bound to perform, is usually a sufficient consideration for a
17 Plaintiff argues that Pat is an accommodation party and therefore various provisions of Article
3 of the Uniform Commercial Code are applicable. The court rejects this argument because the $34,000
Loan Agreement is not a “negotiable instrument” as defined by K.S.A. 2013 Supp. 84-3-104(a). It is not
payable on demand or at a definite time. Although it states a due date of August 1, 2010, it also provides
that “[i]n the event Patricia Gepner passes before me, Terry Kidd, the debt can’t be paid til my death.”
18 Reed v. Hess, 239 Kan. 46, 51, 716 P.2d 555, 560 (1986).
Case 11-05291 Doc# 104 Filed 12/02/14 Page 13 of 27
contract based thereon, unless the claim or defense is obviously invalid, worthless or
frivolous.’”19 The reasonableness and sincerity of the holder’s belief in the claim’s
validity is “‘measured, not by the state of the law as it is ultimately discovered to be, but
by the state of the knowledge of the person who at the time has to judge and make the
concession.’”20 Under Kansas law, the statue of limitations to enforce a contact that is
not in writing is three years.21 Some of the advances which were the subject of the
$34,000 Loan Agreement were made more than three years before July 28, 2005, and
Terry would have had a valid statute of limitations defense to any action by Pat to collect
those advances. But when Pat asked Terry and Debtor to execute the $34,000 Loan
Agreement, she believed the entire debt was enforceable against Terry, and perhaps
against Debtor. Pat is not a lawyer, and there is no evidence that she had any legal
advice about the transaction. Pat’s giving up her perceived right to immediately collect
the entire claim was sufficient consideration for the $34,000 Loan Agreement. Under
Kansas law, “‘an extension of the time of payment of an obligation constitutes in legal
effect a forbearance to sue and . . . is a sufficient consideration for a guaranty of the
obligation.’”22 Therefore Pat’s giving up her perceived right to immediately pursue
19 State, ex rel. Ludwick v. Bryant, 237 Kan. 47, 52, 697 P.2d 858, 862 (1985) (quoting Snuffer v.
Westbrook, 134 Kan. 793, Syl ¶ 1, 8 P.2d 950 (1932)).
20 Reed v. Hess, 239 Kan. at 51, 716 P.2d at 560 (quoting Schiffelbein v. Sisters of Charity, 190
Kan. 278, 280, 374 P.2d 42 (1962), which said it was quoting “12 Am. Jur. p. 581, Sec. 87”).
21 K.S.A. 60-512 (unchanged since 1964).
22 Ryco Packaging Corp. v. Chapelle Int’l., Ltd., 23 Kan. App. 2d 30, 38, 926 P.2d 669, 675
(1996) (quoting 38 Am. Jur. 2d, Guaranty, § 47, p. 1051); Fuller v. Scott, 8 Kan. 25, 32, 1871 WL 710 at
Case 11-05291 Doc# 104 Filed 12/02/14 Page 14 of 27
collection from Terry was also consideration for Debtor’s guaranty agreement to assume
the outstanding debt upon Terry’s death.23 Debtor’s liability on Pat’s claim is not
unenforceable for lack of consideration.
The Court also rejects Debtor’s position that Pat’s claim is unenforceable because
the advances to Terry were investments in Early Bird, not loans. In support of this
theory, Debtor relies on the absence of evidence of the terms of repayment before the
execution of the $34,000 Loan Agreement. But this argument ignores the evidence that
the checks written by Pat when making the advances bear notations indicating that they
are loans and that the Early Bird balance sheet as of December 31, 2000, includes as a
liability a loan owed to Pat.
Although the issues stated in the pretrial order do not include whether the
principal amount owed by Terry as stated in the $34,000 Loan Agreement was accurate,
this issue was raised at trial and was the subject of post-trial briefs, with no objection
from Plaintiff. Debtor argues that Terry’s liability for the approximately $10,000 which
Pat borrowed from Andover State Bank and then advanced to Terry was included in the
balance of the $34,000 Loan Agreement and was also the subject of the $5,484 Loan
Agreement. The record does not support this contention. The documents evidence that
*6 (1871) (“An agreement to extend the time of payment of the note is a sufficient consideration to
sustain the guaranty’).
23 Under K.S.A. 60-520(a), the execution of the $34,000 Loan Agreement started a new
limitations period on Pat’s collection rights, and because the contract was reduced to writing at that time,
the five-year limitations period for written contracts became applicable to it. Pat brought suit in state
court before the new five-year limitations period expired.
