Decisions of 2019

 

 

Ably, Conversion Denied, Notice
Case no. 19-60813

Debtor filed a Motion for an Order to Convert on August 20, 2019, seeking to convert this case to Chapter 13. Debtor’s Motion does not comply with Mont. LBR 1017-1(a)(1) requiring that debtors “seeking conversion under 11 U.S.C. § 706(a) . . shall file a motion for conversion to the desired chapter, with the notice required under Mont. LBR 9013-1. Debtor’s Motion does not include a notice to parties in interest of their right to object within fourteen days.  Given the decision by the United States Supreme Court in Marrama v. Citizens Bank of Mass., 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007), this Court has determined that debtors do not have an absolute right to convert a Chapter 7 case to one under Chapter 13 under § 706, and that bad faith conduct acts as a sufficient basis to deny conversion. In the case sub judice, the Court does not see any allegation of bad faith conduct. However, parties in interest should have an opportunity to review and respond to Debtor’s Motion. Accordingly, IT IS ORDERED that Debtor’s Motion for an Order to Convert is denied.

In re Ably, August 20, 2019, Lori Ann Ably, pro se

2019 Mont. B.R. 175 (August 20, 2019)

Adkins, Personal Appearance for Contested Matters
Case no. 13-61521

Creditors filed an unopposed motion for continuance of the May 9, 2019, hearing and a motion to permit Creditors’ Florida counsel to appear telephonically as provided in Montana Local Bankruptcy Rule (“Mont. LBR”) 5074-1(a). Debtor filed a response stating that Debtor has no objection to either the motion. LBR 5074-1(a) provides: “The Court, except within its discretion, will not conduct evidentiary hearings by telephone."  The Court exercises its sole discretion over the pending contested matter and denies without prejudice Creditors’ motion to permit Creditors’ counsel to appear telephonically.

Mont. LBR 5074-1(a) was adopted by this Court to formalize its longstanding authority to control the conduct of hearings in contested matters and adversary proceedings. In its discretion this Court may conduct evidentiary hearings by telephone where appropriate. However, those circumstances are rare and limited. For example, emergencies or matters that must be heard immediately may justify a telephonic hearing that has an evidentiary component. Generally, the Court utilizes telephonic hearings for status and scheduling conferences, as well as reaffirmation hearings. In some cases, the Court has permitted counsel to appear by phone when they simply want to listen to a proceeding. Even in matters that only involve legal argument, the Court has determined that telephonic hearings are a poor substitute for appearing in the Courtroom. Invariably the parties talk over one another and the Court and the quality of the record is diminished. For these reasons Creditors’ counsel will not be permitted to appear at the continued hearing on Debtor’s Motion by telephone.

With the development of the Court’s video conference facilities, Mont. LBR 5074-1(b) allows a party or attorney to contact the Clerk to arrange appearance by video conference. This Court’s prior enthusiasm for permitting video appearances even in contested hearings is waning. Over the last year the Court has advised parties that if they anticipate a hearing will be contested, they should be prepared to appear in person in the courtroom. Although video has been embraced in this District, it has proven to be a poor substitute for having all counsel, witnesses and the Court in a singular place. Irrespective of the modern technology employed, telephone or video, remote attendance negatively impacts the judicial process, particularly when a hearing is contested. The Court appreciates the time, cost, and inconvenience faced by counsel that are required to travel and appear here, but experience has shown video is an inadequate means for conducting a contested hearing. Thus, if it appears there will be a contested hearing, counsel will not be permitted to appear by video.

If the parties are prepared to stipulate to an adequate set of facts that are distilled from the bankruptcy record in this case, and the singular purpose of any hearing is to make legal argument that relies on the agreed stipulated facts, the Court would entertain a request to the Clerk from Stok Folk + Kon pursuant to Mont. LBR 5074-1(b) to appear by video. If, however, there remain outstanding factual disputes between the parties related to the underlying chronology, other facts, or disagreements on the admission of exhibits that require testimony in any form, the parties shall appear in person.

In re Adkins, Edward A. Murphy for Adkins, Julia Swingley for herself, Robert A Stok for Stok Folk + Kon

2019 Mont. B.R. 175 (May 6, 2019)

Apex Energy, LLC, Chapter 11 Small Business Case, Obtaining Credit, Priming Lien
Case no. 19-60676-11

The court may authorize the obtaining of credit only to the extent necessary to avoid immediate and irreparable harm to the estate pending a final hearing. Debtor's sole member Edwards is prepared to loan Debtor $50,000 for the purpose of reworking the well known as “FLB 4”. The proposed terms of the loan are as follows: • 5% interest; • Repayment in a single payment on March 31, 2020, or the effective date of any Chapter 11 Plan, whichever is sooner; • Loan will be secured by a senior lien on all debtor’s unencumbered assets per 11 U.S.C. § 364(c)(2); • Priming lien on all Debtor’s encumbered property per 11 U.S.C. § 364(d)(1); and• Grant lender a super priority administrative claim pursuant to 11 U.S.C. 364(c) (1), subject to a carve out for (i) allowed professional fees, and (ii) chapter 7 admin expenses.

If the Motion is not approved and reworking the wells and corresponding revenue is not produced, conversion to chapter 7 is almost assured. As for allowing Debtor to obtain interim credit, pending a final hearing, 11 U.S.C. § 364 authorizes Debtor to obtain credit with a priority administrative status, a lien on any property of the estate not already subject to a lien, and a senior lien on all property of the estate. Pursuant to section 364(c)(1), the court may authorize borrowing with a priority over “any or all” administrative expenses. A “super priority” claim is not, however, properly treated as an administrative expense, because it has priority over administrative expenses and is permitted only if the debtor “is unable to obtain unsecured credit allowable … as an administrative expense.”

