FARMERS & MERCHANTS BANK v. TURNER
Filing
13
ORDER denying 11 Motion to Strike, Affirming the Bankruptcy Court, and Remanding to Bankruptcy Court. Signed by CHIEF JUDGE M CASEY RODGERS on September 30, 2014. (aow)
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UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF FLORIDA
PENSACOLA DIVISION
FARMERS & MERCHANTS STATE BANK,
Appellant/Petitioning Creditor,
v.
Case No. 3:13cv498/MCR/CJK
[Bankruptcy Case No. 12-31211-KKS]
DOUGLAS E. TURNER,
Appellee/Alleged Debtor.
_______________________________/
ORDER
Farmers & Merchants State Bank (“the Bank”) appeals an order of dismissal of this
involuntary Chapter 7 bankruptcy proceeding against the alleged debtor, Douglas E. Turner
(“Turner”), filed in the United States Bankruptcy Court for the Northern District of Florida.
See In re Douglas E. Turner, Bankruptcy Case No. 12-31211-KKS. The matter has been
fully briefed and is ripe for a decision.1 Also pending is Turner’s motion to strike certain
portions of the Bank’s brief and reply brief. Now, having fully reviewed the record and the
arguments of the parties, the Court finds that the Bankruptcy Court’s ruling is due to be
affirmed.
Background
A.
Bankruptcy Court Proceedings
On August 31, 2012, the Bank and two other creditors, Tema Burk, TTE, Tema Burk
Revocable Intervivos Trust ("Burk") and Susan C. Smith ("Smith"), commenced an
involuntary Chapter 7 proceeding against Turner, alleging claims in the aggregate amount
of $3,578,682.44 based on state court judgments in their favor against Turner. See
1
The Court has appellate jurisdiction pursuant to 28 U.S.C. § 158(a). The Court has determ ined after
exam ination of the well-drafted briefs and the record that oral argum ent is not needed because “the facts and
legal argum ents are adequately presented in the briefs and record and the decisional process would not be
significantly aided by oral argum ent.” Bankruptcy Rule 8012.
Case No. 3:13cv498/MCR/CJK
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11 U.S.C. § 303(b)(1) (2012) (stating an involuntary bankruptcy proceeding must be
initiated on the petition of three or more creditors, each of which must have a claim that is
not contingent as to liability or the subject of a bona fide dispute as to liability or amount,
and the noncontingent, undisputed claims must total at least $14,425 more than the value
of any lien on property securing the claims). Turner moved to dismiss the Chapter 7
proceeding for failure to state a claim, arguing that the Bank, Burk and Smith are not
eligible creditors to initiate the petition because they asserted the same claims in a
previous Chapter 11 bankruptcy proceeding of Turner Heritage Homes, Inc. (“Turner
Heritage Homes”), and the claims were satisfied, in whole or in part, through the Amended
Reorganization Plan (“the Reorganization Plan” or “Plan”) in that proceeding.2 See In re:
Turner Heritage Homes, Inc., Debtor, Bankruptcy Case No. 11-40517-LMK.
The
Bankruptcy Court held an evidentiary hearing on the motion to dismiss, and the record
shows the following.3
The claimed debts are the result of final judgments entered against Turner
personally based on his guarantees of loans executed on behalf of Summerchase, LLC
(“Summerchase”) and Heritage Hills Development Company, LLC (“Heritage Hills”), while
he was a managing member of these companies. Neither company is still in existence.
In April and May 2011, the companies merged into Turner Heritage Homes, which acquired
all of their assets and existing liabilities and then filed for Chapter 11 bankruptcy in June
2011. The Reorganization Plan was filed on November 7, 2011, and confirmed on March
26, 2012.4 In the time between these dates, the Bank, Smith and Burk obtained personal
judgments against Turner on his guarantees in the amounts of $3,489,142.39 in favor of
the Bank; $38,901.29 in favor of Burk; and $50,683.76 in favor of Smith, each of which
2
See Doc. 2-5.
