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In Re Ledin, 14-12347 (Bankr. D. Kan. Apr. 1, 2016) Doc. # 111
DESIGNATED FOR ONLINE PUBLICATION
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANASAS
JONATHAN E. LEDIN
Case No. 14-12347
ORDER DENYING DEBTOR’S MOTION FOR ORDER TO SHOW CAUSE
WHY CREDITOR SHOULD NOT BE HELD IN CONTEMPT FOR
VIOLATION OF DISCHARGE INJUNCTION
A chapter 7 discharge in bankruptcy enjoins creditors from commencing or
continuing to enforce a prepetition debt as a personal obligation of the debtor. This
injunction does not extend to actions to enforce a pre-petition, non-avoided lien. When
a creditor issues an order of garnishment against a judgment debtor’s bank deposits,
the order attaches any credits or other debts owed by the depository bank to the
debtor on the date that order is served. Like any other lien, a garnishment lien that
is not avoided or released “rides through” a chapter 7 bankruptcy case and remains
effective after the debtor’s discharge. While a garnishing creditor would be precluded
from enforcing a garnishment lien after the judgment debtor filed a chapter 7 petition
without relief from the stay, nothing prevents that creditor from attempting to realize
on the garnishment lien after discharge when the stay has expired.
Before this bankruptcy case was filed, FinanceCo garnished Jonathan Ledin’s
account at Commerce Bank and attached $333.49. After he was discharged, Ledin
sued Commerce in state court to obtain a release of the garnished funds. Commerce
filed a third-party interpleader petition, adding both Ledin and FinanceCo as
defendants, and paid the funds into the court’s registry for the court’s determination
of whether Ledin or FinanceCo was entitled to the funds. Instead of participating in
that process, Ledin presented an ex parte order to a Reno County judge to pay out the
funds to him and the judge entered it. After discovering that Ledin obtained the
funds, FinanceCo moved to alter or amend that order asking that the funds be
returned to the court’s registry and that the court determine the parties’ respective
rights in them. Ledin claims that FinanceCo’s effort to set aside the ex parte order is
an attempt to collect a discharged, prepetition debt from him personally and seeks to
have FinanceCo held in contempt. But because FinanceCo’s efforts only extend to
recovering the funds its garnishment lien attached and not to hold Ledin personally
responsible, FinanceCo did not violate the discharge injunction. Even if FinanceCo’s
actions did violate 11 U.S.C. § 524(a), Ledin has received more than the amount
garnished and has been made whole. Ledin’s motion for contempt is therefore
1 I conducted an evidentiary hearing in this matter on March 16, 2016. The debtor, Jonathan Ledin,
appeared pro se. FinanceCo of Kansas, Inc. appeared by its attorney, Samantha M.F. Woods and its
corporate secretary, Dennis Lubbers. These are my findings of fact followed by my conclusions of law
made in this contested matter pursuant to Fed. R. Bankr. P. 7052.
2 Ex. G, p. 45. With interest accruing thereon at the rate of 21% per annum from October 3, 2008, the
judgment had grown to $15,161.63 when FinanceCo garnished Ledin’s bank accounts in September
of 2014. See Ex. G, p. 50.
3 Ledin claimed, as he did here in a later adversary proceeding, that the Social Security Act and
various banking regulations restrict creditors from garnishing and banks from paying out certain
social security payments. See 31 C.F.R. § 212.6(a). The Reno County court rejected that argument in
the June Garnishment case. Ex. G, pp. 47-48.
4 Ex. G, pp. 50-51.
5 Ex. G, p. 53. Commerce was authorized to withhold the $15 administrative fee by KAN. STAT. ANN. §
60-733(a) (2015 Supp.).
6 Ex. G, p. 71.
In July of 2009, creditor FinanceCo of Kansas, Inc. obtained an agreed journal
entry of judgment against Jonathan Ledin in the principal amount of $6,020.43 in
the District Court of Reno County, Kansas.2 In June of 2014, FinanceCo garnished
Ledin’s bank accounts at Commerce Bank in an effort to collect the judgment (the
“June Garnishment”). After Ledin replied to the June Garnishment claiming that the
funds were exempt social security benefits, the Reno County court conducted a
hearing and overruled the objection, ordering Commerce to pay the garnished funds
to FinanceCo.3 On September 5, 2014, FinanceCo served another garnishment order
on Commerce (the “September Garnishment”).4 Commerce answered on September
15, this time stating that it held $333.49 plus an administrative fee of $15.5 On
September 9, Commerce wrote Ledin a letter terminating their banking relationship
and closing his accounts effective October 10.6 Ledin replied to the September
Garnishment, again claiming that the funds on deposit were exempt from
garnishment because they consisted of social security benefits directly deposited to
his account and requesting a hearing that the court set for September 29, 2014.7 At
that hearing, the Reno County court directed the debtor to file bank statements for
July, August, and September of 2014 not later than October 19, presumably so the
court and FinanceCo could review them to determine whether actual social security
funds had been deposited.8 On October 14, 2014, Ledin filed this chapter 7 bankruptcy
case. No further action on the September Garnishment was taken during the
pendency of the bankruptcy until after Ledin received his chapter 7 discharge on
April 14, 2015.
7 See KAN. STAT. ANN. § 60-735 (2015 Supp.).
8 Ex. G, pp. 74-75.
9 Ledin v. FinanceCo of Kansas, Inc., et al. (In re Ledin), Adv. No. 14-5193 (Bankr. D. Kan.).
10 See the order entered in that proceeding for a more detailed description of the litigation waged in
this Court, and, before that, the Reno County District Court. See Adv. No. 14-5193, Dkt. 51.
11 Ex. A. Ledin v. Commerce Bank, Case No. 2015 CV 295 (D. Ct. of Reno County, Kan.).
While in chapter 7, Ledin (a prolific pro se litigant) filed an adversary
proceeding against Commerce, its branch manager, FinanceCo, and its attorney who
handled the garnishments, claiming an “illegal garnishment” and seeking damages
for their impairing his exempt interest in the social security funds and violating
certain federal statutes and regulations in connection with the June and September
Garnishments.9 I dismissed that proceeding for failure to state a claim.10
In September of 2015, after he was discharged, Ledin sued Commerce in Reno
County District Court for return of the garnished funds.11 Commerce answered,
denied liability, and filed a third-party interpleader petition, adding FinanceCo as a
third-party defendant and seeking to pay into court the $348.49 it held, plus Ledin’s
filing fee of $202.80 and service costs, for a total of $566.29.12 On October 30, 2015,
the state court heard and entered an order granting the third-party petition for
interpleader, directing Commerce to pay the funds into the court’s registry, which it
did, and requiring Ledin and FinanceCo to each prosecute their respective claims to
the money.13 On November 3, 2015, without notice to the other parties, Ledin
presented an ex parte order directing the Reno County court’s clerk to pay over the
interpleaded funds of $566.29 to him. Another Reno County judge entered that order
and the clerk paid the funds to Ledin that day.14
12 Ex. B.
13 Ex. E.
14 Ex. F.
15 Ex. G, 26-32.
16 Dkt. 66. Ledin also demanded a jury trial on that motion. Dkt. 91. I denied that demand from the
bench on March 3, 2016, see Dkt. 94, 96. Civil contempt claimants are not entitled to a trial by jury
on either the issue of contempt or compensatory damages. See Federal Trade Commission v.
Kuykendall, 371 F.3d 745, 751-54 (10th Cir. 2004); Reliance Ins. Co. v. Mast Constr. Co., 159 F.3d
1311, 1318 (10th Cir. 1998). See also Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 41 (1989)
(Seventh Amendment protects right to jury trial only if cause of action is legal in nature, as opposed
to equitable); Mountain Am. Credit Union v. Skinner (In re Skinner), 917 F.2d 444, 447 (10th Cir.
1990) (bankruptcy courts are empowered to exercise civil contempt and equitable powers under 11
U.S.C. § 105(a)); Paul v. Iglehart (In re Paul), 534 F.3d 1303, 1306-07 (10th Cir. 2008) (bankruptcy
courts have equitable power under § 105(a) to enforce and remedy violations of the discharge
When FinanceCo learned of the ex parte order, it filed a Motion to Alter and
Amend on November 25, 2015.15 That motion noted that that the earlier order had
been entered without notice to any other parties and requested that the funds be
returned to the court registry so that the court could determine to whom they should
be paid. In response to that motion, Ledin filed his “Motion for an Order to Show
Cause” here, seeking to hold FinanceCo in contempt of his bankruptcy discharge by
filing the reconsideration motion in Reno County.16 On January 6, 2016, the Reno
injunction); Barrientos v. Wells Fargo Bank, N.A., 633 F.3d 1186 (9th Cir. 2011) (Sections 105(a) and
524 do not create a private cause of action for damages for violation of the discharge injunction; the
remedy for discharge injunction violations is an order of contempt). In any event, FinanceCo declined
to consent to a jury trial by a bankruptcy judge, thereby precluding my conducting a jury trial on
Ledin’s contempt proceeding. 28 U.S.C. § 157(e).
17 Ex. H.
18 Ex. J.
County court set the ex parte order aside and directed that a hearing be scheduled to
determine who was entitled to recover the garnished funds.17 The state court did not
direct Ledin to return the funds and he hasn’t. On February 26, FinanceCo orally
moved to dismiss Ledin’s suit with prejudice and to allow him to retain all the
interpleaded funds. The Reno County court entered an agreed order signed by counsel
for FinanceCo and Ledin dismissing the state case on February 26, 2016.18
Ledin claims that FinanceCo’s actions violated the discharge injunction and
caused him both bodily harm and emotional distress. He seeks damages of $150,000.
But, other than stress, loss of sleep, and distraction, Ledin offered no medical
evidence of any specific physical or psychic injury to support either the validity or the
extent of his damage claim at trial. Nor did he offer any evidence of lost interest or
income as a result of FinanceCo’s actions. Ledin called Mr. Dennis Lubbers,
FinanceCo’s corporate secretary, in his case in chief. Mr. Lubbers testified that he
had no knowledge of Ledin’s file and hadn’t been involved in the collection of the
judgment or in instructing FinanceCo’s lawyers as they represented the company’s
Ledin submitted a trial brief.19 I offered FinanceCo an opportunity to file a
responsive brief, but its counsel advised the Clerk that they would stand on the
evidence, their pleadings, and closing argument.
19 Dkt. 105.
20 11 U.S.C. § 524(a).
21 Mountain Am. Credit Union v. Skinner (In re Skinner), 917 F.2d 444, 447 (10th Cir. 1990)
(bankruptcy courts are empowered to exercise civil contempt and equitable powers under 11 U.S.C. §
105(a)); Paul v. Iglehart (In re Paul), 534 F.3d 1303, 1306-07 (10th Cir. 2008) (bankruptcy courts have
equitable power under § 105(a) to enforce and remedy violations of the discharge injunction).
22 KAN. STAT. ANN § 60-732 (2005) and § 60-733 (2015 Supp.). See In re Hilgers, 352 B.R. 298, 309
(Bankr. D. Kan. 2006), aff’d 371 B.R. 465 (10th Cir. B.A.P. 2007), aff’d 279 Fed. Appx. 662 (10th Cir.
May 20, 2008). See also In re Boden, 61 B.R. 329, 331 (Bankr. D. Kan. 1986) (construing predecessor
statute § 60-717 in effect until its repeal in 2002 and replacement with § 60-732(c)).