This Court has the authority to grant a senior lien (“priming lien”) on all assets of the estate if the debtor is unable to obtain credit otherwise, and if there is adequate protection on the property of the estate on which the senior lien is to be granted. Edwards also testified that Debtor is unable to obtain any loan other than the loan proposed in Debtor’s Motion. Debtor’s oil wells are subject to senior liens held by (i) Margaret Sannes in the amount of $776,929.29, (ii) Nortana Grain in the amount of $16,393.41, and (iii) a disputed lien claimed by Interface Treating Solutions, LLC (“Interface”) in the amount of $55,908.94.Debtor had argued that the prospective increased production and corresponding revenue would be “adequate protection” for the Nortana and Interface liens. However, Edwards also testified that even with the loan, there is no guarantee that production will return to historic levels. As a result, the Court cannot conclude that the Nortana Grain or Interface Treating Solutions (“Interface”) liens would be adequately protected if primed.

Debtor’s Motion for an interim order permitting Debtor to obtain credit from Edwards is GRANTED in part and DENIED in part as follows; 1. The credit shall not exceed the sum of $50,000 and will be granted a super-priority administrative status, subject to a carveout for allowed professional fees and chapter 7 administrative expenses; 2. A senior lien on all property of the estate not already subject to a lien, excepting therefrom any preference claim Debtor may have against Verlon Edwards or Crowley Fleck, or any claim Debtor has against Regency; 3. A “superior” lien on the real property that secures the Sannes Debt, consistent with the Stipulation at ECF No. 59;The security to be granted under the Loan Agreement will be deemed perfected upon issuance of an interim order, even if a final order denies the relief sought by this motion; and, 5. The super-priority administrative status and the liens granted hereby shall be preserved, to the extent the loan proceeds are advanced to the Debtor prior to a final hearing, notwithstanding a final order

In re Apex Energy, LLC, December 13, 2019, James A. Patten for Apex Energy, James Cossitt for Regency

2019 Mont. B.R. 402 (December 13, 2019)

Bickel, Chapter 7, Extension of Time Denied
Case no. 19-60776

The Chapter 7 Trustee timely filed a motion pursuant to Rule 4004(b)(1), seeking a 45 day extension of time for the Trustee, United States Trustee, and any other party in interest to file a motion to dismiss this case under 11 U.S.C § 707, or to file a complaint objecting to discharge under 11 U.S.C. § 727. The Court entered an Order on that same date granting only the Trustee and the United States Trustee the requested extension of time to file a complaint objecting to Debtor’s discharge or a motion to dismiss. On December 16, 2019, the Montana Department of Revenue (“MDOR”) filed a two sentence “Joinder to Chapter 7 Trustee’s Motion for Enlargement of Time to Seek Dismissal or Denial of Discharge Under 11 U.S.C. § 707 or 727” (“Joinder”) seeking to join in the Trustee’s requested extension of time “to allow Debtors the time necessary to amend their schedules and statement of financial affairs as MDOR has repeatedly requested.” MDOR’s joinder is not timely.

Rule 4004(a) sets a strict sixty day time limit within which a party may file a complaint objecting to a debtor’s discharge. Rule 4004(b)(1) allows the court to extend the sixty day time limit for cause. However, a request to extend such time “shall be filed before the [sixty day time limit] has expired.” In addition, Bankruptcy Rule 9006(b)(3) provides that “the court may enlarge the time for taking action under [Rule 4004(a)] only to the extent and under the conditions stated in those rules.” “[T]he deadlines which implicate a debtor's discharge are strict, and ‘without qualification,’ cannot be extended by the bankruptcy court unless a motion is made before the deadline expires.

In re Bickel, December 17, 2019, Joseph V. Womack, Trustee, Theresa G. Whitney for MDOR

2019 Mont. B.R. 408 (December 17, 2019)

Barker v. CIT Bank, United States District Court, (Cavan), Fraud, FDCPA, MUTPA, Statute of Limitations
Case no. CV 17-21-BLG-SPW-TJC

Fraud must be pled with particularity. Federal Rule of Civil Procedure 9(b)provides, “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally. ”“[T]he circumstances constituting the alleged fraud must ‘be specific enough to give defendants notice of the particular misconduct . . . so that they can defend against the charge and not just deny that they have done anything wrong.’”“[A]plaintiff must set forth more than the neutral facts necessary to identify the transaction. The plaintiff must set forth what is false or misleading about a statement, and why it is false.”

A party must plead the following nine elements with particularity in order to properly state a fraud claim in Montana:(1) a representation; (2) falsity of representation; (3) materiality of that representation; (4) speaker’s knowledge of falsity of representation or ignorance of its truth; (5) the speaker’s intent that it should be relied on; (6) the hearer is ignorant of the falsity of the representation; (7) the hearer relies on the representation; (8) the hearer has a right to rely on the representation; and, (9) consequent and proximate injury was caused by reliance on the representation.  Here, Plaintiffs have not alleged fraud with sufficient particularity because they have not pled facts tending to show their detrimental reliance on CIT’s alleged misrepresentation. To establish constructive fraud, a plaintiff must prove all elements of actual fraud except for the speaker’s intent that it should be relied upon. The Court also finds that Plaintiffs’ allegations are not sufficient to state a claim of constructive fraud.

To bring a claim under the FDCPA, a plaintiff must establish that “(1) the plaintiff constitutes a consumer; (2) who was the object of a collection activity arising from a debt; (3) the defendant constitutes a debt collector; and (4) the defendant violated a provision of the FDCPA. ”Because the FDCPA applies only to “debt collectors,” The FDCPA defines a debt collector as “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.”Thus, by the statutory terms, the FDCPA’s application is limited to those whose principle purpose is debt collection, or who regularly collects the debts “due another,” and does not include activities of creditors seeking to collect their own debts. Plaintiffs’ allegations fall short of providing sufficient factual support allowing the Court to infer CIT’s principal purpose is debt collection, or that it regularly collects debt owed or due another, as required by the FDCPA.

