Maryland Consumer Rights Coalition, a local nonprofit advocate for consumers has released four-year scores ranking each and every Maryland state lawmakers. Do you know if your representative is looking for the little guy? Check the rankings at Maryland Consumer.
Once debtor litigates case in state court and a judgment is entered he or she cannot start an adversary case in bankruptcy court on the same issue. The state court judgment will stand and preclude the issue from being litigated again. In the case below, debtor had a judgment rendered against him in the Superior Court. He then filed an adversary in bankruptcy court on the same issue resulting in the dismissal pursuant to the issue preclusion doctrine.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
BRANDI S. NAVE,
Debtor.
____________________________
KEITH BRITT,
Plaintiff,
v.
BRANDI S. NAVE,
Defendant.
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Case No. 09-00651
(Chapter 7)
Adversary Proceeding No.
09-10033
Not for publication in
West’s Bankruptcy Reporter
MEMORANDUM DECISION RE PLAINTIFF’S RESPONSE TO ORDER
TO SHOW CAUSE WHY ADVERSARY PROCEEDING OUGHT NOT BE DISMISSED
The plaintiff Britt was allowed to pursue in the Superior
Court his sanctions claims that he was asserting could be found
non-dischargeable under § 523(a)(6). The Superior Court has
ruled against Britt. Under the doctrine of res judicata (claim
preclusion), the Superior Court’s judgment bars Britt’s pursuit
of his claim in this court. Because Britt is deemed not to have
any claim, the doctrine of collateral estoppel (issue preclusion), which might (or might not) have disposed of the
§ 523(a)(6) question if the Superior Court had ruled instead that
Britt was entitled to a judgment in his favor, does not come into
play as there is no claim as to which to apply that doctrine.
In response to this court’s order to show cause why this
adversary proceeding ought not be dismissed based on the Superior
Court ruling, Britt notes that he has taken an appeal from the
Superior Court’s ruling. The law, however, is well established
that a final judgment is entitled to res judicata effect even if
an appeal is pending. If Britt prevails on appeal, he may within
a reasonable time file a motion under Federal Rule of Civil
Procedure 60(b)(5) to vacate the dismissal of this proceeding.1
Britt asks that the court stay this proceeding pending the
outcome of his appeal from the Superior Court’s ruling, but this
court has no desire to periodically inquire into the status of
Britt’s appeal. Instead, the burden should be on Britt to notify
this court via a timely Rule 60(b)(5) motion in the event his
appeal is successful. A judgment follows dismissing this
adversary proceeding.
[Signed and dated above.]
Copies to: All counsel of record.
1 Rule 60(b)(5) provides in relevant part that a court may
relieve a party from a judgment for the reason that “the judgment
. . . is based on an earlier judgment that has been reversed or
vacated . . . .”
R:CommonTeelSMJudge Temp DocsBritt v Nave (In re Nave) Mem Decsn re Response to OTSC Based on Superior Court Ruling.wpd
2
Cashcall that has being accused by the Consumer Financial Protection Bureau (CFPB) of engaging in unfair, deceptive, and abusive practices, including illegally debiting consumer checking accounts for loans that were void is filing claims in chapter 13 cases.
California-based CashCall, was working with Western Sky Financial, a South Dakota-based online lender. Western Sky Financial famously stated that it was based in an Indian reservation and therefore not subject to state laws. But CFPB asserts that Western Sky is not exempt from state laws.
Typical loans start from $850, but the interest rates are out of this world ranging from 90 percent to 343 percent.Borrowers are required to authorize cashcall to debit payment directly from their bank accounts. The loans were then acquired by WS Funding and serviced by CashCall.
The matter is still pending with the CFPB.
Cashcall has intervened in bankruptcy cases by filing claims such as in the case below.
.UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
SABRINA Y. LEWIS-STANBRACK,
Debtor.
)
)
)
)
)
Case No. 10-01271
(Chapter 13)
Not for publication in
West’s Bankruptcy Reporter.
MEMORANDUM DECISION AND ORDER DISMISSING DEBTOR’S
OBJECTION TO CLAIM #1 FILED BY CREDITOR CASH-CALL, INC.
On July 5, 2011, the debtor filed with the court an
objection to the proof of claim of CashCall, Inc. (Dkt. No. 51).
In the objection, the debtor contended that CashCall’s proof of
claim was not entitled to the prima facie validity afforded
claims under Rule 3001 because it did not contain sufficient
evidence of the debt as required by Rule 3001(c). The proof of
claim filed by CashCall consisted solely of a statement showing
the balance due without any information as to how it arrived at
that balance, including delineating charges for late fees and
interest. After the debtor filed her objection to its claim,
CashCall filed an amended proof of claim to include a detailed
account statement. The statement shows an outstanding principal
U.S. Bankruptcy Judge
S. Martin Teel, Jr.
_____________________
The document below is hereby signed.
Dated: August 29, 2011.balance of $5,044.44 at an astounding 69% interest rate.1 Late
fees accrue at a rate of $29 per month. The debtor made one
payment on interest only between October 2009 and November 2010,
and four minimum payments from December 2009 to June 2011. Given
the interest rate on the loan, that the total amount claimed is
over $12,000 on a $5,000 principal is unsurprising. Because the
amended proof of claim contains a detailed account statement, it
is entitled to prima facie validity under Rule 3001, and,
accordingly, the debtor bears the burden of going forward on its
objection. The debtor has raised no objection to the substance
of CashCall’s claim. Thus, I will dismiss the debtor’s objection
without prejudice. For these reasons, it is
ORDERED that the Debtor’s Objection to Claim #1 Filed by
Creditor Cash-Call, Inc. and Notice of Deadline and Opportunity
to Object (Dkt. No. 51, filed July 5, 2011) is DISMISSED without
prejudice.
[Signed and dated above.]
Copies to: Debtor; recipients of e-notification;
CashCall, Inc.
c/o B-Line, LLC
MS 550
P.O. Box 91121
Seattle, WA 98111-9221
1
The debtor’s objection does not challenge this rate.
Rather, the debtor’s sole objection is that the creditor has
provided insufficient information to allow the debtor to see how
CashCall arrived at the amount claimed.
R:CommonTeelSMGarrettOrdersMiscOverruleOBJPOC (Stanback).wpd
2
All debtors are required to complete a pre-filing credit counseling course before filing their bankruptcy case and file a certificate with the court. Failure to do so could result in the dismissal of your case. Waivers are available however one must demonstrate that he or she attempted to take the course but was unable to do so before filing.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
MELVIN ARTHUR WATSON,
Debtor.
)
)
)
)
)
)
Case No. 11-00561
(Chapter 7)
Not for Publication in
West’s Bankruptcy Reporter
MEMORANDUM DECISION AND ORDER DENYING REQUEST FOR TEMPORARY
WAIVER OF THE CREDIT COUNSELING REQUIREMENT OF 11 U.S.C. § 109(h)
On his Exhibit D to the voluntary petition, the debtor
checked the box requesting a temporary waiver of the prepetition
credit counseling requirement based upon exigent circumstances.
In describing the exigent circumstances that merit a temporary
waiver, the debtor states:
Debtor is 71 and cares for sick wife. Debtor has no
computer to complete course and the telephone course is
$55. Debtor does not have $55 till the first of the
month to pay for the course unless Debtor can borrow
money before the first of the month. Case is filed as
an emergency due to lawsuit trial date of tomorrow July
26, 2011.
The debtor does not represent that he attempted to obtain
counseling prepetition, as required to qualify for waiver, but
instead indicates that he filed the petition with the intent of
U.S. Bankruptcy Judge
S. Martin Teel, Jr.
_____________________
The document below is hereby signed.
Dated: August 1, 2011.seeking counseling postpetition. For reasons explained in more
detail below, the court will deny the debtor’s request for a
temporary waiver of the prepetition credit counseling requirement
of 11 U.S.C. § 109(h).
Section 109(h) of 11 U.S.C. provides that all individuals
filing for bankruptcy must obtain an individual or group briefing
that outlines the opportunities for available credit counseling
and assists the individual in performing a related budget
analysis from an approved non-profit budget and credit counseling
agency during the 180-day period preceding the date of the filing
of the individual’s petition. 11 U.S.C. § 109(h)(1).
Pursuant to 11 U.S.C. § 109(h)(3)(A), the court can waive
this requirement temporarily if (i) the debtor certifies that
there are exigent circumstances that merit a waiver of the credit
counseling requirement, (ii) the debtor certifies that he
requested credit counseling services from an approved non-profit
budget and credit counseling agency before he filed his petition,
but was unable to obtain the necessary services within seven days
of the request, and (iii) the court finds good cause to grant the
waiver. This exemption applies only for the first thirty days
following the filing of the debtor’s petition, although the court
may grant a fifteen day extension of the exemption for cause. 11
U.S.C. § 109(h)(3)(B).
Even if the July 26, 2011 trial constitutes an exigent
2circumstance within the meaning of 11 U.S.C. § 109(h)(3)(A)(i), a
matter as to which the court expresses no opinion, the debtor has
failed adequately to describe any prepetition request for credit
counseling services from an approved non-profit budget and credit
counseling agency, and he has likewise failed to explain why he
was unable to obtain the necessary services within seven days of
making such a request.1
It thus appearing that the debtor is
ineligible for waiver, it is
ORDERED that the debtor’s request for a temporary waiver of
the prepetition credit counseling requirement of 11 U.S.C.
§ 109(h) based upon exigent circumstances is DENIED.
[Signed and dated above.]
Copies to: Debtor; Debtor’s attorney; Chapter 7 Trustee; Office
of United States Trustee.
1
The debtor states that he lacks the necessary funds to
pay for counseling, but he does not indicate that he requested
counseling services and was turned away on that basis. The court
notes that an approved non-profit budget and credit counseling
agency that charges a fee is required to “provide services
without regard to ability to pay the fee.” 11 U.S.C. § 111(2)(B).
R:CommonTeelSMLSOORDERS109(h)Order denying exigent circumstances waiver and dismissal_Melvin Watson.wpd
3
As a Maryland foreclosure lawyer, I have helped clients whose homes have already being in sold in foreclosure negotiate favorable terms to vacate the property. The statutory process according the foreclosure laws requires a ratification of the foreclosure sale and the buyer to obtain a judgment of eviction from the Circuit Court. However, the Court of Appeals also recognized the common law right of buyers to enter a premises in a non-violent matter and take possession following a foreclosure sale in 2012 in the Nickens Case. This ruling triggered the Maryland legislature to enact a new law in 2014 creating stringent requirements for when a buyer can take possession without a court order. To engage in what is known as self-help by having a realtor or other professional change the locks and take possession of the foreclose home, the lender has make sure that:
Trespassers and others with no right or business being the property are not covered by this new law. Failure to follow this procedure gives the homeowner or other lawful resident such as a tenant the right to sue the buyer for actual damages and lawyer fees. The complete rule is attached below. REAL PROPERTY
TITLE 7. MORTGAGES, DEEDS OF TRUST, AND VENDOR’S LIENS
SUBTITLE 1. MORTGAGES AND DEEDS OF TRUST
Md. REAL PROPERTY Code Ann. § 7-113 (2014)
§ 7-113. Prohibition on nonjudicial evictions.
(a) Definitions. —
(1) In this section the following words have the meanings indicated.
(2) “Party claiming the right to possession” means a person or successor to any person who:
(i) Does not have actual possession of a residential property; and
(ii) Has or claims to have a legal right to possession of the residential property:
1. By the terms of a contract or foreclosure sale; or
2. Under a court order, including a court order extinguishing a right of redemption.
(3) (i) “Protected resident” means an owner or former owner in actual possession of residential property.
(ii) “Protected resident” includes a grantee, tenant, subtenant, or other person in actual possession by, through, or under an owner or former owner of residential property.
(iii) “Protected resident” does not include a trespasser or squatter.
(4) “Residential property” means a building, structure, or portion of a building or structure that is designed principally and is intended for human habitation.
(5) “Threaten to take possession” means using words or actions intended to convince a reasonable person that a party claiming the right to possession intends to take imminent possession of residential property in violation of this section.
(6) “Willful diminution of services” means intentionally interrupting or causing the interruption of heat, running water, hot water, electricity, or gas by a party claiming the right to possession for the purpose of forcing a protected resident to abandon residential property.
(b) In general. —
(1) Except as provided in paragraph (2) of this subsection, a party claiming the right to possession may not take possession or threaten to take possession of residential property from a protected resident by:
(i) Locking the resident out of the residential property;
(ii) Engaging in willful diminution of services to the protected resident; or
(iii) Taking any other action that deprives the protected resident of actual possession.
(2) (i) Except as provided in subparagraph (ii) of this paragraph, a party claiming the right to possession may take possession of residential property from a protected resident only in accordance with a writ of possession issued by a court and executed by a sheriff or constable.
(ii) A party claiming the right to possession of residential property may use nonjudicial self-help to take possession of the property, if the party:
1. Reasonably believes the protected resident has abandoned or surrendered possession of the property based on a reasonable inquiry into the occupancy status of the property;
2. Provides notice as provided in subsection (c) of this section; and
3. Receives no responsive communication to that notice within 15 days after the later of posting or mailing the notice as required by subsection (c) of this section.
(c) Posting notice where protected residents have abandoned or surrendered possession. —
(1) If a party claiming the right to possession of residential property reasonably believes, based on a reasonable inquiry into the occupancy status of the property, that all protected residents have abandoned or surrendered possession of the residential property, the party claiming the right to possession may post on the front door of the residential property and mail by first-class mail addressed to “all occupants” at the address of the residential property a written notice in substantially the following form:
“IMPORTANT NOTICE ABOUT EVICTION
A person who claims the right to possess this property believes that this property is abandoned. If you are currently residing in the property, you must immediately contact:
Name
Address
Telephone
Date of this notice
If you do not contact the person listed above within 15 days after the date of this notice, the person claiming possession may consider the property abandoned and seek to secure the property, including changing the locks without a court order.”.
(2) The written notice required by this subsection shall be:
(i) A separate document; and
(ii) Printed in at least 12 point type.
(3) The outside of the envelope containing the mailed written notice required by this subsection shall state, on the address side, in bold, capital letters in at least 12 point type, the following: “Important notice to all occupants: eviction information enclosed; open immediately.”.
(d) Penalties. —
(1) If in any proceeding the court finds that a party claiming the right to possession violated subsection (b) of this section, the protected resident may recover:
(i) Possession of the property, if no other person then resides in the property;
(ii) Actual damages; and
(iii) Reasonable attorney’s fees and costs.
(2) The remedies set forth in this subsection are not exclusive.
(e) Exception. — This section does not apply if the parties are governed by Title 8, Subtitle 2, or Title 8A of this article.
Flagstar Bancorp (FBC) is close to reaching an agreement to settle allegations surrounding its loss mitigation and loan servicing business according to an article by Housingwire.com.
In 2012 Flagstar settled a lawsuit by the US Attorney of Southern New York alleging fraudulent mortgage lending for a cool $133,000,000.00 as report in Detroit Free Press.com
The bank also reached settlements with Freddie Mac and Fannie Mae that were also north of one hundred million dollars as reported in Crains Detroit.
If you have a mortgage with Flagstar and need help with a loan modification do not hesitate to contact my office.
In this following opinion, the Court denied a request to stay a decision appointing a trustee for the purpose of liquidation citing the debtor’s inadequate prosecution of the case. The court highlighted the debtor’s efforts to protect her own interests irrespective of the law in terms of exemptions and any distributions to unsecured creditors. Chapter 13 and chapter 11 debtors must demonstrate good faith in their attempts to reorganize or stand the chance of having the trustee and/or creditors object which could result in a dismissal.
IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND at Baltimore
In re: *
Monica D. Harenberg * Case No. 10-23223-RAG Chapter 11 Debtor *
* * * * * * * * * * * * *
In re: * Case No. 10-23222-RAG Chapter 11 D&M Realty, LLC * Jointly Administered under Debtor * Case No. 10-23223-RAG
* * * * * * * * * * * * *
MEMORANDUM OPINION IN SUPPORT OF ORDER DENYING DEBTORS’ MOTION FOR STAY PENDING APPEAL
I. Introduction
Pending before the Court is the Debtors’ Motion for Stay Pending Appeal (Motion for Stay) (Dkt. No. 132) filed on December 3, 2012.1 The U.S. Trustee (UST) filed its Opposition to
1 As indicated in the Debtors’ Disclosure Statement Regarding Third Amended Plan of Reorganization (Amended Disclosure Statement) (Dkt. No. 111), D&M Realty, LLC (D&M) is presently a shell entity with only a nominal amount of cash ($7,000) to its name. The real estate that it had an interest in was liquidated during bankruptcy and it was left owing a substantial deficiency claim to CFG Community Bank (CFG). Therefore, when the Debtor is re- ferred to in this Opinion, it will mean Monica D. Harenberg unless otherwise indicated or when the plural form is used.
Signed: April 08, 2013 SO ORDERED
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 1 of 30
2
Debtors’ Motion for Stay Pending Appeal (Dkt. No. 140) by the deadline agreed upon by the parties and the matter is now ripe for decision.2
The Motion for Stay seeks to bring the underlying bankruptcy proceeding to a full stop
while the Debtors’ appeal three orders. Each order was issued after this Court’s October 24,
2012 oral ruling that (a) denied approval ‘with prejudice’ of the Amended Disclosure Statement, (b) decided that the Third Amended Plan of Reorganization of D&M Realty, LLC and Monica
D. Harenberg (Amended Plan) (Dkt. No. 110) could not be confirmed and (c) held that a trustee should be appointed to administer this estate.3 Those orders are, the Order Disapproving Debt-
ors’ Disclosure Statement and Denying Confirmation of Debtors’ Third Amended Plan Without
Leave to Amend (Disclosure Statement Order) (Dkt. No. 118), the Order to Show Cause as to
Why a Chapter 11 Trustee Should Not Be Appointed (Show Cause Order) (Dkt. No. 119) and
the Order Denying Debtors’ Motion for Partial Reconsideration, Sustaining Order to Show
Cause as to Why a Chapter 11 Trustee Should Not be Appointed and Converting the Cases to Cases under Chapter 7 (Conversion Order) (Dkt. No. 125).4
II. Preliminary Statement Monica Harenberg owns and manages a real estate enterprise that includes several valu-
able income producing properties. For the past two and a half years, she has proven herself
incapable of prosecuting this case in good faith and it is elementary that a plan proponent’s lack
of good faith is fatal to the confirmation process. Her single-minded effort to protect her own
(and her parents’) economic interests to the complete exclusion of the interests of her substantial
body of general unsecured creditors bears this out in compelling fashion. The Amended Plan and
Amended Disclosure Statement confirm the worst by (a) proposing to pay no more than a total
of $9,500 over a period of five years to an unsecured class of creditors holding claims of well
over one million dollars, (b) granting Juanita Harenberg (Ms. Harenberg’s mother) a fee simple
co-interest in real estate held free and clear and worth approximately $140,000, in addition to a
junior ‘priming’ lien against the rest of the Debtor’s real estate, and (c) proposing to keep for Ms.
Harenberg all residual equity (and future upside potential) in her income producing assets, most,
if not all, of which she stubbornly persists in claiming to be “exempt” from creditor claims
contrary to governing law.
These outrageous proposals exemplify Ms. Harenberg’s approach to the administration of
her case, an approach at cross purposes with her fiduciary responsibilities. With that in mind,
this Court found that that the Amended Plan does not comply “with the applicable provisions of”
the Bankruptcy Code and has not been “proposed in good faith” as required by 11 U.S.C. §§1129(a)(1) and (3).5 Moreover, the Amended Plan violates the liquidation test of Section
1129(a)(7) as well as Section 1123(a)(4)’s prohibition against unfair discrimination among creditors of the same class.6 This Court therefore decided that the Amended Plan could not be
confirmed, the Amended Disclosure Statement could not be approved, and, moreover that Ms.
Harenberg is incapable of ever proffering a plan that complies with the Code and is rooted in
good faith. The appointment of a trustee to insure that the rights of creditors ─ especially the
5 Unless otherwise noted, all statutory citations shall be to the Bankruptcy Code (Code) found at Title 11 of the United States Code and all rule citations are to the Federal Rules of Bankruptcy Procedure (Rules). 6 The Amended Plan also violates Section 1129(a)(11) which bars confirmation if it is likely to be followed by liquidation. The Amended Disclosure Statement acknowledges this, indicating that, “the [Amended Plan] would lack sufficient funding without infusions of capital from” the Debtor’s mother.
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 3 of 30
4
rights of general creditors ─ are protected thus became the only reasonable alternative.7
Accordingly, the Court concludes that the Motion for Stay should be denied.
III. Background (a) Ms. Harenberg’s Statement of Financial Affairs and Schedules and her Unlawful Effort to Exempt all of her Equity
The Court summarized Ms. Harenberg’s lack of good faith in its October 24, 2012 oral
ruling. Her stark track record – culminating in the Amended Disclosure Statement and Amended
Plan – is this case’s singular problem. That problem first manifested in her original Statement of
Financial Affairs and Schedules (SOFA and Schedules) and it was underscored by her
outrageous attempt to exempt from the estate over one million eighty thousand dollars in asset
value.
Ms. Harenberg filed her Voluntary Petition on June 11, 2010.8 On April 27, 2011, she
and D&M filed their Disclosure Statement Regarding Plan of Reorganization of D&M Realty,
LLC and Monica Harenberg (First Disclosure Statement). The Court held a hearing on the
adequacy of the same on June 14, 2011 and that resulted in the entry of the Memorandum
Opinion referred to in footnote 8. The choices Ms. Harenberg made in crafting her SOFA and
Schedules (particularly her Schedule C ─ Exemptions) were deeply relevant to the question
presented by the First Disclosure Statement: whether she had afforded her creditors adequate
information to enable them to make an informed decision regarding the version of her plan then
7 The Court originally intended to appoint a chapter 11 trustee but decided to convert the case to Chapter 7 at the urging of the UST. In lieu of reconsideration, the Debtor likewise supported conversion. 8 Initially, these two cases were (at the request of the Debtors) jointly administered with a third case, Robert’s Plumbing and Heating, LLC (Robert’s Plumbing) filed at Case No. 10-23221. Robert’s Plumbing was the lead case until it was dismissed at that Debtor’s request. Robert’s Plumbing made that request to avoid compliance with the rulings set forth in the Memorandum Opinion in Support of Order Denying Approval of Debtors’ Disclosure Statements (Memorandum Opinion) entered on July 20, 2011 (Dkt. No. 206; Case No. 10-23221).
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 4 of 30
5
pending such that the confirmation process could move forward upon a foundation of full, honest disclosure.9 The core problem was described in the Memorandum Opinion as follows:
Ms. Harenberg filed her Statement of Financial Affairs (HSOFA) and Schedules (Harenberg Schedules) on July 9, 2010 (Dkt. No. 40). Accompanying them was a document entitled General Notes Regarding the Schedules (Harenberg General Notes). As explained in footnote 15, supra, above regarding the RPH General Notes, the Harenberg General Notes likewise present a cavalcade of disclaimers and renouncements of the accuracy of the HSOFA and Harenberg Schedules. If accepted at face value, they render the HSOFA and Harenberg Schedules meaningless. However, the Harenberg General Notes potentially carry much more impact than do the RPH General Notes at this stage of the case. In short, they make it impossible for creditors to know with certainty whether the proposed plan is either proposed in good faith or satisfies the liquidation test of Section 1129(a).
Specifically regarding Ms. Harenberg’s claimed exemptions in her Schedule “C”, the Harenberg General Notes state as follows:
Book Value of Property Interests. It would be prohibitively expensive and unduly burdensome to obtain current market valuation of the Debtor’s properly interests and other significant assets. Accordingly, unless otherwise noted, the value of assets reflected on the Schedules are merely the Debtor’s best guess as to their value, rather than current market value or other valuation methodologies. In Schedule C and its exhibits, the Debtor has asserted an exemption on 100% of the Debtor’s right, title, and interest in each and every asset listed on that schedule, except as otherwise expressly provided. Stated values are not intended to act as a limitation of the amount or proportion of value in which the Debtor asserts an exemption. To the extent that any exemption exceeds the maximum value of exemptions by law, the Debtor asserts that the cushion created by undervaluation of some assets will permit the excess but reserves the right 9 Section 1125 prohibits debtors from soliciting creditor acceptance of their reorganization plan unless and until the court approves the proffered disclosure statement as including adequate information. See In re Microwave Products of America, Inc., 100 B.R. 376, 377 (Bankr. W.D. Tenn. 1989); In re Metrocraft Publishing Services, Inc., 39 B.R. 567, 568 (Bankr. N.D. Ga. 1984).
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 5 of 30
6
to amend Schedule C to apply the exemptions differently.
(Dkt. No. 40, pgs. 2-3). Schedule “C” attempts to exempt a total of $1,046,759 in real estate and $34,297 in personal property. To call this an act of bad faith would be a gross understatement.
Recognizing this, on August 20, 2010, CFG filed its Objection by CFG Community Bank to Debtor Monica D. Harenberg’s Claim of Exemptions (Exemption Objection) (Dkt. No. 81). The specific grounds underlying the Exemption Objection can be summarized as follows:
a. That Ms. Harenberg’s exemptions exceeded the dollar amounts allowed by law; b. That the exemptions as claimed are impermissibly ambiguous or non-specific; and c. That Ms. Harenberg is not entitled to exempt property titled as Tenant’s-By-The Entirety as Ms. Harenberg and her non-filing spouse have joint debts.
Ms. Harenberg neither requested a hearing on the Exemption Objection nor did she file a response to the same. On May 19, 2011, the Court entered the Order Sustaining Objection by CFG Community Bank to Debtor Monica D. Harenberg’s Claim of Exemptions (Exemption Order) (Dkt. No. 185). In pertinent part the Exemption Order provided,
The Objection is well taken and no response has been filed. Moreover, the Objection in part relies upon the Debtor’s use (through incorporation) of a document entitled ‘General Notes Regarding the Schedules’ (Dkt. No. 40) filed by the Debtor as a general, all purpose disclaimer to her Schedules (Dkt. No. 40). This document appears to be purposefully obtuse and calculated in part to absolve the Debtor from any responsibility for the facts set forth, and affirmed under oath, in her Schedules. In light of the multiple layers of uncertainty that result from this tactic, in addition to the overall merit of the Objection, the Objection will be sustained and the claimed exemptions vacated in their entirety.
On June 2, 2011, Ms. Harenberg filed the Debtor’s Motion for Reconsideration (Reconsideration Motion) (Case No. 10- 23223, Dkt. No. 37) which sought to convince the Court to reverse itself and vacate the Exemption Order. The grounds set forth in the Reconsideration Motion are not well-taken. However, for purposes of this Memorandum Opinion, and the preparation of
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 6 of 30
7
future disclosure statements, if any, the Court’s reasoning boils down to the following: to vacate the Exemption Order and reinstate Ms. Harenberg’s exemptions would throw the confirmation process into mind-bending uncertainty. Ms. Harenberg’s claimed exemptions are unsustainable whether Schedule “C” is viewed alone or as reflected by the funhouse mirror of the Harenberg General Notes. Without certainty regarding Ms. Harenberg’s exemptions, and the value of property exempted, creditors have no way of discerning or evaluating the value of property to be distributed under the plan and thereby determine whether liquidation would be the better outcome. Hence, the consequences of both Schedule “C” and the Harenberg General Notes are disruptive in the extreme. As long as they hold sway, Ms. Harenberg’s proposed plan is unconfirmable and any proposed disclosure statement cannot be approved.
