Kuenstler v. Half Price Books, Records, Magazines, Incorporated
Filing
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MEMORANDUM OPINION AND ORDER. The bankruptcy court's judgment is hereby AFFIRMED. Signed by District Judge Amos L. Mazzant, III on 6/28/2018. (baf, )
United States District Court
EASTERN DISTRICT OF TEXAS
DIVISION
IN RE:
TODD WILLIAM KUENSTLER
Appellant
v.
§
§
§
§
§
§
§
§
Civil Action No. 4:17-CV-775
Judge Mazzant
HALF PRICE BOOKS, RECORDS,
MAGAZINES, INC.
Appellee
MEMORANDUM OPINION AND ORDER
Pending before the Court is Todd William Kuenstler’s Appeal of an order issued by the
United States Bankruptcy Court for the Eastern District of Texas granting Half Price Books,
Records, Magazines, Inc.’s Motion to Deem “Motion for Determination of Dischargeability” as a
Complaint and Motion for Leave to File Amended Complaint (Dkt. #5).
BACKGROUND
On August 8, 2016, Half Price Books, Records, Magazines, Inc.’s (“Appellee” or
“Creditor”) filed suit in the 162nd District Court of Dallas County, Texas, asserting claims against
Todd Kuenstler (“Appellant” or “Debtor”), Maggie Kuenstler, Group 23, Inc., Group 523 LLC,
Group 2323 LLC, and Group 52323 LLC1F, in addition to Cartridge World North America, LLC
and Flexbone LLC (collectively, the “Kuenstler Defendants”). Creditor alleged in part:
Between 2009 and January 2016, the Kuenstler Defendants fraudulently invoiced
Plaintiff for alleged products sold by Defendants to Plaintiff. In good faith, and in
reliance upon the representations made by the Kuenstler Defendants, Plaintiff paid
Defendants’ invoices during such time period. Under this nefarious and criminal
scheme to steal from and defraud Plaintiff, the Kuenstler Defendants stole and/or
resold to Plaintiff, in excess of $1,000,000.00.
(Dkt. #2 at pp. 25–26).
On May 15, 2017, Debtor filed a petition under Chapter 7 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the Eastern District of Texas (the “Main Case”).
Kuenstler v. Half Price Books, Records, Magazines, Inc. (In re Kuenstler), Ch. 7 Case
No. 17-41046, Adv. No. 17-04089, slip op (E.D. Tex. May 15, 2017), (Main Case No. 17-41046,
Dkt. #1). Pursuant to 11 U.S.C. § 362(b), the state court case was automatically stayed.
The Section 341 creditors meeting was held on June 16, 2017. The 341 Notice stated that
the filing deadline to file a complaint objecting to the discharge of certain debts was August 15,
2017. The Notice further stated
You must file a complaint:
•
if you assert that the debtor is not entitled to receive a discharge of any debts
under any of the subdivisions of 11 U.S.C. § 727(a)(2) through (7), or
•
if you want to have a debt excepted from discharge under 11 U.S.C.
§ 523(a)(2), (4), or (6).
(Dkt. #5 at p. 9).
On August 14, 2017, Creditor filed its Motion for Determination of Dischargeability
(“Motion for Determination”), objecting to the discharge of the debts owed by the Debtor, and
objecting to the discharge (Main Case No. 17-41046, Dkt. #8). On that same date, Creditor filed
its Motion for Relief from Stay on State Court Proceedings (“Motion for Relief”). (Main Case
No. 17-41046, Dkt. #7) The Motion for Determination specifically objected to the discharge of
the following debts:
(i) Debtor Kuenstler’s liability to Creditor for felony theft, pursuant to 11 U.S.C.
§ 523(a)(4); (ii) Debtor Kuenstler’s liability to Creditor for civil conversion,
pursuant to 11 U.S.C. § 523(a)(4); (iii) Debtor Kuenstler’s liability to Creditor for
fraud, pursuant to 11 U.S.C. § 523(a)(2); (iv) Debtor Kuenstler’s liability to
Creditor for tortious interference with a business contract, pursuant to 11 U.S.C.
