KSB

12-21994 Feagan (Doc. # 118)

In Re Feagan, 12-21994 (Bankr. D. Kan. Sep. 19, 2014) Doc. # 118

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The relief described hereinbelow is SO ORDERED.
SIGNED this 17th day of September, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

JERRY HARRISON FEAGAN and Case No. 12-21994
CYNTHIA A. FEAGAN,
Debtors.

ORDER OVERRULING IN PART DEBTOR’S OBJECTION TO MOTION TO SELL

On July 16, 2013, the Trustee filed a Motion for Approval of Sale of real estate.1 In the
Motion, the Trustee proposed to pay $220,000 of the sale proceeds to Kaw Valley Bank to obtain
a release of a mortgage. Debtors assert that KVB is only entitled to $146,263.84 because the
future advances clause in the mortgage is unenforceable or, alternatively, because KVB is bound
by its statements in the Motion for Relief from Automatic Stay wherein KVB asserted a total
secured claim of only $146,263.84. The Trustee contests the Debtors’ standing to challenge the

1 Doc. 72.

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security agreement. The Court holds that the Debtors have standing to challenge the agreement,
but more evidence is needed to determine whether the future advances clause in the mortgage is
enforceable. The Court also finds that statements made by KVB in the Motion for Relief from
Automatic Stay do not bar KVB from claiming the full amount of security they may be entitled
to under the contract.

Jurisdiction

The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(b).
Reference to the Court of this proceeding is appropriate under 28 U.S.C. § 157(a) and Standing
Order No. 13-1 of the United States District Court for the District of Kansas. This case is a core
proceeding under 28 U.S.C. §§ 157(b)(2)(K), (N), and (O). The parties have stipulated to the
jurisdiction of this Court.

Background

Debtors filed for Chapter 7 bankruptcy relief on July 23, 2012. Among their assets the
Debtors listed a 50 percent interest in 138.7 acres of farmland in Cherokee County, Kansas
(“Property”).2 Debtors listed the value of the Property as unknown. The Property is encumbered
by a mortgage with Kaw Valley Bank (“KVB”) with a maximum principal amount of $180,000
(“Mortgage”).3 The exact amount of debt secured by the Mortgage is disputed. Both Debtors
and Minnie Feagan4 signed the Mortgage. On September 28, 2012, KVB filed its Motion for

2 Doc. 1 at 19.

3 Doc. 34, Ex. 4.

4 Minnie Feagan is Debtor Jerry Feagan’s mother and owner of the other 50 percent interest. Doc. 72.

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Relief from Stay.5 In the Motion for Relief from Stay, KVB asserts that the Debtors held no
equity in the Property.6 In Claim #15-1, KVB asserts a secured claim of $266,000 with the value
of the collateral unknown. No evidence of the Property’s value was provided. The Trustee’s
Motion for Approval of Sale was granted on September 12, 2013, and the Property sold for
$246,900.00, with $220,000 to be paid to KVB conditioned upon a further determination by this
Court.

The issue arises in part from the statements made by KVB in the Motion for Relief from
Automatic Stay. In this motion, KVB listed the total secured debt as $146,263.84. Specifically,
KVB stated that the Debtors borrowed $33,073.76, as evidenced by a promissory note dated
March 14, 2012 (“Note 1”), and $100,000, as evidenced by a promissory note dated January 5,
2012 (“Note 2”). KVB asserts that the Mortgage secures not only Notes 1 and 2, but also that
the future advances clause in the Mortgage includes all other loans made by KVB to Debtors
after March 14, 2008. These other loans include a promissory note for $86,000 signed on May
10, 2010 (“Note 3”); a promissory note for $200,000 signed on June 9, 2011 (“Note 4”); a
promissory note for $400,000 signed on October 15, 2011 (“Note 5”); and a promissory note for
$74,897.89 signed on February 4, 2012 (“Note 6”). Each of these promissory notes referenced
specific collateral, but only Notes 1 and 2 referenced the Mortgage. Note 3 listed a Deed of
Trust in property located in Missouri as the collateral, and Notes 4, 5, and 6 each listed various
personal and business property of the Debtors. According to the Trustee, KVB asserts that by

5 Doc. 34.

6 Doc. 34 at 6 ¶ 32.

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virtue of a future advances clause in the Mortgage, the other Notes are secured under the
Mortgage and the total lien on the property is therefore $232,113.40. This amount includes the
$180,000 maximum principal balance, $45,113.40 in accrued interest, and attorney’s fees of
$7,000.7 Prior to filing the Motion for Approval of Sale, the Trustee and KVB agreed that KVB
would receive $220,000 of the proceeds in full satisfaction of the Mortgage. The Debtors
objected to this settlement agreement (“Agreement”) because they assert that KVB is only
entitled to the $146,900 under the terms of the Mortgage and the statements made in the Motion
for Relief from Automatic Stay. If the Mortgage only secures Notes 1 and 2, then KVB is
entitled to $146,900 of the proceeds as secured, but if some or all of the other promissory notes
are secured by the Mortgage, then KVB’s lien may be $232,113.40.

Debtors claim to have standing to challenge the Trustee’s administration of the case and
the estate assets based on the existence of certain non-dischargeable priority tax debt which may
receive a greater distribution from the proceeds of the sale if KVB’s secured claim is reduced,
thereby lowering Debtors’ post-discharge liability. The Trustee challenges this position because
the Debtors will not receive any proceeds from the sale of the Property, regardless of the
outcome of this dispute.

Discussion

There are two separate issues before the Court: First, whether the Debtors have standing
to challenge the extent of KVB’s secured claim when the Debtors’ only pecuniary interest arises
from a potential reduction in their post-discharge liability. Second, what rights does KVB

7 Doc. 72 at 2 ¶ 9.
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maintain under the Mortgage in light of the claims made in the Motion for Relief from Stay?
There is a split of authority on the first issue,8 and this Court was not able to find controlling
Tenth Circuit precedent. Determining KVB’s rights under the Mortgage involves two issues.
First, whether the future advances clause is enforceable, and second, whether the doctrines of
judicial admissions or judicial estoppel limit KVB to the statements of value and security stated
in the Motion for Relief from Automatic Stay.

A. Debtors have standing to challenge the settlement agreement.
The Trustee contests the Debtors’ standing to challenge his administration of the estate
because the Debtors cannot receive any funds from the sale of the Property, regardless of the
outcome of this issue. The Trustee bases his position on the general rule that chapter 7 debtors
lack standing to challenge the administration of their case unless the debtor would receive a
distribution under 11 U.S.C. § 726(a)(6).9 The Trustee asserts that unless the distribution of the
assets of the estate would produce a surplus to the Debtors, the Debtors are not parties-in-interest
and therefore lack standing.

This Court has previously held that a chapter 7 debtor has standing to challenge a
proposed settlement agreement if the debtor will be adversely affected by that agreement.10

8 Compare In re Adams, 424 B.R. 434, 436-37 (N.D. Ill. 2010) (holding that chapter 7 debtor lacked
standing because the effect on the non-dischargeable debt liability was indirect and that granting debtor standing in
these cases would “interfere with the administration of chapter 7 cases”) with McGuirl v. White, 86 F.3d 1232, 1235

(D.C. Cir. 1996) (holding that the possible reduction of post-discharge liability is direct benefit to the debtor,
sufficient to confer standing).
9 4 COLLIER ON BANKRUPTCY ¶ 502.02[2][c], at 502-13 (Alan N. Resnick & Henry J. Sommer, eds., 16th
ed. 2014). All future statutory references are to title 11 of the United States Code, unless otherwise specified.
10 In re Middendorf, 381 B.R. 774, 776 (Bankr. D. Kan. 2008).
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Other courts have approached the issue by looking to see whether the debtor has any pecuniary
interest in the outcome of the dispute.11 In McGuirl v. White, the Court of Appeals for the D.C.
Circuit held that a debtor had standing to challenge the Trustee’s administration of the estate
because the impact on the debtor’s non-dischargeable debt affected the debtor’s pecuniary
interest in the outcome of the bankruptcy. The court held that a reduction in the debtor’s post-
discharge liability was sufficient for the debtor to have standing to challenge the trustee’s
application for administrative expenses. In In re Adams, the Bankruptcy Court for the Northern
District of Illinois disagreed and held that a chapter 7 debtor in a non-surplus case lacked
standing to challenge the trustee despite the existence of non-dischargeable debt. The courts
reached opposite conclusions because they disagreed on whether the reduction in post-discharge
liability directly affected the debtor’s pecuniary interests. This Court concludes that a reduction
in a debtor’s post-discharge priority tax liability benefits the debtor nearly as directly as an
increase in a surplus distribution. Because a possible outcome in favor of the Debtors here will
mean that they owe less debt after their discharge, the Court will not prevent the Debtors from
challenging the Agreement. Further, this conclusion supports the manifest preference under the
Code to favor the payment of tax liabilities. See, e.g., § 523(a)(1) and 507(a)(8).

This outcome fairly reconciles the interest of the Trustee in administering the estate and
the Debtors’ pecuniary interest. Allowing standing in this case also follows the reasoning in In
re Middendorf because the Debtors may be adversely affected by the Agreement.

B. Whether the future advances clause in the Mortgage is enforceable up to the
11 See In re Cult Awareness Network, Inc., 151 F.3d 605, 607 (7th Cir. 1998); In re Kieffer-Mickes, Inc.,
226 B.R. 204, 208-09 (B.A.P. 8th Cir. 1998); In re Adams, 424 B.R. 434 (N.D. Ill. 2010).

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stated maximum obligation of $180,000, plus interest and fees, is a factual
question.

Promissory notes and mortgages are contracts between the parties, and therefore subject
to the same rules of construction as other contracts. The “primary rule in interpreting promissory
notes and mortgages is to determine the intention of the parties.”12 Courts determine the intent of
the parties by examining the mortgage and note together, not each one individually.13 Future
advances clauses in real estate mortgages are enforceable in Kansas, provided that the
subsequent promissory note either specifically refers to the prior mortgage, or if the subsequent
debt is “of the same kind or character as, or part of the same transaction or series of transactions
with, that originally secured by the mortgage.”14 Whether the subsequent debt is of the same
kind or character, or part of the same transaction or series of transactions, is a factual question.
A lien on future advances cannot exceed the maximum obligation stated in the mortgage.15
Pursuant to § 363(p)(2), “the entity asserting an interest in property has the burden of proof on
the issue of the validity, priority, or extent of such interest.”

Two of the promissory notes signed by the Debtors specifically state that the notes are
secured by the Mortgage. There is no question that the Mortgage secures these notes and the
parties do not contest the issue. The other four notes list other security, however, and therefore
the Court must determine whether the parties intended for the Mortgage to secure Notes 3-6.

12 Mark Twain Kansas City Bank v. Cates, 248 Kan. 700, 709 (Kan. 1991) (citing Carpenter v. Riley, 234
Kan. 758, 763 (Kan. 1984)).
13 See Mark Twain Kansas City Bank v. Cates, 248 Kan. at 710.
14 Id. at 700 (1991).
15 K.S.A. 9-1101; K.S.A. 58-2336.
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Absent a specific reference to the Mortgage in the promissory note, Notes 3-6 will only be
secured if they were “of the same kind or character as, or part of the same transaction or series of
transactions with, that originally secured by the mortgage.”16 Since there has been no evidence
submitted on the record to indicate to the Court that Notes 3-6 were executed in the same
transaction or a series of the same transactions as Notes 1 and 2, this Court cannot presently rule
on the issue.

C.
The doctrines of judicial estoppel and judicial admissions do not limit KVB’s
security to the amount stated in the Motion for Relief from Automatic Stay.
Debtors argue that the representations KVB made in its Motion for Relief from
Automatic Stay regarding the secured portion of the claim should be binding on KVB throughout
this bankruptcy case. In the Motion for Relief from Automatic Stay, KVB stated that the
Property served as collateral for Notes 1 and 2 totaling $146,900. The Motion for relief from
stay stated only that Notes 1 and 2 were secured by the Property, that the Property was
completely encumbered, and therefore that relief from the stay was appropriate. The motion was
unopposed and it was granted. The issue now is whether the statements made by KVB in the
Motion for Relief from Automatic Stay bind KVB on the extent of its lien.