To plead negligence in Montana, a plaintiff must show “(1) the defendant owed the plaintiff a legal duty, (2) the defendant breached that duty, (3) the breach was the actual and proximate cause of an injury to the plaintiff, and (4) damages resulted.”If a duty does not exist, a plaintiff cannot maintain a negligence action.

Generally, the ordinary lending relationship between a bank and its customer is that of a debtor and creditor and “does not give rise to fiduciary responsibilities Further, “a bank has no duty to modify or renegotiate a defaulted loan. ”If the bank goes beyond the role of lender, however, and “actively advises customers in the conduct of their affairs, the bank may owe a fiduciary duty. ”Plaintiffs have failed to state a claim for negligence. Therefore, the Court recommends Count V be dismissed.

”The MUTPA applies to lenders. An act or practice is “unfair if it ‘offends established public policy and . . . is either immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.’” A consumer may sue under the act if he or she has suffered ‘any ascertainable loss of money or property’ as the result of an unfair practice. ”Here, the Court cannot reasonably infer from the facts alleged that Plaintiffs suffered an “ascertainable loss of money or property.

For negligent misrepresentation, a plaintiff must establish:(a) the defendant made a representation as to a past or existing material fact;(b) the representation must have been untrue;(c) regardless of its actual belief, the defendant must have made the representations without any reasonable ground for believing it to be true;(d) the representation must have been made with the intent to induce the plaintiff to rely on it;
(e) the plaintiff must have been unaware of the falsity of the representation; it must have acted in reliance upon the truth of the representation and it must have been justified in relying upon the representation;(f) the plaintiff, as a result of its reliance, must sustain damage.

As for deceit, Plaintiffs must show CIT “willfully deceive[d] another with intent to induce that person to alter the person’s position to the person’s injury or risk.” Under Montana law deceit is defined as:(a) the suggestion as a fact of that which is not true by one who does not believe it to be true;(b) the assertion as a fact of that which is not true by one who has no reasonable ground for believing it to be true;(c) the suppression of a fact by one who is bound to disclose it or who gives information of other facts that are likely to mislead for want of communication of that fact; or(d) a promise made without any intention of performing it.

In this case, Plaintiffs’ claims of negligent misrepresentation and deceit are not sufficiently pled with particularity. They do not plead specific facts regarding how they relied on CIT’s alleged misleading representations, or how they could have relied upon the representation when they were unaware it had been made. Additionally, Plaintiffs do not allege facts to support a claim for deceit.

The discovery rule is codified for actions involving fraud and for claims asserting an injury to person or property. Regarding claims for fraud, deceit, and constructive fraud, Mont. Code Ann. § 27-2-203 provides: The period prescribed for the commencement of an action for relief on the ground of fraud or mistake is within 2 years, the cause of action in such case not to be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud or mistake. For injury to person or property, Mont. Code Ann. § 27-2-102(3) further provides:(3) The period of limitations does not begin on any claim or cause of action for an injury to person or property until the facts constituting the claim have been discovered or, in the exercise of due diligence, should have been discovered by the injured party if:
(a) the facts constituting the claim are by their nature self-concealing; or(b) before, during, or after the act causing the injury, the defendant has taken action which prevents the injured party from discovering the injury or its cause. Generally, “the statute of limitations for actions based on fraud begins to run when the fraud occurs, unless the facts forming the basis for the alleged fraud are, by their nature, concealed, or the defendant takes affirmative action to prevent the plaintiff from discovering the injury.” It cannot be found that CIT took affirmative action to prevent plaintiffs from discovering the ALA. In fact, the document was filed in the public record with the Park County Clerk and Recorder. Such an open, public disclosure is the opposite of fraudulent concealment.

The discovery rule is inapplicable to Plaintiffs’ non-fraud-based claims for similar reasons. The statute of limitations is three years for negligence, two years for violation of the MUTPA, and one year for violation of the FDCPA. As with fraud-based claims, the discovery rule under Section 27-2-102(3)] “applies where the facts constituting the injury by their nature are concealing, or the defendant has taken some action that prevents the injured party from discovering the injury or its causes.” As noted above, however, the ALA was recorded in the public record.

Barker v. CIT Bank, September 6, 2019, Karl Knuchel for Barker, David Knobel, Kenneth K. Lay for CIT

2019 Mont. B.R. 294 (August 12, 2019)

Barstad, Chapter 13, (Myers), Executory Contract, Specific Performance, Claim, Good Faith
Case no. 17-60586. Adversary no. 17-00027

The Powell County District Court awarded specific performance of their Buy-Sell Agreements. Debtors filed their bankruptcy petition six days after the District Court entered its decision, and Davidson and Ide filed the adversary complaint shortly thereafter. The Montana Supreme Court affirmed the Powell County District Court decision.

Under Mont. Code. Ann. § 27-1-411(2), specific performance is an equitable remedy that is applicable when pecuniary compensation for a defendant’s failure to perform pursuant to the terms of a contract fails to afford adequate relief. The Montana statute also provides that specific performance may be compelled where, as here, “it has been expressly agreed in writing, between the parties to the contract, that specific performance thereof may be required by either party or that damages shall not be considered adequate relief.” And, under Mont. Code Ann. § 27-1-419, a court presumes that a breach of a contract involving the sale of land cannot be relieved adequately by pecuniary compensation.