Ms. Harenberg is entitled by law to exemptions. The Exemption Order specifically recognized this by offering her the opportunity to amend the vacated Schedule C. Until her exemptions are properly selected and defined in a manner allowed by law, and the smokey (sic) veil of the Harenberg General Notes is cleared away, her next disclosure statement cannot be evaluated in any meaningful way. Mem. Op. 16-19 (emphasis added).10
Honesty is the consideration that a debtor must pay in exchange for the immense
protection afforded by the Code. In keeping with that policy, the purpose of the statement of
financial affairs and schedules is to provide a transparent view of the Debtor’s assets, liabilities
and financial affairs at the time bankruptcy is filed. The degree to which any bankruptcy case
can be properly and efficiently administered is directly proportional to the level of honesty
imbued in those documents and the responsibility to provide the necessary candor falls squarely on the debtor’s shoulders.11 With these bedrock principles providing context, Ms. Harenberg’s
General Notes could only have been prepared with one purpose in mind: to baffle and bamboozle
10 A copy of Ms. Harenberg’s General Notes is attached as Appendix I. 11 There is no doubt that Ms. Harenberg’s counsel is well aware of these fundamental precepts of bankruptcy law.
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 7 of 30
8
creditors in derogation of their right to receive clear, accurate, straightforward information. And
while the General Notes’ confounding overall impact was bad enough, the difficulty was
multiplied exponentially by the Debtor’s attempt to simultaneously exempt over one million
eighty thousand dollars in asset value. Why would Ms. Harenberg attempt to claim such a huge,
unlawful exemption? Simply put, if no timely objection was filed, then the original exemptions could have become fixed and invulnerable to attack.12 However, CFG’s objection checked the
Debtor’s first attempt at this gambit. Approval of the First Disclosure Statement was therefore
withheld because of (a) the grossly (and purposefully) confused state of the record due to the
General Notes, (b) the unlawful exemptions and (c) the Debtor’s failure to disclose a mélange of
relevant financial information. Between the General Note’s fog and the exemptions’ haze,
accurate information as to the state of Ms. Harenberg’s financial affairs, especially the value of
any equity, could not be gleaned. Accordingly, the Debtors were given ninety (90) days to file an amended disclosure statement and plan.13 Ms. Harenberg filed an Amended Schedule C on November 16, 201114 (Dkt. No. 263;
Case No. 10-23221). All of the real estate parcels listed (save one) were valued at ‘$1’ or ‘$0’
for exemption purposes while the personal property exemptions were mixed: some items of
property were assigned very specific dollar amounts of exempt value while others were assigned 12 Taylor v. Freeland & Kronz, 503 U.S. 638, 643-44 (1992) (If a party in interest fails to object to property claimed as exempt within the period allowed by Rule 4003(b) then the property ‘is exempt’ per Section 522(l) even if the claimed exemption is otherwise illegitimate.). 13 The Memorandum Opinion closed with this caution,
The information provided in the two Disclosure Statements falls well below the minimum standard and the inclusion of outlandish provisions without rational basis has only inspired strict scrutiny. The rulings in this Memorandum Opinion are intended to reflect that conclusion and should be interpreted as such.
Mem. Op. 21. 14 A modified version of the ‘General Notes’ was filed with the Amended Schedule C which only served to compound the confusion.
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 8 of 30
9
exemption values of either ‘$1’ or ‘$0’. However, notwithstanding the superficial appearance of
thoughtful selection, Ms. Harenberg’s overriding intent was made clear by the inclusion of a
single footnote. It read:
Except as otherwise indicated, the Debtor’s exemption of an asset is intended to include 100% of the Debtor’s right, title and interest in and to such asset. Values are approximate and reflect only the Debtor’s good-faith belief in the value of the Debtor’s interest in the asset (net of any existing liens, mortgages, and other encumbrances).
(Am. Sch. C, Ex. C-1 (emphasis added).)
Thus, the Debtor still intended to try and exempt all available equity and her quagmire of
a case quickly tumbled back to square one. The UST objected to Amended Schedule C and
properly sought to “limit the debtor to those exemptions allowed by law” (Dkt. No. 272; Case No. 10-23221).15 On February 14, 2012 a hearing to consider the objection was held. Getting to
the heart of the matter, the Court again emphasized that it would be impossible for the Debtor to
obtain disclosure statement approval as long as she persisted in playing ‘fast and loose’ with the
law governing exemptions. She was cautioned that if her exemptions were not pared down to fit
the governing legal boundaries then the Court would, “sua sponte consider whether a trustee
should be appointed.” At the hearing’s close, the Court ruled as follows:
I’m going to give the debtor 15 days to file an amended Schedule C. And this is the debtor’s last opportunity to amend the Schedule C and any other schedules that need to be amended in a legitimate, lawful way. The law regarding which there could not be any doubt whatsoever in anybody’s mind in this courtroom except perhaps the debtor herself…And then I’m going to give you 60 days from today to file an amended plan and disclosure statement.
(Hr’g Tr. 24, Feb. 14, 2012.)
15 By the time Amended Schedule C was filed, the Debtor had entered into a proposed settlement with CFG, the prior objector. It is therefore likely that the Debtor hoped the Amended Schedule C would slip under the radar without objection thus reaping the undeserved benefit of Taylor’s holding.
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 9 of 30
10
On February 28, 2012 the Debtor filed her third Schedule C with the offensive footnote
deleted. On its face, this iteration of Schedule C did not attempt to exempt all of Ms.
Harenberg’s equity. However, when considered in combination with the Amended Disclosure
Statement and Amended Plan filed on August 31, 2012, it became evident that Ms. Harenberg
was still bent upon trying to do just that while leaving her general creditors little more than
crumbs.
(b) The Amended Disclosure Statement and Amended Plan
1. The Treatment of Juanita Harenberg, the Debtor’s Mother
The Amended Disclosure Statement indicates that the Debtor owns, free and clear of
liens and encumbrances, a fifty per cent (50%) interest in Baltimore City real estate known as 2823 St. Paul Street (2823 St. Paul).16 The Amended Disclosure Statement assigns an approximate value of $140,000 to her interest.17 In response to question 14 of her SOFA, the
Debtor asserted that she held title to this real estate as an “accommodation”. The Amended
Disclosure Statement indicates that she owns the interest as a “convenience”, at least until the
day her father passes away. What happens after that is not disclosed. No documents were
submitted with the Amended Disclosure Statement to either confirm or explain the underlying
nature of the alleged grant and why Ms. Harenberg characterizes her ownership interest this way.
Nor does the Amended Disclosure Statement include an informative narrative explanation.
Nevertheless, the Amended Disclosure Statement goes to great lengths to try and explain why
this interest has no value to the estate, mainly relying upon the alleged difficulty a purchaser of
her share would have in generating income. 16 The other fifty per cent (50%) is apparently owned by Ms. Harenberg’s father. The Debtor originally sought to exempt her half interest from the estate through the machinations described above. 17 The portion of the Amended Disclosure Statement that describes the Debtor’s interests in real property and the corresponding claims of secured creditors is attached as Appendix II.
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 10 of 30
11
To be blunt, this Court is of the opinion that the Amended Disclosure Statement’s
verbiage on this topic is hogwash pure and simple, conjured up to deceive creditors. Section
363(h) is intended to manage this precise circumstance by allowing a trustee to sell a parcel of
real estate that is co-owned by a non-debtor if certain conditions are met. There is no apparent
obstacle to the application of Section 363(h) to 2823 St. Paul and there is little doubt that a
competent trustee could quickly and efficiently employ the statute to administer and liquidate the
real property for the benefit of the estate. Notwithstanding Section 363(h)’s obvious impact and
the benefit its utilization would bring to general creditors, the Amended Disclosure Statement
does not mention that subsection. Instead, the Amended Plan proposes to deed the Debtor’s fifty
per cent interest to her mother in exchange for “past consideration” (alleged unsecured loans)
and an alleged agreement to subsidize the Debtor’s performance under the Amended Plan. Over
and above that largesse, the Amended Plan also proposes to grant the Debtor’s mother a
“priming” lien to be secured by the rest of the Debtor’s real estate which lien would rise in value with each new loan.18 These benefits would accrue notwithstanding the indication on the
Debtor’s SOFA that her mother may have been the recipient of at least $90,000 in preferential payments during the twelve months prior to the filing of the case.19
Ms. Harenberg’s mother is at best an average creditor who may have made unsecured
loans before the bankruptcy filing. The exalted status proposed for her under the Amended Plan
has no rational basis and, as will be explained below, amounts to a prima facie violation of
18 The Amended Disclosure Statement does not disclose any other ‘loan’ terms. 19 The payments are listed in response to Question 3c of the SOFA. The preference period would extend to one year prior to the petition date for Ms. Harenberg’s mother, who is an insider. See Section 547(b)(4)(B). Yet, the Amended Disclosure Statement does not discuss the payments received by Ms. Harenberg’s mother. This may be because the Amended Plan also proposes that post confirmation, all right, title and interest to any claims or causes of action of the estate shall become property of the Debtor for her to pursue or not pursue as she sees fit in her sole discretion.
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 11 of 30
12
Section 1123(a)(4)’s anti-discrimination provisions. Accordingly, this Court concluded that the
treatment afforded her mother was nothing more than additional confirmation of the Debtor’s
bad faith.
2. The Amended Plan’s Treatment of General Creditors
The Debtor’s Amended Plan proposes to pay her general unsecured creditors, with claims
totaling over one million dollars, a grand total of nine thousand five hundred dollars ($9,500),
payable in installments, over five years. In contrast to this proposal, the Debtor’s Amended
Schedule B ─ Personal Property (Dkt. No. 263, Case No. 10-23221) assigns a total value of
$57,719 to her non-real estate assets. Of this, the Debtor has exempted a total of $27,973 leaving approximately $29,746 of non-exempt equity.20 As for the Debtor’s real estate, the analysis
begins with 2823 St. Paul Street and her fifty per cent interest valued at $140,000. In addition,
properties identified as 2918-20 N Calvert Street (2918 Calvert) and 2822 St. Paul Street (2822
St. Paul) were valued by the Debtor at $450,000 and $280,000 respectively, while the Amended
Disclosure Statement fixes the respective lien interests against these two parcels at approximately $400,000 and $170,427.36.21 Combined, these three real properties alone may
hold equity of approximately $299,572.64, a sum substantially more than what was being offered to general creditors.22 When the liquidation value of personal property is added in, the correct
choice becomes crystal clear: immediate liquidation is an infinitely better option for general 20 The Debtor also listed allegedly valueless ownership interests in business entities known as Village Properties and Star Management and a contingent future interest in the Juanita T. Harenberg Trust (Trust). Scant information was provided as to these interests and their value save for the representation that the Debtor receives income from the business entities and that the Trust would be donating valuable real estate as security to close one of the settlements that the Debtor proposed to enter into with a secured lender. 21 Ms. Harenberg declined to obtain appraisals of several other parcels of real estate deeming the cost “prohibitive”. 22 Ms. Harenberg asserts in the Amended Disclosure Statement that any real estate equity may be consumed by the confessed judgment lien in favor of CFG. However, the Amended Disclosure Statement did not inform creditors that per the Debtor’s settlement with CFG, its lien would be released upon the payment of relatively nominal sums by Ms. Harenberg and her co-settling parties. The Order Approving Settlement Agreement with CFG Community Bank Pursuant to Fed. R. Bankr. 9019 was entered on December 5, 2011 in Case No. 10-23221 at Dkt. No. 273.
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 12 of 30
13
creditors. Nevertheless, the Debtor asserts as to all three of the real estate parcels discussed
above that she has “included this property on her schedule of exemptions as being completely
exempt from being property of the estate”. (Am. Disclosure Statement 6-7 (emphasis added).)
Indeed, at page 11, the Amended Disclosure Statement states,
In her Liquidation Analysis, Ms. Harenberg exempted all of her real property, as reflected in Schedule C…. Ms. Harenberg believes that the exempt values of those real properties are accurate and that a … trustee would therefore not be able to liquidate those assets for the benefit of creditors.
(Am. Disclosure Statement 11.)
The Debtor comes full circle with that representation to bring us right back to the original
and inherent problem of bad faith. She is simply not entitled to exempt all of her assets from the
claims of her general creditors and to state otherwise is a gross misrepresentation of fact and law.23
IV. Legal Standards
An appellant who seeks a stay pending appeal must show that:
(1) there is a likelihood of success on the merits of the appeal; (2) she will suffer irreparable injury if the stay is denied; (3) other parties will not be substantially harmed by the stay; and (4) the public interest will be served by granting the stay.
Blackwelder Furniture Co. of Statesville v Seilig Mfg. Co., 550 F.2d 189, 193 (4th Cir. 1977)
rev’d on other grounds, Real Truth About Obama, Inc. v FEC, 575 F.3d 342 (4th Cir. 2009);
Long v. Robinson, 432 F.2d 977, 979 (4th Cir. 1970); Ohio Valley Envtl. Coalition, Inc., v U.S.
23 This point was addressed in In re Forti, which stated, “the mechanisms employed by the debtors could be tantamount to fraud if they assigned a nominal value in order to exempt a high-valued asset of the estate on the basis of the difficulty of valuation.” 224 B.R. 323 (Bankr. D. Md. 1998) (discussing Addison v. Reavis, 158 B.R. 53 (E.D. Va. 1993).).
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 13 of 30
14
Army Corps of Engineers, 890 F.Supp.2d 688, 690 (S.D. W.Va.). 24 The burden rests on the
moving party to establish each element, Long, 432 F.2d at 979, and this Court concludes that Ms.
Harenberg has satisfied none of them.
a. Whether the Debtor has a Likelihood of Success on the Merits
In order to achieve plan confirmation, a debtor must satisfy the applicable elements of 11
U.S.C. § 1129(a). In this case, the relevant provisions provide:
(a) The court shall confirm a plan only if all the following requirements are met:
(1) The plan complies with the applicable provisions of this title.
* * * (3) The plan has been proposed in good faith and not by any means forbidden by law.
* * * (7) With respect to each impaired class of claims or interests—
(A) each holder of a claim or interest of such class— (i) has accepted the plan; or (ii) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date;
* * *
(11) Confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor…
24 The Court in Ohio Valley endeavored to determine what, if any, impact The Real Truth decision had on the criteria for granting a stay pending appeal in light of The Real Truth’s revision of the preliminary injunction standard. The Ohio Valley court concluded that for purposes of securing a stay pending appeal, (1) a party need not make an independent showing as to each prong of the test, (2) that a weaker position on one of the prongs may be buttressed by the factoring in of significantly stronger position on others and (3) a strong showing of likelihood of success on the merits (as opposed to a showing of a ‘serious question’ presented) was needed to secure a stay pending appeal. 890 F. Supp.2d at 692-93. In this case however, Ms. Harenberg fails on each of the test’s four prongs.
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 14 of 30
15
* * *
11 U.S.C. § 1129(a). Supplementing the foregoing, Section 1123(a) specifies certain rules that a
Chapter 11 plan must follow. Subsection (a)(4) provides that, “a plan shall— (4) provide the
same treatment for each claim or interest of a particular class, unless the holder of a particular
claim or interest agrees to a less favorable treatment of such particular claim or interest”. 11
U.S.C. § 1123(a).
While it is true that the October 24, 2012 hearing was a disclosure statement (and not a
confirmation) hearing, the Amended Disclosure Statement and the Amended Plan are woven of
the same fabric and together are fatally defective. The Amended Disclosure Statement was
found wanting because of the material, deceptive inaccuracies described in Section III above but
even more so because of the scheme (constructed upon those deceptions and memorialized in the
Amended Plan) that on its face violates Sections 1129(a)(1) and (3). Applicable law bars Ms.
Harenberg from exempting all of her property yet that is exactly what the Amended Plan
proposes to do. Likewise, her effort to perfect those exemptions – an effort that has spanned the
entire case – in the face of objections and adverse court rulings, and under cover of obfuscation
and deception, is a textbook example of bad faith. Furthermore as regards the general unsecured
creditor class’s treatment, it is plain that (a) the exalted treatment afforded the Debtor’s mother is
grossly discriminatory in violation of Section 1123(a)(4) and (b) they will receive vastly more
upon liquidation than they would per Ms. Harenberg’s proposal, a circumstance that places the Amended Plan squarely at odds with 1129(a)(7).25
25 While Sections 1123(a)(4) and 1129(a)(7) allow creditors to choose to vote in favor of suffering monetary discrimination for the benefit of a fellow class member, or receiving less than they would upon liquidation, the Court found the Debtor’s proposals too grossly inadequate to be considered. This is so because the Debtor used deception to try and convince creditors that the Amended Plan’s proposal was the best they could expect. Without an honest evaluation, creditors would not be an informed voting constituency and their choice would be borne of fraud and ignorance.
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 15 of 30
16
A disclosure statement that describes a plan that cannot be confirmed – one that is
incapable of satisfying Section 1129(a) – cannot be approved. In re 266 Washington Associates,
141 B.R. 275, 288 (Bankr. E.D. N.Y. 1992), aff’d, In re Washington Associates, 147 B.R. 827
(E.D. N.Y. 1992); In re Pecht, 53 B.R. 768, 772 (Bankr. E.D. Va. 1985); In re Eastern Maine
Elec. Co-op., Inc., 125 B.R. 329, 333 (Bankr. D. Me. 1991); In re Kehn Ranch, Inc., 41 B.R.
832, 833 (Bankr. D. S.D. 1984). There is no sound reason to approve a disclosure statement, and
permit voting on an underlying plan, when the plan is fundamentally defective. In re Valrico
Square Ltd. Partnership, 113 B.R. 794, 796 (Bankr. S.D. Fla. 1990) (“[S]oliciting votes and
seeking court approval on a clearly fruitless venture is a waste of the time of the Court and the
parties.”); In re Eastern Maine Elec. Co-op., Inc., 125 B.R. at 333 (“[T]he disclosure statement
should be disapproved at the threshold only where the plan it describes displays fatal facial deficiencies or the stark absence of good faith.”). 26
The Debtors offer no legal authority that undercuts this Court’s finding of bad faith and it
is upon that fact finding that the Court’s decision rests. This boils down to the Debtor having
convinced the Court beyond repair that she will use any means necessary to try and keep the
estate’s substantial equity for herself (and her parents) and will not provide a fair distribution to 26 In United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct. 1367 (2010), the Supreme Court emphasized that a bankruptcy Court must follow relevant statutory directives before confirming a Chapter 13 plan. The Court stated:
§1325(a) instructs a bankruptcy court to confirm a plan only if the court finds, inter alia, that the plan complies with the “applicable provisions” of the Code. * * * [T]he Codes makes plain that bankruptcy courts have the authority ─ indeed the obligation ─ to direct a debtor to conform his plan to the requirements of §§ 1328(a)(2) and 523(a)(3).
260 S.Ct. at 1380. Justice Thomas further indicated in footnote 14 that Section 1325(a), “does more than codify this principle: it requires bankruptcy courts to address and correct a defect in a debtor’s proposed plan even if no creditor raises the issue.” Id. at 1381, n. 14. The relevant language of Section 1129(a)(1) is virtually identical to that of Section 1325(a)(1). In short, this Court offered Ms. Harenberg multiple opportunities to conform her reorganization efforts to the Code’s express boundaries but each offer has been rejected by her terminal overreaching.
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 16 of 30
17
general creditors. Any credibility she may have had has evaporated long ago. Notwithstanding
the events that preceded the Memorandum Opinion and its clear message that she was bound to
conduct herself as a fiduciary, Ms. Harenberg has continued to be ruled by avarice. She cannot
lawfully exempt the vast bulk of her assets, she cannot treat her mother to an exalted status over
other general creditors, and she cannot pay those general creditors less than 1% of their claims
over five years while she continues to reap the benefits of her extensive real estate portfolio. To
conclude otherwise would be tantamount to replacing Section 1129(a) with the epitaph, “Laissez
les bons temps rouler.”
The Motion for Stay does not address the Court’s finding of fact as to a lack of good faith and the Debtor’s failure to comply with applicable law. 27 Instead, the Debtor’s arguments can
be summarized as follows:
(a) There was “little or no equity” in the “real property” in the Debtor’s estate and the proposed plan would have “fairly apportioned value to her creditors, including a larger return to unsecured creditors than they would receive in a Chapter 7 liquidation;
(b) That all affected creditor classes would have voted to accept the plan and therefore creditors should have been given the opportunity to vote on the plan;
(c) That liquidation of the Debtor’s assets is not in the best interest of creditors because the trustee does not have the resources to manage and market the real estate and therefore secured creditors will seek to liquidate their collateral;
(d) That this Court had no authority to deny confirmation without leave to amend and the Debtor may file a plan “at any time” without limitation from the Court;
27 An inquiry into good faith is a factual one geared to a consideration of the totality of the circumstances. Behrmann v. Nat’l Heritage Foundation, 663 F.3d 704 (4th Cir. 2011).
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 17 of 30
18
(e) That the Court erred as a matter of law by making findings of fact and conclusions of law with respect to whether the plan could be confirmed at the hearing on the adequacy of the disclosure statement;
(f) That the Court erred by making findings of fact with respect to the value of the Debtor’s assets without receiving evidence on the same; and finally
(g) That the Debtor should have been permitted to form a creditor’s committee to represent the unsecured creditor body and allow “the Debtors and their estates [to] propose a plan that would be acceptable to all classes.”
As regards subheadings (a), (c) and (f), the Debtor’s own documents belie the Debtor’s
contention. The property analyses and values relied upon were derived from either the Amended
Disclosure Statement or the SOFA and Schedules. The relative values show there is a wealth of
equity and therefore creditors will do substantially better in liquidation than they would waiting
five years to be paid only 1% of their claims. Moreover, the trustee appointed – Lori Simpson,
Esquire – is more than capable of managing, administering and liquidating the estate’s assets.
This case is neither the easiest nor the hardest ever before this Court. Plainly, there is nothing to
indicate that creditors will not be paid within a reasonable time assuming competent
administration. This Court doubts that “all creditor classes” would have been in favor of the
Amended Plan. But even if by some strange turn of events the Debtor received votes in favor of
the Amended Plan from general creditors, for the reasons explained above, the Court would not
have confirmed the Amended Plan due to the Debtor’s bad faith, the violation of applicable law
and the Amended Disclosure Statement’s deceptive nature. The rest of the Debtor’s contentions
are rebutted by the settled legal principles regarding fatally flawed plans outlined above and
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 18 of 30
19
Section 1129(a)(3)’s mandate that good faith must be found in order to confirm a plan.28 It is the
Debtor’s obligation to proceed in good faith and proffer a plan that reflects that and creditors
should not have to wait for the creation of a creditor’s committee for her to gain the inspiration to
do so. Accordingly, the Court concludes that the appeal has no likelihood of success on the
merits.
b. Whether the Debtor will Suffer Irreparable Injury if the Stay is Denied
The requested stay is denied with the Court’s clear understanding (and hope) that
liquidation will begin immediately. Ms. Harenberg complains that this will “prejudice” her interests.29 In response, as Judge Winter wrote in Long,
[T]he principal irreparable injury which defendants claim they will suffer if the order is not stayed is injury of their own making. The defendant…has postponed the moment of truth as long as possible, but the moment of truth is now at hand. It would seem elementary that a party cannot claim equity in his own defaults.
432 F.2d at 981.
It is Ms. Harenberg’s stubborn wrongheadedness that has resulted in the adverse rulings
now on appeal. Creditors have been held at bay long enough. This Court finds no prejudice
whatsoever in the imposition of justice long delayed.
c. Whether Other Parties will not be Substantially Injured by the Stay
Ms. Harenberg’s creditors will be substantially injured by the entry of a stay. In sum,
they have waited for two and a half years while Ms. Harenberg and her counsel have wasted time 28 On appeal, the Court’s findings regarding the lack of good faith will be reviewed for clear error. Behrmann v. Nat’l Heritage Foundation, 663 F.3d at 709. Debtors have failed to make a showing that, on appeal, they will be likely to show clear error in the Court’s finding of bad faith. 29 Debtor also alleges that creditors will be harmed by liquidation as she will not be able to pay secured lenders in accordance with pending consent agreements. The Court expressly declined to approve any of the consent agreements awaiting decision at the October 24th hearing. Moreover, upon liquidation the secured lenders will receive the value of their collateral, which is all they are entitled to receive as recompense for the secured value of their claims. As explained in this Opinion, unsecured creditors should fare exceedingly well as compared to the $9,500 over five years that the Debtor proposes to pay them.
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 19 of 30
20
and money with misdirection and deception. The time has come for this case to move toward its
ultimate conclusion and for creditors to be paid.
d. Whether the Public Interest will be Served by the Grant of the Stay
The public interest in this instance falls squarely on the side of honesty and forthrightness
in judicial proceedings. Ms. Harenberg has shown neither. In bankruptcy, no crime is worse.
Accordingly, the public interest is against the grant of the stay.
V. Conclusion
Ms. Harenberg has dictated her own fate in this case. Her actions eliminate the
possibility of a finding of good faith under Section 1129(a)(3). Accordingly, a separate order
denying the Motion for Stay shall be entered.
cc: Debtors Debtors’ Counsel – Adam Hiller, Esquire U.S. Trustee – Edmund A. Goldberg Trustee – Lori S. Simpson All creditors on the mailing matrix
End of Opinion
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 20 of 30
APPENDIX I
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 21 of 30
Monica D. Harenberg, debtor in possession (the “Debtor”), hereby submits her Schedules of Assets and Liabilities, Statements of Financial Affairs, and Chapter 11 Statement Of Current Monthly Income (collectively, the “Schedules”) pursuant to 11 U.S.C. § 521 and Fed. R. Bankr. P. 1007. The notes, statements, and disclaimers made herein (the “Global Notes”) are fully incorporated by reference in, and comprise an integral part of, the Schedules and should be referred to and reviewed in connection with any review of the Schedules.