1.
The statements made in the Motion for Relief from Automatic Stay do
not constitute judicial admissions.
Debtors assert that KVB is bound by its statements in the Motion for Relief from
Automatic Stay because KVB “admitted that the value of its claim against the [Property] is
limited to the two Notes.” Debtors’ position is that because KVB claimed that only the two

16 Mark Twain Kansas City Bank v. Cates, 248 Kan. at 709.
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Notes referenced in the Motion for Relief from Automatic Stay were secured, KVB is prohibited
from asserting the validity of the future advances clause with regards to Notes 3-6.

“‘Judicial admissions are formal admissions . . . which have the effect of withdrawing a
fact from issue and dispensing wholly with the need for proof of the fact.’”17 Judicial admissions
in pleadings are formal concessions or stipulations that are binding on the party making them.18
A statement will not be held as a judicial admission if the circumstances do not justify such a
finding.19 Whether a statement made in a pleading is binding on the party is up to the court’s
discretion.20

The representations made by KVB in the Motion for Relief from Automatic Stay must be
understood in context. Under the Code, a party-in-interest may obtain relief from the automatic
stay upon a showing that the debtor does not have an equity in the property and the property is
not necessary to an effective reorganization.21 In other words, “[a] creditor can meet its burden
of proof that a debtor has no equity by showing that the liens exceed the value stated. When the
motion is uncontested . . . [t]he court need not determine the exact value.”22 The Motion for
Relief from Automatic Stay filed by KVB met these requirements, and since it was unopposed,

17 Koch v. Koch Indus., Inc., 996 F. Supp. 1273, 1277 (D. Kan. 1998) (quoting Guidry v. Sheet Metal
Workers Intern. Ass’n, Local 9, 10 F.3d 700, 716 (10th Cir. 1993)).
18 See Koch, 996 F. Supp. at 1277 (quoting Michael H. Graham, Federal Practice and Procedure: Evidence
§ 6726).
19 See Koch, 996 F. Supp. at 1277 (quoting Schott Motorcycle Supply v. American Honda Motor Co., 976
F.2d 58, 61 (1st Cir. 1992)).
20 See Koch, 996 F. Supp. at 1278 (quoting Guidry, 10 F.3d at 716).
21 See 11 U.S.C. 362(d)(2).
22 Thomas v. Countrywide Home Loans, Inc. (In re Thomas), 344 B.R. 386, 393 (Bankr. W.D. Penn. 2006).
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the Motion for Relief from Automatic Stay was granted by default. The Court dismisses the
argument because KVB asserted a lien balance that was apparently sufficient to satisfy Debtors
that there was no equity in the Property. The Debtors have also changed their position now that
the value of the Property turns out to be higher than the Debtors might have thought. Because
the issue of valuation and the extent and validity of KVB’s liens were never actually litigated,
the Court will not bind KVB to the statements made in the Motion for Relief from Automatic
Stay. In further support of the Court’s conclusion, neither the Debtors nor the Trustee objected
to KVB’s proof of claim in which KVB asserted a secured claim of $266,000.

The Court determines that the statements made in the Motion for Relief from Stay by
KVB must be considered in the context of the specific purposes of that motion. Because KVB
only needed to demonstrate that Debtors lacked equity in the Property, KVB is not barred from
attempting to collecting the full value of the lien from the proceeds of the sale of the Property.

2.
The doctrine of judicial estoppel does not prohibit KVB from
asserting the full value of the lien on the Property.
Debtors aver that KVB is judicially estopped from asserting a greater lien on the Property
than what was stated in the Motion for Relief from Stay. “Judicial estoppel is an equitable
doctrine, ‘which protects the integrity of the judicial process by prohibiting parties from
deliberately changing positions according to the exigencies of the moment.’”23 In the Tenth
Circuit, three factors are used to determine whether the doctrine of judicial estoppel should be

23 Barker v. Asset Acceptance, LLC, 874 F. Supp. 2d 1062, 1065 (D. Kan. 2012) (quoting Eastman v. Union
Pac. R.R., 493 F.3d 1151, 1156 (10th Cir. 2007)).

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applied.24 Judicial estoppel may be applied if: (1) the party’s later position is clearly
inconsistent with his earlier position; (2) the party has succeeded in persuading a court to accept
the earlier position, so as to create the perception that either the first or second court was misled;
and (3) whether the party seeking to assert an inconsistent position would derive an unfair
advantage or impose an unfair detriment on the opposing party if he were not estopped.25
“Application of the doctrine of judicial estoppel as applied to estimates of value in a bankruptcy
is considered with a different, more relaxed view.”26

Here, the alleged amount of the secured claim of KVB increased from when the Motion
for Relief from Automatic Stay27 and the Motion for Approval of Sale28 were filed. However,
this position is not “clearly inconsistent” with the prior position, because the statements made in
the Motion for Relief from Automatic Stay were for the limited purpose of obtaining relief from
the automatic stay under § 362(d). Moreover, as noted above, KVB needed only to show that it
was entitled to the limited relief from the automatic stay; the Motion for Relief from Automatic
Stay was not in this case a final adjudication of KVB’s rights under the Mortgage. There is no
indication that the Court was misled by the statements made in the Motion for Relief from
Automatic Stay. KVB demonstrated that it was entitled to relief, and because there was no
opposition, the motion was granted. Finally, Debtors assert that they might have opposed the

24 In re Riazuddin, 363 B.R. 177, 185 (B.A.P. 10th Cir. 2007).

25 Id.

26 Kasbee v. Huntington Nat’l Bank (In re Kasbee), 466 B.R. 719, 726 (Bankr. W.D. Penn. 2010).

27 Doc. 34 filed on September 28, 2012.

28 Doc. 72 filed on July 16, 2013.

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Motion for Relief from Automatic Stay had KVB listed the value of the lien at the higher
amount. This argument is not persuasive. The Debtors are now asking this Court to intercede
and find that KVB has misled the Court because the Property was actually worth more than the
Debtors thought. The Court declines this invitation and therefore determines that the doctrine of
judicial estoppel is not applicable to this case.

Conclusion

Debtors have standing to challenge the Agreement because their post-discharge liability
may be decreased upon a favorable finding on the issue of KVB’s lien. If KVB’s lien amount is
reduced, then there will be more estate assets available to pay on priority unsecured tax claims.
This is of sufficient benefit to Debtors to impart standing. The extent of KVB’s lien cannot be
ascertained at this time, as the Court lacks the necessary evidence to make a final determination
as to the extent that KVB’s claim is secured by the Mortgage. Further proceedings are necessary
to fully resolve Debtors’ Objection and an evidentiary hearing consistent with this opinion will
be set forthwith. This Court rejects Debtors’ arguments under the doctrines of judicial
admissions or judicial estoppel.

IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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13-06115 Bernritter v. Bernritter (Doc. # 12)

Bernritter v. Bernritter, 13-06115 (Bankr. D. Kan. Jun. 11, 2014) Doc. # 12

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The relief described hereinbelow is SO ORDERED.
SIGNED this 10th day of June, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

JOHN VON BERNRITTER and Case No. 13-22505-7
SUZANNE ELIZABETH BERNRITTER,
Debtors.

BARBARA J. BERNRITTER,
Plaintiff,

v. Adv. No. 13-6115
JOHN VON BERNRITTER,
Defendant.

ORDER DENYING DEFENDANT’S MOTION TO DISMISS

This matter is before the Court on Debtor/Defendant John Von Bernritter’s motion to
dismiss1 the adversary complaint filed against him by Plaintiff Barbara J. Bernritter. The
adversary complaint seeks the denial of discharge of a $140,547.64 debt to Plaintiff under

1 Doc. 9.
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11 U.S.C. § 523(a)(15),2 which excepts from an individual’s chapter 7 discharge any debt to a
former spouse that is not a “domestic support obligation”3 and “that is incurred by the debtor in
the course of a divorce or separation or in connection with a separation agreement, divorce
decree or other order of a court of record.” Defendant has moved to dismiss the complaint under
Federal Rule of Civil Procedure 12(b)(6), arguing that the allegations made fail to support a §
523(a)(15) claim because they do not connect the debt owed to the parties’ separation agreement.

 Plaintiff Barbara J. Bernritter appears by her attorney, Alan B. Gallas of Gallas & Schultz,
Kansas City, Missouri; Debtor/Defendant John Von Bernritter appears by his attorney, Neil S.
Sader of The Sader Law Firm, LLC, Kansas City, Missouri.

The Court finds that Plaintiff’s complaint states a legally cognizable claim under
§ 523(a)(15), and the Court therefore denies Defendant’s motion to dismiss.

I. Background and Findings of Fact
The following allegations are made in Plaintiff’s complaint or in the attachments
incorporated thereto. Plaintiff and Defendant were previously married, but dissolved their
marriage on August 1, 1994, in the Circuit Court of Jackson County, Missouri. As part of the
proceeding to dissolve their marriage, Plaintiff and Defendant entered into a separation
agreement and a “general real estate partnership” agreement. Through these documents, the
assets of Plaintiff and Defendant were divided, and part of the real estate owned by the parties
was placed into a partnership. The partnership was to be managed by Defendant and was to
continue until all partnership assets were liquidated. Upon sale of the partnership assets, the net
proceeds were to be distributed equally between Plaintiff and Defendant.

Years later, on October 27, 2000, Defendant executed and delivered a promissory note to
Plaintiff in the amount of $90,555. This amount represented Plaintiff’s equitable interest in the

2 All future statutory references are to title 11 of the United States Code, unlessotherwise specified.

3 See § 101(14A) for the definition of a “domestic support obligation.”

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real estate transferred to the partnership at the time the parties’ marriage was dissolved. Debtor
made sporadic payments on the promissory note over the years, and on June 18, 2009, Plaintiff
filed suit in Platte County, Missouri, against Defendant, seeking to collect the money owed on
the note. Shortly thereafter, on November 6, 2009, judgment was entered against Defendant in
favor of Plaintiff for $140,547.64 plus interest, costs, and attorneys’ fees.

John Bernritter filed a chapter 7 bankruptcy petition on September 24, 2013. Plaintiff
then filed her adversary complaint, claiming the obligation owed to her by Defendant should be
excepted from discharge under § 523(a)(15). Plaintiff’s complaint then alleges: “The obligation
owed to [Plaintiff] was incurred by [Defendant] in the course of or in connection with a ‘divorce
or separation agreement.’” Plaintiff also seeks attorneys’ fees incurred by her in relation to this
proceeding.

II. Analysis
A. Legal Standard for Assessing Motion to Dismiss
An adversary proceeding to determine the dischargeability of particular debts is a core
proceeding under 28 U.S.C. § 157(b)(2)(I), over which this Court may exercise subject matter
jurisdiction.4

Defendant’s motion to dismiss is filed under Federal Rule of Civil Procedure 12(b)(6),
which permits a motion for “failure to state a claim upon which relief can be granted.”5 The
requirements for a legally sufficient claim stem from Rule 8(a), which requires “a short and plain
statement of the claim showing that the pleader is entitled to relief.”6 To survive a motion to
dismiss, a complaint must present factual allegations that, when assumed to be true, “raise a right

4 28 U.S.C. § 157(b)(1) and § 1334(b).

5 Rule 12 is made applicable to adversary proceedings via Federal Rule of BankruptcyProcedure 7012(b).

6 Rule 8 is made applicable to adversary proceedings via Federal Rule of BankruptcyProcedure 7008(a).

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to relief above the speculative level.”7 The complaint must contain “enough facts to state a claim
to relief that is plausible on its face.”8 “[T]he complaint must give the court reason to believe that
this plaintiff has a reasonable likelihood of mustering factual support for these claims.”9

The plausibility standard does not require a showing of probability that a defendant has
acted unlawfully, but requires more than “a sheer possibility.”10 “[M]ere ‘labels and
conclusions,’ and ‘a formulaic recitation of the elements of a cause of action’ will not suffice; a
plaintiff must offer specific factual allegations to support each claim.”11 Finally, the Court must
accept the nonmoving party’s factual allegations as true and may not dismiss on the ground that
it appears unlikely the allegations can be proven.12

B. Legal Sufficiency of Plaintiff’s § 523(a)(15) Claim
“One of Congress’s overarching themes in enacting BAPCPA was to redefine and
reinforce the ability of non-debtor former spouses to recover both support and property
settlement obligations from debtors in bankruptcy.”13 To that end, under § 523(a), an individual
debtor filing a Chapter 7 bankruptcy is not discharged from any debt:

(5) for a domestic support obligation; [or]
. . .
(15) to a spouse, former spouse, or child of the debtor and not of thekind described in paragraph (5) that is incurred by the debtor in the
7 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

8 Id. at 570.

9 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (italics

in original).

