Humphrey v. U.S. Trustee
Filing
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OPINION AND ORDER that the bankruptcy court's February 14, 2020 order granting the Trustee's motion for approval of sale at Case No. 5:19-bk-72555, Doc. 72, is REVERSED. The matter is REMANDED to the bankruptcy court for further proceedings not inconsistent with this opinion and order. Signed by Honorable P. K. Holmes III on March 26, 2024. (mjm)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF ARKANSAS
FAYETTEVILLE DIVISION
LADONNA HUMPHREY
APPELLANT
v.
No. 5:20-cv-5048
ANTHONY CHRISTOPHER and
ABSOLUTE PEDIATRIC THERAPY
APPELLEES
OPINION AND ORDER
This is an appeal from a decision of the Bankruptcy Court for the Western District of
Arkansas. The appellant, Ladonna Humphrey, is the debtor in that bankruptcy proceeding.
Appellees Anthony Christopher and his business, Absolute Pediatric Therapy (hereinafter
“Absolute”), are creditors of Ms. Humphrey. Ms. Humphrey appeals from the bankruptcy court’s
decision to approve the sale of her appeal rights in a separate state-court civil proceeding to Mr.
Christopher and Absolute. For the reasons given below, the bankruptcy court’s decision to approve
that sale is REVERSED.
I.
Background.
On May 14, 2018, Absolute hired Ms. Humphrey for the position of “community outreach
director.” She was fired four months later, on September 20. Her termination letter stated that she
was fired for failing to meet expectations with respect to her job duties.
Three weeks after firing Ms. Humphrey, Absolute and Mr. Christopher sued her in the
Circuit Court of Benton County, Arkansas. See generally Absolute Pediatric Servs., Inc. v. et al.
v. Humphrey, Case No. 04CV-18-2961 (Benton Cnty. Ark. Cir. Ct.). Their complaint contained
many allegations, falling into two main categories. First, it alleged that she had stolen client lists,
contact information, and partnership agreements from Absolute and Mr. Christopher. Second, it
alleged that after her termination Ms. Humphrey communicated false accusations to many of
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Absolute’s and Mr. Christopher’s business partners to the effect that Absolute and Mr. Christopher
were engaged in fraudulent and unethical business practices. The complaint brought nine counts
against Ms. Humphrey for tortious interference with business expectancies, defamation, breach of
contract, misappropriation of trade secrets, conversion, and unjust enrichment. (Some of these
counts were duplicated, being brought by both plaintiffs.) Ms. Humphrey then filed a counterclaim
in that same action, alleging that Absolute and Mr. Christopher were indeed engaged in Medicaid
fraud and that they had also violated certain regulations by hiring a convicted felon. She claimed
that her firing violated the False Claims Act because it was done in retaliation for her having
previously reported these illegal activities to regulatory authorities.
Predictably, the litigation was very contentious. Numerous cross-motions for contempt
and sanctions were filed throughout the first half of 2019, alleging all manner of discovery
violations by each side. On April 15 and May 6, 2019, the Circuit Court held an evidentiary
hearing on some of these motions. Then, in an August 14, 2019 order, the court ruled that Ms.
Humphrey had engaged in “active and aggressive spoliation of evidence,” and found her “to be in
willful contempt” of its prior orders. As a remedy, the court struck Ms. Humphrey’s answer and
counterclaim. This resulted in a finding that Ms. Humphrey was liable for the claims in Absolute’s
and Mr. Christopher’s complaint, so a hearing on damages and sanctions was set for September
17, 2019.
At this point, things became somewhat procedurally convoluted. On September 12, 2019,
Ms. Humphrey filed a notice of appeal from the August 14 order striking her pleadings. Then, at
the damages hearing on September 17, the Court ruled from the bench that the plaintiffs were
entitled to recover a judgment against Ms. Humphrey totaling $3,570,977.88: half of it as
compensatory damages, and half of it as punitive damages. However, the Court did not file its
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written judgment to that effect until September 23. In between these two dates, on September 19,
Ms. Humphrey filed for Chapter 7 bankruptcy in federal court. Then, on October 2, the Benton
County Circuit Court held another hearing regarding its previous finding of contempt, after which
it ordered Ms. Humphrey to serve 10 days in jail: 2 days each for 5 separate instances of contempt.
On October 23, Ms. Humphrey filed an amended notice of appeal, this time from the entire Circuit
Court proceeding, including the final contempt order. See generally Humphrey v. Absolute
Pediatric Servs., Inc. et al., Case No. CV-20-33 (Ark. Ct. App.).
