W. Terrence Brown, Trustee v. Leslie Kitchenmaster and KOT, Inc.; (In re Hertzler Halstead Hospital); Adv. No. 04-5142; Case No. 02-13080-11 (Nugent) (November 15, 2005)
MEMORANDUM OPINION
Facts:
The debtor Hertzler Halstead Hospital Corporation (“debtor”) is a not-for-profit corporation that operates a hospital and medical clinic in the city of Halstead, Kansas. In August 2001, the defendant Leslie Kitchenmaster (“Principal”), acting through the corporation he controlled, Peak Management Corporation (“Management Firm”), entered into a management agreement to manage the hospital. At the onset, the Management Firm invested and escrowed $500,000.00 to cover any cash flow shortages in consideration for an option to acquire the assets of the debtor. In November 2001, the Management Firm exercised its option, and the Principal became the chief executive officer. In late 2001, the Principal took out personal loans from the Halstead Bank to pay expenses, and in 2002, the Principal directed the debtor to repay the Bank through KOT, Inc., a corporation principally owned and controlled by the Principal. In June 2002, the debtor filed a chapter 11 bankruptcy, and an independent trustee was appointed. The trustee filed an adversary proceeding to recover preferential payments [see Holding #1] and/or fraudulent transfers [see Holding #2].
Holdings:
1. The payments were preferential under § 547. The only contested element was insolvency, and the Court finds the debtor was insolvent. Furthermore, there was no contemporaneous exchange for new value.
2. The payments were fraudulent transfers under § 548. The Principal effectively admitted that payments to creditors were held to allow for the transfers.
Ba Van Lu and Nancy C. Lu v. United States of America Department of Treasury Internal Revenue Service; Adv. No. 04-5358; Case No. 02-11738-7 (Nugent) (November 16, 2005)
ORDER ON GOVERNMENT’S MOTION TO DISMISS
· Fed. R. Bankr. P. 7041 (FRCP 41(b)): Failure to Prosecute
Facts:
The debtors Ba Van Lu and Nancy C. Lu (“debtors”) filed an adversary complaint to determine that their federal income tax obligations for the years 1993 through 1996 were dischargeable under 11 U.S.C. § 523(a)(1) and 523(a)(7). The adversary proceeding was pending since December 2004, and the debtors failed to respond to written discovery issued by the IRS. The debtors left the United States for Vietnam and counsel has no address or contact information.
Holding:
The Court entered an order to dismiss the adversary complaint with the reservation that the debtors may comply with the discovery within thirty days to preserve the adversary proceeding.
J. Michael Morris, Trustee v. Kevin S. Steele (In re Steele); Adv. No. 04-5265; Case No. 03-13393-7 (Nugent) (November 17, 2005)
MEMORANDUM OPINION
· Doctrine of Marshaling
Facts:
The debtor Kevin S. Steele (“debtor”) filed a Chapter 7 bankruptcy on June 24, 2003 and later filed his federal and state income tax returns entitling him to an aggregate refund of $3,444.00. The taxing authorities set off a portion of his refunds to pay the debtor’s pre-petition non-dischargeable child support obligations. The Trustee filed an adversary proceeding to recover the gross refund. The Trustee argued that the estate is entitled to apply the equitable doctrine of marshaling to prevent the debtor from applying the refund to debt that will flow through the bankruptcy.
Holding:
The Court held that the debtor shall pay the entire refund to the trustee. The debtor benefited from the setoff because the debt was collectable post-discharge.
Sunflower Bank, N.A. v. Brian E. Ware and Mannheim Automotive Financial Services, Inc.; Adv. No. 04-5116; Case No. 04-11368 (Nugent) (December 12, 2005)
ORDER DENYING CROSS MOTIONS FOR SUMMARY JUDGMENT
· Floor Plan Financing: Buyer in Ordinary Course
Facts:
The debtor Brian E. Ware (“debtor”) was a fifty-percent owner in Ultimate Autos LLC (“Dealer”). Mannheim Automotive Financial Services, Inc. (“Floor Plan Financer”) provided floor plan financing to allow the Dealer to acquire used vehicles for resale.