The Montana Supreme Court’s ruling on this aspect of the dispute is preclusive and cannot be relitigated. In Montana, the test for preclusion is (1) was the issue decided in the prior adjudication identical to the one presented in the action in question; (2) was there a final decision on the merits; and (3) was the party against whom collateral estoppel is asserted a party or in privity to a party to the prior adjudication.

Debtors’ Amended Plan characterizes the Buy-Sell Agreements as executory contracts and proposes to reject the same. The Court finds and concludes that this characterization is incorrect. In cases in which specific performance had been ordered prior to bankruptcy, courts have concluded there is no executory contract. Hertz recognized that, within the Ninth Circuit, the “Countryman” definition is generally applied to determine whether a contract is executory for purposes of § 365. That definition provides a contract is executory if the obligations of both parties to the contract “are so far underperformed that the failure of either to complete the performance would constitute a material breach excusing the performance of the other.” This Court concludes that the Powell County District Court decision, entered six days before Debtors filed their chapter 13 petition, and now validated and affirmed by the decision of the Montana Supreme Court, had the effect of rendering the Davidson Buy-Sell Agreement and Ide Buy-Sell Agreement non-executory, and that this eliminates Debtors’ ability to reject the same under § 365 and § 1322(b)(7).

Debtors argue that Davidson and Ide are “creditors” and that a “claim” exists for each under § 101(5)(B) because they had a “right to payment” because the Buy-Sell Agreements allowed them to seek repayment of their earnest money or specific performance. Under this definition, the right to an equitable remedy for breach of performance is a “claim” only if the underlying breach gives rise to a right to payment. “Thus, where a creditor receives a judgment entitling him to specific performance of a land sale contract, that person will have a ‘claim’ if the specific performance decree may be satisfied by an alternative award of monetary damages.” Mont. Code Ann. § 27-1-419 creates a presumption “that the breach of an agreement to transfer real property cannot be adequately relieved by pecuniary compensation[.]” In addition to the statutory presumption, the Buy-Sell Agreements here provide that “If Seller defaults in the performance of this agreement, Purchaser may reclaim the earnest money deposit or the Purchaser shall have only the right of specific performance.” The Court concludes that Davidson’s and Ide’s rights are established by the, now affirmed, District Court decision. Specific performance is an equitable remedy. This equitable remedy is not a “claim” under § 101(5)(B). Consequently, Davidson and Ide are not “creditors” as defined under § 101(10)(A), and this raises a barrier to relief under § 547(b)(1).

Though the phrase in § 547(b) “any transfer of an interest of the debtor in property” is broadly interpreted, the Court concludes the term is not applicable to the Powell County District Court decision here. By its nature, such a judicial decision does not itself effect a transfer of the realty. Rather, it compels the recalcitrant party (or another party to transfer the property consistent with the underlying contractual obligation. The state court decision and order is not a “transfer” but, rather, an order compelling a transfer, which transfer will occur when Debtors (or court appointed persons under the Montana rules) comply and close the sales under the BuySell Agreements. The Court concludes that Davidson and Ide do not have “claims” and, thus, are not “creditors,” and that the Powell County District Court decision is not itself a “transfer.”

Dismissal of a chapter 13 case may be ordered under § 1307(c) “for cause, including” those grounds itemized in § 1307(c)(1) through (c)(11). Here, the Powell County District Court decision and order was issued after almost a year of litigation stemming from Debtors’ refusal to perform and close the Buy-Sell Agreements. About a week later, the chapter 13 petition was filed. The initial plan, filed a few weeks later, proposed to reject the Buy-Sell Agreements and sell the Property. The conclusion that the intent was to avoid the enforcement of the Powell County District Court decision is clear. In Mead’s characterization, supra, Debtors “filed bankruptcy seeking to accomplish in bankruptcy court what [they] could not in state court.” Litigation is often a springboard to bankruptcy, and the mere existence of adversely resolved prebankruptcy litigation is not ipso facto evidence of a lack of good faith. The caselaw requires evaluation of the totality of the circumstances. Here, Debtors’ assets and liabilities, income and expenses, number and nature of creditors, proposed plans, and the factual circumstances underlying the claims of Davidson and Ide as found by the prebankruptcy District Court decision, support the finding that Debtors’ petition was filed and Debtors’ Amended Plan proposed with the “primary motive” and purpose to defeat this state court litigation. The Court finds and concludes that dismissal of this case is appropriate and warranted under § 1307(c).

In re Barstad, June 12, 2019, Danel S. Morgan and Quentin M. Rhoades for Barstad, Jenny M Jourdonnais and Charles Hansberry for Daidson and Ide

2019 Mont. B.R. 229 (June 12, 2019)

Brannan, Chapter 12, Extension of Time
Case no 19-60484

A hearing was held on Debtor’s Motion to Extend Time to File Case Opening Documents (“Motion”) and on confirmation of Debtor’s Chapter 12 together with the objections thereto filed by the Internal Revenue Service and Carrington Mortgage Services, LLC.  Debtor filed an amended Chapter 12 plan on September 11, 2019. Similar to her case in California, Debtor filed her Motion on September 30, 2019, requesting and extension of time until December 28, 2019, “To hire an attorney and gain help with adequately filing a confirmable chapter 12 plan with supporting financial documentation “To work with an attorney to adequately schedule meetings and work out a confirmable plan with Carrington Mortgage regarding evaluation of the secured property.” Debtor’s Motion fails to address any fashion the deadlines set forth in 11 U.S.C. § 1221, which requires that a debtor file a plan not later than 90 days after the order for relief and 11 U.S.C. § 1224 which provides that “[e]except for cause, the hearing [on confirmation of a chapter 12 plan] shall be concluded not later than 45 days after the filing of the plan.” Sections 1221 and 1224, when taken together, contemplate confirmation of a Chapter 12 plan within 135 days of a debtor’s petition date. As of February 19, 2019, Debtor was aware that she needed to hire an attorney to help her draft a confirmable Chapter 12 plan in her California bankruptcy case. Debtor did not get that opportunity as the California bankruptcy case was dismissed, in part, due to Debtor’s failure to confirm a Chapter 12 plan within 45 days of the filing of the plan as required by 11 U.S.C§1224. As with her California bankruptcy case, Debtor chose to commence this case pro se. Then, on the 136th day after she commenced this case, Debtor requests essentially another 90 days so she can seek the assistance of an attorney in drafting a Chapter 12 plan. Debtor offers no explanation as to why she failed to seek the assistance of counsel prior to now.