Ledin claims that FinanceCo’s motion to reconsider the ex parte order violated
his discharge injunction because FinanceCo was continuing to collect a discharged
debt. That is incorrect. Section 524(a)(1) provides that the discharge voids any
judgment as to a personal obligation of the debtor with respect to a discharged debt
and subsection (a)(2) states that the discharge “operates as an injunction against the
commencement or continuation of an action … to collect … any such debt as a
personal liability of the debtor ….”20 Collecting a discharged pre-petition judgment in
personam is barred and doing so would be punishable as civil contempt under 11
U.S.C. § 105(a).21 But, nothing in § 524 precludes a creditor from enforcing a
prepetition garnishment lien that has survived the debtor’s chapter 7 discharge. This
is all FinanceCo sought to do and it is not a violation of the discharge injunction.
Under Kansas law, FinanceCo’s order of garnishment created a lien on the
debtor’s deposits in the hands of Commerce.22 A garnishment order “shall have the
effect of attaching: . . . funds, credits or other indebtedness belonging to or owing the
judgment debtor . . . 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 order.”23 Thus, when the order of garnishment was served
on Commerce prior to Ledin’s bankruptcy filing, FinanceCo obtained a lien on the
$333.49 that Commerce held on deposit for Ledin.24 Because the Reno County court
did not issue an order directing Commerce to pay the funds to FinanceCo before Ledin
filed his bankruptcy case, their ownership never changed.25 The deposits continued
to be Ledin’s property, though subject to FinanceCo’s garnishment lien.26 When he
filed his bankruptcy petition, those funds became property of the bankruptcy estate
and still remained subject to the lien.27
23 KAN. STAT. ANN § 60-732(c)(1) (2005) (Emphasis added).
24 See Johnson v. Brant, 38 Kan. 754, 17 P. 794 (1988) (when judgment creditor garnishes a bank he
acquires a lien on only such non-exempt property of the judgment debtor as the bank holds when the
garnishment is served); R.T. Davis Mill Co. v. Bangs, 6 Kan. App. 38, 49 P. 628 (1897) (garnishment
attaches a lien on the property of the debtor in the hands of the garnishee from the time of the
service of the same); In re Rodriguez, 140 B.R. 562, 564 (Bankr. D. Kan. 1992) (garnishment lien
attaches at time of service of order of garnishment, regardless of whether garnished funds were ever
paid into registry of court).
25 See In re Thomas, 215 B.R. 873, 875 (Bankr. E.D. Mo 1997) (garnished funds are owned by
judgment debtor until court orders these funds paid over to judgment creditor); In re Bensen, 262
B.R. 371, 380-81 (Bankr. N.D. Tex 2001) (lien against funds in bank account was fixed where writ of
garnishment was served prepetition but garnishment action was not completed prepetition; title to
garnished property did not pass to judgment creditor merely upon service of writ); In re Drum Corps
Ass’n of Spokane, 22 B.R. 929, 933 (Bankr. E.D. Wa. 1982) (where order to pay out garnished funds
was stayed by debtor’s bankruptcy filing, debtor still possessed an interest in the funds and they
became property of the estate).
26 KAN. STAT. ANN § 60-739(b) (2015 Supp.) provides that if an order to pay in is not issued within 60
days of the garnishee’s answer, the garnishee may release the deposits to the judgment debtor.
27 11 U.S.C. § 541(a); In re Johnson, 479 B.R. 159 (Bankr. N.D. Ga 2012) (funds in garnishee's
possession at time of bankruptcy filing are property of the estate; auto stay prevented judgment
creditor from seeking disbursement of any funds held by garnishee, but creditor's lien attaches to
garnished funds upon service of garnishment order and bankruptcy filing does not affect the
judgment creditor's lien).
The trustee did not avoid the garnishment lien during the chapter 7
administration.28 Liens that are not avoided during bankruptcy administration “ride
through” a chapter 7 bankruptcy case and survive the debtor’s discharge.29 Though
FinanceCo was certainly stayed from enforcing that lien during the pendency of the
bankruptcy case by the automatic stay, nothing precluded it from enforcing that lien
post-discharge.30 Section 524(a)(1) enjoins continuing to collect a debt “as a personal
liability of the debtor.” It does not enjoin a creditor from realizing on a prepetition
lien. In In re Johnson, a Georgia bankruptcy court explained that the automatic stay
doesn’t require a garnishing creditor to dismiss its garnishment action or release a
garnishment lien, but that before the creditor takes further action, stay relief would
be required.31 Here, no stay relief is required for FinanceCo to proceed to realize upon
its garnishment lien because there is no longer a stay. It expired upon the entry of
the debtor’s discharge order.32 Accordingly, nothing prevented FinanceCo from filing
its motion to alter and amend the November 2015 court order that set the
interpleaded funds over to Ledin. That motion merely sought to restore the parties to
28 For example, in appropriate circumstances, the trustee could have avoided the lien as a
preferential transfer under 11 U.S.C. § 547(b), or if the garnishment lien encumbered exempt
property, the debtor might have avoided the lien as impairing an exemption under 11 U.S.C. § 522(f).
29 See Johnson v. Home State Bank, 501 U.S. 78, 82-83 (1991) (mortgage survives chapter 7
discharge; only the personal liability of debtor is extinguished by the discharge); Long v. Bullard, 117
U.S. 617, 620-21 (1886); In re Johnson, 479 B.R. 159, 171 (Bankr. N.D. Ga. 2012); In re Willis, 199
B.R. 153, (Bankr. W.D. Ky. 1995) (a lien “rides through” bankruptcy unaffected, unless the lien is
disallowed or avoided).
30 The automatic stay terminates the earlier of the time the case is closed or a discharge is granted or
when property is no longer property of the estate. 11 U.S.C. § 362(c)(1) and (2).
31 479 B.R. 159, 171-72.
32 11 U.S.C. § 362(c)(2)(C).
their previous litigation positions so that the state court could determine whether
FinanceCo or Ledin was entitled to the funds. The discharge doesn’t enjoin that.
In February, 2016, FinanceCo abandoned its efforts to enforce its garnishment
lien and recover the garnished funds and, with the debtor’s approval, the Reno
County case was dismissed with prejudice.33 Ledin remains in possession not only of
the $348.49 garnished from his Commerce accounts, but also his state court case
filing fee and costs that Commerce interpleaded into court. He has been more than
made whole. In a somewhat similar setting, another Kansas bankruptcy judge has
held that once a garnishing creditor released garnished wages to the debtor, that
debtor’s motion to avoid the garnishment lien was moot.34 Even if the facts and law
warranted my finding that FinanceCo had violated the discharge injunction, Ledin
has not demonstrated any compensatory damages that I could award beyond
restoring to him his funds on deposit with Commerce.
33 Ex. J.
34 See In re Rodriguez, 140 B.R. 562, 564 (Bankr. D. Kan. 1992).
While this Court takes discharge violations very seriously, FinanceCo’s effort
to enforce a prepetition garnishment lien in rem is not such a violation. Even if I were
to find FinanceCo in contempt, which I do not, Ledin has been made whole by
recovering and retaining all of the interpleaded funds of $566.29. Lacking any factual
or legal support, Jonathan Ledin’s Motion for Contempt against FinanceCo is
# # #
- Category: Judge Nugent
- Published: 07 April 2016
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- Hits: 103
In Re Prucres Inc, 14-10284 (Bankr. D. Kan. Mar. 24, 2016) Doc. # 267
SIGNED this 24th day of March, 2016.
DESIGNATED FOR ONLINE PUBLICATION
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IN RE: )
PRUCRES, INC., ) Case No. 14-10284
) Chapter 11
ORDER DENYING CREDITOR MP PROPERTY PARTNERS – 90 ACRES, LLC’s
MOTION TO DISMISS DEBTOR’S OBJECTION TO
CLAIM NO. 3 (Dkt. 246) and GRANTING DEBTOR’S MOTION
TO ALLOW CLAIM OBJECTION OUT OF TIME (Dkt. 258)
Even when a confirmed plan of reorganization clearly sets a date for claims objections
to be filed, in appropriate circumstances, the Court may entertain a late-filed claim objection
where there has been excusable neglect. To determine whether the late objection is the
product of excusable neglect, courts consider whether the claimant has been prejudiced, how
long the delay lasted, why it occurred, and whether the objector has acted in good faith.
When Prucres filed this case on February 24, 2014, it scheduled MP Property
Partners-90 acres, L.L.C.’s (MP) debt as “disputed.” In its November 2014 plan, Prucres
Case 14-10284 Doc# 267 Filed 03/24/16 Page 1 of 8
claimed it owed MP nothing and telegraphed that it would object to MP’s claim.1 That
objection should’ve been filed on June 30, 2015; instead it was filed 65 days later on
September 3, a significant, but not damaging delay.2 Prucres’ counsel concedes that he did
not calendar the 60-day objection deadline imposed by the plan, but he also says he suffered
a concussion in a car wreck on June 26 and was out of the office for several weeks. Finally,
though this case has had numerous ups and downs, nothing about debtor’s failure to file a
timely motion to extend the claims objection deadline suggests a lack of good faith. Counsel
have been focused on selling the principal asset of the debtor, a process that has proven to be
laborious and contentious. MP and Prucres dispute their respective percentages of interest
in that asset under a Tenancy in Common Agreement. Discovery has closed in this (and the
claims objection) dispute and on February 18, 2016 the matters were set for a May trial. A
final pretrial order is due April 1.
Courts should resolve disputes on the merits when they can. MP has long known that
Prucres disputes its liability on MP’s claim. Very little prejudice attaches to allowing Prucres’
untimely objection to be heard on the merits. MP’s motion to dismiss Prucres’ objection to its
claim is therefore denied and Prucres’ motion to allow claim objection out of time is granted.3
Sometime before Prucres filed this case, MP and Prucres entered into a Tenancy in
Common Agreement under which they acquired a large tract of undeveloped real estate in
Santa Clarita, California. Their respective interests in the land were to be determined by the
provisions of that agreement. MP also loaned Prucres money, secured by a deed of trust on
its tenancy in common interest. When MP’s and Prucres’ principals fell out, litigation ensued
1 Dkt. 115. The plan was confirmed on May 1, 2015. Dkt. 162 (Confirmation Order).
2 Dkt. 207.
3 Debtor appears by its attorney Nicholas R. Grillot. Creditor MP Property Partners – 90
Acres, LLC appears by its attorney J. Michael Morris.
Case 14-10284 Doc# 267 Filed 03/24/16 Page 2 of 8
in California in May of 20134 and, in February of 2014, Prucres filed this chapter 11 case,
scheduling MP‘s claim as unliquidated and disputed.5 On March 20, 2014, MP filed its proof
In November of 2014, Prucres filed its chapter 11 plan.7 In ¶ 3.1 of the plan, it defined
“Allowed Claim” as, among other things, one that has been timely filed and to which no
objection has been filed “on or before the Distribution Date” or before another “applicable
period of limitation fixed by the Bankruptcy Code or by an Order of the Court.” Though
capitalized, the term “Distribution Date” is not defined in the plan. In ¶ 21.1 of the Plan, the
debtor proposed to object to claims within 60 days after the confirmation order. In ¶ 13.3, the
plan provision dealing with MP’s alleged secured claim, Prucres explicitly stated that it owed
MP nothing and that it intended to object to MP’s claim. The confirmation order at ¶ 29
incorporated the plan’s terms and conditions.8
The plan was confirmed on May 1, 2015 and the confirmation order provided that a
motion to sell the Santa Clarita land would be filed within 30 days.9 That motion was filed
on June 25, 2015.10 On June 26, Prucres’ counsel was in a car wreck and sustained a
concussion that sidelined him for several weeks. Before that, however, he had not calendared
the 60-day claim objection deadline. In July, MP’s first lawyer withdrew and Mr. Morris
entered the case on behalf of MP. Prucres filed its objection to MP’s claim on September 3, 65
4 I note that in MP’s state court petition attached to Prucres’ objection, it states a number of
claims, but none based upon the note or deed of trust.