Meanwhile in the bankruptcy proceeding, on December 4, 2019, the Trustee moved to sell
all of Ms. Humphrey’s claims arising out of or related to the facts and claims in the state court
lawsuit, including her appellate rights, for a total of $12,500.00. See In re Humphrey, Case No.
5:19-bk-72555, Doc. 46. The party to which the Trustee sought to sell these rights was none other
than Absolute. Id. Ms. Humphrey opposed this motion, only to the extent that it sought to sell her
defensive appellate rights—i.e., her right to appeal the striking of her answer and the denial of a
jury trial on the issue of damages. See id. at Doc. 59. She did not oppose the sale of her offensive
appellate rights—i.e., her right to appeal the striking of her counterclaim. See id. A hearing on
this motion was conducted on February 12, 2020, and two days later an order was entered granting
the motion in its entirety. See id. at Doc. 72. Ms. Humphrey filed an appeal from that order in this
Court on March 18, 2020. See Case No. 5:20-cv-5048, Doc. 1. On that same day, the Arkansas
Court of Appeals entered a stay of the appellate proceeding in her civil case pending resolution of
her bankruptcy proceeding. That appeal remains stayed today.
Further muddying the waters, only one week before the bankruptcy court’s hearing on the
Trustee’s motion to sell, the State of Arkansas filed an affidavit in the Pulaski County District
Court seeking a warrant for Mr. Christopher’s arrest on charges of Medicaid fraud—the very crime
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of which Ms. Humphrey had been accusing him. See State v. Christopher, Case No. PCS-20-1469
(Pulaski Cnty. Dist. Ct.). It is unclear to this Court whether any of the parties were aware of this
February 5 development on February 12, but at any rate nobody informed the bankruptcy court of
this development during the February 12 hearing. The Pulaski County District Court issued the
requested warrant on March 17, 2020, and Mr. Christopher was arrested two days later. See id.
Eventually, on August 26, 2020, a criminal information formally charging Mr. Christopher with
Medicaid fraud was filed in the Pulaski County Circuit Court. See State v. Christopher, Case No.
60CR-20-2945 (Pulaski Cnty. Cir. Ct.).
Ms. Humphrey’s appeal to this Court from the bankruptcy court’s approval of the sale of
her state-court appellate rights was briefed throughout the month of May 2020. See Docs. 5, 8–9.
However, on March 31, 2021, this Court entered an opinion and order holding the bankruptcy
appeal in abeyance pending the resolution of Mr. Christopher’s criminal case. See Doc. 10. As
explained in the final two paragraphs of that opinion:
If Christopher is convicted of committing the criminal acts Humphrey accused him
of, the effect on this case may be profound. Every court involved in some fashion
with the merits of the ongoing civil dispute between Humphrey and Appellees—
the Circuit Court of Benton County, Arkansas, the United States Bankruptcy Court
for the Western District of Arkansas, and this Court—operates under rules that
allow relief when fraud has been committed on the court, or as equity demands.
See Ark. R. Civ. P. 55(c) (allowing courts to set aside default judgments on the basis
of fraud or misconduct); Fed. R. Civ. P. 60(b)(3), (5), (6) (allowing courts to grant
relief from final orders on the basis of fraud, equity, or other reasons justifying
relief); Fed. R. Bankr. P. 9024 (applying Federal Rule of Civil Procedure 60 to
bankruptcy cases). If Christopher is convicted, additional briefing may be
necessary to determine which courts should take action under these rules. Further,
if Christopher is convicted, Appellees’ counsel likely will prefer an opportunity to
determine whether the conviction gives rise to professional obligations under
Arkansas Rule of Professional Conduct 3.3. Finally, if Christopher is convicted, it
may be difficult to say that his corporate tool, Absolute, purchased any appellate
rights in good faith.
If Christopher is acquitted, or if the charges against him are dismissed, additional
briefing and oral argument may become necessary in this case. In light of the
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unknowns giving rise to these exceptional circumstances, it is most prudent to hold
further proceedings in abeyance at this time, pending Christopher’s conviction or
acquittal, or dismissal of the Medicaid fraud charges against him.
See id. at 5–6.