Given Debtor’s record of prior bankruptcies, the Court would, like the Trustee has already done, strongly encourage Debtor to find counsel to assist her with all aspects of this bankruptcy. It was clear after discussions during the hearing that resolution of Debtor’s Objection to Proof of Claim No. 6 filed by Carrington Mortgage Services, LLC and the resulting valuation of Debtor’s property must occur before confirmation can move forward. A hearing on Debtor’s Objection to Proof of Claim No. 6 is currently scheduled for November 5, 2019. IT IS THEREFORE ORDERED that confirmation of Debtor’s Chapter 12 Plan filed September 11, 2019 is denied; and the Court will hold further consideration of a Chapter 12 plan and Debtor’s Motion in abeyance pending a ruling on Debtor’s Objection to Carrington Mortgage Services, LLC’s Proof of Claim No. 6.

In re Brannan, October 9, 2019, Charmaine Brannan, pro se, Joseph Womack, Trustee

2019 Mont. B.R. 346 (October 9, 2019)

Christman v. Clause, Montana Supreme Court, UCC, Consumer Good, Notice, Sale
Case no. DA 18-0407

The Agreement between the Christmans and Clauses involved the sale of a consumer good (the mobile home) in which the Clauses took a security interest. Under the 2009 U.C.C. statutes, which govern the parties’ Agreement, “manufactured homes” are defined as “goods” under §30-9A-102(1)(rr)(i)(E) and § 30-9A-102(1)(aaa). Section 30-9A-102(1)(w) defines a “consumer good” as “goods that are used or bought for use primarily for personal, family, or household purposes.” The Christmans testified that they resided in the mobile home and did not use it to conduct any business or rent any portion of it. The mobile home was therefore a “consumer good” within the meaning of § 30-9A-102(1)(w). The creation of the security interest in the mobile home triggered the applicability of Title 30, Chapter 9A. Section 30-9A-610, MCA, provides for disposition of collateral after default.  “Default” is generally defined by the security agreement. After a debtor defaults, a secured creditor who takes possession of the collateral has the following options: (1) file suit on the obligation and reduce its claim to judgment; (2) “‘sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing’”; or (3) “‘accept collateral in full or partial satisfaction of the obligation it secures.’” Accordingly, although a creditor’s disposition of the collateral terminates the security interest under § 30-9A-617(1)(b), MCA, termination of the security interest does not do away with the obligations of a creditor under Title 30, Chapter 9A. The creditor remains obligated to: give the debtor notice of how the creditor intends to dispose of the
collateral; conduct a commercially reasonable resale of the collateral, if there is a resale; and the creditor must account to the debtor for any surplus realized from the sale of the collateral.

Abandonment, voluntary surrender, or voluntary repossession of the collateral does not waive the debtor’s right to notice of resale of the collateral. Thus, a debtor who voluntarily returns a mobile home to the creditor is still entitled to notice. The right of the debtor for any surplus obtained from the sale of collateral is set out in two places in Article 9 of the U.C.C.: § 30-9A-608(1)(d), and § 30-9A-615(4)(a). Surplus money is generated by the sale of the debtor’s assets “over and above the amount needed to satisfy the debtor’s obligations to the secured lender, the secured lender is obligated to make an accounting to the debtor and to pay over to the debtor any such surplus.” If a secured party fails to comply with the requirements of Title 30, Chapter 9A, and the collateral is a consumer good, the debtor “may recover for that failure in any event an amount not less than the credit service charge plus 10% of the principal amount of the obligation or the time-price differential plus 10% of the cash price.”

There is no dispute that when the parties entered into the Agreement for the sale of the mobile home, the Agreement was governed by Article 9 of the U.C.C. There is also no dispute that the Clauses did not provide notice of the resale of the collateral or account to the Christmans for any potential surplus. See §§ 30-9A-611, -616, -608(1)(d), -615. The Christmans were in default and vacated because they were unable to pay the more than $50,000 due upon invocation of the acceleration clause. A voluntary repossession indicates a debtor has defaulted, but it does not mean a debtor waived all post-default rights and remedies under the U.C.C. or abandoned interest in any potential surplus. Regardless of whether the Clauses voluntary repossessed the mobile home after the Christmans vacated the premises, notice to the Christmans was still required. Although the Christmans theoretically could have waived their right to notice prior to the resale of the collateral, to legitimately do so, any waiver of the notice would have had to take the form of an authenticated writing signed after default. In this case, no notice was sent, no authenticated writing was signed, and, consequently, there was no waiver of the right to notice. Accordingly, the District Court erred in denying the Christmans’ Motion for Summary Judgment as it pertained to the continued application of the U.C.C. to the Christmans’ claims.

Christman v. Clause, June 4, 2019, D. Michael Eakin for Christman, Christopher T. Sweeney, Peter M Damro for Clause

2019 Mont. B.R. 208 (June 4, 2019)

Dailey, Emerson, Discovery, Motion to Compel
Case nos. 15-61088, 16-60056


The UST filed the Motion to Compel seeking an order compelling UpRight Law to fully respond to its Request for Production. UpRight Law objects to producing the documents on various legal grounds, including attorney client privilege.