3
The Bank was the only one of the three petitioning creditors to participate in the hearing.
4
The confirm ation order states that the Plan binds the debtor and creditors, whether or not the
creditor is im paired under the Plan, but that “[c]onfirm ation of the [Reorganization] Plan shall not operate as
res judicata with respect to the effect of the m erger of Heritage Hills Developm ent Com pany, LLC on the
individual m em bers of Heritage Hills Developm ent Com pany, LLC.”
Case No. 3:13cv498/MCR/CJK
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became final prior to confirmation of the Reorganization Plan.5
Turner testified at the hearing on the motion to dismiss.
He acknowledged
executing promissory notes to the petitioning creditors–the Bank, Burk and Smith–as a
managing member of Summerchase and Heritage Hills and that he had signed personal
guarantees as well.
Although Turner maintained he only guaranteed 25% of the
indebtedness to the Bank, he admitted a default judgment was entered against him for the
entire amount when he failed to defend. The judgments in favor of Burk and Smith arose
out of separately filed cases against Turner, Summerchase, and Fred Turner, and those
judgments were entered with Turner’s consent. Turner testified that in none of those cases
did he raise any objection based on the then-pending Turner Heritage Homes Chapter 11
proceeding, nor did he seek to stay the judgments at any time. He testified that all three
petitioning creditors here had participated in the Chapter 11 proceedings, and they each
received stock in the newly formed entity, Phoenix Realty Partners, Inc. (“Phoenix”), which
emerged out of the Chapter 11 proceedings as a growing business. Turner testified he has
more than twelve unsecured creditors and was not making payments to any of them as of
August 31, 2012, when the Chapter 7 proceeding was filed, explaining his belief that “[t]hey
received stock in Phoenix Realty Partners as payment in full.”6 (Doc. 6, at 17).
Louis Weltman, an officer of Turner Heritage Homes, also testified at the evidentiary
hearing. He testified regarding his assistance with the reorganization and confirmed that
all creditors participating in the Plan received stock in Phoenix. Weltman explained the
terms of the Reorganization Plan, under which the Bank was a Class 4 secured creditor
5
The involuntary petition appears to have inverted two num bers in the Sm ith judgm ent, claim ing
Turner owed Sm ith the am ount of $50,638.76, which is incorrect. (See doc. 3-12).
6
Also during the hearing, the Bank attem pted to elicit testim ony from Turner about a foreign trust he
had created and into which he had allegedly transferred property, either before or during Turner Heritage
Hom es's bankruptcy proceeding. At page 20 of the transcript, the Bankruptcy Judge sustained an objection
to this testim ony as outside the scope of direct, and no further evidence was adm itted on the subject. During
closing argum ent, Turner’s lawyer argued that any reference to a trust in another country is irrelevant to the
m otion to dism iss.
Case No. 3:13cv498/MCR/CJK
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given certain elections, one of which was to have its secured property returned.7 The Bank
elected to have its secured real property returned to it, and, according to Weltman, the
parties stipulated that the property would be valued as worth $1,100,000 for purposes of
the Plan. The Class 4 section of the Plan also provides, “[t]he original shareholders shall
continue to personally guarantee, on a limited basis, the performance by the Debtor.”8 The
remainder of the Bank’s claim, to the extent there was a deficiency beyond the value of the
property, became part of Class 10 under the Plan, which addressed deficiency claims.9
Creditors in this class received common stock of Phoenix aggregating a 5% equity stake
in Phoenix to be shared proportionately by the Class 10 creditors. The Bank did not object
to this treatment under the Plan.