GENERAL NOTES REGARDING THE SCHEDULES
1. Description of the Case and “As Of” Information Date. On June 11, 2010 (the “Petition Date”), the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code (the “Petition”). Since the Petition Date, the Debtor has operated her business and managed her property as a debtor in possession pursuant to §§ 1107(a) and 1108 of the Bankruptcy Code. For purposes of the Schedules, which are intended to relate to facts or events occurring before the filing of the Petition, the Debtor disclosed all facts or events through and including June 11, 2010. The Debtor also attempted to include facts and events that occurred on the Petition Date but prior to the actual filing of the Petition, but to the extent that any such facts or events were inadvertently omitted, the Debtor reserves the right to amend the Schedules to correct any such defects. The Debtor’s bankruptcy case is jointly administered with the Chapter 11 cases of two other debtors, and these Schedules are not intended to refer to those debtors. 2. Unaudited Financial Information. While the Debtor has sought to ensure that the Schedules are accurate and complete based upon information that was available at the time of preparation, the subsequent receipt of information or any audit may result in material changes to financial data and other information contained in the Schedules. Except as otherwise certified, all of the data set forth herein is unaudited. The Schedules do not purport to represent financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”), nor are they intended to correspond to any financial statements otherwise prepared and/or distributed by the Debtor. The amounts set forth in the Schedules may differ in some respects from financial statements or other financial documents prepared by, for, or on behalf of the Debtor and those differences may be material. 3. Accuracy. While the Debtor has sought to file complete and accurate Schedules, inadvertent errors and omissions may exist. Accordingly, the Debtor reserves the right to amend the Schedules as necessary or appropriate. 4. Book Value of Property Interests. It would be prohibitively expensive and unduly burdensome to obtain current market valuation of the Debtor’s property interests and other significant assets. Accordingly, unless otherwise noted, the value of assets reflected on the Schedules are merely the Debtor’s best guess as to their value, rather than current market value or other valuation methodologies. In Schedule C and its exhibits, the Debtor has asserted an exemption on 100% of the Debtor’s right, title, and interest in each and every asset listed on that schedule, except as otherwise expressly provided. Stated values are not intended to act as a limitation of the amount or proportion of value in which the Debtor asserts an exemption. To the extent that any exemption exceeds the maximum value of exemptions by law, the Debtor asserts
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 22 of 30
-2-
that the cushion created by undervaluation of some assets will permit the excess but reserves the right to amend Schedule C to apply the exemptions differently. 5. Liabilities. In preparing the Schedules, the Debtor sought to allocate liabilities between prepetition and postpetition periods based on ongoing information and research. As additional information becomes available and further research is conducted, the allocation of liabilities between prepetition and postpetition periods may change and the Schedules may be amended accordingly. 6. Claim Description. Any failure to designate a claim on the Schedules as “contingent,” “unliquidated,” or “disputed” does not constitute an admission by the Debtor that such claim is not “contingent,” “unliquidated,” or “disputed.” The Debtor expressly reserves the right, on her own behalf or on behalf of the estate, to dispute, or to assert offsets or defenses, to any claim reflected on the Schedules as to existence, validity, amount, classification, priority, or security, or to amend the Schedules to designate any claim as “contingent,” “unliquidated,” or “disputed.” The Debtor has attempted to reconcile each of the claims against her own records and to dispute those with which its records disagree, but in the event the Debtor subsequently determines that any claims listed on the Schedules as “undisputed” are inconsistent with its books and records, the Debtor reserves the right to amend the Schedules to reflect that such claims are disputed, or to object to such claims without amending the Schedules if she determines that amending the Schedules is unnecessary. 7. Executory Contracts and Unexpired Leases. In the ordinary course of her business, the Debtor may have leased real property and/or various articles of personal property from third-party lessors. Such leases are described in the Schedules, but the leased property may not be reflected in the Schedules as assets of the Debtor or property or assets of third parties within the control of the Debtor. On or before the Petition Date, any such contracts or leases listed on Schedule G may have been terminated, may have expired, or may have been modified, amended, or supplemented from time to time by various amendments, restatements, waivers, estoppel certificates, letter and other documents, instruments and agreements which may not be listed therein. Certain of the contracts or leases listed on Schedule G may contain renewal options, guarantees or payments, options to purchase, rights of first refusal, rights to lease additional space and other miscellaneous rights, which may or may not be set forth on Schedule G. Certain executory contracts may not have been memorialized and could be subject to dispute. Executory contracts that are oral in nature, if any, have been scheduled to the best of the Debtor’s knowledge. Additionally, the Debtor may be party to various other agreements concerning real property, such as easements, rights of way, purchase options, subordination, non- disturbance, supplemental agreements, amendments/letter agreements, title documents, consents, site plans, maps and other miscellaneous agreements, and such agreements, if any, may not be set forth in Schedule G. Moreover, certain of the agreements listed on Schedule G may be in the nature of conditional sales agreements or secured financings. Nothing in the Schedules should be construed as an admission or determination as to the legal status of any lease or contract, including but not limited to: (i) whether the Debtor intends to assume, assume and assign, or reject any unexpired lease or executory contract; (ii) whether any interest described (or identified on the face of the controlling documents) as a lease constitutes a true lease or a financing
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 23 of 30
-3-
arrangement; (iii) whether any lease was unexpired on the Petition Date; and (iv) whether any contract was executory on the Petition Date. The Debtor reserves all of her rights, claims and causes of action with respect to the contracts and leases listed on, or omitted from, the Schedules. 8. Secured Claims. Listing of a claim on Schedule D as a secured claim does not constitute an admission by the Debtor that such claim is secured. Any descriptions of claims, security, collateral, or value provided in Schedule D are intended only as a summary. Reference to the applicable loan agreements and related documents is necessary for a complete description of the collateral and the nature, extent and priority of any liens securing each claim listed on Schedule D. The Debtor reserves the right to dispute any claim listed on Schedule D as to amount, liability, or its classification as a secured claim. Moreover, the listing of a claim on Schedule D as a secured claim does not constitute an admission by the Debtor that to the extent such claim is secured, such claim is perfected or otherwise enforceable against property of the estate as a security interest, lien, interest, mortgage, or other encumbrance. 9. Claim Amounts. The amount of claims of individual creditors for, among other things, merchandise, goods, services, or taxes are scheduled in accordance with the amounts invoiced by the creditors as entered on the Debtor’s books and records and may not reflect credits or allowances due from such creditors to the Debtor. The Debtor reserves all rights with respect to any such credits and allowances including without limitation the right to assert claims objections and/or setoffs with respect to same. The dollar amounts of claims listed may be exclusive of contingent and unliquidated amounts. 10. Causes of Action. The Debtor has set forth all known causes of action against third parties as assets in the Schedules. Due to the timing of the filing of the Schedules and the fact that not all causes of action may have been clearly identified, the Debtor reserves all rights with respect to any causes of action that she may have, regardless of whether and how disclosed. Neither these Global Notes nor the Schedules shall be deemed a waiver or limitation of any such causes of action. Moreover, the inadvertent failure to list a particular cause of action in the Schedules is not an admission that such cause of action does not exist and the Debtor reserves the right, at any time, to amend the Schedules to include any cause of action that was omitted. No person reviewing the Schedules should conclude or infer that a cause of action not listed in the Schedules does not exist or has been waived, released, discharged, or otherwise extinguished, and any reliance upon such a conclusion or inference is expressly unreasonable. 11. Satisfied Claims. The Debtor may have satisfied, and may in the future satisfy (to the extent permitted by law), certain debts that may have constituted claims as of the Petition Date. For example and not by way of limitation, the Bankruptcy Court may enter orders authorizing the Debtor to pay certain claims incurred prior to the Petition Date, some of which may be entitled to priority treatment under 11 U.S.C. § 507. To the extent that the Debtor made payments on or after the Petition Date as permitted under the applicable orders, the recipients may not be listed in the Schedules. The inclusion of any claim on the Schedules or Statements should not be construed as an admission that such claim was not satisfied on or after the Petition Date, and the inclusion or exclusion of certain claims that were satisfied on the Petition Date shall not constitute an admission that all such claims were included or excluded. Furthermore, payment by the Debtor of any prepetition claim does not constitute an admission or estoppel that such
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 24 of 30
-4-
payment was authorized by the Court or the Bankruptcy Code, and the rights of the Debtor’s estate to avoid and recover such payments is expressly preserved regardless of how such claim may appear on the Schedules. 12. Insiders. At certain points, the Schedules require the disclosure of information pertaining to insiders of the Debtor. Because it is often unclear who might constitute insiders of the Debtor as that term is defined by 11 U.S.C. § 101(31), the Debtor has attempted to be over- inclusive in the Schedules in disclosing information about (i) entities that may ultimately be deemed insiders by the Court, and (ii) the Debtor’s transactions with, and relationships to, such entities. Nothing in the Schedules should be construed as an admission that such entities are insiders of the Debtor. 13. Co-Defendants. Schedule H contains a list of the parties that may be co-debtors on account of claims or obligations of the Debtor. Parties listed on this schedule may not have consented to their inclusion on this schedule and no estoppel has been thereby created, including but not limited to the individual(s) that signed and/or verified the Schedules. When it was uncertain whether a party was a co-debtor, the Debtor erred on the side of including it and reserves the right to amend the schedules in this regard. The Debtor did not include any party that is merely a co-defendant in litigation with the Debtor unless such party has agreed to assume the Debtor’s liability arising therefrom. 14. Specific Notes. These Global Notes are in addition to any specific notes set forth in the Schedules. 15. Submission of Counsel. The execution below of counsel is for submission of these Global Notes only and does not constitute a statement under oath of the validity of the matters set forth in the Schedules.
Dated: July 9, 2010 Respectfully submitted, Wilmington, Delaware PINCKNEY, HARRIS & WEIDINGER, LLC
/s/ Adam Hiller Adam Hiller (Fed. Bar No. 25301) 1220 North Market Street, Suite 950 Wilmington, Delaware 19801 (302) 504-1497 telephone (302) 442-7046 facsimile
Proposed Attorneys for the Debtor
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 25 of 30
APPENDIX II
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 26 of 30
6
so me o f t h e at to rne y’s fe es incu rre d in th is Ch ap ter 11 c ase . T hose fu nds are cu rren t l y he ld in the
at t o rne y t ru st accoun t o f D&M ’s p ri o r l aw fi rm , Pi nc kne y, H ar ri s & We i d in ge r, L L C .
B. Mo ni ca D. Ha re nbe rg .
As e xp l ained he re in , Ms. Harenbe rg o wns nume rous p arce ls o f re n t al re al e st ate
t h rou ghout M aryl an d and No rth C aro l in a (co l lec t ive l y, t h e “Hare nbe rg Prope rt i es” ). In add i t ion
t o o wn in g the Harenbe rg Prope rt i es, she man age s t he m, as wel l as p rope rt i es o f o the r un re l ated
p art i es, th rou gh a non -deb to r man age men t co mp an y t h at she o wn s and ope rat e s c al l ed St ar
M an age men t . She is also a 50 % m e mbe r o f D& M , bu t bec au se th at en t it y h as on l y no m in al c ash
and $451 ,478 .02 in de fi c i enc y c l ai ms, she asse rt s th at th at i n te rest h as no valu e .
In p ro vi d in g the val ues fo r t h e Harenbe rg Pro pert i e s, M s. Hare nbe rg re l i ed upon th i rd
p art y o p inion s o r app rai sals. E xc ep t wi th re spec t to the p rope rt y l oc at ed at 2900 S. L au re l Fo rk,
M s. Harenb e rg re l ied upon the same app rai sal s o r app rai se rs as the se cu red lende rs in th is c ase in
ob t ain in g the val ue s se t fo rt h be lo w.
T he fo l l o win g are t he Harenb e rg Prope rt i es as o f t he Pe ti t ion Dat e :
1 . 2743 St . Pau l St ., B al t i mo re , M aryl an d . T h is p rope rt y i s re si den t i al ren t al re al
p rope rt y, i n wh ich M s. Harenbe rg h as a 100 % in te rest . Due to recen t reno vat ions, t h i s p rope rt y
h as 5 le asab le un i ts. As se t fo rt h on th e ch art at t ached he re to as E xhi bi t 3 and the app rai sal
at t ach ed as E xhi bi t 4 , the o ri gin al app rai se r on beh al f o f M i d st at e Fede ral Savin gs & Lo an
(“M i d st ate” ) re cen t l y upd at ed an e arl i e r app rai sal and h as p ro vided a c u rren t est i m ated val ue o f
$270 ,000 .00 on t hi s p rope rt y. M i d st at e h as a fi rst -p ri o ri t y se cu red c l ai m again st th is p rop e rt y,
schedu led as an und i spu ted secu red c l ai m in the am oun t o f app ro xi m ate l y $571 ,874 .00 . In a
re cen t fi l i n g, M idst ate asse rt ed th at it s c l ai m i s “app ro xi m ate l y $600 ,000 .00 .” As de sc ri bed
be lo w, th e C FG Jud gmen t may const i tu te a l ien on thi s p rop e rt y, wh i ch wou ld b e jun io r i n
p ri o ri t y to M id st ate ’s d eed o f t ru st , fo r t h e unpai d de fi c i enc y amoun t o f D&M ’s o b l i gat ions
re fe re n ced abo ve . T h is lo an is al so secu red b y a deed o f t ru st agai n st ce rt ai n re al p rope rt y o wned
b y Ju an i t a Hare nbe rg and l oc ated at 2936 St . Pau l St re e t .
B ec ause the amoun t o f M id st ate ’s c l ai m e xceeds the cu rre nt e sti m at ed valu e o f t h i s
p rope rt y, M s. Hare nbe rg be l ie ve s th at the re i s p resen t l y no equ i t y i n th i s p rop e rt y. T he re fo re , sh e
h as inc lud ed th is p rope rt y on he r schedu le o f e xe mp t ions as b ein g co mp le te l y e xe mp t fro m be in g
p rope rt y o f t h e est ate .
M id st ate appe ared in th i s c ase and fi l e d a mo t ion fo r re l i e f fro m t he au to m at ic st ay i n
conne ct ion wi th th i s p rope rt y. M s. Hare nbe rg and M id st ate en te red in to a st ipul at ion and consen t
o rde r wi th M idst ate , wh ich is mo re fu l l y de sc rib ed be lo w and inco rpo rat ed in to th e t e rms o f t h e
Pl an .
2 . 2918 -20 N. C al ve rt St ., B al t i mo re , M aryl an d. T hi s p rope rt y i s re sid en ti al ren t al
re al p rope rt y, i n whi ch Ms. Harenbe rg h as a 100% in te rest . T h is p rope rt y h as 10 le asabl e un i ts.
As se t fo rt h on the ch art at t ached he re to as E xhi bi t 3 and the upd ated app rai sal at t ached as
E xhi bi t 5, t h e o ri gi n al app rai se r on beh al f o f M i dst at e recen t l y upd at ed an e arl i e r app rai sal and
h as p ro vided a cu rren t e st imat ed value o f $ 450 ,000 .00 on th i s p rop e rt y. M i dst at e h as a fi rst –
p ri o ri t y secu red c l ai m against th is p rop e rt y, schedu led as an und ispu ted secu red c l ai m in th e
amoun t o f ap p ro xi mate l y $381 ,249 .00 . In a re cen t fi l i n g, M idst at e asse rt ed th at i t s cl ai m i s
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 27 of 30
7
“app ro xi mate l y $400 ,000 .00 .” As d esc ri bed be lo w, t h e C FG Jud gmen t may al so const i tu te a l i en
on th is p rop e rt y, j un io r in p ri o ri t y t o M idst at e ’s deed o f t ru st , fo r t h e unp aid d e fi c ien c y amoun t
o f D&M ’s o b l i gat ions re fe re n ced abo ve , but t he Deb to r be l ie ves th at t h at l ien may b e avo id ab le .
B ec ause the aggre gate amoun t o f M i dst ate ’s c l aim and the C FG Jud gm ent l i en e xce eds
t he cu rren t est i mated val ue o f t h i s p rope rt y, M s. Hare nbe rg b e li e ves t h at the re i s p re sen t l y no
equ i t y i n th i s p rope rt y. T he re fo re , sh e h as inc luded th i s p rop e rt y o n he r schedu le o f e xe mp t ion s
as be in g co mp le te l y e xe mpt fro m b e in g p rope rt y o f t h e est at e .
T he st ipu l at ion and con sen t o rde r be t ween M s. Hare nbe rg and M idst at e de sc rib ed abo ve
wi l l al so go ve rn t he Pl an ’s t re at ment o f M i d st ate ’s c l ai ms in connec t ion wi t h th is p rop e rt y.
3 . 164 Moun t ain Vi e w Lod ge Dri ve , Gl end al e Sp rings, NC 28607 . T h i s p rope rt y i s
a l arge p arc e l o f re n t al re al p rope rt y c on t ain ing a lod ge and se ve ral c ab ins, in wh ich M s.
Hare nbe rg h as a 50% in te rest wi th he r husb and as ten an c y b y t he en ti re t ie s. A re cen t app rai sal
ob t ained b y B an k o f G ran i t e , a cop y o f po rt i ons o f wh i ch is at t ached he re to as E xhi bi t 6,
su ggests t h at the val ue may b e app ro xi mate l y $ 800 ,000 .00 .
3
B an k o f G ran i t e h as a fi rst -p ri o ri t y
secu red c l ai m against th is p rop e rt y, fo r wh ich i t h as fi l ed a p roo f o f c l ai m in th e amoun t o f
$935 ,906 .05 . M s. Harenbe rg’s ob l i gat ion to rep ay B an k o f Gran i t e i s pe rson al l y gu aran t eed b y
he r hu sb and , as we l l as b y Ju an i t a Hare nbe rg.
As d esc ri bed be lo w, B an k o f G ran i t e appe ared in t h is c ase and aggressi vel y sou gh t re li e f
fro m t h e au to m at ic st ay t o e xe rc i se i ts non -b an krup tc y ri gh t s and re med ies agai nst th i s p rope rt y,
as we l l as to re st ric t M s. Harenb e rg’s use o f re n t s re c ei ved fro m t h at p rop e rt y. T o re so l ve tho se
d ispu te s, Ms. Hare nbe rg and the gu aran to rs en te red in to a se t t le men t agree men t wi th B an k o f
Gran i t e du ri n g th is c ase , wh ich i s mo re fu l l y d e scri b ed be lo w and inco rpo rat ed in to the t e rms o f
t he Pl an .
B ec ause the aggre gat e amoun t o f B an k o f Gran i t e’s c l ai m e xceed s the cu rren t e sti m at ed
val ue o f t h i s p rope rt y, M s. Ha re nbe rg i s t akin g the po sit ion th at the re i s p resen t l y no equ i t y i n
t h is p rope rt y. M o reo ve r, be c ause th i s p rope rt y i s o wned as t en anc y b y t he en t i re t ie s and he r
husb and i s not a deb to r in b an krup tc y, M s. Hare nbe rg h as t aken the posi t ion th at i t wou ld be
e xe mp t fro m p rop e rt y o f t h e est ate e xcep t to p ay j o i n t c red i to rs o f h e rse l f an d he r husb and .
T he re fo re , she h as inc luded th is p rope rt y on he r sch edu le o f e xe mp t ions as be in g co mp le te l y
e xe mp t fro m b ein g p rope rt y o f t h e est ate .
4 . 2822 St . Pau l St ., B al t i mo re , M aryl an d . T h i s p rope rt y i s a si n gle -fam i l y h o me
se rvin g as M s. Harenbe rg’s p rinc ip al residenc e wi th he r non -deb to r spouse . An upd ated
app rai sal , pe rfo rme d b y the same app rai se r u sed b y M idst at e and at t ached h e re to as E xhi bi t 7,
se ts fo rt h an e st i m ated valu e o f $ 280 ,000 .00 as o f Sep t emb e r 1 , 2011 . B ranch B an k & T ru st
Co mp an y (“B B &T ” ) ho ld s a fi rst -p ri o ri t y d eed o f t ru st again st th is p rope rt y, an d the cu rre n t
p ri nc ip al b al ance i s $145 ,427 .36 . C FG ho lds a second -p rio ri t y d eed o f t ru st agai nst th i s p rop e rt y,
fo r wh i ch Ms. Hare nbe rg h as schedu led it a c l aim in the am ount o f $25 ,000 .00 . As de sc ri bed
3
A p or tion o f th e Bank o f Gr an it e ap p r ais al is at tached h er et o as Exh ib it 6 . T he r emain ing p or tion o f th is app r ais al
is av ai lab le fr om couns el to the D eb tor s up on r eq ues t. Ms . Har enb er g inves t igated a mor e r ecen t valuat ion fr om the
app r ais al s er v ice th at p er for med the B ank o f Gr ani te ap p r ais al . D ue to the p r ohib itive cos t, thi s i s th e mos t r ecent
app r ais al av ai lab le as o f th e date o f this dis clos ur e s tatemen t.
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 28 of 30
8
he re in , C FG h as th e CFG Jud gmen t wh ich i s a jud gmen t li en on th is p rope rt y t h at wou ld b e
j un io r in p rio ri t y t o B B&T ’s deed o f t ru st and CFG’s deed o f t ru st , fo r t he unp aid de fi c i enc y
amoun t o f D&M ’s o b li gat ion s re fe re nced abo ve .
B ec ause the aggre gat e amoun t o f c l ai m s e xceeds t he cu rren t est i m ated valu e o f t h i s
p rope rt y, M s. Hare nb e rg i s t akin g the posi t ion th at t he re is p re sen t l y no equ i t y in th i s p rop e rt y.
T he re fo re , she h as inc luded th is p rope rt y on he r sch edu le o f e xe mp t ions as be in g co mp le te l y
e xe mp t fro m b ein g p rope rt y o f t h e est ate .
5 . 2900 S. L au re l Fo rk, L au re l Sp ri n gs, No rt h C aro l in a. T h i s p rope rt y i s a p arce l o f
re n t al re al p rope rt y c on t ain in g th ree rent al c ab ins, i n wh ich M s. Harenb e rg h as a 50% in te re st as
t en anc y b y t h e en t i re t ies wi th h e r non -deb to r spouse . Ms. Hare nbe rg was un ab le to p rocu re an
app rai sal o f t h i s p rope rt y bu t est i mate s the value o f t h i s p rope rt y t o be $280 ,000 .00 .
4
Hi gh l ands
Un ion B an k h as a fi rst -p ri o ri t y se cu red c l ai m agai nst th i s p rope rt y, fo r wh i ch i t h as fi l e d a p roo f
o f c l ai m i n t he amoun t o f $ 271 ,989 .04 .
B ec ause th e aggre gat e amoun t o f Hi gh l ands Uni on ’s c l ai ms are al mo st equ al to the
cu rre n t est i mated value o f t h i s p rope rt y, M s. H are nbe rg i s t akin g the po si tion th at th e re i s
p resen t l y o n l y no min al equ i t y i n t h is p rope rt y. Mo reo ve r, b ec ause th i s p rope rt y i s o wned as
t en anc y b y t h e en t i re t ies and he r hu sb and is not a deb to r i n b an krup tc y, M s. Hare nb e rg h as t aken
t he po si t ion th at i t wou ld be e xe mpt fro m p rop e rty o f t h e est at e e xcep t to p ay j o in t c red i to rs o f
he rse l f an d he r husb and . T h e re fo re , she h as in c luded th is p rope rt y o n he r schedu le o f e xe mp t ions
as be in g co mp le te l y e xe mpt fro m b e in g p rope rt y o f t h e est at e .
6 . 2313 S. L au re l Fo rk, L au re l Sp ri n gs, No rt h C aro l in a. T h i s p rope rt y i s a p arce l o f
re al p rope rt y l o c ated in an e xt re me l y ru ral are a, i n wh ich Ms. Hare nbe rg h as a 100 % int e rest .
M s. Hare nbe rg be l ie ves th at she cou ld rent out t h is p rope rt y b u t e st i m ate s th at the mon th l y
i nco me th at cou ld be gene rat ed fro m t hi s p rop e rt y i s no mo re th an $600 .00 p e r mon th due to i t s
l oc at ion . At t ach ed as E xhi bi t 8 he re to is an app rai sal d ated Ap ri l 26 , 2011 , re fl e c t in g an
e sti mat ed value o f t h i s p rope rt y o f $ 310 ,000 .00 . Hi gh l ands Un ion B an k h as a fi rst -p ri o ri t y
secu red c l ai m against th is p rop e rt y, fo r wh ich i t h as fi l ed a p roo f o f c l ai m in th e amoun t o f
$310 ,201 .50 .
B ec ause th e aggre gat e amoun t o f Hi gh l ands Uni on ’s c l ai ms are al mo st equ al to the
cu rre n t est i mated value o f t h i s p rope rt y, M s. H are nbe rg i s t akin g the po si tion th at th e re i s
p resen t l y on l y no min al equ i t y i n th i s p rope rt y. T he re fo re , she h as in c luded th is p rope rt y o n he r
schedu le o f e xe mp t ions as be in g co mp le te l y e xe mp t fro m be in g p rope rt y o f t h e e st ate .
7 . 2823 St . Pau l St ree t , B al t i mo re , M aryl an d. T h is pro pe rt y i s re siden t i al ren t al re al
p rope rt y wi t h 3 le asab le un i ts, i n wh ich Ms. Har enbe rg h as a 50 % in te rest gi ven to he r b y he r
fat h e r, wi t h an und e rst and in g th at she would ho ld t he p rope rt y fo r h i s ben e fi t as a c on ven i ence
un t i l h i s d e ath (he re mains al i ve ). An app rai sal of a 100 % und i vid ed in te re st in th is p rop e rt y,
upd ated on Sept e mbe r 1 , 2011 , and at t ach ed as E xhi bi t 9 he re to se t s fo rt h a value o f
$280 ,000 .00 . Ju an it a Harenbe rg o wns the o the r 50 % in te rest . T he app rai sal al so p ro vides th at
4
T he value p r ovided b y M s . H ar enb er g is a good fai th es ti m at e o f the value o f th is p r op er t y b as ed up on an ear li er
cons ult at ion w ith a r eal es tate p r ofes s ional b r oker in the locale. Ms . Har enb er g inves t igated th e op tion o f a thor ough
app r ais al o f th is p r op er t y b ut was q uoted a p r ohib itive cos t.
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 29 of 30
9
t he value o f M s. Ha re nbe rg’s i n te rest is $0 .00 in t h is p rope rt y d ue to the l ac k o f a marke t fo r
su ch a frac t i on al o wne rsh ip in t e re st .
M s. Hare nbe rg agre e s wi th th e app rai se r’s vi e w on the val ue o f t h i s fr ac t i on al asse t fo r a
nu mbe r o f re asons. M s. Harenbe rg i s no t in po sse ssion o f t h i s p rope rt y, an d i t was deeded to he r
as an est at e p l ann in g acco mmod at ion b y h e r fat h er wh o re main s al i ve . C on ven t ion al pu rch ase rs
wou ld no t be int e rested in pu rch asin g a p art i al in t ere st in re al p rope rt y fro m a co -o wne r t h at does
no t h ave ph ysic al possession . She does no t e xpec t t o rece i ve an y i nco me o r o the r val ue fro m t h is
p rope rt y wh i l e he r fat h e r i s al i ve . M o reo ve r, i f such in te re st we re sold , ne i the r t he h ypo th et ic al
pu rch ase r o f M s. Hare nbe rg’s 50 % in te rest no r Ju an i t a Harenbe rg wou ld o wn the majo ri t y
nec essary t o make man age men t dec ision s such as ho w to d i st ribu te c ash fl o w. T hus, ne i the r
o wne r cou ld rec ei ve a re tu rn on in vest men t absen t the con sen t o f t h e o the r. R e gard l ess o f
whe the r t he p art ne rs agre e to d ist ri bu te c ash fl ow, t o t he e xten t th at the p rope rt y’s i nco me
e xc eeds i t s e xpen se s, the p artn e rs wou ld b e deemed fo r t ax p u rposes to h ave e arn ed a p ro fi t
de sp it e the fac t t h at the y re ce i ved no c ash fl o w wit h wh ich to p ay t he t axes on th at p ro fi t . M s.