5 Prucres also owns real estate in Wichita, Kansas.
6 Proof of Claim No. 3.
7 Dkt. 115.
8 Dkt. 162.
9 Dkt. 162, p. 11. The parties reserved their rights as to the sale proceeds and to MP’s
disputed secured claim.
10 Dkt. 174. At a hearing on June 18, 2015 on the Debtor’s motion for instructions regarding
the sale and confirmation order (Dkt. 167), the Court ordered that a Motion to Sell be filed
within 7 days.
Case 14-10284 Doc# 267 Filed 03/24/16 Page 3 of 8
days late.11 That same day, Prucres filed a Motion for determination of the parties’ rights to
the Santa Clarita sale proceeds.12 When MP responded on October 7, after receiving an
unopposed extension of time to do so, current counsel raised the missed deadline as a defense
to the claim objection.13 On October 22, I directed the parties to file a Rule 26(f) Report of
Parties Planning Meeting, which they did, and on November 18, I accepted the parties’
proposed scheduling plan. Discovery had already begun and, even though the discovery
deadline has now passed, the parties have agreed to and taken several depositions after its
close. I set these matters for trial in May and await a pretrial order that will come due on
April 1. On February 24, MP filed this Motion to Dismiss Prucres’ objection to its claim.14
After a brief scheduling hearing on March 3, Prucres filed a written response to that motion
as well as its own motion for leave to object to MP’s claim out of time.15 MP replied to those
The current pretrial schedule also controls the parallel dispute between Prucres and
MP about the meaning of the Tenancy in Common Agreement and the extent of debtor’s and
MP’s respective interests in the land and sale proceeds, a matter that must be resolved before
I can authorize a distribution of the Santa Clarita sale proceeds.17 In their pleadings on these
motions, the parties agree that the sale has yet to be closed because, even though there is a
cash buyer under contract, MP wishes to use the proceeds in an I.R.C. § 1031 exchange and
believes it cannot allow the sale to close into escrow without running afoul of tax
11 Dkt. 207.
12 Dkt. 208.
13 Dkt. 221. That same day, MP also responded to Prucres’ related Motion for determination
of rights in the sale proceeds. Dkt. 220
14 Dkt. 246.
15 Dkt. 258 and 259.
16 Dkt. 261 and 262.
17 See Dkt. 208 (Prucres’ motion for determination of parties’ rights and interests) and Dkt.
220 (MP response).
Case 14-10284 Doc# 267 Filed 03/24/16 Page 4 of 8
For the purpose of these motions, I assume without deciding that the 60-day claim
objection deadline provided for in ¶ 21.1 of the Plan binds the debtor and the parties under
11 U.S.C. § 1141(a). However, Fed. R. Bankr. P. 9006(b)(1) provides that the Court may, upon
a showing of excusable neglect, relieve a party from missing certain deadlines that are
specified “by these rules or by a notice given thereunder or by order of court” even when the
movant seeks relief after the deadline has run. Here, the claims objection deadline was
contained in the debtor’s plan. But because the plan’s terms and conditions were incorporated
in the confirmation order, the objection deadline was provided “by . . . an order of the Court.19
I therefore conclude that Rule 9006(b)(1) applies.
In the Pioneer Investment case, the Supreme Court set out a four factor test for courts
to use in determining under Rule 9006(b)(1) whether a party’s “neglect” was excusable.20
Therefore, I consider (1) the danger of prejudice to MP of allowing the objection out of time;
(2) the length of the delay in objecting to the claim; (3) Prucres’ reasons for the delay; and (4)
Prucres’ good faith in requesting additional time. The excusable neglect inquiry is a broad,
equitable one “to balance the interests of the affected parties, guided by the overriding goal
of ensuring the success of the reorganization.”21 The facts set forth above support my
18 26 U.S.C. § 1031 (like-kind exchanges of investment property allow the tax on the gain
from a sale to be deferred, if the sale proceeds are reinvested in similar property).
19 See Dkt. 162, p. 10 ¶ 29. In re Heartland Steel, Inc., 2003 WL 21508233 at *4-*5 (S.D. Ind.
June 26, 2003) (construing whether objection deadline was a matter of contract or court
order; confirmation order gives effect to all plan terms, substantive and procedural, and
thus “prescribes or allows” them and Rule 9006 applies, disagreeing with Ampace), aff’d 389
F.3d 741 (7th Cir. 2004). But see In re Ampace Corp., 279 B.R. 145, 151-52 (Bankr. D. Del.
2002) (mere attachment of chapter 11 plan to confirmation order did not incorporate the
plan by reference into the confirmation order).
20 Pioneer Inv. Serv. Co. v. Brunswick Assocs. Ltd. Partnership, 507 U.S. 380, 395 (1993)
(discussing claims bar date and late-filed claim in chapter 11 case).
21 In re Petroleum Production Management, Inc. 240 B.R. 407, 413 (Bankr. D. Kan. 1999).
Case 14-10284 Doc# 267 Filed 03/24/16 Page 5 of 8
concluding that all four factors are met here.
Long before this chapter 11 case was filed, these parties have been embroiled in
disputes about what Prucres owes MP and their respective interests in the Santa Clarita
land. When this case was filed in February of 2014, the parties were in litigation in California
state court. If MP had any doubt about its claim being in dispute, that doubt should’ve been
resolved when Prucres scheduled its claim as “unliquidated and disputed.” That’s likely why
MP filed a proof of claim.22 MP sought stay relief and, as the parties agreed in an order
resolving it, Prucres filed a plan in November of 2014. In that plan, Prucres stated plainly
that it did not owe MP anything and that it planned to object to MP’s claim.23 MP has long
had reason to be aware of Prucres’ intentions. Though it preserved the timeliness defense in
its October 7, 2015 response to Prucres’ late objection, MP has had every opportunity to
conduct discovery and engage in other pretrial activities. Indeed, MP did not file its motion
to dismiss the claim objection until February 24, 2016, nearly five months after it initially
raised the timeliness issue. There is no hint here that it has been prejudiced or surprised.24
The length of delay—65 days—is long, but is ameliorated by MP’s previous knowledge
of Prucres’ complaints and contentions about its claim and the reasons for the delay. There
are two: a calendar failure and a car wreck. The failure to calendar is inexcusable—debtor’s
counsel practices with a large law firm that boasts decades of expertise and experience in
22 In chapter 11, a claim is “deemed filed” unless it is disputed in the schedules, see 11
U.S.C. § 1111(a) and Fed. R. Bankr. P. 3003(b)(1). If a claim is scheduled as disputed, the
creditor must file a proof of claim, Fed. R. Bankr. P. 3003(c)(2), and if that claim is not
objected to, it is again deemed allowed as filed unless an objection is filed. See 11 U.S.C. §
23 Dkt. 115, Plan, ¶ 13.3. The Plan did not include a detailed description of the merits of
24 See Matter of Southland Corp., 19 F.3d 1084, 1087 (5th Cir. 1994) (debtor’s counsel’s letter
brief on objection to attorney fees claim satisfied writing and filing requirement of Fed. R.
Bankr. P. 3007 and constituted a proper objection; no particular form of objection is
required by Rule 3007); In re 804 Congress, L.L.C., 529 B.R. 213, 221-22 (Bankr. W.D. Tex.
2015) (citing Southland).
Case 14-10284 Doc# 267 Filed 03/24/16 Page 6 of 8
this bankruptcy court. Had the deadline been properly calendared, one of counsel’s many
colleagues at the firm could have filed a timely objection or sought an extension of the
deadline. But I must also consider that debtor’s counsel was out of action for several weeks
due to a concussion received in a serious car accident. During that time, the deadline in
question passed. While it is a close call, I reluctantly conclude that the accident and
concussion are circumstances beyond the debtor’s counsel’s control and that MP has not been
prejudiced by the resulting delay.
Finally, there is no indication that Prucres laid in the weeds and only stated its
objections to MP’s claim at the last moment.25 MP has always known of Prucres’ objection.
MP examined the debtor’s principal as early as July of 2014 and certainly had an opportunity
to explore why the debtor scheduled MP’s claim as disputed. Indeed, MP waited nearly five
months to seek dismissal of Prucres objection to its claim. Meanwhile, discovery proceeded
on both the claim objection and the determination of each party’s interest under the tenancy
in common agreement. Neither party has involved the court in any discovery disputes. The
matter is set for trial in a few weeks and both parties have made it clear that they need a
prompt determination on the claim and the proportionate ownership interests to close the
sale. Granting this relief under Rule 9006(b)(1) furthers the effort to resolve the fundamental
dispute between them on its merits.
For these reasons, I GRANT the debtor’s motion to object to MP’s claim out of time
(Dkt. 258) and DENY MP’s motion to dismiss that claim objection (Dkt. 246). I remind counsel
of the necessity of providing me with a final pretrial order not later than April 1, 2016. In the
25 Cf. In re Hyman Companies, 497 B.R. 465, 471-74 (Bankr. E.D. Pa. 2013) (debtor’s
supplemental objection to claim raised a new basis for objection that was not previously
asserted in its original objection to creditor’s proof of claim and was time-barred by the
claim objection deadline set by debtor in its plan).
Case 14-10284 Doc# 267 Filed 03/24/16 Page 7 of 8
interest of reaching the prompt decision that both parties seek, and to further the closing of
the Santa Clarita sale, neither the pretrial order deadline nor the trial setting will be
continued. Trial counsel shall appear in person at a final pretrial conference at 11:00 on April
21, 2016 in Room 150 and trial remains set for 9:00 a.m., May 4, 2016, in Room 150.
# # #
Case 14-10284 Doc# 267 Filed 03/24/16 Page 8 of 8
- Category: Judge Nugent
- Published: 21 March 2016
- Written by Judge Nugent
- Hits: 117
Dold v. Rainbows United Inc, 15-05144 (Bankr. D. Kan. Mar. 4, 2016) Doc. # 20
SIGNED this 4th day of March, 2016.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANASAS
RAINBOWS UNITED, INC.
LORRAINE A. DOLD,
RAINBOWS UNITED, INC.
Case No. 09-12457
Adv. No. 15-5144
ORDER GRANTING DEFENDANT’S MOTION TO DISMISS
Case 15-05144 Doc# 20 Filed 03/04/16 Page 1 of 16
When Rainbows United’s chapter 11 plan was confirmed, its confirmation
order discharged “any debt” that Rainbows had incurred up to that time, no matter
whether the holders of those debts had filed proofs of claim, the claims had been
allowed, or the claimants had accepted the plan.1 The Bankruptcy Code defines “debt”
as “liability on a claim” and “claim” as a “right to payment,” one that can be, among
other things, merely contingent.2 A contingent claim arises at the time the conduct
that causes it occurs, even if the claim is not asserted or does not actually accrue until
Before Rainbows filed its chapter 11 case in 2009, Lorraine Dold was its
president. And, while she was president, Rainbows failed to remit trust fund payroll
taxes to the Internal Revenue Service for the years 2007, 2008, and 2009. Rainbows
scheduled Ms. Dold as a creditor because it owed her a small amount for employee
expenses. In its chapter 11 plan, Rainbows proposed that, after confirmation, those
taxes (over $2.0 million plus penalties) would be paid over a five year period. Under
the plan, the IRS would forbear pursuing the penalties if Rainbows paid the taxes
and interest, but would not forgive them. The plan provided that it could collect the
penalties if the debtor missed any payments. After the plan was confirmed in 2010,
1 11 U.S.C. § 1141(d)(1).