Mr. Christopher’s criminal case languished in the Pulaski County Circuit Court for another
two and a half years, with very little activity reflected on the docket beyond various continuances
and substitutions of counsel. See State v. Christopher, Case No. 60CR-20-2945. Then, on October
5, 2023, Mr. Christopher moved to dismiss the charges against him as a sanction for the state’s
alleged destruction of impeachment material. In that motion, Mr. Christopher referenced an
investigative report from the state attorney general’s office, which the state had produced to Mr.
Christopher in discovery at some point during the criminal proceeding.
In this report, an
investigator mentioned having interviewed several individuals on November 13, 2018, including
Ms. Humphrey, regarding suspected Medicaid fraud by Mr. Christopher. The investigator also
mentioned having received an email from Ms. Humphrey on November 14. Then, in an entry
dated November 15, 2018, the investigator noted that an assistant attorney general instructed her
to keep only print versions of any emails that Ms. Humphrey sent her and to delete them from her
computer in order to make them more difficult to obtain via Freedom of Information Act requests,
because this assistant attorney general suspected that Mr. Christopher’s attorneys would want to
see those emails. In his motion for sanctions, Mr. Christopher alleged that Ms. Humphrey’s emails
to the investigator had never been provided to him. He argued that Ms. Humphrey was a potential
witness in his criminal prosecution, and that this amounted to destruction of materials which he
could have used to impeach her credibility at his trial. In its October 11, 2023 response to the
motion, the state did not dispute the veracity of the investigator’s notes, but argued that Mr.
Christopher had suffered no prejudice because it did not intend to call Ms. Humphrey as a witness
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and that, regardless, print copies of all such emails had been preserved and provided to Mr.
Christopher in discovery.
Then, only two days after filing its response in opposition to Mr. Christopher’s motion for
sanctions, the state filed a motion to enter nolle prosequi. In relevant part, it stated:
The Office of the Attorney General’s Medicaid Fraud Control Unit has had
personnel and administration changes since the beginning of the investigation of
this case, which was five years ago. The Lead Investigator, the Assistant Attorney
General, the Senior Assistant Attorney General and the Deputy Attorney General
previously assigned to this case, and referenced in Defendant’s Motion, are no
longer employed by the Office of the Attorney General. The undersigned Special
Deputy Prosecuting Attorney entered her appearance March 7, 2023. The State has
made significant efforts to shore up witnesses and evidence in order to fully
prosecute this case. However, due to the length of time that has transpired, evidence
has become stale, and witnesses have become unavailable. At this point, the State
cannot go forward because it is not possible to meet our burden of proof on the
charges filed.
See id. (paragraph numbers and breaks omitted). Five days later, the state’s motion was granted
and the charges against Mr. Christopher were dismissed.
The following month, this Court was notified of the dismissal of Mr. Christopher’s charges,
see Doc. 15, and it entered an order lifting the stay and reopening this bankruptcy appeal, see Doc.
16. The parties provided supplemental briefing throughout the months of December 2023 and
January 2024. Ms. Humphrey has raised three issues on appeal: (1) whether defensive appellate
rights are property of the estate; (2) whether the Trustee properly determined whether the sale was
in the best interests of the estate; and (3) whether the fact that Mr. Christopher was charged with
Medicare fraud was relevant to the value of Ms. Humphrey’s counterclaim for damages. See Doc.
1, p.1. The matter is now finally ripe for decision.
II.
Standard of Review.
A federal district court has jurisdiction to hear appeals from the rulings of a bankruptcy
court under 28 U.S.C. § 158. Generally, the district court reviews the bankruptcy court’s findings
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of fact for clear error and its conclusions of law de novo. In re Reynolds, 425 F.3d 526, 531 (8th
Cir. 2005). However, decisions that are committed to the bankruptcy court’s discretion are
reviewed for abuse of discretion, which occurs when the bankruptcy court “fails to apply the proper
legal standard or bases its order on findings of fact that are clearly erroneous.” In re Farmland
Indus., Inc., 397 F.3d 647, 651 (8th Cir. 2005). The decision to approve a settlement or
compromise of a bankruptcy debtor’s cause of action is committed to the bankruptcy court’s
discretion. See In re Martin, 212 B.R. 316, 319 (B.A.P. 8th Cir. 1997).
III.
Discussion.