Hare nbe rg b el ie ves th at no bu ye r wou ld pu rch ase a frac t i on al p rope rt y i n t e rest ri pe fo r l i t i gat i o n
o r p ay fo r t he ob l i gat ion to p ay t axe s on inco me wi t hou t rec ei vin g the in come . In add i t ion , M s.
Hare nbe rg doe s not kno w o f a b ro ke r wi l l in g to l i st a 50 % in te rest in p rop e rt y and doe s no t
be l ie ve th at a marke t e xi st s fo r p art i al in te rest s o f t hi s n atu re , esp ec i al l y gi ven the l i ke l ihood o f
l i t i gat i on b e t ween co -o wne rs aft e r t h e acqu isi t ion . Unde r the se c i rcu mst anc es, Ms. Hare nbe rg
be l ie ve s th at the value o f t h is p rope rt y i n t e re st on th e Pe t i t ion Dat e was, and con t inue s to be ,
$0 .00 .
B ec ause the value o f t h i s p rope rt y i n t e rest i s $0.00 , M s. Hare nbe rg h as inc luded th i s
p rope rt y on h e r sch edul e o f e xe mpt ion s as b e in g co mp le te l y e xe mp t fro m be in g p rope rt y o f t h e
e st ate . As desc ri bed be lo w, ho we ve r, i f t h i s pro pe rt y i n te rest doe s h ave value , the re is a
possib i li t y t h at a C h apt e r 7 t rustee cou ld re al i ze val ue fro m i t .
Ha re nbe rg Pe rfo rma nce Si nc e Ba nkruptc y
Si nce the Pe t i t ion Date , Ms. Harenbe rg h as con t inued to u se he r p rope rt i es as in vest men t s
t o gene rat e ren t al inco me , wi th the e xc ept ion o f t he p rope rt ie s loc ated at 2822 St . Pau l St re et ,
B al t i mo re , M aryl and and the one lo c ated at 2313 S. L au re l Fo rk Ro ad , L au re l Sp rin gs, No rth
C aro l in a. Wi t h the assist anc e o f h e r accoun t an t and coun se l , M s. Harenb e rg h as gene rat ed p ro fi t
and loss st at e men ts fo r e ach o f t he p rope rt i es se t fo rt h abo ve , wi th the e xcep t ion o f h e r residenc e .
Mo reo ve r, M s. Hare nb e rg i s p ro vid in g su mmari es fo r e ac h p rop e rt y (wi t h t he e xc ep tion o f h e r
re siden ce ) and fo r he rsel f p e rson al l y c once rnin g t he ave rage ne t inco me gene rat ed be fo re and
a ft e r t h e Pe ti t ion Dat e . T he se sp re adsh ee ts are co l lec t i ve l y at t ac hed he re to as E xhi bi t 1.
Wi t h respe c t to E xhi bi t 1 , the fo l l o win g shoul d be t aken in to con side rat ion wh en
an al yz in g t he p ro fi t an d l oss st at emen ts and an y summari e s t he reto :
(i ) T he ave rage po stpe t i tion inco me o f t he 2743 St . Paul St , B al t i mo re , M aryl an d
p rope rt y h as dec l ined , wh i le th e o the r p rope rt ie s se t fo rt h h ave i nc re ased i n inco me since t he
Pe t i t ion Date .
Case 10-23223 Doc 157-2 Filed 04/08/13 Page 30 of 30
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: LISA M. KIRKLAND, ü
Debtor.
EDUCATIONAL CREDIT MANAGEMENT
CORPORATION, ý No. 09-1379
Plaintiff-Appellant,
v.
LISA M. KIRKLAND,
Defendant-Appellee. þ
Appeal from the United States District Court
for the Western District of Virginia, at Lynchburg.
Norman K. Moon, District Judge.
(6:09-cv-00002-nkm; 01-00627-WA1)
Argued: January 26, 2010
Decided: March 12, 2010
Before MOTZ, KING, and AGEE, Circuit Judges.
Reversed by published opinion. Judge Agee wrote the majority
opinion, in which Judge Motz joined. Judge King wrote a
dissenting opinion.
COUNSEL
ARGUED: Troy A. Gunderman, EDUCATIONAL CREDIT
MANAGEMENT CORPORATION, Oakdale, Minnesota, for
Appellant. Stephen Eldridge Dunn, STEPHEN E. DUNN,
PLLC, Forest, Virginia, for Appellee. ON BRIEF: James C.
Joyce, Jr., JAMES C. JOYCE, JR., PLC, Roanoke, Virginia,
for Appellant.
OPINION
AGEE, Circuit Judge:
Educational Credit Management Corporation (“ECMC”)
appeals the district court’s determination that the bankruptcy
court had jurisdiction to determine the post-petition interest
and collection costs to which ECMC was entitled as the result
of a default on a student loan that occurred after the Chapter
13 estate was closed and the debtor discharged. For the reasons
set forth below, we conclude the bankruptcy court lacked
subject matter jurisdiction as to the issues of collection costs
and post-petition interest in this case, and we reverse the judgment
of the district court.
I.
On eight separate occasions between 1989 and 1995, Lisa
M. Kirkland borrowed money from Sallie Mae in order to
finance her college education. ECMC, United Student Aid
Funds, Inc. (“USAF”), and the New Jersey Higher Education
Assistance Authority (“NJHEAA”) guaranteed the loans.
In February 2001, Kirkland filed a Chapter 13 bankruptcy
petition in the United States Bankruptcy Court for the Western
District of Virginia, properly listing all of the loans as
debts. Sallie Mae filed five proofs of claim, three of which
were allowed: claim no. 6 in the amount of $8,126.72 (guaranteed
by USAF), claim no. 7 in the amount of $2,680.59
(guaranteed by NJHEAA), and claim no. 9 in the amount of
$4,737.27 (guaranteed by ECMC). At the time Kirkland filed
her petition, none of the student loans were in default.
Kirkland’s approved Chapter 13 bankruptcy plan provided
for sixty monthly payments of $700. The plan was designed
so that Kirkland would pay the three Sallie Mae loans in full,
except for any interest that accrued on the loans during the
pendency of the bankruptcy. Kirkland timely made 55
monthly payments, totaling $38,500.00, to the Chapter 13
Trustee.
For reasons not entirely clear from the record, the Chapter
13 Trustee scheduled lower amounts to be paid on each of
Sallie Mae’s claims than what the bankruptcy court had
approved based on the filed proofs of claim. Compounding
this error, sums that were scheduled to be paid toward claim
no. 9 were actually paid toward claims no. 6 and 7, causing
an overpayment on those claims, and no payment on claim no.
9. Sallie Mae refunded the amount that had been overpaid on
claims no. 6 and 7 to the Chapter 13 Trustee. Because the
Chapter 13 Trustee’s records incorrectly showed that all the
claims in the bankruptcy estate had been paid in full, he
refunded the money received from Sallie Mae directly to
Kirkland and did not require her to make the final five plan
payments. Instead, the Chapter 13 Trustee filed a final report,
the order of discharge was entered, and, in February 2006, the
case was closed.1
Following the close of her bankruptcy proceeding, Kirkland
1It is not clear from the record why the Trustee used lower claim
amounts, as no order reduced the loan amounts as filed in each of Salle
Mae’s allowed claims. Nor is it clear from the final report how the Trustee
accounted for the supposed overpayment on claims no. 6 and 7, or the
refund that Sallie Mae paid to the bankruptcy estate.
began receiving notices that she owed Sallie Mae approximately
$5,000. Kirkland sought additional documentation,
and Sallie Mae asserted that she still owed the entire principal
loan amount reported in claim no. 9, plus the accrued interest.
In June 2007, Kirkland filed an adversary proceeding
against ECMC in the bankruptcy court, styled a Complaint to
Determine Dischargeability of Debt (“Complaint”).2 Kirkland
asserted that since the loan had been properly listed as part of
her Chapter 13 plan, it should have been paid in full by the
Chapter 13 Trustee during the pendency of her bankruptcy
estate, and the claim was thus discharged as part of the bankruptcy
proceeding. Kirkland specifically acknowledged in her
Complaint “that interest that accumulated during the term of
the Chapter 13 would be non-dischargeable,” and that she was
responsible for paying the post-petition interest that had
accrued on the loan. Accordingly, she asked the court to
determine only that the loan principal had “been paid in full
and discharged except to the extent of any interest that may
have” accrued during the bankruptcy proceeding. J.A. 5.
ECMC responded that claim no. 9 had not been paid during
Kirkland’s bankruptcy proceeding and consequently the court
could not declare that the loan had been discharged.3 ECMC
further maintained that the bankruptcy court could not now
adjudicate the student loan obligation as discharged unless it
made a finding of undue hardship, which Kirkland had neither
pled nor shown. Neither Kirkland nor ECMC asked the bankruptcy
court to make any determination as to post-petition
interest or collection costs.
In its memorandum and judgment, the bankruptcy court
concluded that it had jurisdiction “over this matter” pursuant
2Sallie Mae appeared as a co-defendant until the appeal to the district
court. For ease of reference, the opinion will refer simply to ECMC.
3ECMC also averred that Sallie Mae had assigned the student loan debt
to ECMC, who was now the holder of the debt.
to 28 U.S.C. §§ 1334(a) and 157(a), also noting that the proceeding
was a “core proceeding” under § 157(b)(2)(A). The
court then noted that student loans are nondischargeable in
bankruptcy absent proof of undue hardship, found that no
amount had been paid on Kirkland’s loan during her bankruptcy,
and held that Kirkland owed ECMC the full amount
of principal due on the loan, $4,737.27. It observed that the
Chapter 13 Trustee “cannot unilaterally reduce the amount of
an allowed claim,” J.A. 86, and that although Kirkland “was
not at fault for the return of funds to the chapter 13 trustee,
she cannot keep the money refunded to her and, at the same
time, claim that she paid it to Sallie Mae.” J.A. 87.
The bankruptcy court then stated that Kirkland and ECMC
“agree that some amount of interest has accrued to date since
the filing of” the bankruptcy petition. J.A. 87. It observed that
Kirkland had not disputed the sum ECMC included in the
documentation it filed with the court, and so it awarded
ECMC $184.40 in post-petition interest.4 Lastly, the court
stated that it was not awarding ECMC any collection costs
because ECMC “has not provided any statutory or factual
basis for the accrual of” such costs. J.A. 87.
ECMC filed a motion to alter or amend, contending that it
should have been awarded more than $184.40 in post-petition
interest because that amount ignored the full amount of “interest
incurred during the Bankruptcy and the capitalized interest
since.” J.A. 94. In addition, ECMC asserted it was entitled to
collection costs under the applicable statute and implementing
regulations, which set a fixed amount of costs to be imposed.5
4ECMC filed an exhibit in the bankruptcy court reflecting the principal
due on the loan to Kirkland of $4,737.27, but also showing interest of
$184.40. It is unclear from the record why ECMC claimed any amount of
post-petition interest in Kirkland’s discharge proceeding, or what the
amount of $184.40 represented.
5Specifically, ECMC contended the bankruptcy court lacked discretion
to deny collection costs because the federal regulation implementing 20
The bankruptcy court denied ECMC’s motion and held that
although ECMC was legally entitled to post-petition interest,
it was also responsible for providing the court with sufficient
information to determine the amount of interest due. Consequently,
it held that because ECMC had only provided documentation
of accrued interest in the amount of $184.40, that
was the only amount ECMC could recover. In addition, the
court held that under its reading of the relevant statute and
federal regulations, ECMC was only entitled to “reasonable”
collection costs based on whatever amount would be incurred
by a prudent creditor under the circumstances. Finding that
ECMC had failed to act as a prudent creditor during the pendency
of Kirkland’s bankruptcy, the court held ECMC was
partially responsible for the events resulting in post-petition
default on the loan and concluded that no collection costs
were appropriate.
On appeal to the district court, ECMC asserted for the first
time that the bankruptcy court, and now the district court,
lacked subject matter jurisdiction to make any determination
as to either post-petition interest or collection costs. The district
court rejected that contention, for the reasons discussed
below. As did the bankruptcy court’s, the district court’s substantive
analysis focused on ECMC’s failure to prove that it
was owed a greater amount of post-petition interest than
$184.40. The district court also affirmed the bankruptcy
court’s determination to award no collection costs, observing
that although a creditor was entitled under 20 U.S.C.
U.S.C. § 1091a(b)(1) — 34 C.F.R. § 682.410(b)(2) — requires the assessment
of actual collection costs or, in the alternative, the lesser of two calculations
(1) the amount the same borrower would be charged for
collection costs under the formula provided in 34 C.F.R. § 30.60, or (2)
the amount the borrower would be charged for collection costs if the loan
were held by the Department of Education. ECMC argued the bankruptcy
court mistakenly relied upon a definition of “reasonable collection costs”
that did not apply to 34 C.F.R. § 682.410(b)(2).
§ 2091a(b)(1) to reasonable collection costs, the statute did
not guarantee a specific amount.
ECMC noted a timely appeal and this Court has jurisdiction
based on 28 U.S.C. § 158(d).
II.
When reviewing a decision by a district court in its capacity
as a bankruptcy appellate court, this Court examines factual
findings of the bankruptcy court for clear error and reviews
legal conclusions de novo. See IRS v. White (In re White), 487
F.3d 199, 204 (4th Cir. 2007). Whether subject matter jurisdiction
exists is a question of law that we also review de
novo. See New Horizon of NY LLC v. Jacobs, 231 F.3d 143,
150 (4th Cir. 2000).
III.
On appeal, ECMC contends that the bankruptcy court, and
consequently the district court, lacked subject matter jurisdiction
to determine or award collection costs and post-petition
interest. Specifically, ECMC asserts the bankruptcy court
“lacked authority to discharge the post-petition interest and
collection cost part of the student loan debt” because those
obligations arose after Kirkland filed her bankruptcy petition
and were unrelated to the loan principal represented by claim
no. 9. Appellant’s Br. 21.
Although ECMC failed to raise the issue of subject matter
jurisdiction in the bankruptcy court, we can always consider
whether subject matter jurisdiction exists. New Horizon, 231
F.3d at 150. Subject matter jurisdiction cannot be forfeited or
waived, and can be raised by a party, or by the court sua
sponte, at any time prior to final judgment. Arbaugh v. Y &
H Corp., 546 U.S. 500, 514 (2006). Accordingly, ECMC’s
failure to raise the issue of subject matter jurisdiction in the
bankruptcy court is not dispositive.
“Federal bankruptcy courts, like the federal district courts,
are courts of limited jurisdiction.” Canal Corp. v. Finnman
(In re Johnson), 960 F.2d 396, 399 (4th Cir. 1992). Two statutes
govern jurisdiction over bankruptcy proceedings, 28
U.S.C. §§ 157 and 1334. Under the latter statute, district
courts “have original and exclusive jurisdiction of all cases
under title 11,” and “original but not exclusive jurisdiction of
all civil proceedings arising under title 11, or arising in or
related to cases until title 11.” § 1334(a), (b). Under § 157,
district courts can refer § 1334(a) and (b) cases to bankruptcy
courts. § 157(a). While subject matter jurisdiction is determined
by § 1334, the application of § 157(b) and (c) determines
the bankruptcy court’s authority to act once that
jurisdiction is established. See Valley Historic Ltd. P’ship v.
The Bank of New York, 486 F.3d 831, 839 n.3 (4th Cir. 2007).
The sole issue raised in Kirkland’s complaint requested that
the bankruptcy court determine the dischargeability of her
obligation to pay ECMC the principal of her loan. ECMC has
not questioned the bankruptcy court’s jurisdiction in this
regard, and the bankruptcy court clearly had subject matter
jurisdiction to determine the issue of discharge as to the principal
of the loan represented by claim no. 9.6
However, without separately analyzing its authority to do
so, the bankruptcy court proceeded sua sponte to adjudicate
collection costs and post-petition interest. The bankruptcy
court proceeded on this course despite the fact that Kirkland
specifically acknowledged in her pleading that she owed postpetition
interest to ECMC and excluded that interest from her
6Because Kirkland sought a determination that the principal obligation
had been discharged during her bankruptcy proceeding, the bankruptcy
court had jurisdiction under § 1334. In addition, even more directly on
point than the subsection identified by the bankruptcy court, § 157(b)(2)(I)
lists “determinations as to the dischargeability of particular debts” as constituting
a core proceeding. In any event, this component of the bankruptcy
court’s decision — the nondischargeability of the principal loan
obligation — is not at issue on appeal.
request to determine the dischargeability of the underlying
principal of the loan. Moreover, the record does not reflect
that either party ever requested the bankruptcy court to make
a determination as to whether post-petition interest or collection
costs were owed to ECMC, much less the amount. The
bankruptcy court’s May 2008 memorandum opinion is the
first occasion where those issues arise.
After the bankruptcy court’s memorandum and judgment
raised the matters of post-petition interest and collection
costs, ECMC challenged that decision in its motion to alter or
amend, but did not question the court’s jurisdiction to consider
those issues. Not surprisingly, the bankruptcy court did
not discuss its subject matter jurisdiction to consider the issue
of post-petition interest and collection costs when it denied
ECMC’s motion.
ECMC first questioned subject matter jurisdiction in its
brief to the district court, which noted that although ECMC
had not raised the issue in the bankruptcy court, subject matter
jurisdiction may be questioned at any stage of litigation,
including an appeal. ECMC contended that the bankruptcy
court “lacked subject matter jurisdiction to determine Kirkland’s
obligation for interest and collection costs” because
those issues “do not arise under, arise in, or relate to cases
under Title 11.” J.A. 135.
The district court reviewed the concepts of “arising in,”
“arising under,” and “related to” jurisdiction, citing our decision
in Valley Historic Ltd. Partnership v. Bank of New York
(Valley Historic), 486 F.3d at 835-36. However, the court’s
analysis seems to focus on jurisdiction to adjudicate the dischargeability
of the principal of the student loan debt, an issue
not raised or contested by the parties.7 The district court
7Among the court’s statements to this end are: “[T]he fact that Kirkland
had not paid [claim no. 9] when she brought the adversary proceeding
means that there was a ‘conceivable bankruptcy administration purpose’
offered only a conclusory statement directed to the separate
matter of subject matter jurisdiction over the issues of postpetition
interest and collection costs:
Kirkland would have never had to bring the adversary
proceeding against Sallie Mae and ECMC in
Bankruptcy Court were it not for the problems that
arose out of her closed Chapter 13 bankruptcy case.
The post-petition interest and collection costs sought
by ECMC in the Bankruptcy Court, for example,
would not have even been at issue were it not for the
maladministration of the bankruptcy plan and the
initial bankruptcy proceeding. The controversy at
issue between Kirkland and ECMC would have had
no practical existence but for the bankruptcy. Kirkland’s
case was not only one “related to” a case
under Title 11, but also one “arising in” Title 11. The
Bankruptcy Court therefore had subject matter jurisdiction
to rule on the issues before it.
J.A. 138.
We disagree, and hold that the bankruptcy court lacked
subject matter jurisdiction to determine the issues of postpetition
interest and collection costs to award ECMC.
ECMC’s claim to post-petition interest and collection costs is
not a matter “under Title 11,” nor is it a civil proceeding “arising
in,” or “related to” Kirkland’s bankruptcy petition. This is
so because ECMC’s claims to post-petition interest and collection
costs arose entirely independent from Kirkland’s
bankruptcy proceeding.
to be served . . . .” J.A. 137. “Because the adversary proceeding would not
have been necessary but for the errors contained in the plan and the Trustee’s
Report, there is a strong enough nexus to uphold the Bankruptcy
Court’s jurisdiction over this matter.” J.A. 137.
ECMC’s claim to post-petition interest or collection costs
does not “aris[e] under Title 11.” A claim “aris[es] under Title
11” if it is a cause of action created by the Bankruptcy Code,
and which lacks existence outside the context of bankruptcy.
Aheong v. Mellon Mortgage Co. (In re Aheong), 276 B.R.
233, 242-46 (B.A.P. 9th Cir. 2002). ECMC’s claim for postpetition
interest or collection costs does not satisfy this
requirement. Post-petition interest is based on a contractual
right created by the loan agreement and, as detailed below, the
right to collect such unmatured interest is not affected by or
part of the bankruptcy proceeding. Collection costs are a contractual
obligation, but in the student loan context also based
on the statutory right set forth in 20 U.S.C. § 1091a(b)(1),
providing that individuals who borrow money for higher education
through a title 20 loan are required to pay “reasonable
collection costs” in the event of a default. A cause of action
to collect on either post-petition interest or collection costs is
not found in the bankruptcy code but does clearly exist outside
the context of bankruptcy. Thus, neither can be said to be
an issue which “arises under Title 11.”
A claim to post-petition interest and collection costs is also
not a matter “arising in” or “related to” a bankruptcy proceeding.
We most recently described “arising in” and “related to”
jurisdiction in Valley Historic:
A proceeding or claim “arising in” Title 11 is one
that is “not based on any right expressly created by
title 11, but nevertheless, would have no existence
outside of the bankruptcy. Therefore, a controversy
“arises in Title 11” when it would have no practical
existence but for the bankruptcy.
. . . .
[F]or “related to” jurisdiction to exist at the postconfirmation
stage, the claim must affect an integral
aspect of the bankruptcy process—there must be a
close nexus to the bankruptcy plan or proceeding.
Practically speaking, under this inquiry matters that
affect the interpretation, implementation, consummation,
execution, or administration of the confirmed
plan will typically have the requisite close nexus.
486 F.3d at 835, 836-37 (emphasis in original) (internal quotation
marks, alterations, and citations omitted).
ECMC’s right to post-petition interest or collection costs
does not satisfy either of these jurisdictional requirements.
Post-petition interest, by definition, is interest that accrues on
an obligation during the pendency of the bankruptcy estate,
but after the bankruptcy petition is filed. 11 U.S.C.
§ 502(b)(2) prohibits post-petition interest—that is, interest
that has not matured at the time the bankruptcy petition is
filed—from being included in a proof of claim against the
bankruptcy estate. See Kielisch v. Educ. Credit Mgmt. Corp.
(In re Kielisch), 258 F.3d 315, 321-22 (4th Cir. 2001)
(observing that § 502 prohibits creditors from claiming postpetition
interest from bankruptcy estates). Thus, the debtor’s
obligation to pay post-petition interest pre-exists the bankruptcy
petition, does not become part of the bankruptcy proceeding,
and is an obligation that survives the debtor’s
discharge. Once the bankruptcy estate is closed, the debtor
remains personally liable for post-petition interest. See id. at
325 (citing Bruning v. United States, 376 U.S. 358, 363
(1964)).
Based on these principles, ECMC could not have included
post-petition interest in its proof of claim to Kirkland’s bankruptcy
estate, see id. at 323, and the Chapter 13 Trustee would
have been without authority to pay any such interest. Any
claim that ECMC has to post-petition interest exists independent
from the bankruptcy, based on the original student loan
agreement. Even though some post-petition interest matured
during the pendency of the bankruptcy, it cannot be said that
this obligation “arose in” the bankruptcy because that obliga-
tion “would have existed whether or not [Kirkland] filed
bankruptcy.” See Valley Historic, 486 F.3d at 836.
ECMC’s claim to post-petition interest also does not “relate[]
to” Kirkland’s bankruptcy. It does not “affect an integral
aspect of the bankruptcy process.” Cf. id. at 836-37. As noted
above, the post-petition interest obligation cannot be claimed
against the bankruptcy estate and is, instead, a personal obligation
of the debtor that remains at the close of the bankruptcy
proceeding and after discharge of the underlying debt
for the principal. The post-petition interest neither affects nor
is affected by Kirkland having filed bankruptcy or the administration
of her bankruptcy estate. ECMC’s claim to postpetition
interest thus lacks the requisite “close nexus” to the
bankruptcy proceeding to establish “related to” jurisdiction.
Accordingly, the issue of post-petition interest did not arise
in or relate to the bankruptcy proceeding. Kirkland’s Complaint
acknowledged as much when it asked the bankruptcy
court to determine the dischargeability of the principal loan
obligation, while admitting that she would still be liable for
any post-petition interest that accrued on the loan. The bankruptcy
court lacked subject matter jurisdiction to determine
the independent issue of whether or how much post-petition
interest Kirkland owed ECMC.
Similarly, Kirkland’s obligation to pay collection costs, if
such an obligation exists, also arose apart from Kirkland’s
bankruptcy proceeding. Under 20 U.S.C. § 1091a(b)(1), “a
borrower who has defaulted on a loan made under this [Title]
shall be required to pay, in addition to other charges specified
in this [Title], reasonable collection costs.”8
Here, it is undisputed that Kirkland was not in default at the
8The issue of whether Kirkland is in default on the ECMC loan is not
an issue on appeal and we make no determination of any kind in that
regard.
time she filed her petition. Instead, ECMC contends that Kirkland
defaulted on her obligation to pay the loan after her discharge
and the close of her bankruptcy estate. Therefore, any
right ECMC has to collection costs associated with a default,
if there was such, also arose after Kirkland’s discharge and
the close of her bankruptcy estate. Consequently, ECMC’s
claim to collection costs cannot be said to “arise under Title
11,” nor does it “aris[e] in” or “relate[] to” Kirkland’s bankruptcy
case. The claim exists irrespective of Kirkland’s bankruptcy
and had no effect on that proceeding or her bankruptcy
estate. The bankruptcy court thus lacked subject matter jurisdiction
to consider whether to award ECMC collection costs,
much less the amount of such costs.9
IV.
Accordingly, the district court erred in concluding that the
bankruptcy court had subject matter jurisdiction over postpetition
interest and collection costs that Kirkland may owe
ECMC.10 For the foregoing reasons, we reverse the district
9Because of our resolution of the matter of subject matter jurisdiction,
we do not address ECMC’s arguments based on the merits of the bankruptcy
court’s determinations as to the amount of post-petition interest or
collection costs to which ECMC may be entitled.
10In her appellate brief, Kirkland contends that the case is moot because
Sallie Mae transferred the loan at issue to USAF and ECMC no longer has
an interest in it. She relies on an August 2008 letter from Sallie Mae as
support for this assertion. In its reply brief and during oral argument,
ECMC responded to Kirkland’s assertion by contending that it continues
to hold the promissory note at issue and therefore has an ongoing interest
in the matter.
The bankruptcy court was aware of the August 2008 letter because it
refers to it in its October 2008 memorandum denying ECMC’s motion to
alter or amend. However, neither it nor the district court addressed
whether the letter made the matter moot, and neither made any factual
findings relevant to that determination.
