Decisions of 2013

 

Amen, Motion to Approve Compromise, Sale, November 15, 2013

Case no. 12-61125

As all parties correctly note, in deciding whether to approve the Settlement Agreement and Release, the Court considers the factors articulated in Martin v. Kane (In re A&C Properties), 784 F.2d 1377, 1381 (9th Cir. 1986): (a) the probability of success in the litigation; (b) the difficulties, if any, to been countered in the matter of collection; (c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.

The first A & C Properties factor favors approval of the settlement.  Womack testified that the probability of success in the litigation with Lazy JC Ranch, LLC involved two legal disputes, the first dealing with real property and the second dealing with Lazy JC Ranch, LLC’s asserted interest in Michael’s membership interest in Lowe/Amen, LLC.  Intertwined with the foregoing disputes are claims Lowe Property Holdings, LLC and Lowe/Amen, LLC have against Michael. The Trustee’s proposed settlement resolves not only the two disputes with Lazy JC Ranch, LLC, but also with Lowe Property Holdings, LLC and Lowe/Amen, LLC.                   

The second factor is inapplicable here because the Trustee is not seeking to collect a money judgment from any of the parties.  The third factor is the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it. Litigation of the above issues would cause delay in this case and would result in additional expense to the bankruptcy estate.  The fourth and final factor is the paramount interest of the creditors and a proper deference to their reasonable views in the premises.  With respect to the creditors filing claims, Lowe Property Holdings, LLC and Lowe/Amen, LLC are the largest creditors in this case.

Bar Nothing Ranch Partnership opposes the settlement as it relates to treatment of  Lazy JC Ranch, LLC arguing that if Bar Nothing Ranch Partnership’s lien in Parcel A is invalidated, then Lazy JC Ranch, LLC’s interests will be elevated and its share of distribution will be greater, even though Bar Nothing Ranch Partnership and Lazy JC Ranch, LLC are similarly situated.  The problem with such argument is that Bar Nothing Ranch Partnership and Lazy JC Ranch, LLC are not similarly situated.    Unlike Lazy JC Ranch, LLC , Bar Nothing Ranch Partnership does not have a security interest in Michael’s membership interest in Lowe/Amen, LLC.  Moreover, the Court is not persuaded by Bar Nothing Ranch Partnership’s argument that its claim is diluted by approval of the settlement in the event its lien is invalidated at some future date.  Bar Nothing Ranch Partnership’s “what if” argument is based upon a hypothetical ruling against Bar Nothing Ranch Partnership in the associated adversary proceeding.

In re Amen, November 15, 2013, Trent M. Gardner for Trustee Womack, Jeffrey A. Hunnes for Lazy J.C. Ranch, LLC, James A. Patten and W. Scott Green for Bar Nothing Ranch Partnership, Kevin P Heaney for Lowe/Amen LLC

2013 Mont.B.R. 54

 

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B-Bar Tavern Inc. v. Prairie Mountain Bank, Motion to Amend Complaint

Case no. 12-60228, Adversary no. 12-00043

 

Amendment of a complaint is governed by Fed. R. Civ. P. 15(a) (made applicable in adversary proceedings by F.R.B.P. 7015). Rule 15(a) allows a party to amend its pleading once as a matter of course under certain circumstances not present here. In these circumstances Rule 15(a)(2) provides that a party "may amend its pleading only with the opposing party’s written consent or the court’s leave. The Court should freely give leave when justice so requires." PMB does not consent. In the instant case the Court’s original deadline to complete discovery was February 28, 2013. The Court has not extended that deadline. The proposed amended complaint adds several new claims, which are non-core and would require additional discovery by PMB to prepare adequately to litigate the new claims, taking PMB’s employees away from their normal tasks. The Court finds that these factors support a finding that allowing Plaintiff’s amended complaint and joinder of Potts would unduly prejudice PMB. It appears to the Court that the Plaintiff knew or should have known the facts raised by the amended complaint. The Court concludes that justice does not require allowing Plaintiff’s proposed amendment to add claims and join Potts. Both sides admit that the Plaintiff has joined Potts in litigation in state court. Thus, denying Plaintiff’s combined motion to amend does not mean that it loses its claims for relief against Potts, but rather means only that Plaintiff can litigate its claims against Potts fully in another forum, which is not under the constraints of § 1121(e) and § 1129(e). Instead of delaying this adversary proceeding and chapter 11 small business confirmation indefinitely, denying the combined motion preserves the August 5, 2013, date of commencement of trial and this Court’s ability to hear and decide core proceedings.

In re B-Bar Tavern Inc., B-Bar Tavern Inc. V. Prairie Mountain Bank, April 5, 2013. James A, Patten for B-Bar Tavern, John P. Paul and James A. Donahue for Prairie Mountain Bank

2013 Mont.B.R. 23

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B-Bar Tavern Inc. v. Prairie Mountain Bank, Summary Judgment

Case No. 12-60228, Adv. No. 12-00043

Pending in this adversary proceeding is the motion for summary judgment filed by Defendant Prairie Mountain Bank ("PMB"), which seeks summary judgment in its favor on all counts of Plaintiff’s complaint, plus costs and attorney’s fees. Plaintiff filed a response in opposition and statement of genuine issues.

Summary judgment is governed by FED. R. BANKR. P. 7056. Rule 7056, incorporating FED. R. CIV. P. 56(c), states that summary judgment "should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." "The proponent of a summary judgment motion bears a heavy burden to show that there are no disputed facts warranting disposition of the case on the law without trial." When seeking summary judgment, the moving party must initially identify those portions of the record before the Court which it believes establish an absence of material fact. If the moving party adequately carries its burden, the party opposing summary judgment must then "set forth specific facts showing that there is a genuine issue for trial." PMB addresses Count Six only briefly, contending that the validity of the assignment of leases is a non-issue and needs no resolution by the Court because the validity of the TI is the determinative issue in this case. The Court concludes that PMB utterly failed its heavy burden under Rule 56 to show that there are no disputed facts warranting disposition of the case on the law without trial.

The above-quoted facts and detailed arguments of the parties persuade the Court that summary judgment is not an appropriate disposition for Counts Two and Three. The parties argue in great detail about the validity of the TI as a mortgage and under Montana’s Small Tract Financing Act because of numerous alleged defects. At this stage the moving party has a heavy burden, and this Court is not convinced that PMB satisfied its burden that there are no genuine issues of material facts with respect to Counts Two and Three. Summary judgment therefore will be denied as to Counts Two and Three, and because of that summary judgment must be denied to the extent they affect Counts One, Five, and Seven. The Court finds that a genuine issue of material fact exists under Count Four whether the TI and Settlement Agreement satisfy the statute of frauds. The Court allows that a rational trier of fact might resolve disputes raised during summary judgment proceedings in favor of the nonmoving party, so summary judgment must be denied. Having considered the arguments, as above the Court concludes that PMB failed to satisfy its heavy burden under Count Five that no genuine issues of material fact exist. The Court allows that a rational trier of fact might resolve the disputes raised by the parties in Count Five in favor of the nonmoving party, so summary judgment must be denied.

B-Bar Tavern Inc v. Prairie Mountain Bank, August 2nd 2013, James A Patten for Plaintiff, James A Donahue and John P. Paul for Defendant

2013 Mont.B.R. 38

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B-Bar Tavern Inc. v. Prairie Mountain Bank, Chapter 11, Adversary Proceeding, Objection to Claim, Avoid Lien, Reformation, December 18, 2013

This Court concludes that PMB does not have an allowed “claim” against B-Bar Tavern in the amount asserted, and PMB’s Claim 1 must be disallowed in its entirety.  PMB filed Proof of Claim No. 1 accompanied by attachments which include Ex. 31, the Barnes, Inc., promissory note dated 3- 24-2009, the TI executed by Dick (Ex. 35).  Ex 31 is a promissory note signed by Jack on behalf of Barnes, Inc., and it does not constitute evidence that B-Bar Tavern is liable to PMB for repayment of the loan.  The note attached to PMB’s Claim  is evidence of a debt owed by Barnes, Inc. It is not evidence of a debt owed by B-Bar Tavern. In the instant case no evidence exists in the record that B-Bar Tavern expressly agreed to be personally liable for the debt and its inclusion as the debtor is unanimously agreed to be a mistake.  Thus, Ex. 35 does not bind B-Bar Tavern personally to repay the $741,041.10 debt.

Montana’s statute of frauds requires that an agreement, which by its terms is not to be performed within a year from the making of the agreement, must be in writing or is invalid.  The Barnes, Inc., note, had a 3-year maturity, so any promise by B-Bar Tavern to be liable to repay that note is invalid unless in writing as required under the statute of frauds. No such writing exists in the record.

The regular mortgage statutes include MCA § 71-1-201, which provides in pertinent part that property may be mortgaged “to secure existing debts, to secure debts created simultaneously with the execution of the mortgage, . . . .”   However, a dispute exists between the parties about the date Dick executed Ex. 35. His handwritten signature states “3/25/9" while the printed dates on page 1 and the acknowledgment on page 12 state March 24, 2009. MCA §§ 1-4-105 and 28-3-205 provide that when an instrument contains partly written words and partly language in preprinted form, the written words control the pre-printed form.  Therefore, subject to PMB’s counterclaim for reformation, Dick’s handwritten date of “3/25/9" controls and Ex. 35 does not comply with the requirement of MCA § 71-1-201 that the mortgage secure a debt created simultaneously with the execution of the mortgage, because the debt on Ex. 31 was created the day before Dick’s handwritten date of March 25, 2009.

Representative Capacity

Plaintiff argues that B-Bar Tavern’s lack of corporate authority to mortgage its property is consistent with Dick’s execution of the TI personally rather than in a representative capacity for B-Bar Tavern, and that PMB failed its responsibility to assure that its loan documents were prepared and executed in conformity with the law. The Court agrees that Dick did not sign Ex. 35 in a representative capacity for B-Bar Tavern as required, but from Dick’s testimony it is clear that he intended to, and the Court will address that below.

Acknowledgment

Ex. 35 includes both short-form certificates of notarial acts described in MCA § 1-5-610, one for an individual capacity, which is left blank, and the second for “Business or Entity Acknowledgment” which Robbins signed as notary, naming B-Bar Tavern as the entity.  However, the acknowledgment does not name Dick or his title, which is required. Robbins admitted that Dick’s name and representative capacity were required on the acknowledgment, and that it was a mistake for her to leave them out.  Based on the lack of Dick’s name and representative capacity on the acknowledgment the Court finds that Ex. 35 was not properly acknowledged as required under MCA §§ 1-5-602(1), 1-5-609(2) and 1-5-610. Not having been properly acknowledged, Ex. 35 could not be recorded pursuant to MCA § 70-21-203.

 Settlement Agreement

This Court agrees that Plaintiff’s statutory trustee powers as debtor-in-possession are not subject to the Settlement Agreement, which predated the filing of the petition which commenced the case under Title 11 and empowered the Plaintiff under § 544(a). Plaintiff did not have strong arm powers at the time of the Settlement Agreement, and nothing in the Settlement Agreement, purports to waive the provisions of the Bankruptcy Code.  Above, this Court concluded that PMB failed to satisfy the requirements of Montana’s mortgage and acknowledgment statutes in completing execution of Ex. 35. That failure means that Ex. 35 did not satisfy Montana law for recording the mortgage under MCA § 70-21-203.  Subject to the Court’s decision on PMB’s counterclaim seeking reformation, PMB’s lien is subject to avoidance by the Debtor-in-Possession under § 544(a). The release provision of the Settlement Agreement, did not deprive the Debtor-in-Possession of the strong arm powers of § 544(a).

Reformation

PMB contends that it is entitled to the remedy of reformation under MCA § 28-2-1611 to correct the mutual mistake in the TI, which has B-Bar Tavern’s name typed at paragraph 4 of Ex. 35 where the name of the obligor Barnes, Inc., would appear. The Court agrees. Not only MCA § 28-2-1613, but also MCA § 28-2-905(1)(a) authorizes a court, in cases of mistake, to depart from the parole evidence rule and to consider evidence other than the contents of the writing.  In considering the record, the Court concludes that the equities weigh heavily in favor of PMB. Dick and Jack testified that PMB fulfilled all its obligations to Jack and fully performed under the Settlement Agreement.  The Court sees no evidence of inequitable conduct by PMB in this record. PMB’s acquiescence in Potts’ strategy was done to comply with its loan limit requirements under law.

Attorney Fees.

Plaintiff prevailed under Montana’s mortgage and acknowledgment statutes in showing that Ex. 35 is invalid, as discussed above. Therefore, PMB cannot win an award of attorneys’ fees based on Ex. 35. But, PMB prevailed in its counterclaim for reformation under MCA § 28-2-1611, and the net result is that Ex. 35 will be reformed and Plaintiff is not a prevailing party.  PMB cites no statutory provision which entitles it to an award of attorneys’ fees in a reformation action based on MCA § 28-2-1611, and the Court is unaware of any such statute.  Therefore, under the American Rule applicable in Montana, PMB is not entitled to an award of attorneys’ fees.

 B-Bar Tavern Inc., v. Prairie Mountain Bank, December 18, 2013, James A. Patten and Benjamin C. Tiller for B-Bar Tavern, James A. Donanue, Gregory J. Hatley and John P. Paul for Prairie Mountain Bank

2013 Mont.B.R. 60

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Bailey, Hunt v. Bailey, Issue Preclusion, Discharge

Case no 12-60253, Adv. no. 12-300037

 

Plaintiffs in this adversary proceeding have moved for summary judgment to except theirclaim in the amount of $169,440.75 from the Defendant/Debtor Randy Ray Bailey’s discharge under 11 U.S.C. § 523(a)(2)(A), based on the issue preclusion/collateral estoppel doctrine and summary judgment entered against Defendant in the Gila County Superior Court of the State of Arizona, based on fraud. Defendant denies obtaining money by false pretenses, false representations or fraud.

The doctrine of claim preclusion provides that a final judgment on the merits bars furtherclaims by parties or their privies based on the same cause of action. Issue preclusion applies in dischargeability proceedings. As a matter of full faith and credit, a federal court must determine the preclusive effect of a prior state court judgment by applying the issue preclusion law of the state of the court that rendered the prior judgment. For collateral estoppel to apply (1) the issue must have been actually litigated in a previous proceeding, (2) the parties must have had a full and fair opportunity and motive to litigate the issue, (3) a valid and final decision on the merits must have been entered, (4) resolution of the issue must be essential to the decision, and (5) there must be common identity of the parties.

Defendant’s attorney failed to respond to the motion for summary judgment filed in the Arizona litigation, and summary judgment was entered on Plaintiffs’ claims including fraud. The Defendant voluntarily selected Keith Lallis as his attorney of record in the Arizona litigation, and he cannot now avoid the consequences of the acts or omissions of his freely-selected attorney. The issues were submitted on Plaintiffs’ motion for summary judgment for determination, and were determined. Therefore, the issues were "actually litigated."

Section 523(a)(2)(A) provides that, "a discharge under . . . this title does not discharge an individual debtor from any debt – (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by – (A) false pretenses, a false representation, or actual fraud, . . . ." To prevail on a § 523(a)(2)(A) claim, a creditor must establish five elements:

"‘(1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of his statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor's statement or conduct; and (5) damage to the creditor proximately caused by its reliance on the debtor's statement or conduct.'" Applying the doctrine of issue preclusion/collateral estoppel because Plaintiffs have satisfied each of the required elements, this Court finds and concludes that the Plaintiffs have satisfied their burden for summary judgment under Rule 56(a) by showing that no genuine issue of material fact exists, and that they are entitled to summary judgment as a matter of law under §523(a)(2)(A) excepting their claim in the amount of $169,440.00 from the Defendant’s discharge based on the Arizona summary judgment.

In re Bailey, Hunt v. Bailey, April 2, 2013, Andrew Pierce for Hunt, , Randy Bailey, Pro se

2013 Mont.B.R. 22

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Bailey, Hunt v. Bailey, Attorneys Fees

Case no 12-60253, Adv. no. 12-300037

Chapter 7, Adversary Proceeding, Attorneys Fees

After a trial and judgment entered in this adversary proceeding against the Defendant excepting Plaintiffs’ claim from Defendants’ discharge, Plaintiffs filed a "Motion for Award of Attorneys’ Fees". Plaintiffs moved for an award of attorneys’ fees based on Arizona statute, A.R.S. §12–341.01(A), which states, "in any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorney fees." The Defendant objected to Plaintiffs’ Motion for attorneys’ fees, but cites no authority in support of his opposition other than his difficult circumstances1 and errors by this Court and the Arizona state court.

In Travelers, the Supreme Court reaffirmed the nature and scope of a right to payment is determined by state law. Noting that it has "long recognized that the basic federal rule in bankruptcy is that state law governs the substance of claims, Congress having generally left the determination of property rights in the assets of a bankrupt's estate to state law." Since the Travelers decision, the allowance of claims for attorney's fees in bankruptcy generally is recognized as governed by state law. Accordingly, this Court applies Arizona state law to determine Plaintiffs’ eligibility to collect postpetition attorney’s fees. Plaintiffs correctly state the applicable Arizona statute is A.R.S § 12–341.01. Section § 12–341.01(A) allows a trial court to award attorney fees to the prevailing party in "any contested action arising out of a contract, express or implied."

When a creditor is forced to defend a judgement, courts have frequently awarded associated costs and attorney fees. Such courts state that awarding attorney fees to a creditor that has successfully prosecuted to judgment a nondischargeable fraud-based debt is to make creditor whole for all damages allowable under state law or contract arising out of a debtor's fraud. A bankruptcy proceeding is substantially intertwined with a contract dispute when the evidence is directly related to and used in both proceedings and identical or substantially overlapping discovery would occur. Based on Travelers and the other above-cited authority, this Court finds and concludes that Plaintiffs are entitled to reasonable attorneys’ fees pursuant to A.R.S. § 12-341.01(A).

Hunt v. Bailey, July 8, 2013, Michael J Harper for Hunt, Andrew J. Pierce for Bailey

2013 Mont.B.R. 37

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Bellamy, Chapter 13, Lien Avoidance, November 19, 2013

Case no. 13-60391

Altana holds a consensual lien on Debtor’s residence stemming from a $40,624.00 home equity loan Debtor and his spouse obtained from Summit Credit Union (now Altana), which loan was secured by a Trust Indenture under the Small Tract Financing Act.  As reflected in Proof of Claim No. 1, Altana asserts it was owed $68,596.50 on Debtor’s petition date.

 Debtor objects to Altana’s Proof of Claim No. 1 and seeks to avoid its lien against Debtor’s home, arguing Altana’s claim is wholly unsecured.  Altana counters that the value of Debtor’s home is something more than $100,000, that a portion of its claim is secured and that the protections of 11 U.S.C. § 1322(b)(2) apply.

 Debtor offered no facts to support his opinion that the as-is value of his home is $110,000.  The Court thus rejects Debtor’s opinion of value.  The Court also rejects Baker’s opinion of value.  When Altana’s counsel questioned Baker about errors in his appraisal and called into question certain aspects of the appraisal, Baker became confused, was unable to answer some questions, and was generally unable to support his appraisal with credible testimony.  The facts with respect to Baker’s testimony and appraisal, as recited above, demonstrate by themselves why the Court does not accept Baker’s opinion of value.  The Court need not belabor the matter.  Accepting Bruner’s opinion that the as if completed value of Debtor’s home is $255,000 and subtracting $80,000 for additional work needed to complete Debtor’s home4, the Court concludes that the value of Debtor’s home today, as it sits, is $175,000.

Debtor owes Wells Fargo Bank $160,657.40 on its first position lien, leaving additional value in Debtor’s home of $14,342.60 for Altana’s second position lien, which is also, under 11 U.S.C. § 506(a), the amount of Altana’s allowed secured claim.  In other words, Altana’s claim is partially secured, and partially unsecured, rather than wholly unsecured as argued by Debtor.  Altana’s secured claim is secured only by a security interest in Debtor’s home.  Debtor is precluded from modifying the rights of Altana because the anti-modification clause of § 1322(b)(2) protects both the secured and unsecured components of an undersecured lienholder's claim.  Because Debtor is not seeking to value Altana’s secured claim, but rather, is seeking to wholly avoid Altana’s lien, Debtor’s motion to avoid lien under 11 U.S.C. § 506 and objection to claim must be denied.  Additionally, confirmation of Debtor’s Chapter 13 Plan dated September 4, 2013, must be denied because it seeks to improperly modify the rights of Altana.