§ 523(a)(6); and (v) Debtor Kuenstler’s liability to Creditor for conspiracy to
commit fraud and felony theft, pursuant to 11 U.S.C. § 523(a)(2).
...
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Furthermore, Creditor requests this Court enter an Order declaring none of Debtor
Todd Kuenstler’s debts to be dischargeable because he has failed to explain
satisfactorily the loss of millions of dollars which he obtained by fraud, theft, and
other malicious acts over the course of several years . . . .
...
This Court has the authority to discharge debts unless the debtor has failed to
explain satisfactorily any loss of assets or deficiency of assets to meet the debtor’s
liabilities. 11 U.S.C. § 727(a)(5).
(Main Case No. 17-41046, Dkt. #8 at p. 4).
However, the Motion for Determination was mistakenly filed as a motion in the Main Case
and not properly filed as a complaint and initiated as an adversary proceeding pursuant to Federal
Rules of Bankruptcy Procedure 7001(6), 7003, and 7004. See FED. R. BANKR. P. 7001(6), 7003,
7004. In other words, Creditor failed to properly file a complaint and initiate an adversary
proceeding by the August 15 filing deadline. On August 29, 2017, Debtor filed a response to
Creditor’s Motion for Determination on the grounds that Creditor failed to timely initiate a proper
adversary
proceedings
within
the
60-day
time
period
(Main
Case
No. 17-41046,
Dkt. #12 at pp. 2-3).
On September 13, 2017, Creditor commenced a proper adversary proceeding by filing its
First Amended Complaint for Determination of Dischargeability and Objecting to Debtor’s
Discharge Pursuant to Sections 523 and 727 of the Bankruptcy Code (“Amended Complaint”) and
its Motion to Deem Its “Motion for Determination of Dischargeability” as a Complaint and Brief
in Support Thereof and Motion for Leave to Amend Complaint (“Motion to Deem”). Kuenstler v.
Half Price Books, Records, Magazines, Inc. (In re Kuenstler), Ch. 7 Case No. 17-41046, Adv. No.
17-04089, slip op (E.D. Tex. September 13, 2017), (Adv. No. 17-04089, Dkt. #1). The Motion to
Deem asked the bankruptcy court to deem Creditor’s Motion for Determination a complaint
objecting to the discharge of the debts owed by the Debtor, and objecting to the discharge.
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On September 27, 2017, the bankruptcy court held an evidentiary hearing on Creditor’s
Motion to Deem. At the hearing, Debtor asserted it would be improper for the bankruptcy court
to consider the Motion for Determination as a timely-filed complaint because Debtor never
received “actual notice” of the Motion for Determination (Dkt. #2 at pp. 453–471). Creditor
argued that Debtor received “actual notice” of the Motion for Determination when his lawyer,
Mr. Robert DeMarco, who represented him at his creditor’s meeting and had held a retainer for
purposes of responding to an objection to discharge claim until August 31, 2017, was served with
the Motion for Determination on August 14, 2017. Mr. DeMarco argued that it was not sufficient
notice to simply serve debtor’s counsel. Mr. DeMarco argued that to show actual notice to Debtor,
Creditor had to show evidence that the Motion for Determination was mailed to Debtor.
After hearing evidence and arguments of counsel for Debtor and Creditor, the bankruptcy
court ruled that actual notice had been provided to Debtor, and explained:
[I]n order for the Court to reach the question of whether the debtor had actual notice,
the underlying presumption or predicate is that, in fact, the creditor has not
complied with the rules. So it appears to the Court that requiring compliance with
the rules in order to show actual notice is sort of bootstrapping one against the other,
or maybe its circular. . . .
But for the reasons stated by the Court in the Thompson case and the cases cited
therein for determining whether the debtor had actual notice, service on counsel is
sufficient. Particularly in this case where the lawsuit had been filed before and the
debtor hired counsel for the purpose of defending them in a
discharge/dischargeability action. And that was disclosed at the 341 meeting. So
the debtor had reason to anticipate that a 727 or a 523 action would be filed. And
indeed it was filed, the motion was filed and served on counsel that was retained
for that very purpose. Therefore, the Court finds that for the purpose of the Relation
Back Doctrine, if you will, the filing of the motion objecting to discharge is
sufficient, in this case.