10 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

11 Kan. Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011) (quoting

Twombly, 550 U.S. at 555).

12 Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).

13 Wodark v. Wodark (In re Wodark), 425 B.R. 834, 838 (B.A.P. 10th Cir. 2010).

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course of a divorce or separation or in connection with a separationagreement, divorce decree or other order of a court of record, or adetermination made in accordance with State or territorial law by agovernmental unit[.]

Plaintiff’s claim under § 523(a)(15) alleges a debt to a former spouse that was incurred by
Defendant “in connection with a separation agreement.” Creditors, like Plaintiff, bear the burden
of proof by a preponderance of evidence with respect to dischargeability actions.14 Although
most § 523(a) exceptions to discharge are strictly construed in favor of the debtor,15 “exceptions
to discharge under § 523(a)(15) are construed more liberally than other provisions of § 523.”16

To state a claim under § 523(a)(15), a plaintiff must allege sufficient facts that could
show that the debt in question is: (1) to a “former spouse;” (2) is not (a)(5) support; and (3) is
incurred “in connection with a separation agreement, divorce decree or other order of a court of
record.”17 Defendant does not dispute that the facts alleged support the first and second prongs of
a § 523(a)(15) claim;18 he only argues that the allegations made in Plaintiff’s complaint are
insufficient to tie the debt owed to Plaintiff on the promissory note to the parties’ separation
agreement.

In response to Defendant’s motion to dismiss, Plaintiff cites Kush v. Kush (In re Kush)19
in support of her claim. In the Kush bankruptcy case, the husband and wife divorced and the

14 Grogan v. Garner, 498 U.S. 279, 283, 291 (1991).

15 Mantooth v. Jones (In re Jones), 9 F.3d 878, 880 (10th Cir. 1993).

16 Taylor v. Taylor (In re Taylor), 478 B.R. 419, 427 (B.A.P. 10th Cir. 2012). The TaylorBAP decision was appealed to the Tenth Circuit where the Tenth Circuit also affirmed thebankruptcy court’s determination that the debt at issue was a § 523(a)(15) obligation. See Taylor

v. Taylor (In re Taylor), 737 F.3d 670 (10th Cir. 2013).
17 See Taylor, 478 B.R. at 427-28 (listing elements) (internal quotation marks omitted).
18 As a result, this Court will likewise not address the “former spouse” and “not (a)(5)
support” portions of the claim.
19 Adversary Case No. 06-225, Bankruptcy Case No. 05-24972, 2006 WL 3096681(Bankr. D. Ariz. Oct. 30, 2006).
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parties’ divorce decree awarded the marital home to the ex-wife and all property related to the
ex-husband’s landscaping business to the ex-husband.20 The decree also required each party to be
responsible for the taxes on all property awarded to that party in the divorce decree.21 The
ex-husband/debtor owed old taxes stemming from his landscaping business, and when he failed
to pay the taxes, the IRS issued notices of intent to levy on the ex-wife’s home.22 The parties
then co-signed a second lien on the home in order for the ex-husband to pay the tax debt, and the
ex-husband agreed to solely make the second mortgage payments.23 Eventually, because the ex-
wife sought to refinance her home, the parties executed a promissory note for the ex-husband to
pay the ex-wife for the payment of the second lien.24 After the ex-husband filed bankruptcy, the
ex-wife sought to have the debt on the promissory note determined nondischargeable under
§ 523(a)(15).25 The bankruptcy court determined that the debt on the promissory note was
incurred in connection with the parties’ divorce and was nondischargeable.26 The court reasoned
that although the original obligation arose from the indemnification for the payment of income
taxes and was transformed into an obligation to make payments on the promissory note, the ex-
wife was “clearly able to trace the obligation.”27 The bankruptcy court found that the “essential
nature of the obligation” remained the same and that it arose out of the divorce decree.28 Thus,

20 Id. at *1.

21 Id.

22 Id.

23 Id.

24 Id. at *2.

25 Id. at *1.

26 Id. at *3.

27 Id. at *4.

28 Id.

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because the original obligation would be nondischargeable, so would the obligation on the
promissory note.29

Here, the facts are similar. The parties set up the general real estate partnership as a
method of distributing their jointly-held property at the time of the divorce. The general real
estate partnership agreement is incorporated into the parties’ separation agreement. Essentially,
the complaint alleges that the partnership agreement was executed to effectuate the divorce
property settlement. The parties’ subsequent promissory note was connected to Defendant John
Bernritter’s partnership obligations; Defendant was the managing partner and was to divide the
net sale proceeds of the partnership assets with Plaintiff. The parties’ promissory note indicates a
subsequent, different arrangement was made, but the arrangement is still one that grew out of the
partnership agreement, which itself grew out of the settlement agreement. The character of the
underlying debt remains.

The Tenth Circuit has indicated its willingness to hold a former spouse liable for marital
debt that has changed in form. In Robinson v. Robinson (In re Robinson), 30 the parties’ divorce
proceeding required the ex-husband to pay the second mortgage on the house awarded to the exwife.
31 The ex-wife later refinanced her home, but asserted in the ex-husband’s bankruptcy
proceeding that the ex-husband’s debt on the second mortgage was nondischargeable.32 The
Tenth Circuit concluded that the ex-wife’s act of refinancing the debt did not extinguish the ex


29 Id. See also Archer v. Warner, 538 U.S. 314, 320 (2003) (concluding that reducing afraud claim to a settlement does not change the nature of the debt for dischargeability purposes);
Burrell-Richardson v. Mass. Bd. of Higher Educ. (In re Burrell-Richardson), 356 B.R. 797, 804

(B.A.P. 1st Cir. 2006) (concluding that a debt did not lose its characteristic as a student loanobligation when the debt was reduced to a judgment); Moraes v. Adams (In re Adams), 761 F.2d
1422, 1427 (9th Cir. 1985) (addressing dischargeability of punitive damages under § 523(a)(6)
and concluding that “the exception to discharge turns upon the nature of the act which gave riseto the liability rather than upon the nature of the liability”).
30 921 F.2d 252 (10th Cir. 1990).

31 Id. at 253.

32 Id.

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husband’s obligation to pay the debt and affirmed the district court’s decision that the debt was
nondischargeable.33 The facts of Robinson are similar to the facts at hand—the allegations here
show that the parties’ actions transformed the debt from the form originally envisioned in the
marital settlement agreement and the partnership agreement, but did not extinguish Defendant’s
obligation to pay and did not alter the nature of the debt.

Although the determination of whether a particular debt is dischargeable is a question of
federal law,34 the federal courts are reluctant to interfere in family law matters.35 Ultimately,
Plaintiff’s complaint alleges sufficient facts to state a claim under the § 523(a)(15) exception to
discharge, a statutory directive that is construed more liberally than other provisions of § 523.36
Although the facts of this complaint will ultimately be resolved via an evidentiary hearing where
the specific dynamics will be ascertained, Plaintiff’s complaint states a sufficiently viable claim
to survive dismissal. Defendant’s motion to dismiss Plaintiff’s complaint is denied.

III. Conclusion
For the reasons set forth above, the Court finds that Plaintiff’s complaint states a legally
cognizable claim under § 523(a)(15), and Defendant’s motion to dismiss is denied.

It is, therefore, by the Court ordered that Defendant’s motion to dismiss is DENIED,
as stated more fully herein.

IT IS SO ORDERED.

33 Id.

34 See Sampson v. Sampson (In re Sampson), 997 F.2d 717, 721 (10th Cir. 1993) (statingthat nondischargeability under § 523(a)(5) “is a question of federal law”).

35 See Wise v. Bravo, 666 F.2d 1328, 1332 (10th Cir. 1981) (noting that the substantivelaw of domestic relations “is one uniquely within the province of the respective states”).

36 Taylor v. Taylor (In re Taylor), 478 B.R. 419, 427 (B.A.P. 10th Cir. 2012). Also, the
§ 523(a)(5) exception to discharge for domestic support obligations is not construed strictly infavor of the debtor. See 4 COLLIER ON BANKRUPTCY ¶ 523.05, at 523-1 (Alan N. Resnick &
Henry J. Sommer, eds., 16th ed. 2013); Mantooth v. Jones (In re Jones), 9 F.3d 878, 880 (10thCir. 1993).

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###


ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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11-06208 Expert South Tulsa, LLC, v. Cornerstone Creek Partners, LLC (Doc. # 105)

Expert South Tulsa, LLC, v. Cornerstone Creek Partners, LLC, 11-06208 (Bankr. D. Kan. Jun. 10, 2014) Doc. # 105

PDFClick here for the pdf document.


 

The relief described hereinbelow is SO ORDERED.
SIGNED this 9th day of June, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

EXPERT SOUTH TULSA, LLC, Case No. 10-20982
Debtor. Chapter 11

EXPERT SOUTH TULSA, LLC,
Plaintiff,

v. Adv. No. 11-06208
E.H. HAWES REVOCABLE TRUST,
Intervenor,
v.
CORNERSTONE CREEK PARTNERS, LLC,
Defendant.

MEMORANDUM OPINION AND ORDER GRANTING
CORNERSTONE CREEK PARTNERS LLC’S
MOTION FOR SUMMARY JUDGMENT


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Introduction

This case comes before the Court on the Motion for Summary Judgment filed by
Cornerstone Creek Partners, LLC (Cornerstone or Defendant)1 and the objection to it filed by
Plaintiff Expert South Tulsa, LLC, and Intervenor E.H. Hawes Revocable Trust.2 Prior to the
filing of this case, Debtor Expert South Tulsa, LLC (EST), sold real property (Memorial
Commons) to Cornerstone. EST filed this adversary case to avoid the sale of Memorial
Commons to Cornerstone, asserting claims under the Bankruptcy Code and the Oklahoma
Uniform Fraudulent Transfer Act. EST’s adversary complaint3 requests relief under 11 U.S.C.
§§ 544(b) and 548.4 E.H. Hawes Revocable Trust (Trust) has been substituted for EST to protect
the Trust’s potential interest in a certain promissory note described below.5

Jurisdiction

The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C.
§ 1334(b). Reference to the Court of this proceeding is appropriate under 28 U.S.C. § 157(a)
and Standing Order No. 13-1 of the United States District Court for the District of Kansas. This
case is a core proceeding under 28 U.S.C. § 157(b)(2)(H).

1 Doc. 40.

2 Doc. 78.

3 Doc. 1.

4 All future statutory references are to the Bankruptcy Code, as amended by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005, 11 U.S.C. §§ 101 - 1532, unless otherwise specifically noted.

5 The Debtor/Plaintiff appears by its attorney, Jonathan A. Margolies of McDowell, Rice, Smith &
Buchanan, Kansas City, MO; Intervenor E.H. Hawes Revocable Trust appears by its attorney, Eric L. Johnson of
Spencer Fane Britt & Browne, LLP, Kansas City, MO; Defendant Cornerstone Creek, LLC, appears by its attorneys,
John W. McClelland of Armstrong Teasdale, LLP, Kansas City, MO, and Sidney K. Swinson of GableGotwals,
Tulsa, OK.