In July 2002, the debtor entered into a personal note with Sunflower Bank, N.A. (“Bank”) to acquire a 1997 Acura from the Dealer. The Bank was noted as the lien holder. The Dealer went into default, and the Floor Plan Financer repossessed the 1997 Acura and sold it, without notice to the Bank. The debtor filed a chapter 7 bankruptcy proceeding, and the Bank and the Floor Plan Financer dispute who is entitled to the proceeds of the sale of the 1997 Acura. The Floor Plan Financer argues that the debtor was not a buyer in the ordinary course, and therefore the debtor took the vehicle subject to the Floor Plan Financer’s unreleased lien. The Bank argues that the debtor purchased the 1997 Acura, and any lien of the Floor Plan Financer was as to the sale proceeds, leaving the 1997 Acura free and clear for the new lien by the Bank.
Holding:
After the purchase, the Acura was not offered for sale by the Dealer, and the debtor made payments to the Bank—all in satisfaction of a good-faith buyer in the ordinary course. However, whether the sale violated the floor plan agreement and whether the transaction was made in the ordinary course comporting with the usual or customary practices remains unsettled. Both motions for summary judgment are denied.
Earl C. Mills v. United States of America Internal Revenue Service (In re Mills; Adv. No. 04-7012; Case No. 03-43341-7 (Karlin) (November 17, 2005)
MEMORANDUM OPINION AND ORDER DENYING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
Facts:
The debtor Earl C. Mills (“debtor”) is a neurosurgeon, earned from 1987 through 1998 an adjusted gross income that ranged from $85,000.00 to $435,000.00, with an average annual income of $255,000.00. Prior to 1987, the debtor acquired several homes and lived a lavish lifestyle. Since 1987, the debtor has lived in several rented homes until he purchased a home in Wichita in 2003, acquired antiques and artworks, belonged to a country club, took trips, hired an interior decorator and made significant donations. Since 1987 the debtor filed income tax returns, but failed to remit payment. The debtor filed a Chapter 7 bankruptcy, and later an adversary complaint seeking a determination that the past-due income taxes from 1987 through 1998, now totaling over $1.7 million, are dischargeable. The IRS contends that the debtor has willfully attempted to evade and defeat the otherwise dischargeable taxes, and therefore, precluded from a discharge on those taxes.
Holding:
The issue is whether the debtor took steps to ensure that his ongoing expenses were reasonable and necessary under his available income, the debtor’s awareness of his tax situation, and the debtor’s intent. The Court held that summary judgment is not appropriate because the IRS has failed to show at summary judgment the unreasonableness of the debtor’s efforts, and whether the debtor could and should have done more to reduce his living expenses. The Court is unable to determine whether the debtor acted willfully in failing to pay his taxes.
Jan Hamilton, Trustee v. Washington Mutual Bank, FA. (In re Colon); Adv. No. 05-7032; Case No. 04-42174 (Karlin) (December 5, 2005)
MEMORANDUM AND ORDER DENYING MOTION FOR SUMMARY JUDGMENT
· 11 U.S.C. § 544: Constructive Notice
Facts:
The debtors Jorge Colon and Antoinette Ortiz-Colon (“debtors”) refinanced their home in 2003 and pledged a mortgage to Tyler Thaylor, Bean & Whitaker Mortgage Corp., which was later assigned to Washington Mutual Bank (“Mortgagee”). The mortgage was recorded and described the property, in part, as “Lot 29”. The correct lot number for the property is Lot 79. The street address and the Parcel ID Number on the mortgage were correct. In August 2004, the debtors filed a Chapter 13 bankruptcy petition and claimed the property exempt. The Trustee filed the adversary complaint to avoid the lien for the benefit of the bankruptcy estate.
Holding:
An examination of the index kept under the legal description for Lot 79 would not have reflected the mortgage, and there is nothing within the four corners of the instrument that would put a purchaser who was researching the title on notice that he or she needs to check further. Therefore, the recorded mortgage was insufficient to impart constructive knowledge of the mortgage to the Trustee, and because the Trustee did not have constructive notice, he qualifies as a hypothetical lien creditor and a bona fide purchaser under § 544.
