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According to this case, New Hampshire law requires that certain factual issues relating to fraudulent transfers be tried to a jury, and where those issues overlap with legal issues that do not require a jury trial, the court could have those issues determined by a jury as well.
In re Simply Media, Inc., 2007 WL 4264514 (Bkrtcy.D.N.H., Bk. No. 06-11539-JMD, Adv. No. 07-1030-JMD, Nov. 28, 2007)
United States Bankruptcy Court, D. New Hampshire.
In re SIMPLY MEDIA, INC., Debtor.
Steven M. Notinger, Chapter 7 Trustee, and Bradley C. Reifler, Plaintiffs
v.
Christina Brown a/k/a Christina Rago, individually and in her capacity as Trustee of First Marcus Trust, Elizabeth Brown, Maria Schulman, Wainwright Bank and Trust Company, Dudley C. Goar, Esq., The University of Chicago, Angelika Thumm, K & G Building Management Company, Camp Nashoba Day, Kathryn San Filippo, and Middlesex Savings Bank, Defendants.
*1 On November 16, 2007, the Court held a hearing on a Motion to Continue Trial Date [of] December 3, 2007, filed by Christina Brown, Elizabeth Brown, and Maria Schulman (collectively, the "Defendants") (Doc. No. 168) (the "Motion"). After considering the Motion, the objection thereto filed by the Plaintiffs (Doc. No. 193), and the arguments of counsel, the Court determined, for the reasons set forth on the record, that it would not continue the trial based on the Defendants' contentions that discovery was incomplete and the Defendants' expert witness was not available for trial on December 3, 2007, but the Court did indicate that it would further consider the Defendants' request to continue the trial based upon their jury demand. Accordingly, the Court took the Motion under advisement. For the reasons set forth below, the Court has determined that the Defendants do have a right to a jury trial with respect to some of the claims. Accordingly, the Motion is granted. The three-day trial set to commence on December 3, 2007, is hereby continued, subject to the Court's further rulings below.
A. The Complaint
Bradley Reifler ("Reifler"), one of the Plaintiffs, commenced this action in Massachusetts Superior Court prior to Simply Media, Inc. ("Simply Media") filing bankruptcy in New Hampshire on November 13, 2006. The complaint contained twelve counts and asserted claims against the Defendants and others. Counts I through XI alleged Simply Media made fraudulent transfers under M.G.L. c. 109A § 5. Count XII sought to impose a constructive trust. At the hearing on the Motion, the parties agreed that while this action was pending in Massachusetts, the Defendants filed counterclaims against Reifler and made a proper and timely jury demand.
After Simply Media filed bankruptcy, Reifler removed the action to this Court on January 10, 2007. On February 21, 2007, the Court permitted Steven M. Notinger ("Notinger"), Simply Media's chapter 7 trustee, to intervene as a plaintiff. On August 15, 2007, the Plaintiffs filed a motion seeking to amend the complaint by adding Notinger, as the chapter 7 trustee of David Brown's bankruptcy estate, as a plaintiff, by adding Middlesex Savings Bank as a defendant, and by adding additional claims against the Defendants. After a hearing, the Court granted the motion, and an amended complaint was filed on September 7, 2007.
B. The Amended Complaint
The amended complaint contains fifteen counts and asserts claims against the Defendants and others. Counts I through XI still allege Simply Media made fraudulent transfers under M.G.L. c. 109A § 5; however, new claims have been alleged against the Defendants in some of these counts. Count XII still seeks the imposition of a constructive trust. Counts XIII through XV are new and assert claims against Christina Brown for turnover, unjust enrichment, and civil conspiracy and against Elizabeth Brown and Maria Schulman for unjust enrichment. The Defendants filed answers to the amended complaint and re-asserted their counterclaims against Reifler in filings made with the Court on November 1, 2007.
C. The Counterclaims
*2 The Defendants each filed separate answers, but they each asserted the same four counterclaims against Reifler in this Court. Count I asserts a claim for abuse of process, Count II asserts a claim for tortious interference with advantageous relations, Count III asserts a claim for breach of fiduciary duty, and Count IV asserts a claim for breach of M.G.L. 93A § 11.
D. Right to Jury Trial
In Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), the United States Supreme Court outlined a three-part test for determining when the right to a jury trial exists in the bankruptcy context. Container Recycling Alliance v. Lassman, 359 B.R. 358, 360 (D.Mass.2007). "Courts must consider (1) whether the party seeking a jury trial would be entitled to one at common law; (2) whether the remedies sought are legal rather than equitable in nature; and, if the first two prerequisites are met, (3) whether Congress has withdrawn jurisdiction over that type of action from courts of law and assigned it exclusively to non-Article III tribunals sitting without juries." Id. at 360-61. In Langenkamp v. Culp, 498 U.S. 42, 44 (1990), the United States Supreme Court "held, emphasizing parts two and three of the Granfinanciera test, that creditors who had filed proofs of claim against a debtor's estate had submitted those claims to the equitable jurisdiction of the bankruptcy court." Lassman, 359 B.R. at 361. Accordingly, such creditors were not entitled to a jury trial.
In addition to the substantive requirements for finding a right to a jury trial, parties must also satisfy certain procedural requirements. Federal Rule of Bankruptcy Procedure 9015(a) provides that Rule 38, as well as certain other rules, of the Federal Rules of Civil Procedure "apply in cases and proceedings, except that a demand made pursuant to Rule 38(b) ... shall be filed in accordance with Rule 5005." Rule 38(b) provides that "[a]ny party may demand a trial by jury of an issue triable of right by a jury by (a) serving upon the other parties a demand therefor in writing at any time after the commencement of the action and not later than 10 days after the service of the last pleading directed to such issue, and (2) filing the demand as required by Rule 5(d). Such demand may be indorsed upon a pleading of the party."
1. Fraudulent Transfer Counts
a. Christina Brown
Upon review of the pleadings filed in this action while pending both in Massachusetts state court and in this Court, the Court finds that Christina Brown is entitled to a jury trial on the fraudulent transfer claims in Count I, both in her individual and in her trustee capacity. Christina Brown is entitled to a jury trial on this count because (1) her demand was timely; (2) she has not filed a claim in Simply Media's bankruptcy; (3) she would be entitled to a jury trial on a fraudulent transfer claim at common law; (4) the Plaintiffs seek a legal remedy; and (5) Congress has not withdrawn jurisdiction over that type of action from courts of law and assigned it exclusively to non-Article III tribunals sitting without juries. See Langenkamp, 498 U.S. at 44; Granfinanciera, 492 U.S. at 36, 42; see also Anderson v. Simchon ( In re Southern Textile Knitters, Inc.), 236 B.R. 207, 212 (Bankr.D.S.C.1999) (noting defendants who had not filed a proof of claim or asserted a counterclaim against the trustee were entitled to a jury trial with respect to actions seeking to recover for breach of fiduciary duty, for preferential transfers under the Bankruptcy Code, for fraudulent transfers under the Bankruptcy Code and state law, and for civil conspiracy, among other relief). The Court further concludes that Christina Brown would not be entitled to a jury trial on the fraudulent transfer claims in Count III, Count IV, Count V, and Count IX because her demand was not timely under Rule 38(b) with respect to these counts, i.e., her demand was made on November 1, 2007, which is more than ten days after the amended complaint was filed on September 7, 2007.
*3 Thus, while one of the fraudulent transfer claims against Christina Brown is triable to a jury, the others are not. This situation is similar to the situation where a complaint involves both legal claims, for which the right to a jury trial exists, and equitable claims, for which the right to a jury trial does not exist. In those situations,
[t]he rule which has developed is that where legal and equitable claims are combined in an action, the action must be structured and tried in a manner that preserves the right to jury trial with respect to the legal claim. Where the legal claim and the equitable claim have common issues of fact, the right to a jury trial cannot be negated through prior determination of the equitable claim by the court. This means that if the legal claim and the equitable claim do have common issues of fact, the legal claim must be decided first by the jury.