 In re Bellamy, November 19, 2013, Craig D. Martinson for Debtor, Thomas R Martin for Altana

2013 Mont.B.R. 56

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Belzer, Chapter 13, Disposable Income

Case no. 12-61590

 

The Trustee contends that if Debtors use Cassie’s new wage in calculating projected disposable income, Debtors will be above-median and thus, Debtors’ disposable income should be determined by Part III of Form B 22C. Second, the Trustee argues based upon such calculation, "Debtors’ Plan should extend for the sixty month applicable commitment period." Debtors agree that their projected disposable income must account for Cassie’s increased pay, but counter that based upon their average monthly income received in the six-month period preceding their bankruptcy filing, their income is below-median and thus, the applicable commitment period is 36 months.

The Supreme Court in Hamilton v. Lanning, focusing on the term "projected," reasoned that the ordinary meaning of projected supported a forward-looking approach because "in ordinary usage future occurrences are not ‘projected’ based on the assumption that the past will necessarily repeat itself." Following the holding set forth in Hamilton v. Lanning, this Court agrees that Cassie’s increased income, which was known at the time of confirmation, must be included in the calculation of Debtors’ projected disposable income. However, Hamilton v. Lanning does not dictate that debtors calculate their projected disposable income using Form 22C when there are changes in income that are known or virtually certain to occur. Projected disposable income can still be determined by Schedules I and J. Unlike the term "projected disposable income," which is not defined in the Bankruptcy Code, the term "current monthly income" is defined and does not require or suggest a forward-looking approach.

In re Belzer, Robert Drummond Trustee, Benjamin C. Tiller for Belzers, March 19, 2013

2013 Mont.B.R. 17

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Bender, Chapter 13, Objection to Claim

Case no. 12-61449

Debtor’s Objection to the Bank’s claim alleges that it is duplicative, and that the Bank does not have a security interest in the Skidsteer. The Debtor’s Objection on the grounds the claim is duplicative is easily disposed of. Ex. K states plainly that the Proof of Claim amends previously filed Claim Number 3. The Bank filed its amended Proof of Claim in response to the Trustee’s objection that the claim lacked the required security documents. Montana Local Bankruptcy Rule 3001-2 ("Attachments to Proofs of Claim") requires that a proof of claim "shall include those documents required by F.R.B.P. 3001(c) and (d); and an itemized summary ...." Rule 3001(c) provides that when a claim is based on a writing, the original or a duplicate shall be filed with the proof of claim." As an amendment, the Bank’s amended Proof of Claim is not duplicative and that objection is overruled.

Under Rule 7001(2), an adversary proceeding is a proceeding to determine the validity, priority or extent of a lien or other interest in property. Debtor’s Objection is not an adversary proceeding, and thus the validity of the Bank’s security interest in the Skidsteer or other collateral is not before the Court in the manner required by the Rule. Because of this procedural defect, Debtor’s Amended Objection is overruled to the extent it seeks a determination of the validity of the Bank’s security interest. A proof of claim that is executed and filed in accordance with the Rules "shall constitute prima facie evidence of the validity and amount of the claim." A claim "is deemed allowed, unless a party in interest . . . objects." Upon objection, a bankruptcy court shall determine the amount of such claim . . . as of the date of the filing of the petition, and shall allow such claim in such amount except to the extent that— (1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.

Under MONT. CODE ANN. § 28-2-904, the execution of a written contract supersedes all oral negotiations or stipulations concerning its matter which preceded or accompanied the execution of the instrument. Bender has not alleged mistake, imperfection of the writings, so there can be no evidence of the terms of the agreement other than the contents of the writing. A separate Order shall be entered overruling Debtor’s Amended Objection to Independence Bank’s Amended Proof of Claim No. 3, and denying confirmation of Debtor’s Amended Chapter 13 Plan.

In re Bender, March 27, 2013, Gregory W. Duncan for Bender, Chris R. Young for Independence Bank.

2013 Mont.B.R. 21

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Bodeker, Chapter 7, Search and Seizure, 4th Amendment

Case no. 12-60137

Pending in this Chapter 7 case is the Trustee’s Notice of Intent to Sell gold and silver of the estate. Debtor objects that the Trustee’s search of his home for his gold and silver was an illegal search and seizure under the Fourth Amendment1 to the United States Constitution, and therefore that requiring Debtor to amend his Schedules to include the gold and silver should be suppressed and the gold and silver should be returned to the Debtor.

Schedule B failed to list Renn’s gold and silver, and failed to list his food supply. Asked why he did not schedule his gold, silver and food, Renn answered that it was pursuant to his church’s policy to be self sufficient for what may come, and he did not consider his food, gold or silver to be an asset. Asked about his failure to list his firearms, money and dall sheep mount, he answered that he was under heavy stress from the loss of his wife and he did not even think of those items, or his tractor and implements. The 341 meeting continued on April 9, 2012. At that meeting Renn produced documents and admitted for the first time that he owned gold and silver worth at least $22,000. Renn gave the Trustee a written statement explaining why he did not previously disclose his gold and silver. Brandon testified that Renn’s statement said that he "lied out of necessity" because "social security is going to be gone and some day the dollar’s going to crash, like they’re talking a lot about today."

Renn resists amending his Schedules to add the gold and silver, and no claim of exemption is stated in his Schedule C for the gold and silver. Where a debtor fails to list an asset on his or her schedules, "that asset continues to belong to the bankruptcy estate." The Trustee’s duties are set forth at 11 U.S.C. § 704(a), including § 704(a)(1) to "collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as possible as is compatible with the best interests of parties in interest." The bankruptcy trustee has the duty and authority to take actions that "maximize the value of the estate." When a debtor files a chapter 7 petition, all of his or her assets become property of the estate and may be used to pay creditors, subject to the debtor’s ability to reclaim specified property as exempt. This Court finds that no evidence exists in the record that the private party, Brandon, intended to assist law enforcement efforts under the second prong. Rather, she searched Renn’s house to further her own ends and for a legitimate independent motivation, i.e., to satisfy her trustee duties under § 704(a)(1) to collect property of the estate. For Brandon’s search to be subject to the Fourth Amendment, Renn had to show that she acted with the intent to assist the government in its investigatory purposes and not for an independent purpose. Considering the totality of the circumstances in this case, the Court concludes that Renn failed to show that he had an objectively reasonable expectation of privacy when his attorney consented and advised Renn to allow the Trustee to follow him to his residence and search for undisclosed assets, including the told and silver.

In re Bodeker, June 7, 2013, Kevin Vainio for Bodeker, Robert K Baldwin and Kyle Nelson for Brandon

2013 Mont.B.R. 33

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Bucher v. Hughes, Chapter 7, Dischargeability, Driving while Intoxicated

Case no. 12-61143, Adversary no. 12-00048

In this adversary proceeding the Plaintiff Shane C. Bucher seeks exception from the discharge1 of the Defendant/Debtor Patrick H. Hughes ("Hughes"), under 11 U.S.C. § 523(a)(9), the sum of $36,929.71 for personal injuries caused by Hughes’ operation of his motorcycle vehicle while intoxicated. Hughes’ answer denies that intoxication was proven. He argues that the alcohol charges were dismissed and that § 523(a)(9) does not apply. The Complaint seeks exception from Defendant’s discharge pursuant to § 523(a)(9). Exceptions to discharge should be strictly construed against an objecting creditor and in favor of a debtor in order to effectuate the fresh start policy afforded by the Bankruptcy Code.

Section 523(a)(9) excepts from discharge any debt "for death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance". This statute evidences the clear intent of Congress to prevent drunken drivers from escaping liability by discharging debts in bankruptcy. In order to except a debt from discharge pursuant to § 523(a)(9) a court must find (1) that a personal injury or death occurred; (2) as a result of a motor vehicle accident; (3) caused from a debtor’s operation of a motor vehicle while (4) unlawfully intoxicated by alcohol, a drug or another substance.

Only the fourth element was contested by the Defendant in his objection, where he argues that legal intoxication was never proven. However, because Hughes failed to file a statement of genuine issues, by operation of LBR 7056-1(a)(3) Plaintiff’s SOUF Fact Nos. 11, 12 and 13 are deemed admitted. Those facts establish that Hughes was observed intoxicated by alcohol immediately after he injured the Plaintiff by two nurses, and his BAC was measured above the legal intoxication limit by the Forensic Science Division of the Montana Department of Justice, and by an independent forensic toxicologist. Defendant argues that these statements are hearsay and inadmissible, and that a trial is required to determine whether he was unlawfully intoxicated. His argument ignores the process of summary judgment. The Court finds and concludes that Plaintiff satisfied his initial burden to identify those portions of the record which it believes establish an absence of material fact.

The burden shifted to the Defendant opposing summary judgment to "set forth specific facts showing that there is a genuine issue for trial. Defendant failed to satisfy that burden when he failed to file a Statement of Genuine Issues as required by Mont. LBR 70561(a)(2). Although not pled, the Court notes another strong policy reason why the Plaintiff’s debt must be excepted from discharge. In the Ninth Circuit debts arising from restitution orders are nondischargeable under 11 U.S.C. § 523(a)(7) because of state "penal and rehabilitative interests."

Rule 15(b)(2), FED. R. CIV. P., requires that an issue not raised by the pleadings is tried by the parties’ express or implied consent, it must be treated in all respects as if raised in the pleadings. Defendant’s arguments regarding restitution, in this Court’s view, imply his consent that § 523(a)(7) be treated as if raised in the pleadings. Defendant failed to pay the restitution except for a single payment. The balance owed on the $29,463.70 judgment, plus unpaid interest, is nondischargeable.

In re Hughes, February 26, 2013, Bucher v. Hughes, Lawrence Anderson for Bucher, Gregory W, Duncan for Hughes

2013 Mont.B.R. 12

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B.Y.O.B. Inc.  Chapter 7, Prima Facia Validity of Claims, January 15, 2013

Case No. 11-62347

 

The Trustee objects to Claim 10 also because no documentation is attached, and that there is no showing that the $98,000 was paid by the Glantz family to Debtor or is anything other than a capital contribution. The Trustee objects that the claim is barred by applicable statutes of limitations, the statute of fraud and usury. The Trustee requests that Claim 10 be disallowed entirely, or in the alternative allowed only in the amount of $45,012.26 to reflect the balance shown by the Debtor’s books and records.

In this instant case no documentation or spreadsheets are attached to Claims 9 and 10 evidencing the loans, itemizing the claims of Donna’s Estate and Glantz Family, or providing a basis for the charging or allowance of interest, which is signed by or on behalf of the Debtor. Only Jim Glantz’s handwritten statement attached to Claim 10 discusses interest, and it is dated 5/17/2012, long after the cash advances by the Glantz Family shown by Ex. 3 and the 1995 loan to which he refers. Based on the lack of documentation, the Court finds that Claims 9 and 10 are not entitled to the evidentiary presumption or prima facie treatment of the validity and amount of such claims under Rule 3001(f). The claimants have the ultimate burden.

An unwritten agreement that by its terms is not to be performed within a year from the making of the agreement would violate Montana’s statute of frauds, MCA § 28-2-903(1)(a). Bloome v. First National Bank of Miles City, 238 Mont. 181, 186, 776 P.2d 525, 528 (1989). Jim Glantz’s handwritten note attached to Proof of Claim 10 argues that the Glantz Family extended a loan in the amount of $98,000 on October 17, 1995, which was to accrue interest added to the principal on an annual basis. That statement is not signed by Donna or on behalf of BYOB, and is dated 5/17/2012 while the claimant refers to a debt incurred in 1995. Thus, whatever the agreement between Donna and the Glantz Family, it was not to be performed within a year from its making and the statute of frauds applies. The Court concludes that the Glantz Family’s Proof of Claim No. 10 is invalid and barred by the statute of frauds, § 25-2-903(1)(a), both with respect to the principal and claimed interest, because Glantz Family did not produce a writing subscribed by Donna Glantz or other agent of BYOB, and the evidence shows that repayment of the loans was not to be performed within one year from the making of the agreement.

In re B.Y.O.B. Inc, January 15, 2013, Christy Brandon Trustee, pro se

2013 Mont.B.R. 4

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Cardwell, Chapter 13, Objection to Claim, Creditor Fees and Costs, November 7, 2013

Case no. 13-60311

The attachment to Proof of Claim 12 itemizes the $24,997.06 arrearage as comprised of 24 installments of $678.17 due from April 1, 2011, to March 1, 2013 ($16,276.08), plus $8,720.98 in additional prepetition fees, expenses and other charges. The $8,720.98 in additional expenses is comprised of $98.27 in late charges incurred 3/1/2013, $487.50 in attorney’s fees incurred 12/21/2012, $1,268.00 in title costs, $142.00 in recording fees, $252.00 in property inspection fees from 5/7/11 through 3/2/13, $5,660.76 described as “Escrow shortage or deficiency” dated 3/13/2013, and $425.00 in post-petition attorney fees “for filing the proof of claim, reviewing the plan and filing request for special notice.”Debtors’ Object to Proof of Claim No. 12 filed by Chase based on 11 U.S.C. § 506(b) on the grounds it is undersecured.  Debtors further argue that Montana’s prohibition against collection of a deficiency in a foreclosure of a trust indenture in MONT. CODE ANN. (“MCA”) § 71-1-317 limits Chase’s arrearage claim to accrued principal and interest despite the anti-modification provisions of 11 U.S.C. § 1322(b)(2).

Debtors offered no evidence at the hearing to rebut JP Morgan Chase Bank’s Claim 12, and as a result it is entitled to the rebuttable presumption of the validity and amount of its claim, except with respect to the value of its collateral which it failed to state. The parties do not dispute that the value of Debtors’ residence which is the bank’s security is $120,000. Thus, Debtors’ Objection will be sustained in part, and secured claim will be allowed in the amount of $120,000, with the remainder of the $136,988.72 claim allowed as an unsecured nonpriority claim.  However, as to the amount of JP Morgan Chase Bank’s arrearage, the Court finds and concludes that the Debtors have not satisfied their burden to come forward with evidence to rebut the presumption of validity of the amount of claimed arrearage claim.

Debtors argue that Montana’s anti-deficiency statute MCA § 71-1-317 prohibits JP Morgan Chase Bank from claiming attorney fees or anything except principal and interest despite § 1322(b)(2). The opening clause of MCA §71-1-317 limits it application to “[w]hen a trust indenture executed with this part is foreclosed by advertisement and sale . . . .” The facts in the instant case do not show foreclosure by advertisement and sale. Debtors seek to retain their residence and cure the default pursuant to the Bankruptcy Code. Because of the opening clause, MCA § 71-1-317 does not apply.

In the instant case, likewise no separate itemization has been provided of the $487.50 in attorney fees listed on the attachment. The Court cannot determine what tasks were performed, or by whom, or the billing rate. On the other hand, the attachment provides three dates, 8/12, 9/12, and 10/12, when the attorney’s fees were provided prepetition. The deed of trust entitles JPMorgan Chase Bank to attorney fees, and the Debtors have not objected to the $487.50 in prepetition fees or the $425 in post petition fees  in attorney’s fees on the ground that they are not reasonable. Based on the deed of trust provision,  Proof of Claim 12 and attachment, this Court finds that JP Morgan Chase Bank has  complied with the requirements of LBR 2016-1(f) and that the $487.50 in prepetition fees and the  $425 in postpetition  attorney’s fees is reasonable.

 In re Cardwell, November 7, 2013, D. Randy Winner for Debtors, Erika R. Peterman for JP Morgan Chase Bank

 2013 Mont.B.R. 52

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Center Field Properties, LLC., Chapter 11, Administrative Expenses

Hawthorn Suits Franchising, Inc. for payment of the sum of $85,736.08 as a postpetition administrative claim under 11 U.S.C. § 503(b)(1)(A) based on a "License Agreement" with the Debtor and Debtor’s use of HSF’s reservation system and advertising. Debtor Center Field Properties, LLC filed an objection to the amount requested, contending that HSF should be allowed an administrative claim in the sum of $4,343.35 for actual benefit to the estate under § 503(b)(1)(A). HSF’s Motion asks for allowance of an administrative claim due under Ex. 1 in the amount of $85,736.08 under § 503(b)(1)(A) which provides that there shall be allowed administrative expenses, including "(A) the actual, necessary costs and expenses of preserving the estate . . . ." The burden of proving an administrative expense claim is on the claimant. In order to keep administrative costs to the estate at a minimum, actual, necessary costs and expenses of preserving the estate are construed narrowly. Here, the Court decides only the amount of HSF’s administrative claim to be allowed under § 503(b)(1)(a).

After considering the parties’ evidence and witness testimony, the Court finds and concludes the actual, necessary costs and expenses of preserving the estate which should be allowed to HSF is the amount of $4,489.26 shown by Ex. A and Poindexter’s testimony. Construing the Motion narrowly, the Court concludes that HSF failed to show that its Hawthorn Marks "directly and substantially benefitted the estate" to the extent of $85,736.08 as required for allowance under § 503(b)(1)(A). Accordingly, in the exercise of its broad discretion the Court will allow HSF’s an administrative claim under § 503(b)(1)(A) to the extent of $4,489.26 in accordance with the Debtor’s evidence, but otherwise denies it.

In re Center Field Properties LLC., July 3, 2013, James A Patten for the Debtor, Michael J. Connolly and John H Grant for HSF

2013 Mont.B.R. 36

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Chitwood, Chapter 13, Objection to Claim, Creditor Fees and Costs, November 6, 2012

Case no 13-60257

The attachment to Proof of Claim 12 itemizes the $26,625.07 arrearage as comprised of12 installments of $1,883.58 due from April 1, 2012, to March 1, 2013 ($22,602.96), plus $4,022.11 in additional prepetition fees, expenses and other charges. The $4,022.11 additional expenses is comprised of $376.70 in late charges from April to August 2012, $540 in attorney’s fees from August 2012 to October 2012, $126.50 in filing fees and court costs, $1,002.08 in advertisement cost, $1,101 in title costs, $47 in recording fees, $105 in property inspection fees from February 2012 to January 2013, and $723.834 described as “Escrow shortage or  deficiency.”  Debtors’ Object to Proof of Claim No. 12 filed by Wells Fargo Bank, N.A. based on 11 U.S.C. § 506(b) on the grounds it is undersecured.  Debtors further argue that Montana’s prohibition against collection of a deficiency in a foreclosure of a trust indenture in MONT. CODE ANN. (“MCA”) § 71-1-317 limits Wells Fargo Bank’s arrearage claim to accrued principal and interest despite the anti-modification provisions of 11 U.S.C. § 1322(b)(2).

 Debtors offered no evidence at the hearing to rebut Wells Fargo Bank’s Claim 12, and as a result Wells Fargo Bank is entitled to the rebuttable presumption of the validity and amount of its claim, except with respect to the value of its collateral which it failed to state. The parties do not dispute that the value of Debtors’ residence which is the bank’s security is $329,300. Thus, Debtors’ Objection will be sustained in part, and Wells Fargo Bank’s secured claim will be allowed in the amount of $329,300, with the remainder of the $346,701.13 claim allowed as an unsecured nonpriority claim.  However, as to the amount of Wells Fargo Bank’s arrearage, the Court finds and concludes that the Debtors have not satisfied their burden to come forward with evidence to rebut the presumption of validity of the amount of claimed arrearage claim.

 Debtors argue that Montana’s anti-deficiency statute MCA § 71-1-317 prohibits Wells Fargo Bank from claiming attorney fees or anything except principal and interest despite § 1322(b)(2). The opening clause of MCA §71-1-317 limits it application to “[w]hen a trust indenture executed with this part is foreclosed by advertisement and sale . . . .” The facts in the instant case do not show foreclosure by advertisement and sale. Debtors seek to retain their residence and cure the default pursuant to the Bankruptcy Code. Because of the opening clause, MCA § 71-1-317 does not apply.