(Dkt. #6 at pp. 30–31) (emphasis added).
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On October 30, 2017, Debtor filed his Notice of Appeal (Dkt. #1). On January 8, 2018,
Debtor filed his brief in support (Dkt. #5). In his brief, Debtor designated the issue to be decided
on appeal as follows:
Whether the Bankruptcy Court erred in concluding Appellant received “actual
notice” of the contents of the Motion for Determination of Dischargeability
(“Dischage Motion”) such that it was proper to deem the Discharge Motion a timely
filed complaint objecting to: (a) the discharge of Appellee’s Claim against
Appellant; and (b) Appellant’s discharge? 1
(Dkt. #5 at pp. 7–8). On January 23, 2018, Creditor filed its brief in response (Dkt. #7).
LEGAL STANDARD
A district court has jurisdiction to hear appeals from “final judgments, orders, and decrees”
of a bankruptcy court. 28 U.S.C. § 158(a)(1) (2012). A bankruptcy court’s “findings of fact are
reviewed for clear error and conclusions of law are reviewed de novo.” Drive Fin. Servs., L.P. v.
Jordan, 521 F.3d 343, 346 (5th Cir. 2008); see also In re Soileau, 488 F.3d 302, 305
(5th Cir. 2007); Ferrell v. Countryman, 398 B.R. 857, 862 (E.D. Tex. 2009). In a bankruptcy
appeal, “a district court cannot consider issues that were not initially presented to the bankruptcy
court.” Ferrell, 398 B.R. at 863 (citations omitted). A district court “will not allow a party to raise
an issue for the first time on appeal merely because a party believes that he might prevail if given
the opportunity to try a case again on a different theory.” Ferrell, 398 B.R. at 863 (citing Forbush
v. J.C. Penney Co., 98 F.3d 817, 822 (5th Cir. 1996)).
ANALYSIS
Debtor appeals the bankruptcy court’s October 16, 2017 Order granting Creditor’s Motion
to Deem “Motion for Determination of Dischargeability” as a Complaint and Motion for Leave to
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The Court notes that Debtor has not raised on appeal the issue regarding the bankruptcy court’s reliance on Louviere
v. Thompson (In re Thompson), 572 B.R. 638, 651–57 (Bankr. S.D. Tex. 2017), and its use of the actual
notice/relation-back doctrine. Thus, that issue is not on appeal.
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File Amended Complaint (the “Order”). Debtor argues that he never received “actual notice” of
the claims set out in the Motion for Determination. Debtor claims that service upon his counsel
cannot constitute “actual notice” to the Debtor.
Due process in the bankruptcy context requires that individual notice be given before rights
can be affected. Huddleston v. Nelson Bunker Hunt Tr. Estate, 117 B.R. 231, 232 (N.D. Tex. 1990),
aff’d sub nom. Huddleston v. Nelson Bunker Hunt, 935 F.2d 1290 (5th Cir. 1991). Here, the
bankruptcy court, after hearing evidence, specifically found that Debtor received proper and
adequate notice of the Motion to Deem. The Court “cannot disturb this factual finding unless it is
clearly erroneous.” Huddleston, 117 B.R. at 232. “A finding of fact is clearly erroneous only if
‘on the entire evidence, the court is left with the definite and firm conviction that a mistake has
been committed.’” In re Dennis, 330 F.3d 696, 701 (5th Cir. 2003) (quoting Hibernia Nat’l Bank
v. Perez (In re Perez), 954 F.2d 1026, 1027 (5th Cir.1992)).
Federal Rule of Bankruptcy Procedure 4004(a) states,
[i]n a chapter 7 case, a complaint, or a motion under § 727(a)(8) or (a)(9) of the
Code, objecting to the debtor’s discharge shall be filed no later than 60 days after
the first date set for the meeting of creditors under § 341(a).
FED. R. BANKR. P. 4004(a). Further, Federal Rule of Bankruptcy Procedure 4007(c) states in
pertinent part,
a complaint to determine the dischargeability of a debt under § 523(c) shall be filed
no later than 60 days after the first date set for the meeting of creditors under
§ 341(a).