Magers v. Bonds (In re Bonds Distrib. Co.), No. 98-6044, 2000 WL 33682815, at *4 (Bankr.M.D.N.C. Nov. 15, 2000) ( cited in WSC, Inc. v. The Home Depot, Inc. ( In re WSC, Inc.), 286 B.R. 321, 332 (Bankr.M.D.Tenn.2002)). As articulated by the First Circuit Court of Appeals in Perez-Serrano v. DeLeon-Velez, 868 F.2d 30, 32 n. 1 (1st Cir.1989), "[u]nder the doctrine of 'law of the case,' a jury cannot re-examine findings made by the court." As a result, issues of common fact must be tried to a jury with the bankruptcy court being bound by those findings. WSC, Inc., 286 B.R. at 334.
The Court concludes that the Plaintiffs' separate fraudulent transfer claims involve common facts and that severing Count I from Counts III, IV, V, and IX would be complicated, duplicative, wasteful and unnecessary. See id. Count I alleges that Christina Brown directly received transfers from Simply Media totaling $14,308.57 and that she, individually and as trustee, received transfers from and benefitted from payments made by Simply Media totaling $1,008,629.50, which transfers and payments were made for and on behalf of herself, individually and as trustee, and her children, Elizabeth Brown and Maria Schulman. Count III alleges that Christina Brown, as trustee, benefitted from transfers totaling $206,356.79 made to Wainwright Bank, which payments were for a mortgage on property in Lincoln, Massachusetts, in which Christina Brown and her family live and which is owned by a trust of which Christina Brown is the trustee (the "Lincoln Property"). Count IV alleges that Christina Brown benefitted from transfers totaling $78,447.93 made to her daughter, Maria Schulman, by Simply Media. Count V alleges that Christina Brown benefitted from transfers totaling $17,641.83 made to her attorney by Simply Media. Count IX alleges that Christina Brown benefitted from transfers totaling $4,640.00 made to a camp attended by Christina Brown's minor daughter.
It appears to the Court that the payments outlined in Counts III, IV, V, and IX might very well be included within the payments outlined in Count I of the complaint as well as the same conduct under the actual fraud allegations in all counts. In addition, all of these fraudulent transfer counts make constructive fraud allegations under M.G.L. c. 109A § 5 regarding Simply Media's insolvency, whether Simply Media was left with unreasonably small capital as a result of the transfers, and whether Simply Media received reasonably equivalent value in exchange for the questioned transfers. These are common factual issues. Therefore, in accordance with the Seventh Amendment, the Congressional delegation of authority to the Supreme Court to promulgate rules of procedure, including Rule 38, and the Supreme Court's limitations on the discretion of trial courts where the constitutional right to a jury trial exists, the factual issues in Counts III, IV, V, and IX must be determined once by a jury in connection with a jury trial of Count I. Wallace Motor Sales, Inc. v. American Motors Sales Corp., 780 F.2d 1049, 1066 (1st Cir.1985) (citing Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 511 (1959) ("[O]nly under the most imperative circumstances, circumstances which in view of the flexible procedures of the Federal Rules we cannot now anticipate, can the right to a jury trial of legal issues be lost through prior determination of equitable claims.")). Thus, even though Christina Brown failed to satisfy the procedural requirements for a jury trial with respect to some of the fraudulent transfer counts against her, the Court concludes that the Seventh Amendment and considerations of efficiency and judicial economy require all of the fraudulent transfer counts to be tried by a jury.
b. Elizabeth Brown
*4 Like her mother, Elizabeth Brown properly and timely asserted a jury demand as to Count II of the complaint which seeks to avoid, as fraudulent, transfers totaling $72,212.70 made by Simply Media directly to and for her benefit. After amendment, Elizabeth Brown was added as a defendant to Counts VI and X. Like her mother, Elizabeth Brown did not timely make a jury demand as to these counts as the amended complaint was filed on September 7, 2007, and her demand was made on November 1, 2007. Elizabeth Brown has not filed a claim in Simply Media's bankruptcy case.
For the reasons outlined above, Elizabeth Brown has a right to a jury trial on the fraudulent transfer claim asserted in Count II. The Court also believes that Counts VI and X should be tried with Count II. In Count VI the Plaintiffs allege that Simply Media made fraudulent transfers totaling $16,200.00 for Elizabeth Brown's benefit as the payments were for her rent. In Count X the Plaintiffs allege that Simply Media made fraudulent transfers totaling $4,500.00 for Elizabeth Brown's benefit as these payments were also for her rent. Again, the payments outlined in Counts VI and X might very well be included within the payments outlined in Count II of the complaint. Counts VI and X allege both actual and constructive fraud as does Count II. For that reason, the Court believes there are common issues of fact related to the transfers as well as to the issues of solvency and reasonably equivalent value as discussed above.
c. Maria Schulman
Like the other Defendants, Maria Schulman properly and timely asserted a jury demand FN1 as to Count IV of the complaint which seeks to avoid, as fraudulent, transfers totaling $78,447.93 made by Simply Media directly to and for her benefit. After amendment, Maria Schulman was added as a defendant to Counts VII and VIII. Like the other Defendants, Maria Schulman did not timely make a jury demand as to these counts as the amended complaint was filed on September 7, 2007, and her demand was made on November 1, 2007. Maria Schulman has not filed a claim in Simply Media's bankruptcy case.
FN1. Although the Court cannot find in its file an answer or a separate jury demand filed by Maria Schulman while the case was still pending in Massachusetts, at the hearing on the Motion the Plaintiffs agreed that the Defendants made a timely jury demand while the case was pending in Massachusetts state court. The Court will accept the Plaintiffs' position.
For the reasons outlined above, Maria Schulman has a right to a jury trial on the fraudulent transfer claim asserted in Count IV. The Court also believes that Counts VII and VIII should be tried with Count IV. In Count VII the Plaintiffs allege that Simply Media made fraudulent transfers totaling $27,479.44 for Maria Schulman's benefit as the payments were for her tuition and other charges at The University of Chicago. In Count VIII the Plaintiffs allege that Simply Media made fraudulent transfers totaling $4,422.50 for Maria Schulman's benefit as these payments were for her rent. Again, the payments outlined in Counts VII and VIII might very well be included within the payments outlined in Count IV of the complaint. Counts VII and VII allege both actual and constructive fraud as does Count IV. For that reason, the Court believes there are common issues of fact related to the transfers as well as to the issues of solvency and reasonably equivalent value as discussed above.
2. Constructive Trust
*5 In Count XII of the amended complaint, the Plaintiffs seek to impose a constructive trust with respect to the Lincoln Property. According the Plaintiffs, Simply Media provided the funds to pay the mortgage, utility payments, professional house cleaning services, landscaping services, tree services, cable television services, repairs and improvements, and general maintenance services with respect to the Lincoln Property and that without these payments Christina Brown, as trustee, would not have been able to maintain the Lincoln Property. The Plaintiffs seek an order finding Simply Media the beneficiary of a constructive trust and that the Lincoln Property should be held for the benefit of Simply Media's bankruptcy estate.
The Plaintiffs seek equitable relief. Therefore, Christina Brown, as trustee, has no right to a jury trial on this claim. See America Universal Ins. Co. v. Pugh, 821 F.2d 1352, 1356 (9th Cir.1987) ("The imposition of a constructive trust is purely an equitable remedy and equitable remedies are not triable of right by a jury."). Accordingly, this is one of those situations described above where a complaint seeks both legal and equitable relief. Therefore, "the action must be structured and tried in a manner that preserves the right to jury trial with respect to the legal claim" and issues of common facts must be tried to a jury with the bankruptcy court being bound by those findings. Bonds Distrib. Co., 2000 WL 33682815, at *4 (cited in WSC, Inc., 286 B.R. at 332).