Case 11-05291 Doc# 104 Filed 12/02/14 Page 15 of 27
there were separate accountings of the advances represented by the $34,000 Loan
Agreement and the $5,484 Loan Agreement. The worksheet prepared by Pat, entitled
“Terry Owes Me,”24 which shows the calculations establishing the balance of the
$34,000 Loan Agreement, includes a $20,000 advance on July 26, 2000, the same date as
the loan from Andover State Bank. A worksheet prepared by Terry shows two $10,000
advances on the same date.25 Debtor relies upon this circumstantial evidence, the vague
testimony of Pat that the “Terry Owes Me” worksheet contains all of the advances from
Pat to Terry,26 and vague testimony of Vicki that the $10,000 advance is included in the
balance of the “Terry Owes Me” worksheet. But Pat was insistent throughout her
testimony that there were two separate transactions. The first was multiple advances for
which no interest was charged and no repayment schedule was established before the
execution of the $34,000 Loan Agreement, and the second was the advancement of the
proceeds from the Andover State Bank loan, on which Terry made payments — both
before and after the 2005 loan agreements were drafted and executed — to cover
principle and interest owed to the bank.
Further, examination of the exhibits refutes Debtor’s position. According to Pat’s
work sheet, the only payment on the $38,147.89 she had advanced was $3,500 paid on
24 Exh. 6.
25 Exh. 5.
26 Trial Tr., May 6, 2014, at 71-72.
Case 11-05291 Doc# 104 Filed 12/02/14 Page 16 of 27
September 6, 2001.27 When the $34,000 Loan Agreement was initially signed in July
2005, Debtor corrected the typewritten note by reducing the amount owed, initially
stated to be $38,147.89, by the $3,500. A separate worksheet regarding the $5,484 Loan
Agreement prepared by Pat’s daughter shows Terry’s payments to Pat of $4,600 between
May 5, 2002, and June 13, 2005.28 If the advance of the proceeds of the Andover Bank
loan were included in the “Terry Owes Me” worksheet, the payments attributed to that
loan should also have been credited on that worksheet. They were not. Both the retyped
version of the $34,000 Loan Agreement and the $5,484 Loan Agreement were executed
by Terry and Debtor on November 5, 2005; on that date, the parties agreed that there
were two separate obligations owed to Pat. The evidence presented persuades the Court
that it is more likely that there were two separate transactions, and the $10,000 advance
from Andover State Bank was not included in the accounting which was the basis for the
$34,000 Loan Agreement.
For the foregoing reasons, the Court overrules Debtor’s objections to Pat’s proof
B. Denial of Discharge under § 727(a)(2)(A).
A party objecting to a discharge under § 727(a)(2)(A) “‘must show by a
27 This payment is also reflected on a worksheet prepared by Terry of the balance owed as of
March 5, 2002. Exh. 5. That worksheet also includes three $100 payments in 2001 which are not
reflected on any of Pat’s worksheets but appear to correlate with cancelled checks for advances which
bear a notation of “Pd Back.” Exh. 8.
28 Exh. 10.
Case 11-05291 Doc# 104 Filed 12/02/14 Page 17 of 27
preponderance of the evidence that (1) the debtor transferred, removed, concealed,
destroyed, or mutilated, (2) property of the [debtor], (3) within one year prior to the
bankruptcy filing, (4) with the intent to hinder, delay, or defraud a creditor.’”29 The
discharge provisions of the Code are to be construed liberally in favor of the debtor and
strictly against the objector seeking to block the discharge.30 Pat, as the plaintiff, has the
burden of proof to show each of these elements31 by a preponderance of the evidence.
Plaintiff’s § 727(a)(2)(A) objection to Debtor’s discharge is based upon three
transfers: (1) the January 14, 2011 transfer of $2,992.34 from Commerce account
*0086, in the names of Irma Kidd, David Kidd, and Jennifer Kidd, to Commerce
Account *8370, in the names of David and Jennifer Kidd; (2) the January 14, 2011
transfer of $55,000 from Commerce account *0086 to Commerce account *8371, in the
names of David and Jennifer; and (3) the March 8, 2011 transfer of $2,480 from Rose
Hill Bank checking account *8906 to Rose Hill savings account *8920. The Court finds
that Pat has failed to prove that these transfers should be the basis for the denial of
Debtor’s discharge under § 727(a)(2)(A).