The doctrine of mootness constitutes a part of the constitutional limits
of federal court jurisdiction. United States v. Hardy, 545 F.3d 280, 283
court’s judgment affirming the bankruptcy court’s order to
deny collection costs and awarding $184.40 in post-petition
interest.11
REVERSED
KING, Circuit Judge, dissenting:
Although I admire and respect the diligence and wisdom of
my distinguished colleagues in the panel majority, I am nevertheless
convinced that our friend Judge Moon decided this
case properly, on both the jurisdictional and merits issues. I
would therefore affirm on the basis of his fine opinion for the
district court. See Educ. Credit Mgmt. Corp. v. Kirkland, No.
6:09-cv-00002 (W.D. Va. Mar. 10, 2009).
I respectfully dissent.
(4th Cir. 2008). However, we lack the necessary factual record to determine
the significance, if any, of the August 2008 letter on ECMC’s interest
in the case. Nevertheless, we conclude that it is unnecessary to remand
the case for further development of the record on this point based on our
determination that the bankruptcy court lacked subject matter jurisdiction
over the issues raised on appeal.
11The bankruptcy court’s decision that Kirkland’s obligation on claim
no. 9 was not discharged during her bankruptcy and that Kirkland owed
ECMC $4,737.27 in principal on that claim was not challenged before the
district court or on appeal to this Court. Accordingly, that portion of the
bankruptcy court’s judgment is not affected by our conclusion that the
bankruptcy court lacked jurisdiction to decide post-petition interest and
collection costs.
This matter was filed as an adversary complaint requesting that he court find a state court judgment based on allegations of fraud and misrepresentations was non-dischargeable. The Bankruptcy Court agreed that debtor was bound by the state court judgment and that the parts of the judgment rooted in allegations of fraud were excepted form discharge.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Baltimore Division)
In re: *
DAVID A. REECHER, * Case No. 11-30365-DER
Debtor. * (Chapter 7)
* * * * * * * * * * * * *
DAISY COULOOTE PHILLIP, *
Plaintiff, *
vs. * Adversary Pro. No. 12-00061-DER
DAVID A. REECHER, *
Defendant. *
* * * * * * * * * * * * *
MEMORANDUM OPINION
Daisy Couloote Phillip is the holder of a judgment entered by the Circuit Court for Prince George’s County, Maryland (the “Circuit Court”) in her favor and against David A. Reecher in the amount of $2,650,000. The complaint filed by Daisy Phillip in the Circuit Court asserted claims in ten counts, five of which sought both compensatory and punitive damages against
~ 2 ~
David Reecher under Maryland law for civil conspiracy, intentional misrepresentation, constructive fraud, concealment and non-disclosure, and conversion. The Circuit Court entered a judgment against David Reecher for $150,000 in compensatory damages, plus $500,000 in punitive damages on each of those five counts.
After David Reecher filed a voluntary Chapter 7 bankruptcy petition in this court, Daisy Phillip commenced this adversary proceeding in which she asks for a determination under 11 U.S.C. § 523(a)(2) that the entire amount of her judgment is a claim that is excepted from discharge (that is, nondischargeable) by reason of “fraud, false pretenses, and misrepresentations with actual malice and intent to deceive.” David Reecher contends that he did not commit fraud or make any intentional misrepresentations, is not bound by the Circuit Court judgment because it was a default judgment, and is entitled to a fresh opportunity in this court to litigate whether he is liable to Daisy Phillip at all and the nature of any such liability. For the reasons that are explained in this opinion neither party is correct. Collateral estoppel applies and the judgment is nondischargeable in part, but the remainder of the judgment is dischargeable.
A trial on the merits was conducted over the course of seven days starting on October 15, 2013 and concluding on October 24, 2013. At the trial, both Daisy Phillip and David Reecher called witnesses to testify (including themselves) and offered numerous exhibits that were introduced into evidence. Following the trial, I held this matter under advisement and requested post-trial memoranda from the parties, the last of which was filed on December 2, 2013 [Docket Nos. 115, 116, 117, and 118].
INTRODUCTION
The application of collateral estoppel is not discretionary. This case must be decided in light of the Fourth Circuit’s instruction that “Federal courts must give the same preclusive effect
~ 3 ~
to a state court judgment as the forum that rendered the judgment would have given it.” Sartin v. Macik, 535 F.3d 284, 287 (4th Cir. 2008). It is well settled in the Fourth Circuit that “[t]o preclude a debtor from litigating an issue dispositive of discharge, the record in the case giving rise to the judgment debt must show that the issue was actually litigated and determined by a final valid judgment … and that it was necessary to the decision.” In re Raynor, 922 F.2d 1146, 1149 (4th Cir. 1991) (citing Combs v. Richardson, 838 F.2d 112, 113 (4th Cir. 1988)). In considering this matter, I am mindful that “the determination that an issue was actually litigated and necessary to the judgment must be made with particular care.” Combs v. Richardson, 838 F.2d at 113. This court must determine to what extent the Circuit Court’s findings of fact are consistent with the findings of fact necessary for a determination of nondischargeability and whether this court needs to make additional findings of fact in order to determine the nondischargeability of the claims of Daisy Phillip.
David Reecher relies on Gulati v. McClendon (In re McClendon), 415 B.R. 170 (Bankr. D. Md. 2009), to support his contention that he is entitled to a second opportunity to litigate in this court. In McClendon, the court found that collateral estoppel did not apply to the state court judgment in question because the record of the lower court proceeding was “silent as to whether the issues determined there are identical to those tried here.” Id. at 182. It is indeed the case that, as stated in McClendon, “[c]ollateral estoppel is not appropriate when a finding of nondischargeability requires proof of an element not litigated in the earlier proceeding.” Id. In the instant matter, however, this court has the transcript and a record of the findings of fact made by the Circuit Court at the damages hearing that provide the factual basis for the determination of whether Daisy Phillip’s claims are nondischargeable. The Circuit Court awarded punitive damages on the five counts of civil conspiracy, intentional misrepresentation, constructive fraud,
~ 4 ~
concealment and non-disclosure, and conversion; necessarily finding that all elements of each of those causes of action had been shown by Daisy Phillip.
Applying these principles and after careful consideration of the evidence (particularly the record in the litigation in the Circuit Court), I find for the reasons explained below that (i) David Reecher is bound by the judgment entered by the Circuit Court and is not entitled to a second opportunity to litigate his liability to Daisy Phillip in this court, (ii) the compensatory damages of $150,000 and the punitive damages of $500,000 each awarded by the Circuit Court under the intentional misrepresentation, civil conspiracy, and concealment and non-disclosure counts in Daisy Phillip’s complaint are claims that are excepted from discharge under § 523(a)(2) (that is, they are nondischargeable claims), and (iii) the punitive damages awarded by the Circuit Court on the other two counts are not excepted from discharge under § 523(a)(2) (that is, they are dischargeable claims).1
JURISDICTION
The court has subject matter jurisdiction over this proceeding under 28 U.S.C. § 1334, 28 U.S.C. § 157(a), and Rule 402 of the Local Rules of the United States District Court for the District of Maryland. This is a “core proceeding” under 28 U.S.C. § 157(b)(2)(I). This memorandum opinion constitutes the court’s findings of fact and conclusions of law in accordance with Rule 52 of the Federal Rules of Civil Procedure (made applicable here by Rule 7052 of the Federal Rules of Bankruptcy Procedure).
1 This memorandum opinion is limited to consideration of the application of 11 U.S.C. § 523(a)(2)(A) to the claims made by Daisy Phillip. Nothing in her complaint, pre-trial memorandum, arguments at trial, or post-trial memoranda asserted that her claims are excepted from discharge under any other provision of § 523(a).
~ 5 ~
FINDINGS OF FACT
Daisy Phillip filed a verified complaint against David Reecher and others in the Circuit Court on February 17, 2009 that was docketed as Daisy Couloote Phillip v. Chesapeake Home Buyers, et al., Case No. CAL09-04792. The course of the litigation in the Circuit Court is revealed in the Civil Case Summary.2 On July 8, 2009, Aaron G. Seltzer entered an appearance in the Circuit Court litigation and filed a motion to dismiss the verified complaint on behalf of David Reecher as well as defendants Chesapeake Home Buyers (“Chesapeake”), Eric Golden, Landco Investments, Inc. (“Landco”), and 5444 Taylor Street, LLC.3 Plaintiff’s Ex. 39, p. 5 of 26. Daisy Phillip thereafter filed a first and a second amended verified complaint. On December 18, 2009, the Circuit Court held a hearing at which the motion to dismiss was granted with leave for Daisy Phillip to file a further amended complaint within 30 days. Plaintiff’s Ex. 39, pp. 8-9 of 26.
The Third Amended Complaint
Daisy Phillip4 filed her Third Amended Verified Complaint for Money Damages (the “Third Amended Complaint”) [Plaintiff’s Ex. 1] on January 14, 2010. The Third Amended
2 The Civil Case Summary was introduced into evidence as part of Plaintiff’s Exhibit 4 (Affidavit Pursuant to Local Bankruptcy Rule 7016-1(d)(1)) and Plaintiff’s Exhibit 39 (Authentication of Record). For ease of reference in this Memorandum Opinion, I refer to the Civil Case Summary by the page numbers in Plaintiff’s Exhibit 39.
3 Veracity Title, LLC (“Veracity Title”) was also named as a defendant in Daisy Phillip’s complaint and amended complaints. By a separate course of proceedings not relevant here, the Circuit Court ultimately dismissed all of Daisy Phillip’s claims against Veracity Title by an order entered on April 27, 2010 after a hearing held on March 26, 2010. Plaintiff’s Ex. 39, p. 13 of 26.
4 For the sake of simplicity, I refer to the plaintiff in this opinion as “Daisy Phillip.” Her maiden name was apparently Daisey M. Williams. After her first marriage, she was known as Daisey High. After she remarried, she was and is now known as Daisey Couloote Phillip. At the time she purchased the Property (as defined below) in 1999, she took title by a Deed that identified her as Daisey M. Williams. At the time of the events in 2007 at issue here, she was known and referred to in various documents as Daisey Williams High and/or Daisey M. High. The plaintiff was identified in the Third Amended Complaint and in her complaint filed in this court as “Daisy” Couloote Phillip, which I take to be a typographical error since she signed her name to the verification of the Third Amended
~ 6 ~
Complaint contains nine counts against David Reecher and other defendants for breach of fiduciary duty (Count 1), unjust enrichment (Count 2), civil conspiracy (Count 3), intentional misrepresentation (Count 4), negligent misrepresentation (Count 5), constructive fraud (Count 7), concealment and non-disclosure (Count 8), conversion (Count 9), and unfair and deceptive trade practices (Count 10).5 In each of those counts, Daisy Phillip requested entry of judgment against David Reecher for compensatory damages in the amount of $289,000. In addition, Daisy Phillip sought punitive damages in the amount of $500,000 against David Reecher for five of those counts – namely, the counts for civil conspiracy (Count 3), intentional misrepresentation (Count 4), constructive fraud (Count 7), concealment and non-disclosure (Count 8), and conversion (Count 9). The Third Amended Complaint alleges the following facts.
Daisy Phillip was the owner of real property located at 5444 Taylor Street, Bladensburg, Maryland 20710 (the “Property”). David Reecher, Eric Golden, Chesapeake, Landco, and 5444 Taylor Street, LLC acting in concert intentionally and with malice deceived Daisy Phillip into executing documents that divested her of ownership of the Property and intentionally and fraudulently obtained the equity value of the Property. The course of events began in or about April of 2007 when Daisy Phillip contacted Chesapeake through use of the yellow pages. Shortly thereafter, Eric Golden met with Daisy Phillip and identified himself to her to be the representative and an officer of Chesapeake and Landco. Eric Golden advised Daisy Phillip that
Complaint as “Daisey” Couloote Phillip. This error has been perpetuated in various pleadings filed in this case and in the Circuit Court (including the judgment entered in her favor by the Circuit Court). In any event, there is no dispute and I find for purposes of this decision that all such names (and any variations thereof) refer to one and the same person – that is, the plaintiff in this adversary proceeding, Daisey Couloote Phillip.
5 Count 6 of the Third Amended Verified Complaint asserts a claim for negligence solely against Veracity Title.
~ 7 ~
he was able to list and sell the Property, and he agreed to sell the Property through Chesapeake and to reimburse the equity in the Property to her. Plaintiff’s Ex. 1, ¶¶ 11-15.
Eric Golden had with him pre-prepared blank documents which Daisy Phillip signed on the day he met with her. Eric Golden fraudulently induced Daisy Phillip to sign those documents describing them as a contract for sale of her Property by Chesapeake. Eric Golden promised that the documents would be filled out and forwarded to Daisy Phillip once they were completed by the principals of Chesapeake or Landco. The documents that Eric Golden induced Daisy Phillip to sign included organization documents for 5444 Taylor Street, LLC. Plaintiff’s Ex. 1, ¶¶ 16-18.
5444 Taylor Street, LLC was a Maryland limited liability company that had offices at 1633 Bald Eagle Road, Arnold, Maryland 21012, the same address as Chesapeake, Landco, and David Reecher. Plaintiff’s Ex. 1, ¶¶ 5-9, 37. The blank documents initially signed by Daisy Phillip provided that she was the sole owner of 5444 Taylor Street, LLC. Plaintiff’s Ex. 1, ¶¶ 18, 37. The blank documents also included a Deed that without Daisy Phillip’s knowledge, authorization, or consent purported to transfer title to the Property to 5444 Taylor Street, LLC.6 Plaintiff’s Ex. 1, ¶¶ 18, 19. On or about May 7, 2007, Veracity Title conducted a settlement at the request of David Reecher, Eric Golden, Chesapeake, and Landco that transferred the Property to 5444 Taylor Street, LLC without the knowledge, authorization, or consent of Daisy Phillip. Plaintiff’s Ex. 1, ¶ 21.
6 A copy of the Deed to 5444 Taylor Street, LLC was attached as Exhibit B to the Third Amended Complaint. Plaintiff’s Ex. 1, ¶ 19. Although the Third Amended Complaint was admitted into evidence in this court without that exhibit attached, a copy of the Deed as recorded in the Land Records of Prince George’s County, Maryland on August 17, 2007 was admitted separately into evidence at trial. Plaintiff’s Ex. 15, DCP-243. The Deed was also admitted into evidence as Exhibit No. 2 at the December 17, 2010 hearing in the Circuit Court. Plaintiff’s Ex. 3, DCP-048, ln. 10.
~ 8 ~
David Reecher was the resident agent for 5444 Taylor Street, LLC [Plaintiff’s Ex. 1, ¶ 37] and signed its Articles of Organization (the “Articles of Organization”) to confirm his consent to act as its resident agent.7 Eric Golden acting as an agent of Chesapeake and in concert with David Reecher intentionally and fraudulently induced Daisy Phillip to execute an assignment to Landco of her membership interest in 5444 Taylor Street, LLC.8 Plaintiff’s Ex. 1, ¶ 26. David Reecher, who was the President of Landco, signed the Assignment on its behalf. Plaintiff’s Ex. 1, ¶ 7. Landco (and thus 5444 Taylor Street, LLC) was exclusively controlled by David Reecher. Plaintiff’s Ex. 1, ¶ 26.
After the meeting with Eric Golden, Daisy Phillip was induced to move out of the Property in order to expedite its sale. At that time, she owned the Property subject to one mortgage debt in the amount of approximately $99,555, secured by a Deed of Trust held by Citi-Mortgage. Plaintiff’s Ex. 1, ¶ 20.
On or about June 28, 2007, Eric Golden met with Daisy Phillip at her new residence. At that time, Eric Golden induced Daisy Phillip to sign a document titled as “Affidavit of 5444 Taylor Street, LLC” (the “Affidavit”) under false pretenses. The Affidavit purported to confirm that Daisy Phillip was transferring the Property to 5444 Taylor Street, LLC. The Affidavit was signed by Daisy Phillip on June 28, 2007 and notarized by David Williamson, an employee of Landco, on June 29, 2007, a different date. The Affidavit was inconsistent with the previously
7 A copy of the Articles of Organization was attached as Exhibit A to the Third Amended Complaint. Plaintiff’s Ex. 1, ¶ 18. Although the Third Amended Complaint was admitted into evidence in this court without that exhibit attached, a copy of the Articles of Organization dated April 23, 2007 was admitted separately into evidence at trial. Plaintiff’s Ex. 7, DCP-124.
8 A copy of the Assignment of Membership and Economic Interest (the “Assignment”) was attached as Exhibit G to the Third Amended Complaint. Plaintiff’s Ex. 1, ¶ 26. Although the Third Amended Complaint was admitted into evidence in this court without that exhibit attached, a copy of the Assignment dated April 26, 2007 was admitted separately into evidence at trial. Plaintiff’s Ex. 7, DCP-138. The Assignment was also admitted into evidence as Exhibit No. 5 at the December 17, 2010 hearing in the Circuit Court. Plaintiff’s Ex. 3, DCP-050, ln. 6.
~ 9 ~
signed documents, which purported to transfer her interest in the Property to 5444 Taylor Street, LLC and to transfer her interest in 5444 Taylor Street, LLC to Landco.9 Plaintiff’s Ex. 1, ¶ 23.
Eventually, a Residential Contract of Sale for the Property in the amount of $289,000 was submitted by Antonio Saabedra and Josefa Rosales on or about October 10, 2007.10 The contract identified the seller as “Daisey M. Williams and/or 5444 Taylor Street, LLC,” and was accompanied by several documents that stated the seller was solely “Daisey M. Williams.” On or about November 9, 2007, Veracity Title conducted a settlement on that contract. According to the Settlement Statement (Form HUD-1) (the “HUD-1”)11 and the Itemized Disbursement Statement (the “Disbursement Statement”)12 for the settlement, the net sale proceeds of $151,272.84 were to be paid to 5444 Taylor Street, LLC, but were in fact transferred by wire to Landco. A Deed was recorded in the Land Records of Prince George’s County, Maryland on or
9 A copy of the Affidavit was attached to the Third Amended Complaint. Although the Third Amended Complaint was admitted into evidence in this court without the attached exhibits, a copy of the Affidavit was admitted separately into evidence at trial. Plaintiff’s Ex. 7, DCP-159. A copy of the Affidavit as filed in the Land Records of Prince George’s County, Maryland on August 17, 2007 along with the Deed was also admitted into evidence at trial. Plaintiff’s Ex. 15, DCP-247.
10 A copy of the Residential Contract of Sale was attached as Exhibit I to the Third Amended Complaint. Although the Third Amended Complaint was admitted into evidence in this court without exhibits, a copy of the Residential Contract of Sale was admitted separately into evidence at trial. Plaintiff’s Ex. 17; Defendant’s Ex. 37. The Residential Contract of Sale was also admitted into evidence as Exhibit No. 6 at the December 17, 2010 hearing in the Circuit Court. Plaintiff’s Ex. 3, DCP-051, ln. 3. At trial in this court, Gary Rand testified that David Reecher directed him to execute the Residential Contract of Sale and to attend the subsequent closing on behalf of the seller.
11 A copy of the HUD-1 was attached as Exhibit H to the Third Amended Complaint. Although the Third Amended Complaint was admitted into evidence in this court without exhibits, a copy of the HUD-1 was admitted separately into evidence at trial. Plaintiff’s Ex. 13; Defendant’s Ex. 42. The HUD-1 was also admitted into evidence as Exhibit No. 7 at the December 17, 2010 hearing in the Circuit Court. Plaintiff’s Ex. 3, DCP-052, ln. 5.
12 A copy of the Disbursement Statement was attached as Exhibit L to the Third Amended Complaint. Although the Third Amended Complaint was admitted into evidence in this court without exhibits, a copy of the Disbursement Statement was admitted separately into evidence at trial. Plaintiff’s Ex. 18; Defendant’s Ex. 43. The Disbursement Statement was also admitted into evidence as Exhibit No. 9 at the December 17, 2010 hearing in the Circuit Court. Plaintiff’s Ex. 3, DCP-053, ln. 23.
~ 10 ~
about November 30, 2007 that transferred the Property to Antonio Saabedra and Josefa Rosales without the knowledge, authorization, or consent of Daisy Phillip. Plaintiff’s Ex. 1, ¶¶ 27-30.
Daisy Phillip contacted Eric Golden in November of 2007 to inquire about the sale of the Property, at which time she was informed that the Property had been sold and that she should soon receive her money from the proceeds of sale. She subsequently made numerous attempts to reach Eric Golden by telephone, but her calls were not returned. On or about March 5, 2008, Daisy Phillip received a check for $1,000 from Landco and was informed she would receive weekly checks until the full net sale price was paid to her. She received no further payments, and then discovered for the first time that the documents she signed provided for organization of 5444 Taylor Street, LLC and the transfer of her interest in 5444 Taylor Street, LLC to Landco, and that a deed transferring the Property to 5444 Taylor Street, LLC was recorded on August 17, 2007 without her knowledge, authorization, or consent. Plaintiff’s Ex. 1, ¶¶ 32-36.
The Role of Aaron Seltzer
After the Third Amended Complaint was filed by Daisy Phillip in the Circuit Court, no answer or other response was filed and it appears that Aaron Seltzer played a less active role as the attorney for David Reecher and his other defendant clients. Aaron Seltzer was prohibited from practicing law for failure to pay his annual assessment to the Client Protection Fund by an Order entered on April 7, 2010 by the Court of Appeals of Maryland. Defendant’s Ex. 74. Less than two weeks earlier (on March 25, 2010), Aaron Seltzer filed a motion to withdraw his appearance in the Circuit Court. Plaintiff’s Ex. 39, p. 12 of 26. According to a docket entry on May 28, 2010, however, that motion was denied on April 10, 2010. Plaintiff’s Ex. 39, p. 14 of 26 (“the motion to withdraw appearance filed by defendant’s attorney, aaron g. seltzer is denied.”).
~ 11 ~
Well after entry of the judgment against David Reecher by the Circuit Court, Aaron Seltzer was disbarred effective October 7, 2011 by a Per Curiam Order entered by the Court of Appeals of Maryland. Defendant’s Ex. 73. The opinion explaining the reasons for entry of that order was entered on December 22, 2011 and is reported at Attorney Grievance Commission v. Seltzer, 424 Md. 94 (2011). The reasons for his disbarment involved serious misconduct, but there is nothing in the record to suggest that such misconduct related in any way to Aaron Seltzer’s representation of David Reecher or the other defendants.
In any event, Aaron Seltzer was admitted to practice law in Maryland and was counsel of record for David Reecher in the Circuit Court at the time the Third Amended Complaint was served on him on January 14, 2010. Moreover, he remained admitted to practice until at least April 7, 2010 – that is, until a date more than nine weeks after the deadline for David Reecher to file an answer to the Third Amended Complaint.13
The Subsequent Course of the Circuit Court Litigation
Because no answer or other response to the Third Amended Complaint was ever filed by David Reecher, Chesapeake, Eric Golden, Landco, or 5444 Taylor Street, LLC, the Circuit Court declared David Reecher and the other defendants to be in default by an Order dated October 13, 2010, and set a hearing on ex parte proof for December 17, 2010. Plaintiff’s Ex. 2, DCP-031; Plaintiff’s Ex. 39, p. 28. In accordance with Rule 2-613 of the Maryland Rules of Civil Procedure, the Clerk of the Circuit Court issued a Notice of Default Order on October 21, 2010 that notified David Reecher of (i) the entry of an order of default against him, (ii) his right to
13 Under Rule 2-341 of the Maryland Rules of Civil Procedure, an answer must be filed within 15 days after service of an amended complaint. Thus, in this instance, David Reecher’s answer was due on January 29, 2010.
~ 12 ~
move to vacate that order within 30 days of its entry, and (iii) the hearing on ex parte proof scheduled for December 17, 2010.14 Plaintiff’s Ex. 2, DCP-032; Plaintiff’s Ex. 39, p. 32.
Neither David Reecher nor any of the other defendants ever filed a motion to vacate the order of default. Accordingly, the Honorable C. Philip Nichols conducted a hearing on December 17, 2010 in the Circuit Court for the purpose of determining the damages to be awarded against David Reecher and the other remaining defendants. Daisy Phillip and her attorney, Joseph H. Ostad, appeared at the hearing; however, none of the defendants appeared. A copy of the transcript of the hearing before Judge Nichols was introduced at the trial in this court. Plaintiff’s Ex. 3.
Daisy Phillip testified under oath at the hearing before Judge Nichols and her attorney offered exhibits that were admitted into evidence. Her testimony included the following facts. Daisy Phillip graduated from high school in 1985, which was her highest level of education. She purchased the Property in 1999 for $115,000. She lived there until 2007, when she moved as a result of events that are the subject matter of this dispute. At that time, she was employed as a bus driver and experienced a cut in hours. As a result, she was having difficulty keeping up with her mortgage and utility payments. The balance due on her mortgage at the time was a little less than $100,000. She decided to sell her house so that she could get the equity out of the Property
14 In his testimony at trial in this court, David Reecher denied that he received the Notice of Default Order. The Clerk of the Circuit Court addressed to Notice of Default to David Reecher at “1633 Bald Eagle Road, Arnold, MD 21012.” Plaintiff’s Ex. 2, DCP-032; Plaintiff’s Ex. 39, p. 32. The Articles of Organization and the Operating Agreement for 5444 Taylor Street, LLC both list “1633 Bald Eagle Road, Arnold, Maryland 21012” as, among other things, the address of David Reecher as the resident agent for 5444 Taylor Street, LLC. Plaintiff’s Ex. 7, DCP-125 and DCP-127. Moreover, in paragraph 6(u) of his Amended Answer filed in this adversary proceeding [Docket No. 16], David Reecher admits that his address is 1633 Bald Eagle Road, Arnold, Maryland 21012. I do not believe David Reecher’s testimony denying receipt of the Notice of Default Order is credible, and I find that he did in fact receive the Notice of Default Order.
~ 13 ~
and could then put that money down on another house and lower her monthly mortgage payment. Plaintiff’s Ex. 3, DCP-042 through DCP-046.
Daisy Phillip also testified that she had never formed a limited liability company and did not understand the meaning of the term. She did not intend for title to the Property to be transferred to 5444 Taylor Street, LLC, nor did she see or sign the settlement or disbursement statements for the transfer of the Property to 5444 Taylor Street, LLC. She never intended to assign any interest in 5444 Taylor Street, LLC to Landco or any other party. She did not see, sign, or authorize anyone to sign the Residential Contract of Sale submitted by Antonio Saabedra and Josefa Rosales. She did not see and did not authorize anyone to sign on behalf of her or on behalf of 5444 Taylor Street, LLC the Deed that transferred the Property to Antonio Saabedra and Josefa Rosales,15 nor did she see or sign the HUD-1. She did not see the Disbursement Statement or authorize the net proceeds of $151,272.84 to be wire transferred to 5444 Taylor Street, LLC. And lastly, she never received any money from the defendants other than the $1,000 check from Landco payable to Daisy High.16 Plaintiff’s Ex. 3, DCP-047 through DCP-054.