Generally, under New Hampshire law, the Court may impose a constructive trust if it finds a confidential or fiduciary relationship existed between the parties and the potential that the person holding the property would be unjustly enriched if equitable relief is not granted. Carroll v. Daigle, 123 N.H. 495 (1983). A confidential relationship exists if there is a personal relationship of such character that the transferor is justified in believing that the transferee will act in his interest. Cornwell v. Cornwell, 116 N.H. 205, 209 (1976) (citing Kachanian v. Kachanian, 100 N.H. 135, 137 (1956)). It is not necessary to allege and prove a fiduciary relationship, fraud or undue influence to establish a constructive trust. Kachanian, 100 N.H. at 137. Rather it is sufficient to establish that the character of a personal relationship is such that the party seeking to establish the trust was justified in believing that a transferee would act in his interest and that the transferee failed to perform that promise. Id.
In Massachusetts the law is similar. Under a constructive trust theory, a plaintiff does not have to show that the defendant intended to create a trust in the plaintiff's favor; rather, the plaintiff must allege and show that there is evidence of fraud, breach of fiduciary duty, or other misconduct on the part of the defendants. Feinman v. Lombardo, 214 B.R. 260, 265 (D.Mass.1997) (citing Collins v. Guggenheim, 631 N.E.2d 1016, 1017 (Mass.1994) (refusing to impose a constructive trust where there was no evidence of fraud or breach of duty by the defendant, even though both plaintiff and defendant, an unmarried couple, contributed to the maintenance and improvement of their residential farm and joint bank account); Fortin v. Roman Catholic Bishop of Worcester, 625 N.E.2d 1352, 1357-58 (Mass.1994)). "Such a showing is required to be made because a constructive trust is an equitable remedy that the court imposes to prevent unjust enrichment." Feinman, 214 B.R. at 265 (emphasis in the original) (citing In re Nat'l Reserve Corp., 199 B.R. 241, 247 (Bankr.D.Mass.1996); In re Monarch Capital Corp., 130 B.R. 368, 376 (Bankr.D.Mass.1991); In re Mill Concepts Corp., 123 B.R. 938, 944 (Bankr.D.Mass.1991); 76 Am.Jur.2d Trusts § 163 (1992)).
*6 In the Court's view, there will be an overlap in evidence regarding the actual fraud allegations in Counts I through XI and the fraud elements of the constructive trust claims. For that reason, the Court believes the right to a jury trial on those issues under Counts I through XI require that the constructive trust claim be tried to a jury.
3. Turnover
In Count XIII, the Plaintiffs seek turnover of the Lincoln Property on the grounds that David Brown, Christina Brown's husband, has retained a secret interest in and/or controls and exercises dominion over the use of the Lincoln Property and treats it as his own. The Plaintiffs argue that it is equitable to treat the Lincoln Property as if it belongs to him and not to Christina Brown, as trustee. The Plaintiffs seek an order that Christina Brown, as trustee, holds the Lincoln Property in trust and for the benefit of David Brown, thus making it an asset of the bankruptcy estate of David Brown. It is clear that the Plaintiffs seek equitable relief. Thus, Christina Brown, as trustee, has no right to a jury trial on this claim. See Walker v. Weese, 286 B.R. 294 (D.Md.2002) (concluding that the defendants had no right to a jury trial in an action brought by the trustee seeking a declaratory judgment that the debtors' prepetition attempts to transfer assets to an offshore trust were ineffective as a matter of law because the remedies sought in the various counts were equitable in nature); Welt v. Leshin ( In re Warmus), 252 B.R. 584, 586-87 (Bankr.S.D.Fla.2000) (concluding that claims seeking turnover and recovery of estate property under 11 U.S.C. §§ 542 and 550 are "clearly and uniquely equitable claims under the Bankruptcy Code" for which there is no right to a jury trial); Southern Textile Knitters, 236 B.R. at 213 (holding that a cause of action requesting turnover of property is equitable in nature and therefore the defendants were not entitled to a jury trial on that cause of action).
Despite having no right to a jury trial on Count XIII, the Court believes that the evidence needed to establish that the Lincoln Property is an asset of David Brown's estate will overlap with the evidence needed to establish that the transfers by Simply Media for the benefit of the Lincoln Property were fraudulent under state fraudulent transfer law. For that reason, Count XIII should be tried to a jury.
4. Unjust Enrichment
The Court finds that the Defendants have no right to a jury trial with respect to the Plaintiffs' claim of unjust enrichment in Count XIV of the amended complaint because the Defendants' demand was untimely. In addition, under New Hampshire law, "there is no right to a jury on an unjust enrichment claim because New Hampshire courts traditionally have understood unjust enrichment as an equitable claim and restitution is an equitable form of monetary relief." Massachusetts Eye and Ear Infirmary v. QLT, Inc., 495 F.Supp.2d 188, 192 (D.Mass.2007). In Massachusetts, the "requirement that there be no available legal remedy expressly marks unjust enrichment as an equitable remedy." Id. at 193. Thus, even if a demand had been timely made, there is no right to a jury trial on an unjust enrichment claim.
*7 In their unjust enrichment claims against the Defendants, the Plaintiffs specifically make reference to (1) transfers to Christina Brown totaling $1,008,629.50, which are the same transfers referenced in Count I for which there is a right to a jury trial; (2) transfers to Elizabeth Brown totaling $72,212.70, which are the same transfers referenced in Count II for which there is a right to a jury trial; and (3) transfers to Maria Schulman totaling $78,447.93, which are the same transfers referenced in Count IV for which there is a right to a jury trial. There can be no doubt then that the evidence to be presented and the factual issues to be decided with respect to Counts I, II, IV, and XIV will overlap. In order to preserve the Defendants' right to a jury trial with respect to Counts I, II, and IV, Count XIV must necessarily be tried along with them.
5. Civil Conspiracy
The Court finds that the Defendants have no right to a jury trial with respect to the Plaintiffs' claim of civil conspiracy in Count XV because the Defendants' demand was untimely. If the demand had been timely, the Defendants would have been entitled to a jury trial. See Redmond v. Hassan (In re Hassan), 375 B.R. 637, 649-50 (Bankr.D.Kan.2006) (recommending that the district court conclude that the right to a jury trial attaches to the trustee's claim for civil conspiracy as a "claim based on an alleged civil conspiracy is a legal claim"); WSC, Inc., 286 B.R. at 332 (concluding that the debtor had a right to a jury trial with respect to its civil conspiracy claim against defendants that were not creditors and had made no claim to participate in assets of the estate); Hayes v. Equitex, Inc. ( In re RDM Sports Group, Inc.), 260 B.R. 915, 919 (Bankr.N.D.Ga.2001) (ruling that the trustee did not waive his right to a jury trial on his claim of civil conspiracy, among others, as "civil conspiracy is a common law, or legal, claim"); Southern Textile Knitters, Inc., 236 B.R. at 212 (noting defendants who had not filed a proof of claim or asserted a counterclaim against the trustee were entitled to a jury trial with respect to actions seeking to recover for breach of fiduciary duty, for preferential transfers under the Bankruptcy Code, for fraudulent transfers under the Bankruptcy Code and state law, and for civil conspiracy, among other relief).