 In the instant case, likewise no separate itemization has been provided of the $540 in attorney fees listed on the attachment. The Court cannot determine what tasks were performed, or by whom, or the billing rate. On the other hand, the attachment provides three dates, 8/12, 9/12, and 10/12, when the attorney’s fees were provided prepetition. The deed of trust entitles Wells Fargo Bank to attorney fees, and the Debtors have not objected to the $540 in attorney’s fees on the ground that they are not reasonable. Based on the deed of trust provision, Wells Fargo Bank’s Proof of Claim 12 and attachment, this Court finds that Wells Fargo Bank has complied with the requirements of LBR 2016-1(f) and that the $540 in attorney’s fees is reasonable.

 In re Chitwood, November 6, 2013, D. Randy Winner for Debtors, Erika R Peterman for Wells Fargo

 2013 Mont.B.R. 51

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Cini, Chapter 11, Motion for Sanctions, February 8, 2013

Case no. 10-62715

In this Chapter 11 case the Debtor Robin Cini ("Robin") filed a Motion for Sanctions against her former spouse Nigel Cini ("Nigel") for Violations of the Automatic Stay. She alleges the violation by filing two lawsuits against Robin on April 18, 2012, in the Flathead County Montana District Court. Nigel filed a response in opposition calling Robin’s Motion frivolous and asking that she be held in contempt.

The Debtor’s filing of her bankruptcy petition on November 19, 2010, gave rise to an "automatic stay." § 362(k) provides for damages for willful violation of the stay upon a finding that the defendant knew of the automatic stay and that the defendant’s actions, which violated the stay, were willful. A party with knowledge of bankruptcy proceedings is charged with knowledge of the automatic stay. Further, "once a creditor or actor learns or is put on notice of a bankruptcy filing, any actions intentionally taken thereafter are ‘willful’ within the contemplation of § 362([k])."

It does not matter that Nigel believes his actions were justified, either to preserve his rights against the running of a statute of limitations, or because he believed the stay did not apply because his new state law claims against Robin are nondischargeable under § 523(a)(6). He did not file a motion to modify stay before filing his two complaints in state court. "The creditor takes the risk of being assessed for damages if he fails to obtain clarification from the bankruptcy court."

Actions taken in violation of the automatic stay are void, not merely voidable. Under Roman the Court must examine whether the Debtor could have mitigated her damages, and in determining the appropriate amount of attorney’s fees to award courts look "to two factors: (1) What expenses or costs resulted from the violation; and (2) what portion of those costs was reasonable, as opposed to costs that could have been mitigated." Robin’s only evidence of actual damages was her testimony that she incurred $2,700 in fees for her attorney to investigate, and incurred another five hours of fees to prepare for and attend the hearing on her Motion for Sanctions, and costs for renting videoconferencing time.  Cossitt’s billing rate is $300 per hour. Therefore the Court finds that Nigel’s willful violations of the stay caused Robin damages in the form of attorney fees in the total amount of $4,200, which the Court will award pursuant to § 362(k) for Nigel’s willful violations of the stay. The Court awards nothing for the videoconference costs because no testimony to support an award of such cost in any amount exists in the record. The Court awards nothing for emotional damages.

In re Cini, February 8, 2013, James H. Cossitt for Robin, Nigel Cini, Pro se.

2013 Mont.B.R. 7

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Cini v. Cini, Chapter 11, Adversary Proceeding, Summary Judgment, February 25, 2013

Case no. 10-62715, Adversary no. 11-00007

Plaintiff satisfied her burden of showing that she is entitled to summary judgment as a matter of law that Nigel does not have a valid lien, claim or other interest in any and all claims, recoveries and proceeds arising out cases in the Montana Eleventh Judicial District Court, Flathead County.

Mont. LBR 7056-1(a)(2) requires that a separate "Statement of Genuine Issues" setting forth specific facts which preclude summary judgment in favor of the moving party, must be filed by the party opposing the motion together with an opposition brief. Nigel filed a response in opposition and request for Rule 9011 sanctions, but he did not file a separate, short and concise "Statement of Genuine Issues" setting forth the specific facts which he asserts establish a genuine issue of material fact precluding summary judgment in favor of the moving party, as required by LBR 7056-1(a). The Court finds that Plaintiff has satisfied her initial burden of proof of demonstrating that there is no genuine issue of material fact. Plaintiff filed a detailed SOUF, supported by exhibits, state court documents, and affidavits. The burden thus shifted to Nigel to set forth specific facts and affirmatively showing that there is a genuine issue for trial. The Court finds that Nigel has failed to satisfy his burden. Nigel failed to file a statement of genuine issues as required by Mont. LBR 7056-1(a)(2). Pursuant to LBR 7056-1(a)(3), all the material facts in the Plaintiff’s SOUF are deemed admitted. Nigel has not established any genuine issue of material fact by his arguments. He has not shown that he requested reconsideration of the Montana Supreme Court’s decision, or that he requested and was granted a stay of the decisions of the district court and Montana Supreme Court, or that his petition for certiorari was filed, or that certiorari was granted by the United States Supreme Court. The state court decision that the sheriff’s sale of Nigel’s interests was performed in accordance with applicable law is final.

Montana applies a four-element test to determine whether re-litigation of an issue is barred under issue preclusion: (1) Was the issue decided in the prior adjudication identical to the issue raised in the action in question? 2. Was there a final judgment on the merits in the prior adjudication? 3. Was the party against whom preclusion is asserted a party or in privity with a party to the prior adjudication? 4. Was the party against whom preclusion is asserted afforded a full and fair opportunity to litigate the issue that may be barred? The Court finds that all four elements for issue preclusion are satisfied by Plaintiff, and concludes that Plaintiff is entitled to summary judgment as a matter of law that, as a result of the sheriff’s sale, Nigel has no valid lien, claim or other interest in any and all claims, recoveries and proceeds arising out of Case # DV-09-1488(a) and #DP-09-67(A) in the Montana Eleventh Judicial District Court.

In re Cini, Cini v. Cini, February 25, 2013, James Cossitt for Robin, Nigel Cini, pro se

2013 Mont.B.R. 10

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Cini v.Viscomi & Gersh, et al, Settlement, Violation of Stay, May 4, 2012

Case no. 10-62715, Adversary no. 11-00007

At the trial the Court sustained Cossitt’s objection based upon Rule 7008(b), F.R.B.P., which provides: "(b) Attorney’s Fees. A request for an award of attorney’s fees shall be pleaded as a claim in a complaint, cross-claim, third-party complaint, answer, or reply as may be appropriate." Carroll did not plead his request for attorney fees as a claim or counterclaim in his answer, so the Court denied Carroll’s request for attorney fees at trial. The Court here reaffirms that denial based on Rule 7008(b).

Counts I and III call for a determination of the validity and priority of Robin’s and Carroll’s respective interests and/or liens. Here, the evidence shows a final decision by the state court in the marital dissolution case approving the sheriff’s sale, Ex. 4, which was affirmed by the Montana Supreme Court in Ex. 5. Under Rule 201, Fed. R. Evid., courts may take judicial notice of undisputed matters of public record, including documents on file in federal or state courts. Those decisions are final, and under the law of the case this Court declines to reopen what has been decided with respect to the validity of the sheriff’s sale.

The officer’s lien in favor of Carroll pursuant to § 71-3-1503 expired after 120 days under § 25-13-402(1)(a), when Carroll failed to accomplish a sheriff’s sale. Robin purchased all of Nigel’s rights and interests in and to the Trust Fund at the sheriff’s sale. When Carroll eventually attempted to levy on execution of his second writ, that was void because Nigel’s interests had become property of the Robin’s estate. As Debtor-in-Possession, Robin has rights and powers of a trustee under 11 U.S.C. §1107(a). Thus, Robin has "strong arm" powers under 11 U.S.C. § 544(a)(1), including the rights and powers of a judicial lien creditor on all property on which a creditor on a simple contract could have obtained such a judicial lien. Section 544(a)(1) allows a trustee in bankruptcy to avoid unperfected interests in personal and real property. Carroll’s voluntary lien is unperfected, and if it had survived the sheriff’s sale, it would be avoidable under § 544(a)(1).

Above, the Court recited the evidence under the four A & C Properties factors. Three of the four factors clearly weigh in favor of approval of the settlement. The fourth factor, collection, is not a factor because of insurance coverage and MDOT being an arm of the state.

Actions taken in violation of the automatic stay are void, not merely voidable. Carroll did not seek relief from the stay before he attempted execution of his second writ. His actions in execution of his second writ were in willful violation of the stay and void, and subject Carroll to sanctions. In addition, once a violation of the stay has ended, any attorney fees the debtor incurs after that point in pursuit of a damage award would not be to compensate for "actual damages" under § 362(k)(1), and so cannot be recovered under the "American Rule."

Cini v. Viscomi and Gersh, May 4, 2013. James Cossitt and Mary Denevi for Robin Cini, Peter Carroll , pro se, Michael A. Visomi, pro se

2013 Mont.B.R. 27

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Davis, Motion to Avoid Lien, October 11, 2013

Case no. 13-60866

Kopp sold her Salt Lake City home and invested the proceeds from the sale of her home in the Antler Trail property. Debtor and Kopp made improvements to the property and on October 6, 2000, Debtor executed a Quit Claim Deed transferring the Antler Trail property to Debtor and Kopp as joint tenants. On March 22, 2002, Debtor and Kopp jointly filed a Declaration of Homestead Exemption in Madison County. Debtor and Kopp contributed their various talents, assets, and financial resources to Country Confidence, LLC and their personal lives until May 23, 2008, when all of the relationships between Debtor and Kopp ceased. Judge Tucker proceeded to enter judgment in favor of Kopp and against Davis in the amount of $34,400.00, which amount was to be a lien against the real property and improvements. Debtor has not made any payments to Kopp. Instead, Debtor commenced this Chapter 7 bankruptcy case on June 24, 2013.

Chiu repeated the Ninth Circuit’s analysis that "under § 522(f)(1) a debtor may avoid a lien if three conditions are met: (1) there was a fixing of a lien on an interest of the debtor in property; (2) such lien impairs an exemption to which the debtor would have been entitled; and (3) such lien is a judicial lien." Condition 3 is satisfied because it is undisputed that Kopp’s lien arising from the Judge Tucker’s Judgment and Amended Judgment is a judicial lien. It is similarly undisputed that Debtor is asserting and is entitled to a homestead exemption in the Antler Trail property. However, the outcome of Debtor’s motion to avoid lien hinges on whether Conditions 1 and 2 are fully met, namely, whether Debtor is entitled to a homestead exemption in 100 percent of the Antler Trail property and whether there was a fixing of a lien on an interest of the Debtor in property.

While Judge Tucker concluded that Debtor should have the parties’ real property and improvements, under Montana law, Debtor’s and Kopp’s prior interests in Antler Trail property were not extinguished and new interests were not created by the terms of the judgment and no subsequent deeds have been recorded. Instead, Debtor and Kopp still jointly own the Antler Trail property. The Montana legislature amended MCA § 70-32-104 by specifically providing: "(2) If a claimant who is an owner of an undivided interest in real property claims a homestead exemption, the claimant is limited to an exemption amount proportional to the claimant’s undivided interest." Consequently, Debtor is limited to an exemption amount proportional to the Debtor’s undivided interest in the homestead property. Unfortunately, Neel and MCA § 70-32-104(2) provide little relief to Debtor because Debtor’s undivided interest in the Antler Trail property on her petition date was limited to one-half the equity in the home, or $38,064.78. The equity associated with Kopp’s one-half interest in the homestead property is not protected by Debtor’s homestead exemption. Debtor’s Motion to Avoid Lien Under 11 U.S.C. § 522(f) filed September 13, 2013, at docket entry no. 19, is denied.

In re Davis, October 11, 2013, James J Screnar for Davis, Jeanette Ellen Berry for Kopp

2013 Mont.B.R. 48

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Duncan et al v. Stokes, Adversary Proceeding, Summary Judgment, February 8, 2013

Reversed on appeal Stokes v. Duncan et al (unpublished disposition)

Case no 09-60265  Adv, no. 12-00052

Pending in this adversary proceeding seeking a declaratory judgment are: Plaintiffs’ motion for summary judgment and Defendant’s objection thereto and motion to dismiss for lack of subject matter jurisdiction. Trial is scheduled to begin on March 7, 2013.  Summary judgment is governed by FED. R. BANKR. P. 7056. Rule 7056, incorporating FED. R. CIV. P. 56(c), states that summary judgment "should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." "The proponent of a summary judgment motion bears a heavy burden to show that there are no disputed facts warranting disposition of the case on the law without trial." the Court’s ultimate inquiry is to determine whether the "specific facts" set forth by the nonmoving party, viewed along with the undisputed background or contextual facts, are such that a rational or reasonable jury might return a verdict in its favor based on that evidence. Applying this standard, the Court finds and concludes that Plaintiffs satisfied their initial burden to identify those portions of the record which they believe establish an absence of issues of material fact. Based upon Stokes’ failure to show that genuine issues of material fact exist, the Court finds that no genuine issues of material fact exist, and the inquiry shifts to whether the moving parties are entitled to judgment as a matter of law.

Stokes complaint against Plaintiffs in the state court action CDV 2012-156 avers that Plaintiffs are liable for failing to properly advise Stokes of the detrimental impact that a bankruptcy filing would have on his appeal, as to which debts could be discharged, and that they improperly prepared and filed his schedules. Much of this alleged malpractice took place prior to the filing of his Chapter 11 petition. Given the broad scope of § 541(a)(1) and the above-quoted language from Hettick and Brown, and cases cited therein, this Court concludes that Stokes’ legal malpractice claims asserted in CDV 2012-156 are property of the estate. Stokes himself believed that the malpractice claims were property of the estate enough to submit the initial bid to purchase them from the Trustee. Based on that and the above, this Court concludes that Stokes’ state law claims in CDV 2012-156 were property of the estate purchased from the estate by the Plaintiff Duncan. this Court concludes that it falls within the "related to" jurisdiction of this Bankruptcy Court. Plaintiffs’ purchase of the estate’s interest in Stokes’ state law malpractice claims invokes a substantive right created by the federal bankruptcy law, and is not one that could exist outside of bankruptcy in the state district court. In sum, this Court finds and concludes that Plaintiffs’ petition for a declaratory judgment is a core proceeding under § 157(b)(2)(A) and (O) as it concerns the administration of the estate and enforcement of this Court’s Order affecting the liquidation of assets of the estate.

Duncan and Glover v. Stokes (In re Stokes), February 8, 2013, Michael F McMahon for Duncan and Glover, Edward Murphy for John Patrick Stokes

2013 Mont.B.R. 8

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Havre Airie #166 Eagles v. Groven, Chapter 11, Adversary Proceeding, March 14, 2013

Case no 12-60679, Adv. No 12-00027

In this adversary proceeding the Plaintiff/Debtor seeks to avoid, under 11 U.S.C. §547(b), a judicial lien obtained by the Defendant Kaycee Groven ("Groven") and to have Groven’s claim declared wholly unsecured. The Plaintiff/Debtor has the burden of proving the avoidability of transfers under §547(b).

Barnhill v. Johnson’s broad definition of "transfer" allows for the avoidance of judicial liens such as Groven’s. While the Bankruptcy Code does not define "an interest of the debtor in property," the Supreme Court has interpreted the term to mean "that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings." Several of the elements of § 547(b) are admitted in the agreed facts and stipulations listed in the Pretrial Order and quoted above. Agreed Fact 7 establishes that Groven’s judicial lien is a transfer made for or on account of an antecedent debt owed by the Debtor before the transfer was made, satisfying § 547(b)(2). Agreed Fact 9 establishes that the transfer was to or for the benefit of a creditor, Groven, satisfying § 547(b)(1). Agreed Fact 8 establishes that the transfer was made within 90 days before the petition date, satisfying § 547(b)(4)(A). Groven does not contest those elements.

However, Groven contends that the Plaintiff failed to show that the transfer was made while the Debtor was insolvent under § 547(b)(3), and that the Plaintiff has failed to prove §547(b)(5), i.e., that the transfer enabled the creditor to receive more than she would receive if the case were a case under chapter 7, the transfer had not been made, and the creditor received payment of such debt to the extent provided by the provisions of this title.

Under the applicable "balance sheet" test debtors are insolvent when their liabilities exceed their assets. Section 101(32) of the Bankruptcy Code defines "insolvent" to mean, with respect to individuals, "financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation, exclusive of – (I) property transferred, concealed, or removed with intent to hinder, delay or defraud such entity’s creditors; and (ii) property that may be exempted from property of the estate under section 522 of this title ...." Groven called no witnesses and offered no exhibits or other evidence to rebut the presumption under § 547(f) that the Debtor was insolvent during the 90 days preceding the date of the filing of the petition. Therefore the presumption is not rebutted.

Groven’s judgment enables her to receive more than she would in a chapter 7 case because she has the opportunity, right and the incentive to bid at a sheriff’s sale up to the fair market value of $132,500. In all likelihood Independence Bank would stop bidding when the bid was high enough to satisfy its $118,000 claim plus some amount for fees and costs, leaving Groven as the successful purchaser of the real property which has equity which, because of her judgment, she would not have to share pro rata with unsecured creditors5. Based on the equity shown by the agreed facts and stipulations, the Court finds and concludes that the Plaintiff has satisfied its burden of proof and met all the requirements of § 547(b) to avoid the transfer.

In re Havre Aerie #166 Eagles, Havre Aerie #166 Eagles v. Groven, March 14, 2013, Steve Johnson, Church Harris Johnson and Williams for Plaintiff, Phillip Alder Hohenlohe, Hohenlohe Jones PLLP for Defendant

2013 Mont.B.R. 13

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Havre Aerie Eagles, Chapter 11, Disclosure Statement, Confirmation, March 20, 2013

Case no. 12-60679

Groven objects to final approval of Debtor’s Disclosure Statement, and objects to confirmation of Debtor’s Plan. With respect to the Disclosure Statement, Groven contends that it was prepared based on information provided by Farnham, who has a history of providing false testimony under oath and is not credible. She argues that the Debtor has provided no proof or evidence to verify that the benefit funds are subject to a trust and not property of the estate, and that the Debtor’s evidence of valuation of personal property and going concern value of the business is not adequate for her to evaluate and make an informed judgment about Debtor’s Plan.  Debtor responds that the Disclosure Statement includes financial and management history based on tax returns, and a liquidation analysis with stipulated valuations which Groven has had the opportunity to evaluate, and is not based only on Farnham’s credibility. With respect to asset values Debtor has submitted amended Schedules and answered questions at the meeting of creditors, and Debtor argues that the liquidation analysis provides what the law requires as to the value of Debtor’s business.

In a Chapter 11 case, before confirmation a "court does not conduct an independent investigation and relies upon its reading of the document for apparent completeness and intelligibility, Having reviewed Debtor’s Disclosure Statement and attachments, the Court finds and concludes that it satisfies § 1125(a)(a) and provides adequate information, and that Groven’s objections are not well taken Groven’s claim in a separate class is not unfair, that the small payments to officers of the Debtor or trust monies do not constitute an equity interest in violation of the absolute priority rule, and that Debtor is not suspended or dissolved creating an equity interest in the Debtor’s property in favor of the Grand Aerie.

If Congress had intended to include the phrase "may not discriminate unfairly" in § 1122(a), it would have included it. Since Congress did not include the phrase in § 1122(a), this Court will not infer its inclusion. Groven objects to the separate classification of her claim from the other unsecured creditors. Debtor argues that its Plan’s discrimination is fair because there are reasonable, nondiscriminatory reasons for it, namely that without the discrimination it cannot pay trade creditors and remain in business, and would be unable to perform under the Plan if it fails to remain in business. This Court finds that legitimate business justifications exist for the Debtor to classify Groven’s claim separately from the Class Three unsecured claims, based mainly on the anticipated future credit and/or services from the Class Three creditors. this Court overrules Groven’s objection based on the absolute priority rule because the evidence shows that the Debtor is a non-profit and no evidence exists of present ownership or interests in the organization’s profit other than the Debtor. Having considered the totality of the circumstances, the Court finds and concludes that the Plan has been proposed in good faith and not by any means forbidden by law.