The first two of these transfers occurred on the same day under identical
29 Mathai v. Warren (In re Warren), 512 F.3d 1241, 1249 (10th Cir. 2008) (quoting Gullickson v.
Brown (In re Brown), 108 F.3d 1290, 1293 (10th Cir. 1997)). The Circuit referred to “property of the
estate” in item (2), but § 727(a)(2)(A) actually applies to transfers of property of the debtor that were
made within one year before filing bankruptcy — no bankruptcy estate exists until the debtor files
bankruptcy, so transfers made before that could not involve property of the estate.
30 6 Collier on Bankruptcy, ¶ 727.01 (Alan N. Resnick & Henry J. Sommer, eds.-in-chief, 16th
31 Fed. R. Bankr. P. 4005.
Case 11-05291 Doc# 104 Filed 12/02/14 Page 18 of 27
circumstances, so the Court will consider them together. The parties have stipulated that
the transfers were made in January 2011, less than one year before the filing of Debtor’s
bankruptcy petition, but Debtor contends that Pat has not satisfied her burden of proof on
the other three elements.
As to these transfers, the Court agrees Pat has not sustained her burden to prove
that the transfers were made by Debtor. The Commerce Bank transactions were made by
David, not by Debtor, but Pat argues that David’s acts should be attributed to Debtor.
Although the acts of an agent may be attributed to the principal for purposes of an
objection to discharge,32 the Court finds a lack of evidence that David was acting as
Debtor’s agent when he made the transfers. Under Kansas law, “‘[w]here the
relationship of principal and agent is in issue, the party relying thereon to establish his
claim or demand has the burden of establishing its existence by clear and satisfactory
evidence.’”33 There is no direct evidence that David acted as Debtor’s agent when
making the transfers. Debtor testified that she did not know anything about them. David
testified that he made the transfers of his own accord, not at the authorization of his
mother. Pat argues that David’s acts should nevertheless be attributed to Debtor based
upon circumstantial evidence of coordinated conduct between Debtor and her son
because Debtor temporarily removed her name from the Rose Hill savings account on
32 See Gannett v. Carp (In re Carp), 340 F.3d 15, 26 & n. 5 (1st Cir. 2003).
33 In re Schicke, 290 B.R. 792, 804 (10th Cir. BAP 2003) (quoting Turner & Boisseau, Chtd., v .
Marshall Adjusting Corp., 775 F.Supp. 372, 377-78 (D.Kan. 1991)).
Case 11-05291 Doc# 104 Filed 12/02/14 Page 19 of 27
the same day that David withdrew the funds from Commerce account *0086. This
circumstantial evidence of actions by both Debtor and David regarding the title to bank
accounts does not prove agency by “clear and satisfactory evidence.”
Further, the Court finds that even if David was acting as Debtor’s agent, Pat still
could not prevail because she failed to prove that Debtor, through David, acted with the
intent to hinder, delay, or defraud Pat. David and Debtor consistently and convincingly
testified that Debtor had withdrawn her one-third share of the “family money” from
Commerce account *0086 by approximately December 2009, and that in their view, on
January 14, 2011, Debtor had no interest in the funds on deposit in Commerce account
*0086. Details of the withdrawals were provided by David. They allocate $70,827.08 to
Debtor. This is approximately one-third of the $221,548.08 “family money.”34 All of
these withdrawals for the benefit of Debtor were made on or before December 2, 2009,
although withdrawals for David’s and Margo’s benefit continued thereafter. David
testified that he made the January 2011 transfers because he was concerned that funds
remaining in Commerce account *0086 after December 2009, which he believed
belonged to him and Margo and not their mother, could be garnished if Pat prevailed in
her litigation against Debtor. David’s intent was to protect his and his sister’s property,
not to hinder or delay Pat’s claim to Debtor’s property. Because David sincerely
believed as of January 14, 2011, that Debtor had no interest in the funds in Commerce
34 E.g., exh. 73.
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account *0086 when he transferred that money, he could not have acted with the intent
to hinder, delay, or defraud Pat from getting Debtor’s property.