Daisy Phillip testified that she did not learn about the sale of the Property until sometime in early December of 2007 when Eric Golden called her by telephone with the news that “they had moved the house.” In that conversation, Daisy Philip asked Eric Golden when she would be
15 A copy of the Deed to Antonio Saabedra and Josefa Rosales was attached as Exhibit K to the Third Amended Complaint. Plaintiff’s Ex. 1, ¶ 29. Although the Third Amended Complaint was admitted into evidence in this court without that exhibit attached and the Deed was not offered or admitted into evidence at trial, a copy of that Deed was admitted into evidence as Exhibit No. 8 at the December 17, 2010 hearing in the Circuit Court. Plaintiff’s Ex. 3, DCP-052, ln. 25.
16 The $1,000 check is referred to in the Third Amended Complaint. A copy of the $1,000 check was admitted into evidence at trial in this court. Plaintiff’s Ex. 21, DCP-349. The $1,000 check was also admitted into evidence as Exhibit No. 11 at the December 17, 2010 hearing in the Circuit Court. Plaintiff’s Ex. 3, DCP-055, ln. 13.
~ 14 ~
getting the equity out of the Property; a question to which he responded by telling her to call him back after Christmas. When Daisy Philip contacted him on December 26, 2007, Eric Golden told her he was on vacation and to call him back in January. When she contacted him in January of 2008, he told her he would have to “talk to his boss” and get back to her. Daisy Philip testified that Eric Golden never called her back, did not respond to her calls, and only answered the telephone when she resorted to the subterfuge of calling him from a payphone. In that instance, Eric Golden stated that “the real estate market is slow at this time,” that “they didn’t have the money,” that they would try to send her $1,000 per week, and that when the real estate market improved “he would send [her] the full amount that is due to [her].” Daisy Phillip responded by telling “him that was not part of the deal.” After she received and cashed the $1,000 check because she “needed the money,”17 Daisy Phillip called Eric Golden again and “asked him where was the rest of [her] money,” at which point Eric Golden told her that “was not part of the deal.” Daisy Phillip responded by telling him she “still had claims … over my house.” After that conversation, Daisy Phillip went to the courthouse, obtained copies of the documents that had been filed, and hired a lawyer. Plaintiff’s Ex. 3, DCP-055 through DCP-057.
The transcript makes clear that Judge Nichols concluded based upon the admitted allegations of the Third Amended Verified Complaint, Daisy Phillip’s testimony, and the other evidence presented at the December 17, 2010 hearing that each of the remaining defendants, including David Reecher, was liable jointly and severally to Daisy Phillip for fraudulent and other wrongful conduct that warranted an award of both compensatory and punitive damages. Part way through the testimony by Daisy Phillip, the following colloquy occurred:
17 The $1,000 check was dated March 5, 2008, was payable to “Daisy High,” was endorsed and cashed by Daisy Phillip, and cleared the account of Landco at Wachovia Bank, N.A. on March 14, 2008. Plaintiff’s Ex. 21, DCP-349. At trial in this court, David Reecher testified that he signed the $1,000 check on behalf of Landco.
~ 15 ~
THE COURT: Since we are here on ex-parte proof —
MR. OSTAD: Yes.
THE COURT: And it is uncontested, tell me how we figure the damages and we are done with this.
MR. OSTAD: One of the components of the damages is punitive damages Your Honor. I was just going through this as to what they did to her and how they basically —
THE COURT: They swindled her out of her home.
MR. OSTAD: Yes.
THE COURT: We are there.
Plaintiff’s Ex. 3, DCP-047, ln. 6-17. Daisy Phillip was then further examined by her counsel and a number of exhibits were admitted into evidence. At the conclusion of the hearing, Judge Nichols determined that the amount of compensatory damages to be awarded was $150,000. At which point the hearing concluded as follows:
THE COURT: How much are you looking for in punitive damages?
MR. OSTAD: Your Honor what we would ask for in punitive damages is $500,000.00 on each Counts that we’ve forwarded — that we’ve pled in this case and there are, I believe, seven Counts on this for various actions and Counts to include, you know, conspiracy, intentional misrepresentation, negligent misrepresentation, fraud, concealment, conversion and unfair trade practices.
THE COURT: Judgment in favor of Plaintiff against the Defendants $150,000.00; $500,000.00 in punitive damage on each Count, plus costs of Court. Thank you all very much.
MR. OSTAD: Thank you Your Honor.
Plaintiff’s Ex. 3, DCP-060, ln. 1-15 (emphasis added).
~ 16 ~
Although counsel for Daisy Phillip obviously was mistaken as to the number of counts in which she sought punitive damages (there were five, not seven), there is no ambiguity as to the nature of the judgment entered by the Circuit Court. The Certified Copy of Judgment and Docket Entries for the December 17, 2010 hearing and the resulting Daily Sheet and Judgment of the Circuit Court were both admitted into evidence at trial. Plaintiff’s Ex. 4. The Daily Sheet states “[c]ompensatory damages assessed at $150,000.00” and “[p]unitive damages assessed at $500,000.00 for each counts 3, 4, 7, 8 and 9.” The Judgment as docketed on January 3, 2011 by the Circuit Court states in essence as follows:
This matter having been decided by a judge: with Judge Nichols presiding, it is this 17th day of December, 2010,
ORDERED AND ADJUDGED that:
Judgment is granted in favor of Plaintiff Daisy Couloote Phillip
And against Defendants’; Chesapeake Home Buyers; Eric Golden; David Reecher; Landco Investments, Inc.; 5444 Taylor Street, LLC jointly and severly with interest from date and costs.
in the sum of $2,650,000.00.
Costs are assessed against Defendants’.
Plaintiff’s Ex. 4, DCP-090 (inapplicable or instructive form text deleted) (typographical errors in the original).
Thus, the record before this court demonstrates that the Circuit Court found based upon the undisputed allegations in the Third Amended Verified Complaint and the evidence presented at the December 17, 2010 hearing that David Reecher and the other defendants were jointly and severally liable under Maryland law to Daisy Phillip on each of the five counts for which she sought punitive damages – that is, liable to her on each of her five separate claims for civil
~ 17 ~
conspiracy, intentional misrepresentation, constructive fraud, concealment and non-disclosure, and conversion.
The Evidence Presented at Trial in This Court
As indicated above, a lengthy trial was conducted in this court at which eight witnesses (including Daisy Phillip and David Reecher) testified and numerous documents were admitted into evidence. During that time I had the opportunity to observe the demeanor, and judge the credibility, of the witnesses. Based upon that trial, I make the following additional findings of fact.
I found Daisy Phillip’s testimony to be credible. I believe her testimony that she intended to sell the Property to obtain the equity value for use in purchasing a more affordable home and that she was induced by misrepresentation and fraud into signing blank documents that resulted in an entirely different transaction which diverted that equity to a corporation owned and controlled by David Reecher. I believe her testimony that Eric Golden promised to provide her with copies of the documents as ultimately completed and executed, but never did so. In addition, I believe her testimony that she met David Williamson, the notary who purportedly executed the various documents at issue in the transaction, for the first time on the first day of trial in this court.
I did not find David Reecher’s testimony to be credible. David Reecher is an experienced and sophisticated business man. He was involved in owning and running a number of businesses (including real estate related businesses) before forming Landco in 2003. David Reecher was the President and sole stockholder of Landco. David Reecher and his wife, Cheryl Reecher, each owned a 50% interest in DR Holdings, Inc. (“DRH”). DRH owned a 40% interest in 1, 2, 3 for Real Estate, L.L.C., the broker David Reecher engaged to list the Property for sale. Gold
~ 18 ~
Monster, Inc., which was owned by Eric Golden, also owned a 40% interest in 1, 2, 3 for Real Estate, L.L.C. Peter Fastow, an attorney who represented Landco and 1, 2, 3 for Real Estate, L.L.C. and who did closings for Veracity Title, owned a 10% interest in 1, 2, 3 for Real Estate, L.L.C.
David Reecher hired, trained, and supervised the employees of Landco. At the times relevant to this dispute, the only employees of Landco were David Reecher, Eric Golden, Gary Rand, David Williamson, Lisa Lima, and Tina Doyle. Landco conducted its business from an office in the basement of David Reecher’s residence at 1633 Bald Eagle Road, Arnold, Maryland 21012 where he could supervise and monitor the activities of Landco’s employees on a daily basis. David Reecher worked closely with Eric Golden; so closely in fact, that Lisa Lima characterized them as partners in her testimony. David Reecher reviewed and approved all contracts and other deal documents on behalf of Landco. As he stated in his testimony, he was the one “in charge.”
David Reecher signed many of the documents related to the transactions that resulted in transfer of the Property from Daisy Phillip to Antonio Saabedra and Josefa Rosales. The Standard Purchase and Sale Agreement [Plaintiff’s Ex. 7, DCP-115] was signed by David Reecher on behalf of or as the “Buyer.”18 He signed the Articles of Organization in his individual capacity to express consent to serving as the resident agent for 5444 Taylor Street, LLC. Plaintiff’s Ex. 7, DCP-124; Plaintiff’s Ex. 37. He signed the Assignment on behalf of Landco. Plaintiff’s Ex. 7, DCP-138. When the Property was first listed for sale for $314,700 in May of 2007 with 1, 2, 3 for Real Estate, L.L.C. as the broker and Mark J. Powers as the listing
18 Although the buyer is designated in the first line of the agreement as “Landco Investment, Inc. or assigns,” David Reecher’s signature on the Standard Purchase and Sale Agreement does not bear any indication that he executed the contract in a representative capacity.
~ 19 ~
agent, David Reecher signed the Exclusive Right to Sell – Listing Agreement For Improved Real Property (the “First Listing Agreement”) on behalf of or as the “Seller/Owner.”19 Plaintiff’s Ex. 16, DCP-250. When the listing with 1, 2, 3 for Real Estate, L.L.C. was revised in June of 2007 to increase the listing price to $344,700 and to designate Ray Burton as the listing agent, David Reecher again signed the Exclusive Right to Sell – Listing Agreement For Improved Real Property (the “Second Listing Agreement”) on behalf of or as the “Seller/Owner.”20 Plaintiff’s Ex. 16, DCP-266.
David Williamson was a notary public at the times relevant to this dispute and his signature appears on most of the relevant documents. He was an employee of Landco from 2004 until August of 2007. He was trained by David Reecher to perform a number of functions in Landco’s business. When his employment was terminated, David Williamson left his notary record book in his desk in the basement of David Reecher’s residence. The notary record book was not introduced into evidence at trial, and David Reecher testified he was unable to locate it. Based upon his testimony, I do not believe David Williamson knows what documents he actually properly notarized in the presence of the person whose signature is purported to appear on the document. David Williamson claimed in his testimony that he met with Daisy Phillip, but he could not remember her or where he met with her. I do not believe he ever met with Daisy Phillip or actually witnessed her execute any of the documents that purport to bear her signature.
19 Although the first paragraph of the First Listing Agreement designates the seller as “Daisey M. Williams and/or Taylor Avenue LLC,” David Reecher’s signature on the agreement does not bear any indication that he executed the contract in a representative capacity.
20 Although the first paragraph of the Second Listing Agreement designates the seller as “DAISEY M. WILLIAMS and/or TAYLOR ST, LLC,” David Reecher’s signature on the agreement does not bear any indication that he executed the contract in a representative capacity.
~ 20 ~
David Williamson himself questioned the authenticity of what purports to be his signature on documents signed by Daisy Phillip. He did not believe that his signature is the one that appears on (i) the witness line next to Daisy Phillip’s signature on the Operating Agreement 5444 Taylor St. LLC, and (ii) the three witness lines next to the signatures of Daisy Phillip and David Reecher on the Assignment. Plaintiff’s Ex. 7, DCP-137 and DCP-142.
David Williamson also stated it was not his practice to act as a witness on documents that he notarized. As a result, he did not believe that his signature is the one that appears on the witness line next to Daisy Phillip’s signature on the blank deed to 5444 Taylor Street, LLC or on the deed to 5444 Taylor Street, LLC as recorded in the Land Records of Prince George’s County, Maryland. Plaintiff’s Ex. 12, DCP-233, DCP-235; Plaintiff’s Ex. 15, DCP-244.
David Williamson likewise questioned the authenticity of the notarization that appears on the Affidavit that was recorded with the Deed to 5444 Taylor Street, LLC. Plaintiff’s Ex. 15, DCP-247. He doubted it was genuine for two reasons: (i) he did not recall any one-page affidavits, and (ii) he would not have notarized a document on a date different from the date on which it was executed.
David Williamson also testified about a number of documents related to transactions with other parties on which his signature or notarization appeared. Plaintiff’s Ex. 25. In many instances, he questioned the authenticity of what appeared to be his signature as witness. With respect to a transaction involving Cheryl Stubblefield, he stated that signatures that were purported to notarize an affidavit and a deed were not genuine. Plaintiff’s Ex. 25, DCP-386 and DCP-388.
David Reecher testified that he believed the $1,000 check from Landco paid to Daisy Phillip was for a “bird dog” agreement – that is, that Daisy Phillip was being hired by Eric
~ 21 ~
Golden to recruit other clients who would be interested in selling their homes. The testimony of all parties, however, including David Reecher himself, was that Landco did not regularly engage in “bird dog” arrangements. Daisy Phillip had no knowledge of “bird dog” agreements, did not agree to recruit clients for Eric Golden, and believed the $1,000 check was an installment on the amount owed to her for the equity of the sale of the Property.
I do not believe David Reecher’s testimony that he was unaware of and did not participate in the misrepresentations and fraud perpetrated on Daisy Phillip. I do not believe David Reecher’s testimony that he did not know that Eric Golden obtained signatures on blank documents (including those signed by Daisy Phillip) that were later completed by Eric Golden or other Landco employees. I do not believe that David Reecher did not know about the irregularities in the notarization practices at Landco. Many things about his testimony do not ring true. The most telling in my mind is the so-called “bird dog” agreement. No person with business experience and acumen like that of David Reecher would – as he would have this court believe – enter into an agreement under which an obviously dissatisfied customer would supposedly be paid to solicit new customers for his business unless he was motivated to cover up or mitigate liability for an illegitimate transaction involving that same customer.
Based upon the evidence presented in this court, I believe that the course of events with respect to the Property took place as alleged in the Third Amended Complaint. Daisy Phillip was induced by misrepresentation and fraud to sign documents that were subsequently filled out in a way to set up a step transaction through 5444 Taylor Street LLC that was completely different from what she was led to believe or intended and that deprived her of her objective for the transaction – namely, liquidating the equity in the Property in order to acquire a more affordable residence. David Reecher, Eric Golden, Gary Rand, Lisa Lima, and David
~ 22 ~
Williamson each participated in this wrong perpetrated on Daisy Phillip from the time Eric Golden first met with Daisy Phillip to when Gary Rand (acting at the direction of David Reecher) attended the closing on sale of the Property to Antonio Saabedra and Josefa Rosales. I agree with the conclusion reached by Judge Nichols that they “swindled her out of her home.” Thus, I find the evidence presented in this court to be consistent with, and to support the judgment entered by, the Circuit Court.
CONCLUSIONS OF LAW
The exceptions to discharge provided for in § 523 of the Bankruptcy Code are to be construed narrowly “to protect the purpose of providing debtors a fresh start.” Foley & Lardner v. Biondo (In re Biondo), 180 F.3d 126, 130 (4th Cir. 1999). Conversely, this court must be “equally concerned with ensuring that perpetrators of fraud are not allowed to hide behind the skirts of the Bankruptcy Code.” Id. As the Supreme Court has indicated, while the Bankruptcy Code provides a debtor with ‘“a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt,”’ the Bankruptcy Code also “limits that opportunity to the ‘honest but unfortunate debtor.’” Brown v. Felsen, 442 U.S. 127, 128 (1979) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)).
The burden of proof is on the creditor to establish by a preponderance of the evidence that a debt is not dischargeable. Kubota Tractor Corp. v. Strack (In re Strack), 524 F.3d 493, 497 (4th Cir. 1991) (citing Grogan v. Garner, 498 U.S. 279, 291 (1991)); Colombo Bank v. Sharp, 477 B.R. 613, 619 (D. Md. 2008). As the Fourth Circuit has explained, a creditor asserting a claim for nondischargeability under § 523(a)(2)(A) must prove five elements by a preponderance of the evidence – namely, “(1) false representation, (2) knowledge that the representation was
~ 23 ~
false, (3) intent to deceive, (4) justifiable reliance on the representation, and (5) proximate cause of damages.” Nunnery v. Rountree (In re Rountree), 478 F.3d 215, 218 (4th Cir. 2007).
When (as here) a creditor has reduced a claim to judgment in a state court prior to bankruptcy, the bankruptcy court “must give the same preclusive effect to [the] state court judgment as the forum that rendered the judgment would have given it.” Sartin v. Macik, 535 F.3d at 287 (citing Allen v. McCurry, 449 U.S. 90, 96 (1980)); Pahlavi v. Ansari (In re Ansari), 113 F.3d 17, 19 (4th Cir. 1997)). Therefore, this court must apply Maryland law in determining the extent to which preclusive effect must be given to the judgment in the Circuit Court entered by default, but after active participation by David Reecher in the early stages of the proceeding.
“In Maryland a default judgment is considered more akin to an admission of liability than to a punitive sanction.” Hayden v. Bullinger, 350 Md. 452, 472 (1998). See also Hopkins v. Easton Nat’l Bank, 171 Md. 130, 134 (1936); Pacific Mortgage & Inv. Group, Ltd. v. Horn, 100 Md. App. 311, 332 (1994); Gotham Hotels, Ltd. v. Owl Club, Inc., 26 Md. App. 158, 173 (1975). Maryland has adopted a four-part test to determine whether collateral estoppel should apply to a judgment:
1. Was the issue decided in the prior adjudication identical with the one presented in the action in question?
2. Was there a final judgment on the merits?
3. Was the party against whom the plea is asserted a party or in privity with a party to the prior adjudication?
4. Was the party against whom the plea is asserted given a fair opportunity to be heard on the issue?
Colandrea v. Wilde Lake Community Association, 361 Md. 371, 391 (2000) (citing Washington Suburban Sanitary Commission v. TKU Associates, 281 Md. 1, 18-19 (1977).
~ 24 ~
In applying this test to default judgments, the determination usually rests on whether the judgment was actually litigated. This requirement is met when (as is the case here) a defendant files an answer or appears in the matter, the issues are considered by a jury or finder of fact, the defendant had notice and an opportunity to argue on its behalf, and the defendant had an incentive to litigate the matter in the prior proceeding and reasonably foresee litigation on the same issue. Nestorio v. Assocs. Commercial Corp. (In re Nestorio), 250 B.R. 50, 56 (D. Md. 2000).
With respect to default judgments entered against defendants such as David Reecher who filed a motion to dismiss and thus actively participated in earlier stages of the prior litigation, this court has held that collateral estoppel applies. As Judge Stephen Derby concluded, “it would be unfair to permit a party to avoid the preclusive effect of an anticipated adverse decision merely by not appearing for trial or by not having a factual defense to present.” Ramsey v. Bernstein (In re Bernstein), 197 B.R. 475, 480 (Bankr. D. Md. 1996). Similarly, Judge Robert Gordon found that “there is an expectation by the parties that the issue will be decided, and the subsequent court is not in a position to evaluate a party’s litigation strategy in another case” when, as he put it quite succinctly, “the party’s investment in the former litigation drifts from participatory to unresponsive.” Reed v. Reed (In re Reed), 2013 WL 6497926, at *7 (Bankr. D. Md. 2013). David Reecher’s participation in the Circuit Court litigation falls into this category and he should not be permitted a second opportunity to litigate the same issues in this court.
David Reecher also urges this court to disregard the judgment and the findings of the Circuit Court because of the disbarment of his counsel in the Circuit Court litigation. It is well settled law, however, that a party is bound by their choice in counsel and cannot relitigate a matter if they later regret that choice. As the Supreme Court stated,
~ 25 ~
Petitioner voluntarily chose this attorney as his representative in the action, and he cannot now avoid the consequences of the acts or omissions of this freely selected agent. Any other notion would be wholly inconsistent with our system of representative litigation, in which each party is deemed bound by the acts of his lawyer-agent and is considered to have notice of all facts, notice of which can be charged upon the attorney.
Link v. Wabash RR. Co., 370 U.S. 626, 633-34 (1962) (quotations omitted). See also Coltec Indus., Inc. v. Hobgood, 280 F.3d 262, 274 (3rd Cir. 2002) (“[c]ourts have not looked favorably on the entreaties of parties trying to escape the consequences of their own ‘counseled and knowledgeable’ decisions”).
Thus, this court must determine the extent to which the findings of the Circuit Court awarding punitive damages on the five counts of the Third Amended Verified Complaint for civil conspiracy, intentional misrepresentation, constructive fraud, concealment and non-disclosure, and conversion support a determination that the judgment entered in favor of Daisy Phillip is nondischargeable under § 523(a)(2)(A). Under Maryland law, in order to make a finding that a plaintiff is entitled to punitive damages a court must make a finding of “actual malice” which is “characterized by knowing and deliberate wrongdoing.” Ellerin v. Fairfax Sav., F.S.B., 337 Md. 216, 228 (1995). See also Darcars Motors of Silver Spring, Inc. v. Borzym, 379 Md. 249, 264 (2004) (“[A] jury may award punitive damages only when a plaintiff has demonstrated by clear and convincing evidence that the defendant acted with ‘actual malice.’ We have defined the term ‘actual malice’ as ‘conduct of the defendant characterized by evil motive, intent to injure, ill will, or fraud.’” (citations omitted)).
As a starting point, the award of punitive damages by Judge Nichols was a finding that the actions taken by David Reecher showed the requisite malice toward Daisy Phillip. Moreover, the award of punitive damages on each of the five counts necessarily included a
~ 26 ~
finding by the Circuit Court that Daisy Phillip had proven all the elements of a claim under Maryland law not merely for intentional misrepresentation, but also for civil conspiracy, constructive fraud, concealment and non-disclosure, and conversion.21 In evaluating the dischargeability of each of the five counts on which punitive damages were awarded by the Circuit Court, this court must decide whether in determining that Daisy Phillip had proven the elements of each cause of action under Maryland law, the Circuit Court also must necessarily have found facts establishing the elements for nondischargeability under § 523(a)(2). If that is not the case, the Supreme Court has made clear in Brown v. Felson that Daisy Phillip is entitled to present extrinsic evidence in this court to establish the nondischargeable nature of her claims. 442 U.S at 138-39.
It is well settled that § 523(a)(2)(A) bars discharge not merely of claims for money obtained by fraud or misrepresentation, but also of all claims arising from the money so obtained. As the Supreme Court has held, § 523(a)(2)(A) “encompasses any liability arising from money, property, etc., that is fraudulently obtained, including treble damages, attorney’s fees, and other relief that may exceed the value obtained by the debtor.” Cohen v. de la Cruz, 523 U.S. 213, 223 (1998). See also Rountree, 478 F.3d at 220 (“[The Supreme Court] has
21 This court need not consider David Reecher’s suggestion that the award of punitive damages on each of the five counts was a misapplication by the Circuit Court of the Maryland law of punitive damages. If such was the case, his remedy lay in the Maryland courts of appeal and not in review of that decision by the bankruptcy court. See I.R.S. v. Teal (In re Teal), 16 F.3d 619, 622 (5th Cir. 1994) (federal court “must give res judicata effect to a prior judgment even if it would be voidable on appeal because of legal error”) (citing Federated Dept. Stores, Inc. v. Moitie, 452 U.S. 394, 398-99 (1981)); Goss v Goss, 722 F.2d 599, 605 (10th Cir. 1983) (“The res judicata or collateral estoppel ‘consequences of a final, unappealed judgment on the merits [are not] altered by the fact that the judgment may have been wrong.’”) (quoting Federated Dep’t Stores, 452 U.S. at 398). Whatever the law of Maryland, the award of punitive damages on each of the five counts necessarily predicated on a finding by Judge Nichols that Daisy Phillip had proven the elements for a claim under each of the five causes of action. The question here is limited to determination of whether one or more of them is a claim excepted from discharge under § 523(a)(2)(A).
~ 27 ~
determined that subsection (a)(2)(A) provides an exception to the discharge of punitive damages when those punitive damages arise from a debt obtained through fraud.”).
For the reasons that follow, this court concludes that the damages awarded by the Circuit Court for intentional misrepresentation, civil conspiracy, and concealment and non-disclosure are claims that are nondischargeable under § 523(a)(2)(A), and that those awarded for constructive fraud and conversion are dischargeable under § 523(a)(2)(A).
Intentional Misrepresentation
The elements of intentional misrepresentation (also known in Maryland simply as fraud or deceit) are nearly identical to the bankruptcy cause of action for nondischargeability under § 523(a)(2)(A). To prove a claim for intentional misrepresentation under Maryland law a plaintiff must show:
(1) that a representation made by a party was false; (2) that either its falsity was known to that party or the misrepresentation was made with such reckless indifference to truth to impute knowledge to him; (3) that the misrepresentation was made for the purpose of defrauding some other person; (4) that that person not only relied upon the misrepresentation but had the right to rely upon it with full belief of its truth, and that he would not have done the thing from which damage resulted if it had not been made; and (5) that that person suffered damage directly resulting from the misrepresentation.
Nat’l City Bank of Minneapolis v. Lapides (In re Transcolor Corp.), 296 B.R. 343, 372 (Bankr. D. Md. 2003) (citing B.N. v. K.K., 312 Md. 135, 149 (1988)). As a practical matter, there is no substantive difference between Maryland law and the test applicable under § 523(a)(2)(A) of the Bankruptcy Code. The damages awarded by the Circuit Court on the intentional misrepresentation count of the Third Amended Complaint are nondischargeable because every element needed to prove nondischargeability pursuant to § 523(a)(2)(A) – that is, (i) false
~ 28 ~
representation, (ii) knowledge that the representation was false, (iii) intent to deceive, (iv) justifiable reliance on the representation, and (v) proximate cause of damages – is required in order to sustain a claim for intentional misrepresentation under Maryland law.
Numerous courts have found that state court judgments for intentional misrepresentation are subject to collateral estoppel in bankruptcy court actions to determine nondischargeability. See, e.g., Stennis v. Davis (In re Davis), 486 B.R. 182, 191 (Bankr. N.D. Cal. 2013) (“[t]he state court judgment for intentional misrepresentation is sufficiently identical with the issues under § 523(a)(2)(A) to establish nondischargeability by collateral estoppel.”); Catercorp, Inc. v. Henicheck, Jr. (In re Henicheck), 186 B.R. 211, 217 (Bankr. E.D. Va. 1995) (holding that a state court judgment for intentional misrepresentation was nondischargeable pursuant to § 523(a)(2)(A) and that the bankruptcy court was precluded from relitigating the matter). In addition, Judge Derby of this court has also held that a debtor was estopped from relitigating a state court default judgment for intentional misrepresentation and that the factual finding for the state court judgment was sufficient for a finding of nondischargeability under § 523(a)(2)(A). Fleming v. McCoskey (In re McCoskey), 2006 WL 5217793, at *5 (Bankr. D. Md. Feb. 19, 2006).