To establish a claim of civil conspiracy, there must be a common design or agreement, express or implied, between two or more persons to do a wrongful act, and proof of some tortious act in furtherance of the agreement. Allandale Farm, Inc. v. Koch, No. 97350, 1997 WL 1229248, at *3 (Mass.Super.Nov.3, 1997); see also Movitz v. Home Depot U.S.A., Inc., 82 Fed. Appx. 230 (1st Cir.2003) ("Under New Hampshire law, a civil conspiracy consists of: (1) two or more persons; (2) an unlawful object to be accomplished; (3) an agreement on the object or course of action; (4) one or more unlawful over acts; and (5) damages proximately resulting from the acts."). The Plaintiffs allege that the Defendants and others acted in concert to transfer, or to permit to be transferred, Simply Media property in order to hinder, delay or defraud creditors. The Plaintiffs allege that the Defendants have caused the Plaintiffs to suffer damages totaling $1,159,290.13, which seemingly represents the amount of the transfers outlined in Count I to Christina Brown totaling $1,008,629 .50, in Count II to Elizabeth Brown totaling $72,212.70, and in Count IV to Maria Schulman totaling $78,447.93. Because the unlawful object that purportedly was accomplished through the Defendants' conspiracy were the fraudulent transfers described in Counts I, II, and IV of the amended complaint, the factual issues under these counts with respect to actual fraud and the conduct of the Defendants and acts of the Defendants under Count XV will be common and overlap. For that reason, Count XV should also be tried to a jury at the same time as Counts I, II, and IV.
6. Abuse of Process
*8 The Defendants allege that Reifler has used the legal process by filing this and other actions in order to accomplish an ulterior and unlawful purpose, i.e., to coerce and extort money from the Defendants in order satisfy Reifler's judgment against Simply Media and David Brown. "The elements of the tort of abuse of process in Massachusetts are: (1) that the process is used (2) for an ulterior or illegitimate purpose, (3) resulting in damage to the plaintiff." Refuse & Envtl. Sys., Inc. v. Indus. Servs. of America, Inc., 932 F.2d 37, 41 (1st Cir.1991). The Defendants seek monetary damages from Reifler on this claim. Accordingly, the Court concludes that the Defendants' claim is a legal one and therefore the Defendants are entitled to a jury trial on Count I of the counterclaim.
7. Tortious Interference with Advantageous Relations
In Count II of the counterclaim, the Defendants allege that Reifler tortiously and maliciously interfered with the Defendants' relationships, both personally and as directors and shareholders of Simply Media, by bringing this and other actions. An action claiming tortious interference with contractual relations is an action sounding in contract and tort and for which a right to a jury trial exists as the action "is legal in nature and involves a matter of private right." Wakefern Food Corp. v. C & S Wholesale Grocers, Inc. (In re Big V Holding Corp.), No. 00-4372(RTL), 01-758, Civ. A 01-233(GMS), 2002 WL 148292, at *5 (D.Del. July 11, 2002). Accordingly, the Defendants have a right to jury trial on Count II of the counterclaim.
8. Breach of Fiduciary Duty
The Defendants assert a counterclaim against Reifler for breach of fiduciary duty for which they seek monetary damages. Such relief is legal in nature. The Court finds the Defendants are entitled to a jury trial on Count III of the counterclaim. See Pereira v. Farace, 413 F.3d 330, 340-41 (2d Cir.2005) (concluding defendants were entitled to a jury trial on the trustee's breach of fiduciary duty claims as the trustee sought compensatory damages-a legal claim); Southern Textile Knitters, 236 B.R. at 212 (noting defendants who had not filed a proof of claim or asserted a counterclaim against the trustee were entitled to a jury trial with respect to actions seeking to recover for breach of fiduciary duty, for preferential transfers under the Bankruptcy Code, for fraudulent transfers under the Bankruptcy Code and state law, and for civil conspiracy, among other relief).
9. Unfair and Deceptive Business Practices
In Count IV of the counterclaim, the Defendants allege that by bringing this and other actions Reifler committed an unfair and deceptive act and practice within the meaning of M.G.L. c. 93A § 11 for which the Defendants seek monetary damages. Because the Defendants seek actual damages and not injunctive relief, the Court concludes that the Defendants have a right to a trial by jury. See QLT, Inc., 495 F.Supp.2d at 197 ("The trinity of cases considering the right to trial by jury on an unfair trade practices claim is thus in agreement. There is a right to trial by jury when the plaintiff seeks actual and treble damages ... By contrast, there is no right to trial by jury to the extent that the plaintiffs seek injunctive relief ... The most manageable way to sort out chapter 93A claims is to look to the nature of the remedy sought. This rule is in keeping with the First Circuit's observation that chapter 93A provides for both legal and equitable remedies.").
E. Right to Jury Trial in the Bankruptcy Court
*9 In the Court's view the Defendants have timely requested and have a right to jury trial on Counts I, II, and IV of the amended complaint and on Counts I through IV of their counterclaim. In addition, in order to preserve their right to a jury trial on these counts, the Court believes that Counts III and V through XV of the amended complaint should also be tried to a jury at least with respect to common factual issues.
The United State Code provides:
If the right to a jury trial applies in a proceeding that may be heard under this section by a bankruptcy judge, the bankruptcy judge may conduct the jury trial if specially designated to exercise such jurisdiction by the district court and with the express consent of the all the parties.
11 U.S.C. § 157(e). Rule 77.4(e) of the Local Rules of the United States District Court for the District of New Hampshire states "[p]rovided all parties expressly consent, the bankruptcy judges of this district are authorized to conduct jury trials in those instances where a right to a jury trial attaches in a proceeding that may be heard by a bankruptcy judge under 28 U.S.C. § 157."
In this proceeding, neither the Plaintiffs nor the Defendants have expressly consented to have a jury trial conducted by this Court. Accordingly, the Court hereby orders the Plaintiffs and the Defendants to file a statement on or before December 12, 2007, indicating whether they consent to this Court conducting such a jury trial. If both sides do not consent, the Court will issue a report and recommend to the United States District Court for the District of New Hampshire that the reference for this proceeding be withdrawn. See LR 77.4(d).
F. Continuance of Trial
Pending the filing of the statements referenced above, the trial of this matter shall be continued generally.
Fraudulent transfers and bad faith by the debtor would prevent the debtor from converting his Chapter 7 bankruptcy case into a Chapter 13 case.
In re Goines, 2007 WL 3531549 (Bkrtcy.M.D.N.C., No. 07-50812, Nov. 13, 2007)
United States Bankruptcy Court, M.D. North Carolina, Winston-Salem.
In re Valarie Mae GOINES, Debtor.
No. 07-50812, Nov. 13, 2007.
A. Carl Penney, Winston-Salem, NC, for Debtor, Edwin H. Ferguson, Jr., Concord, NC, Trustee.
MEMORANDUM OPINION DENYING MOTION TO CONVERT CASE FROM CHAPTER 7 TO CHAPTER 13
THOMAS W. WALDREP JR., Bankruptcy Judge.
*1 This matter came before the Court for hearing on October 17, 2007, after sufficient and proper notice, on the Motion to Convert Chapter 7 Case to Chapter 13 (the "Conversion Motion"), filed by the above-referenced debtor (the "Debtor") on September 24, 2007. At the hearing, Edwin H. Ferguson appeared in his capacity as Chapter 7 Trustee (the "Trustee"), Michael D. West appeared in his capacity as the Bankruptcy Administrator, and A. Carl Penney appeared on behalf of the Debtor. Based upon a review of the Conversion Motion, the evidence and arguments presented at the hearing, and a review of the entire official record, the Conversion Motion will be denied.
I. JURISDICTION
The Court has jurisdiction over this subject matter of this proceeding pursuant to 28 U.S.C. §§ 151, 157, 1334, and the General Order of Reference entered by the United States District Court for the Middle District of North Carolina on August 15, 1984. This is a core proceeding within the meaning of 28 U.S.C. § 157(b).
II. FACTS
On May 29, 2007, the Debtor filed for Chapter 7 protection. Jeffrey P. Farran served as counsel for the Debtor.FN1 The Debtor's original Schedules I and J showed that she had monthly net income of $3,321.00 and monthly expenses of $3,204.00, leaving net income of only $117.00. Schedule A described the Debtor's interest in real property located at 644 Nottinghill Drive, Winston-Salem, North Carolina (the "Property") FN2 as a "tenant in common with 2 brothers (1/3 interest)." On June 22, 2007, the Debtor's Section 341 meeting was held, and the Debtor testified that she owned the Property jointly with her brothers for several years. The Debtor was also asked if she had transferred any property within the previous two years, and she replied in the negative. The Section 341 meeting was continued to July 6, 2007.