The UST’s Motion to Compel is governed by Federal Rule of Bankruptcy Procedure(“Rule”)7037, which incorporates by reference Federal Rule of Civil Procedure (“Federal Rule”)37. The UST states in the Motion to Compel that the parties have complied with the meet and confer requirement of Federal Rule 37(a)(1), by attempting to resolve their discovery disputes prior to filing the Motion to Compel.“Generally, litigants in a civil action are entitled to discovery ‘regarding any no privileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case.’ Upon the failure of a party to disclose requested information the opposing party may move to compel disclosure. Federal Rule 37(a)(2)(B). Accordingly, a failure to answer an interrogatory or to respond to a request for production are grounds for obtaining an order compelling disclosure. Federal Rule 37(a)(2)(B).Based on the liberal discovery policies of the Federal Rules a party resisting discovery bears the burden of showing why the discovery should not be allowed.

UpRight Law’s objections fall somewhere on the spectrum between the specificity required, and a blanket refusal. Moving past the Court’s general characterization of the objections allows consideration of the merits of the positions advanced by the parties. First,  the UST contends UpRight Law opposes Request for Production No. 9 for various reasons, including “work product.” The only reference the Court saw to work product in that response was stated as follows:UpRight Law “disclaims any responsibility to produce a log of documents not produced based on the attorney-client privilege or the attorney work product doctrine, on grounds of its defensive commensurate adoption of the . . . position advanced by the UST . . .”To the extent UpRight Law is claiming a work product defense based upon the above sentence, it is overruled. The Court cannot discern the legal basis for this objection. The discovery process must be completed without continual delay and the parties have been aware of the Court’s expectations
regarding production and a privilege log since at least September 2017. To realize, almost 2years later that the UST and Upright Law continue to fuss about these issues, or otherwise disregard the Court’s instructional footnote is discouraging.

UpRight Law, in its response to the UST’ Motion to Compel, also opposes the UST’s Requests for Production arguing the requested information contains privileged material. This objection has been largely resolved because 104 affected Montana Consumers have waived the attorney-client privilege.

The Court entered an Order directing the parties to agree on a protocol for contacting the Montana Consumers and securing either a waiver or assertion of the attorney-client privilege. The parties agreed on a protocol. The Montana
Consumers were contacted. According to a report filed August 21, 2019, the parties sent “postage paid letter packets” to 127 Montana Consumers. Fourteen of the Montana Consumers affirmatively waived their attorney-client privilege and 90 did not respond, which resulted in a waiver, as explained in the letter. Thirteen Montana Consumers affirmatively asserted their privilege and 10 postage paid letter packets were returned as undeliverable. The attorney-client privilege remains intact for 23 Montana Consumers. UpRight Law’s attorney client privilege applies to the other 23 Montana Consumers, and its objection to production of material relating to these 23 Montana Consumers is sustained. UpRight Law’s objection to the UST’s Requests for Production are overruled as to the 104 Montana Consumers who explicitly waived their attorney-client privilege, or chose to waive the attorney-client privilege by not responding.

The UST seeks, in part, to enjoin UpRight Law from violating 11 U.S.C. § 526, which allows this Court to enjoin UpRight Law from violating § 526, dealing with debt relief agencies, if the Court finds that UpRight Law intentionally violated § 526 or engaged in a clear and consistent pattern or practice of violating § 526. A finding of a clear and consistent pattern or practice arguably requires an examination of Upright Law’s interactions with a broad cross
section of Montana Consumers. Part of the UST’s argument is that Montana Consumers paid Upright Law to commence bankruptcies on their behalf that were never filed. Thus, the Court finds the request is neither disproportional nor burdensome. Indeed, the UST must explore the extent and scope of Upright Law’s alleged and potential wrongdoing because the UST has an "independent obligation to execute and enforce the bankruptcy laws,” To fulfill this obligation, it must be permitted to plumb the depths of Upright Law’s contact, communication and interactions with Montana Consumers. Further, the burdensome objection is premised on the parsing of privileged from non-privileged material that is responsive to the requests. However, the waiver of the privilege by 104 affected Montana Consumers leaves this objection devoid of a factual basis.

UpRight Law complains that the UST has had ample opportunity to complete discovery. This objection is wholly without merit. A cursory review of the docket in this case demonstrates the discovery process in this case has been litigated by the parties, and the Court has resolved some issues by parsing requests into phases, and depending on the results in the initial phase, directing the parties to then consider what to do next. This has resulted in delay, and the Court's extension of the deadlines on different occasions. For instance, the parties stipulated in July of2017 to extend discovery because the parties were attempting to resolve consensually a dispute concerning UpRight Law’s responses to the UST’s written discovery.

In view of the broad definition of “relevant” discovery, the UST’s RPD Nos. 5 & 9 seek discoverable information relevant to its legal claims for relief. Specifically, the information sought may reasonably assist the UST in evaluating the case, preparing for trial, or facilitating settlement. Indeed, the colloquy with counsel at the hearing demonstrated that despite Upright Law's apparent willingness to resolve this matter, those efforts have been unsuccessful because
Upright Law has not provided the UST sufficient information either through discovery or otherwise to evaluate the appropriateness of any proposed settlement. The Court finds that the UST's Requests for Production are relevant.