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Statement of Facts

On January 26, 2007, EST obtained a loan with Marshall & Ilsley Bank (M&I) for the
purpose of developing 35 acres of real estate in Tulsa, Oklahoma. An approximately 21.5-acre
parcel of this real estate, known as Memorial Commons, was eventually sold to Cornerstone and
is the subject of the dispute in this case. The loan, which was renewed or modified on several
occasions, was evidenced by an amended promissory note dated April 8, 2008 (Note),6 and was
secured by a purchase money mortgage, security agreement, assignment of rents and leases, and
fixtures filing dated January 26, 2007 (Mortgage).7 EST’s principals, Lawrence V. McLellan II
and Trey Hawes, guaranteed the Note on April 8, 2008.8 On March 25, 2009, M&I assigned the
Note, Mortgage, and related loan documents to OKL 18, LLC (OKL).9 At the time of this
assignment, EST was in default on the Note.10 Shortly after OKL acquired the Note and
Mortgage, EST and OKL entered into a forbearance agreement.11 This forbearance agreement
(First Forbearance Agreement) was signed on April 22, 2009, and granted EST until July 22,
2009, to make payments before OKL foreclosed on the property.12 The consideration paid to
OKL for the First Forbearance Agreement was $500,000 (First Forbearance Fee). The Trust

6 Doc. 100-1, Exhibit 1 to Affidavit of Edwin Hugh (‘Trey”) Hawes, III, Exhibit A to Plaintiff and
Intervenor’s Objection (Doc. 78) (hereafter Objection).

7 Doc. 100-2, Exhibit 2 to Exhibit A to Objection.

8 Doc. 100-3, Exhibit 3 to Exhibit A to Objection.

9 Doc. 102-2, Exhibit E to Objection.

10 Doc. 100, Exhibit A to Objection, ¶ 19, at 5.

11 Doc. 100-11, Exhibit 11 to Exhibit A to Objection.

12 Id. ¶ 3, at 3-4.

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paid $200,000 of this fee.13 The First Forbearance Agreement also contained a provision
allowing EST to settle its liability with OKL upon payment of $5,000,000.14 On July 23, 2009,
OKL and EST entered into a second forbearance agreement (Second Forbearance Agreement).15
The $100,000 fee paid to OKL for this agreement was paid by the Trust.16 The Second
Forbearance Agreement provided that OKL would not attempt to collect against Memorial
Commons until August 5, 2009, with an option to extend the forbearance period to August 20,
2009. The fee to exercise the extension was $250,000; this fee was paid to OKL by Expert
Development, a management company. Expert Development’s principals at the time were
Lawrence McLellan and Trey Hawes.

Despite these agreements, OKL initiated foreclosure proceedings in Oklahoma on
August 11, 2009 (Foreclosure Action).17 In the Foreclosure Action, OKL sought judgment in
personam against EST as to the Note and in rem as to the Mortgage.18 On December 30, 2009,
and while the Foreclosure Action was pending, OKL assigned its interest (Assignment) in the
Note and Mortgage to GTMI, LLC (GTMI). This Assignment was not recorded and GTMI was

13 Doc. 100, Exhibit A to Objection, ¶ 23, at 6.

14 Doc. 100-11, Exhibit 11 to Exhibit A to Objection, ¶¶ 4(b) and (c), at 4-5.

15 Doc. 100-16, Exhibit 16 to Exhibit A of Objection.

16 Doc. 100, Exhibit A to Objection, ¶ 31, at 8.

17 OKL 18, LLC v. Expert South Tulsa, LLC, et al., Case No. CJ-2009-05969 in the District Court of Tulsa
County, Oklahoma. Doc. 40 ¶ 2, at 3. This case was consolidated with Key Construction of Oklahoma, LLC v.
Expert South Tulsa, LLC, Case No. CJ-2009-3100. Id. The Key Construction case was filed by the largest
mechanic’s lien holder against EST. Any reference to the Foreclosure Action is to this consolidated case.

18 Doc. 40-4, Defendant’s Exhibit 1 (Petition for Foreclosure) to Exhibit A (Declaration of Elizabeth R.
Muratet, Doc. 40-2) to Motion for Summary Judgment (MSJ). In the Foreclosure Action, the Mortgage was defined
as “that certain Purchase Money Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture
Filing,” and this Court adopts the same classification.

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not substituted as a party in the Foreclosure Action. On November 6, 2009, OKL filed a motion
for default judgment in the Foreclosure Action. EST did not respond to any of the pleadings
filed in that case.

On November 9, 2009, OKL and the Trust signed an “Option to Purchase the Tulsa
Note” (Option Agreement).19 The terms of the Option Agreement provided that the Trust could
purchase the Note from OKL no later than December 31, 2009, for a payment of $1,645,108 plus
certain per diem payments if payment were tendered after November 30, 2009. The Option
Agreement contained both a strict deadline20 and a clause indicating that time is of the essence.21

During December 2009, EST negotiated with a potential buyer (Mike Sitton and his
company, Sitton Properties, LLC) and with several creditors to sell Memorial Commons by the
end of 2009. When it became clear that a sale would not be completed before the Option
Agreement deadline, Trey Hawes communicated this situation to Steve Perry, a member and
manager of OKL.22 During the communications on December 29, 2009, Steve Perry indicated
that the Option Agreement23 could potentially be extended beyond the expiration date.

A contract to purchase Memorial Commons (Purchase Agreement) was eventually signed
between EST and Cornerstone with the sale to close on January 8, 2010. The terms of the

19 Doc. 100-27, Exhibit 27 to Exhibit A to Objection.

20 Id. ¶ 2, at 2.

21 Id. ¶ 12, at 3.

22 Doc. 100-32, Exhibit 32 to Exhibit A to Objection.

23 Id. at 2-3. The statements made in the email string are vague at best, but for purposes of this motion, the
Court will infer that Perry is speaking about the Option Agreement.

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Purchase Agreement are listed in the Seller’s Closing Statement.24 Under the Purchase
Agreement, Cornerstone paid $3,000,000, but only $261,477.00 of this amount went to EST.25
The balance of the purchase price satisfied the claims of some of EST’s other creditors.26
Notably, $1,742,170.16 of the purchase price was paid to GTMI; $114,999.77 was distributed
among various mechanic’s lienholders; $415,000.00 was paid to the Trust; and $225,000.00 was
paid to Expert Development.27 The remaining funds were used to pay other costs arising from
the sale.28 Attendant to the closing, OKL and GTMI released their mortgage interests in
Memorial Commons.29 The Note, however, was never marked satisfied or paid in full, nor was
anything done to the Note physically to indicate that the debt was released or satisfied. Also
attendant to the sale closing, OKL voluntarily dismissed the Foreclosure Action with prejudice.30
Finally, the mechanic’s lien claimants31 released their liens in Memorial Commons and settled

24 Docs. 40-11 and 40-12, Exhibit 8, parts 1 and 2, to Exhibit A to MSJ.
25 Doc. 40-11, Exhibit 8, part 1, to Exhibit A to MSJ.


26 Id.
27 Id.


28 Id.

29 Doc. 40-24, Exhibit 3 to Exhibit B (Declaration of Pam Bewley) to MSJ; Doc. 102-23, Exhibit Z to
Objection.

30 Doc. 40-13, Exhibit 9 to Exhibit A to MSJ, at 5.

31 The mechanic’s lienholders were: Key Construction Oklahoma, LLC; Messer Construction, Inc.; MSB
Construction Co.; Circle Services Construction; Pave Stone Store of Oklahoma; Utility Supply Co., Inc.; and Liberty
Precast, LLC. These companies were all joined in the Key Construction case noted in footnote 17, supra. These
companies are collectively referred to as the mechanic’s lien claimants or mechanic’s lienholders.

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their claims against EST.32 No one disputes that at closing Cornerstone obtained clear title to
Memorial Commons.

Shortly after the sale closed, Hawes asked GTMI for an assignment of the Note to the
Trust.33 GTMI indicated that it was not sure whether any obligation on the Note continued once
the Foreclosure Action was dismissed with prejudice.34 Nonetheless, in April 2010, GTMI
assigned the Note, without representation or warranty, to the Trust, back-dated to January 8,
2010.35

On January 19, 2010, eleven days after the sale closed, Cornerstone sold Memorial
Commons to South Memorial Development, LLC (South Memorial) for $4,421,230. As a result
of the sale to South Memorial, Cornerstone allegedly earned a profit of $1,421,230.

On March 30, 2010, EST was placed in involuntary chapter 7 bankruptcy by one of its
creditors. The case was then converted to chapter 11 on May 7, 2010. This adversary
proceeding was filed by EST on September 1, 2011, to recover $1,421,230.00 from Cornerstone
under either 11 U.S.C. §§ 548 or 544(b) of the Bankruptcy Code.36 Cornerstone filed the instant
Motion for Summary Judgment; the Hawes Trust is the intervenor37 and is a party-in-interest.

32 Key Construction’s foreclosure action was dismissed with prejudice when the dismissal was filed in the
Foreclosure Action. At the same time, the mechanic’s lienholders all filed releases of their mechanic’s liens and
disclaimers disavowing any right, title, or interest in Memorial Commons.

33 Doc. 100-39, Exhibit 39 to Objection.

34 Id.

35 Doc. 40-31, Exhibit I to MSJ.

36 Doc. 1, Complaint, at 4-6.

37 Doc. 61.

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Summary Judgment Standard

Summary judgment is appropriate if the movant shows that there is no genuine dispute as
to any material fact and the movant is entitled to judgment as a matter of law.38 To determine
whether a genuine dispute as to a material fact exists, all justifiable inferences must be drawn in
favor of the non-moving party.39 Summary judgment is appropriate if the non-moving party
“fails to make a showing sufficient to establish the existence of an element essential to that
party’s case.”40

Since Cornerstone is the movant, all justifiable inferences from the evidence in the record
will be drawn in favor of EST and the Trust. Cornerstone must demonstrate that no genuine
issue as to any material fact exists and that it is entitled to judgment as a matter of law.

Discussion

There are two independent claims against Cornerstone. The first claim arises under
§ 544(b); the second arises under § 548. Under § 544(b), the Court looks to state law causes of
action, here the Uniform Fraudulent Transfer Act of Oklahoma. Under § 548, the Court looks to
whether the sale was a constructively fraudulent transfer under the Code. Cornerstone
challenges both the UFTA claim and the § 548 claim on the grounds that the transfer of fully
encumbered property does not satisfy the definition of an “asset” or “an interest of the debtor in
property.” Second, Cornerstone challenges the claim that EST did not receive reasonably
equivalent value because, according to Cornerstone, the consideration EST received was equal to

38 FED. R. CIV. P. 56(a) and FED. R. BANKR. P. 7056.
39 Magnus, Inc. v. Diamond State Ins. Co., 545 Fed. App’x 750, 752 (10th Cir. 2013) (citation omitted).
40 Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).


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or greater than the fair market value of the property. The Court considers each argument in turn
and reaches the following conclusions.

A.
The Trust may not avoid the sale of Memorial Commons under § 544(b) because the
sale did not constitute a fraudulent transfer under the UFTA as adopted by
Oklahoma.
“Section 544(b) of the Bankruptcy Code permits the Trustee to stand in the shoes of a
creditor to assert any state law claims that a creditor may have.”41 According to § 544(b), “the
trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred
by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that
is allowable under section 502 of this title or that is not allowable only under section 502(e) of
this title.” To establish a claim under this statute, the Trustee, or in this case, the Debtor-inpossession,
must establish liability under applicable state law.42

Here, the applicable state law is the law of Oklahoma.43 Oklahoma has adopted the
Uniform Fraudulent Transfer Act (UFTA).44 The UFTA provides:

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor

whose claim arose before the transfer was made or the obligation was incurred if

the debtor made the transfer or incurred the obligation without receiving a

reasonably equivalent value in exchange for the transfer or obligation and the

debtor was insolvent at that time or the debtor became insolvent as a result of the

41 Kupetz v. Wolf, 845 F.2d 842, 845 (9th Cir. 1988).

42 Georgia-Pacific Corp. v. Lumber Prods. Co., 590 P.2d 661, 666 (Okla. 1979) (Creditor asserting the
applicability of Oklahoma UFTA has the burden of proof.).

43 See Brenner v. Oppenheimer & Co. Inc., 273 Kan. 525, 539 (Kan. 2002). “Where the parties to a
contract have entered an agreement that incorporates a choice of law provision, Kansas courts generally effectuate
the law chosen by the parties to control the agreement.” Here, the parties chose to have Oklahoma law control.