FN1. On July 16, 2007, Farran filed a motion requesting Court authority to withdraw as the Debtor's counsel, which was granted on August 21, 2007. On September 24, 2007, the Debtor filed a motion to employ A. Carl Penny as counsel for the Debtor, which was granted the following day.
FN2. The Property has been the Debtor's home for the past sixteen years.
Prior to the continued Section 341 meeting, the Debtor produced a copy of a deed concerning the Property, which disclosed that the Property had been transferred on April 5, 2007, from the Debtor's sole ownership to joint ownership with her two brothers. At the continued Section 341 meeting on July 6, 2007, the Debtor admitted that she transferred the Property to herself and her two brothers just 54 days before she filed her Chapter 7 petition.
Based on these facts, on July 9, 2007, the Trustee filed an adversary proceeding (AP No. 07-06035) objecting to the discharge of the Debtor pursuant to Section 727(a) of the Bankruptcy Code (the "Discharge Adversary Proceeding"). Nine days later, on July 18, 2007, the Trustee filed another adversary proceeding (AP No. 07-06038), seeking recovery of the Property as a fraudulent conveyance pursuant to Section 548 of the Bankruptcy Code (the "Fraudulent Conveyance Adversary Proceeding").
The Debtor did not respond to the complaint in the Discharge Adversary Proceeding, and on August 22, 2007, the Trustee filed a motion for entry of default. The next day, an entry of default was entered. On September 17, 2007, the Trustee filed a motion for default judgment.
*2 The Debtor did not respond to the complaint in the Fraudulent Conveyance Adversary Proceeding, and on August 23, 2007, the Trustee filed a motion for entry of default. The next day, an entry of default was entered. On September 17, 2007, the Trustee filed a motion for default judgment. On September 18, 2007, the Debtor filed an answer to the complaint.
On September 24, 2007, the Debtor filed the Conversion Motion and certain amendments to schedules I and J. The amended schedules show that the Debtor had an increase in net income of $964.00 per month. On October 9, 2007, the Trustee objected to the Conversion Motion.
II. DISCUSSION
A. The Statute
The Debtor in this case would like to convert her Chapter 7 case to a case under Chapter 13 pursuant to Section 706 of the Bankruptcy Code. The pertinent portions of Section 706 provide:
(a) The debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.
(d) Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.
11 U.S.C. § 706.
The statutory language "at any time" appears to confer an absolute right to convert so long as the case was not previously converted to a Chapter 11, 12, or 13 case. The Debtor's case has not previously been converted. Prior to the Supreme Court's 2007 ruling in Marrama v. Citizens Bank of Massachusetts, 127 S.Ct. 1105, 1110 (2007), several courts of appeals were split as to whether the right to convert was absolute for all debtors. Some circuits, including the Fourth Circuit, held that only the most egregious circumstances could justify denial of what is otherwise a clear statutory right. In re Cooper, 426 F.3d 810, 814 (6th Cir.2005)(disallowing Chapter 7 debtor conversion due to bad faith); Finney v. Smith (In re Finney), 992 F.2d 43, 44-45 (4th Cir.1993)( "[C]ongress intended § 706(a) to confer 'the one-time absolute right' to convert from liquidation to reorganization, because 'the debtor should always be given the opportunity to repay his debts.' "); Kuntz v. Shambam (In re Kuntz), 233 B.R. 580, 585 (1st Cir.BAP1999) (debtor's one-time right to conversion may be denied in "extreme circumstances" constituting bad faith). Other circuits allowed conversion in spite of the debtor's bad faith conduct. In the Matter of Martin, 880 F.2d 857, 859 (5th Cir.1989)(conversion allowed after debtor received Chapter 7 discharge and the debtor engaged in pre-petition bad-faith conduct); In re Croston, 313 B.R. 447, 451 (9th Cir.BAP2004)(debtor may convert if the statutory prerequisites are met, regardless of a debtor's bad faith); Miller v. U.S. Trustee (In re Miller), 303 B.R. 471, 473 (10th Cir.BAP2003) (debtor had absolute right to convert even though there was substantial evidence of abuse of the system); In re Street, 55 B.R. 763, 765 (9th Cir.BAP1985)(conversion must be allowed if not previously converted, even if debtor received judgment of nondischargeability in Chapter 7 case).
*3 In 2007, the Supreme Court, in a 5 to 4 decision, abrogated the Martin, Croston, and Miller decisions by holding that a Chapter 7 debtor forfeited her right to convert to Chapter 13 by engaging in pre-petition bad faith conduct. Marrama, 127 S.Ct. at 1110. The bad faith conduct by the debtor established "cause" that would have warranted dismissal or reconversion of her Chapter 13 case, rendering her unqualified to be a debtor under Chapter 13. Id. Such a result is consistent with the Supreme Court's view that the purpose of bankruptcy law is to give "the honest but unfortunate debtor ... a new opportunity in life and a clear field for future effort." Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934); see Grogan v. Garner, 498 U.S. 279, 287 (1991).
B. The Determination of Bad Faith
Marrama does not define "bad-faith conduct" but merely notes that the conduct of the debtor must be "atypical" and limited to "extraordinary cases." FN3 So how should a court determine bad faith in this context? There are two standards from which to choose: a plain meaning approach or an absence of good faith approach. Under the plain meaning approach, the common meaning of the term "bad faith" is used. See In re Computer Dynamics, Inc., 252 B.R. 50 (Bankr.E.D.Va.1997)("bad faith" under F.R.B.P. 9011 has a plain meaning). The term "bad faith" is defined as "dishonesty of belief or purpose." Black's Law Dictionary 145 (8th ed.2004).FN4 Therefore a debtor who is dishonest in belief or purpose loses her absolute right to convert from a Chapter 7 case to a Chapter 13 case.FN5
FN3. "We have no occasion here to articulate with precision what conduct qualifies as 'bad faith' sufficient to permit a bankruptcy judge to dismiss a Chapter 13 case or to deny conversion from Chapter 7. It suffices to emphasize that the debtor's conduct must, in fact, be atypical. Limiting dismissal or denial of conversion to extraordinary cases is particularly appropriate in light of the fact that lack of good faith in proposing a Chapter 13 plan is an express statutory ground for denying plan confirmation." Marrama, 127. S.Ct. at 1112 n. 11.
FN4. Previous editions of Black's Law Dictionary expressed an older definition of "bad faith," meaning an absence of good faith. Black's Law Dictionary 127 (5th ed.1979). This helps to explain why pre- Marrama cases used a lack of good faith approach to define bad faith.
FN5. Bad faith certainly may be shown by acts of dishonesty, but it may also be shown in other ways. See In re Wampler, 302 B.R. 601, 605-606 (Bankr.S.D.Ind.2003)(denying a motion to convert based on bad faith where the debtor filed the motion for an illegitimate purpose); In re Sully, 223 B.R. 582, 585 (Bankr .M.D.Fla.1998)(finding bad faith in the filing of a motion to convert where debtor's intent in converting the case was not to reorganize, but to frustrate the bankruptcy process and regain control of settlement proceeds to the detriment of creditors); In re Lesniak, 208 B.R. 902, 906 (Bankr.N.D.Ill.1997)(denying motion to convert based on bad faith where filing of motion was not motivated by desire to repay debts or provide greater dividend to creditors, but to save debtors' property). Because good faith is an "amorphous notion," it is impossible to identify the "infinite variety of factors" that might weigh in the "good faith equation." In re Condon, 358 B.R. 317, 326 (6th Cir.BAP2007) (quoting Metro Employees Credit Union v. Okoreeh-Baah (In re Okoreeh-Baah), 836 F .2d 1030, 1033 (6th Cir.1988)).