Havre Aerie #166 Eagles, Steven M. Johnson for the Debtor, Philip A Hohenlohe for Groven

2013 Mont.B.R 18

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Helena Christian School Inc., Chapter 11, Relief from Stay, September 16th, 2013

Case no 13-60091

Debtor filed a voluntary Chapter 11 bankruptcy petition on January 29, 2013. Mountain West filed an earlier motion to modify stay on March 9, 2013. In a request for extension of time to respond to the March 9, 2013, motion, Debtor’s counsel represented that the Debtor had received an offer from a third party to purchase Mountain West’s collateral, that the sale was expected to close on or before April 2, 2013, and that if the sale was completed, Mountain West’s motion to modify stay would be moot and this case would most likely be dismissed.  Debtor filed several more requests seeking additional time to respond to Mountain West’s March 9, 2013, motion. Debtor finally filed an objection on May 15, 2013. A hearing on Mountain West’s motion was held July 9, 2013, at which time the Court denied Mountain West Bank’s motion, without prejudice. Mountain West filed its Second Motion to Modify Stay on August 7, 2013. Debtors filed opposition to Mountain West’s Motion on August 22, 2013.

Helena Christian School does not dispute the amount Mountain West claims it is owed.  Rather, Debtor argues that the highest and best use of the property is for mining and that if the property is mined, it is worth $20 million, based upon an alleged report prepared by an unidentified geologist. Helena Christian School also contends in its Objection to Second Motion to Modify Stay, docket entry no. 78, that it "received a geologist’s report that indicates large deposits of silver and gold ore that could produce up to $20 million dollars in revenue, which will be provided to the Court under seal at the time of the hearing." Helena Christian School has not provided the Court with a geologist’s report. the only evidence presented by the Debtor consisted of Exhibit A, which is a collection of satellite images obtained from google earth that Robert Shrewsbury then marked with lines and push pin images, and Exhibit G, which is an aerial photograph taken by an airplane pilot.

Mountain West’s Motion to Modify stay is based upon § 362(d)(1). Section 362(d)(1) allows for the granting of relief from the automatic stay "for cause, including the lack of adequate protection of an interest in property of such party in interest[.]" A certified real estate appraiser, Tim Moore, determined that the Property has a value of $845,000.00. Debtor does not dispute Moore’s valuation of $845,000, which assumes the highest and best use of the Property is to hold it and develop it into a large lot subdivision.  Instead, Debtor argues that Moore’s valuation is not based upon the highest and best use of the Property, which Debtor argues is mining. Without more then the pictures and Shrewsbury’s bald opinion, this Court gives little weight to the value asserted by Debtor. The Court has already concluded Debtor does not have any equity in the Property. In addition, Debtor offers no other form of adequate protection. For the reasons discussed above, the Court concludes that Mountain West has a colorable claim. Therefore, exercising its broad discretion, the Court finds cause exists to lift the automatic under § 362(d)(1).

In re Helena Christian School, Inc., September 16, 2013, Amy Randall for Mountain West, J. Colleen Herrington and Gary S Deschenes for Debtor

2013 Mont.B.R. 45

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Hinesley Family Limited Partnership No. 1, Objection to Claim

Case No. 10-61822

The Trustee contends that his objection to Hinesley’s amended Proof of Claim should be sustained under the principal of res judicata. Hinesley does not address the Trustee’s res judicata claim in either his Response to the Trustee’s objection filed July 1, 2013, or his Brief filed July 31, 2013. Hinesley’s sole argument in opposition is that $11,725 of Hinesley’s claim is for wages, and that pursuant to 11 U.S.C. § 507(a)(4), a priority attaches to lost wages earned within 180 days before the filing date of the petition. Res judicata, or claim preclusion, prohibits lawsuits on ‘any claims that were raised or could have been raised’ in a prior action." Such principal recognizes that cases litigated to conclusion are entitled to finality. Claim preclusion applies when there exists between two separate cases "(1) an identity of claims; (2) a final judgment on the merits; and (3) identity or privity between parties."

The circumstances of this case satisfy the three elements of claim preclusion under Federal law. The Court entered its Memorandum of Decision and separate Order on June 21, 2011, and that decision is final. Under the last and final element, identity of claims, federal courts ask:

(1) whether rights or interests established in the prior judgment would be destroyed or impaired by prosecution of the second action; (2) whether substantially the same evidence is presented in the two actions; (3) whether the two suits involve infringement of the same right; and (4) whether the two suits arise out of the same transactional nucleus of facts.

However, for purposes of completeness, even if claim preclusion did not apply, which it does, the Trustee’s Objection could be sustained on the merits. Hinesley’s claim for lost wages of $92,200, stems not from monies earned while he was employed by the Debtor, but rather, stem from the arbitrator’s conclusion that until all matters were resolved, Hinesley should receive whatever his brother Morgan received, even though Hinesley was no longer employed by the Debtor. Hinesley’s claim for lost wages is simply not a priority claim under 11 U.S.C. §507(a)(4).

In re Hinesley Family Limited Partnership No.1, August 7th, 2013, Joseph V. Womack, Trustee

2013 Mont.B.R. 39

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Hofman, Chapter 13, Adversary Proceeding, Mortgage Claim, February 25, 2013

Case no. 12-60619, Adversary No. 12-600039

This adversary proceeding is a core proceeding to determine the validity of HSBC’s lien and allowance/disallowance of claims under 11 U.S.C. §§ 157(b)(2)(B) and (K). Plaintiffs’ complaint objects to HSBC’s secured claim asserting two claims for relief: (1) Wrongful and Erroneous Foreclosure Representation as to Standing to Make Claim because Nomura is dormant or dissolved, because HSBC is overseeing the sale or trading of unregistered securities in violation of federal law, and HSBC is not the owner of the promissory note and therefore lacks standing; and, as a result, (2) Debtors seek expungement of HSBC’s Proof of Claim which purports that it is secured by Debtors’ residence.

In Veal the BAP held "that a party has standing to prosecute a proof of claim involving a negotiable promissory note secured by real property if, under applicable law, it is a ‘person entitled to enforce the note’ as defined by the Uniform Commercial Code." The evidence shows that Meritage, not HSBC, was the initial payee of the note. Therefore, HSBC was required to demonstrate facts sufficient to establish its standing. HSBC cannot rely on the evidentiary presumption of its Proof of Claim based upon F.R.B.P. 3001(f), even if this Court had not disallowed the Proof of Claim as late-filed, because if a claim is challenged on the basis of standing the creditor must first satisfy the standing requirement of Rule 3001(b) to avail itself of the presumptions contained in Rule 3001(f). Meritage indorsed the note both in blank and specifically to HSBC by Allonge dated November 20, 2006. An indorsement in blank is an indorsement that is not payable to an identified person. MCA § 30-3-204. Thus, an instrument indorsed in blank becomes payable to bearer and any person who possesses the instrument becomes its holder. MCA § 30-3-204(2). A person is entitled to enforce an instrument if he, she or it is the holder of the instrument.

In this case Montana law applies because the DOT is made under the SFTA, and paragraph 16 provides that the DOT shall be governed by the law of the jurisdiction in which the Debtors’ residence in Missoula is located. Under Montana law, HSBC has shown that it is entitled to summary judgment as a matter of law because the evidence is uncontroverted that HSBC is both the owner of the note by indorsement and/or allonge shown on HSBC’s Ex. A, and is assignee of the DOT from MERS shown by HSBC’s Ex. C. Thus, HSBC would be entitled under Montana law, §§30-3-301 and 71-1-110, to enforce the note and assignment of the DOT.

Recently in Joseph v. Bank of America N.A., 2012 WL 6100037 (D. Mont. 12/7/2012), the U.S. District Court, Hon. Richard F. Cebull, adopted a magistrate’s findings and recommendations including that basic agency law applies to the STFA, and that Montana law permits a party to designate an agent to conduct nonjudicial foreclosure sales, and to do most acts for which the party is responsible, unless a contrary intention clearly appears. Based on the decisions in Joseph and Knucklehead Land Co., ante, and the absence of any provision in MCA §§ 71-1-313 and 71-1-315 that requires a trustee to own a beneficial interest in a note to initiate nonjudicial foreclosure, the Court finds that Montana has altered by statute the common law rule described in Veal, MCA § 71-1-304(2) additionally provides that "[w]hen a transfer in trust of an interest in real property is made to secure the performance of the obligation . . . , a power of sale is conferred upon the trustee to be exercised after a breach of the obligation for which the transfer is security." This power of sale is conferred on the trustee without the necessity of being a payee or a beneficiary, as the trustee by definition holds "legal title." MCA § 71-1-303(7). Furthermore, as discussed above even if Montana followed the common law rule, the evidence in this case shows that HSBC owns the payee’s interest in the note and is beneficiary under the DOT. Thus, HSBC could enforce the DOT under the common law as well.

In re Hoffman, Hoffman v. HSBC, February 25, 2013, Jurian and Dawn Hoffman, Pro se, Joe Solseng for HSBC

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2013 Mont.B.R. 11

Hunt v. Bailey, Chapter 7, Adversary Proceeding, Attorneys Fees

Case no. 12-60253, Adversary no. 12-00037

Pending in this adversary proceeding is the Defendant Randy Ray Bailey’s Objection to Plaintiffs’ attorney Michael J. Harper’s ("Harper") attorney fee charges, on the grounds they are erroneous and inflated. Plaintiffs moved for an award of attorney fees based on their state law contract claims and Arizona statute. After a hearing on Plaintiffs’ motion, at which Defendant did not appear. On July 8, 2013, the Court entered a Memorandum of Decision in which the Court recognized that a creditor has the right to recover attorney fees from a debtor. The Court allowed Plaintiffs’ attorneys to file an affidavit of attorney’s fees and costs, which this Court would review for reasonableness in its discretion.

In exercising its discretion to determine reasonableness of fees, this Court reviewswhether the applicant provided:

1. a description of the services provided, setting forth, at a minimum, the parties involved and the nature and purpose of each task;

2. the date each service was provided;

3. the amount of time spent performing each task; and

4. the amount of fees requested for performing each task.

With three (3) exceptions, the Court finds that Harper has provided sufficient detail to enable this Court to make its determination whether the fees are reasonable. Under Rule 2016-1(a), where lumped tasks exceed one hour the Court will allow one hour and disallow the rest. Harper requests a total of 4.0 hours for services provided on 1/29/2013 and 3/7/2013, but describes those tasks as "privileged attorney-client information." The Court disallows those 4 hours and $1,260 from Harper’s fees for failure to provide adequate detail. With respect to the remainder of Harper’s request for fees and costs, the Court finds that Harper satisfied his burden to show the fees and costs are reasonable.

Hunt v. Bailey, October 16, 2013, Andrew W. Pierce and Michael J Harper for Hunt, Randy Pierce pro se

2013 Mont.B.R. 49

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IB Agriculture, Inc., Motion to Modify Stay, Non-core Proceedings, October 18, 2013

Case no. 13-60967

Creditor Monty’s Plant Food Co. (“Monty’s”) filed a Motion to Modify Stay requesting relief from the automatic stay to proceed with a jury trial against the Debtor and other defendants in the United States District Court for the Western District of Kentucky.   Under 11 U.S.C. § 362(g), a creditor has the burden of proving that a debtor does not have equity in property, while the debtor has the burden of proof on all other issues to show that the stay should not be modified.  Monty seeks relief from the stay to litigate IB’s claims and its counterclaim in the Kentucky case, where the Montana federal district court concluded venue is proper. Kentucky law appears to govern the breach of contract claims. Pretrial preparation has concluded and the Kentucky case is ready for trial. Based on these undisputed facts, the Court finds that Monty’s has established a prima facie case that cause exists for relief from the stay under § 362(d)(1), and so the Debtor has the burden of proof to show that the stay should not be modified.  Instead, at the hearing Debtor’s counsel argued that this Court can hear and determine the claims pleaded in the Kentucky case in its determination of Debtor’s future objection to Monty’s Proof of Claim. Under 28 U.S.C. § 157(b)(2)(B), core proceedings include allowance or disallowance of claims against the estate, and also include estimation of claims or interests for the purposes of confirming a plan under chapter 11.

 The Debtor argues that this Court can determine allowance of Monty’s Proof of Claim.  However, § 157(b)(2)(O) specifically excludes from core proceedings personal injury tort claims.  Monty’s second defense in paragraph 30 of its answer, attached to its Proof of Claim, refers to a malice claim under Montana law in Count VII of IB’s complaint. Malice is a tort claim, and as such excluded from core proceedings under § 157(b)(2)(O). Similarly, Monty’s counterclaims for breach of duty of good faith and fair dealing and tortious interference with business prospects are tort claims and thus non-core. At best, this Court could hear the non-core claims and issue proposed findings of fact and conclusions of law to the U.S. District Court in Montana, which has transferred venue to Kentucky.  Based upon the status of the Kentucky case, versus the barest preliminary stage in the instant case, this Court deems it appropriate in its exercise of its discretion to grant Monty’s Motion and allow the parties to proceed to judgment in Kentucky, with the limitation that the stay shall remain in place to prohibit Monty’s from enforcing any judgment entered in the Kentucky case without first requesting and obtaining further relief from this Court. The Court believes that this result will result in a more prompt determination of the parties’ respective claims than if the case remains in this Court.

 In re IB Agriculture, Inc., October 18, 2013, Jon R Binney for Debtor, Dean A. Stensland for Monty

2013 Mont.B.R. 50

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Jirsa, Chapter 13 , Post Petition Transfer

Case no. 12-61335

In their pending motion Debtors seek a determination by this Court that the Lease with Option to Purchase between Debtors, as the landlord/owners, and Camilla and Kevin Smith, was either terminated by Debtors on December 28, 2012, or is an executory contract which Debtors can reject under 11 U.S.C. § 365. The Smiths raise various arguments in opposition to Debtors’ motion. For instance, the Smiths argue the Lease with Option to Purchase must be interpreted under the Montana Residential Landlord/Tenant Act, and that Debtors waived their right to reject the Lease with Option to Purchase under the December 28, 2012, letter by accepting the $4,048.76 payment from the Smiths. For the reasons discussed below, the Court concludes that the Lease with Option to Purchase is null and void, but that the Smiths now have a lien against said property for the rents and option payment they paid to Debtors.

Because the Lease with Option to Purchase was not effective until August 19, 2012, it isgoverned by 11 U.S.C. § 549 dealing with postpetition transactions. The evidence and testimony presented at the hearing establishes that Camilla and Kevin Smith entered into the Lease with Option to Purchase without knowledge of Debtors’ bankruptcy case. The Smiths are good faith purchasers.

While the Smiths are good faith purchasers, the Court finds that their purchase price of $70,000.00 is not "present fair equivalent value." Because the purchase price of $70,000.00 offered to the Smiths is less than the present fair equivalent value of the 3010 Valley Drive property, under § 549, Debtors may avoid the Lease with Option to Purchase, but in return, the Smiths are entitled to a lien against the 3010 Valley Drive property to the extent of any present value given. Given such fact, the Court finds that the present value given to Debtors by the Smiths equals all the monthly rent payments plus the $1,000.00 option payment the Smiths made to the Debtors under the Lease with Option to Purchase Agreement, which through May 2013, the Court calculates as totaling $6,700.00.

In re Jirsa, May 20, 2013. Jon R. Binney for Jirsa, Charles E Petaja for Smiths

2013 Mont.B.R. 28

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Kahle, Chapter 13, Good Faith, February 8, 2013

Case no. 11-61359

Pending are competing motions to dismiss and convert. Debtor filed a motion to dismiss. Objections thereto were filed by creditor Robert A. Charbonneau ("Charbonneau"), who also moved to convert the case to Chapter 7 alleging bad faith by the Debtors in filing their Chapter 13 petition and plan. The Chapter 13 Trustee has also filed a motion to convert. Debtors filed their motion to dismiss on October 9, 2012 11 . Kim testified that they filed their motion to dismiss because the mediation held in Adv. No. 12-14 was unsuccessful, because Kris’s health issues and care needs interfere with Kim’s ability to prepare for trial, and because Debtors determined that the bankruptcy court lacks jurisdiction to hear and decide Adv. 12-14 based on the decision entered by the United States Supreme Court in Stern v. Marshall, U.S. , 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) 12 . Kim was asked by her counsel on direct examination how she proposes to pay her creditors if this case is dismissed. She responded that she can pay creditors by selling one or two of her properties, perhaps to a family member, and that she is looking at taking out a loan to pay creditors. Kim testified that her father was helping her pay the creditors, and that she seeks dismissal in order to proceed with the litigation in state court in DV-09-06 neagainst Charbonneau in state court. She testified that Kris’s health is the basis for Debtors’ motion to dismiss this case, and that she is able to deal with their creditors including Charbonneau outside of bankruptcy. In determining whether a petition or plan is filed in good faith the court must review the "totality of the circumstances." The Court does not consider Debtors’ motion to dismiss after resolution of Debtors’ motion to sell #11 Short Horn to constitute unfair manipulation of the Code. Section 363(f) and § 1303 authorize a debtor to sell property free and clear of any interest if the conditions are met. Likewise, the Court finds that no evidence exists in the record that Debtors filed their plan in an inequitable manner. They obtained the Trustee’s consent to confirmation of their Plan, and the Trustee’s consent to a modified Plan, which increased the plan payments and added a possible sale of #5 Kim Court, which Charbonneau’s Ex. 6 explains would "pay all unsecured creditors in full." Charbonneau’s motion to convert notes that Debtors were current on their plan payments at the time, and therefore Debtors demonstrated an ability to perform under the terms of their plan until they moved to dismiss. The Court finds and concludes that the first Leavitt factor shows bad faith by the Debtors in filing their Chapter 13 bankruptcy petition and Schedules, which omitted assets 13 .

In sum, the first of the four Leavitt factors show bad faith by the Debtors in filing their Chapter 13 petition and Schedules which omit assets. The Court finds and concludes that the other three Leavitt factors do not show bad faith by the Debtors in filing their petition and plan. In reviewing the "totality of the circumstances," the Court concludes that the Debtors filed their petition and plan in good faith despite their omission of assets .

In re Kahle, February 8, 2013, Jon R. Binney for Kahles, Andrew W. Pierce for Charbonneau

2013 Mont.B.R. 6

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Kohlrus, Chapter 7, Trustees Application for Attorney fees, January 2, 2013

Case no. 08-61750

 

The Court considers the Trustee’s Application for Final Compensation of Attorney Darcy M. Crum and Reimbursement of Expenses, filed on July 16, 2012 which requests an award of attorney fees in the amount of $5,130.00 plus reimbursement of expenses in the amount of $81.01. 81.01. An objection was filed by creditor and Debtor’s former spouse on the grounds Crum is requesting professional fees for travel and performing trustee tasks. At the hearing Morgan clarified that Edinger does not object to any specific entries in Crum’s Application, but objects more generally to the process under which Crum seeks professional fees ahead of payment to creditors. Edinger testified that her expectations in this case were different from Crum’s, and that "I expected more out of the system than what I got."

This Court has an independent obligation to review each application to evaluate the propriety of the compensation requested. The above excerpt demonstrates that this Court is obligated to review each request for fees and costs to insure that applicants provide:

1. a description of the services provided, setting forth, at a minimum, the parties involved and the nature and purpose of each task;

2. the date each service was provided;

3. the amount of time spent performing each task; and

4. the amount of fees requested for performing each task.