FED. R. BANKR. P. 4007(c). Finally, Rules 7001(4) and 7001(6) expressly state that “a proceeding
to object to or revoke a discharge” and “a proceeding to determine the dischargeability of a debt”
are adversary proceedings. FED. R. BANKR. P. 7001(4), (6). Thus, taken together, the above
referenced Rules require a creditor, if it wants to prevent a debtor from obtaining a discharge of
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the specific debt that it holds, or prevent a debtor from obtaining a discharge of all of its debts, to
initiate an adversary proceeding by filing a complaint objecting to discharge no later than the 60th
day following the first date set for the meeting of creditors. Creditor’s deadline to object to the
discharge was August 15, 2017. The Fifth Circuit notes that
[O]ne of the purposes of Bankruptcy Rule 4007(c) and sections 523(a)(3)(B) and
523(c) is to give creditors notice and an opportunity to be heard. Another purpose
of the time references in these statutes, however, is to promote the expeditious and
efficient administration of bankruptcy cases by assuring participants in bankruptcy
proceedings “that, within the set period of 60 days, they can know which debts are
subject to an exception to discharge.”
Matter of Sam, 894 F.2d 778, 781 (5th Cir. 1990) (quoting Neeley v. Murchison, 815 F.2d 345,
347 (5th Cir.1987)). “Our construction of the rule and the statutes in Neeley simply recognized
that the purpose of the notice requirement is satisfied when the creditor has actual knowledge of
the case in time to permit him to take steps to protect his rights.” Id.
As discussed above, Creditor mistakenly filed its Motion for Determination in the Main
Case on August 14, 2017, and subsequently commenced a proper adversary proceeding on
September 13, 2017, by filing its Amended Complaint. The bankruptcy court applied the “actual
notice/relation-back” doctrine set forth in Louviere v. Thompson (In re Thompson), 572 B.R. 638,
651–57 (Bankr. S.D. Tex. 2017), and found that even if a creditor does not properly commence an
adversary proceeding within the 60-day deadline imposed by Rule 4007, so long as the creditor,
prior to the deadline, files a pleading that contains sufficient information putting the debtor on
notice that the creditor is attempting to object to the discharge, then the “actual
notice/relation-back” principle can be used to overcome the failure to timely commence an
adversary proceeding (See Dkt. #6 at pp. 30–31; Main Case No. 17-41046, Dkt. #28; Adv. No.
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17-04089, Dkt. #10). The bankruptcy court also found that service upon Debtor’s counsel
provided Debtor with “actual notice.”
In Thompson, a creditor filed two detailed pleadings with the court on or before the 60-day
deadline to object to dischargeability of a debt—a motion to lift stay and a complaint, filed in the
original bankruptcy proceeding instead of initiating a new adversary proceeding. 572 B.R.
at 650—657. The motion to lift stay, by referencing attached exhibits, set forth in detail the factual
background and relationship between debtor and creditor. Id. at 642. Months after the deadline
had passed, the creditor initiated an adversary proceeding and re-filed its complaint to the
dischargeability of debts, and invoked the relation-back doctrine, seeking to prevent the dismissal
of his late-filed complaint. Id. at 650. The court held that the re-filed complaint related back to
the complaint which was improperly filed in the original proceeding, and deemed the re-filed
complaint in the adversary proceeding as timely. Id. at 656.
The bankruptcy court in Thompson relied on the Fifth Circuit’s opinion in Covert v.
McGuirt (Matter of McGuirt), 879 F.2d 182 (5th Cir. 1989), which described the “actual notice”
argument by articulating the creditor’s position in this manner:
[Creditor] asserts that the filing of the motion [for relief from the automatic stay]
satisfied the primary purpose of rule 4007(c) of notifying the debtor of the existence
and basis of an objection to the discharge so as to enable the debtor to answer and
defend against that objection.
McGuirt, 879 F.2d at 183 (emphasis added). “Thus, in the Fifth Circuit’s view, for the ‘actual
notice/relation-back’ argument to have any merit, the focus must be on whether the creditor gave
notice to the debtor prior to the deadline that the creditor intended to object to discharge.”