The Court will begin its analysis with the issue of whether defensive appellate rights are
property of the estate. “The nature and extent of the debtor’s interest in property are determined
by state law.” N.S. Garrott & Sons v. Union Planters Nat’l Bank of Memphis (In re N.S. Garrott
& Sons), 772 F.2d 462, 466 (8th Cir. 1985). “However, once that determination is made, federal
bankruptcy law dictates to what extent that interest is property of the estate.” Id. The federal-law
component here is straightforward: to whatever extent state law recognizes a cause of action to be
an interest in property, then that interest is included in the bankruptcy estate. See In re Senior
Cottages of Am., LLC, 482 F.3d 997, 1001 (8th Cir. 2007). However, it is a much more nuanced
question whether and to what extent Arkansas law recognizes the right of appeal to be a cause of
action that is personal property.
In Arkansas, “personal property” has long been understood by courts to include “things in
action.” See, e.g., Allen v. Barnett, 186 Ark. 494, 54 S.W.2d 399, 400 (1932). A “thing in action”
has consistently been defined by the Arkansas Supreme Court to mean “the right of bringing an
action, or a right to recover a debt or money, or a right of proceeding in a court of law to procure
the payment of a sum of money or a right to recover a personal chattel or sum of money by action.”
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See Bridges v. Shields, 2011 Ark. 448, at *5, 385 S.W.3d 176, 179–80 (quoting Gregory v. Colvin,
235 Ark. 1007, 1008, 363 S.W.2d 539, 540 (1963)). The Arkansas Court of Appeals has also
repeatedly acknowledged that “[b]ankruptcy estate property . . . includes all causes of action the
debtor could have brought at the time of the bankruptcy petition.” See, e.g., Hobson v. Holloway,
2010 Ark. App. 264, at *8, 377 S.W.3d 376, 380; Bibbs v. Cmty. Bank of Benton, 101 Ark. App.
462, 466, 278 S.W.3d 564, 566 (2008).
However, none of these formulations appears to
contemplate proceeding in a purely defensive posture. Clearly, defending oneself against a lawsuit
brought by another party is not “bringing an action” or attempting to “recover a debt or money” or
attempting to “procure the payment of a sum of money.” The undersigned is unable to find any
Arkansas cases disputing this common-sense notion. Thus, under Arkansas law, Ms. Humphrey’s
right to defend herself against the lawsuit that was brought against her is not personal property, but
the causes of action she asserted in her counterclaim are personal property.
However, Ms. Humphrey’s appeal of the state-court judgment is unitary, being taken from
not only the default judgment that was entered on the claims brought against her, but also from the
dismissal of her counterclaims. As such, her appeal rights have a blended status under Arkansas
law, being partly her personal property and partly not. This Court has found scant caselaw
discussing whether blended offensive and defensive appellate rights are property of the bankruptcy
estate. None of those cases is helpful here, because all such cases involved states under whose law
defensive appellate rights are personal property. See, e.g., In re Croft, 737 F.3d 372 (5th Cir. 2013)
(discussing Texas law); In re Mozer, 302 B.R. 892 (C.D. Cal. 2003) (discussing California law).
Ultimately, however, this Court need not decide whether Ms. Humphrey’s defensive
appellate rights are included in the bankruptcy estate, because even if they are, the bankruptcy
court clearly abused its discretion in approving their sale to Absolute. During the hearing on the
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Trustee’s motion to approve the sale, all parties and the bankruptcy court itself acknowledged that
Absolute’s obvious motive and intention in purchasing Ms. Humphrey’s appellate rights was to
then substitute itself in her place and dismiss her appeal. In other words, the sale was effectively
a settlement or compromise of Ms. Humphrey’s appeal with the opposing party in that civil
proceeding. Absolute was paying $12,500.00 in order to guarantee that it would continue to hold
a $3,570,977.88 judgment against Ms. Humphrey—a judgment which it was then arguing, and
which the bankruptcy court later held, is not dischargeable in bankruptcy. See Absolute Pediatric
Servs., Inc. et al. v. Humphrey, Case No. 5:19-ap-07070 (W.D. Ark.) (Doc. 55). To approve a
settlement or compromise, the bankruptcy court must first determine that the settlement is fair and
equitable and in the best interests of the estate. See In re Martin, 212 B.R. 316, 319 (B.A.P. 8th
Cir. 1997). This sale was obviously none of those things.
After Ms. Humphrey’s bankruptcy petition was filed, the Trustee hired the same attorney
who had represented Ms. Humphrey in the civil proceeding to represent her in the appeal from that
proceeding. See In re Humphrey, Case No. 5:19-bk-72555, Docs. 23, 34, 35. Under that
agreement, this attorney would not charge any attorney fees for his services, and would charge
actual costs only to the extent assets were recovered. See id. at Doc. 34, ¶ 7. Court filings indicate
that he was hired to pursue Ms. Humphrey’s “counterclaim.” See Case No. CV-20-33 (Ark. Ct.