In re Daily, August 28, 2019, Brett R Cahoon for UST, Charles W Hingle, Brianne McClafferty for Upright Law

2019 Mont. B.R. 277 (August 28, 2019)

Daly, Chapter 13,  Motion to File Under Seal, Detail
Case no. 04-60020

Drummond filed a Motion for Leave to File Documents Under Seal requesting an order authorizing him to file, under seal, the Application for Professional Fees and Costs and the Notice of Application for Professional Fees and Costs for the Estate’s attorneys, Daniel Fasy of Fasy Law, PLLC, and Molly Howard of Datsopoulos, MacDonald & Lind, P.C., in the matter of Becker, et al. v. Roman Catholic Diocese of Great Falls-Billings, BDV-12-0101. Drummond gives no reason or explanation as to why the referenced application for fees should be filed under seal. This Court is an institution of public record and the Ninth Circuit Court of Appeals emphasized the policies on the sealing of records:

Unless a particular court record is one “traditionally kept secret,” a “strong presumption in favor of access” is the starting point.... A party seeking to seal a judicial record then bears the burden of overcoming this strong presumption by meeting the “compelling reasons” standard.... That is, the party must “articulate[ ] compelling reasons supported by specific factual findings,” ... that outweigh the general history of access, and the public policies favoring disclosure, such as the “‘public interest in understanding the judicial process.’ ” ... In turn, the court must “conscientiously balance [ ] the competing interests” of the public and the party who seeks to keep certain judicial records secret.... After considering these interests, if the court decides to seal certain judicial records, it must “base its decision on a compelling reason and articulate the factual basis for its ruling, without relying on hypothesis or conjecture.”

These prudential and carefully circumscribed considerations of open judicial processes and public access to court records are no less important when dealing with bankruptcy court adjudication. Drummond has failed to establish that sealing the application for fees is justified by statute, rule, case law, or sound considerations of policy.

Accordingly, Drummond’s Motion for Leave to File Documents Under Seal is denied without prejudice

In re Daly, January 8, 2019, Robert Drummond Chapter 13 Trustee

2019 Mont. B.R. 4 (January 8, 2019)

Dave Giddeon Trucking LLC, Cash Collateral, Adequate Protection
Case no. 19-60475

Debtor filed a Motion for Use of Cash Collateral accompanied by a separate Motion for Emergency Hearing. The Motion requests the Court’s authorization to use cash collateral pursuant to § 363. In connection with the request the Motion also seeks a finding that Three Rivers Bank of Montana is adequately protected pursuant to §§ 105, 361, 362, 363 and 507. Debtor desires to use the cash collateral realized from hauling various freight and crude oil and the collection of any receivables, occurring within the ordinary course of business, to continue to pay its employees and fund its ongoing business operations as part of its efforts to preserve and maximize its business operations as a going concern and arrange a means to pay its outstanding creditors through a chapter 11 plan. Bank contends its loan balances exceed the value of its collateral so its interests are not adequately protected, and the Motion should be denied. Alternatively, it requests that the Debtor provide adequate protection should it be permitted to use cash collateral. A declaration was attached to the objection, but this Court has a long history of not accepting evidence by declaration or affidavit.

The Debtor continues to operate its business and manage its properties as debtor and debtor-in-possession pursuant to §§ 1107(a) and 1108 of the Bankruptcy Code. Whitney testified regardinga graph that illustrates 2019 Weekly Income Calculations, projections. This graph shows a steady trend of increasing weekly income that plateaus in early July. Whitney explained that these peaks correspond to a 5-week collection period instead of 4 weeks. David testified regarding the values ascribed by Debtor to assets subject to liens in favor of the Bank. The total value of these assets was $1,876,591.46. The Bank’s objection alleges that its collateral is worth less than this amount. However, neither the Declaration nor the appraisal are properly before the Court at this time.

The proceeds realized from the collection of accounts receivables from Debtor’s hauling business constitute “cash collateral” within the meaning of § 363 of the Code. The Bank has a security interest in the Cash Collateral. The Bank does not consent to Debtor’s use of the Cash Collateral. Debtor’s current inability to access the Cash Collateral will result in Debtor having insufficient liquidity to maintain its operations. Without the immediate use of the Cash Collateral, the Debtor will be forced to discontinue operations.

The statutory predicates for the relief requested herein are §§ 361 and 363 of the Code and Bankruptcy Rule 4001(b). 11 U.S.C. § 363(c)(2) prohibits a debtor from using cash collateral unless the court, after a notice and hearing, authorizes such use in accordance with the Code. After a preliminary hearing, the Court may authorize the use, sale or lease of cash collateral only if there is a reasonable likelihood that the trustee will prevail at the final hearing. 11 U.S.C. § 363(e) allows an entity with an interest in the cash collateral to request adequate protection. Once requested, the court shall, with or without hearing, condition or prohibit the use or sale, among other things, of cash collateral as needed to provide adequate protection. The adequate protection payments Debtor proposes to make to the Bank that are reflected in the budget that Debtor filed as modified by the revised budget attached as Exhibit “A” hereto, along with the replacement liens are sufficient at this time to protect the Bank from any diminution in value of the Bank’s interest in the prepetition Cash Collateral. The adequate protection terms are fair and reasonable under the circumstances, reflect the Debtor’s exercise of prudent business judgment consistent with its fiduciary duties and are supported by reasonably equivalent value and fair consideration. Additionally, in its Motion, Debtor requests entry of an order pursuant to Bankruptcy Rule 4001(b)(2) and Local Rule 4001-2, setting a final hearing not earlier than 15 days from the date of Debtor’s Motion, for this Court to consider entry of a Final Order authorizing the use of the cash collateral.