USAA Federal Savings Bank and MBNA America Bank, N.A. v. Danny and Melody Herrin (In re Herrin); Adv. No. 05-7018; Adv. No. 05-7019; Case No. 04-43472 (Karlin) (December 21, 2005)
MEMORANDUM AND ORDER DENYING PLAINTIFFS’ MOTION TO SET ASIDE DISMISSAL AND SETTING DEADLINE FOR RESOLUTION OF MOTION FOR ATTORNEY’S FEES
· Fed. Rule Bankr. P. 9023 (FRCP 59): Motion to Reconsider
Facts:
USAA Federal Savings Bank and MBNA America Bank, N.A. (“plaintiffs”), through shared counsel, commenced an adversary proceeding to seek determination that certain credit card debt was nondischargeable pursuant to § 523(a)(2). Counsel for the plaintiffs failed to meet certain deadlines imposed by the Court, including failing to submit an approved pretrial order after written and personal notices to do so. The Court later entered a conditional order of dismissal for lack of prosecution unless the pretrial order was filed by a date certain. The plaintiffs failed to file the pretrial order. The case was dismissed, and the plaintiffs filed a motion to reconsider, arguing that docketing errors within counsel’s office caused the failures.
Holding:
The failures within counsel’s office are not an excusable neglect, and the motion shall be denied. Furthermore, the defendants filed a motion for attorney’s fees, and the Court shall take the motion under advisement.
Advanta Mortgage Corporation USA, Chase Manhattan Mortgage Corporation and Deutche Bank National Trust Company v. The Mortgage Banc, Inc., n/k/a Home Mortgage, Inc. (In re Quenzer); Adv. No. 99-7127; Case No. 99-41732-13 (Karlin) (December 22, 2005)
MEMORANDUM ORDER AND OPINION
• TILA: Rescinded Transaction
Facts:
In June 1997 the debtors Perry and Lori Quenzer (“debtors”) entered into a home mortgage transaction with Home Mortgage, Inc., wherein the mortgagee failed to comply with the Truth-In-Lending Act by giving insufficient notice. The mortgage was later assigned. The parties stipulate and agree that the notice provided was insufficient, and that the debtors were entitled to an extended rescission period of three years. The debtors filed their chapter 13 bankruptcy petition in August 1999 and notified that they were exercising their extended rights to rescind the transaction, and requesting statutory penalties. Judge Pusateri held that the mortgage was immediately void upon rescission and that the mortgage holder was left with an unsecured claim. The mortgage holder appealed, and the United States District Court remanded the case and found that the Court could and should reconsider the release of the lien on payment by the debtors and whether the statutory penalties were time-barred [See Holding #1]; and the process to effect the recession. [See Holding #2]
Holdings:
1. Any statutory penalties for affirmative relief as a result on the improper disclosures are time-barred. Any statutory penalties for the failure to rescind the transaction are not time-barred.
2. The Court will condition the voiding of the mortgage upon full tender by the debtors. No interest shall be awarded the mortgage holders, nor are the debtors allowed to make their payments in installments.
Larry Lee Woody v. United States Department of Justice; Larry Lee Woody v. United States Department of Education (In re Woody); Adv. No. 02-6095; Adv. No. 02-6096; Case No. 02-21662-7 (Berger) (December 15, 2005)
MEMORANDUM OPINION AND ORDER SUPPLEMENTING ORAL FINDINGS AND CONCLUSIONS
· 11 U.S.C. § 523(a)(8): Student Loan Obligation
· Dischargeability of Health Education Assistance Loan
Facts:
The plaintiff/debtor Larry Lee Woody (“plaintiff/debtor”) seeks to discharge a traditional student loan under § 523(a)(8) (“523 Loan”), and a Health Education Assistance Loan (“HEAL Loan”). The plaintiff/debtor has had an adjusted gross income over the last six years averaging less than $27,000.00 and has estimated monthly deductions and expenses exceeding his estimated gross monthly income going forward. The plaintiff/debtor is currently employed, but it is highly unlikely that his income will increase materially over the amount he is now earning. The plaintiff/debtor owns no real property and virtually no personal property and is in poor health. The Court held the 523 Loan would impose an undue hardship. [See Holding #1] Furthermore, the non-discharge of the HEAL Loan would be unconscionable. [See Holding #2]
Holdings:
1. The plaintiff/debtor cannot maintain, based on his current income and expenses, a minimal standard of living for himself and repay the 523 Loan; his state of affairs will likely persist for a significant portion of the repayment period; and he has made a good-faith effort to repay. Even though the plaintiff/debtor has failed to make a voluntary payment, there was insufficient income to support payments, and it is clear from the record that he has made a good-faith effort to maximize his personal and professional resources.