Weltman also testified that Burk and Smith participated in the Chapter 11
proceedings as Class 12 friends and family creditors, who similarly received proportionate
shares of common stock in Phoenix aggregating a 5% equity stake.10 Weltman discussed
the plain language of Section 2.16 of the Plan, titled “Satisfaction of Claims,” which
provided that the treatment of claims under Article 2 (which lists all classes of claims) was
in “full satisfaction, release, and discharge” of claims against the Chapter 11 debtor and
estate. Also, Weltman confirmed that Section 4.13 under Article 4 of the Plan11 deals with
distributions in “complete satisfaction and release” of “all claims against and interest in the
debtor’s estate” and property.12 (Doc. 6, at 38). The Plan further provided as the “Effect
7
The Plan also states “Class 4 is im paired.”
8
There is no dispute that Turner Heritage Hom es fulfilled its perform ance by returning the real
property. The parties agree that the Bank received the property.
9
The Plan states “Class 10 claim s are im paired.”
10
The Plan states “Class 12 claim s are im paired.”
11
Article 4 is titled “Unclassified Claim s and Disputed Claim s and Distributions.”
12
In relevant part, the Plan states: “The distributions and rights provided under this Plan will be in
com plete satisfaction and release, effective as of the Effective Date, of all Claim s against and Interests in the
Debtor’s Estate and all liens upon any Property of the Estate.” (Doc. 2-5, Section 4:13).
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of Confirmation” that all of the provisions of the Plan would be binding on the debtor, its
estate, all creditors, and “all other entities who are affected (or whose interests are
affected) in any manner by the Plan.” (Doc. 2-5, Section 5.01). According to Weltman, the
language provided for full satisfaction of claims against the debtor, stating, “[t]hat was what
the purpose of the plan was.” Weltman also testified that Phoenix is a viable company with
value and numerous clients. He stated that no creditor had asked him to place a value on
the Phoenix stock but also testified, “I believe it has value, yes.” (Doc. 6, at 40).
At the close of the hearing, Turner argued for dismissal on grounds that, in light of
the terms of the Reorganization Plan, the petitioning creditors in this case have been
satisfied in full because the claims were released in the Chapter 11 proceeding, or
alternatively, they have been satisfied at least in part, and, therefore, a bona fide dispute
exists regarding the amount of the claims. Turner argued that, based on the Plan, the
Bank’s claim is at least $1,100,000 less than claimed in the petition and must also be
reduced by the value of the shares of stock received. By contrast, the Bank argued that
the claims were satisfied only as against the Chapter 11 debtor and did not release or
satisfy individual claims against Turner for the deficiency based on judgments against him.
The Bank also argued it satisfied its burden to show there is no bona fide dispute as to the
amount of the debts because the final judgments far exceed the statutory threshold, and
Turner offered no evidence valuing the stock.
The Bankruptcy Court requested supplemental briefing on the issue of whether a
final judgment that has not been stayed or appealed may nevertheless be subject to a
bona fide dispute under 11 U.S.C. § 303 based on a showing that a third party has partially
or totally satisfied the underlying debt.
In its final decision, the Bankruptcy Court
determined that a final judgment can be subject to a bona fide dispute and granted the
motion to dismiss. Specifically, the Bankruptcy Court found that all three petitioning
creditors have claims that have been reduced to a final judgment, establishing a prima
facie case that there is no bona fide dispute; unrefuted testimony and evidence showed
that the underlying claims of Burk and Smith were completely satisfied by distributions of
Case No. 3:13cv498/MCR/CJK
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shares of common stock under the Reorganization Plan; and, as to the Bank’s claim, the
Bankruptcy Court found that although there is no bona fide dispute as to liability, Turner
established a bona fide dispute as to amount. The Bankruptcy Court found that no
evidence had been presented as to the value of the property transferred to the Bank under
the Plan, and there was no evidence that the Bank gave Turner any credit against the
judgment for the value of the property deeded to it or for the value of the stock transferred
to the Bank for the deficiency, though part of the judgment had been paid. The Bankruptcy
Court concluded: “Here the Court can’t tell if the claim of the bank has been fully or
partially satisfied under the terms of the Turner Heritage Home, Chapter 11 case. Either
way, there’s clearly a bona fide dispute as to the amount of the bank’s claim against Mr.