44 The Oklahoma UFTA provisions are codified in OKLA. STAT. ANN. 24 §§ 112-123.

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transfer or obligation.45

A transfer is defined as “every mode, direct or indirect, absolute or conditional, voluntary
or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes
payment of money, release, lease, and creation of a lien or other encumbrance.”46 An asset is
property of the debtor, excluding property “to the extent it is encumbered by a valid lien . . . .”47
According to Cornerstone, the plain reading of the UFTA suggests that when property is fully
encumbered by a valid lien, it is no longer an asset of the debtor, and therefore a transfer of fully
encumbered property is not fraudulent under the UFTA.

Oklahoma does not appear to have any case authority on this issue, and the parties cite to
none, so this Court will look to other jurisdictions that have interpreted the same or similar
provisions. The general rule under the UFTA is that a debtor must have equity in property
before it can be considered an asset.48 If Memorial Commons were fully encumbered at the time
it was sold to Cornerstone, the transfer was not fraudulent under the UFTA.49 The Trust asserts
that property ceases to be fully encumbered when a lienholder agrees to release its lien for less
than full value of the collateral. The determination of whether the property was fully

45 OKLA. STAT. ANN. 24 § 117(A).

46 OKLA. STAT. ANN. 24 § 113(12) (emphasis added).

47 OKLA. STAT. ANN. 24 § 113(2)(a).

48 See e.g., In re Brun, 360 B.R. 669, 674 (Bankr. C.D. Cal. 2007); Nat’l Loan Investors, L.P. v. World
Prop., LLC, 830 A.2d 1178, 1183 (Conn. App. Ct. 2003); Webster Indus., Inc. v. Northwood Doors, Inc., 320 F.
Supp. 2d. 821, 837 (N.D. Iowa 2004); and Kellstrom Bros. Painting v. The Carriage Works, Inc., 844 P.2d 221, 222
(Or. Ct. App. 1992).

49 See 5 COLLIER ON BANKRUPTCY ¶ 548.02[2][b], at 548-36 (Alan N. Resnick & Henry J. Sommer, eds.,
16th ed. 2013). “[T]he UFTA does not permit creditors to set aside a transaction if the transfer was of property
overencumbered by valid liens or of otherwise exempt or immune property.”

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encumbered is made at the time of the transfer.50

The Trust points to World Properties to support its position. In World Properties, the
Connecticut Court of Appeals was asked to overturn the trial court’s finding that the defendants
violated the UFTA. The defendants in that case were a husband and wife, along with the
multiple shell companies they used to shelter money and assets from their creditors. The
defendants frequently assigned property and funneled profits between the different corporations
for no consideration. One of these transfers included property fully encumbered by a $17
million judgment lien on property valued at $14.5 million. The defendants argued that the
transfer of the property from one corporation to another was not fraudulent under the UFTA
because it was not an asset. The court disagreed with that position and determined that a prior
agreement between the judgment lien creditor and the defendant corporation to settle the debt for
$5.2 million limited the value of the lien to the compromised amount.51 The court held that
because the agreement occurred prior to the transfer, the settlement “fully discharged the $17
million lien and substituted the $5.2 million lien in its stead.”52 Because the new lien was below
the market value of the property, the court determined that the property was an asset of the
debtor and therefore the UFTA applied. The Trust argues the same principle applies here.
According to the Trust, GTMI agreed to release its lien upon payment of the approximately
$1,700,000 Option Price, thereby limiting the lien to that amount. At the sale closing, EST owed

50 World Properties, 830 A.2d at 1183.
51 Id.
52 Id.


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close to $8 million on the Note and the property was worth no more than $4,990,000.53

The facts in World Properties are distinguishable from those here because at the time of
the Memorial Commons’ sale, there was no prior agreement in place that limited OKL’s ability
to enforce the entire amount of the Note against EST. The Option Agreement was between OKL
and the Trust, and it provided that the Trust could purchase the Note and Mortgage from OKL
for a price below Memorial Commons’ market value. If the Trust had purchased the Option, the
Trust would have then been able to enforce the entire amount of the Note against EST, which is
exactly what the Trust is attempting to do in this adversary case. The Option Agreement did not
limit the value of the lien against EST. The Trust similarly cannot point to the Forbearance
Agreements as evidence that the value of the lien was reduced because those agreements were
temporary and OKL was legally entitled to enforce the full value of the lien upon the expiration
of those agreements.

EST secured the release of the Note and Mortgage upon payment of a portion of the sale
proceeds to GTMI. This occurred concurrently with the transfer of Memorial Commons to
Cornerstone, not prior to the transfer as in World Properties. For UFTA purposes, the transfer of
Memorial Commons to Cornerstone was not a transfer of an asset. However, even if the result of
the agreement were that Memorial Commons became an asset of the debtor, the discussion
below explains why EST received reasonably equivalent value for the property.

B.
The Trust may not avoid the sale under § 548 because EST received reasonably
equivalent value when it sold Memorial Commons to Cornerstone.
Section 548 of the Code allows the trustee, or in chapter 11 cases, the debtor-in


53 Doc. 78 ¶ 100, at 28-29 (stating that an appraisal less than a month after the sale valued Memorial
Commons at $4,990,000).

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possession,54 to avoid fraudulent transfers made within two years of the petition date.

Specifically, § 548(a)(1) states:

The trustee may avoid any transfer . . . of an interest of the debtor in
property . . . that was made or incurred on or within 2 years before the date of the
petition, if the debtor voluntarily or involuntarily –

(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or
defraud any entity to which the debtor was or became, incurred or indebted; or
(B) (i) received less than a reasonably equivalent value in exchange for such transfer or
obligation; and
(ii) (I) was insolvent on the date that such transfer was made or such obligation was
incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in a business or a transaction, or was about to engage in
business or a transaction, for which any property remaining with the debtor was an
unreasonably small capital . . . .
Cornerstone argues that the sale of Memorial Commons was not a fraudulent transfer because it
was not a transfer “of an interest of the debtor in property” and that even if it were, the Debtor
received “reasonably equivalent value.”55

1. Under Oklahoma law, Debtor had an interest in Memorial Commons.
What constitutes “an interest of the debtor in property” is not defined in the Bankruptcy
Code in the same way that asset is defined in the Oklahoma UFTA. Without a clear definition,
Cornerstone asserts that the UFTA analysis applies to § 548 and therefore fully encumbered
property cannot be fraudulently transferred.56 The Court disagrees. The Supreme Court has
stated that “property of the debtor subject to the preferential transfer provision is best understood
as that property that would have been part of the estate had it not been transferred before the

54 11 U.S.C. § 1107(a).
55 No claim has been asserted that the transfer was made with fraudulent intent under § 548(a)(1).


56 Cornerstone cites In re Solomon, 300 B.R. 57, 63 (Bankr. N.D. Okla. 2003), to support its position that
the UFTA and § 548 “are in pari materia,” but in Solomon, neither party questioned whether the debtor had an
interest in the property, so the court did not consider the issue.

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commencement of the bankruptcy proceedings.”57 Property of the estate includes fully
encumbered property.58 Cornerstone correctly asserts that the extent of a debtor’s interest in the
property is determined by state law.59 The applicable Oklahoma law that determines the
Debtor’s rights in encumbered real property is not the UFTA, however. In Oklahoma, a
mortgagor retains “all incidents of ownership,” including the right to possession, the right to
collect rents, and the right to hold title.60

EST retained all incidents of ownership as a mortgagor under Oklahoma law. These
rights gave EST a sufficient interest in the property such that Memorial Commons would have
been property of the estate had EST not sold the property to Cornerstone. This interest is
therefore sufficient to satisfy the first prong of the § 548 analysis.

The Trust argues that Memorial Commons was not fully encumbered at the time it was
sold because GTMI contractually limited its interest in the loan to the amount of the Option
Price. Since the amount of equity in Memorial Commons that EST possessed at the time of the
transfer is not necessary to determine whether EST had an interest in the property, the impact of
the Option Agreement is more applicable to whether EST received reasonably equivalent value.

57 Begier v. Internal Revenue Service, 496 U.S. 53, 58-59 (1990) (internal quotation marks omitted).

58 See §§ 362(d)(2)(A), 506(a)(1), and 541(b); see also In re Equator Corp., 2007 WL 3119679, at *2
(Bankr. S.D. Tex.) (“The fact that property is fully encumbered, or even over-encumbered, does not exclude the
property from the definition of property of the estate . . . .”); In re Kasper, 309 B.R. 82, 98 (Bankr. D.C. 2004)
(citing U.S. v. Whiting Pools, Inc., 462 U.S. 198 (1983)).

59 Barnhill v. Johnson, 503 U.S. 393, 397 (1992) (citation omitted); see also Butner v. U.S., 440 U.S. 48, 55
(1979) (“Property interests are created and defined by state law.”).

60 Teachers Ins. and Annuity Ass’n of America v. Oklahoma Tower Assocs. Ltd. P’ship, 798 P.2d 618, 61920
(Okla. 1990). See also Butner, 440 U.S. at 52-54 (discussing generally the difference between “lien” and “title”
theory states).

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2.
Expert South Tulsa received reasonably equivalent value for the sale of
Memorial Commons.
Section 548 of the Bankruptcy Code allows trustees to avoid constructively fraudulent
transfers. Constructively fraudulent transfers are those transfers in which the debtor did not
necessarily transfer the property with any fraudulent intent, but which the Code deems to
unfairly diminish a debtor’s assets to the creditor’s detriment.61 For a court to find that a transfer
was constructively fraudulent under this section, it must find that the debtor did not receive
“reasonably equivalent value.”62 “The plaintiff seeking to set aside a transaction has the burden
of proving a lack of reasonably equivalent value.”63

Although “reasonably equivalent value” is not defined in the Code, courts have
developed a two-part test to determine whether it exists on a case-by-case basis.64 The first part
of the test looks to whether the debtor received any value in exchange for the property.65 This
step is usually only examined when it is unclear what exactly was received in exchange for the
asset transferred. If a court determines that value was received in exchange for the asset
transferred, then the next step is to determine whether that value was “reasonably equivalent” to
the value of the asset transferred.66 Here, both parts of the test are contested, and therefore the
Court looks at each one in turn.

61 5 COLLIER ON BANKRUPTCY ¶ 548.05, at 548-67, supra note 49.
62 11 U.S.C. § 548(a)(1)(B)(i).
63 Kipperman v. Onex Corp., 411 B.R. 805, 837 (Bankr. N.D. Ga. 2009).
64 5 COLLIER ON BANKRUPTCY ¶ 548.05[2][a], at 548-68, supra note 49.


65 Id.

66 Sender v. Buchanan (In re Hedged-Investments Assocs., Inc.), 84 F.3d 1286, 1289 (10th Cir. 1996).

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 The Code defines value under § 548(d)(2)(A) as “property, or satisfaction or securing of
a present or antecedent debt of the debtor . . . .” As the definition suggests, courts may consider
more than the dollar value provided from the purchaser in an alleged fraudulent transfer.67 It has
been noted that “in deciding whether value has been transferred the court must examine ‘all
aspects of the transaction and carefully measure the value of all benefits and burdens to the
debtor, direct or indirect.’”68 Value can include satisfaction of antecedent debt of the debtor, but
it does not normally include the satisfaction of another party’s debt.69 Value can include indirect
benefits to the estate when these benefits result from the transaction.70

Here, the transfer of Memorial Commons from EST to Cornerstone encompassed more
than the $3 million purchase price. It is evident from the closing documents that the release of
the mortgages, the dismissal with prejudice of the Foreclosure Action, and the release of the
mechanic’s liens were tied to, and consideration for, the sale of Memorial Commons to
Cornerstone. These concessions, provided by OKL, GTMI, and the mechanic’s lien claimants,
were made in accordance with the sale, and the only reason they are questioned now is because
the Trust wishes to enforce the Note.

67 See Pummill v. Greensfelder, Hemker & Gale (In re Richards & Conover Steel, Co.), 267 B.R. 602, 612

(B.A.P. 8th Cir. 2001) (Courts must consider all the factors bearing on the sale.).
68 Id., quoting Christians v. Crystal Evangelical Free Church (In re Young), 82 F.3d 1407, 1415, vacated,
521 U.S. 1114 (1997), reinstated, 141 F.3d 854 (8th Cir.1998), cert. denied, 525 U.S. 811 (1998).