Thus, the judgment of the Circuit Court finding David Reecher liable to Daisy Philip for intentional misrepresentation was sufficient to establish as a matter of federal law (without need for consideration of extrinsic evidence) that her claim for actual and punitive damages under Count 4 of the Third Amended Complaint is excepted from discharge and thus nondischargeable under § 523(a)(2)(A).
~ 29 ~
Civil Conspiracy
Under Maryland law, liability for civil conspiracy requires a finding of “a combination of two or more persons by an agreement or understanding to accomplish an unlawful act or to use unlawful means to accomplish an act not in itself illegal, with the further requirement that the act or the means employed must result in damages to the plaintiff.” Rosen v. Kore Holdings, Inc. (In re Rood), 459 B.R. 581, 603 (Bankr. D. Md. 2011) (citing Hoffman v. Stamper, 385 Md. 1, 24 (2005)). The underlying unlawful act or tort of the conspiracy for which David Reecher was found liable by the Circuit Court included intentional misrepresentation, which as discussed above is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). Numerous courts have found debts arising on account of a civil conspiracy to be nondischargeable where the underlying unlawful act was nondischargeable. See, e.g., Aetna Casualty and Surety Co. v. Markarian (In re Markarian), 228 B.R. 34, 46 (B.A.P. 1st Cir. 1998) (affirming bankruptcy court’s decision that all debts related to jury finding against the debtor for common-law fraud, statutory fraud and conspiracy were nondischargeable pursuant to §523(a)); Fed. Deposit Ins. Corp. v. Smith (In re Smith), 160 B.R. 549, 555 (N.D. Tex. 1993) (holding debt for conspiracy nondischargeable under § 523(a)(6) even though his conduct was not an independent, recognized tort but his actions were willful and malicious); MacDonald v. Buck (In re Buck), 75 B.R. 417, 420-422 (Bankr. N.D. Cal. 1987) (“a debtor who has made no false representation may nevertheless be bound by the fraud of another if a debtor is a knowing and active participant in the scheme to defraud”); Multiut Corp. v. Draiman (In re Draiman), 2006 WL 1876972, at *8 (Bankr. N.D. Ill. June 22, 2006) (finding a state court judgment for violations of the Uniform Deceptive Trade Practices Act, tortious interference with prospective business relationships and conspiracy to breach fiduciary duty and employment contract nondischargeable pursuant to 11 U.S.C.
~ 30 ~
§ 523(a)(6)); A&W Industries, Inc. v. Goldblatt (In re Goldblatt), 2002 Bankr. LEXIS 2011, at *25 (Bankr. N.D. Tex. Nov. 7, 2002) (finding debt nondischargeable under § 523(a)(6) where debtor conspired to commit fraud), aff’d, 2004 WL 594604 (N.D. Tex. Mar. 24, 2004), aff’d 111 Fed. Appx. 765 (5th Cir. 2004) (unpublished), cert. denied, 544 U.S. 975 (2005).
The reasoning in one unreported opinion is particularly persuasive here. The facts in Chandler v. Alexakis (In re Alexakis), 2012 Bankr. LEXIS 5795 (Bankr. S.D. Ohio, Dec. 13, 2012), were similar to those in the case at hand. In that case, two homeowners (the Chandlers) contacted the debtor’s company regarding foreclosure prevention. After a suit in state court following the foreclosure of the Chandlers’ home, the debtor was found liable for both fraud with willful and malicious conduct and civil conspiracy. The bankruptcy court found that the debtor’s “willing participation in a civil conspiracy that induced the Chandlers to part with money as well as the Debtor’s own fraudulent acts and statements that induced the Chandlers into a false sense of security that ultimately led to the loss of their home” merited the conclusion that the judgment debt owed to the Chandlers was excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(A). Id. at *26. Similarly, the Circuit Court found that David Reecher was a willing participant in a civil conspiracy to defraud Daisy Phillip.
Thus, the judgment of the Circuit Court finding David Reecher liable to Daisy Philip for civil conspiracy was sufficient to establish as a matter of federal law (without need for consideration of extrinsic evidence) that her claim for actual and punitive damages under Count 3 of the Third Amended Complaint is excepted from discharge and thus nondischargeable under § 523(a)(2)(A).
~ 31 ~
Concealment and Non-Disclosure
Like intentional misrepresentation, the elements of a claim for concealment and non-disclosure under Maryland law are nearly identical to the elements for nondischargeability under § 523(a)(2)(A). There is, however, one key difference. A plaintiff must show that “(1) the defendant owed a duty to the plaintiff to disclose a material fact; (2) the defendant failed to disclose that fact; (3) the defendant intended to defraud or deceive the plaintiff; (4) the plaintiff took action in justifiable reliance on the concealment; and (5) the plaintiff suffered damages as a result of the defendant’s concealment.” Simms v. Mut. Benefit Ins. Co., 137 Fed. Appx. 594, 600 (4th Cir. Md. 2005) (citing Green v. H & R Block, Inc., 355 Md. 488, 525 (1999)). The difference here lies in the omission of a material fact or representation as opposed to the making of a false representation as required under § 523(a)(2)(A).
While the parties directed the court to no opinion (reported or otherwise) that has held that § 523(a)(2)(A) applies to a claim under Maryland law (or the law of any other state) for concealment and non-disclosure, there is ample case law that a judgment for concealment and non-disclosure can be nondischargeable pursuant to § 523(a)(2)(A). See, e.g., Citibank (S.D.), N.A. v. Eashai (In re Eashai), 87 F.3d 1082, 1089 (9th Cir. 1996) (“bankruptcy courts have conceded that a debtor’s silence or omission regarding a material fact can constitute a false representation”); Wolstein v. Docteroff (In re Docteroff), 133 F.3d 210, 216 (3rd Cir. 1997) (“‘bankruptcy courts have overwhelmingly held that a debtor’s silence regarding material fact can constitute a false representation actionable under 523(a)(2)(A).’”) (quoting In re Horne, 823 F.2d 1285, 1288 (8th Cir. 1987)); Miller v. Cigna Ins. Co., 311 B.R. 57, 61 (D. Md. 2004) (“A debtor’s silence regarding [certain] information can constitute a false misrepresentation actionable under 11 U.S.C. § 523(a)(2)(A).”); Fleet Resources v. Zwick (In re Zwick), 1997 WL
~ 32 ~
278973, at *1 (10th Cir. May 27, 1997) (affirming order holding that a state court judgment for fraudulent concealment is nondischargeable pursuant to § 523(a)(2)(A)).
Thus, the judgment of the Circuit Court finding David Reecher liable to Daisy Philip for concealment and non-disclosure was sufficient to establish as a matter of federal law that her claim for actual and punitive damages under Count 8 of the Third Amended Complaint is excepted from discharge and thus nondischargeable under § 523(a)(2)(A).
Constructive Fraud
Constructive fraud does not require the making of a misrepresentation, but rather involves the breach of a duty. Also, it does not require a finding of actual reliance on the part of the plaintiff, but focuses instead on whether the breach in duty would tend to deceive others. Constructive fraud under Maryland law is the “‘breach of a legal or equitable duty which, irrespective of the moral guilt of the fraud feasor, the law declares fraudulent because of its tendency to deceive others, to violate public or private confidence, or to injure public interests.’” Canaj, Inc. v. Baker & Div. Phase III, 391 Md. 374, 421-22 (2006) (citing Md. Envtl. Trust v. Gaynor, 370 Md. 89, 97 (2002)). In the context of nondischargeability, however, exceptions to discharge for fraud require “positive fraud, or fraud in fact, involving moral turpitude or intentional wrong … and not implied fraud, or fraud in law, which may exist without the imputation of bad faith or immorality.” Neal v. Clark, 95. U.S. 704, 709 (1877) (interpreting § 17a(4) of the Bankruptcy Act of 1867, a predecessor of § 523(a)(4) of the Bankruptcy Code).
Thus, the judgment of the Circuit Court finding David Reecher liable to Daisy Philip for constructive fraud was not sufficient to establish as a matter of federal law that her claim for actual and punitive damages under Count 7 of the Third Amended Complaint is excepted from discharge and thus nondischargeable under § 523(a)(2)(A). Nothing in the extrinsic evidence
~ 33 ~
presented at trial would require this court to alter that conclusion or would otherwise make the damage claims against David Reecher for constructive fraud nondischargeable under § 523(a)(2)(A).
Conversion
Lastly, under Maryland law conversion has only two elements – namely, a physical act of ownership or dominion over a person’s property combined with the intent to exert such ownership or control over the property, regardless of whether they are doing so in good faith. Darcars Motors of Silver Spring, 379 Md. at 261-62 (citations omitted). Conversion does not require any finding of a misrepresentation or reliance on the part of the plaintiff. Kawaauhau v. Geiger 523 U.S. 57, 64 (1998) (“not every tort judgment for conversion is exempt from discharge”); Davis v. Aetna Acceptance Co., 293 U.S. 328, 332 (1934) (“a wilful and malicious injury does not follow as of course from every act of conversion … there may be a conversion which is innocent or technical, an unauthorized assumption of dominion”). In short, nothing in the law of conversion requires a finding of false representation, false pretense, or fraud as required by § 523(a)(2)(A).
Thus, the judgment of the Circuit Court finding David Reecher liable to Daisy Philip for conversion was not sufficient to establish as a matter of federal law that her claim for actual and punitive damages under Count 9 of the Third Amended Complaint is excepted from discharge and thus nondischargeable under § 523(a)(2)(A). Nothing in the extrinsic evidence presented at trial would require this court to alter that conclusion or would otherwise make the damage claims against David Reecher for conversion nondischargeable under § 523(a)(2)(A).
~ 34 ~
Conclusion
For these reasons, the judgment entered by the Circuit Court against David Reecher on the Third Amended Complaint is nondischargeable under 11 U.S.C. § 523(a)(2)(A) to the extent it awarded compensatory damages in the amount of $150,000, as well as punitive damages in the amount of $500,000 on Count 4 for intentional misrepresentation, $500,000 on Count 3 for civil conspiracy, and $500,000 on Count 8 for concealment and non-disclosure. The punitive damages awarded on the remaining two counts, however, are not covered by the exception in § 523(a)(2)(A) and are subject to the discharge granted by this court to David Reecher. Accordingly, an order will be entered consistent with this memorandum opinion that grants in part and denies in part the relief sought in Daisy Phillip’s complaint filed in this adversary proceeding.
cc: All Parties
All Counsel
~ END OF OPINION ~
This case is critical for married debtors who are have joint debt that results in liens against their home. This ruling holds that a debtor using the homestead exemption can only avoid the lien on his or her share of entireties property which means a lien remains on the non-filing debtors share. This means that a husband and wife with a lien on their home can only avoid liens resulting from joint debts if both parties file. It is not sufficient for one debtor to file and avoid the lien.
IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND at Baltimore
In re: *
Leonard Paul Raskin * Case No. 11-27484-RAG Chapter 7 Debtor *
* * * * * * *
Leonard Paul Raskin *
Movant *
v. *
Susquehanna Bank *
Respondent *
* * * * * * * * * * * * *
MEMORANDUM OPINION IN SUPPORT OF ORDER AVOIDING JOINT LIEN AS TO ONLY THE DEBTOR’S AGGREGATE INTEREST IN REAL PROPERTY OWNED BY THE ENTIRETIES
I. Introduction
An apparent collision between the intent of the relatively new Maryland Homestead
Exemption statute and the venerable common law form of ownership known as tenants by the
Date signed February 12, 2014
Entered: February 12, 2014
2
entireties supplies the dramatic tension that fuels this case‟s plot. The tough question presented
is whether Leonard Raskin, a single-filing debtor, may use the combined force of 11 U.S.C. §
522(f) and § 11-504(f) of the Annotated Code of Maryland, Courts and Judicial Proceedings
Article (Homestead Exemption), to avoid completely Susquehanna Bank‟s judgment liens
against real estate owned as tenants by the entireties by him and his wife Kathy Raskin (who is
not in bankruptcy) because the lien „impairs‟ Mr. Raskin‟s homestead exemption.1 Because
Kathy Raskin‟s undivided half-interest in the real estate is not property of the estate, settled
common law would generally prevent Mr. Raskin from unilaterally impairing Susquehanna
Bank‟s joint lien rights. The recent case of In re Alvarez, 733 F.3d 136 (4th Cir. 2013) reaffirms
that principle with respect to Section 506(a) of the Code. Yet, the language of the Homestead
Exemption strongly suggests that the Maryland legislature has created an exception to the rule.
Hence, does Alvarez‟s holding, or like principles expressed in even older decisions, negate Mr.
Raskin‟s strategy and insulate Susquehanna Bank‟s lien rights in this context or should the
Homestead Exemption be enforced in accordance with its plain meaning? The Court concludes
that the Maryland legislature‟s intent must be honored, notwithstanding what the common law
might require in another setting, albeit to a lesser extent than that prayed for by Mr. Raskin.
II. Procedural History
On August 26, 2011 (Petition Date), Mr. Raskin filed his Voluntary Petition for Relief
under Chapter 7 of the Code. On February 22, 2012, he filed a Motion to Avoid Judicial Lien
Impairing Exemption Pursuant to 11 U.S.C. §522(f) (Motion to Avoid Lien) (Dkt. No. 71).
Susquehanna Bank (Susquehanna) filed its Opposition to Motion to Avoid Judicial Lien
Impairing Exemption Pursuant to 11 U.S.C. §522(f) (Dkt. No. 72) on March 26, 2012. The 1 Unless otherwise noted, all subsequent federal statutory citations are to the Bankruptcy Code (Code), found at Title 11 of the United States Code.
3
Debtor filed a Reply Memorandum in Support of Motion to Avoid Judicial Lien Impairing
Exemption Pursuant to 11 U.S.C. §522(f) (Dkt. No. 73) on April 2, 2012 and an evidentiary
hearing was held on April 13, 2012.
The presentation of evidence took no more than ten minutes. It consisted only of the
admission into evidence of Mr. Raskin‟s Exhibits 1 through 9 without objection, his expert
appraiser giving an opinion as to the value ($500,000) of the subject real estate and then
Susquehanna‟s fleeting cross-examination that pointed out the appraiser had not “valued” Mr.
Raskin‟s undivided entireties interest but had only appraised the land. The legal debate that
preceded the submission of evidence consumed the lion‟s share of the time.
When the words were exhausted, the Court requested additional memoranda to address
the impact, if any, of the decisional law on a married, single-filing debtor‟s effort to avoid a joint
lien against property owned by the entireties and the hearing was continued until June 15, 2012
for further argument.2 In quick succession, the parties filed the Debtor‟s Post-Hearing
Memorandum in Support of Motion to Avoid Judicial Lien Impairing Exemption Pursuant to 11
U.S.C. §522(f) (Dkt. No. 79), Susquehanna Bank‟s Post Trial Memorandum in Further Support
of its Objection to Debtor‟s Motion to Avoid Judicial Lien Impairing Exemption Pursuant to 11
U.S.C. §522(f) (Dkt. No. 80) and, finally, Debtor‟s Post-Hearing Reply Memorandum in Support
of Motion to Avoid Judicial Lien Impairing Exemption Pursuant to 11 U.S.C. §522(f) (Dkt. No.
81). After the June 15th hearing the matter was taken under advisement.3
2 The Court noted the conflict between In re Hunter, 284 B.R. 806 (Bankr. E.D. Va. 2002) and In re Strausbough, 426 B.R. 243 (Bankr. E.D. Mich. 2010) with respect to the application of Section 506(a) in a similar factual context.
3 The Court has already apologized to the parties for the long delay between the June 15th hearing and the issuance of this Opinion, but it bears repeating. The delay was unavoidable due to serious circumstances beyond the Court‟s control.
4
III. Factual Background
The uncontested facts are simple. On March 25, 2011, Susquehanna commenced a state
court confession of judgment proceeding (State Court Case) against Mr. Raskin, Mrs. Raskin and
others. Susquehanna‟s claims were based upon the alleged guaranties by the Raskins of
indebtedness due from their co-defendants. On April 8, 2011, judgments by confession were
entered against the Raskins. These judgments resulted in valid, joint liens (Susquehanna Liens)
against 4010 Eland Road, Phoenix, Maryland (Eland Road), the Raskins‟ principal residence.4
Mr. and Mrs. Raskin own Eland Road as tenants by entireties and it was encumbered by the
Susquehanna Liens as of the Petition Date.
While Mrs. Raskin apparently continues to contest the validity of the judgments against
her, Mr. Raskin has thrown in the towel in the State Court Case in favor of his hope that the
Motion to Avoid Lien will net comprehensive relief for both he and his wife in this Court. Their
divergent paths were noted at Paragraph 13 of the Debtor‟s Objection to Susquehanna Bank‟s
Motion to Terminate the Automatic Stay in Order to Prosecute State Court Proceedings (Dkt.
No. 55) which states, “[t]he Debtor admits that Mrs. Raskin currently seeks to have the
Confessed Judgments entered against her vacated but denies that the Debtor is seeking to pursue
further litigation with the Bank.” On Susquehanna‟s side of the equation, it stated in the
preamble to the Motion to Terminate that it was filed to obtain an order from this Court,
“terminating the automatic stay…in order to prosecute the [judgments in the State Court
Case]…and …deferring the Debtor‟s discharge until such prosecution has been concluded.”5
4 See Susquehanna‟s Motion to Terminate the Automatic Stay in Order to Prosecute State Court Proceedings (Motion to Terminate) (Dkt. No. 50). Susquehanna did not file a proof of claim in this case but based upon the Motion to Terminate, the total judgments entered against the Debtor appear to be in excess of $4 million while the Susquehanna Liens total approximately $1,334,310.91.
5 Susquehanna relied upon old law. In bygone days, a party owed a joint debt by husband and wife often had to race into the bankruptcy court to secure the deferral of the entry of a married, single-filing debtor‟s discharge and then
5
The Motion to Terminate was first heard on December 2, 2011 and that hearing was
continued to January 13, 2012 for final argument and an oral ruling. On that day, the Motion to
Terminate was denied with this Court holding that there would be no practical purpose – and
hence no „cause‟ – to lifting the stay in favor of Susquehanna as (1) Mr. Raskin was not
contesting Susquehanna‟s right to a judgment against him under Maryland law and therefore
there was nothing meaningful for the state court to do and (2) Mr. Raskin‟s exercise of his
homestead exemption would have to, at a minimum, trump Susquehanna‟s right to enforce its
judgment against Mr. Raskin‟s interest in Eland Road.6
Eland Road is encumbered by two senior deeds of trust held by Wells Fargo Home
Mortgage in the approximate amounts of $450,692.00 and $32,813.00. Mr. Raskin has claimed a
homestead exemption of $16,495.00 on the basis of his interest in Eland Road. He argues that
when the formula set forth in Section 522(f)(2)(A) is applied, the Susquehanna Liens impair his
exemption and must be avoided. Moreover, he also asserts that the statute‟s benefit can only be
fully realized in this instance if it is interpreted to nullify the joint Susquehanna Liens in their
entirety, notwithstanding (a) the fact that his wife‟s undivided interest is not subject to this
Court‟s jurisdiction and (b) the protection that would normally be afforded to the Susquehanna
Liens by otherwise applicable law. Susquehanna, on the other hand, takes the position that the obtain a joint judgment in the state court to preserve its rights against property held by the entireties. This was so because a single-filing spouse could, if both clever and lucky enough, obtain a discharge first and in that way, forever change a joint debt into an individual obligation of the non-filing spouse. Phillips v. Krakower, 46 F.2d 764, 765 (4th Cir. 1931) condemned this strategy as “legal fraud” reasoning that an individual spouse should not be able to use bankruptcy to achieve a result that could not be achieved outside of bankruptcy – the nullification of a joint debt and the insulation of entireties property – if the creditor was savvy enough to foresee the possible consequences. See also Chippenham Hosp., Inc. v. Bondurant, 716 F.2d 1057, 1058-59 (4th Cir. 1983); Davidson v. Virginia Nat’l Bank, 493 F.2d 1220, 1222 (4th Cir. 1974). Sumy v. Schlossberg, 777 F.2d 921 (4th Cir. 1985) held that (1) a married single-filing debtor could not exempt entireties property from the claims of joint creditors and (2) the debtor‟s trustee could administer such property in a single spouse‟s bankruptcy for the benefit of those joint creditors, thus lessening the burden on subsequent joint creditors who find themselves in a position similar to Mrs. Krakower.
6 Admittedly, the second part of the ruling was made without the benefit of an in-depth analysis of the arguments pro and con.
6
Homestead Exemption cannot be used to negatively affect its lien at all but, if the statute is
applied in this context, it must be applied as conservatively as possible in light of the principles
embodied within the vast mountain of case law that interprets the entireties estate and the
inevitable impact of those principles upon Mr. Raskin‟s strategy.7
IV. Jurisdiction and Venue
The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§1334,
157(b)(2)(B) and (K) and Local Rule 402 of the United States District Court for the District of
Maryland. Venue is likewise proper under 28 U.S.C. §1409(a).
V. Analysis
Under Section 522(f)(1), “the debtor may avoid the fixing of a [judicial] lien on an
interest of the debtor in property to the extent that such lien impairs an exemption…”. Section
522(f)(2)(A) supplies the mandatory arithmetic for determining impairment:
a lien shall be considered to impair an exemption to the extent that the sum of – (i) the lien; (ii) all other liens on the property; and (iii) the amount of the exemption that the debtor could claim if there were no other liens on the property; exceeds the value that the debtor‟s interest in the property would have in the absence of any liens.
7 Maryland‟s Court of Appeals has described the entireties estate as follows:
Tenants by the entireties are, in the contemplation of the common law, which is the law of this state but one person, and hence they take, not by moieties, but the entirety. They are each seized of the entirety and the survivor takes the whole. The nature of this estate forbids and prevents the sale or disposal of it, or any part of it, by the husband or wife without the assent of both… . The husband cannot convey, incumber (sic), or at all prejudice such estate to any greater extent than if it rested in the wife exclusively in her own right. He has no estate as he can dispose of to the prejudice of the wife‟s estate. The unity of husband and wife as one person, and the ownership of the estate by that person prevents the disposition of it other than jointly.
Ades v. Caplan, 132 Md. 66, 103 A. 94, 95 (Md. 1918) (internal citations omitted). The Court in In re Beihl, 197 F. 870, 873 (E.D. Pa. 1912), after listing a handful of the attributes of the entireties estate wrote, “[a]nd this catalogue of difficulties could easily be extended, if it were necessary to exhibit more plainly the peculiar structure that has been built on the foundation of pure fiction.”
7
A debtor must have an allowable exemption available that applies to the property subject
to the lien in order to realize the benefit of the statute. Section 522(b) allows a debtor to choose
between federal or state exemptions, “unless the State law that is applicable to the debtor…
specifically does not so authorize.” 11 U.S.C. § 522(b)(2). Maryland has opted out of the
federal exemptions, see Md. Code, Cts. & Jud. Proc. § 11-504(g), and hence Mr. Raskin is
limited to selecting from only the Maryland exemptions. These include the Homestead
Exemption which provides in relevant part that, “in any [bankruptcy proceeding] any individual
debtor …may exempt the debtor‟s aggregate interest in…[o]wner-occupied residential real
property…”. Md. Code, Cts. & Jud. Proc. § 11-504(f)(1)(i). Companion subsection 11-
504(f)(1)(ii) limits the total value of the exemption to no more than the adjusted total exemption
allowed under Section 522(d)(1).8 The ability to use the Homestead Exemption is also limited
by venue, time and familial relationships. First, it may only be used in bankruptcy cases.
Second, subsection (f)(2) states that an individual may not claim the exemption if certain family
members, including a spouse, have claimed the exemption as to the same property within eight
years prior to the bankruptcy filing.9 And third, subsection 11-504(f)(3) states that the
exemption, “may not be claimed by both a husband and a wife in the same bankruptcy
proceeding.” Md. Code, Cts. & Jud. Proc. § 11-504(f)(3). It is undisputed that none of the limits
or exclusions apply to Mr. Raskin and he is entitled to use the Homestead Exemption.
Applying subsection 522(f)(2)(A), and the Homestead Exemption to the facts presented
yields this result: 8 Section 522(d)(1) is the federal „residence and burial plot‟ exemption, a droll combination to be sure. Its monetary ceiling can vary in accordance with Section 104(a). At the time this case was filed, that amount was $21,625 and the amount selected by Mr. Raskin ($16,495) is enough to consume the available equity in Eland Road.
9 Although unstated in the Homestead Exemption, the eight year bar must have been selected to track the period a debtor must normally wait before receiving a subsequent discharge. See Section 727(a)(8).
8
Susquehanna Liens $1,334,310.91
Wells Fargo Mortgage I $450,692.00
Wells Fargo Mortgage II $32,813.00
Allowable Homestead Exemption10 + $21,625.00
Total $1,839,440.91
Debtor‟s Interest11 – $500,000.00
Amount by which sum of all liens and Debtor‟s exemption exceeds the value of the Debtor‟s interest in the absence of any liens
$1,339,440.91
If Mr. Raskin was an unmarried debtor and everything else was equal, then the foregoing
calculation would be the beginning and end of the inquiry. The Court could easily find that the
Susquehanna Liens impair his exemption and enter an appropriate order. Unfortunately for Mr.
Raskin, in this instance his marriage complicates things. Indeed, Susquehanna has labored
mightily to establish that his marriage, and the fact that Mrs. Raskin is not in bankruptcy,
disqualifies him from utilizing the Homestead Exemption in any way that negatively impacts its
lien rights. Susquehanna argues that:
a. The Susquehanna Liens do not impair Mr. Raskin‟s homestead exemption because the liens do not attach to the Debtor‟s undivided interest in Eland Road but instead attach to the undivided whole of the tenants by the entirety estate;
b. As Mrs. Raskin is not in bankruptcy, and her interest in Eland Road is not subject to this Court‟s jurisdiction, Mr. Raskin cannot utilize the power of Section 522(f) to nullify even a sliver of the joint Susquehanna Liens;
c. Allowing Mr. Raskin to use the Homestead Exemption to nullify the Susquehanna Liens would amount to condoning the “legal 10 This is the amount Mr. Raskin could exempt, per Section 522(f)(2)(A).
11 For purposes of the calculation, the Court has assigned 100% of Eland Road‟s uncontested fair market value to Mr. Raskin‟s undivided interest. If his interest were assigned a value of $250,000, the Susquehanna Liens would still impair his exemption.
9
fraud” condemned by a venerable line of cases that begins with Philips; and
d. The precise language of the Homestead Exemption statute, viewed against the background of settled entireties law, does not permit the avoidance of the Susquehanna Liens in their entirety.