2 See 11 U.S.C. § 101(12) and (5)(A), respectively.
3 Watson v. Parker (In re Parker), 264 B.R. 685 (10th Cir. BAP 2001), aff’d 313 F.3d 1267
(10th Cir. 2002), cert. denied 540 U.S. 965 (2003); Jeld-Wen, Inc. v. Brunt (In re Grossman’s
Inc.), 607 F.3d 114, 125 (3d Cir. 2010); Grady v. A.H. Robins Co., Inc., 839 F.2d 198 (4th Cir.
1988); Republic Bank & Trust Co. v. Hutchinson, 444 B.R. 728 (Bankr. W.D. Ky. 2011); In
re Huffy Corp., 424 B.R. 295 (Bankr. S.D. Ohio 2010); In re Pan American Hosp. Corp., 364
B.R. 839 (Bankr. S.D. Fla. 2007).
Case 15-05144 Doc# 20 Filed 03/04/16 Page 2 of 16
Rainbows paid all of the taxes and interest. Only then did the IRS assess a “trust
fund recovery penalty” (TFRP) against Ms. Dold which it began to collect by setting
off her income tax refunds.4
Rainbows’ articles of incorporation include a provision that indemnifies its
officers against threatened legal action that arises out of an officer’s conduct if that
officer’s “acts are not in question” or if, in the opinion of independent legal counsel,
that officer “acted in good faith and in the reasonable belief” that the actions were in
the best interests of Rainbows.5 After the IRS began to collect the TFRP from her in
2015, Ms. Dold sued Rainbows in state court for indemnification against that
obligation. Rainbows removed that case here and moved to dismiss the complaint for
failure to state a plausible claim.
Assuming that Ms. Dold’s “acts are not in question” or that she “acted in good
faith” such that the corporation’s indemnification provisions have been triggered, her
claim against Rainbows for that indemnity arose when the corporation failed to remit
the taxes beginning in 2007. Federal law made it likely she would be liable for the
TFRP beginning at that time even though the IRS did not assess that liability against
her until much later. Accordingly, Ms. Dold’s indemnification claim, like all of
Rainbows’ other pre-confirmation debts, has been discharged. Because she has failed
to state a claim against the debtor, her complaint must be dismissed.6
4 26 U.S.C. §6672(a). This penalty is sometimes referred to as a Trust Fund Recovery
Penalty, hence the acronym TFRP.
5 Adv. Dkt. 1, Complaint, p. 7.
6 Plaintiff Lorraine Dold is represented by attorney Mark Ayesh. Defendant Rainbows
United, Inc. is represented by Patricia A. Reeder in this adversary proceeding.
Case 15-05144 Doc# 20 Filed 03/04/16 Page 3 of 16
Rule 12(b)(6) Standards
A plaintiff’s complaint states a claim upon which relief may be granted when
the facts as pled could plausibly support a cause of action against the defendant
without regard for whether plaintiff could ultimately prevail on the claim.7 The claim
must be plausible on its face.8 A plausible claim is one that shows more than a sheer
possibility and less than a probability that she is entitled to the relief she seeks.9
For purposes of this motion, I must take the allegations Ms. Dold pled in the
petition to be true.10 In addition, I can also consider matters filed in Rainbows’
chapter 11 bankruptcy case without converting the motion to dismiss to one for
summary judgment under Fed. R. Civ. P. 12(d).11 Accordingly, I have taken judicial
notice of Rainbows’ schedules, claims register, chapter 11 plan, and the order of
confirmation entered in the case.12 The following facts control this motion.
7 Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) (In ruling on a motion to
dismiss the judge must accept all allegations as true and may not dismiss on the basis that
it appears unlikely the allegations can be proven.).
8 Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007) (enough facts must be alleged tonudge the claim across the line from conceivable to plausible).
9 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
10 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (Inreviewing the sufficiency of the complaint, the court assumes the truth of the plaintiff’s
well-pleaded factual allegations and views them in the light most favorable to the
11 See Navajo Nation v. Urban Outfitters, Inc., 935 F. Supp. 2d 1147, 1157 (D.N.M. 2013)
(Conversion of motion to dismiss to one for summary judgment is not required under Rule
12(d), where court can properly take judicial notice of the extra-pleading materials); J.P.
Morgan Trust Co. Nat. Ass'n v. Mid-Am. Pipeline Co., 413 F. Supp. 2d 1244, 1257-58, 126061
(D. Kan. 2006).
12 Navajo Nation, supra; Grynberg v. Koch Gateway Pipeline Co., 390 F.3d 1276, 1278 n.1
(10th Cir. 2004); Van Woudenberg v. Gibson, 211 F.3d 560, 568 (10th Cir. 2000) (A court ispermitted to take judicial notice of its own files and records), abrogated on other grounds by
McGregor v. Gibson, 248 F.3d 946, 955 (10th Cir. 2001).
13 Ms. Dold takes no issue with Rainbows’ factual statement. Adv. Dkt. 14, pp. 2-3.
Case 15-05144 Doc# 20 Filed 03/04/16 Page 4 of 16
Rainbows United, Inc. is a not-for-profit corporation in Wichita, Kansas. It filed
a chapter 11 bankruptcy petition here on July 30, 2009. Lorraine Dold was the
president and chief executive officer of Rainbows from July 5, 1988 until she was
terminated on August 20, 2009. Ms. Dold was listed as a creditor on Schedule E (for
unreimbursed business expenses) and received notice of Rainbows’ bankruptcy and
the claims bar date. She did not file a proof of claim.14
The IRS did.15 Its unsecured priority tax claim against Rainbows as of the date
of the petition for unpaid quarterly employee withholding trust fund taxes incurred
during the years 2007-2009 totaled $2,355,689.32 in taxes and interest. The IRS also
asserted an unsecured general claim for $764,366.07, representing a penalty on the
unpaid trust fund tax deposits. Ms. Dold alleges in paragraph 8 of her complaint that
the amount of the penalties assessed and now at issue exceeds $60,000. The precise
amount of the tax penalty is not relevant to deciding this motion.
After the bar date expired, Rainbows filed its chapter 11 plan of
reorganization.16 In it, Rainbows proposed to pay its priority tax claims, including
those owed to the IRS on account of unpaid trust fund taxes, with interest, within
five years of the effective date of the plan. So long as its plan payments remained
current, Rainbows would not have to pay the unsecured penalty. While forbearing to
collect the penalty, the IRS did not abate it. Instead, it expressly reserved the right
14 Ms. Dold’s claim for $86 in expense reimbursement was scheduled as an uncontested,
unsecured claim and, therefore, deemed allowed. See 11 U.S.C. § 1111(a) and § 502(a).
15 Proof of Claim 3-5, as amended July 1, 2010.
16 Dkt. 293.
Case 15-05144 Doc# 20 Filed 03/04/16 Page 5 of 16
to collect the penalty if Rainbows defaulted on its plan payments. The plan made no
provision for paying officer indemnification claims. Ms. Dold did not object to the
confirmation of Rainbows’ plan. The Court confirmed it on March 29, 2010.17 The
confirmation order modified the plan’s contents to provide that if Rainbows
successfully completed the plan payments, the penalty portion of the IRS’s tax claim
against Rainbows “will be waived and deemed satisfied.” Rainbows completed its plan
payments to the IRS, paying all outstanding employment taxes and interest in full as
provided under the plan.
Sometime in 2015, the IRS assessed the “responsible person” TFRP against
Ms. Dold as Internal Revenue Code § 6672 provides.18 It collected $2,037 from Ms.
Dold by setting off her tax refunds. When Ms. Dold was an officer at Rainbows, the
corporation’s Articles of Incorporation provided for the indemnification of officers and
directors against threatened or actual claims against them based upon their conduct
if the director or officer had “acted in good faith and in the reasonable belief that the
actions were in or not opposed to the best interests of the Corporation.”19 Ms. Dold
invokes that provision here and alleges that she has incurred attorney fees in excess
of $10,000 in defending against the IRS’s efforts to collect the TFRP.
In September of 2015, Ms. Dold sued Rainbows in state court to enforce the
indemnification provision under the Articles and state law, and requested damages
17 Dkt. 337.
18 26 U.S.C. § 6672.
19 Adv. Dkt. 1, Complaint, p. 7.
Case 15-05144 Doc# 20 Filed 03/04/16 Page 6 of 16
in excess of $70,000.20 Rainbows removed the lawsuit to the bankruptcy court21 and
filed the current motion to dismiss under Fed. R. Civ. P. 12(b)(6) as made applicable
to adversary proceedings by Fed. R. Bankr. P. 7012(b).22
Confirmation generally discharges all pre-confirmation debts of a
The effect of confirmation of a chapter 11 plan is described in Bankruptcy Code
§ 1141, in relevant part:
(a) Except as provided in subsection (d)(2) and (d)(3) of this section[neither of which is applicable here], the provisions of a confirmed plan
bind the debtor, . . . any creditor . . ., whether or not the claim . . . ofsuch creditor is impaired under the plan and whether or not suchcreditor has accepted the plan.
* * *
(d)(1) Except as otherwise provided in this subsection, in the plan, or in
the order confirming the plan, the confirmation of a plan – (A) dischargesthe debtor from any debt that arose before the date of such confirmation,
and any debt of a kind specified in section 502(g), 502(h), or 502(i) of this
title, whether or not ---
a proof of the claim based on such debt is filed or deemed
filed under section 501 of this title;
such claim is allowed under section 502 of this title; or
the holder of such claim has accepted the plan; . . .23
20 Lorraine A. Dold v. Rainbows United, Inc., Case No. 2015-cv-002354 District Court of
Sedgwick County, Kansas. Because Ms. Dold originally filed her case in Kansas state court,
she titled the opening pleading a “petition.” Now that the case has been removed to the
bankruptcy court, to avoid confusion, we will refer to it as the “complaint.” Adv. Dkt. 1, pp.
21 See 28 U.S.C. § 1452(a); Fed. R. Bankr. P. 9027; D. Kan. LBR 9027.1. The Court notes
that Ms. Dold has not filed the statement following removal as provided by Rule 9027(e)(3).
22 Adv. Dkt. 3, 4.
11 U.S.C. § 1141(d)(1) [Emphasis added].
Case 15-05144 Doc# 20 Filed 03/04/16 Page 7 of 16
Thus, except in circumstances not present here,24 when a plan is confirmed, the
debtor is discharged from any debt that arose prior to the confirmation date. Ms. Dold
says that her indemnification claim arose post-confirmation -- after Rainbows did not
pay its tax penalty and the IRS assessed the “responsible person” TFRP against her.
Officers of corporations that fail to pay trust fund taxes are subject to
Plaintiff’s personal liability for the TFRP derives from § 6672 of the Internal
Revenue Code. Employers are required to withhold federal social security and income
taxes from their employees' wages as those wages are paid, and pay over the taxes
quarterly to the government. The accumulated withholdings are deemed to constitute
a “special fund in trust for the United States” and are commonly referred to as trust
fund taxes.25 Officers and other principals are encouraged to withhold and deposit
trust fund taxes by I.R.C. § 6672(a), which penalizes those persons within an
employer's business who are responsible for collecting and paying over the withheld
taxes but willfully fail to do so.26
(a) General rule.--Any person required to collect, truthfully account for,
and pay over any tax imposed by this title who willfully fails to
collect such tax, or truthfully account for and pay over such tax, . . .