Crum’s billing statement complies with the above requirements. The Court finds that Crum has provided adequate detail to enable this Court to undertake its independent investigation. However, the Court finds that there are services provided by Crum in the Application which are not compensable as attorney’s fees and costs. The Court must first review the provisions of 11 U.S.C. § 704, to determine whether the activity performed by the trustee is among typical trustee duties that are covered under the compensation provisions set forth in § 326. Upon reviewing the duties set forth in § 704 and case law, the Court finds that the services performed by Crum with respect to the sale of personal property, and abandonment of other property, are within the scope of trustee duties and did not require any legal expertise beyond the normal knowledge and skill possessed by trustees. Crum’s services related to the contested motion to modify stay and settlement were outside of simple and routine trustee tasks, and the attorney fees and costs incurred by Crum were actual, reasonable and necessary for the estate at the time they were incurred. By contrast, the $225 fee requested by Crum for preparing a notice of abandonment of a mobile home on December 15, 2010, and the $292.50 requested for preparing exhibits and notices of sale of personal property on April 25, 2012, are tasks within the scope of the Trustee's duties. Other than the $517.50 disallowed as trustee duties, the Court finds that the professional fees and costs requested by Crum are actual, reasonable and necessary for the estate under § 330(a)(1)(A).

In re Kohlrus, January 2, 2013, Darcy Crum, Pro se, Dan Morgan for Edinger

2012 Mont.B.R. 1

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Luedtke, Chapter 13, Disposable Income, Old Car Deduction

(Reversed on Appeal, 2014 Mont. B.R. 231)

Case no. 13-60098

At issue before the Court is whether the Debtor is entitled to include an additional $200.00 "old vehicle" operation/transportation expense on line 27A of Debtor’s Form B 22 C. The Trustee's objection raises the issue of the "disposable income" test under § 1325(b)(1)(B) and the standard amount allowed under the "means test" of § 707(b)(2)(A)(ii)(I). The Debtors argue that the additional $200 deduction is supported by both the Internal Revenue Manual, Part 5, Chapter 8, Section 5.8.5.20.3(5) and case law.

The National and Local Standards referenced in this provision and referred to by Form B 22C are tables that the IRS prepares listing standardized expense amounts for basic necessities. According to the IRS website, the standards are part of the tax collection process, and are referred to as part of the "Collection Financial Standards." They are part of an internal administrative process "used to help determine a taxpayer's ability to pay a delinquent tax liability."

The Internal Revenue Manual "IRM" promulgated by the IRS is the official guide to income tax collection and regulation by the United States Government. The IRM is divided into different parts; relevant to this case are two subsection (15 and 8) of Part 5 which is entitled Collecting Process. According to the Ransom Court, the Collection Financial Standards—the IRS's explanatory guidelines to the National and Local Standards—explicitly recognized the distinction between ownership and operating costs, ... "Although the statute does not incorporate the IRS's guidelines, courts may consult this material in interpreting the National and Local Standards."

This Court finds and concludes that the use and incorporation of the IRS Manual is not at odds with the statutory language. Since this Court "may consult this material in interpreting" the Standards under Ransom, this Court sees no reason not to continue to consult the IRM and the Financial Analysis Handbook, wherein the old vehicle expense is authorized, for similar reasons as the IRS uses it and the reason Congress adopted the Means Test, "to help ensure that debtors who can pay creditors do pay them .... the maximum they can afford."

In re Luedtke, June 17, 2013, Edward A. Murphy for Luedtke, Robert Drummond, Trustee

2013 Mont.B.R. 34

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Marsh,  Chapter 7, Employment of Trustee’s Attorney

Case no. 12-60195

Brandon filed her original Application on June 21, 2013, to employ herself as attorney for the estate on a contingency fee basis "to pursue on behalf of the Estate claims regarding property of the estate." Pursuant to this Court’s long-standing practice the Court approved Brandon’s original Application. Debtor requests the Court reconsider and deny the Trustee’s Application, and require the Trustee to address all factors in Rule 2014(a), identify all claims for relief and provide a meaningful cost/benefit analysis.

Cossitt argued that this Court should depart from its local practice of approving trustees’ applications to employ themselves, and should follow the "continuing evolution of the law" by conducting a more "front end" approach. Based on the evidence in this case, this Court declines the opportunity to depart from its regular practice of approving employment applications at this time.

The Amended Application states specific facts showing the necessity for Brandon’s employment, i.e., the existence of assets which may be property of the estate. The amended Application names Brandon, and states that the reasons for her selection are her familiarity with the case and unavailability of alternate representation. The amended Application explains the professional services to be rendered as her investigation and services seeking determination, recovery and turnover of assets for the estate. The amended Application identifies the proposed arrangement for compensation as a graduated contingency fee arrangement, which the original Application describes as ranging from 30% to 50%, with Brandon willing to advance all costs required for the representation. The Court finds that the amended Application satisfies the requirement to state specific facts showing the necessity for Brandon’s employment, and that the Trustee has satisfied her burden to showing that cause exists to justify her employment as counsel under § 327(d) on a contingency fee basis.

With a possible $370,000 recovery at no cost to the estate, except for the payment of any approved contingency fee, the cost-benefit analysis is a simple matter to conclude that Brandon’s employment is in the best interests of the estate. If counsel is employed on a contingency fee basis which is approved by the court after notice and hearing, and the rules require an application and opportunity to object at the time of the application for compensation, the Court does not envision a conflict between the trustee’s statutory duty and a fee application in the event of a substantial recovery. After all, the Court retains the independent duty to review all applications for compensation.

In re Marsh, August 21st, 2013, Christy L Brandon, Trustee, James H. Cossitt for Marsh

2013 Mont.B.R. 43

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Matt, Compromise, Turnover, November 18, 2013

Case no. 12-61456

In deciding whether to approve the parties’ agreement, the Court considers the factors articulated in Martin v. Kane (In re A&C Properties), 784 F.2d 1377, 1381 (9th Cir. 1986):

(a) the probability of success in the litigation; (b) the difficulties, if any, to be encountered in the matter of collection; (c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.

Debtor opposes the Trustee’s settlement with the Zeilers arguing Lot 3-B is worth in excess of $180,000 (the $170,000 reflected in the buy-sell agreement, plus the additional $10,000 the Zeilers have agreed to pay as part of their settlement with the Trustee).  Debtor first tried to sell Lot 3-B in 2009 at a price of $390,000, and also tried to sell Lots 3-B, 3-C and 3-D in 2011 for $750,000.  When Debtor’s efforts to sell the lots were unsuccessful, Debtor decided to offer the lots for sale at an auction that as far as the Court can ascertain, was widely advertised.  That auction resulted in a sales price of $170,000 for Lot 3-B, and a no-sale on Lot 3-C. 

While Debtor contends that Lot 3-B is worth $294,000, Susan Lovely testified that she thought she could sell Lot 3-B for perhaps $225,000 if listed for 6 months.  If Susan Lovely could sell Lot 3-B for $225,000 within 6 months, for which there is no guarantee, the Estate would receive $211,500 after Susan Lovely’s commission.  From those proceeds, the Trustee would spend some amount litigating his claims with the Zeilers, including perhaps litigating Debtor’s appeal of this Court’s May 22, 2013, Judgment in Adversary Proceeding No. 12-00064.  Considering all relevant factors, including the Trustee’s approved  agreements with  Cindy Smith and Richard Tegtmeier, the fact that Debtor was unsuccessful in selling Lot 3-B between 2009 and 2013, and was only able to sell Lot 3-B after an auction, which auction appears to have been conducted in a reasonable manner, the Court finds that the Trustee’s  agreement with the Zeilers is "fair and equitable" as required by In re A&C Properties.

With respect to the pending motion for turnover, the Trustee filed an ex parte motion on November 11, 2013, seeking to freeze access to two storage units.  The Court granted the Trustee’s ex parte motion on November 13, 2013.  On November 15, 2013, the Trustee reported to the Court that he had secured the two storage units that were the subject of the ex parte motion.  The 1973 MGB, VIN GHN5UD295341G, which is the subject of the Trustee’s pending Motion for Turnover, was in one of the storage units.  Debtor provided the Trustee with a key that he represented was to the ignition of the MGB, but the Trustee was unable to determine if the key did indeed fit the ignition of the 1973 MGB because the vehicle was locked and the key that Debtor provided did not fit in the door lock.  In light of the Trustee’s Report to the Court and given the Court’s oral ruling on the matter at the hearing, the Motion for Turnover is granted.

In re Matt, November 18, 2013, Joseph V. Womack, Trustee, Paul G. Matt, pro se,  William M. Kebe for Zeiler

2013 Mont.B.R. 55

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Morley, Chapter 7, Objection to Exemption-Account Receivable, February 8, 2013

Case no. 12-60383

The Trustee to Debtor’s claim of exemption in the sum $2,516.13 in accounts receivable that the Debtor collected post-petition and claimed exempt under Montana’s earnings exemption statute, MONT. CODE ANN. ("MCA") § 25-13-614, on the grounds the Debtor is self-employed, citing In re Gamman, 20 Mont. B.R. 35 Bankr. D. Mont. 2002). Debtor filed a response in opposition asserting that the Debtor receives earnings from only one person.

The extended quote above from Gamman resolves several disputed issues. First, the exemption is determined as of the petition date. On the petition date the Debtor was owed $3,900, and he did not collect it until after the date of filing of petition. This Court held in Gamman that accounts receivable and traceable assets therefrom fail to meet the Kokoszka test for earnings under § 1672. 20 Mont. B.R. at 41. This Court reasoned: "Protection of Gamman’s accounts receivable, like a tax refund, would not further the Congressional policy of preserving consumer debtors employment and regulating garnishment of compensation needed to support wage earners." Under Montana law "employee" means a person who works for another for hire, and the term does not include an independent contractor. MCA § 39-2-903(3). The Court finds that the Debtor is in independent contractor and self employed, as he repeatedly represents himself in his signed tax returns. Based upon Montana’s limited definition of employer and employee, and Montana’s utilization of the federal definition of "earnings" under § 1672 as construed in Osworth and Kokoszka, this Court holds that, notwithstanding liberal construction of Montana exemption law, Debtor’s account receivable does not fit within the exemption limitation of "periodic payments of compensation", since "earnings" do "not pertain to every asset that is traceable in some way to such compensation."

In re Morley, February 11, 2013, Darcy M.Crum, Trustee, Seven M. .Johnson for Morley

2013 Mont.B.R. 9

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Moss, Objection to Claim, Automatic Stay, Judicial Notice, August 13th, 2013

Case no 12-61093 (Affirmed on Appeal, Boyce v. Samson, 2014 Mont. B.R. 230)

On February 16, 2012, the state court entered an opinion and order. In Ex. A the court granted Moss’s motion for judgment on the pleadings against Boyce and Sayer on all counts of their counterclaims, finding that Boyce and Sayer could not assert claims of Tupi Plain in their own name or on their own behalf against Moss. The Court granted plaintiff summary judgment against Boyce and Sayer on plaintiff’s claims in the amount of $49,267.87 plus interest, costs and attorney fees, for a total award in the amount of $55,950.37. The court also granted plaintiff’s motion for summary judgment dismissing Boyce and Sayer’s counterclaims against the plaintiff, again because Boyce and Sayer were not parties to the agreement with Moss & Associates for representation.

Debtor Darrel Linn Moss ("Moss" or "Debtor") filed his Chapter 7 petition on July 3, 2012. On February 22, 2013, Creditors filed an amended Proof of Claim 6 correcting their calculation of the claim for treble damages, fees and costs, and reducing the amount of their total claim to $440,228.33. The Trustee filed objections to Creditors’ amended Claim 6.

Under Rule 201, Fed. R. Evid., courts may take judicial notice of undisputed matters of public record, including documents on file in federal or state courts. The law is clear under Rule 201 that the Court may take judicial notice of adjudicative facts, which means that the Court may take the undisputed language of the documents to say what they say. Taking judicial notice does not necessarily mean that what documents say is entitled to any weight. But that becomes moot when all parties offer the same documents for admission into evidence, and stipulate to their admission.

Creditors’ contend that the judgment by the state court acts was entered in violation of the automatic stay of § 362(a) and therefore the judgment is void and should be removed from all records. Creditors’ motion must be denied on procedural grounds. A proceeding to determine the validity or extent of a lien or other interest in property requires an adversary proceeding under F.R.B.P. Rule 7001(2). Lien avoidance under the plain language of § 522(f)(1) is limited to the debtor. The automatic stay does not apply to suits against non-debtors and does not protect their property. Creditors are not the debtor in this Chapter 7 case, or in any other bankruptcy case shown by the record. The automatic stay did not apply to Moss & Associates’ state court action against Creditors, and did not protect Creditors’ property.

The Trustee argues that the theories of collateral estoppel (issue preclusion) and res judicata (claim preclusion) bar Creditors’ Claim 6, because the state court decided the issues in DV-10-961. The test in Montana to apply collateral estoppel (issue preclusion) is

(1) the issue decided in the prior adjudication is identical with the one presented in the action in question;

(2) there was a final judgment on the merits; and

(3) the party against whom collateral estoppel is asserted was a party or in privity with a party to the prior adjudication.

All three elements are present, and collateral estoppel (issue preclusion) bars Creditors from relitigating their amended Claim 6 in this bankruptcy case. The Court concludes that the elements for application of res judicata (claim preclusion) are present to bar Creditors from relitigating their amended Claim 6 in this bankruptcy case.

In re Moss, August 13th, 2013, Richard J. Samson , Trustee, Shannon Boyce and Kyeann Sayer, Pro se

2013 Mont.B.R. 42

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Moss, Chapter 7, Stay Pending Appeal, November 12, 2013

Case no.  12-61092

Creditors’ motion suggests that they might offer a bond for a stay pending appeal.  However, at the hearing Boyce stated that Creditors cannot afford to post a supersedeas bond.  As a result, Creditors as the moving parties seeking a stay pending appeal must satisfy the requirements of F.R.B.P. Rule 8005.

This Court considers four factors in determining a motion for stay pending appeal: “(1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies.”

The Court concludes that Creditors failed their burden to make a strong showing that they are likely to succeed on the merits of their appeal with respect to the applicability of the stay to the Debtor’s actions.  The Creditors have the burden to make a “strong showing” that they are likely to succeed on the merits. 

The case docket shows that there is no pending or proposed distribution by the Trustee of property of the estate, and no evidence was offered that a distribution is contemplated during the pendency of Creditors’ appeal. Therefore, the Court concludes that Creditors have failed to satisfy their burden to show that they will be irreparably injured if the stay pending appeal is not granted.  The Court finds that the third factor is a wash, as the Trustee must expend fees and costs to oppose Creditors’ appeal whether or not a stay is granted.  A stay pending appeal is not necessary to ensure that the controlling law is followed. Creditors’ appeal proceeds and a decision will be rendered by the Bankruptcy Appellate Panel whether or not a stay pending appeal is granted by this Court. Further, if this Court denies a stay pending appeal Creditors are free under Rule 8005 to seek a stay pending appeal from the Bankruptcy Appellate Panel.

 In re Moss, November 12, 2013, Shannon Boyce, pro-se, Richard J. Samson, Trustee

 2013 Mont.B.R. 53

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Neff, Montana Department of Labor and Industry v. Neff, Automatic Stay, Police Power

Case no. 13-60092, Adversary no. 13-00013

Pending in this adversary proceeding is the Motion for partial summary judgment filed by Plaintiff Montana Department of Labor and Industry to dismiss Defendants’ counterclaim which alleges that the Department violated the automatic stay of 11 U.S.C. § 362(a) by attempting to collect a debt after the date of the filing of their bankruptcy petition. The Department’s complaint seeks exception of its claims from Debtors’ discharge under Count I (False Representation – 11 U.S.C. § 523(a)(2)(A)), and Count II (Larceny – § 523(a)(4)). Defendants filed an answer denying the material allegations under Counts I and II, and asserting affirmative defenses and a counterclaim against the Department for damages for violation of the automatic stay of 11 U.S.C. § 362(a), by continuing to attempt to collect debts after receiving notice of the Debtors’ bankruptcy filing.

The Debtors’ filing of their Chapter 7 bankruptcy petition on January 29, 2013, gave rise to an "automatic stay." Exceptions to the stay are listed at § 362(b), including the "police power" exception of § 362(b)(4): "Section 362(b)(4) provides that the filing of a bankruptcy petition does not operate as an automatic stay ‘of the commencement or continuation of an action or proceeding by a governmental unit ... to enforce such governmental unit's ... police or regulatory power.’ The Ninth Circuit applies two alternative tests to determine whether the actions of a governmental unit are in exercise of its police and regulatory power as defined in 11 U.S.C. section 362(b)(4): The "pecuniary purpose" and the "public policy" test. Satisfaction of either test will suffice to exempt the action from the reach of the automatic stay under the police power exception.

The Department’s postpetition actions did not seek to recover contractual damages, but instead were to recover the amounts of unemployment benefits wrongfully received by Defendants’ false representations, and penalties pursuant to MCA § 39-51-3201 of Montana’s Unemployment Insurance Law. Such action was not intended to gain the Department an advantage over creditors or potential creditors. From examination of the uncontroverted facts and Montana’s Unemployment Insurance Law, the Court finds and concludes that the Department’s primary purpose of its postpetition actions is to effectuate public policy. The Court sees no evidence that the Department’s actions were brought primarily to advantage discrete and identifiable entities, but rather the Department's postpetition actions were to collect wrongfully paid unemployment benefits and penalties. "Punishment in the form of civil penalties, disgorgement, and restitution serves a public, rather than pecuniary, purpose." The Department’s postpetition actions are exempt from the stay under the police and regulatory power exception of § 362(b)(4), under both the pecuniary purpose test and the public policy test.

Montana Department of Labor and Industry v. Neff, (In re Neff), August 26th, 2013, Joseph Nevin for State of Montana, Jon Binney for Neffs

2013 Mont.B.R. 44

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Neff, Montana Department of Labor and Industry v. Neff, Chapter 7, Adversary Proceeding, Issue Preclusion, Summary Judgment, December 19, 2013

Case no 13-60092, Adversary no. 13-00013

The Department filed its motion, seeking the Court to rule in limine, based upon issue preclusion and the Hearing Officer’s decision, that the Defendants are precluded from arguing or introducing at trial evidence that a Department representative advised them to report less hours than they actually worked with they applied for UI benefits. Defendants filed a response in opposition, incorporating their response to the Department’s second motion for summary judgment, and arguing that there exists relevant evidence in the form of representations made by Department representatives to the Defendants about reporting the number of hours worked.

There is a principle in the Ninth Circuit that a court is not to make credibility determinations or weigh conflicting evidence when granting or denying summary judgment.  Applying this principle, it would not be proper for the Court to make a credibility determination or weigh conflicting evidence between what the Defendants assert Department representatives told them about the number of hours to report, versus what the Hearing Officer found. Whether or not Department representatives advised Defendants about the number of hours to report would be a genuine issue of material fact to be decided at trial, unless this Court deems it appropriate to prohibit Defendants from offering evidence in support their contentions on the basis of issue preclusion.

The test in Montana to apply collateral estoppel or issue preclusion is:  (1) the issue decided in the prior adjudication is identical with the one presented in the action in question; (2) there was a final judgment on the merits; and (3) the party against whom collateral estoppel is asserted was a party or in privity with a party to the prior adjudication.

On the crucial element of identity of the issues, it is clear from the amended complaint that the Department’s decision against Defendants for wrongfully paid unemployment benefits and penalties is based upon Montana’s unemployment insurance statutes, and is not based upon a judgment awarded for actual fraud. While there may be similar elements, identity of issues “means that the exact same issue must have been litigated in the prior action.”  This Court is not persuaded that the Department has satisfied its heavy burden of showing that the exact same elements of fraud under § 523(a)(2)(A) were litigated in the Department’s administrative proceeding to recover wrongfully paid unemployment benefits and penalties under Montana UI statutes. Ninth Circuit law continues to provide that “although an issue was litigated and a finding made on that issue in prior litigation, the prior judgment will not foreclose reconsideration of that issue if the issue was not necessary to the rendering of the prior judgment,and hence was incidental, collateral, or immaterial to that judgment.           