Turner.” The Bankruptcy Court therefore dismissed the petition.
B.
Arguments on Appeal
This appeal by the Bank followed. The Bank argues that the Bankruptcy Court
incorrectly interpreted the Chapter 11 Reorganization Plan and confirmation order; made
clearly erroneous findings of fact that the Burk and Smith judgments were satisfied and that
there was no evidence of the value of the real property; and incorrectly failed to shift the
burden to Turner, as the alleged debtor, to establish a bona fide dispute. The Bank also
argues that the Bankruptcy Court erred in finding a bona fide dispute in amount without
proof that the disputed portion is sufficient to bring into question whether the statutory
threshold is met. Finally, the Bank argues alternatively that the Bankruptcy Court erred by
failing to find that the Bank could proceed as the sole petitioning creditor due to special
circumstances of fraud related to Turner’s transfer of money to a foreign trust.
Turner argues that the Bankruptcy Court’s dismissal should be affirmed on grounds
that there is at least a bona fide dispute regarding the amount of the claim as to all three
judgments and maintains the fact findings were not clearly erroneous. Turner maintains
that a majority of courts to consider the issue have determined that a dispute as to any
amount of the claim is sufficient to render a petitioning creditor ineligible to bring an
involuntary Chapter 7 proceeding.
Case No. 3:13cv498/MCR/CJK
Additionally, Turner filed a motion to strike the
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references to fraud in the Bank’s brief and reply brief because the issue was neither
presented to, nor addressed by, the Bankruptcy Court.
C.
Standards of Review
In deciding a bankruptcy appeal, the district court applies the same standards as a
court of appeals, reviewing the legal conclusions of the bankruptcy court de novo and its
findings of fact for clear error. See In re Optical Techs., Inc., 425 F.3d 1294, 1299-1300
(11th Cir. 2005); In re JLJ Inc., 988 F.2d 1112, 1116 (11th Cir. 1993); see also Bankruptcy
Rule 8013. In considering a bankruptcy court’s interpretation of the effect of its own prior
order, courts in the Eleventh Circuit apply a deferential standard and will not disturb the
bankruptcy court’s interpretation “unless it clearly abused its discretion.”13 In re Optical
Techs., 425 F.3d at 1300. This standard, however, does not alter the district court’s
obligation to apply de novo review to questions of law. Id. at 1302.
Discussion
In relevant part, the Bankruptcy Code provides that an involuntary bankruptcy case
may be commenced on petition of three or more creditors, each of which must have a
claim14 that is “not contingent as to liability or the subject of a bona fide dispute as to
liability or amount,”15 and the claims in the aggregate must total at least $14,42516 more
than the value of any lien on property securing such claims. See 11 U.S.C. § 303(b)(1)
13
The Bank urges the Court not to apply this deferential standard to the Bankruptcy Judge’s
interpretation of the Turner Heritage Hom e Reorganization Plan because she was not the judge who
confirm ed the Plan. Each judge’s ruling speaks for the Bankruptcy Court of the Northern District of Florida,
however, and thus due deference will be given to their interpretation of the court’s own prior orders whenever
appropriate, but not to issues of law.
14
A "claim " is defined in part as a "right to paym ent, whether or not such right is reduced to
judgm ent." 11 U.S.C. § 101(5)(A).
15
The phrase, “as to liability or am ount,” was added by the 2005 Bankruptcy Abuse Prevention and
Consum er Protection Act (“BAPCPA”), Pub. L. No. 109-8, §§ 1234(a)(1)(A) & (a)(12), 119 Stat. 23 (Apr. 20,
2005). As discussed further below, there is som e dispute am ong courts as to how this additional language
has altered the analysis.