24 See §1141(d)(3) (Denying discharge if corporation is liquidated, the debtor does not
engage in business after plan consummation, and debtor would be denied a discharge under
§727(a) were the case filed in chapter 7).
25 26 U.S.C. § 7501(a).
26 Finley v. United States, 82 F.3d 966, 970 (10th Cir. 1996) on reh'g en banc, 123 F.3d 1342
(10th Cir. 1997). See also Smith v. United States, 894 F.2d 1549 (11th Cir. 1990) (IRS notprecluded from seeking recovery of trust fund penalty from corporation’s president as
responsible person, even though it had approved bankrupt corporation’s plan of
reorganization that paid the government less than total withholding tax owed; that is what
led to president’s liability under § 6672).
Case 15-05144 Doc# 20 Filed 03/04/16 Page 8 of 16
shall, in addition to other penalties provided by law, be liable to a
penalty equal to the total amount of the tax evaded, or not collected,
or not accounted for and paid over. . . .27
Here, the IRS considered Ms. Dold, Rainbows’ president, a responsible person under
§ 6672(a) and assessed the TFRP against her.28 She does not dispute her “responsible
person” status nor does she contest the IRS’s assessment of the TFRP. Instead, she
asserts a right to be indemnified by Rainbows against the collection of the TFRP from
her and against any legal fees she has incurred or will incur in defending against
Rainbows’ articles of incorporation indemnify officers against claims
that arise out of their good faith conduct in the line of duty.
Rainbows’ charter contains an indemnification clause that states as follows:
This Corporation shall indemnify any Director, officer, employee, or
agent of the Corporation who was or is the [sic] threatened to bemade a party in any legal proceedings, whether civil, criminal,
administrative, or investigative, if successful on the merits or
otherwise in defense, or even if unsuccessful in defense, if such
person or persons, as determined by the Directors, whose acts are not
in question, or by the legal opinion of independent legal counsel,
acted in good faith and in the reasonable belief that the actions were
in or not opposed to the best interests of the Corporation.29
27 26 U.S.C. § 6672(a), emphasis added. Even though § 6672 denominates it as a “penalty,”
it is assessed and collected in the same manner as taxes. See 26 U.S.C. § 6671(a).
28 Taylor v. Internal Revenue Service, 69 F.3d 411, 416 (10th Cir. 1995) (factors for
demonstrating “indicia of responsibility;” the crucial inquiry is whether the person had the
“effective power” to pay the payroll taxes); Denbo v. United States, 988 F.2d 1029 (10th
Cir.1993) (addressing the willful standard).
29 Adv. Dkt. 1, Complaint ¶ 11 [Emphasis added]. The above indemnification clause derives
from the Kansas Corporation Code which empowers corporations to indemnify officers,
directors, employees and agents. See KAN. STAT. ANN. § 17-6305 (2014 Supp.) as amended
July 1, 2010.
Case 15-05144 Doc# 20 Filed 03/04/16 Page 9 of 16
In her complaint, Ms. Dold concedes that the IRS can assess the § 6672 penalty
against her which, implicitly, is also conceding that she “willfully fail[ed] to collect
such tax, or truthfully account for and pay over such tax” as the statute provides. But,
even assuming that such an act could be found to be “in good faith” and “not opposed
to the best interests” of Rainbows—which is a stretch—the issue here is whether her
indemnity claim arose before or after the confirmation date. Rainbows contends that
it arose before confirmation and was discharged by operation of § 1141(d)(1). Ms. Dold
contends the claim is a post-petition claim because debtor “contrary to its
representations did not satisfy in full the unpaid employment taxes” and because the
IRS did not assess the penalty against her until the taxes and interest were paid, well
Claims arise when the conduct upon which they are based occurs, not
when the related cause of action “accrues.”
Section § 101(5)(A) defines a “claim” as a right to payment, whether or not such
right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.31 The
definition of “claim” in § 101 applies in all bankruptcy chapters. A “debt” is defined
under the Bankruptcy Code as “liability on a claim.”32 A “creditor” is a person that
has a claim against the debtor “that arose at the time of or before the order for relief
concerning the debtor.”33
30 Adv. Dkt. 14, p. 5.
31 11 U.S.C. § 101(5)(A) [Emphasis added].
32 11 U.S.C. § 101(12).
33 11 U.S.C. § 101(10)(A).
Case 15-05144 Doc# 20 Filed 03/04/16 Page 10 of 16
When a “claim” “arises” in bankruptcy is determined by the Bankruptcy Code,
not by state law rules for determining when a claim or cause of action accrues.34
Courts in the Tenth Circuit apply the “conduct theory” in determining when a claim
arises under the Bankruptcy Code. In Watson v. Parker,35 where the debtor was a
negligent attorney, the Tenth Circuit Court of Appeals concluded that the plaintiff,
who was the debtor’s client, had a legal malpractice claim that arose on the date the
malpractice allegedly occurred, prior to the date the debtor filed his chapter 7
The Tenth Circuit Bankruptcy Appellate Panel’s underlying Parker opinion
succinctly described the conduct theory: the “claim” arose “at the time the Debtor
committed the conduct on which the [c]laim is based.”37 If the conduct occurred
prepetition (or, as in this case, preconfirmation) and could give rise to liability, the
claim was a prepetition debt:
Here, Watson’s Claim involves legal representation that occurred
pre-petition. Regardless of when the Kansas statute of limitations
began to run, Watson had a contingent claim against the Debtor at
the moment the Debtor engaged in the conduct that formed the basis
for malpractice liability. As established by the record, the
34 In re Chance Industries, Inc., 367 B.R. 689, 699 (Bankr. D. Kan. 2006), citing Watson v.
Parker (In re Parker), 264 B.R. 685 (10th Cir. BAP 2001), aff’d 313 F.3d 1267 (10th Cir.
2002), cert. denied 540 U.S. 965 (2003). See In re Grossman’s Inc., 607 F.3d 114, 120-21 (3dCir. 2010) (rejecting state law accrual test and overruling Avellino & Bienes v. M. Frenville
Co., Inc. (In re M. Frenville Co., Inc.), 744 F.2d 332 (3d Cir. 1984), noting widespreadcriticism of Frenville decision; Frenville’s accrual test does not account for the fact that a
“claim” can exist under the Code before a right to payment exists under state law).
35 313 F.3d 1267, 1269 (10th Cir. 2002) (in adopting the conduct theory the Circuit Court
concluded that it is “more in tune with the plain language and the policy underlying the
Bankruptcy Code.”), affirming 264 B.R. 685 (10th Cir. BAP 2001).
36 Id. at 1270. Unlike the chapter 11 discharge, a chapter 7 discharge only discharges debts
that arose prior to the petition date. 11 U.S.C. § 727(b).
37 264 B.R. 685, 697 (10th Cir. BAP 2001).
Case 15-05144 Doc# 20 Filed 03/04/16 Page 11 of 16
malpractice occurred in May 1996, when the Debtor failed to respond
to the Show Cause Order, resulting in the dismissal of the Federal
Case. At that time, at a minimum, Watson had a contingent prepetition
claim against Debtor.38
The Bankruptcy Appellate Panel also mentioned a variant of the conduct
theory—the “narrow conduct” or prepetition relationship test.39 That test adds a
factor: the claimant must have had a specific relationship with the debtor at the time
of the offending conduct. In Parker, both the Appellate Panel and the Court of Appeals
concluded that because the plaintiff-client had a prepetition attorney-client
relationship with the debtor, her claim arose even before her cause of action accrued
because the debtor committed the malpractice during the attorney-client relationship
with her before he filed his case.40
Courts have applied the conduct and narrow-conduct theories in a variety of
legal settings, including claims for indemnity.41 The conduct that gives rise to a claim
38 264 B.R. at 698.
39 Id. at 697, n. 12.
40 Id. See also 313 F.3d 1267, 1269 n. 1.
41 See In re Hemingway Transport, Inc., 954 F.2d 1 (1st Cir. 1992) (in environmental cleanupcost setting, the court recognized that a “claim” encompasses an unliquidated, contingent
right to payment under a prepetition indemnification agreement executed by the debtor,
even though the triggering contingency does not occur until after the filing of the petition
and valuation of the claim is difficult); In re Mariner Post-Acute Network, Inc., 303 B.R. 42,
45 (Bankr. D. Del. 2003) (chapter 11 debtor’s former officers and directors state court claims
based on post-petition breach of prepetition contract of indemnification were prepetition
claims and barred by plan confirmation order and discharge injunction); In re Houbigant,
Inc., 188 B.R. 347 (Bankr. S.D.N.Y. 1995) (in trademark infringement setting, contractual
indemnification under license agreement arose as a contingent claim as of the date the
license agreement was executed; because agreement was executed prepetition any claim
arising out of contractual indemnity was prepetition claim and party with right toindemnity “knew or should have known” that it held a contingent indemnification claim on
date of filing); In re Amfesco Indus., Inc., 81 B.R. 777 (Bankr. E.D.N.Y. 1988) (directors and
former directors of chapter 11 debtors asserting indemnification claim under debtor’s
articles of incorporation and New York business corporation law for expenses related to
Case 15-05144 Doc# 20 Filed 03/04/16 Page 12 of 16
in bankruptcy will vary depending on the nature of the liability, be it tort, contract,
or tax.42 “Conduct theory” courts agree that finding that a claim arose at the earliest
point possible generally serves the underlying policy goals of bankruptcy by bringing
into the process as many claims as possible and equitably distributing the debtor’s
property among the appropriate creditors.43
A good example of the conduct theory’s application to a claim for
indemnification in a tax setting arose in In re Marshall, decided in this division in
2003.44 There, the chapter 7 debtor had previously operated a car dealership.
Marshall filed bankruptcy and received a chapter 7 discharge in 1995 and the case
was closed. Before Marshall filed his bankruptcy, a surety issued a retailers’ sales tax
bond in connection with the debtor’s car dealership. One of the conditions of the bond
was that the debtor would indemnify the issuer against any claims on the bond. After
Marshall was discharged, the surety paid the bond claim for sales tax that came due
and which the debtor had failed to remit before the bankruptcy petition was filed.
Post-discharge, the surety sued Marshall in state court for indemnification and
obtained a default judgment. Marshall moved to reopen his bankruptcy case to seek
a determination that the unscheduled surety debt had been discharged. The surety
argued that its debt arose post-petition because it had paid the bond claim nearly 3
years after debtor’s discharge. The bankruptcy court concluded otherwise:
post-petition threatened litigation grounded on the directors’ prepetition conduct was a
prepetition claim and not entitled to administrative expense priority).
42 See Saint Catherine Hospital of Indiana, LLC v. Indiana Family and Social Services
Admin., 800 F.3d 312, 317 (7th Cir. 2015).