69 In re Richards & Conover Steel, Co., 267 B.R. at 613.

70 See, e.g., Kipperman v. Onex Corp., 411 B.R. 805, 837-38 (Bankr. N.D. Ga. 2009) (stating that “courts
must look beyond the actual money received to the indirect benefits to the debtor.” The court also included
“synergistic effects of new corporate relationships, the arrival of a new, more successful management team, tax
benefits, additional access to credit to facilitate new business opportunities, and the ability to protect a source of
supply or customer relationships” in the list of benefits potentially received by a debtor in a leveraged buyout
context.).

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Before turning to the Note, the Court finds that the release of the Mortgage by OKL and
GTMI and the release of the mechanic’s liens fall under the definition of “value” and therefore
must be included as value to EST. The evidence shows that the mortgages were to be released
simultaneously with the closing of the sale and the closing was contingent on their release. This
is also true for the mechanic’s liens. The mechanic’s lienholders consented to the release of their
liens and debt upon payment of a portion of the purchase price. These actions were all taken in
accordance with the Purchase Agreement and must be included in the analysis because they each
provided value to EST. Ignoring these benefits to EST simply because they did not come directly
from Cornerstone would be unjust and would not accurately reflect the significance of the
transaction. That is, although Cornerstone obviously did not release liens or satisfy debt at
closing, this occurred because of the sale to Cornerstone and the consideration paid by
Cornerstone. The benefit of this bargain must be included as value to EST.

Turning now to the Note, this Court must determine whether it remains enforceable after
the Foreclosure Action was dismissed with prejudice. The Trust provides the following evidence
that the Note remains enforceable: (1) The Note was assigned to GTMI prior to the dismissal
with prejudice; (2) Both OKL and GTMI signed a release of their mortgage interest but did not
sign a release of the Note; (3) GTMI allegedly “acknowledged its responsibility with respect to
the assignment of the Tulsa Note to the Trust;”71 (4) GTMI assigned the Note to the Trust in
April 2010, but made it effective to January 8, 2010; and (5) The original Note was not stamped
“released,” “forgiven” or “satisfied.”

For purposes of this Motion, the Court finds that GTMI did in fact assign the Note to the

71 Doc. 78 ¶ 88, at 26.

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Trust. The issue, however, is whether EST continued to have any obligation under the Note after
the dismissal with prejudice was filed in the Foreclosure Action. The Trust asserts that the
assignment of the Note to GTMI, who was not a party to the Foreclosure Action, preserved the
obligation despite the filing of the dismissal. Cornerstone’s position is that the dismissal with
prejudice ended all rights to enforce either the Mortgage or the Note, and the principle of res
judicata prevents any action to collect on the loan.

Resolving this issue requires a determination of answers to two questions: Was the
assignment of the Note from OKL to GTMI prior to the dismissal with prejudice of the
Foreclosure Action effective to terminate the state court’s ability to adjudicate the dispute until
GTMI was added as a party, and if not, was the dismissal with prejudice a final adjudication of
the Foreclosure Action on its merits? The Court determines that the dismissal with prejudice of
the Foreclosure Action terminated any right to enforce the Note and the Mortgage and that the
dismissal was sufficient to serve as res judicata as to the Trust’s claim to enforce the Note.

The general principles of res judicata and estoppel by judgment have been clearly
blueprinted. It is the rule of long standing and frequent repetition that where a
second suit between the same parties, or their privies, is on the same cause of
action, the final judgment in the prior action is conclusive as to all matters which
were actually litigated and as to every issue, claim, or defense which might have
been presented; and that where a later suit is upon a different cause of action, the
judgment in the former operates as an estoppel only in respect to the issues and
questions which were actually litigated and determined.72

Res judicata “is designed to ensure the finality of judicial decisions.”73 A stipulated, voluntary
dismissal, approved by the court with prejudice, is a judgment on the merits.74

72 Providential Dev. Co. v. U.S. Steel Co., 236 F.2d 277, 280 (10th Cir. 1956).
73 Clark v. Haas Group, Inc., 953 F.2d 1235, 1237 (10th Cir. 1992).
74 Id. at 1238.


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Here, the dismissal of the Foreclosure Action was agreed to by all the parties to the
lawsuit and it was approved by the state court. Therefore, it was a judgment on the merits.
Moreover, OKL and EST were the parties to the Foreclosure Action. GTMI was the assignee of
the Note from OKL and was therefore in privity with OKL. Any decision in the Foreclosure
Action was equally effective as to GTMI because the assignment occurred while the lawsuit was
pending, and therefore GTMI was bound by the state court’s decision. EST was the other party
to the lawsuit, and EST is the plaintiff in this case even though the Trust is arguing the case as
the intervenor. However, even if this were a separate lawsuit and the Trust were attempting to
enforce the Note as the holder, the dismissal of the Foreclosure Action with prejudice would bar
the Trust’s claim.

The Trust also claims that the backdated assignment from GTMI was effective from
January 8, 2010. However, as the assignee of GTMI, who was the assignee of OKL, the Trust
was also bound by the outcome of the Foreclosure Action. As a result, the Note obtained by the
Trust was unenforceable once the dismissal was filed.

The second step in the § 548 analysis is to determine whether the value received by EST
was “reasonably equivalent” to the value of Memorial Commons. A determination of reasonably
equivalent value looks to the value received by the debtor in comparison to the value of the
assets transferred.75 “Reasonably equivalent value” means “‘approximately equivalent” or
“roughly equivalent,” and in voluntary transactions it means something “similar to fair market
value.”76 Cornerstone sold Memorial Commons on the open market for $4,400,000 shortly after

75 See In re Richards & Conover Steel, Co., 267 B.R. at 612.
76 See BFP v. Resolution Trust Corp., 511 U.S. 531, 540 n.4, 545 (1994) (internal quotation marks omitted).


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acquiring it from EST. The Trust presents evidence that the fair market value of Memorial
Commons at the time of the transfer was at least $4,400,000, but suggests that it may have been
worth $4,990,000. The Court finds that the value received by EST in exchange for Memorial
Commons included the release of the mechanic’s liens valued at $499,740.2977 and the release of
the Note and Mortgage valued at $7,754,151.00.78 If all of the value received by EST is
considered, the total amount EST received was significantly more than the appraisal value of
$4,990,000. Therefore, the Court determines that EST received reasonably equivalent value
when it transferred Memorial Commons.

Conclusion

Summary judgment is granted in favor of Cornerstone because the Trust cannot show any
genuine issue of material fact precluding judgment in favor of Cornerstone. Interpreting the
evidence in the light most favorable to the Trust fails to show that a reasonable finder of fact
could reach a holding in favor of the Trust. The Trust cannot succeed on its § 544(b) claim
because the transfer of fully encumbered property is not subject to Oklahoma’s Uniform
Fraudulent Transfer Act. The Trust cannot succeed on its § 548 claim because EST received
reasonably equivalent value for the sale of Memorial Commons. For the reasons set forth above,
Cornerstone’s Motion is GRANTED.

A judgment based on this ruling will be entered on a separate document as required by
Federal Rules of Bankruptcy Procedure 7058, 9021, and Federal of Civil Procedure 58.

IT IS SO ORDERED.

77 Doc. 40-2, Exhibit A to MSJ, ¶ 4, at 2.

78 Id.

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###


ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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12-20854 Spencer (Doc. # 157)

In Re Spencer, 12-20854 (Bankr. D. Kan. Jun. 12, 2014) Doc. # 157

PDFClick here for the pdf document.


 

The relief described hereinbelow is SO ORDERED.
SIGNED this 11th day of June, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

BOBBY JOE SPENCER and Case No. 12-20854
DIANE WIGGINS SPENCER,
Debtors.

MEMORANDUM OPINION AND ORDER
GRANTING IN PART AND DENYING IN PART
CREDITOR’S MOTION FOR A MORE DEFINITE STATEMENT


Debtors Bobby Joe Spencer and Diane Wiggins Spencer (“Debtors”) filed their chapter
13 bankruptcy petition on March 31, 2012, listing CitiMortgage, Inc. (“Creditor”) as a creditor
with a lien secured by Debtors’ principal residence. Debtors amended their plan, and this Court
confirmed the amended plan on July 26, 2012. The confirmed Chapter 13 Plan calls for payment
of both pre-petition arrearages and post-petition monthly payments to CitiMortgage. On
October 1, 2012, Creditor filed its secured proof of claim, Claim 12-1. After the Court denied
Debtors’ initial objection to the proof of claim, Debtors filed a pro se Amended Objection to
Claim 12.1 This Court elected to treat Debtor’s [sic] Amended Objection to CitiMortgage, Inc.

1 Doc. 103.

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Proof of Claim as an adversary complaint, and pursuant to Fed. R. Bankr. P. 7012 and Fed. R.
Civ. P. 12(e),2 Creditor has filed the Motion for More Definite Statement3 presently before the
Court. Federal Rule of Civil Procedure 12(e) allows a party to seek “a more definite statement
of a pleading to which a responsive pleading is allowed but which is so vague or ambiguous that
the party cannot reasonably prepare a response.”4 Because the Court agrees that the fraud
portion of Debtor’s [sic] Amended Objection is so vague or ambiguous that Creditor cannot
reasonably prepare a response, the Court grants Creditor’s motion for a more definite statement
with respect to that portion of the objection and requires Debtors to file a second amended claim
objection within 30 days.

Where, as here, a plaintiff is proceeding pro se, the Court will construe the plaintiff’s
pleadings liberally.5 Thus, if a plaintiff’s complaint can reasonably be read “to state a valid
claim on which the plaintiff could prevail, [the court will] do so despite the plaintiff’s failure to
cite proper legal authority, his confusion of various legal theories, his poor syntax and sentence
construction, or his unfamiliarity with pleading requirements.”6 However, it is not “the proper
function of the . . . court to assume the role of advocate for the pro se litigant.”7 For that reason,
the court will not “construct arguments or theories for the plaintiff in the absence of any
discussion of those issues,”8 nor will it “supply additional factual allegations to round out a

2 Fed. R. Bankr. P. 7012 incorporates Fed. R. Civ. P. 12(b)-(i) and makes it applicable toadversary proceedings in bankruptcy court.

3 Doc. 108.

4 Fed. R. Civ. P. 12(e).

5 Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991).

6 Id.

7 Id.

8 Drake v. City of Fort Collins, 927 F.2d 1156, 1159 (10th Cir. 1991).

- 2


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plaintiff’s complaint or construct a legal theory on plaintiff’s behalf.”9

“A motion for a more definite statement should not be granted merely because the
pleading lacks detail; rather, the standard to be applied is whether the claims alleged are
sufficiently specific to enable a responsive pleading in the form of a denial or admission.”10
Generally, Rule 12(e) motions are disfavored by the courts because of the minimal pleading
requirements of the Federal Rules.11 The parties should obtain additional details with respect to
claims through the discovery process.12 “Rule 12(e) is designed to strike at unintelligible
pleadings rather than pleadings that lack detail,”13 and the decision whether to grant or deny such
a motion is within the sound discretion of the court. The Court considers only the objection in
assessing definitiveness, not Debtors’ additional pleadings.

Debtors’ Amended Objection appears to state three bases for the objection: “The Court
is moved that Debtors objects [sic] to CMI’s Proof of Claim . . . for being Late; Improper Party
of Interest and Fraudulent.” Based on the additional information provided in the objection, the
first basis for the objection, lateness, is clear and does not require additional clarification.
Likewise, the second basis for the objection, that Creditor is not the true party-in-interest, is also
clear and requires no additional detail. But the third basis for the objection, that the proof of
claim is fraudulent, requires additional details.