16
The dollar am ount is adjusted every three years and changed to $15,325 in 2013. See 11 U.S.C.
§ 303 (fn. 1). The Court will refer to the statutory am ount in effect at the tim e the involuntary petition was filed
in 2012.
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(2012);17 see also In re Trusted Net Media Holdings, Inc., 550 F.3d 1035, 1043-46 (11th
Cir. 2008) (en banc) (determining that the requirements of § 303(b) are not jurisdictional
but establish statutory conditions for commencing a proceeding, which may be waived).
Read as a whole, § 303 establishes a five part test for a contested involuntary petition:
(1) the petitioning claimholders' claims are not contingent as to liability,
(2) the claims are not subject to a bona fide dispute as to liability or amount,
(3) the value of such claims total in the aggregate at least [the statutory
threshold amount];
(4) three or more entities commenced the involuntary petition; and
(5) the alleged debtor is generally not paying its debts as they come due.
In re Flamingo Enterprises, Inc., 2009 WL 1730960, at *4 (Bankr. S.D. Fla. 2009) (footnote
omitted) (citing In re Euro–American Lodging Corp., 357 B.R. 700, 712 (Bankr. S.D.N.Y.
2007)). There is no dispute on the record in this appeal as to elements (1), (4) and (5); the
issues on appeal instead concern elements (2) and (3)–that is, whether there is a bona fide
dispute as to liability or amount for each of the three petitioning creditors and whether the
total of the undisputed claims aggregates at least the statutory threshold amount.
On a motion to dismiss an involuntary petition, the petitioning creditor bears the
burden to demonstrate a prima facie case that its claim is not subject to a bona fide
dispute. See In re Bimini Island Air, Inc., 370 B.R. 408, 413 (S.D. Fla. 2007); In re
Biogenetic Techs., Inc., 248 B.R. 852, 856 (Bankr. M.D. Fla. 1999) (stating involuntary
bankruptcy “is a severe remedy and Congress prefers that creditors settle their disputes
without resorting to the involuntary bankruptcy procedure”). If a prima facie undisputed
claim is shown, the burden then shifts to the alleged debtor to come forward with evidence
of a bona fide dispute as to liability or amount. See In re Biogenetic Techs., 248 B.R. at
856; see also In re Axl Indus., Inc., 127 B.R. 482, 485 (S.D. Fla. 1991). The Bankruptcy
Code does not define the phrase “bona fide dispute,” see Busick, 831 F.2d at 749, but a
majority of courts, including bankruptcy courts in Florida, apply an objective standard. See
17
Additionally, this provision applies where the alleged debtor has twelve or m ore creditors at the
tim e. Turner’s undisputed testim ony established that he had m ore than twelve creditors. Also, in an
involuntary bankruptcy case, the petitioning creditors m ust prove that the alleged debtor is generally not paying
his debts as they becom e due. 11 U.S.C. § 303(h)(1). Turner adm itted this as well.
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In re Huggins, 380 B.R. 75, 82 (Bank. M.D. Fla. 2007) (collecting cases); see also 2 Collier
on Bankruptcy ¶ 303.11[1] (16th ed.) (noting the Second, Third, Fifth, Sixth, Seventh,
Eighth, and Tenth Circuits, as well as bankruptcy courts in the First and Eleventh Circuits,
have adopted an objective standard). Under this standard, a bona fide dispute exists and
requires dismissal of the creditors’ petition “if there is either a genuine issue of material fact
that bears upon the debtor's liability [or amount], or a meritorious contention as to the
application of law to undisputed facts.” In re Axl Indus., Inc., 127 B.R. at 485; see also In
re Rosenberg, 414 B.R. 826, 845 (Bankr. S.D. Fla. 2009). In other words, “if there are
substantial legal or factual questions raised by the debtor, the debtor can preclude the
creditor from being an eligible petitioning creditor.” 2 Collier on Bankruptcy ¶ 303.11[1].
“
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