Alternatively, a court could use a different standard, that of an absence of good faith. Many courts, pre- Marrama, wrestled with what constituted actions sufficient to surrender the right to convert. Post- Marrama, the Bankruptcy Court for the Eastern District of Pennsylvania used an absence of good faith approach by applying a "totality of circumstances" test that courts in the Third Circuit created and applied pre- Marrama to determine whether a motion to convert has been filed in good faith. In re Piccoli, No. 06-2142, slip op. at *6-7 (E.D.Pa. Sept. 27, 2007)(2007 WL 2822001)(citing In re Pakuris, 262 B.R. 330, 335-36 (Bankr.E.D.Pa.2001)); see also In re Murray, No. 07-10101, slip op. at *4 (Bankr.D.Del. October 24, 2007). In evaluating the totality of the circumstances, the Piccoli court considered whether (1) the motion was filed in good faith, (2) the Chapter 13 plan was confirmable, (3) there was unfair prejudice to creditors (4) conversion was efficient in administration, and (5) conversion would further an abuse of the bankruptcy process. Id. at *7.
This Court concludes that the plain meaning approach better follows the Marrama decision. The plain meaning approach is more suited to protecting the rights and interests of the "honest debtor ." The absence of good faith approach makes a determination based in part on feasability, efficiency, and the best interests of creditors.FN6 These determinations are not at the heart of the doctrine. Moreover, the plain meaning approach protects the honest debtor by requiring a showing of dishonesty by the objecting party, rather than a showing of honesty by the debtor.
FN6. Language in Marrama controverts the use of this test. "There is an argument that the standards for good faith in a motion to convert under 11 U.S.C. § 706(a) should be the same as the standards for good faith in an initial Chapter 13 petition." Marrama, 127 S.Ct. at 1109 (citing In re Marrama, 430 F.3d 474, 479 (1st Cir.2005)("We can discern neither a theoretical nor a practical reason that Congress would have chosen to treat a first-time motion to convert a chapter 7 case to chapter 13 under subsection 706(a) differently from the filing of a chapter 13 petition in the first instance."). The key phrase here is "initial Chapter 13 petition." Issues of feasibility, efficiency, and the best interests of creditors are raised after the petition, usually at the Section 341 meeting and the Section 1325 plan confirmation hearing.
C. The Burden of Proof
*4 Marrama did not address which party has the burden of persuasion in determining whether the debtor's conduct evidences sufficient bad faith to deny a motion to convert her case to Chapter 13. However, any ambiguities should be generally resolved in favor of the debtor, New Neighborhoods, Inc. West Virginia Workers' Compensation Fund, 886 F.2d 714, 719 (4th Cir.1989), which supports the conclusion that the objecting party has the burden of proof. Placing the burden of proof on the objecting party, not the debtor, is also consistent with the plain meaning approach discussed above.FN7
FN7. The "honest" debtor has an absolute right to convert. Putting the burden of proof on the objecting party requires that party to demonstrate the debtor's dishonesty and avoids putting the debtor in the untenable position of having to prove a negative, i.e., that she was not dishonest.
D. The Standard of Proof
Marrama did not address the proper standard of proof to be applied. What standard must the objecting party meet? "The function of a standard of proof, as that concept is embodied in the Due Process Clause and in the realm of factfinding, is to 'instruct the factfinder concerning the degree of confidence our society thinks he should have in the correctness of factual conclusions for a particular type of adjudication.' " Addington v. Texas, 441 U.S. 418, 423 (1979)(quoting In re Winship, 397 U.S. 358, 370 (1970)). There are two standards of proof that are applicable to bankruptcy proceedings: clear and convincing, and preponderance of the evidence.
The preponderance of the evidence standard is applicable in civil actions, unless important individual interests are at stake, and then a clear and convincing standard is required. Grogan v. Garner, 498 U.S. 279, 286 (1991). The preponderance of the evidence standard is generally applied where there is a monetary dispute between private parties, where society has a minimal concern with the outcome. Addington, 441 U.S. at 423. Therefore, litigants "share the risk of error in roughly equal fashion." Id . In bankruptcy proceedings, for example, the preponderance of the evidence standard is used in cases that determine whether debts will be excepted from the debtor's discharge pursuant to Section 523(a). Grogan, 498 U.S. at 286.
A clear and convincing standard applies in cases where the interests at stake "are deemed to be more substantial than mere loss of money." In re Mark, 336 B.R. 260, 265 (Bankr.D.Md.2006)(quoting Addington, 441 U.S. at 423-24). A clear and convincing evidence standard is used in "cases involving fraud or some other quasi-criminal wrongdoing by the defendant" or when there is a statutory presumption involved. Addington, 441 U .S. at 424; Mark, 336 B.R. at 265 (clear and convincing evidence is used to overcome the statutory presumption of bad faith in Section 362(c)(3)(A)).FN8 This heightened standard of proof necessitates a showing of high probability or reasonable certainty, but it does not mean clear and unequivocal. Kent K. v. Bobby M., 110 P.3d 1013, 1018-19 (Az.2005); Judicial Inquiry and Review Com'n of Virginia v. Peatross, 611 S.E.2d 392, 400 (Va.2005). However, it does place a heavier burden upon one party to prove its case to a reasonable certainty. Judicial Inquiry and Review Com'n, 611 S.E.2d at 400.
FN8. A clear and convincing standard is also used when proving moral turpitude or when a clear liberty interest is at stake, such as commitment for mental illness, deportation, or denaturalization. See Woodby v. INS, 385 U.S. 276, 285 (1966)(deportation); Chaunt v. United States, 364 U.S. 350, 353 (1960)(denaturalization); Thompson v. Nicholson, 423 F.3d 1279, 1283 (Fed.Cir.2005)(liberty interest); Vogel v. American Warranty Home Service Corp., 695 F.2d 877, 882 (5th Cir.1983)(fraud); U.S. v. Fatico, 458 F.Supp. 388, 404 (E.D.N.Y.1978) (moral turpitude).
*5 This Court finds the proper standard to be the lower standard, preponderance of the evidence. While the Court recognizes that the "absolute right of the honest debtor" is an important consideration, it is not a liberty interest nor a statutory presumption. The Supreme Court's holding in Grogan guides this result. Grogan, 498 U.S. at 286 (holding Section 523(a) dischargability actions, including fraud, are decided by using a preponderance of the evidence standard). The issue involves a determination of what chapter of the Bankruptcy Code a debtor will use to pay and discharge her debts, not whether she is eligible to file bankruptcy at all. The lower standard must be used to determine whether the debtor meets the definition of a debtor under Chapter 13.
E. The Bad Faith Conduct of the Debtor
A Chapter 7 debtor may forfeit his right to convert to Chapter 13 by engaging in prepetition bad faith conduct that establishes "cause" warranting dismissal or reconversion of his Chapter 13 case, rendering him unqualified to be a debtor under Chapter 13. Marrama, 127 S.Ct. at 1110-1111. In Marrama, the debtor misrepresented the value of real property on his petition and failed to disclose that he had transferred his property during the preceding year. Id. at 1107. When the Chapter 7 trustee sought recovery of the property, the debtor moved to convert the case to Chapter 13, and the trustee objected. Id. Other courts, following Marrama, have not allowed conversion from Chapter 7 to Chapter 13 where debtors made prepetition fraudulent transfers, improperly represented their financial situation on their schedules, and moved to convert their case due to the litigation filed by the trustee. See In re Piccoli, No. 06-2142, slip op. at 4-8 (E.D.Pa. Sept. 27, 2007)(2007 WL 2822001)(district court affirmed bankruptcy court, which denied on bad faith grounds the debtor's motion to convert because the debtor conveyed real property to his daughter and son-in-law 16 months before filing and his amended schedules); In re Truong, No. 03-40283, slip op. at 3-4 (Bankr.D .N.J. Mar. 5, 2007)(2007 WL 708874) (court denied debtors' motion to convert because they transferred property to family members and corporate entities to protect it from the trustee and creditors, made inconsistent explanations of assets and liabilities, and filed the motion only after the trustee moved to remove them from their residence).