When a party alleges fraud, Federal Rule of Civil Procedure 9(b)14 requires the party to
“state with particularity the circumstances constituting fraud,” with general allegations only

9 Whitney v. New Mexico, 113 F.3d 1170, 1173-74 (10th Cir. 1997).

10 Creamer v. Ellis Cnty. Sheriff Dep’t, 2009 WL 484491, at *1 (D. Kan. Feb. 26, 2009).

11 Id.

12 Id.

13 Id.

14 Rule 9(b) is applicable in bankruptcy pursuant to Fed. R. of Bankr. P. 7009.
- 3


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allowed for “[m]alice, intent, knowledge, and other conditions of a person’s mind.” The party
alleging fraud must “set forth the time, place and contents of the false representation, the identity
of the party making the false statements and the consequences thereof.”15 In other words, the
alleging party must specify the “‘who, what, where, and when of the alleged fraud.’”16

The Court is aware that the “‘who, what, where, and when” standard is generally applied
in a motion to dismiss or a motion to strike context,17 but the Court finds that these same details
are necessary to enable a responsive pleading in the form of a denial or admission. Absent these
details, an opposing party cannot know the nature of the fraud it is meant to admit or deny. From
the standpoint of a party seeking to formulate a response, or from a court attempting to evaluate
a fraud claim, this lack of details renders the fraud claim unintelligible.

Here, the fraud claim lacks all necessary detail. For the fraud claim, Debtors’ Amended
Objection states only the following, taken verbatim from the objection:

The Court is moved the Debt/Claim from CMI is fraudulent and fabricated, which

must address by CMI.

The Court is moved CMI is NOT the Party of interest at the time of its CLAIM

filing.

The Court is moved CMI was NOT the Party of Interest in state court action.

The Court is moved CMI claim prepared by Bankruptcy Specialist, Mr. Derrick

Brown, dated 10/01/2012 is fabricated and fraudulence.

The Court is moved pursuant 18 U.S.C 152 and 3571 and under Federal Fraud

Guidelines requires the Debtors to prove those elements of Who, What, When,

Where and How to substantiate fraud.18
These statements fail to set forth the time, place, and contents of the false representation, the
identity of the party making the false statements and the consequences of the allegedly false

15 Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir. 1997) (quotingLawrence Nat’l Bank v. Edmonds (In re Edmonds), 924 F.2d 176, 180 (10th Cir. 1992)) (internalquotation marks omitted).

16 Jamieson v. Vatterott Educ. Ctr., Inc., 473 F. Supp. 2d 1153, 1156 (D. Kan. 2007)
(quoting Plastic Packaging Corp. v. Sun Chem. Corp., 136 F. Supp. 2d 1201, 1203 (D. Kan.
2001)).

17 Id.

18 Doc. 103, at 2.
- 4


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statement. This pleading is insufficiently specific to enable a responsive pleading and is the kind
of pleading Rule 12(e) is designed to address. Even reading the objection in conjunction with
Debtors’ two responses to the motion seeking a more definite statement fails to supply the
necessary detail; the responses are difficult to understand and never clearly explain the nature of
the alleged fraud.

Therefore, with respect to the portion of Debtors’ Amended Objection addressing fraud,
Creditor’s motion for a more definite statement is granted, and Debtors have 30 days to file a
second Amended Objection to Claim 12. If Debtors fail to file an adequate second Amended
Objection, the portion of the objection alleging fraud will be dismissed. With respect to the
remaining two bases of the Amended Objection, the motion is denied. For administrative
purposes, the deadline for Creditor’s responsive pleading will be established by the Court after
the fraud pleading issue is resolved.

IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
- 5


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12-06114 Lord v. Quinn (Doc. # 47)

Lord v. Quinn, 12-06114 (Bankr. D. Kan. May 29, 2014) Doc. # 47

PDFClick here for the pdf document.


The relief described hereinbelow is SO ORDERED.
SIGNED this 28th day of May, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

JAMES E. KILEY, JR., Case No. 12-21669
Debtor.

CAROL W. LORD,
Plaintiff,

v. Adv. No. 12-6114
KATHLEEN A. QUINN,
as Administrator C.T.A. of the
JAMES E. KILEY, JR., Estate,

Defendant.

MEMORANDUM OPINION AND ORDER
DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
AND GRANTING DEFENDANT’S MOTION TO DISMISS


Creditor/Plaintiff Carol W. Lord (“Plaintiff”) filed this adversary proceeding against
Debtor/Defendant James E. Kiley, Jr. (“Debtor”), seeking a determination of nondischargeability
of Debtor’s debt to Plaintiff under 11 U.S.C. § 523(a)(6),1 which bars discharge of debts

1 All statutory references are to the Bankruptcy Code, as amended by the BankruptcyAbuse Prevention and Consumer Protection Act of 2005, 11 U.S.C. §§ 101 - 1532, unless

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resulting from willful and malicious injuries.2 Pursuant to Plaintiff’s motion, and in light of
Debtor’s death, the Court has substituted Kathleen A. Quinn as Administrator C.T.A of the
James E. Kiley, Jr., Estate in this action in place of Debtor Kiley.3 Plaintiff has moved for
summary judgment,4 and Debtor has filed a motion to dismiss or, in the alternative, a cross-
motion for summary judgment.5 The motions are fully briefed, and the Court is prepared to rule.
Because Plaintiff failed to provide any statutory basis for her argument that this debt is
nondischargeable, the Court grants Debtor’s motion to dismiss. This determination renders both
motions for summary judgment moot, and the Court denies those motions.

I. Legal Standard
Debtor moves for dismissal under Federal Rules of Civil Procedure 12(b)(6) and (b)(1).6
Rule 12(b)(6) provides a vehicle for a party to challenge the legal sufficiency of a claim. The
requirements for a legally sufficient claim stem from Rule 8(a), which requires “a short and plain
statement of the claim showing that the pleader is entitled to relief . . . .”7 To survive a motion to
dismiss, a complaint must present factual allegations, that when assumed to be true, “raise a right
to relief above the speculative level,”8 and the complaint must contain “enough facts to state a

otherwise specifically noted.
2 Plaintiff appears pro se. Defendant Kathleen A. Quinn, as Administrator C.T.A. for the
James E. Kiley, Jr., Estate, appears by Jay T. Grodsky, Leawood, KS.
3 Doc. 41. This order will continue to refer to the Debtor simply as Debtor, because the

Court is ruling on motions filed before Debtor Kiley’s death.
4 Doc. 22.
5 Docs. 26, 27, and 29.
6 These rules apply to adversary proceedings under Federal Rules of Bankruptcy

Procedure 7012. All references to Rules herein, without more, are to the Federal Rules of Civil
Procedure.
7 FED. R. CIV. P. 8(a). Rule 8(a) applies to adversary proceedings under Federal Rule ofBankruptcy Procedure 7008.
8 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
- 2


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claim to relief that is plausible on its face.”9

A Rule 12(b)(1) motion allows a defendant to seek dismissal for lack of subject matter
jurisdiction; the plaintiff must carry the burden of proving jurisdiction.10 In deciding a Rule
12(b)(1) motion, the court may consider evidence outside the pleadings without converting the
proceeding to one for summary judgment.11 Debtor here limits his motion to a facial challenge
to the sufficiency of Plaintiff’s complaint. On such motions, the court accepts the well-pleaded
material allegations as true and construes them to favor the plaintiff.12 Finally, as a general
matter, challenges to jurisdiction should be addressed as motions to dismiss and cannot serve as
the basis for deciding a summary judgment motion.13

III. Factual Allegations
Because the Court decides this matter on Debtor’s motion to dismiss, the Court takes as
true the factual allegations presented in the complaint,14 as modified and developed in Plaintiff’s
response to Debtor’s motion to dismiss.15 The Court also notes that facts subject to judicial
notice may be considered in a Rule 12(b)(6) motion without converting the motion to dismiss

9 Id. at 570.
10 Basso v. Utah Power & Light Co., 495 F.2d 906, 909 (10th Cir. 1974).
11 Cizek v. United States, 953 F.2d 1232, 1233 (10th Cir. 1992).
12 United States v. Ritchie, 15 F.3d 592, 598 (6th Cir. 1994).
13 Shikles v. Sprint/United Mgmt. Co., 426 F.3d 1304, 1317-1318 (10th Cir. 2005) (noting


that “the general rule is that it is improper for a district court to enter judgment under Rule 56 fordefendant because of a lack of jurisdiction”) (internal quotation marks omitted) (quoting 10ACHARLES ALAN WRIGHT, ARTHUR R. MILLER & MARY KAY KANE, FEDERAL PRACTICE AND
PROCEDURE: CIVIL § 2713, at 235 [238-39] (3d ed. 1998)).

14 Twombly, 550 U.S. at 555.
15 Carson v. Cudd Pressure Control, Inc, 299 F. App’x 845, 848 (10th Cir. 2008)
(considering the complaint in conjunction with the response to determine whether a plaintiffsuccessfully stated a claim).
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into a motion for summary judgment.16 This allows the court to “take judicial notice of its own
files and records, as well as facts which are a matter of public record.”17 In this case, the Court
takes judicial notice of the state administrative agency and state court documents attached to the
complaint.18 The Court does so without converting the motion to dismiss into a motion for
summary judgment.19

Debtor was the sole member and managing attorney of The Kiley Law Firm, LLC, and
Plaintiff was an employee at the firm. Debtor failed to pay Plaintiff according to her contract,
and in November 2007, Plaintiff filed a “Claim for Wages” with the Kansas Department of
Labor. In October 2008, the Department of Labor hearing officer found that Debtor and The
Kiley Law Firm were jointly and severally liable for the unpaid wages and pre-judgment interest
for a total of $54,427.62, plus a penalty for willful failure to pay in the amount of $44,514.97.20
Debtor filed a Petition for Review of the Initial Order with the Secretary of the Department of
Labor, who denied the petition, finding that the hearing officer properly interpreted and applied
the law and that the hearing officer’s findings of fact were supported by a preponderance of
substantial, competent evidence.21 Debtor filed a Petition for Judicial Review with the District

16 Tal v. Hogan, 453 F.3d 1244, 1265 (10th Cir. 2006).

17 Id. (quoting Van Woudenberg ex rel. Foor v. Gibson, 211 F.3d 560, 568 (10th Cir.
2000).

18 Pace v. Swerdlow, 519 F.3d 1067, 1072-73 (10th Cir. 2008); St. Louis Baptist Temple,
Inc. v. FDIC, 605 F.2d 1169, 1172 (10th Cir. 1979) (“[F]ederal courts, in appropriatecircumstances, may take notice of proceedings in other courts, both within and without thefederal judicial system, if those proceedings have a direct relation to matters at issue.”) (citationsomitted).

19 See Grynberg v. Koch Gateway Pipeline Co., 390 F.3d 1276, 1278 n.1 (10th Cir. 2004)
(facts subject to judicial notice may be considered without converting a motion to dismiss into amotion for summary judgment); Turner v. City of Tulsa, 525 F. App’x 771, 773 (10th Cir. 2013)
(same).

20 Exhibit 4, Doc. 1-4, at 17.

21 Exhibit 5, Doc. 1-5, at 4.

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Court of Shawnee County, Kansas; the court denied the petition.22 Debtor appealed the decision,
and in July 2011, the Kansas Court of Appeals affirmed in part and reversed in part.23
Specifically, the court affirmed the Shawnee District Court decision upholding the October 1,
2008, Initial Order finding that Debtor and his firm were jointly and severally liable for the
unpaid wages plus interest, but found “no evidence of intent to do wrong or cause injury to
another,”24 and so held “the agency’s decision to award the civil penalty under K.S.A. 44-315(b)
[for willfulness] was not supported by substantial competent evidence and, therefore, must be
reversed.”25 Debtor sought review of the portion of the decision affirming the award for unpaid
wages to the Kansas Supreme Court, but the Court denied the petition for review. Plaintiff did
not appeal the portion of the decision rejecting the DOL’s willfulness determination.
Plaintiff alleges that Debtor used firm funds to work on cases for personal friends, when he
should have used those funds to pay her. Plaintiff alleges that Debtor certainly knew his actions
would have a potentially devastating economic impact upon Plaintiff and that his actions were
driven by his desire for the intentional infliction of emotional distress. Plaintiff alleges that she
was damaged economically, professionally and emotionally as a result of Debtor’s conduct.

On June 19, 2012, Debtor filed a petition for relief under chapter 7 of the Bankruptcy
Code. Plaintiff filed this adversary case seeking to have the debt owed to her declared
nondischargeable.