This Court does not consider it consistent with public policy and Defendants’ right to fully present facts in a fair adversary proceeding to bar their testimony about whether or not Department representatives advised them to report only 16 hours instead of the hours they worked.  Other than Defendants’ contentions that Department representatives told them to report 16 hours instead of the hours they actually worked, no other contested issue of fact exists for trial. However, that fact remains a genuine issue of material fact which remains for determination at trial.

Montana Department of Labor and Industry v. Neff, (In re Neff), Joseph Nevin for the Montana Department of Labor and Industry, Jon R. Binney for Neff, December 19, 2013

2013 Mont B.R. 61

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Olsen, Chapter 13, Relief from Stay, August 13th, 2013

Case no. 13-60733

Pending in this Chapter 13 case is the "Motion for Declaratory Determination Re: Scope of Automatic Stay" ("Motion") (Docket No. 8) filed on June 5, 2013, by creditor Tim Meikle ("Meikle") seeking a declaration pursuant to 11 U.S.C. § 362(d)(1), for "cause," i.e., that Human Interactive Products, Inc. ("HIP"), a corporation of which Debtor owns a substantial interest, is not a debtor in this case and is not protected by the automatic stay of 11 U.S.C. § 362(a).

Meikle sued Olsen and HIP in the Montana First Judicial District Court, Lewis and Clark County, Cause No. DV 2011-718. The complaint in DV 2011-718, Ex. 1, asserts five claims for relief against Olsen and HIP, including for fraud, tortious breach of the covenant of good faith and fair dealing, and acting in concert, agency or assumption wherein Meikle avers Olsen and HIP were acting in concert "or as agents or alter ego ...." Another lawsuit between the parties is pending in the Montana Twenty-First Judicial District Court, Ravalli County, DV-11-710. The parties were engaged in discovery. Olsen denied the allegations of fraud and alter ego.

Under 11 U.S.C. § 362(g), a creditor has the burden of proving that a debtor does not have equity in property, while the debtor has the burden of proof on all other issues to show that the stay should not be modified, including adequate protection. Given the fact that Meikle seeks to proceed against HIP only, and not the Debtor and Debtor’s Schedules showing that the value of HIP is $0, the Court finds that Meikle established a prima facie case that cause exists for relief for cause.

The Bankruptcy Appellate Panel ("BAP") for the Ninth Circuit Court of Appeals has noted: "Section 362(a)(1) applies only to actions against a debtor." Thus, § 362(a) does not stay actions against guarantors, sureties, corporate affiliates, or other non-debtor parties liable on the debts of the debtor.

Granting relief from the automatic stay returns the parties to the legal position which they enjoyed prior to the imposition of the stay. Thus, while the Court has flexibility in determining whether to grant Meikle’s Motion, by granting the Motion Debtor retains whatever claims, defenses and remedies he may have against Meikle in a nonbankruptcy forum, should Debtor choose to actively participate in HIP’s defense.

In re Olsen, August 13th, 2013, Nik Geranios for Olsen, Brian J. Miller for Meikle

2013 Mont.B.R. 41

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Samson v Western Capital Partners LLC, Fraudulent Transfer, Preference, March 18, 2013

Case no 09-60452, Adversary no. 10-00094

An actual fraud theory alleges that the debtor transferred assets within a specified period before filing for bankruptcy and that the debtor did so with a fraudulent intent. Constructive fraud proceeds on the theory that, although the debtor may not have had a fraudulent intent, the court nevertheless should void the transfer, usually because the debtor received inadequate consideration. Samson seeks recovery from WCP based upon 11 U.S.C. § 550. Section 550 provides that "to the extent a transfer is avoided under section . . . . 548 . . . of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from — (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made . . . ." In order to avoid Debtor’s guarantee under 11 U.S.C. § 548(a)(1)(B), Samson must show (1) that Debtor incurred an obligation; (2) within two years of her bankruptcy petition date; (3) that Debtor received less than reasonably equivalent value for the obligation incurred; and either (4) was insolvent at the time the obligation was incurred or was rendered insolvent as a result of the obligation, or was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital.

In exchange for the guarantee, WCP argues Debtor received "value" when she signed the guarantee because $4,002,334.96 of the loan proceeds were used to pay off American Bank’s first position lien on Lot 176. WCP’s argument is not persuasive because Debtor was not personally liable on the American Bank obligation and more importantly, during the loan process, Debtor lost the ownership interest she had in Lot 176 when it was transferred to Montana Specs. However, even if Debtor did in fact receive some value from her guarantee, which the Court finds she did not, the next inquiry is whether the value Debtor purportedly received was roughly equivalent to the $13,065,000 obligation for which she was liable. Nothing in the evidence shows that Debtor received anything that this Court could construe as reasonably equivalent value in exchange for her guarantee of Crocker’s loan from WCP.

For purposes of the Balance Sheet Test, this Court must assign a value to Debtor’s assets and liabilities and then determine whether the value of Debtor’s assets exceeded her liabilities. For the reasons discussed above, the Court finds that Karas reached the correct conclusion as to whether Debtor was solvent, under the Balance Sheet Test, on June 15, 2007. The methodology used by Karas was reasonable and appropriate.

Thus, the best and only way this Court can restore the bankruptcy estate to its pretransfer position is to award Samson the money WCP received from the sale of the condominium. WCP is not, as it argues, paying twice for one loan and such remedy is not a "forced loan." With respect to items which WCP has already sold, the Court finds that the appropriate remedy is judgment against WCP for the monetary benefit it received from the sale of such assets.

However, in the case of assets still in WCP’s possession, the Court finds that the appropriate remedy is the return of such assets to Debtor’s bankruptcy estate, such as Debtor’s interest in BLX, BFI, and the letter agreement with Sandoval. In the case of property that is returned to the bankruptcy estate, the Court agrees with WCP that Samson is not entitled to an additional monetary damage associated with such property. In all, the Court finds that the Trustee is entitled to recover the sum of $4,013,410.99 from WCP. For his usury claim, the Court awards Samson $356,609.69. On Debtor’s petition date, WCP, per its calculation of interest rate, alleged that Debtor and Crocker owed a principal amount of $11,659,993.61. Excluding Debtor’s property, WCP’s Loan Activity & Interest Calculations show principal payments totaling $4,913,888.53. Subtracting the foregoing amount from the principal loan amount of $11,659,993.61 leaves a claim still owing of $6,746,105.08. WCP’s proof of claim is allowed as a general unsecured claim for the foregoing amount of $6,746,105.08.

In re Blixseth, Samson v. Western Capital Partners, March 18, 2013, David B. Cotner and Hugh Robert McCullough for Samson, Robert W. Hatch, Joseph J. Novak and Daniel J Vedera for Western Capital

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2013 Mont.B.R. 16

Schafer, Chapter 13, Adversary, Motion to Dismiss, March 25, 2013

Case no 07-61297, Adversary no. 12-00041

Defendant Ocwen Loan Servicing, LLC ("Ocwen"), filed a Motion to Dismiss for failure to state a claim upon which relief can be granted. chafer commenced his voluntary Chapter 13 bankruptcy case on November 6, 2007. The Court entered an Order confirming Debtor’s First Amended Chapter 13 Plan on January 4, 2008. Schafer’s confirmed Plan listed Ocwen as a secured creditor, whose claim was unimpaired. Schafer proposed to cure an arrearage of $13,380.41 owed to Ocwen through his Chapter 13 Plan. In March of 2011, the Court granted Schafer permission to make an early payoff of his Chapter 13 plan obligations, which also enabled him to pay the mortgage to Ocwen in full. Schafer alleges he requested a payoff statement from Ocwen, which showed a balance due of $56,415.00 as of April 5, 2011. Schafer paid Ocwen the amount it claimed was owed. The Court entered an Order of discharge. Schafer’s case was closed on July 28, 2011. Schafer now contends he overpaid Ocwen the sum of $6,144.32. Schafer also alleges he paid $2,949.71 of additional interest at the payoff date. Because of Schafer’s belief that he overpaid Ocwen, Schafer filed on May 21, 2012, a motion to reopen his case to pursue Ocwen for violating the terms of his Chapter 13 Plan.

The Court agrees with Ocwen that an objection to the allowance of its Proof of Claim would, at this late date, be untimely. However, this Court does not read Schafer’s complaint as an objection to Ocwen’s allowed claim. Rather, accepting all factual allegations in the complaint as true, the Court finds it plausible that Ocwen might have charged Schafer more than it was entitled to under the terms of Schafer’s Amended Plan and this Court’s Order confirming the same. accepting all factual allegations in the complaint as true, the Court finds it plausible that Ocwen might have charged Schafer more than it was entitled to under the terms of Schafer’s Amended Plan and this Court’s Order confirming the same. As a leading commentator on Rule 12(b)(6) writes: "[T]he purpose of a motion under Federal Rule 12(b)(6) is to test the formal sufficiency of the statement of the claim for relief; the motion is not a procedure for resolving a contest between the parties about the facts or the substantive merits of the plaintiff’s case."In this case, a dismissal of Schafer’s amended complaint would be inconsistent with the plausibility standard.  Without passing on the merits of Ocwen’s defense, the Court would note that "[u]nder Montana law, a claim accrues when an action can be brought." Under the facts plead by Schafer, he had no claim until Ocwen demanded more than it was entitled under its Proof of Claim and as provided in Schafer’s confirmed Plan.

In re Schafer, Schafer v. Ocwen, March 25, 2013, John Heenan and Ross Richardson for Schafer, Charles Hansberry for Ocwen.

2013 Mont.B.R. 20

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Southern Electric Electric Generation and Transmission Cooperative, Inc, Chapter 11, Relief from Order, January 8, 2013

Case No 11-62031

A hearing was held on the Joint Motion to Vacate Administrative Expense Order. Consistent with its Proof of Claim, PPL EnergyPlus, LLC filed on July 13, 2012, an Application for Allowance and Payment of Administrative Claim Pursuant to 11 U.S.C. § 503(b)(9) ("Application"), seeking approval of its $2,492,412.00 administrative claim. On August 6, 2012, the Court entered an Order allowing PPL EnergyPlus, LLC an administrative expense claim of $2,492,412.00 after finding good and sufficient cause existed to approve the Application.

The moving parties argue "Rule 60(a) authorizes the Court to ‘correct a clerical mistake or a mistake arising from oversight or omission whenever one is found in a judgment, order, or other part of the record.’ Here, such a mistake and omission exist because the Court presumably entered the Administrative Expense Order without knowledge of PPL’s failure to comply with Mont. LR 9013-1(e)[.]" At a hearing held September 25, 2012, the moving parties did not offer a defense to PPL EnergyPlus, LLC’s Application, but harkened back to their due process argument based on PPL EnergyPlus, LLC’s failure to attach the notice contemplated by Mont. LBR 9013-1(e) to their Application. The Court concluded in an Order entered October 23, 2012, that it was a waste of scarce judicial resources to remedy an alleged due process violation by granting an unsupported motion. Thus, to afford the moving parties an opportunity to properly defend their pending motion, the Court scheduled the second hearing, which was held December 18, 2012, and advised the moving parties of the need to sustain their burden of proof by showing, through factual evidence and/or legal argument, that they have a meritorious defense to the Application The Court cautioned in the October 23 2012, Order that absent such a showing, the Order approving the Application would stand.

Rule 60, FED.R.CIV.P., incorporated into the Federal Rules of Bankruptcy Procedure by Rule 9024, provides relief from an order or judgment for such items as mistake, inadvertence, excusable neglect, newly discovered evidence and fraud. The moving parties seek relief under Rule 60(b)(4) which allows the Court to grant parties relief from an Order if "the judgment is void." Such relief normally will not be granted unless the moving party is able to show both injury and that the circumstances beyond its control prevented timely action to protect its interests. The moving parties argue in the first instance that electricity is not a "good" and that 11 U.S.C. § 503(b)(9) only allows an administrative claim for "goods" received within 20 days before the date of commencement of a case. Under the facts of this case, the Court finds the reasoning that electricity is a good. The Trustee failed to present any persuasive evidence proving that the value of the power Debtor received from PPL EnergyPlus, LLC was anything less than $2,492,412.00.

In sum, , the Trustee, Committee and Noteholders failed to present a meritorious defense to PPL EnergyPlus, LLC’s administrative application. Therefore, the Court’s Order entered August 6, 2012, allowing PPL EnergyPlus, LLC an administrative expense claim of $2,492,412.00 shall stand as entered.

In re Southern Electric Generation and Transmission Cooperative, Inc. January 8, 2013

John Cardinal Parks of Denver, Colorado and Joseph V. Womack for the Chapter 11 Trustee; Harold V. Dye for the Committee; Martin S. King and William A. (Trey) Wood, III for PPL EnergyPlus, LLC; Martin S. Smith for Beartooth Electric Cooperative, Inc.; and Ross P. Richardson for NorthWestern Energy.

2013 Mont.B.R. 2

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Southern Montana Electric Generation and Transmission Cooperative Inc., Chapter 11, Disclosure Statement, October 1, 2013

Case no 11-62031

In its written objection to approval of the Disclosure Statement filed September 24, 2013, Mid-Yellowstone Electric complains that "1) the Disclosure Statement is inadequate as it supports an unconfirmable bankruptcy plan, and 2) key portions of the Disclosure Statement are based upon a [sic] conclusory and unsupported statements." Beartooth Electric Cooperative, Inc. echos the foregoing, arguing "(i) the Disclosure Statement fails to provide adequate information as that term is defined in 11 U.S.C. § 1125(a)(1), and (ii) the Trustee’s Second Amended Plan of Reorganization . . . that the Disclosure Statement describes is not capable of being confirmed."

The Disclosure Statement filed September 23, 2013, satisfies many of the objections filed on September 18, 2013. Other objections that were not cured by the Disclosure Statement filed September 23, 2013, are more in the nature of plan objections. Dissension exists among the Objecting Members and they apparently do not want to proceed forward at this time as a cohesive group. However, that is not a reason to deny approval of an otherwise valid Disclosure Statement. The objecting parties also question whether the Trustee’s Plan will ultimately be feasible, or whether the Plan is simply visionary.5 The objecting parties also raise valid arguments with respect to the benefit, if any, of Southern Montana’s retention of the Highwood Generating Station, and repaying the Noteholders $60 million, when less than six month ago, the Trustee was arguing Highwood Generating Station and certain contract rights had a value of $5.6 In addition to Highwood Generating Station, the Committee convincingly argued that the Trustee should show at confirmation that his proposed plan will benefit more than the Trustee, Estate Professionals and the Noteholders. The Court agrees that the road to confirmation in this case is not nicely paved, and the Trustee has significant hurdles to overcome, but as stated earlier, that does not warrant disapproval of a Disclosure Statement that otherwise satisfies the requirements of 11 U.S.C. § 1125.

In sum, the objecting parties argue that the Disclosure Statement does not provide adequate information to enable them to make an informed judgment on the Plan. Ultimately, however, the objecting parties have demonstrated that they have information of a kind, and in sufficient detail to enable a hypothetical investor to make an informed judgment about the Trustee’s Third Amended Plan of Reorganization filed September 23, 2013, at docket entry no. 1048. Therefore, the Court will grant final approval of the Disclosure Statement.

As for the Motion by Trustee for Entry of an Order Approving (I) the Confirmation Hearing Notice, the Contents of the Solicitation Package, and the Manner of Mailing and Service of the Solicitation Package, (II) the Procedures for Voting and Tabulation of Ballots, (III) the Forms of Ballots, and (IV) the Procedures for Allowing Claims for Voting Purposes Only, the Court grants said Motion subject to the valid objections of the Committee and subject to the terms of this Memorandum of Decision and accompanying order.

In re Southern Montana Electric Generation and Transmission Cooperative, Inc., October 1, 2013, Harold Dye for Unsecured Creditors Committee, Laurence R. Martin and Martin Smith for Beartooth, Trent M. Gardner and John P. Paul for Fergus Electric Cooperative, Glen Ryder for Mid-Yellowstone Electric, Martin S. King for PPL Energy Plus, John C. Parks and Joseph Womack for the Trustee, Jonathan B. Alter for Prudential Insurance, Jeffrey A. Hunnes for Tongue River Electric, Joshua I. Campbell for U.S. National Bank, James A. Patten for EPC Services, James W Ehrman for Energy West.

2013 Mont.B.R. 47

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Southern Montana Electric Generation and Transmission Cooperative Inc., Chapter 11, Removal of Trustee, November 26, 2013

Case no. 11-62031

The remaining Members would now like to liquidate Southern Montana and to that end Beartooth Electric Cooperative, Inc., Fergus Electric Cooperative, Inc., Mid-Yellowstone Electric Cooperative, Inc. and Tongue River Electric Cooperative, Inc. filed on October 18, 2013, a Member Cooperatives’ Plan of Liquidation which values the Noteholders’ collateral at $16.5 million. The Members’ plan provides that the Noteholders’ claim will be paid and satisfied in full by the surrender of the Highwood Generation Station and other collateral. The balance of the Noteholders’ claim will be allowed as a general unsecured claim in an amount to be determined after resolution of any claims objection and any avoidance actions.

In contrast, the Trustee’s Third Amended Plan of Reorganization filed September 23, 2013, at docket entry no. 1048 retains possession of the Highwood Generating Station, classifies the Noteholders’ claims into Classes 2(A) and 2(B), and provides for the claims in an aggregate principal amount equal to $85 million less (a) the total amount of adequate protection payments paid to the Noteholders pursuant to the DIP Order; (b) 100% of the Noteholders’ professional fees; and (c) the Noteholders’ share of the proceeds of the settlement between the City of Great Falls and Electric City Power, Inc. Prudential’s share of the claim in the amount of $75 million will bear interest at the rate of 6.0% per annum, and Modern Woodmen’s share of the claim in the amount of $10 million will bear interest at the rate of 5.25% per annum. The Trustee’s proposed plan also requires the Members to guarantee a contract with Morgan Stanley. The Members have represent that they will not sign the guarantee.

Fergus Electric Cooperative, Inc. requests that the Trustee be removed from this case at this time, arguing “the circumstances which necessitated the appointment of a Chapter 11 Trustee no longer exist” and that “there is no longer any reason to incur the extraordinary expense of a Chapter 11 Trustee and his professionals in this matter.”

As the parties correctly note, this Court never determined that cause existed for the appointment of a trustee under 11 U.S.C. § 1104(a)(1), and similarly never found that the appointment of a trustee was in the interests of creditors, equity security holders, or others under 11 U.S.C. § 1104(a)(2). The appointment of the Trustee in this case was the result of an agreement between the United States Trustee and the Members of Southern Montana. The pending motion was electronically served on the United States Trustee, who has not filed a response to the request to remove the Trustee.

From the evidence presented, it is apparent all Members of Southern Montana agreed to the appointment of a Trustee early on because Southern Montana’s Board of Trustees was deadlocked and unable to proceed forward in any meaningful fashion. Through agreements with the Trustee, YVEC and the City of Great Falls have left Southern Montana, leaving Southern Montana with four members who are in unanimous agreement that they do not want to move forward together and who are also in unanimous agreement that Southern Montana should be liquidated. The Court finds that a change in circumstances, namely that Southern Montana’s Board of Trustees is no longer deadlocked, obviates the need for the continued appointment of the Trustee.

Carrie Boysun, an accountant employed by Southern Montana, testified she believes that without YVEC, Southern Montana will run out of cash because Southern Montana is experiencing about $100,000 of negative cash flow each month.  The negative cash flow is undoubtedly in part related to the professional fees being paid to the Trustee, his counsel and counsel for the Noteholders. A cursory review of the record reveals that the Trustee, his counsel and counsel for the Noteholders have applied for fees and costs in excess of $6 million, and yet, after two years, the Trustee has not secured confirmation of a plan.  Given the specific circumstances of this case, the Court does not see the need for the Trustee’s continued appointment.

In re Southern Montana Electric B=Generation and Transmission Cooperative, Inc., November 26, 2013, Robert K. Baldwin, Trent M. Gardner, John P. Paul for Fergus Electric Cooperative Inc., Harold V. Dye for Unsecured Creditors Committee, Martin Smith for Beartooth Electric Cooperative, Martin S. King for PPL EnergyPlus. Gary Ryder for Mid-Yellowstone Electric Cooperative. John C. Parks, Joseph V. Womack for the Trustee, Jonathan B Alter, Seven M. Johnson for Noteholders, Jeffrey A. Hunnes for Tongue River Electric Cooperative, James A. Patten for EPC Services Company.