44 In re Marshall, 302 B.R. 711 (Bankr. D. Kan. 2003).
Case 15-05144 Doc# 20 Filed 03/04/16 Page 13 of 16
Applying Parker and the conduct theory to USFG's indemnification
claim in the case at bar yields the conclusion that the USFG debt is
a prepetition debt subject to § 727(b). The debtor's agreement to
indemnify USFG for any claims under the retailers' sales tax bond
was entered into prepetition in 1987. At the moment that the
principal Marshall Blain Chevrolet, Inc. failed to remit the 1993 sales
taxes for June, July and August, USFG had an indemnification claim
against the debtor, contingent upon whether USFG would have to pay
the bond claim to the State of Kansas. The conduct which gives riseto USFG's indemnification claim and state court judgment, is the
debtor's indemnification agreement and nonpayment of the 1993
sales tax—both of which occurred prior to debtor's bankruptcy inJuly 1994. Accordingly, this Court concludes that USFG's
indemnification claim against the debtor is a prepetition claim . . .45
Similar reasoning suggests that Dold’s indemnification claim arose prior to the
confirmation of Rainbows’ plan. Ms. Dold served as an officer of Rainbows throughout
the periods when Rainbows failed to deposit the trust fund taxes. As president and
chief executive officer, she was in charge when the unpaid payroll tax deposits came
to light, leading to Rainbows filing its chapter 11 bankruptcy petition in 2009. From
the moment Rainbows failed to remit the payroll taxes, Ms. Dold was in jeopardy of
being assessed a TFRP.46 Whatever indemnification right she may have had arose
then, too. Even though the IRS did not assess the TFRP against her until after
Rainbows’ plan had been confirmed, she was in peril of it as early as 2007 and though
her claim against Rainbows may not have matured until she learned of the
assessment, that debt was certainly contingent from the moment Rainbows failed to
45 Id. at 716. Emphasis added.
46 See Kelley v. United States, 868 F. Supp. 1276 (W.D. Okla. 1994), aff’d 68 F.3d 483 (10th
Cir. 1995), cert. denied 516 U.S. 1119 (1996) (trust fund was established and the
withholding tax liability attached when the wages were paid and the taxes were collected
by corporation, not on the date the corporation’s quarterly taxes were actually due; thus,
the corporation’s bankruptcy filing during the fourth quarter before the taxes were due did
not change plaintiff’s status as a responsible person).
Case 15-05144 Doc# 20 Filed 03/04/16 Page 14 of 16
pay the trust fund deposit, well before confirmation. At the very latest, the moment
Rainbows proposed in its plan that it would not pay its penalty to the IRS, Ms. Dold
knew or should have known that she was potentially in the government’s cross-hairs47
and that Rainbows’ had an obligation to indemnify her under the articles of
Ms. Dold had a prepetition relationship with the debtor that more than
satisfies the narrow conduct test. She was the president of Rainbows when three
years of withholding taxes were not paid and when Rainbows filed its chapter 11 case.
Her right to indemnification was outlined in the organization’s existing articles of
incorporation. Thus, she had a prepetition employment relationship with the debtor
when the conduct giving rise to her indemnification claim took place. All of this
happened before confirmation and gave rise to a contingent debt that Rainbows’
confirmation operated to discharge in 2010.
Because plaintiff’s contingent claim for indemnity against her § 6672
“responsible person” tax penalty arose before confirmation, Rainbows’ debt to her was
discharged upon confirmation of Rainbows’ plan of reorganization under 11 U.S.C. §
1141(d)(1). The discharge injunction precludes her from pursuing the debt against
Rainbows under 11 U.S.C. § 524(a)(2) and prevents the court from granting the relief
47 Smith v. United States, 894 F.2d 1549, 1555 (11th Cir. 1990).
48 The Court today expresses no opinion on whether Rainbows is obligated by the articles of
incorporation or state law to indemnify Ms. Dold. For purposes of ruling on this motion to
dismiss, it finds that the alleged source of indemnification and Rainbows’ liability
thereunder is plausible.
Case 15-05144 Doc# 20 Filed 03/04/16 Page 15 of 16
she seeks. Therefore, Rainbows United’s motion to dismiss for failure to state a claim
must be GRANTED and the complaint dismissed. A judgment shall issue this
# # #
Case 15-05144 Doc# 20 Filed 03/04/16 Page 16 of 16
- Category: Judge Nugent
- Published: 23 March 2016
- Written by Judge Nugent
- Hits: 126
Lusk et al v. Check N Go of Kansas Inc, 14-05004 (Bankr. D. Kan. Mar. 8, 2016) Doc. # 54
DESIGNATED FOR ONLINE PUBLICATION
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANASAS
RANDY J. LUSK and,
KATHY L. LUSK
Case No. 10-13771
RANDY J. LUSK and
KATHY L. LUSK
CHECK ‘N GO OF KANSAS INC.,
Adv. No. 14-5004
ORDER GRANTING DEFENDANT’S MOTION TO SET ASIDE
DEFAULT JUDGMENT AS VOID
Proper service of process is fundamental to invoking the bankruptcy court’s
personal jurisdiction over a defendant in an adversary proceeding. Ordinarily,
obtaining service is straightforward, at least when counsel and the parties carefully
observe the provisions of Fed. R. Bankr. P. 7004 and Fed. R. Civ. P. 4. Here, they
didn’t. The plaintiffs’ counsel never filed an executed summons and requested a
default judgment based on an unsworn “return of service” nearly six months after the
court issued the summonses. Had plaintiffs filed a properly executed summons
containing a signed declaration of the date and manner of service, service would have
been presumed to be complete when the summons was mailed.1 They didn’t.2 This is
a fundamental procedural error that makes it impossible for the Court to know when
or if the defendant was ever served. Failed service undercuts the Court’s personal
jurisdiction of this defendant, rendering the judgment void. Because proper service
was not accomplished within 120 days of the complaint’s filing,3 this adversary
proceeding must be dismissed unless good cause exists to allow an extension of time
to accomplish proper service.4
1 See Fed. R. Bankr. P. 9006(e); see also In re Wallace, 316 B.R. 743, 747 (10th Cir.
2 See Fed. R. Civ. P. 4(l)(1) which applies in adversary proceedings under Fed. R.
7004(a), requiring an affidavit proving service and Fed. R. Bankr. P. 7004(e) requiring
service be delivered or mailed within 14 (now 7) days after the summons is issued.
3 See Fed. R. Civ. P. 4(m). The former 120 day time limit in Rule 4(m) was reduced to
days by the December 1, 2015 amendments to the Federal Rules of Civil Procedure.
4 Plaintiffs appear by their current counsel William H. Zimmerman, Jr. Defendant Check
Go of Kansas, Inc. appears by its counsel Andrew W. Muller.
Before the Lusks filed their chapter 13 bankruptcy in 2010, they borrowed
$575 from Check ‘N Go of Kansas, Inc. (CNG). They scheduled CNG as an unsecured
creditor, listing its Wichita address on their Schedule F. CNG didn’t file a claim. CNG
says that it sold the Lusk debt to a third party in May of 2010, prior to the Lusks’
bankruptcy. Even so, the Lusks charge that CNG made 13 collection calls to them in
late 2013 and early 2014 and violated the automatic stay. They sued CNG in this
proceeding and sought judgment for $10,000 for each of the 13 post-petition collection
calls they received, $130,000, plus their attorneys’ fees and costs.
After their former counsel Rick E. Hodge, Jr. filed the complaint on January
16, 2014, he requested that two summonses be issued, one directed to CNG in care of
its “directing officer” at its home office address in Cincinnati and the other to The
Corporation Company in Topeka, CNG’s Kansas registered agent.5 Those summonses
were issued on January 23, 2014.6 The summons form the Court uses contains a list
of service methods on the back that includes first class mail for many defendant types
and a special provision for certified mail to insured depositary institutions. Someone
checked the certified mail service box despite the fact that CNG is not an insured
5 Adv. Dkt. 2 and 3.
6 Adv. Dkt. 4 and 5.
7 Adv. Dkt. 2, 3, 4, and 5. The Court checked BankFind, a FDIC website for locating and
verifying insured depository institutions, https://research.fdic.gov/bankfind/ on
2016. CNG did not appear there.
8 Adv. Dkt. 7.
Nothing happened for two months. Then, in March, Hodge filed a motion to
extend time in which to seek the entry of a clerk’s default and a default judgment.8
In that motion, he represented that: “Proper service was effectuated by United States
Certified Mail, Return Receipt Requested, to an officer of Check ‘N Go of Kansas Inc.,
and to its registered agent; a certification with return receipt will be filed with the
Clerk of the Bankruptcy Court within 48 hours of the filing of this Motion.”9 Hodge
submitted an order granting a 30-day extension that the Court signed and entered
on April 17. He has not submitted the certified mail return receipt nor filed the
executed summonses.10 Nor did Hodge pursue default or default judgment during the
9 Adv. Dkt. 7, ¶ 10. Emphasis added.
10 Adv. Dkt. 8.
11 See Adv. Dkt. 13. There is no such animal in federal court; rather, Fed. R. Civ. P.
to proof of service by various means.
12 Adv. Dkt. 14.
13 Adv. Dkt. 14-1. That declaration did not state the manner of service on CNG nor to
at CNG service was directed.
Another six weeks passed and, on May 29, the Court ordered the plaintiffs to
show cause why the case should not be dismissed for lack of prosecution. Then Hodge
filed an unsworn separate document titled “return of service,” on June 3, 2014.11 In
the “return,” Mr. Hodge stated that he served CNG by first class mail on January 23,
2014, by mailing summonses to CNG’s “directing officer” in Cincinnati and to its
registered agent, The Corporation Company in Topeka. He did not file an executed
summons. On June 3, the plaintiffs requested the entry of a clerk’s default.12 Attached
to the June 3 request for default was a document titled “Declaration of Rick E. Hodge,
Jr.” which stated that CNG “was properly served” on January 23, 2014. 13 The motion
for default contained a certificate of service indicating that the motion had been
mailed to CNG, on June 23, 2014, 20 days after the motion and certificate were filed
here.14 Notwithstanding these inconsistencies, on June 10, the Clerk entered a
default.15 That day, the plaintiffs moved for default judgment.16 On June 11, the Court
entered the default judgment (albeit on a document titled “Clerk’s Entry of Default
Judgment”)17 and docketed the Judgment on June 12 as required by Rule 58.18 After
the plaintiffs unsuccessfully attempted to garnish some deposit accounts of CNG in
Ohio and Wichita, the adversary case was closed on October 28, 2014.
14 Adv. Dkt. 14-3. This is obviously incorrect because the purported date of service,
had not yet occurred and because nothing was filed in the Court’s CM/ECF system for
matter on that date.
15 Adv. Dkt. 16.
16 Adv. Dkt. 17.
17 Adv. Dkt. 19. Because the amount of the judgment was a sum certain, the Clerk
entered it under Rule 55(b)(1).
18 Adv. Dkt. 20. Fed. R. Bankr. P. 7058 makes Fed. R. Civ. P. 58 applicable in
19 Adv. Dkt. 36. See Fed. R. Civ. P. 60(b)(1) (granting relief from judgments entered
mistake, inadvertence, surprise, or excusable neglect) and 60(b)(4) (granting relief
judgments). Rule 60(b) applies in all bankruptcy cases and proceedings. Fed. R. Bankr.
Acting through different counsel, the Lusks filed a Notice of Foreign Judgment
in the District Court of Sedgwick County, Kansas. When CNG received notice of that,
it filed a motion to set aside the default judgment on May 7, 2015, claiming that the
judgment had been entered by mistake and that it is void.19 CNG claims that it sold
the Lusk debt before they filed their bankruptcy petition, that it never received a
summons, and that it was never properly served in the adversary proceeding because
the summons was mailed to a “directing officer” rather than a “managing agent.” In
their affidavits, both CNG’s general counsel and an officer of CT Corporation, the
owner of The Corporation Company, deny receiving the summonses and complaint.