Thompson, 572 B.R. at 652 (emphasis in original). The Thompson court went on to conclude that
service upon the debtor’s counsel gave actual notice to the debtor.
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[B]ecause of the “actual notice/relation-back doctrine” the Motion to Deem should
be conditionally granted. . . . This is so because Louviere filed not one, but two
detailed pleadings with this Court on or before the 60-day deadline of March 20,
2017 . . . and he immediately served these pleadings on the Debtors, through their
counsel, all of which gave actual notice to the Debtors that Louviere intended to
seek an order form this Court declaring the Judgement to be non-dischargeable.
Id. at 654 (emphasis added) (internal citations omitted).
In this case, a creditor’s meeting was held on June 16, 2017. Mr. DeMarco represented
Debtor at this creditor’s meeting. The transcript from the meeting demonstrates that at the time
Mr. DeMarco was served with the Motion for Determination, Mr. Demarco had been paid by
Debtor and was holding an $18,000 retainer in a trust to defend him and object to discharge claims
in his bankruptcy. At the creditor’s meeting Mr. DeMarco stated the following:
Mr. DeMarco: Well, I’m not saying it’s not property of the estate. But under the
terms of the agreement, he effectively bought my services up to $18,000 for the
sole purpose and limited purpose of representing him personally in an objection to
discharge claim. So the value to the estate is the asset of that agreement.
(Dkt. #7 at p. 7). See Matter of Sadkin, 36 F.3d 473, 476 (5th Cir. 1994) (finding actual notice was
provided to creditor and satisfied due process concerns through the attendance of creditor’s
representative at a creditors’ meeting where the claim was discussed, even though amended list of
exceptions was not served on creditor).
Further, Mr. DeMarco drafted and signed Debtor’s response to Creditor’s Motion for
Determination, which was filed August 29, 2017 (Dkt. #7 at p. 7). At the hearing on the Motion
to Deem, Mr. DeMarco stated that after his receipt of the Motion for Determination, which was
filed and served on Mr. DeMarco on August 14, 2017, Mr. DeMarco communicated with Debtor
(Dkt. #7 at p. 7). There is also evidence that Creditor served the Motion for Determination on
Debtor’s wife by mailing it to her at her residence that she shares with Debtor, and also served the
motion on two companies Debtor owns or controls via the creditor matrix (Dkt. #7 at p. 7).
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The Court finds that the bankruptcy court did not err in finding that Debtor received notice
of the Motion for Determination when his counsel, Mr. DeMarco, was served with it.
Mr. DeMarco had been hired for the very purpose of defending a discharge/dischargeability action.
“[A]ll constitutional due process requires in this case is that he have ‘notice reasonably calculated,
under all the circumstances, to apprise [Debtor] of the pendency of the action and afford [Debtor]
an opportunity to present [his] objections.’” Sam, 894 F.2d at 781 (quoting Mullane v. Central
Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950)). “Thus, [Debtor] had the ‘actual knowledge
of the case’ necessary to permit him to take steps to protect his rights.” Id. (emphasis in original).
Lastly, the bankruptcy court’s finding that service on Debtor’s attorney constituted actual notice
to Debtor is consistent with Fifth Circuit precedent of avoiding a dismissal with prejudice unless:
(1) the delay has been caused by the plaintiff himself, not by his attorney; (2) there is actual
prejudice to the defendant; and (3) the delay has been caused by intentional conduct. See Millan
v. USAA Gen. Indem. Co., 546 F.3d 321, 326 (5th Cir. 2008); Thompson, 572 B.R. at 651–57. In
this case, these factors are not present. Thus, the Court finds that the bankruptcy court did not err
in finding that the Debtor received “actual notice” of the Motion for Determination when it was
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served upon Debtor’s counsel.
CONCLUSION
Based on the foregoing, the bankruptcy court’s judgment is hereby AFFIRMED.
IT IS SO ORDERED.
SIGNED this 28th day of June, 2018.
___________________________________
AMOS L. MAZZANT
UNITED STATES DISTRICT JUDGE
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