The Court therefore denies Pat’s objection to Debtor’s discharge under
§ 727(a)(2)(A) based upon the January 2011, transfers of the balance of Commerce
account *0086, in the names of Debtor, David, and Jennifer, to accounts which did not
include Debtor as an owner. Pat has failed to prove two necessary elements (that the
transfers from Commerce Bank account *0086 were made by Debtor and that they were
made with the intent to hinder, delay, or defraud Pat).35
The Court also finds that Pat has failed to sustain her burden to prove that
Debtor’s discharge should be denied under § 727(a)(2)(A) based upon the transfer of
$2,480 from Rose Hill checking account *8906 to Rose Hill savings account *8920 on
March 8, 2011. In support, Pat cites an exhibit prepared by Pat’s daughter which states
that on March 8, 2011, less one year prior to filing her bankruptcy petition, “Irma
transferred U.S. Income Tax Refund from Rose Hill checking account to David Kidd
savings account.” Although a transfer between two Rose Hill accounts was made on that
date, there was no resulting change of ownership. The account statements show the
35 The Court makes no ruling on whether Debtor had an interest in the balance in Commerce Bank
account *0086 in January 2011 before the transfers were made. Debtor argues that a gift of one-third of
the “family money” was given to David and one-third to Margo when the funds were received by Debtor,
that approximately one-third of the balance had been withdrawn by Debtor before January 2011, and that
Debtor therefore had no interest in the account balance in January 2011. Pat, on the other hand, argues
that although the account was a co-tenancy account, the funds were all owned by Debtor. She contends
no gift tax return was ever filed, Debtor had full access to the balance in the account, the accounting
showing Debtor’s share of the “family money” is not accurate, and only Debtor’s Social Security number
was associated with the account.
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deposit of the $2,480 tax refund to account *8906 on March 4, 2011, and a telephone
transfer of the same amount to account *8920 on March 8, 2011, but both account
statements identify David, Margo, and Debtor as co-owners of the accounts. The
signature card for the *8920 account dated July 6, 2007, identifies all three of them as
owners, but includes only Debtor’s Social Security number. On January 14, 2011,
Debtor’s name was removed from account *8920, but an updated signature card for that
account dated January 15, 2011, one day later, again shows all three family members as
owners, but bears David’s Social Security number. The only change resulting from the
removal of Debtor’s name on the account for one day was the change of the Social
Security number associated with the account from Debtor’s to David’s. Debtor does not
dispute that she continued to have an ownership interest in both Rose Hill accounts, and
on Schedule B, she included the balances of both Rose Hill accounts as of the date of her
bankruptcy filing. The evidence therefore shows that the March 8, 2011 transfer was
between two accounts that were both titled jointly in the names of Debtor, David, and
Margo. There was no transfer of Debtor’s property for purposes of the denial of
discharge under § 727(a)(2)(A).
C. Denial of Discharge under § 727(a)(4)(A).
Section 727(a)(4)(A) provides that a discharge shall be denied if “the debtor
knowingly and fraudulently, in or in connection with the case — (A) made a false oath
or account.” The denial of a discharge under § 727(a)(4)(A), like the denial of a
discharge under § 727(a)(2)(A), requires proof that the debtor acted with a wrongful
Case 11-05291 Doc# 104 Filed 12/02/14 Page 22 of 27
intent. The knowing and fraudulent omission of items from the debtor’s bankruptcy
schedules is a common instance of a false oath. However, omissions based “upon honest
advice of counsel, to whom the debtor had disclosed all the relevant facts, . . . will not be
deemed willfully false.”36
Pat contends that Debtor knowingly and fraudulently made false statements in her
Statement of Financial Affairs because: (1) she failed to identify the sale of the
Prudential stock and the deposit of the proceeds in David’s account; (2) she failed to
disclose the removal of her signature from the Rose Hill savings account; and (3) she
failed to disclose the January 2011 transfer of funds from Commerce Bank account
Debtor’s Schedule B, “Personal Property,” lists on line 13 a “½ interest in
Prudential Financial Inc Common Stock” valued at $2,000. The stock was owned in the
name of “Irma E. Kidd TOD David E. Kidd.” Debtor inherited her interest through
Terry. The stock was sold on July 29, 2011, the proceeds of $4,362.68 were received on
August 8, 2011 (after Debtor filed her bankruptcy petition), and the proceeds were
deposited into Commerce account *8371, owned by David and Jennifer, on August 11,
2011. On the advice of Debtor’s bankruptcy counsel, Debtor paid the Trustee $2,181.34,
one-half of the proceeds, by a cashier’s check dated September 8, 2011. On the advice
of Debtor’s litigation counsel, David paid the Trustee $2,181.34 by a cashier’s check
36 6 Collier on Bankruptcy, ¶ 727.04.
37 Doc. 81.
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dated December 5, 2011.