Hodge moved to withdraw as counsel and, on June 30, 2015, the Lusks’ current
counsel entered the case. Though the Court urged the parties to stipulate to the
operative facts before briefing this motion, they could not agree.20 Most of the facts
that I have found here come from my review of the docket in this case. After reviewing
the summonses and alleged proofs of service, I conclude that service of process in this
case failed for the reasons below. The Court lacked personal jurisdiction of CNG when
it entered the default judgment. The judgment is void.
20 In lieu of stipulations, CNG submitted Proposed Findings of Fact (supported by
and matters of record) to which the Lusks responded without record support. See Adv.
48 and 52.
21 See Fed. R. Bankr. P. 7004(a)(1).
22 See Fed. R. Bankr. P. 7004(b)(3).
23 See Director’s Procedural Form 2500.
Bankruptcy Rule 7004 and parts of Fed. R. Civ. P. 4 incorporated therein,
govern service of process in an adversary proceeding.21 Rule 7004(b) provides for first
class mail service on various classes of parties including corporations.22 Rule 7004(h)
provides that an insured depositary institution must be served by certified mail.
Civil Rule 4(a) governs the form and content of summonses and the process of
preparing them for issuance by the Clerk. If someone other than a member of the U.S.
Marshals Service serves a summons, Civil Rule 4(l)(1) requires the process server to
prove service by filing an affidavit detailing how it was accomplished. The summons
form that the Clerk’s Office issues contains a “check-the-box” form of declaration
setting out different methods of service, the date of service, and a place for the
to sign under penalty of perjury.23 The process server proves service by completing
and signing the declaration on the summons he mailed to the party served. That copy
is called an “executed summons.” Without an executed summons being filed, the
Court has no way to know how, when, or if service was made.
When this adversary proceeding was filed in early 2014, Bankruptcy Rule
7004(e) required that a summons be served within 14 days of being issued.24 If it could
not be served in that time or there is some error on the summons, the party seeking
service should request an alias summons. If no process was served within 120 days
(now 90 days) after the complaint was filed, Civil Rule 4(m) requires the court to
either dismiss the proceeding without prejudice or, for good cause, set a date certain
by which to complete service. Proper service is “effective to establish” the bankruptcy
court’s personal jurisdiction of the defendant if it is otherwise consistent with the
Constitution and the laws of the United States.25
24 Rule 7004(e)’s 14-day period for mail service after issuance of the summons has
been reduced to its current 7 days. See Norton Bankr. Law and Practice 3d, Norton
Bankruptcy Rules, Rule 7004 Advisory Committee Note (2014) (Thomson Reuters 2015-
25 Fed. R. Bankr. P. 7004(f).
The plaintiffs’ initial counsel somehow failed to observe these rules. To begin
with, CNG is not an insured depositary institution that is entitled to service by
restricted mail. Rather, it could have been served by first class mail like any other
corporation, as Rule 7004(b)(3) provides. Counsel should have mailed the summons
and complaint to the attention of an officer, a managing or general agent, or an agent
authorized or appointed to receive service of process.26 Consequently, checking the
“certified mail” box on the issued summons was the first of a series of missteps here.
26 Some courts required the summons to be directed to the attention of the specifically
officer or agent while others permit service by reference to the office or title held
unnamed person. See In re Villar, 317 B.R. 88, 93 (9th Cir. BAP 2004); In re Outboard
Corp., 359 B.R. 893, 899-900 (Bankr. N.D. Ill. 2007). This Court need not decide
summons directed to the “directing officer” of CNG would have been sufficient, but for
plaintiffs’ failure to prove service, because the summons directed to CNG’s registered
The Corporation Company, complies with Rule 7004(b)(3).
27 See Adv. Dkt. 13 (the “return”) and Adv. Dkt. 14-1 (the declaration).
28 Rule 7004(e) provides that “if a summons is not timely delivered or mailed, another
summons will be issued for service.” If counsel changed the method of service, he
requested alias summonses to replace those originally issued.
29 In re Villar, 317 B.R. 88, 94 (9th Cir. BAP 2004) (Once defendant has established a
facie error in service, the party attempting to effect service bears the burden of
proof); In re
Turkal, 507 B.R. 342, 344 (Bankr. D. Kan. 2014) (plaintiff bears the burden of
personal jurisdiction over defendants and proving the validity of the method of
service); In re
Failing to prove service was the second. Because service is presumed to be
complete upon mailing of the summons, the only way the Court can know if and when
the summons was mailed is by the process server filing the executed summons as
proof of service. Counsel never did. Even if he served CNG by certified mail, he never
filed the “return receipts” necessary to prove that. Third, the unsworn “return of
service” he filed on June 3, 2014 and later reaffirmed with a declaration under
penalty of perjury says that the defendant was served by first class mail, not
mail as the reverse sides of the issued summonses say.27 Fourth, when counsel failed
to prove service within Rule 7004(e)’s 14-day period, he should have requested alias
summonses.28 He didn’t. The Lusks argue that once a summons is mailed, service is
presumed to be complete, but this series of errors more than meets that
presumption.29 Indeed, these circumstances cause me to question whether CNG was
served at all.
Longoria, 400 B.R. 543, 548 (Bankr. W.D. Tex. 2009) (litigant attempting to effect
responsible for proper service and bears the burden of proof).
30 Fed. R. Bankr. P. 9006(e).
31 The obligation to answer the adversary complaint is not triggered until the
“duly served.” See Fed. R. Bankr. P. 7012(a).
32 In re Cossio, 163 B.R. 150, 154 (9th Cir. BAP 1994), aff’d 56 F.3d 70 (9th Cir.
court has no discretion to refuse vacating a void judgment under Rule 60(b)(4)); In re
Turkal, 507 B.R. 342, 344 (Bankr. D. Kan. 2014) (court lacks personal jurisdiction over
party if service of process was insufficient); In re Teligent Inc., 485 B.R. 62, 67-68
S.D. N.Y. 2013) (Rule 60(b)(4) relief is not discretionary and a meritorious defense is
required; a judgment is void if the court lacked jurisdiction of a party due to
service of process).
33 The former 120 day time limit in Rule 4(m) was reduced to 90 days by the December 1,
2015 amendments to the Federal Rules of Civil Procedure.
34 See 4B Charles Alan Wright et al., Federal Practice and Procedure § 1137 (4th ed.
See also Oklahoma ex rel. Board of Regents v. Fellman, 2005 WL 2886236, 153 Fed. Appx.
505 (10th Cir. 2005) (failing to determine whether good cause existed an abuse of
Without an executed summons, I cannot tell when or if the summonses were
mailed.30 Therefore, the answer time provided for in Bankruptcy Rule 7012(a) has
never run.31 While Rule 4(l)(3) states that failure to prove service does not affect
validity and that a court has discretion to allow the proof to be amended, the other
service anomalies mentioned in this order force me to conclude that service here, if it
occurred at all, was not valid. That voids the default judgment for lack of personal
jurisdiction and requires that I set aside the judgment.32
When this proceeding was filed, Civil Rule 4(m) provided that if a defendant
was not served within 120 days of the date the complaint was filed, the Court must
either order the proceeding dismissed without prejudice or extend the time for service
upon a showing of good cause by plaintiffs.33 More than two years have passed since
the filing of the complaint on January 16, 2014. Nevertheless, rather than dismiss
the adversary proceeding, Rule 4(m) grants me the discretion to allow additional time
to serve this defendant for good cause.34 The series of process server errors supply
that cause.35 Therefore, the Lusks will have 14 days from the entry of this order to
serve the summons and complaint on CNG and shall timely file proof of that service.
35 The Court is not without fault in entering the initial judgment and will pay closer
to service details before entering default judgments going forward. Having concluded
proper service was incomplete, I need not reach the merits of CNG’s claim that it never
received service or that it should be relieved of the judgment for the reasons
Fed. R. Civ. P. 60(b)(1) and Fed. R. Bankr. P. 9024.
36 Dkt. 19 and 20.
The fatal defects in the plaintiffs’ purported service of process on CNG require
me to GRANT its motion for relief from the default judgment under Civil Rule
60(b)(4). Because the Court lacked personal jurisdiction of CNG, the default judgment
and Judgment are void and hereby SET ASIDE.36 If the Lusks do not serve CNG and
prove that service by filing an appropriate executed summons within 14 days of the
entry of this order, this adversary proceeding will be dismissed without prejudice.
# # #
- Category: Judge Nugent
- Published: 05 January 2016
- Written by Judge Nugent
- Hits: 887
Morris v. Ark Valley Credit Union et al, 14-05002 (Bankr. D. Kan. Sep. 19, 2015) Doc. # 75
DESIGNATED FOR ONLINE PUBLICATION ONLY
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IN RE: )
JEFFREY KENT GRACY, ) Case No. 13-11917
) Chapter 7
J. MICHAEL MORRIS, Trustee, )
vs. ) Adv. No. 14-5002
ARK VALLEY CREDIT UNION; )
and JEFFREY KENT GRACY )
ORDER ON REMAND
On August 25, 2015, the United States District Court, Hon. J. Thomas Marten,
reversed this Court’s determination that Ark Valley Credit Union’s lien did not attach
to Jeffrey Gracy’s manufactured home and remanded the adversary proceeding for
me to determine whether that home was a fixture.1 If the home was a fixture on the
petition date, the lien of Ark Valley’s mortgage encumbers it and, if that encumbrance
is unperfected as to the manufactured home, the Trustee can avoid and preserve it
for the benefit of the bankruptcy estate under 11 U.S.C. §§ 544 and 551.
In my Memorandum Opinion issued on January 6, 2015, I concluded that Ark
Valley’s mortgage did not attach to the manufactured home because its habendum
clause’s language did not sufficiently describe the home.2 KAN. STAT. ANN. § 84-9-
108(e) provides that general collateral type descriptors are not adequate to
reasonably describe the collateral in consumer transactions and Ark Valley’s
mortgage only spoke in terms of “fixtures and improvements.” Because I held that
the mortgage’s description was inadequate, I did not reach the issue of whether the
manufactured home was a fixture or improvement. The District Court reversed on
this point and held that the use of the words “fixtures and improvements” in close
proximity to the common address of the real estate and its legal description was
reasonably descriptive. The District Court strictly construed the statutory language
of KAN. STAT. ANN. § 58-4214(a), the “title elimination” statute of the Kansas
Manufactured Housing Act, to hold that complying with it is not the only means of
rendering a manufactured home annexed to real estate a fixture or improvement.3
1 J. Michael Morris, Trustee v. Ark Valley Credit Union, et al., Case No. 15-1024-JTM (D. Kan. Aug.
2 Adv. Dkt. 56.
3 In its order, the District Court noted that this conclusion is contrary to the Tenth Circuit
Bankruptcy Appellate Panel’s holding in In re Thomas, 362 B.R. 478 (10th Cir. BAP 2007), that KAN.
STAT. ANN. § 58-4214 is the sole means of converting a manufactured home to an improvement of
Case 14-05002 Doc# 75 Filed 09/17/15 Page 2 of 9
real property. The District Court disagreed and noted that it is not bound by contrary BAP authority.
As the District Court’s order is the law of this case, I am required to disregard Thomas here.