Was there "bad faith conduct" by the Debtor sufficient to establish "cause" warranting dismissal or reconversion of her case? After reviewing the testimony and evidence, the Court finds that (a) the undisclosed transfer of real property to the Debtor's brothers 54 days before filing and (b) the misrepresentations on her schedules and at her Section 341 meeting evidence the Debtor's bad faith by a preponderance of the evidence.FN9
FN9. Although this decision does rely upon the following facts, the Court notes that the Debtor's bankruptcy appears to be timed precisely to avoid paying her creditors. If the testimony at the hearing is to be believed, the Debtor did not need to file for Chapter 7 relief. Both of the Debtor's brothers testified that, because the Debtor was out of work for several months, they gave her money to pay the mortgage on the Property and her other expenses. Thus, there was no financial reason for the Debtor to file bankruptcy when she did. At the time of filing, the Debtor was a registered nurse and had completed all of the course work to become a family nurse practitioner; she only needed to pass a test in order to obtain her new position with a corresponding increase in income. She filed her bankruptcy, then took the test and passed, which increased her net income by $964.00 per month. Had the Debtor taken the test and obtained her new position first, a presumption of abuse would have arisen under Section 707 of the Bankruptcy Code, which would have required her to file a Chapter 13 bankruptcy or have her case dismissed.
The Debtor gave two explanations for the transfer of the Property to her brothers, but they cannot both be true. The Debtor testified that she transferred the Property to herself and her brothers as an asset protection planning move, so that any potential medical malpractice creditors of the Debtor would not be able to reach the Property to satisfy their claims. Then the Debtor and her brothers testified that it was a family tradition that all real property be owned jointly by all of the family. They described how this family tradition started with their grandparents and was carried on today. Each bother testified that their houses were jointly owned with family members. The brothers testified that this was the reason that the Property was transferred to them. As these two reasons are independent of one other, they both cannot be the reason for the transfer. Some aspect of the Debtor's testimony is not truthful.
*6 Most importantly, the transfer of the Property was not reported on the Debtor's petition, on her Statement of Financial Affairs, or at her Section 341 meeting. Question 10 in her Statement of Financial Affairs required the Debtor to disclose, under oath, any transfers that she made within two years of the filing of the case. The Debtor's answer to this question indicated that no transfers had occurred. At the hearing, the Debtor testified that she did not realize this error when she reviewed and signed her schedules in the office of her first attorney, Farran. She testified that she looked at the petition, schedules, and Statement of Financial Affairs quickly and that she was under a great deal of stress.FN10 At her Section 341 meeting, the Debtor denied that she had made any transfers within two years of her bankruptcy. Then, at the continued Section 341 meeting of creditors, when confronted with the deed showing the transfer of the Property, the Debtor testified that she "forgot" to disclose to the Trustee and her first attorney (Farran) that she had transferred the Property. Such testimony undercuts the Debtor's previous excuse of asset protection planning, as discussed above. If she transferred the Property to protect it, would that transfer not be memorable?
FN10. That the Debtor read the petition and attachments quickly is no excuse for material and inaccurate statements on these documents. Bankruptcy relies heavily on self-reporting by debtors. A debtor's signature avowing to the truth and correctness of the bankruptcy petition, schedules of assets and liabilities, and statement of financial affairs is undertaken on penalty of perjury. 28 U.S.C. § 1746; Fed. R. Bankr.P. 1008. Truth in reporting is consonant with the purposes of bankruptcy, which is to "give[ ] the honest but unfortunate debtor ... a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt." Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). Debtors that purposefully misrepresent the value of their existing assets are not seeking a "fresh start;" rather, such debtors are seeking a "head start," an act that is not countenanced by the Bankruptcy Code and which may be punishable as a felony. 18 U.S.C. § 157 ("A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so-... (3) makes a false or fraudulent representation ... at any time before or after the filing of the petition ... shall be fined under this title, imprisoned not more than 5 years, or both."). E.g., In re Jarrell, 189 B.R. 374, 377 (Bankr.M.D.N.C.1995)(bankruptcy does not afford a debtor a right to a "head start"). Put plainly, a debtor must make every effort to ensure that the petition, schedules, and statements are as accurate as possible, and "[n]either the trustee nor the creditors should be required to engage in a laborious tug-of-war to drag the simple truth into the glare of daylight." Boroff v. Tully (In re Tully), 818 F.2d 106, 110 (1st Cir.1987). The Court finds that the misrepresentations in the Debtor's schedules in this case are not innocent.
Finally, the Debtor's demeanor and testimony at the hearing undercut her assertion that she acted in good faith. During the hearing, the Trustee and the Bankruptcy Administrator subjected the Debtor to intense scrutiny and questioning. The Debtor was calm and composed throughout this questioning, even when the Bankruptcy Administrator plainly questioned the Debtor's integrity. The Debtor responded without emotion, which is not the normal response of a wrongly-accused person. The Debtor's testimony was not consistent with a person who is nervous or confused under stress. The Debtor also exhibited a highly selective memory. During her testimony, she remembered details when it was to her advantage and could not remember material facts when it was not to her advantage. The Debtor testified that stress caused her to forget about transferring the Property to her and her brothers less than two months before she filed her bankruptcy. No evidence was presented to support the Debtor's assertions about her alleged medical condition. In sum, her testimony was not persuasive.
The Court determines that, for the reasons stated above, the Trustee has carried his burden to show bad faith conduct by the Debtor, sufficient to warrant denying the Conversion Motion on the basis of Marrama.
IV. CONCLUSION
The Debtor's prepetition and post-petition acts establish her bad faith conduct, rendering her unqualified to be a debtor under Chapter 13. The Conversion Motion will be denied.
This opinion constitutes the Court's findings of fact and conclusions of law. A separate order shall be entered pursuant to Fed. R. Bankr.P. 9021.
Homestead protection does not follow a personal residence into a partnership, says this California case.
In re Bell, 2007 WL 4190686 (Bkrtcy.N.D.Cal., No. 04-45847 EDJ, Nov. 21, 2007)
In re Bell Bkrtcy.N.D.Cal.,2007. United States Bankruptcy Court,N.D. California. In re Clay Scott BELL, Debtor. No. 04-45847 EDJ.
Nov. 21, 2007.
Scott E. Turner, Law Offices of Scott E. Turner, Redwood City, CA, for Debtor. Michael J. McQuaid, Carr, McClellan, Ingersoll, et al., Burlingame, CA, for Trustee.
MEMORANDUM DECISION RE DEBTOR'S MOTION TO AVOID TRUSTEE'S LIEN
EDWARD D. JELLEN, Bankruptcy Judge.
*1 Lois I. Brady, trustee in bankruptcy (the "trustee"), holds a lien on certain proceeds she received when she sold a partnership interest that Clay Scott Bell, the above debtor ("Bell"), owned at the date of his bankruptcy petition. Bell has filed a motion seeking an order avoiding, and preserving for his own benefit, the trustee's lien.
Bell grounds his motion on Bankruptcy Code § 522(f)(1), by which a debtor can avoid certain liens that impair a debtor's claim of exemption.FN1Here, Bell has claimed a $50,000 homestead exemption as to the partnership interest the trustee sold, and he claims that the trustee's lien impairs that exemption. Alternatively, Bell asks for an order requiring the trustee to deliver to him $50,000 from the proceeds of the sale of the partnership interest, representing the amount of his homestead exemption.