2013 Mont.B.R. 57

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Spanish Peaks Holdings II LLC, Chapter 11, Assume Ground Lease

Despite Boyne’s contentions to the contrary, the Trustee has not previously rejected the Ground Lease and the Ground Lease is not deemed rejected under the Bankruptcy Code. The Bankruptcy Code provides trustees maximum flexibility in situations where the Chapter 7 debtor is the lessor of nonresidential real property. In such scenarios, the time periods of 11 U.S.C. § 365(d)(1) are not applicable. Similarly, the lease is not deemed rejected under 11 U.S.C. § 365(d)(4). Moreover, FED.R.BANKR.P. 6006 does not provide a procedure for compelling a Chapter 7 trustee to assume or reject a lease under such circumstances.

Contrary to Boyne’s assertions, the fact that the Trustee sought four extensions of time to reject, assume, or assume and assign executory contracts, and referenced ski terrain activities therein, does not create a deadline for assuming or rejecting executory agreements that did not otherwise exist. Boyne also argues that the Trustee rejected the Ground Lease in the Term Sheet, Sale Motion and Bidding Procedures Order. With respect to the Term Sheet, Boyne complains that the proposed Notice attached to the Trustee’s Stipulation and Joint Motion to Approve Term Sheet states that the "property subject to the sale will be sold "free and clear of all liens, claims and encumbrances, except for Permitted Encumbrances[,]" and that the Permitted Encumbrances described in Exhibit D do not reference the Ground Lease. While the Ground Lease is not specifically identified as a "permitted encumbrance" on the attached Exhibit D, Exhibit D also provides that a permitted encumbrance is any "[o]ther encumbrance acceptable to the Successful Bidder in its sole discretion." The Court does not read the language of the Notice as a specific rejection of the Ground Lease and Boyne cites to no other portion of the Stipulation and Joint Motion to Approve Term Sheet, or the attachments thereto, in support of its argument that the Trustee has rejected the Ground Lease.  The Court does not consider the Trustee’s proposed asset purchase agreement a specific rejection of the Ground Lease. The Trustee’s proposal is just that, a proposal. Indeed, it is the prospective buyer, and not the Trustee, who will arguably decide which obligations it wants to assume. Schedule C will undoubtedly take form as the sales process progresses.

For the reasons discussed above, the Court finds that the Trustee has not rejected the Ground Lease. The Court also finds no merit in Boyne’s judicial estoppel argument where the statements that form the basis of Boyne’s argument were made by Spanish Peaks Acquisition Partners, LLC, and not the Trustee.

In re Spanish Peaks Holdings II LLC, May 29,.2013,  John L. Amsden for the Trustee, Benjamin P. Hursh, David M Wagner, Michael Lastowski, Paul D Moore for Boyne

2013 Mont.B.R. 32

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Stampley, Chapter 13, Domestic Support, Jurisdiction, February 8, 2013

Case No. 12-60732

Pending in this Chapter 13 case is confirmation of Debtor’s Second Amended Chapter 13 Plan filed on December 17, 2012, and objection filed by Debtor’s former spouse and creditor Susan Clarion Stampley.

Clarion’s objections to confirmation are not based on any of the enumerated requirements of § 1325. As explained in Stipulated Fact 8, the Plan’s provision for payment in full of Clarion’s allowed secured claim in paragraph 2(b) appears to satisfy the requirement for provision of her allowed claim at § 1325(a)(5)(B). The Debtor contends that neither the Decree of Dissolution nor litigation to set aside a decree are core proceedings, and rather fall within the domestic relations exception to federal court jurisdiction. He argues that he did not waive his right to seek relief from the divorce decree in the state court when he objected to Clarion’s proof of claim, and that the decision whether to vacate the Decree of Dissolution belongs in the state courts, not the federal courts. Debtor submits that his Plan should be confirmed because it treats Clarion’s claim as a secured claim that will be paid in full with interest if the state court decision is affirmed, and if the Decree of Dissolution is vacated he will modify his plan. Clarion objects to the Plan provision at paragraph 7 that an order confirming the Plan shall constitute an order modifying the automatic stay to the extent necessary to allow the Montana Supreme Court to rule on the appeal pending before it. Core proceedings are enumerated in detail at 28 U.S.C. § 157(b)(2)(A) through (P). This Court sees no subsection in § 157(b)(2) in which the determination whether to grant a debtor relief from a Decree of Dissolution of a marriage entered by a state court based on mistake could be considered a core proceeding. On the contrary, a long recognized "domestic relations exception" limits federal jurisdiction in cases involving the issuance of a divorce or alimony decree. In the instant case, which involves Debtor’s appeal of the state court’s denial of his motion for relief from the Decree of Dissolution, the policy underlying the domestic relations exception applies. This Court deems it appropriate under the domestic relations exception, and for purposes of comity with the state court and respect for state law, to abstain and defer to the state courts on appeal, and the court which entered the decree, for their determination of the merits of the Debtor’s appeal and any subsequent proceedings involving division of marital property and enforcement of court orders.

A final reason to overrule Clarion’s objection to the provision in the Plan for modification of the stay is the fact that the Debtor has never been stayed from pursuing his appeal. Further, a defendant in an action brought by a plaintiff/debtor may defend itself in that action without violating the stay.

In re Stampley,  February 8, 2013, Edward A. Murphy for Stampley, Reid J. Perkins for Clarion

2013 Mont.B.R. 5

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Stampley v. Clarion, Appeal, Avoid Judicial Lien

Chapter 13, Appeal, Avoid Judicial Lien.

There are two issues raised in this appeal, a primary issue and a secondary issue. The primary issue is whether the lien was fixed to Stampley's pre-existing interest. The secondary issue, whether Clarion's proof of claim is a secured claim, is moot if the lien did not fix to Stampley's pre-existing interest. Stampley moved to avoid Clarion's judicial lien under 11 U.S.C. § 522(f)(1 )(A) on the grounds that it impaired an exemption to which he was entitled under 11 U.S.C. § 522(b). Stampley claimed a homestead exemption under Montana Code Annotated § 70-32-201. Chiu stated that "under § 522(f)(1) a debtor may avoid a lien if three conditions are met: (1) there was a fixing of a lien on an interest of the debtor in property; (2) such lien impairs an exemption to which the debtor would have been entitled; and (3) such lien is a judicial lien." The timing of when the lien attached to the property interest is vital in determining whether the lien can be avoided under § 522(f)(1). If Stampley had an interest in the property before the lien attached, he can avoid the fixing of the lien. But, according to Farrey, if the judicial lien attached before Stampley acquired the property interest, or at the same as the creation of the property interest, he cannot avoid the fixing of the lien. The Montana Supreme Court has recently clarified the issue of property acquired before marriage and found that "[section 40-4-202, MCA, obligates a court to equitably apportion between the parties all assets and property of either or both spouses, regardless of by whom and when acquired. This directive applies to all assets, including pre-acquired property ...."

Stampley correctly argues that nowhere in Funk does the Court discuss the termination of pre-existing interests and the creation of new interests, which is the crux of this case. However, Stampley does not provide any relevant authority that says his interests were not modified by the dissolution of marriage decree. Additionally, Stampley fails to address the Quane decision which holds that a judicial lien stemming from a dissolution proceeding does not fix on an interest of the Debtor which existed prior to the dissolution, and is thus not avoidable under § 522(f)(1)(A). As a result, this Court is not persuaded by Stampley's arguments to rule against precedent. Consequently, this Court will affirm the Bankruptcy Court's order denying Stampley's motion to avoid Clarion's judicial lien.

The basis for Stampley's objection is based on his motion to avoid the judicial lien. As stated above, Stampley's objection to Clarion's proof of a claim is moot if Stampley's motion to avoid the lien is denied. Thus, because this Court will affirm the Bankruptcy Court's order denying Stampley's motion, his objection is moot.

Stampley v. Clarion, June 24, 2013, Edward A. Murphy for Stampley, Reid A. Perkins for Clarion

2013 Mont.B.R. 35

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Standley, Chapter 12, Confirmation, Motion to Dismiss

Case no. 11-62373

State Bank of Townsend, in its objection, argues Debtors’ Plan is not proposed in good faith, that Debtors’ Plan does not propose to pay it’s secured claim in full, that the Plan attempts to eliminate it’s security interest in violation of § 1225(a)(5)(B)(ii), that the Plan is not feasible, that the plan unfairly discriminates, that it does not provide for the surrender of the Home Place and the Nichols Place as Debtors’ previously agreed, and that the proposed term and interest rate is unreasonable. After the confirmation hearing, Zions filed an objection to confirmation of Debtors’ Plan. While the Court would generally not consider an objection filed after the hearing, the Court finds that Zions’ objection is timely given that Debtors did not file their Plan until January 24, 2013, which was only one week prior to Zions’s objection. In its objection, Zions complains about the sale of the three parcels of land, two of which have already been approved.5 Zions also complains that Debtors’ Plan creates unnecessary delay by granting Debtors until December 31, 2013, to sell the three parcels in the event the sales are not concluded by May 1, 2013. Also, Zions objects arguing said Plan does not propose to pay it’s secured claim in full, that Debtors identify the collateral securing it’s claim as approximately 900 acres when in fact Zions’s claim is secured by approximately 1,693 acres, that the value of it’s claim is incorrectly stated at $135,000, and that the proposed interest rate and term for repayment of it’s claim is unreasonable.

Debtors’ Plan provides for an interest rate of 4.75% for Zions and State Bank of Townsend. The Court takes judicial notice that the prime rate of interest has been 3.25 percent for some period of time. The next step requires that a risk factor be added to the prime rate. Risk is heightened to an extent based on the unpredictable nature of the agricultural economy. The Court concludes that a risk factor of one and one-half percent is not unreasonable. In addition to a reasonable market rate of interest, § 1225(a)(5)(B) requires that a debtor provide for payments to creditors over a reasonable market term. The Court finds that such term does not comport with §1225(a)(5)(B) by providing for payments to creditors over a reasonable market term.

In addition, the Court finds that the drafting of paragraph 2(b) of Debtors’ Second Amended Chapter 12 Plan is, as Zions persuasively argues, ambiguous.   If the sale of the other 80 parcel is approved and if Debtors’ contract with Cascade County is approved, Debtors may well have a feasible Chapter 12 Plan. However, those matters are still undecided as of this date. Debtors’ Plan does not satisfy the requirements for confirmation. However, it appears Debtors may finally be taking the steps necessary to formulate a confirmable Chapter 12 plan. Thus, the Court finds it appropriate to hold the pending motion to dismiss in abeyance until after the hearing on approval of the gravel contract and until after the Court rules on the pending motion for sale of the other 80 acre parcel. In the interim, the Court will grant Debtors one final opportunity to amend their Chapter 12 plan to comport with this Memorandum of Decision.

In re Standley, March 22, 2013, Gary S. Deschenes for Standleys, John H Grant for State Bank of Townsend, Randall C. Lester for Zions Agricultural Finance.

2013 Mont.B.R. 19

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Standley, Chapter 12, Sanctions, Dismissal, December 6, 2013

Case no 11-62373

The first payment due under the confirmed Plan is due on the date of December 31, 2013, based in part upon sales of three parcels of Debtors’ real property. Mike and the Trustee testified that 2 of the 3 sales have closed.  The approved Stipulation (Doc. 244) between Debtor and State Bank, Ex. J, gives State Bank a number of options at paragraph 9d on pages 3-5, including taking a deed in lieu of foreclosure, Debtors’ listing the 80 acres for sale, or foreclosure. State Bank has sole discretion proceed under any of the options, or none of the options, and the decision not to pursue any of the options shall not be deemed a waiver.

 Whether or not the motion to dismiss is granted or denied, the undisputed evidence is that the Debtors have failed to perform as agreed, and State Bank’s motion to dismiss is not frivolous.  Rule 1208(c) authorizes a “party in interest” to request dismissal for cause, which State Bank has done.  In sum, the Court finds that Debtors’ Request for sanctions fails to satisfy Rule 9011, and it is denied.  While there has been delay and missed deadlines by Debtors, in order to prove “cause” under § 1208(c)(1) State Bank must prove “unreasonable” delay “that is prejudicial to creditors.”

 State Bank has not shown that the delay in completing the third sale of 80 acres is unreasonable, or that the delay has been prejudicial to State Bank or creditors.  There is no evidence that the deadline to make the plan payment has been moved up, and no evidence that the Debtors will not be able to make the December 31, 2013, plan payment as Mike and the Trustee testified they can. Thus, the Court finds that concludes that State Bank failed its burden to show “cause” to dismiss the case under §1208(c).

 In re Standley, December 6, 2013, Gary S. Deschenes, for Standley, John Grant for State Bank of Townsend, James Volk Trustee

2013 Mont.B.R. 58

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Stokes v. Duncan et al, Subject Matter Jurisdiction, 9th Cir. BAP (Unpublished)

Case no. 09-60265, Adv. No 12-00053, BAP no. MT-13-1097, September 23,2013

On February 28, 2012, while the chapter 7 case was still pending, the Debtor commenced an action against Duncan and Glover, Duncan's paralegal, in Montana state court (the "State Court Action"). After he became aware of this litigation, the Trustee claimed the Malpractice Claims as assets of the Debtor’s estate and obtained a stay of the State Court Action. The bankruptcy court subsequently approved the sale of the Malpractice Claims by auction ("Sale Order"). The Sale Order described the assets to be sold as "the estate’s interest, if any, in the Malpractice Claims." It also contained language protecting the estate from post-sale claims; in particular, it provided that the sale was "as is, where is" and that "the Trustee [made] no representations or warranties regarding the validity or sufficiency of the claims and/or whether the claims are property of this bankruptcy estate." The protective language protected the estate from a not-so-hypothetical litigation risk as the Debtor asserted that the Malpractice Claims accrued entirely post-petition and that the estate had no interest in them.

It is axiomatic that in rem jurisdiction over an asset terminates once the bankruptcy estate relinquishes all rights and interests in the asset. a bankruptcy court ordinarily lacks jurisdiction to adjudicate ownership disputes involving former property of the estate. The bankruptcy court lacked jurisdiction under 28 U.S.C. § 1334(e) to adjudicate disputes as to ownership and property rights in the Malpractice Claims once the asset was sold and transferred from the estate. The bankruptcy court’s in rem jurisdiction over the Malpractice Claims lapsed after the sale.

Section 541 defines property of the estate, but does not create a right to relief. It, therefore, follows that an action to enforce a right thereunder cannot exist. Under these particular facts, then, whether the assets sold were property of the estate under § 541 was a secondary (and perfunctory) issue in contrast to the actual and substantive issue: ownership of and rights in the Malpractice Claims for the purposes of the State Court Action. Here, the Declaratory Relief Action could not "arise under" the Code. Here, the Sale Order sold all of the estate’s interest in the Malpractice Claims and expressly provided that the sale was made without warranty of title. Once again, the express disclaimer insured that the estate was insulated from the outcome of any subsequent dispute with respect to the assets sold. Thus, it mattered not, from the estate’s perspective, what the Trustee sold to Duncan. The outcome of the Declaratory Relief Action could not impact the bankruptcy estate, could not impact creditor recoveries, and could not impact or involve the Trustee. Thus, the bankruptcy court did not have "related to" jurisdiction.

Stokes v. Duncan, (9th Cir. BAP) September 23, 2013, (Unpublished)

2013 Mont.B.R. 46

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Tipton, Chapter 13, Objection to Claim of Mortgage Claimant, January 11, 2013

Case No 12-60158

Debtor filed an Objection to Proof of Claim No. 8 filed by Residential Credit Solutions, Inc. arguing " Claimant has attached no evidence that Claimant is the true party in interest, or that Claimant holds a perfected security interest in the claimed collateral, as is required by Mont. LBR 3001".

The Note attached to RCS’s Proof of Claim No. 8 is a negotiable instrument. An indorsement is a signature made on an instrument for the purpose of negotiating the instrument. MCA § 30-3-203. An indorsement in blank is an indorsement that is not payable to an identified person. MCA § 30-3-204. Thus, an instrument indorsed in blank becomes payable to bearer and any person who possesses the instrument becomes its holder. MCA § 30-3-204. A person is entitled to enforce an instrument if he, she or it is the holder of the instrument. MCA §30-3-301. In this case, the Note is endorsed in blank and Debtor has not presented any evidence to refute that RCS is the holder of the Note. However, even if RCS was not the holder of the Note, RCS could still be entitled to enforce the Note as "a nonholder in possession of the instrument who has the rights of a holder."

American Brokers Conduit was the original payee of the Note and Mortgage Electronic Registration Systems, Inc. ("MERS"), solely as nominee for American Brokers Conduit, was the original beneficiary under the Deed of Trust. By letter dated July 12, 2011, Debtor was advised by JPMorgan Chase Bank, N.A. that the right to collect payments from Debtor was being transferred to RCS on August 1, 2011. Sometime prior to August 1, 2011, Debtor was again advised by a "Notice of Assignment, Sale, or Transfer of Servicing Rights" that RCS would be servicing Debtor’s loan and that payments and correspondence were to be directed to RCS. On September 13, 2011, MERS granted, conveyed, assigned and transferred its beneficial interest in the Deed of Trust to JPMorgan Mortgage Acquisition Corp., whose address was "c/o Residential Credit Solutions, Inc." On September 28, 2011, JPMorgan Mortgage Acquisition Corp., by RCS, its attorney in fact, appointed First American Title Insurance Company as the successor trustee under the Deed of Trust.

Based upon the facts before the Court, Debtor offers no evidence to refute that RCS is the holder of the Note and MCA § 30-3-301 allows the holder of a note to enforce the note.  Moreover, under MCA § 71-1-110 the "assignment of a debt secured by mortgage carries with it  the security,"2 and pursuant to MCA § 71-1-305, mortgage law applies to trust indentures.

In re Tipton, January 11, 2013, Ralph Wilkerson for Tipton, Erika Peterman for JP Morgan Mortgage Acquisition Corp.

2013 Mont.B.R. 3

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VANN'S INC., Chapter 7, Application for Fees and Costs

Case no 12-61281

After filing the Chapter 11 petition on August 5, 2012, the Debtor also filed a motion for post-petition financing with a $2 million loan from First Interstate Bank. On September 14, 2012, GE filed a supplemental objection to the DIP loan noting that through December 28, 2012, the Debtor had a net cash flow loss of $6,132,300.00. Thereupon, GE on September 18, 2012, filed a motion to convert the case to Chapter 7, noting that pursuant to the DIP interim order to obtain up to $500,000 in post-petition financing the Debtor funded at least $320,000.00 into a segregated account for professional fees plus a carveout available from CDF’s collateral to chapter 11 professional up to $250,000.00. Thereafter a Chapter 11 Trustee was appointed upon request of the Unsecured Creditors Committee ("UCC"), upon which motion the Court on October 2, 2012, appointed Richard Samson as Chapter 11 Trustee. Further on October 26, 2012, the Court approved the stipulation between the Chapter 11 Trustee, First Interstate Bank, GE, the UCC and U.S. Trustee to convert this case to Chapter 7. Thus, from the above, it is clear the carveout for professional fees was fixed at $670,000.00, and all professionals were aware of that fact.

From the above, it is clear that during the pre-petition period devoted to restructure of the Debtor in a Chapter 11 case, Perkins and Hamstreet were paid significant funds of over $400,000.00 in a 5 month period. This fact must be taken into consideration in ruling on the pending fee and cost requests by Perkins and Hamstreet. In order to apply that salutary standard in this case, I find the proper and necessary course of action and exercise of discretion is to apply the carveout standard set by the parties and lender FIB which set $670,000.00 aside for payment of Debtor’s professionals and UCC professionals.  Indeed, Perkins counsel acceded to such plan. Ex. 4. In sum, Debtor’s professionals provided their best estimates of reasonable fees and then added a $250,000 cushion. It is only prudent, and indeed necessary, that this Court hold the professionals to such estimates. The balance of the carve out left to pay Perkins and Hamstreet as noted above is $335,782.78. I conclude that it is only equitable and fair that Perkins and Hamstreet split that sum, with an award of $167,891.39 to each as a reasonable final fee and cost award, particularly in light of the pre-petition bankruptcy services paid of over $400,000.