Dana Milby, Debtor’s bankruptcy counsel, testified that the entry on Schedule B
of a one-half interest in the stock was based upon Debtor’s understanding that she owned
a one-half interest and David owned the other one-half interest. When distributing the
proceeds, Debtor acted consistent with this understanding. There is no evidence that
Debtor, when making this representation, was acting with wrongful intent. If Debtor’s
intent was to conceal her interest in the stock, she would have made no disclosure, rather
than an incomplete disclosure. The reporting that the stock was presently owned, rather
than in the process of being sold, is not material. A discharge will not be denied based
upon the incomplete disclosure of Debtor’s ownership of the Prudential stock.
The second omission relied upon by Pat is the failure to disclose the removal of
Debtor’s name from Rose Hill savings account *8920. Debtor’s Statement of Financial
Affairs, question 11, “Closed financial accounts,” states that Debtor’s name was
removed from a Commerce Bank savings account in January 2011. There is no mention
of Rose Hill accounts. The exhibits show that the signature card for Rose Hill savings
account *8920 dated July 6, 2007, identifies Debtor, David, and Margo as joint owners,
but includes only Debtor’s Social Security number. On January 14, 2011, Debtor’s name
was removed from account *8920, but an updated signature card for that account dated
January 15, 2011, one day later, again shows all three family members as owners, but
bears David’s Social Security number. The only change resulting from the removal of
Debtor’s name on the account for one day was the change of the Social Security number
Case 11-05291 Doc# 104 Filed 12/02/14 Page 24 of 27
associated with the account from Debtor’s to David’s. Debtor continued to have an
ownership interest in the account. Debtor included the balance in the Rose Hill savings
account and the Rose Hill checking account on the date of her bankruptcy filing in item
2 on Schedule B.38 Although Debtor’s Statement of Financial Affairs would have been
more complete if she had disclosed the changes to the Rose Hill savings account, the
Court finds that the omission was not material and cannot be the basis for the denial of
The third omission relied upon by Pat is Debtor’s failure to disclose the $58,00039
that was transferred from Commerce account *0086, in the names of Debtor, David, and
Jennifer, to David’s and Jennifer’s accounts in January 2011. Debtor’s bankruptcy
attorney testified that she had a long discussion with Debtor about her understanding that
she had no interest in the funds in the Commerce account when the transfer was made.
Counsel reviewed a worksheet prepared by David showing that Debtor’s share of the
$211,548.08 in “family funds” was $70,516.03, and that as of January 2011, Debtor had
withdrawn $70,837.01 of the funds. Based upon this inquiry, counsel understood that
David’s and Margo’s interests in the family funds removed from Commerce account
*0086 on January 14, 2011, were their inheritances, in which Debtor had no interest.
38 Trial Tr. 149, ll. 8-23.
39 This is the sum of two transfers, one of approximately $3,000 from Commerce Account *0086
to Commerce Account *8370 and the other of $55,000 from Commerce Account *0086 to Commerce
Account *8371. They are the basis for Plaintiff’s first and second objections to discharge under
§ 727(a)(2)(A), discussed above. The $55,000 transfer is also the subject of the adversary proceeding
brought by the Trustee against David and Jennifer, which has been settled.
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Counsel therefore prepared the response to question 11, “Closed financial accounts,”
stating that a savings account at Commerce Bank had been closed by removal of
Debtor’s name from the account in January 2011, and that “[n]one of the funds in the
account belonged to Ms. Kidd.” Question 10 of the SOFA, “Other transfers,” and
question 14, “Property held for another person,” were both answered “none.” Debtor’s
counsel testified that based upon her inquiry about the “family funds,” she believed the
answers were accurate.
Assuming, but not deciding, that the entire balance in Commerce account *0086
in January 2011 was Debtor’s property, the Court nevertheless finds the inaccuracies and
omissions cannot be the basis for the denial of Debtor’s discharge. Debtor’s belief that
the funds were “family money” and that she had withdrawn her entire share prior to
January 2011 were thoroughly discussed with her counsel. Based upon the testimony as
a whole, the Court has no doubt that Debtor and David sincerely believed that Debtor
had no interest in the remaining “family funds” in January 2011. There is therefore no
basis to find that the errors and omissions regarding the withdrawals from and closure of
Commerce account *0086 were knowing and fraudulent.
For the foregoing reasons, the Court denies Debtor’s objection to Pat’s proof of
claim, and denies Pat’s objection to discharge under § 727(a)(2) and § 727(a)(4)(A).
Case 11-05291 Doc# 104 Filed 12/02/14 Page 26 of 27
Judgments based on these rulings will be entered on separate documents.
IT IS SO ORDERED.
# # #
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