FN1.Bankruptcy Code § 522(f)(1) provides, in relevant part: "Notwithstanding any waiver of exemptions but subject to paragraph (3), the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is- (A) a judicial lien ... [subject to certain exceptions not relevant here]."
The trustee opposes Bell's motion. The trustee also seeks an order surcharging Bell's interest in the sales proceeds, should Bell's motion be granted.
The court will deny Bell's motion, which renders the trustee's motion moot.
A. Facts
The facts the court needs to decide Bell's motion are undisputed. Prior to the filing of Bell's chapter 7 petition, Bell owned a 15% interest in a partnership named "Dome." One of Dome's assets was certain real property containing multiple units situated in Oakland, California, County of Alameda (the "Property"). Although Bell had no ownership interest in the Property, or any of the units comprising the Property, his partnership interest in Dome entitled him to reside in one of the residential units at the Property, pursuant to a grant of authority in the Dome partnership agreement.
Approximately three months before the filing, one of Bell's creditors, Bruce Beasley ("Beasley"), obtained a judgment against Bell in the sum of $493,181. Beasley then sought to enforce the judgment by recording an abstract of judgment with the Alameda County Recorder's Office. In addition, on September 27, 2004, less than 90 days prior to the date of Bell's chapter 7 filing, Beasley filed and served a motion for a charging order with the California Superior Court pursuant to Cal.Civ.Proc.Code § 708.320.FN2Under California law, the filing of such motion resulted in Beasley obtaining a judgment lien on Bell's 15% interest in Dome. Id.
FN2.Cal.Civ.Proc.Code § 708(a) provides, in relevant part: "A lien on a judgment debtor's interest in a partnership ... is created by service of a notice of motion for a charging order on the judgement debtor and on [additional parties]."
On October 27, 2004, Bell filed his voluntary chapter 7 petition herein. Thereafter, the trustee filed an adversary proceeding against Beasley to avoid Beasley's judgment lien on Dome as an avoidable preference under Bankruptcy Code § 547(b). On August 3, 2007, this court entered judgment in favor of the trustee. The judgment avoided Beasley's lien on Dome, and preserved the lien for the benefit of Bell's bankruptcy estate pursuant to Bankruptcy Code § 551.FN3
FN3.Bankruptcy Code § 551 provides, in relevant part: "Any transfer avoided under section ... 547... is preserved for the benefit of the estate but only with respect to property of the estate."
Thereafter, the trustee sold Bell's interest in Dome for $381,000 pursuant to an Order Authorizing Trustee to Sell Bankruptcy Estate's Right Title and Interest in Partnership (Dome) entered August 15, 2007. The order provided that the Beasley lien, as preserved for the benefit of the estate, was transferred to the sales proceeds.
*2 The current dispute between the trustee and Bell arises out of Bell's attempt to claim a homestead exemption as to his interest in Dome. Bell's Schedule C (Property Claimed as Exempt) filed as part of his chapter 7 case claims as exempt $50,000 of value in Debtor's residence held in the form of a 15% interest in Dome. Dome owns the [Property]. The [Property] is worth approximately $1,000,000. Debtor believes that his interest is less than 15% of the value of the building. The partnership claims a $120,000 charge against the debtor's interest because the partnership has operated in the red for 20 of the last 25 years.
Bell claimed the exemption pursuant to Cal.Civ.Proc.Code § 704.730(a)(1), California's "automatic" homestead exemption (sometimes referred to as an "Article 4" homestead exemption). Bell contends that he resided at the Property at the date of the petition, that the Property was his principal dwelling, and that the fact that the Property was owned by Dome rather than Bell is irrelevant to his right to claim an exemption as to the proceeds from the trustee's sale of Dome.
The trustee disputes that Bell resided at the Property at the date of the petition and contends that even if Bell did, he may not claim a homestead exemption as to his interest in Dome or any portion of the Property.
B. Discussion
For present purposes, the trustee concedes that if Bell is entitled to claim a homestead exemption as to Dome, then Bell would be entitled to avoid the trustee's lien interest in the proceeds from the sale of Dome up to the sum of $50,000, the amount of the exemption claim at issue. See In re Heintz, 198 B.R. 581 (9th Cir. BAP1996) (holding that if a trustee avoids and preserves a lien on exempt property, the debtor may seek to avoid the trustee's lien and preserve it for the debtor's own benefit if the trustee's lien impairs the debtor's exemption). The trustee also concedes that such lien avoidance, in turn, would entitle Bell to the payment of $50,000 out of the proceeds.
Thus, the key issue is whether Bell may claim a homestead exemption under California law in Dome, a partnership interest, because of the fact that Dome owned the residence where Bell lived. The court concludes in the negative.
The parties agree that the issue is governed by California law. SeeBankruptcy Code § 522(b)(2) (authorizing the States to "opt out" of the exemptions specified in the Bankruptcy Code) and Cal.Civ.Proc.Code § 703.130 (whereby California opts out of the Bankruptcy Code exemptions).California Civ. Proc.Code § 703.020(a) provides: "The exemptions provided by this chapter apply only to the property of a natural person."FN4Dome is not a natural person. Thus, Bell may not claim any property of Dome, including any interest in the Property, as exempt. Nor does any provision of California law entitle Bell to claim his partnership interest in Dome as exempt.
FN4. "This chapter" within the meaning of Cal.Civ.Proc.Code § 703.020 encompasses both California's Article 4 "automatic" homestead exemption, and California's Article 5 "declared" homestead.
Moreover, for purposes of California's Article 4 homestead exemption, "homestead" is defined as the debtor's "principal dwelling." Cal.Civ.Proc.Code § 704.710(c). "Dwelling," in turn, is defined as the "place where a person resides." Cal.Civ.Proc.Code § 704.710(a). Dome, however, is not a "dwelling," and thus, cannot be an Article 4 homestead.
*3 The plain language of Cal.Civ.Proc.Code §§ 703.020(a) and 704.710(a) and (c), coupled with the fact that Bell cannot claim his interest in Dome as exempt, would conclusively resolve the pending motions, but for the decision of the California Court of Appeal in Fisch, Spiegler, Ginsburg & Ladner v. Appel, 10 Cal.App. 4th 1810, 13 Cal.Rptr.2d 471 (1992). In Appel, the court held that the debtors therein could claim an exemption in their residence, notwithstanding the fact that title to the residence was in a revocable trust under which the right to revoke was held by the debtors.
Appel, however, is distinguishable. The court's decision was grounded on the facts that the trust was revocable and that the power of revocation was held by the debtors. The court reasoned that the debtors' right to revoke the trust gave them a contingent reversionary interest in the residence at issue, and that the contingent reversionary interest was an interest in real property that was eligible for a debtor to claim as exempt pursuant to California's Article 5 declared homestead provisions. Appel, 10 Cal.App. 4th at 1813, 13 Cal.Rptr.2d at 473. The court also noted that the debtors claimed a life estate interest in their residence and that the creditor opposing the exemption did not dispute this fact. Id.
Here, Bell has no interest in the Property, or any portion thereof, and no right to acquire title to any interest in the Property by means of a right of revocation.
The court also notes that Bell has furnished no case law in which a court allowed a claim of homestead exemption as to a residence owned by a partnership.
Although not binding, decisions of other states construing their homestead laws are instructive, and support the proposition that Bell may not claim a homestead exemption as to a partnership interest or a residence owned by a partnership. See, In re Gorman, 82 B.R. 253, 256 (D.Vt.1987) (holding that under Vermont law, individual partners may not claim a homestead exemption in partnership property); In re Brooks, 103 B.R. 123 (Bankr.S.D.Tex .1988) (same, under Texas law); In re Hale, 2004 Bankr.LEXIS 2495 (Bankr.D.Idaho 2004) (same, under Idaho law); Buchman v. Canard, 926 So.2d 390 (Fla.3d Dist.Ct.App.2005) (same, under Florida law).But see Sco