In re VANN’S INC., May 21, 2013, Richard Samson, Trustee, Brian Jennings and Alan D. Smith for Perkins Coie

2013 Mont.B.R. 29

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Warburton, Chapter 7, Exception to Discharge

Case no 12-60022, Adv.no. 12-00018

A party seeking denial of discharge under § 727(a)(2) must prove by a preponderance of the evidence: "1) a disposition of property, such as transfer or concealment, and 2) a subjective intent on the debtor’s part to hinder, delay or defraud a creditor through the act of disposing of the property. However, it is sufficient under the plain language of §727(a)(2)(A) to deny discharge upon a showing of intent to hinder or delay or defraud creditors. In other words, intent to defraud need not be shown because mere proof of intent to hinder or to delay is sufficient. Intent may be inferred from surrounding circumstances including "badges of fraud" that constitute circumstantial evidence of intent, or a course of conduct. This Court finds such evidence sufficient by a preponderance of the evidence to conclude that Plaintiff has satisfied the second requirement of intent to hinder, delay or defraud, and judgment shall be entered under Plaintiff’s Fourth Claim for Relief denying Debtors’ discharge under § 727(a)(2).

Plaintiff contends that Debtors removed, concealed, destroyed or failed to keep or preserve the partnership’s books of account or financial records from which the partnership’s business transactions may be ascertained and assets traced back to the Warburtons. Plaintiff must show (1) that the debtor failed to maintain and preserve adequate records, and (2) that such failure makes it impossible to ascertain the debtor’s financial condition and material business transactions. The Court finds that such failure by Debtors to maintain and preserve adequate records makes it impossible to ascertain the Debtors’ financial transactions and material business transactions.

Section 523(a)(4) provides that a discharge under section 727 does not discharge an individual debtor from any debt . . . "(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." To prevail on their § 523(a)(4) claim, Plaintiff is required to establish (1) that Debtors were acting in a fiduciary capacity, and (2) that Debtors committed a "defalcation" in that capacity. The scope of the term "fiduciary capacity" under § 523(a)(4) is a question of federal law.

The evidence cited above, in this Court’s view, easily establishes that the Warburtons consciously disregarded or was willfully blind to a substantial and unjustifiable risk that their conduct would violate a fiduciary duty. Their failure to deposit cash receipts, misappropriatstandard of conduct that a law-abiding person would observe" in their situation. Id. Indeed, the evidence suggests further that Warburton’s conduct was intentional.ion of money and taking of ABRG inventory off-site and failure to return is "a gross deviation from the standard of conduct that a law-abiding person would observe" in their situation.

Estate of Courtnage v. Warburton, May 21, 2013, William O. Bronson and James A Patten for Plaintiff, John and Linda Warburton, Pro se

2013 Mont.B.R. 30

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Warwood, Chapter 11, Plan Confirmation

Case no. 12-60132

Through his Chapter 11 Plan, as amended by subsequent stipulations, Debtor proposesto sell as many Tracts as necessary to pay all administrative claims and Class I, II, III, IV, V, VI,VII, IX, and X claims, including CLS Mortgage.1 Per Exhibit 1, Debtor’s debts total $1,409,896.61. Debtor’s proposed Plan provides that in the event the allowed claims are not paid within 20 months from the confirmation date, Debtor will sell his remaining property by an auction sale that is to be completed no later than June 13, 2015.

With regard to the applicable requirements of 11 U.S.C. § 1129(a), the Court finds that both Debtor and Debtor’s Plan comply with all provisions of the Bankruptcy Code, thus satisfying § 1129(a)(1) and § 1129(a)(2). In addition, the Court finds that Debtor’s Plan, which proposes full payment, together with interest, of all classes of creditors’ claims, has been proposed in good faith and not by any means forbidden by law in satisfaction of 11 U.S.C. § 1129(a)(3). Also, compensation and payment of professional services is conditioned under the Plan upon approval of the Bankruptcy Court as required by § 1129(a)(4). Subsections 1129(a)(5), 1129(a)(6) and 1129(a)(13) are not applicable to this case. Section 1129(a)(8) is equally not applicable because Debtor is seeking confirmation under § 1129(b). As noted above, Debtor’s Plan proposes full payment, together with interest, of all classes of creditors’ claims. The Court finds Debtor’s Plan satisfies the "best-interest-of-creditors" test found at § 1129(a)(7). Debtor’s Plan also provides for payment in full of any claims covered by 11 U.S.C. § 507 andi n the manner provided therein, thus satisfying the requirements of § 1129(a)(9). Moreover, at least one impaired class has voted affirmatively in favor of Debtor’s Plan, thus satisfying 11 U.S.C. § 1129(a)(10) of the Bankruptcy Code.

At issue in the instant case is § 1129(b)(2)(A)(i)(II): whether "each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property." Debtor has sufficient equity in Tracts 1, 2, 3, and 4 to pay the costs of sale, capital gains and also pay CLS Mortgage’s secured claim, which CLS Mortgage claims was $481,187.88, as of April 9, 2013, in full. The Court thus finds that Debtor’s Plan satisfies the payment requirement of § 1129(b)(2)(A)(i)(II).

In re Warwood, April 22, 2013, James A Patten for Warwood, Mark L. Evans for CLS Mortgage

2013 Mont.B.R. 25

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Werner v. Gilbert, Chapter 7, Discharge, Fraud

Case no. 12-61446, Adv. No.12-00060

In her complaint, Kristine fails to cite the particular Bankruptcy Code section under which she seeks to except the sum of $6,680.00 from Douglas’s discharge. However, the Court surmises, based upon Kristine’s use of the word "fraud," that she is seeking to except such debt from discharge under 11 U.S.C. § 523(a)(2)(A). Section 523(a)(2)(A) provides that, "a discharge under . . . this title does not discharge an individual debtor from any debt – (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by – (A) false pretenses, a false representation, or actual fraud, . . . ." To prevail on a § 523(a)(2)(A) claim, a creditor must establish five elements:

"‘(1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of his statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor's statement or conduct; and (5) damage to the creditor proximately caused by its reliance on the debtor's statement or conduct.

The period of time relevant for purposes of the Court’s decision is April of 2008 through August of 2008, because that is when Kristine loaned Douglas the $6,680.00. Based upon a careful review of all the evidence, the Court finds that Kristine has not satisfied her burden of proof to except the sum of $6,680.00 from Douglas’s discharge. Kristine contends she would not have loaned Douglas any money had she known he had delinquent debt during the period of time in question in 2008. However, by her own admission, Kristine knew that Douglas owed past due child support in early 2008. Likewise, while it is not completely clear what Kristine thought Douglas’s debts were in early 2008, Kristine’s Exhibit 15, which is the email Douglas sent to Kristine on September 1, In sum, Kristine has failed to establish that Douglas’s financial condition in 2008 was a factor in her decision to loan Douglas money, particularly when Kristine admitted that she knew Douglas owed some amount for past due child support at the time.

In re Gilbert, April 30, 2013, Kristine Werner, Pro se, Douglas Gilbert, Pro se

2013 Mont.B.R. 26

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Wiard, Chapter 7, Motion for Sanctions, Violation of Automatic Stay

Case no. 13-60094

Debtors are seeking sanctions against David Brooks Rice ("David") and Gayla Rice ("Gayla") (together "Rices") under 11 U.S.C. § 362(k) for violation of the automatic stay when Rices contacted Mineral County, Montana officials to commence criminal charges against Debtor Richard Wiard after the date of filing of Debtors’ petition.

Rices sued Richard in Mineral County Justice Court by filing a complaint on August 13,2012, Case No. SM-12-6. Ex. C is the complaint which alleges Richard was indebted to Rices in the amount of $1,188 for overcharging for concrete. The justice court entered a default judgment against Richard on September 12, 2012, in the total amount of $1,273. The day before the supplementary hearing, Debtors initiated this bankruptcy case by filing a petition on January 29, 2013. David testified that he went to the sheriff’s department and filed a criminal complaint against Richard. David stated that he gave the sheriff copies of his exhibits and told the sheriff that Richard had filed for bankruptcy. Richard testified that a patrolman served him with a criminal citation. Ex. J is the citation from the Mineral County Sheriff dated February 21, 2013, stating that Richard was charged with theft for an occurrence which took place on July 11, 2012.

Debtors’ Motion alleges that David Rice sent Richard insulting letters prior to the bankruptcy petition date, and that after the petition date David went to the Sheriff’s office and swore out a complaint accusing Richard of theft, which Debtors contend was for the purpose of collecting the debt. Richard testified that the county attorney said that the criminal charge was a civil matter not a criminal matter and dismissed the charge.

Debtors’ filing of her bankruptcy petition on November 19, 2010, gave rise to an "automatic stay." 11 U.S.C. § 362(a). However, the commencement of a case does not operate as a stay under § 362(a) "of the commencement or continuation of a criminal action or proceeding against the debtor." In this Court’s view Rices, like County Market in Hartung, "did nothing more than fulfill its societal obligation to report a crime to the proper authorities . . . . Simply put, ‘Bankruptcy courts were not created as a haven for criminals. Other than Rices’ report of the alleged theft to the sheriff and/or county attorney, no evidence exists in the record that Rices contacted the Debtors in any fashion, other than the § 341(a) meeting of creditors which is specifically provided for under the Code. The exception of § 362(b)(1) requires that Debtors’ Motion for sanctions against Rices be denied.

In re Wiard, August 9th, 2013, Nik Geranios for Wiard, Edward A. Murphy for Rice

2013 Mont.B.R. 40

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Wygal, Chapter 7, Objection to Exemptions

Case no 13-60063

Debtor filed a voluntary Chapter 7 bankruptcy petition on January 23, 2013, and claimed a $2,575.00 tool of the trade exemption in his 1998 Dodge Truck. From 2005 to the present, Debtor has been self-employed as a paint contractor. Per his Statement of Financial Affairs, Debtor asserts he earned no gross income from employment or the operation of a business in either 2011 or 2012. Debtor testified that he purchased his 1998 Dodge truck in 2005 to use in his contracting business. Debtor fully depreciated the Dodge truck on Wygal Industries, Inc.’s tax returns. The Trustee objects to Debtor’s claimed tool of the trade exemption in the 1998 Dodge Truck arguing, based upon prior decisions of this Court, that exemptions in motor vehicles may only be claimed under the motor vehicle exemption found at MCA § 25-13-609(2), and not under the tool of the trade exemption found at MCA § 25-13-609(3).

In the past, this Court has held generally that a motor vehicle cannot be exempted as a tool of the trade under MCA § 25-13-609(3). See In re Anderson, 15 Mont. B.R. 389, 390 (Bankr. D.Mont. 1996) (recognizing that "a motor vehicle could be classed as exempt only under § 25-13-609(2), and not as a tool of the trade"); In re Giese, 8 Mont. B.R. 395, 398 (Bankr. D.Mont. 1990) (denying a tool of the trade exemption in a licensed motor vehicle because "licensed motor vehicles may only be exempted under subsection (2) of § 25-13-609"; and In re Neutgens, 7 Mont. B.R. 43, 45-46, 126 B.R. 91 (Bankr. D.Mont. 1989) (holding that trucks which were registered and titled with the State of Montana could "only be claimed as exempt under § 25-13-609(2)"). The facts in this case do not warrant revisiting this Court’s prior precedent at this time. This is so because, as disclosed on his Statement of Financial Affairs, Debtor has not generated any income from his contracting business for at least two years.

In re Wygal, April 11, 2013, Ross P Richardson, Trustee, Brandon Wygal, Pro se

2013 Mont.B.R. 24

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Yellowstone Club, Chapter 11, Leave to Sue, March 15, 2013

Case no 08-61570, 08-61571, 08-61573, 08-62572

Hearing was held on the Amended Motion for Leave to Sue Stephen R. Brown and the Law Firm of Garlington Lohn & Robinson, PLLP in the U.S. District Court for the District of Montana filed by Timothy Blixseth. Brown was one member on an eleven member committee and served as a layperson on the Committee, performing no legal work for the Unsecured Creditors Committee. The Unsecured Creditors Committee was represented by Brown and other attorneys. The Unsecured Creditors Committee eventually filed a lawsuit against Credit Suisse. Blixseth intervened in that action and this Court has since entered a Judgment against Blixseth in the amount of $40,992,210.81on grounds Blixseth fraudulently misappropriated the proceeds from the Credit Suisse loan. Blixseth filed on June 8, 2011, a complaint in the United States District Court. The United States District Court concluded that all Blixseth’s claims were subject to the Barton Doctrine, and that no exceptions applied.  Judge Molloy thus entered an Order dismissing Blixseth’s complaint for lack of subject matter jurisdiction.  In Crown Vantage, 421 F.3d 963, the Ninth Circuit adopted a series of factors for a court "to consider in exercising its discretion" to enjoin a party from proceeding with an action against a court appointed officer, including (I) whether the acts or transactions at issue "relate to the carrying on of the business connected with the property of the bankruptcy estate"; (ii) whether the claims pertain to actions of the trustee while administering the estate"; (iii) whether "the claims involve the individual acting within the scope of his or her authority under the statute or orders of the bankruptcy court, so that the trustee is entitled to quasi-judicial or derived judicial immunity"; (iv) whether movants are "seeking to surcharge the trustee, that is, seeking a judgment against the trustee personally"; and (v) whether "the claims involve the trustee's breaching her fiduciary duty either through negligent or willful misconduct." Judge Molloy has already determined that Brown, in his capacity as the Chair of the Unsecured Creditors Committee, was an officer of this Court. As an officer of this Court, Brown "is entitled to a form of derivative judicial immunity from liability for actions carried out within the scope" of his official duties.

In sum, Blixseth continues to complain that Brown has violated Blixseth’s attorney client privilege. This Court has found that Brown did not violate Blixseth’s attorney-client privilege. Blixseth also seeks to assert claims that more appropriately belong to the Debtors. Finally, all the allegations in Blixseth’s proposed complaint are so intertwined with and dependent upon Brown’s actions as a member of the Unsecured Creditors Committee that it makes it impossible for this Court to isolate Blixseth’s so-called "pre-petition malpractice and malfeasance" claims from Brown’s activities as a member of the Unsecured Creditors Committee.

In re Yellowstone Club, LLC, March 15, 2013, Andrew Hawes, Michael Ferrigno, Christopher Conant for Blixseth, Mikel Moore, Dale R Cockrell for Brown and GLR, Robert James, Robert Weaver for Hutchinson and Bullivant, Houser Bailey, Trent Gardner for Beckett and Parsons, Behle and Latimer, Michael F McMahon for Patten and Patten, Peterman Beckkedahl and Green.

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2013 Mont.B.R. 14

Yellowstone Club, Glasser v. Desert Ranch LLLP, et al, Preliminary Injunction, Chapter 11, Adversary Proceeding, Preliminary Injunction, December 13, 2013

Case no. 08-61570, Adv. no. 10-00015

Plaintiff requests entry of an order enjoining Blixseth, Desert Ranch, LLLP and Desert Ranch Management, LLC from transferring any of their assets in a value that exceeds Five Thousand Dollars ($5,000.00) until the litigation is resolved or the judgment in Adversary Proceeding No. 09-00014 is fully satisfied or bonded, and for the appointment of a Trustee to monitor any such transactions. The Defendants oppose Plaintiff’s motion arguing Plaintiff has failed to satisfy the “four-part conjunctive elemental analysis and that this Court lacks the constitutional authority to grant a preliminary injunction, which Defendants characterizes as a final order.

Section 105(a) of Title 11 allows bankruptcy courts to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code].”  Under such provision, a bankruptcy court may enjoin actions against a non-debtor that “threaten the integrity of a bankrupt's estate.  Based upon the foregoing and given the current state of the law in the Ninth Circuit, the Court is not persuaded by Blixseth’s argument that this Court’s lacks the constitutional authority to grant a preliminary injunction.

 In order to obtain a preliminary injunction, the moving party must establish: (1) a strong likelihood of success on the merits, (2) the likelihood of irreparable injury to plaintiff if preliminary relief is not granted, (3) a balance of the hardships favoring the plaintiff, and (4) that an injunction advances the public interest.

The Court finds that Plaintiff has shown a strong likelihood of success on the merits as to this cause of action.  Contrary to a specific Order of this Court, Blixseth has disposed of the Tamarindo Resort Property to the detriment of the Plaintiff. Blixseth has also admittedly disposed of numerous other asserts, all to the detriment of the Plaintiff. Plaintiff has persuasively alleged serious fraudulent activity on the part of Blixseth and Desert Ranch, amounting to substantial amounts of misappropriated money.  Blixseth previously argued that an injunction would frustrate his abilities to operate his businesses. As Plaintiff convincingly argues, at this juncture, Blixseth does not appear to be operating any business, other than the selling of assets. Bixseth and Desert Ranch have engaged in a pattern of secreting or dissipating assets to avoid judgment, and the likelihood of irreparable harm is strong if Blixseth and Desert Ranch continue with the further liquidation of assets.  As discussed earlier, Blixseth stipulated to the entry of an order prohibiting Blixseth and the other defendants in that action from selling, transferring, disposing, encumbering or otherwise liquidating Blixseth’s Tamarindo Resort Property. Yet Blixseth proceeded to sell the Tamarindo Resort Property, and then failed to mention such sale at a hearing heldon his motion to vacate preliminary injunction.  The Court is not persuaded by Blixseth’s public interest arguments to the contrary.

In re Yellowstone Mountain Club, LLC, Glasser v. Desert Ranch Management LLC et al, December 13, 2013,  Shane Coleman for Glasser, Patrick Fox for Desert Ranch

2013 Mont.B.R. 59

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Zeiler v. Matt, Chapter 13, Adversary Proceeding, Specific performance

Case no. 12-61456, Adversary no. 12-00064

This Adversary Proceeding turns on whether the Buy-Sell Agreement between Matt and the Plaintiffs is an executory contract. If the Buy-Sell Agreement is executory, Matt seeks to reject it under 11 U.S.C. § 365. If the Buy-Sell Agreement is not executory, Plaintiffs seek to compel Matt’s specific performance under the Buy-Sell Agreement, which is one of the "Buyer’s Remedies" under the Buy-Sell Agreement. Matt argues that a "contract is executory, and therefore assumable under § 365, only if one party’s failure to perform its obligation would excuse the other party’s performance." Applying such reasoning to this case, Matt argues that "Zeiler’s refusal to pay . . . excused [Matt’s] obligation" to convey title. The problem with such argument is that Plaintiffs did not refuse to pay. Rather, Plaintiffs tendered payment in full, in the form of a nonrefundable down payment of $34,000.00 and certified funds in the amount of $135,751.19. As of July 17, 2012, when Plaintiffs tendered the payment of $135,751.19,

Plaintiffs had no further obligations to perform under the Buy-Sell Agreement. In the case sub judice, the Plaintiffs did more than tender performance, they fully performed under the Buy-Sell Agreement when they signed all necessary documents and presented the title company with bankable funds for the full purchase price on July 17, 2013. The Buy-Sell Agreement in this case is not an executory contract that Matt can reject.

The Buy-Sell Agreement signed by Matt on June 29, 2012, expressly identifies specific performance as one of the Plaintiffs’ remedies in the event Matt accepted the offer, which he did, and in the event Matt refused to consummate the sale within the time period provided in the Buy-Sell Agreement, which he also did. The Court will enter a separate judgment in favor of the Plaintiffs, Larry and Jo Ellen Zeiler and against Defendant Matt Grover Matt, III; and Defendant Matt Grover Matt, III shall, within fourteen (14) days, take the steps necessary to close the Buy-Sell.

In re Matt, Zeiler v. Matt, May 22, 2013, William M. Kebe for Zeiler, Mark Hilario for Matt

2013 Mont.B.R 31

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