2. The HEAL conscionability standard is more stringent than the undue hardship imposed under § 523(a)(8). Prior decisions have adopted the totality of the circumstances approach and should only be used as a general guideline for examination of the debtor’s overall circumstances and efforts. The conscionability factors of § 523(a)(8) should be considered, as well as the accumulated wealth income and ability to pay; the age/health process and efforts for increased earnings; and good-faith of the debtor. Given the facts and circumstances of this case, it would be unconscionable to deprive the plaintiff/debtor of the means to maintain his health and a minimal lifestyle by accepting the HEAL Loan from discharge, and therefore the debtor is entitled to discharge the HEAL Loan.
J. Michael Morris, Trustee v. Solomon State Bank; Thomas L. Elder and Mary E. Elder (In re Elder); Adv. No. 04-5229; Case No. 04-12898-7 (Somers) (November 7, 2005)
MEMORANDUM AND ORDER PARTIALLY GRANTING TRUSTEE’S COM-PLAINT TO AVOID AND PRESERVE SECURITY INTEREST
Facts:
In September 2003, the debtors Thomas and Mary Elder (“debtors”) entered into a loan with Solomon State Bank (“Bank”) to finance their homestead in Salina, Kansas. The homestead included a 2001 manufactured home. The debtors pledged a mortgage to the Bank to secure the loan. The Bank never filed a notice of security interest with the Kansas Department of Revenue and was not listed as the lien holder on the certificate of title on the manufactured home. The Trustee argued that even though the Bank intended to acquire a perfected lien in the manufactured home that the loan documentation was insufficient to create a security interest, and the parole evidence rule bars consideration of the debtors intent to grant the Bank a lien on the home.
Holding:
The Court finds that the Bank had an unperfected security interest in the manufactured home, which may be avoided and preserved for the benefit of the estate.
In re Rafter Seven Ranches, LP; Case No. 05-40483-12 (Somers) (December 6, 2005)
MEMORANDUM AND ORDER DENYING WNL’S MOTION IN LIMINE
Facts:
The debtor Rafter Seven Ranches, LP (“debtor”) and WNL Investments, L.L.C. (“WNL”) entered into a series of real estate agreements which the debtor asserts were loans from WNL to the debtor, secured by equitable mortgages on the properties. WNL asserts that it is the owner of the real estate which it acquired by absolute sale, free and clear of liens and encumbrances from the debtor, and two related trusts in October 2002. WNL filed a motion in limine to prohibit the debtor from introducing evidence at trial to vary or contradict the actual terms of the warranty deeds and transfer agreements.
Holding:
The Court determined that it could not determine the purpose or the economic substance of the transaction without consideration of the extrinsic evidence. Therefore, the extrinsic evidence would be admissible in support of the debtor’s position that the transactions created an equitable mortgage.
In re John Herman Schmidt and Patsy Lee Schmidt; Case No. 04-24766-13 (Somers) (January 4, 2006)
JUDGMENT DISMISSING CASE FOR LACK OF CHAPTER 13 ELIGIBILITY; MEMORANDUM GRANTING CREDITORS’ MOTIONS TO DISMISS AND FINDING CREDITORS’ MOTION TO SHOW CAUSE MOOT
· 11 U.S.C. § 109: Eligibility
Facts:
The debtors John and Patsy Schmidt (“debtors”) filed a Chapter 13 bankruptcy petition in November 2004, and in April 2005, the creditors moved to dismiss the petition on the basis that the debtors are not eligible for relief because they do not have regular income and that the non-contingent liquidated, unsecured debts exceed the statutory limit.
Holding:
The Court found that the debts listed as “unknown” on the schedules included a significant amount owed for medical bills that are unsecured, non-contingent liquidated debts, causing the total unsecured debt to be in excess of the statutory limit. Furthermore, the debtors are not eligible for Chapter 13 relief, because they do not have regular income. The uncertain income from rental property and anticipated consultant services was not sufficient.
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