App.) (Feb. 19, 2020 Motion to Stay, ¶ 3). But it is inconceivable how he could have effectively
done so without also simultaneously pursuing her defensive appeal—which he had already filed
before Ms. Humphrey’s bankruptcy petition—given that the money judgment against her and the
dismissal of her counterclaim both arose from a single order striking her pleadings in circuit court,
and given that any eventual recovery on her counterclaim would necessarily have been offset by
any outstanding adverse judgment against her on Absolute’s claims in the same proceeding. In
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other words, the Trustee had a choice between, on the one hand, pursuing an appeal at no cost to
the estate of a $3,570,977.88 judgment against Ms. Humphrey—an appeal which had the potential,
however small, of removing that entire liability from the estate’s books; or on the other hand,
effectively guaranteeing that the estate would include a non-dischargeable debt of $3,558,477.88.
The Trustee opted for, and the bankruptcy court approved, the latter course. This cannot possibly
have been in the best interest of the estate.
This Court is mindful that when a bankruptcy court considers approving a settlement or
compromise, it need not find that the settlement constitutes the best result obtainable, but rather
only that “the settlement does not fall below the lowest point in the range of reasonableness.” See
Tri-State Fin., LLC v. Lovald, 525 F.3d 649, 654 (8th Cir. 2008). But this settlement falls well
below that lowest point. No middle-income rational actor would ever accept a settlement offer of
a $3,558,477.88 non-dischargeable debt where the alternative is to appeal a $3,570,977.88
judgment at no personal expense. Accordingly, this Court concludes that the bankruptcy court’s
decision to approve this sale was based on a “clearly erroneous assessment of the evidence.” 1 Id.
Absolute and Mr. Christopher claim that Ms. Humphrey never challenged the
reasonableness of the settlement amount before the bankruptcy court, and that she has therefore
waived this issue for purposes of this appeal. The Court disagrees; it is clear from the audio
recording of the hearing on the Trustee’s motion that while Ms. Humphrey did not dispute the
reasonableness of the settlement amount as to her offensive appellate rights, she objected entirely
to the sale of her defensive appellate rights, and considered them to be essentially priceless as they
1
Given the foregoing analysis, this Court need not reach the issue of whether Mr.
Christopher’s then-pending criminal charges were relevant to any assessment of the value of Ms.
Humphrey’s appellate rights.
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implicated what her counsel characterized as her fundamental constitutional right to defend herself.
Regardless, given the enormous sum at stake and the extremely one-sided nature of this settlement,
allowing this sale to stand “would be a plain miscarriage of justice,” such that Ms. Humphrey
would be permitted to challenge the reasonableness of the settlement for the first time on appeal.
See In re Hervey, 252 B.R. 763, 767–68 (B.A.P. 8th Cir. 2000).
There is one remaining argument to address, which was raised by Absolute and Mr.
Christopher in their briefing on this appeal. They contend that the “finality rule” prevents a court
from undoing a completed sale from the estate to a good-faith purchaser absent a stay pending
appeal. See In re Rodriquez, 258 F.3d 757, 759 (8th Cir. 2001). The idea here is that once property
has left the bankruptcy estate courts are unable to supply a remedy as to that property, rendering
the issue moot. See id. Additionally, “[t]his rule protects the finality of bankruptcy sales and the
reasonable expectations of good-faith third-party purchasers.”
See id.
This rule has no
applicability here, because Ms. Humphrey in fact did obtain a stay satisfying all these concerns:
she obtained a stay of the very state-court appellate proceedings that are the subject of this sale.
Nothing has occurred in that case which would prevent this Court from supplying the remedy that
Ms. Humphrey requests. Indeed, not a single brief on the merits has been filed in that matter. Thus
the sale can easily be undone without prejudice to any party.
IV.
Conclusion.
IT IS THEREFORE ORDERED that the bankruptcy court’s February 14, 2020 order
granting the Trustee’s motion for approval of sale at Case No. 5:19-bk-72555, Doc. 72, is
REVERSED. The matter is REMANDED to the bankruptcy court for further proceedings not
inconsistent with this opinion and order.
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IT IS SO ORDERED this 26th day of March, 2024.
/s/P. K. Holmes, III
P.K. HOLMES, III
U.S. DISTRICT JUDGE
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