IV. Analysis
1. Jurisdiction
An adversary proceeding to determine the dischargeability of particular debts is a core

22 Exhibit 7, Id. at 19.

23 Exhibit 8, Doc 1-6, at 2.

24 Id. at 17.

25 Id.

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proceeding under 28 U.S.C. § 157(b)(2)(I), over which this Court may exercise subject matter
jurisdiction.26

Under Rule 12(b)(1), Debtor argues that this Court lacks jurisdiction over Plaintiff’s
complaint under the Rooker-Feldman doctrine.27 The Tenth Circuit examined the Rooker-
Feldman doctrine in Tal v. Hogan:

Pursuant to 28 U.S.C. § 1257(a), federal review of state court judgments can beobtained only in the United States Supreme Court. The Rooker-Feldman doctrine
precludes cases brought by state-court losers complaining of injuries caused bystate-court judgments rendered before the district court proceedings commencedand inviting district court review and rejection of those judgments. Thus, theRooker–Feldman doctrine prevents a party losing in state court from seekingwhat in substance would be appellate review of a state judgment in a UnitedStates district court, based on the losing party’s claim that the state judgmentitself violates the loser’s federal rights.28

Here, Plaintiff was the losing party in the sense that Plaintiff appears to rely on the Department
of Labor’s willfulness findings, which were overturned by the appellate court. But Plaintiff is
not claiming that the state court judgment itself violated her federal rights or that the state court
judgment caused her any injury. Because she does not make these claims, the Rooker-Feldman
doctrine does not apply, and this Court has jurisdiction to reach the merits of the motion to
dismiss.

2. Plaintiff’s Claim
Before assessing Debtor’s res judicata and collateral estoppel arguments, the Court must
determine the nature of Plaintiff’s claims. When a plaintiff is proceeding pro se, the Court will

26 28 U.S.C. § 157(b)(1) and § 1334(b).

27 The Rooker-Feldman doctrine is jurisdictional. Worthington v. Anderson, 386 F.3d
1314, 1318 (10th Cir. 2004). To the extent that Debtor argues that the Court lacks jurisdictionunder res judicata or collateral estoppel, the Court notes that these doctrines are non-
jurisdictional. Franklin Sav. Corp. v. United States (In re Franklin Sav. Corp.), 385 F.3d 1279,1286 (10th Cir. 2004); Rekhi v. Wildwood Indus., Inc., 61 F.3d 1313, 1317 (7th Cir. 1995).

28 453 F.3d at 1255-56 (internal citations, quotation marks, and alterations omitted).

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construe the plaintiff’s pleadings liberally.29 Thus, if a plaintiff’s complaint can reasonably be
read “to state a valid claim on which the plaintiff could prevail, [the court will] do so despite the
plaintiff’s failure to cite proper legal authority, his confusion of various legal theories, his poor
syntax and sentence construction, or his unfamiliarity with pleading requirements.”30 However,
it is not “the proper function of the . . . court to assume the role of advocate for the pro se
litigant.”31 For that reason, the court will not “construct arguments or theories for the plaintiff in
the absence of any discussion of those issues,”32 nor will it “supply additional factual allegations
to round out a plaintiff’s complaint or construct a legal theory on plaintiff’s behalf.”33 The court
need only accept as true the plaintiff’s “well-pleaded factual contentions, not his conclusory
allegations.”34

This Court’s review of the initial complaint suggests that Plaintiff attempts to rely on the
factual findings from her state court case to sustain her burden of showing the willfulness
necessary to support a nondischargeability determination under 11 U.S.C. § 523 (a)(6). But
those findings were struck down by the appellate court. In her response, Plaintiff appears to
back away from the willfulness argument. Instead, she relies on the argument that “the Kansas
Supreme Court’s affirmation of the Appellate Court’s decision that Plaintiff Lord has an
‘absolute right to the benefit and no condition subsequent can impose a forfeiture of that
benefit.’”35 Plaintiff argues that “[t]he debt owed to Plaintiff is not merely an unpaid wage

29 Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991).

30 Id.

31 Id.

32 Drake v. City of Fort Collins, 927 F.2d 1156, 1159 (10th Cir. 1991).

33 Whitney v. New Mexico, 113 F.3d 1170, 1173-74 (10th Cir. 1997).

34 Hall, 935 F.2d at 1110 (citation omitted).

35 Doc. 31, at 2 (italics added).

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amount Plaintiff claims is owed to her. It is a judgment granted to her by the Kansas Appellate
Court and affirmed by the Kansas Supreme Court.”36 This reading of the Plaintiff’s argument,
that Plaintiff is relying on the existence of a judgment against Debtor as the basis for
nondischargeability, is asserted throughout her response. She states repeatedly that she is not
attempting to relitigate the Kansas Court of Appeals decision and that “the issue of non-payment
of [this] judgment . . . for payment of wages has never been litigated.”37 But there is no statutory
basis for holding that any debt, when reduced to a judgment, cannot be discharged.

The Bankruptcy Code seeks to provide “a ‘fresh start’ for the honest but unfortunate
debtor.”38 However, the Bankruptcy Code does not provide a blanket fresh start for all debtors
under all circumstances. Bankruptcy Code § 523 provides a list of debts that are
nondischargeable, and the burden of proof rests with the party opposing the discharge;39
generally, all other debts are dischargeable.40 Discharge provisions are strictly construed against
the creditor,41 and, because of the fresh start objectives of bankruptcy, doubt is to be resolved in
the favor of debtors.42 A judgment for the creditor alone is not enough to make a debt
nondischargeable; the character of the liability, for purposes of describing exceptions to

36 Id.

37 Id. at 3.

38 Educ. Credit Mgmt. Corp. v. Polleys (In re Polleys), 356 F.3d 1302, 1308 (10th Cir.
2004) (citations omitted).

39 Grogan v. Garner, 498 U.S. 279 (1991).

40 There are debts that may be excluded from discharge in bankruptcy that are not set outin the Code, such as debts for HEAL student loans. See 42 U.S.C. § 292f(g). However, the less
stringent § 523(a)(8) undue hardship test may apply to a second bankruptcy discharge. DEANNE
LOONIN & GEOFF WALSH, NATIONAL CONSUMER BANKRUPTCY LAW CENTER, STUDENT LOAN
LAW § 10.6, at 202 n.196 (4th Ed. 2010).

41 4 COLLIER ON BANKRUPTCY ¶ 523.05, at 523-21. (Alan N. Resnick & Henry J.
Sommer, eds., 16th ed. 2013).

42

Mathai v. Warren (In re Warren), 512 F.3d 1241, 1248 (10th Cir. 2008).
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discharge, is not changed by the fact that the liability has been reduced to judgment.43 Because

Plaintiff does not assert another basis for her nondischargeability argument, her complaint fails

to state a claim upon which relief may be granted.

3. Collateral Estoppel
Even if the Court were to construe Plaintiff’s complaint and response as relying on the

factual findings from the state court proceedings, or even on the events underlying the state court

proceedings, to show willfulness under § 523(a)(6), Plaintiff would still fail to state a claim

because her claim would be barred by collateral estoppel.44 “The doctrine of collateral estoppel

(issue preclusion) applies in discharge litigation under § 523.”45 The Tenth Circuit BAP

explained collateral estoppel in Hill v. Putvin (In re Putvin):

Collateral estoppel or issue preclusion is a doctrine that prohibits the relitigationbetween the same parties of issues of ultimate fact that have been determined by avalid and final judgment. The purpose of the collateral estoppel doctrine is toprotect parties from multiple lawsuits, prevent the possibility of inconsistentdecisions, and conserve judicial resources.

In bankruptcy court the collateral estoppel doctrine may apply indetermining the dischargeability of a debt. When a federal court reviews thepreclusive effect of a state court judgment under the collateral estoppel doctrine,
it is guided by the mandates of the Full Faith and Credit Act, 28 U.S.C. § 1738,
which codifies the Full Faith and Credit Clause of the Constitution, Art. IV, § 1.
The Full Faith and Credit Act directs a federal court to look to the preclusion lawof the state in which the judgment was rendered. It requires the federal court togive the same preclusive effect to a state-court judgment as another court of thatState would give. While ultimately, a bankruptcy judge determines whether a debtis nondischargeable under § 523, a state court judgment may preclude therelitigation of settled facts under the collateral estoppel doctrine.46

43 Peters v. United States ex rel. Kelley, 177 F. 885, 887 (7th Cir. 1910).

44 Sierra Club v. Two Elk Generation Partners, Ltd., 646 F.3d 1258, 1264 (10th Cir.

2011) (holding that “judicial affirmance of an administrative determination is entitled to

preclusive effect”) (citing Kremer v. Chemical Constr. Corp., 456 U.S. 461, 480 n.21 (2011)).

45 Calvin Opp Concrete, Inc., v. Davis (In re Davis), Case No. 12-11958, Adv. 12-5159,

2013 WL 3776363, at *3 (Bankr. D. Kan. July 15, 2013); see also Brown v. Felsen, 442 U.S. 127

(1979).

46 332 B.R. 619, 624-25 (B.A.P. 10th Cir. 2005) (footnotes omitted) (internal quotationmarks omitted).

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Here, the Court applies Kansas collateral estoppel law.

In Kansas, collateral estoppel operates to preclude the relitigation of issues that

were actually decided in a prior proceeding. The elements of collateral estoppel

stated by the Kansas Supreme Court are: (1) a prior judgment on the merits which

determined the rights and liabilities of the parties on the issue based upon ultimate

facts; . . . (2) the parties must be the same or in privity; and (3) the issue litigated

must have been determined and necessary to support the judgment.47
The first and second elements are clearly met; the parties are the same and neither party has
argued that the prior judgment was not a judgment on the merits. The third element is a closer
question and requires examination of willfulness under the Kansas Wage Payment Act48 and
§ 523(a)(6).

To find a debt nondischargeable under § 523(a)(6), a court must find that the debt was for
a willful and malicious injury by the debtor. “Willful and malicious” requires proof both that the
injury was willful and that it was malicious.49 The Supreme Court has explained, “The word
‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a
deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.”50
The malicious element requires proof that “the debtor either intend the resulting injury or
intentionally take action that is substantially certain to cause the injury.”51

In its decision in this case, the Kansas Court of Appeals explained the willfulness
standard it applied under the Kansas Wage Payment Act. “A willful act is one indicating a

47 In re Davis, 2013 WL 3776363, at *3 (footnotes omitted) (internal quotation marks
omitted).

48 K.S.A. § 44-312 to § 44-327.

49 Mitsubishi Motors Credit of Amer. v. Longley (In re Longley), 235 B.R. 651, 655

(B.A.P. 10th Cir. 1999).
50 Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998) (italics in original).
51 Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129 (10th Cir. 2004) (quoting Hope
v. Walker (In re Walker), 48 F.3d 1161, 1164 (11th Cir. 1995)).
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design, purpose, or intent on the part of a person to do wrong or to cause an injury to another.”52
This definition is not co-extensive with the definition of willfulness under § 523(a)(6) because it
includes acts that are merely wrong, but that do not necessarily involve an intentional injury.
Also, the Kansas definition is more inclusive than the definition under § 523(a)(6), such that if
an act is not willful under the Kansas Wage Payment Act, it cannot be willful under § 523(a)(6).
The appellate court’s determination that the record showed “no evidence of intent to do wrong or
cause injury to another”53 was necessary to that court’s judgment. Thus, because all three
elements of collateral estoppel under Kansas law are met, the doctrine precludes the re-litigation
of the willfulness question in this Court. And because Plaintiff is barred from re-litigating this
question, her complaint fails to state a claim upon which relief may be granted under Rule
12(b)(6).

V. Conclusion
Debtor’s motion to dismiss is granted. Plaintiff’s motion for summary judgment and
Debtor’s cross-motion for summary judgment are both denied as moot. It is further ordered that
the foregoing constitutes findings of fact and conclusions of law under Rule 7052 of the Federal
Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. A
judgment based on this ruling will be entered on a separate document as required by Fed. R.
Bankr. P. 9021 and Fed. R. Civ. P. 58.

IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
52 Exhibit 8, Doc. 1-6, at 14 (quoting Holder v. Kansas Steel Built, Inc., 224 Kan. 406,
411 (1978)).
53 Id. at 17.
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