4 See Peoples State Bank of Cherryvale v. Clayton, 2 Kan. App. 2d 438, 440, 580 P.2d 1375 (1978)
(The Uniform Commercial Code’s definition of fixtures does not conflict with common law, and
application of the common-law test of fixtures, is appropriate.); KAN. STAT. ANN. § 84-9-102(a)(41)
(2014 Supp.) (defining “fixtures” as “goods that have become so related to particular real property
that an interest in them arises under real property law.”).
The statute does not preclude a determination that a manufactured home is a fixture
at common law.4 On remand, the principal issue before me is whether this particular
manufactured home is a fixture. If it is, I must then determine the value of Ark
Burden of Proof
As plaintiff, the Trustee had the burden to show that Ark Valley had a lien
that not been properly perfected at the petition date and would therefore be avoidable
by someone wielding the trustee’s hypothetical lien creditor powers under §544(a).
Rather than fight about perfection, Ark Valley instead argued that it had never taken
a lien in the manufactured home because it was not described in the mortgage and
not affixed. Thus, part of the Trustee’s proof necessarily focused on whether the
manufactured home had become a fixture and he had the burden of persuasion on
Mr. Gracy testified that he and his late wife purchased the manufactured home
sometime after 1994 and placed it on the real estate near Caldwell thereafter. The
home was placed on piers that are set on concrete slabs spaced 2-3 feet apart that run
length-wise under the home. The home is 50 feet long. The home is anchored to the
piers and slabs by “metal straps” or “stanchions.” He skirted the home with brick, but
the skirting is decorative, not structural and bears no weight. The utilities are run
through the floor of the structure from underground. He built a wood porch that is
attached to the home and the ground. The back door is accessible via concrete steps
and a concrete pad.
Ms. Gillette from Ark Valley testified that loan officers at her institution were
trained to take a mortgage on manufactured homes that were on a permanent
foundation. She stated that they “had to be on a permanent foundation” to make a
home equity loan and the “title had to be eliminated so they became real estate.”5 She
said she did not know this home was a manufactured home and that Mr. Gracy didn’t
tell her that in 2009 or 2010 when the loans were made and the mortgages granted.
She did know there was a home of some kind there and she testified that she intended
to take a security interest in it, severely undercutting Ark Valley’s “no lien attached”
defense. Mr. Gracy testified that when he gave the mortgages to Ark Valley, he
understood that the house and garage were part of the collateral.6 Mr. Gracy has lived
in the manufactured home for 20 years.
5 Adv. Dkt. 68, Tr. at p. 52. See also KAN. STAT. ANN. § 58-4214 (2005) (title elimination statute).
6 Adv. Dkt. 68, Tr. at pp. 19-20.
The Trustee presented Rick Hopper, a real estate agent familiar with the
Caldwell area, to testify about the value of the home and land. Mr. Hopper is a realtor
and an auctioneer who auctions 40 to 50 properties a year. He drove by Mr. Gracy’s
homestead and, based on “experience and gut feel,” as well as a review of comparable
sales, determined that the value of the property overall was $70,000 with the
manufactured home contributing $40,000. He later revised the opinion after referring
to the NADA guide for used manufactured homes and, based upon that document, he
concluded that the manufactured home itself was worth only $21,743. In his second
opinion letter, however, he stuck by his view that the land itself is worth $30,000,
yielding a total value for the tract and home of $51,743. The property has been
appraised for taxes in Sumner County at $69,230. I find that the reasonable retail
replacement value of the manufactured home is $21,743.7
The District Court’s remand order requires me to determine whether the
manufactured home is a fixture at common law. To demonstrate that an item of
personal property has become a common law fixture, a party must show that the item
has been annexed to real property, that it has been adapted or appropriated to the
use of the real property, and that the annexor intended that it become a fixture.8 In
determining whether the property has been annexed sufficiently to be classified as
an improvement to the real estate, Kansas courts look to the degree of permanency
of its attachment to the land.9 “Permanency” in this sense does not require the
7 See 11 U.S.C. § 506(a)(2)(In a chapter 7 or 13 case, replacement value of property acquired for
personal family or household use is price a retail merchant would charge given the property’s age
and condition at the time value is determined).
8 Stalcup v. Detrich, 27 Kan. App. 2d 880, 886, 10 P. 3d 3 (2000), citing U.S.D. No. 464 v. Porter, 234
Kan. 690, 695, 676 P.2d 84 (1984).
9 City of Wichita v. Denton, 296 Kan. 244, 257-58, 294 P.3d 207 (2013) (billboard structure attached
to land by a concrete foundation that had been in place for 20 years was personal property classified
as a trade fixture and not compensable in condemnation proceeding).
Case 14-05002 Doc# 75 Filed 09/17/15 Page 5 of 9
property to be immovable. Rather, whether the chattel is affixed or intended to be
affixed is a matter of degree.10
Here, the home retains its rail framework and it is plausible that the home
could be removed from the ground without significant damage to either. The home is
strapped to the piers and slabs, but is not otherwise attached.11 But courts assess less
importance to this factor than they do to the other two and when there is persuasive
evidence that the property has been adapted to the land’s use and that the annexor
intended it to become part of the land, those latter proofs make up for a lesser degree
of permanence of the attachment.12 As the Kansas Supreme Court long ago
recognized, the courts have placed less emphasis on the annexation test:
But attachment to the realty is not alone sufficient to change the
character of personal property. It is only one of several tests to
determine whether property originally a chattel has become a fixture by
being used for a particular purpose, and however the rule may have been
formerly it is not now deemed to be the controlling test. Tyler, on page
101 of his treatise on fixtures, says: “The simple criterion of physical
annexation is so limited in its range, and so productive of contradiction,
that it will not apply with much force, except in respect to fixtures in
dwellings.” . . . It [fixture] is now determined by the character of the act
by which the structure is put into its place, the policy of the law
10 In re Farmland Industries, Inc., 298 B.R. 382, 388-89 (Bankr. W.D. Mo. 2003) (equipment
containing a regenerator and reactor vessels installed in oil refinery)
11 Stalcup, supra at 886-87 (metal building that was bolted to a concrete slab was not a fixture;
parties intended for the metal building to remain personal property and building was taxed
separately from real estate); Beneficial Finance Co. of Kansas, Inc. v. Schroeder, 12 Kan. App. 2d
150, 737 P.2d 52 (1987), rev. denied 241 Kan. 838 (1987) (in determining that bank that financed
purchase of mobile home did not have to make a new fixture filing when mobile home was set on
concrete block foundation on real estate, the appellate court noted the ease with which a mobile
home could be moved and the enormous burden on a secured creditor to monitor the whereabouts of
the mobile home).
12 Alphonse Squillante, Law of Fixtures: Common Law and the Uniform Commercial Code -- Part I:
Common Law of Fixtures, 15 HOFSTRA L. REV. 191, 207-208 (1987) (hereafter “Squillante”). See
Atchison, T. & S.F.R.Co. v. Morgan, 42 Kan. 23, 21 P. 809, 812 (1889) (physical annexation to the
realty is not alone sufficient to change character of personal property and is no longer the controlling
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connected with its purpose, and the intention of those concerned.
Thus the latter factors of adaptation and intent decide this case.
The land at Caldwell is Mr. Gracy’s homestead. He placed this manufactured
home on that land to inhabit as his homestead and has done so for nearly 20 years.
The home contributes considerable value to the homestead property. He surrounded
the home with brick skirting, built a porch and a back patio adjacent to it, and erected
a large garage just by it. Adding these amenities and living in the home suggest Mr.
Gracy’s efforts to adapt it to the use of the land as his homestead.14 The home provides
Mr. Gracy a place to live on his homestead. Mr. Hopper, the realtor retained by the
Trustee to value the home, testified that the home contributed about $21,734 in value
to the land, but he also testified that the home and the land, sold together, could bring
as much as $70,000. This also supports a conclusion that the home has been
successfully adapted to the use of the realty.15
Turning to Gracy’s intent to make his manufactured home a permanent part
of the realty, I am required to determine his intent at the time of annexation.16 The
title elimination statute had not been enacted at the time that Gracy annexed his
manufactured home to the realty in the mid-1990’s and I can draw no inference from
his or the Credit Union’s not eliminating title then or later. But, it is clear to me that
13 Atchison, T. & S.F.R.Co. v. Morgan, 21 Pac. at 811-12.
14 Farmland Industries, Inc., 298 B.R. at 389 (adaptation to the use of the realty is shown by
evidence that the land was used for a particular purpose and the property in question was used to
further that purpose).
15 Atchison, T. & S.F.R. Co., 42 Kan. 23, 21 P. 809, 812 (1889) (If a structure is placed on the realty
to improve it and make it more valuable, that is evidence that it is a fixture.).
16 In re Equalization Appeals of Total Petroleum, Inc., 28 Kan. App. 2d 295, 301, 16 P.3d 981 (2000).
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Mr. Gracy intended to make the property as a whole his homestead when he moved
the manufactured home onto the realty and subsequently made further
improvements to it while he continuously lived there over the next 20 years. Ark
Valley presented no evidence to the contrary. Gracy’s improvements, along with his
grant of several mortgages on the land and its improvements also demonstrate his
intention that the home remain affixed and become part of the realty. Mr. Gracy said
he considered it his permanent home.17 He stated he intended to encumber it along
with his homestead real estate. Even if he hadn’t, courts generally infer that a
mortgagor intends personal property to be a fixture when he grants a mortgage in
land to which personal property has been annexed.18 Certainly both he and Ms.
Gillette intended the lien of the mortgage to attach to the home. Given both Mr.
Gracy’s and Ms. Gillette’s testimony, it is easy to conclude that both the mortgagor
and mortgagee here treated the home as part of the real estate.
All three factors having been shown, I conclude that this home is a fixture or
improvement to the Caldwell land and, given the law of this case as determined by
the District Court, is subject to Ark Valley’s mortgages even though its title was never
Whether or not KAN. STAT. ANN. § 58-4214 determines the manufactured
home’s status as a fixture for purposes of attachment of Ark Valley’s mortgages, the
statute does affect whether Ark Valley properly perfected its security interests in the
17 Adv. Dkt. 68, Tr. at p. 28.
18 Stalcup, 27 Kan. App. 2d 880, 886 (acknowledging general rule that a building is normally
considered to be part of real estate and that the burden of showing otherwise is upon the party
claiming the building is personal property); Squillante, supra p. 228.
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home by merely recording its mortgages. The statute makes clear that, for the
purposes of the KMHA,19 a manufactured home only becomes real estate that is
encumbered by a mortgage on the real estate where it is set when the home’s title is
eliminated.20 Because the title hadn’t been eliminated at the date of Gracy’s petition,
a security interest in the home could only have been perfected under KAN. STAT. ANN.
§ 58-4204(i) by placing Ark Valley’s liens on the home’s certificate of title. Both the
Trustee and Ark Valley agree that this never occurred. Accordingly, the Trustee can
use his hypothetical lien creditor powers under §544(b) to avoid and preserve the
unperfected security interest.
Judgment should be entered on remand for the Trustee and against Ark Valley
Credit Union avoiding the liens of the Ark Valley mortgages as unperfected and
preserving them for the estate, said liens having a value of not more than $21,734,
the value of the manufactured home. A final judgment will issue this day.
# # #
19 Kansas Manufactured Housing Act, KAN. STAT. ANN. § 58-4201 et seq. (2005 and 2014 Supp.).
20 KAN. STAT. ANN. § 58-4214(a). See also § 58-4204(a) which provides that for purposes of titling
and perfecting a security interest, a manufactured home is deemed to be personal property.
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