The first contention relies upon language included in In re Ford, 3 B.R. 559, 570-71
(Bankr. D. Md. 1980), aff’d sub nom., Greenblatt v. Ford, 638 F.2d 14 (4th Cir. 1981). The
argument is that the Susquehanna Liens do not impair Mr. Raskin‟s exemption because they
attached to only the “entire, combined, and unsevered interests, as a unity, of,” both Mr. and
Mrs. Raskin in Eland Road as opposed to his individual undivided interest in the whole. Id. at
576. Yet Ford also acknowledges that upon the filing of bankruptcy, “what passed to the estate
and became an asset of the estate was [the debtor‟s] individual undivided interest as a tenant by
the entirety.” Ford, 3 B.R. at 575; see also Section 541(a)(1). Therefore, Mr. Raskin‟s undivided
interest in Eland Road is within this Court‟s jurisdiction. Matter of Paeplow, 972 F.2d 730, 736
(7th Cir. 1992); Sumy, 777 F.2d at 923-24; Bondurant, 716 F.2d at 1058.
Viewed in this light, Susquehanna‟s argument that its liens do not attach to Mr. Raskin‟s
individual interest splits the hair too finely. Notwithstanding the language in Ford that
Susquehanna relies upon, and the often confounding metaphysics of an entireties estate, Sumy
long ago acknowledged the possibility that the passage to the estate of an individual debtor‟s
undivided interest in entireties property could result in the avoidance of a joint lien secured by
that undivided interest if the lien impairs an exemption. The Court stated, “[i]f the debtor‟s
interest in entireties property is exempt under § 522(b)(2)(B)12, then most pre-petition judicial
liens on that property would impair that exemption and be avoidable at the debtor‟s option under
12 The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 moved what had been Section 522(b)(2)(B) to the present Section 522(b)(3)(B) without changing the language.
10
§ 522(f)(1).” Sumy, 777 F.2d at 930. Admittedly, the Sumy Court was marshalling policy
reasons as to why neither Mr. Sumy‟s undivided interest, nor the entire entireties estate, was
exempt from the claims of joint creditors notwithstanding the erroneous dicta included in Ford.13
But the Court‟s observation makes it clear that a single-filing married debtor could use Section
522(f)(1) to avoid a lien interest lodged against an undivided entireties interest if a proper
exemption was available.14 Mr. Raskin does not rely upon Section 522(b)(3)(B), or any theory
of entireties property, as the source of his exemption rights. He relies upon the Homestead
Exemption, a recent enactment of the Maryland legislature. The legislature can plainly adjust the
common law and that power includes the adjustment of property rights. Paeplow, 972 F.2d at
736-37 (recently enacted Indiana exemption statute alters the historic treatment of property
owned by the entireties); In re Continental Midway Corp., 185 F.Supp. 867, 870 (D. Md. 1960);
Pope v. State, 284 Md. 309, 341, 396 A.2d 1054, 1073 (Md. 1979); County Council for
Montgomery County v. Investors Funding Corp., 270 Md. 430, 312 A.2d 225 (Md. 1973); Art. 5
of the Md. Declaration of Rights. Indeed, it appears that is precisely what the Maryland
legislature intended to do in this instance by enacting the Homestead Exemption which, once
operative, necessarily must be combined with the power of Section 522(f) when an entitled
debtor makes the choice to do so.15
13 The Ford opinion incorrectly stated that then Section 522(b)(2)(B) operated to exempt entireties property from even the claims of joint creditors. Ford, 3 B.R. at 576. The court failed to recognize that the exemption applies only to the extent that the interest is “exempt from process under applicable nonbankruptcy law.” Sumy corrected this misconstruction. See, footnote, 5, supra.
14 It is equally certain that trustees have the power to unilaterally sell entireties property – something a spouse could not do outside of bankruptcy – on the basis of the single-filing spouse‟s undivided interest whether the non-filing spouse consents or not. See Section 363(h). 15 Even if Alvarez‟s holding, discussed infra, could be taken as an affirmation of Ford‟s view that the joint lien attaches to the spouses‟ „whole‟ entireties interest, and not that of only one spouse, the holding cannot be interpreted to undercut the legislature‟s prerogative to change the law, if that is what the legislature intended. This Court believes that it was.
11
Sharpening its aim, Susquehanna nevertheless contends, relying upon In re Hunter, 284
B.R. 806 (Bankr. E.D. Va. 2002), that in order to avoid the Susquehanna Liens, this Court must
also have jurisdiction over Mrs. Raskin‟s undivided interest.16 Anticipated in Sumy, this
argument has been raised and rejected in prior cases decided under Section 522(f). See In re
Lashley, 206 B.R. 950 (Bankr. E.D. Mo. 1997) (Because spouses each own the whole of the
entireties interest, the Court has jurisdiction over the entireties estate due to the single spouse‟s
filing and may avoid a joint judicial lien in its entirety, leaving only an unsecured claim against
the non-filing spouse); In re Janitor, No. 10-22594, 2011 WL 7109363 (Bankr. W.D. Pa. Jan. 4,
2011) (In the case of a single-filing spouse, the debtor‟s exemption of an interest in property
owned by the entireties, and lien avoidance due to impairment under Section 522(f), does not
impermissibly sever the tenant‟s by the entirety estate, but the joint lien will only be avoided as
to debtor‟s interest and not as to non-filing spouse‟s survivorship interest); In re Sisk, No. 11-
32350, 2011 WL 6153277 (Bankr. W.D. N.C. Dec. 12, 2011) (avoiding a joint lien as to only the
single-filing debtor‟s interest in the entireties real estate because the debtor‟s spouse was not in
bankruptcy); see also In re Staples, No. 00-10147C-7G, 2000 WL 33673800 (Bankr. M.D. N.C.
June 13, 2000) (avoiding a judicial lien under Section 522(f) on tenants by the entirety property
where only one spouse was in bankruptcy and deciding that the lien should be avoided as to only
the debtor‟s interest in the real estate without addressing whether the non-filing spouse‟s interest
need be before the court).17
16 Alvarez had not been decided by the time of the final argument in this case. Nevertheless, the Fourth Circuit‟s ruling affirms Hunter.
17 Lashley, Sisk and Staples each involved the application of state homestead exemptions. Janitor applied the federal exemptions allowed under Sections 522(d)(1) and (5). In the wake of Alvarez, the quantum of the underlying interpretation of entireties law by Lashley and Janitor would not be accepted as sound reasoning in this Circuit. Lashley interprets Missouri entireties law and holds that because the debtor owns “the whole of the [entireties] interest,” avoidance of the lien as to the debtor‟s interest “avoids the lien on the whole of the property.” 206 B.R. at 953. Janitor goes to great lengths to distinguish Hunter’s view of Pennsylvania entireties law and thus is in direct
12
These cases are grounded upon (1) the premise that the debtor‟s interest in entireties
property becomes property of the estate and (2) Section 522(f)‟s unambiguous right to avoid a
lien that encumbers “an interest of the debtor in property” if an exemption is available and is
impaired by the lien. The available exemption in this case ─ the Homestead Exemption ─ falls
squarely in Mr. Raskin‟s favor. The statute‟s plain language permits him to exempt his
“aggregate interest” in his “owner occupied residential real estate” without conditioning the right
upon the form of ownership. Section 522(f)(1) allows him to “avoid the fixing of a lien” on his
“interest” in property to the extent the lien impairs his exemption. These benefits are not made
dependent upon a joint filing by a married couple. To the contrary, the Homestead Exemption
takes the opposite approach by limiting the exemption‟s use to only one spouse, especially if
there is a jointly-filed bankruptcy. And that peculiar limitation extends for eight years after the
exemption is used. Moreover, the fact that the exemption is only available in bankruptcy
proceedings (as opposed to a state court execution or foreclosure case) is even stronger evidence
that the legislature knew exactly the impact it sought to achieve by enacting the statute.
The exercise of an exemption grants two practical benefits to a debtor. One is the ability
to keep the exempt property and the other is the right to shield it from future collection efforts,
including those that could have been based upon pre-existing liens that would pass through
bankruptcy unaffected but for the Code‟s avoidance powers. See Sections 522(c) and (k).
Section 522(f) embodies one of the many avoidance powers that operate hand in hand with
conflict with Alvarez. Nevertheless, in this context, this Court agrees with the cited cases to the extent they provide support for the proposition that the undivided entireties interest of a married, single-filing debtor comes into the estate and the legislature may create exemptions that, when coupled with Section 522(f), are sufficient to compel the avoidance of a lien against that interest. In re Marino, 27 B.R. 282 (Bankr. N.D. Ind. 1983) is the only case uncovered in which a debtor was denied the ability to avoid any portion of a joint lien against entireties property under Section 522(f) and that was largely based upon an interpretation of the Indiana exemption statute. However, the Seventh Circuit later rejected Marino‟s interpretation of the statute. Paeplow, 972 F.2d at 736. Marino is, therefore, largely discredited, although not explicitly overturned.
13
exemption rights. With that symmetry in mind, is it reasonable to conclude that the Maryland
legislature would enact the state‟s very first homestead exemption statute18, limit its application
to only bankruptcy cases, expressly indicate that one spouse is entitled to use the exemption for
„owner occupied real estate‟, continue that restriction for eight years and then silently exclude
from its reach the undivided entireties interest of the spouse entitled to exercise the exemption
right? Or intend, without expressly saying so, that it cannot be used by that spouse in
conjunction with Section 522(f). This Court does not think so. In Maryland, spouses
presumptively take title to real estate as tenants by the entireties. Young v. Cockman, 182 Md.
246, 251, 34 A.2d 428, 431 (Md. 1943) (“A conveyance to husband and wife will ordinarily
create a tenancy by entireties… .”); see also Md. Code, Real Prop. §2-117. The Court does not
have statistics to prove the point but decades of experience teach that in Maryland, tenancy by
the entireties is the most common form of spousal real estate ownership. The Court will assume
that the legislature understood this too and that if it had wanted to exclude marital real estate
owned by the entireties from the Homestead Exemption, or attempt to bar individual spouses
from using Section 522(f) (assuming it could somehow override the Supremacy Clause), it could
have easily expressed that intent in a manner that would eliminate guesswork. The fact that
neither approach was taken is strong evidence in favor of Mr. Raskin‟s position.19
In part because there appear to be no meaningful Section 522(f) cases that support its
position, Susquehanna instead turns to cases which address Section 506, especially Hunter,
whose reasoning and holding were adopted in Alvarez. At this stage, Alvarez is the opinion that
18 It appears that Maryland was the only state of the fifty that did not have a homestead exemption statute.
19 Insofar as the facts at bar are concerned, the Homestead Exemption‟s intent is unambiguous. Even so, because of the unexplained change in the common law, and the apparent discrimination against jointly filing married couples (or even, it seems, separately filing married individuals due to the „single use in eight years‟ proscription) discussed infra, the Court attempted to uncover any helpful legislative history. None was found.
14
must be addressed. Were it not for the Homestead Exemption, and if all else were equal,
Alvarez, and the common law it is built upon, would likely mandate victory for Susquehanna.
Indeed, Alvarez’s holding, “that the bankruptcy court correctly determined that it lacked
authority to strip off the debtor‟s valueless lien because only the debtor‟s interest in the estate,
rather than the complete entireties estate, was before the bankruptcy court…” 733 F.3d at 138,
seems to require that result. However, the Alvarez decision is distinguishable.
Alvarez interprets Section 506(a)(1) (which divides a lienholder‟s claim into secured and
unsecured depending upon the value of the estate‟s interest in the property) and evaluates Mr.
Alvarez‟s assertions within the context of deeply rooted entireties jurisprudence. Because Mr.
Alvarez‟s wife did not file bankruptcy and her undivided interest was not before the bankruptcy
court, the Fourth Circuit decided that the joint lien could not be stripped from entireties real
estate. Relying in part upon Ford’s analysis, the Court reasoned as follows:
[B]ecause a bankruptcy trustee obtains only custody of a debtor‟s interest in entireties property, the filing of an individual bankruptcy petition and the creation of an individual bankruptcy estate do not sever the unities of a tenancy by the entirety. Therefore, under our precedent and in accordance with principles of Maryland law, only Mr. Alvarez‟s interest in the entireties property, and not the whole of the entireties property owned by the marital unit, became part of his bankruptcy estate.
Id. at 141 (internal citations omitted).
However, the Court also recognized that the legislature (in that instance Congress) can
alter the playing field. Mr. Alvarez argued that since Section 363(h) permits a trustee to sell
entireties property with neither the consent nor presence of a non-debtor spouse, the entire
entireties estate must be subject to bankruptcy court administration. In response the Court
explained, “[t]his provision represents a narrow legislative exception to the general common law
15
rule prohibiting any unilateral severance of an entireties estate.” Id. at 142.20 And that
distinction – the presence of a permissible exercise of legislative power – provides the difference
here: to the extent the common law would otherwise bar Mr. Raskin from unilaterally avoiding
the Susquehanna Liens, the Maryland legislature has decreed otherwise by enacting the
Homestead Exemption, notwithstanding the resulting awkwardness and somewhat mystifying
potential for collateral damage to joint filing married couples discussed below. Suffice to say
here that the legislature‟s exercise of its prerogative also negates the argument that this is a case
of “legal fraud”.
In Phillips, Mrs. Krakower held a $5,500 note signed by the debtor, Mr. Phillips, and his
wife, who together owned a parcel of Baltimore real estate by the entireties. When Mr. Phillips
was adjudged bankrupt, Mrs. Krakower sought to delay the entry of his discharge in order to
secure a state court judgment and lien against the land. In affirming the bankruptcy court‟s
deferral of the discharge, the Fourth Circuit noted that Mr. Phillips‟ undivided interest did not
become a part of his bankruptcy estate and therefore was not subject to administration by the
trustee.21 The Court also recognized the settled state law principle that while individual creditors
have no claim against, and may not execute upon, entireties assets, joint creditors, such as Mrs.
Krakower, may do so in the ordinary course. Then the Court explained why deferral of
discharge was the correct result:
The discharge of Phillips in bankruptcy not only will prevent judgment being obtained against him on the note, but will prevent also, during his lifetime, the property held by entireties being subjected to the satisfaction of any judgment which may be 20 Long ago, the Maryland Court of Appeals in Ades deferred to Congressional intent and accepted without blinking the avoidance by operation of bankruptcy law of a joint lien on the individual interest in entireties property of a sole filing spouse. Ades, 103 A. at 95 (“[U]pon the filing of the [bankruptcy] petition within the period mentioned above the lien of the judgment, so far at least as the right of the husband in the estate by entirety was concerned, was struck down by the provisions of the federal act… .”).
21 That was the law at that time.
16
obtained against his wife. And so, although the bankruptcy proceeding has brought no interest in the estate by entireties into court for the benefit of the creditors of Phillips, his discharge in bankruptcy will remove that entire property beyond the reach of creditors entitled to subject it to their claims.
Phillips, 46 F.2d at 764.
The Court observed that if Mr. Phillips‟ sleight of hand was allowed it would amount to
“legal fraud” and therefore, the bankruptcy court‟s protection of Ms. Krakower‟s joint debt and
state law enforcement rights was affirmed. Id. The use of equity to achieve justice in Phillips is
beyond reproach. However, Mr. Phillips raised no independent state law that mandated a
different result. Nor was any mentioned in any of the subsequent „legal fraud‟ decisions.
Because that is precisely what the Homestead Exemption does, it cannot be „legal fraud‟ to allow
Mr. Raskin to exercise his exemption rights. See Section 522(b)(2); Eaton v. Boston Safe
Deposit & Trust Co., 240 U.S. 427, 429 (1916) (“The policy of the bankruptcy act is to respect
state exemptions… .”); Herbert v. Fliegel, 813 F.2d 999, 1002 (9th Cir. 1987) (“Whatever the
policy considerations, the [exemption] issue is still governed by the Oregon statute.”); Paeplow,
972 F.2d at 736-37; In re Donaldson, 156 B.R. 51, 53 (Bankr. N.D. Ca. 1993).
Nevertheless, the reach of the Homestead Exemption can extend no farther than what is
permitted by its language. Hence, at this juncture the Court must part ways with Mr. Raskin‟s
reasoning in favor of Susquehanna‟s. This is so because the express language of the Homestead
Exemption cannot be interpreted to permit the complete avoidance of the Susquehanna Liens.
While this result is ungainly, it is required by basic principles of statutory construction.
Caminetti v. U.S., 242 U.S. 470, 485 (1917) (If the language of a statute is plain, and does not
lead to an absurd or impracticable result, it is the sole evidence of legislative intent and the sole
function of the court is to enforce it). Subsection (f)(1)(i) of the Homestead Exemption grants
17
the exemption to only “any individual debtor” in a bankruptcy proceeding and applies it to only
“the debtor’s aggregate interest in…[o]wner-occupied residential real property.” A debtor may
not claim the exemption if the debtor‟s spouse has successfully claimed the exemption within the
past eight years. Md. Code, Cts. & Jud. Proc. § 11-504(f)(2)(i). And the exemption may not be
claimed by both spouses in a joint bankruptcy proceeding. Md. Code, Cts. & Jud. Proc. § 11-
504(f)(3). Applying these restrictions at face value, the conclusion is inescapable that only one
spouse can use the Homestead Exemption and, in the case of property owned as tenants by the
entireties, that spouse is limited to avoiding a joint lien only to the extent that it attaches to his or
her aggregate interest in the property and impairs his or her exemption. While this result crashes
like a wave into the principles articulated in Ford, reviewed in Sumy and reaffirmed in Alvarez,
the Court cannot see any other way to make sense of – and rationally apply – the language. The
legislature only granted the right to use the exemption to a lone spouse. Without an explicit bar
against using the exemption for an entireties interest, it must be assumed that the legislature
understood fundamental aspects of Maryland real property law – chief among them the way
property is normally owned by husband and wife – when the statute was enacted and,
nevertheless, chose this awkward, but not quite absurd, result. Stated another way, a worse
outcome would be to rob Mr. Raskin of his express statutory right by grafting on a judge-made
exception that excludes entireties interests from an exemption right that the legislature has
expressly granted.22
22 There is a full body of case law that permits a court to avoid an “absurd result” when interpreting a statute. Caminetti, 242 U.S. at 490; Kaczorowski v. Mayor & City Council of Baltimore, 309 Md. 505, 513-14, 525 A.2d 628, 632 (Md. 1987). However, that is a dangerous tool. In any event, the avoidance of the lien against only Mr. Raskin‟s interest is not an absurd outcome, as strange as it seems. The result ultimately means that the Susquehanna Liens cannot be involuntarily enforced against Eland Road unless Mrs. Raskin survives Mr. Raskin and his undivided interest passes to her. Ades, 103 A. at 95. And that would have to occur before the passage of eight years and a bankruptcy filing by Mrs. Raskin to complete the unfinished business. The Court concludes that it would be absurd to instead adopt Susquehanna‟s suggested limit – that the exemption could only be applied to carve out a portion of the proceeds for Mr. Raskin upon liquidation of Eland Road – as was suggested during oral argument.
18
However, because no two spouses can ever utilize the exemption at the same time (or by
one for eight years after its use by the other), and in light of the common law principles of unity
that generally govern the entireties estate, it appears the exemption can never be used in the same
time frame to completely avoid a joint lien against property owned by the entireties.23 That
outcome frankly does not make sense but, in this context, that observation is irrelevant. This is
so because on these facts, Mr. Raskin‟s contention – that the statute cannot be interpreted to
exclude from its reach entireties property and associated joint liens – at best raises only a
hypothetical issue: Mrs. Raskin is not in bankruptcy and therefore is not discriminated against by
the Homestead Exemption‟s apparent injustice.
Mr. Raskin argues passionately that this incongruity could not have been intended:
[U]nder [Susquehanna‟s] argument, the [Homestead Exemption] would never be available to any married person in a bankruptcy case if a creditor beats them to the court and gets a judgment lien on marital property, regardless of whether both husband and wife filed for bankruptcy jointly.
…if [Mrs. Raskin] were to lose [the State Court Case] and seek bankruptcy relief, she would not be permitted to claim her interest in [Eland Road] as exempt under the [Homestead Exemption], leaving not only [her] interest permanently subject to the [Susquehanna Liens], but also leaving the Debtor burdened with the [Susquehanna Liens] on [Eland Road], which would prevent the Debtor from ever selling or refinancing [Eland Road]. This would be the result, as there is no precedent in English common law or Maryland (nor should there be) for a tenancy by the entirety interest being subject to a lien held by a creditor on only one
Ct.‟s Hr‟g Recording, June 15, 2012, 24:20-26:58. The exemption right must be enforced in accordance with its terms, and in combination with the accompanying rights of Section 522(f), and the avoidance of the lien against only Mr. Raskin‟s undivided interest seems to be the most conservative way to honor the statute‟s language (and weave a somewhat tattered silk purse), all things considered. To the extent this outcome indirectly benefits Mrs. Raskin, that is the legislature‟s choice to make.
23 Taken together, the eight year limitation that applies to a host of individual family members, and the „one spouse‟ rule, seems to limit the Homestead Exemption‟s use to only the first family member who seeks to claim it with respect to a particular piece of jointly owned property, regardless of the form of ownership, or whether the bankruptcy filing is joint or separate.
19
tenant‟s interest in the entirety property, so that the cloud on the Debtor‟s interest in [Eland Road] would forever encumber that interest notwithstanding the avoidance of the [Susquehanna Liens] on the Debtor‟s interest.
(Debtor‟s Post-Hr‟g Mem. 13.)
For these reasons, Mr. Raskin claims that the legislature must have intended the
Homestead Exemption to benefit both spouses – and for joint liens to be entirely avoided from
entireties property – notwithstanding the express application to only the “aggregate interest” of
the individual who files bankruptcy and the limitation on its availability to only one spouse. The
reasons why the legislature would decide to withhold from a married, single-filing debtor the
ability to avoid entirely a joint lien against entireties property are readily understandable; they
are the same reasons that underlie Alvarez and are likely based upon a respect for the unity of the
entireties estate. 24 Therefore, no tears should be shed for Mr. Raskin as a result of the limited
relief granted by this Opinion. Because Mrs. Raskin is not in bankruptcy, the „one spouse at a
time‟ dichotomy does not work a hardship on Mr. Raskin (or her), when viewed from the
standpoint of a common law purist. Furthermore, while strange, the result in this case is
consistent with Ades, the only Maryland case uncovered that speaks directly to the permissibility
of a wounded, but still breathing, post-bankruptcy entireties shell.
In Ades, Section 67f of the Bankruptcy Act of 1898 was interpreted as automatically
discharging from an insolvent debtor‟s property any lien obtained within four months of the
bankruptcy filing. Ades, 103 A. at 94. The debtor and his wife owned property by the entireties
and the creditor obtained a joint judgment within the four month period. Later, when the creditor
sought to enforce the judgment in a post-bankruptcy collection action, the debtor sought an
injunction on the basis of Section 67f. The Court of Appeals observed that the effect of Section 24 By the same token, somewhat less respect is shown for the symmetry of the entireties estate by permitting an individual spouse to avoid „half‟ of the joint lien.
20
67f would have to be honored unless the entireties estate required, “a different meaning to be
given to the act.” That notion was rejected:
[U]pon the filing of the aforesaid petition within the period mentioned above the lien of the judgment, so far at least as the right of the husband in the estate by entirety was concerned, was struck down by the provisions of the federal act, the effect of which was practically the same as if the judgment had been recovered against the wife alone, in which case the said leasehold property could not have been sold during the lifetime of the husband, if at all, under an execution issued on such judgment.
* * *
It is clear, we think, that the leasehold property, now held as an estate by entirety cannot be sold at any time before the death of the husband, if then, under an execution issued on said judgment as it now stands, and therefore we find no error in the court below in overruling the demurrer to the bill and in granting the injunction prayed for therein.
Id. at 95.25
In essence, this is the same result reached by the courts in Janitor, Staples and Sisk and
this Court sees no plausible basis to reach a different outcome. 26 Mr. Raskin asserts that there is
no precedent for “for a tenancy by the entirety interest being subject to a lien held by a creditor
on only one tenant‟s interest in the entirety property”. (Debtor‟s Post-Hr‟g Mem. 13.) But Ades
holds exactly the opposite and, moreover, that interpretation of the Homestead Exemption, while
25 To be sure, Ades’ reasoning relies in part upon the premise that the spouse‟s undivided interest in the entireties estate passed to the bankruptcy trustee. To reach that conclusion, the Ades court relied upon Beihl’s refusal to grant an injunction against a non-debtor spouse to prevent the sale of entireties property because, “[w]hatever title the bankrupt had then has already passed from him [to the trustee in bankruptcy] by operation of law.” Beihl, 197 F. at 873. In 1918, that conclusion – that the undivided interest of the filing spouse passed to the trustee – may have been wrong, see Citizens Savings Bank, Inc., for use of Govatos v. Astrin, 61 A.2d 419, 422 (Sup. Ct. Del. 1948), but it does not undo the fact that Ades deemed acceptable the post-bankruptcy fracturing of the entireties estate in Maryland as long as the hammer was slung by the legislature‟s hand.
26 Lashley‟s decision to nullify the joint lien in its entirety is not supportable in this District because Lashley held that, “the spouses each own the whole of the property” and “avoiding the judicial lien on the Debtor‟s interest avoids the lien on the whole property”. 206 B.R. at 953. That outcome neither comports with Alvarez, Maryland common law nor the language of the Homestead Exemption.
21
not perfect, makes the most sense. Thus, the Susquehanna Liens will be avoided as to Mr.
Raskin‟s undivided interest in Eland Road but not as to Mrs. Raskin‟s.27
VI. Conclusion
For the reasons stated above, Mr. Raskin is entitled to avoid the Susquehanna Liens on
only his interest in the Residence he owns with Mrs. Raskin. An Order memorializing this
holding will be issued.28
End of Opinion
27 Nevertheless, the Court strongly agrees with Mr. Raskin‟s assertion that it does not make sense as a matter of policy for the legislature to discriminate against married couples, and in favor of their joint creditors, by withholding the Homestead Exemption from spouses who are willing to file jointly. It seems clear that the Homestead Exemption was enacted in part to help struggling Maryland families deal with our Nation‟s economic meltdown. To use language that can only be interpreted as excluding the whole entireties estate from the statute‟s reach, and give joint creditors a leg up over other similarly situated creditors, would seem to run counter to that purpose.
28 While the Court concludes that the correct result has been reached, the dispute presents a question of law for which there is no controlling decision from the Fourth Circuit. Likewise, on its surface this Opinion runs counter to common law principles expressed in Alvarez. Finally, it also presents the rare conundrum of a state law that only applies in the federal system. Therefore, and especially in light of the constitutionally mandated diminution of the stature and authority of bankruptcy courts, see Stern v. Marshall, 131 S. Ct. 2594 (2011), at the request of either party the Court is prepared to certify this question for direct appeal to the Fourth Circuit under the provisions of 28 U.S.C. § 158(d)(2)(A).
Bankruptcy Lawyer 