In re Dave Giddeon Trucking LLC, Molly Considine and James A Patten for Deave Giddeon Trucking, Jenny Jouronnais for Three Rivers Bank, David Newman for United States Trustee

2019 Mont. B.R. 194 (May 22, 2019)

Davidson and Ide v. Barstad, Montana Supreme Court, Contract, Material Breach, Condition Precedent
Case no. DA 18-0050

Following the auction, Sellers, through Woodrow, immediately executed separate written buy-sell agreements with Davidson and Ide, respectively, using standard fill-in contract forms provided by the Auctioneer. Inter alia, the buy-sell agreements declared that the undersigned buyer was “the highest bona fide bidder”. The agreements stated that “Seller agrees to sell and convey [the property] to Purchaser by General Warranty Deed . . . pursuant to” terms set forth in the agreement, including the incorporated and attached REATC as initialed by Woodrow. The agreements further stated that the “Seller acknowledges and agrees” that the Auctioneer conducted the auction “pursuant to a separate Agreement between Seller and Auction Company” and that the Seller “accepts Purchaser was the successful bidder.” Sellers separately notified Buyers that Sellers would not perform and close on the real estate sales as previously agreed due to Buyers’ alleged non-compliance with pre-auction bid deposit and post-auction earnest money requirements.

A contract condition is the subsequent occurrence of a specific uncertain act, event, or circumstance. A condition precedent to contract formation is a specific condition, usually an extraneous event or circumstance or third-party act, the occurrence upon which the reciprocal promises constituting the contract consideration depend. In contrast, a condition precedent to a contract performance, duty, or right is a specific post-formation act or forbearance by a promisor, the occurrence upon which the reciprocal performance or forbearance of the other party depends. The failure or non-satisfaction of a condition precedent to contract formation renders the contemplated contract non-existent as never formed and thus non-binding and unenforceable. In contrast, the failure or non-satisfaction of a condition precedent to performance generally effects or constitutes a breach of an enforceable contract promise subject to remedy as a material or non-material breach of the contract. Upon a material breach of a contract, the non-breaching party has the option of either rescinding the contract without requirement for further performance or, alternatively, enforcing the contract at law or in equity. In contrast, a non-material breach does not relieve the non-breaching party from performance but merely entitles the party to enforce the contract at law or in equity.

A breach of contract is not material if the breaching party substantially performed all essential contract requirements. In other words, a breach is not material if the non-breaching party has or will substantially receive “the expected benefit of the contract.” Substantial performance occurs when the breaching party has performed all “major aspects of the contract but has deviated in insignificant particulars that do not detract from the benefit” expected by the non-breaching party had the breaching party “literal[ly] perform[ed].” A “‘material breach’ is a failure to do something that is so fundamental to a contract that the failure to perform . . . defeats the essential purpose of the contract.” Whether a breach is material or not is a matter of “objective reasonableness rather than” the non-breaching party’s “purely subjective belief.” A party claiming a material breach must show the materiality of the breach.

While the REATC expressly specified that the bid deposits must be in the form of certified funds or other form acceptable to the Sellers, neither the language of the buy-sell agreements, nor that of the REATC, expressly conditioned the parties’ mutual obligations under the buy-sell agreements upon strict compliance with the specified pre-auction bid deposit requirements. Thus Buyers’ compliance with the specified pre-auction bid requirements was not a condition precedent to formation of the post-auction buy-sell agreements between Sellers and the respective Buyers. The Auctioneer was the actual and manifestly ostensible agent of the Sellers. Beyond that actual and ostensible agency, the “Registration” section of the REATC expressly authorized prospective bidders to make the required bid deposit either “in certified funds, or other funds acceptable to the Seller and/or Auction Company. . . .” Consequently, as a matter of law on the faceof the REATC, the buy-sell agreements that incorporated it, and the prior agency agreement between the Sellers and Auctioneer, the Auctioneer was actually and ostensibly authorized to accept pre-auction bid deposits in any form he deemed acceptable.

Aside from the fact that Ide’s affidavit assertions do not necessarily differ in any materially sinister regard as alleged by Sellers, whether he made his $50,000 bid deposit in cash or by cashier’s check is immaterial because it remains beyond genuine material dispute that: (1) a cashier’s check constituted “certified funds” as referenced in the REATC; (2) cold, hard cash is not yet anything less than the substantial equivalent of a cashier’s check; and (3) the Seller’s agent (the Auctioneer) was in possession of Ide’s bid deposit and derivative earnest money deposit at all times until deposited with the title company as contemplated by the buy-sell agreement. Thus, the form of Ide’s pre-auction bid deposit, and derivative post-auction earnest money deposit, neither effected a failure of a condition precedent to formation of his buy-sell agreement with Sellers, nor a failure of a condition precedent to their performance thereunder. We hold that the District Court did not erroneously grant summary judgment specifically enforcing the Ide buy-sell agreement with Sellers.

Davidson and Ide v. Barstad, February 26, 2019, Quentin M. Rhoades for Barstad, J Andrew Person, Alan F McCormick for Davidson, Graham J Coppes for Ide

2019 Mont. B.R. 59 (February 26, 2019)

Doty, Chapter 13, Confirmation, Feasibility
Case no 18-61048

Creditor Rocky Mountain Bank filed an objection to confirmation the grounds Debtors’ Plan is not feasible. Michael testified about a demonstrative exhibit which he developed and produced at the hearing which he described as a “E-Rail (tile cutter)” which Debtors propose to manufacture and sell to European Tile Masters along with a “Tile Miter Saw” to fund their Plan.

RMB objects that Debtors’ Plan is not feasible based on their reduced income showed by their Schedules and Statements. However, reduced income is not uncommon prior to the filing of a Chapter 13 bankruptcy case, and often is a cause for filing. The feasibility requirement is found at 11 U.S.C. § 1325(a)(6) which provides for confirmation if “(6) the debtor will be able to make all payments under the plan and to comply with the plan.” A debtor does not need to prove that his or her plan is guaranteed to be successful. To demonstrate that a plan is feasible, chapter 13 debtors must show that their plan has a “reasonable chance of success.” Mycek, 2013 WL 9994332, *3, quoting Bassett, 413 B.R. at 788 (citing In re Hungerford, 19 Mont. B.R. 103, 117 (Bankr. D. Mont. 2001), 2001 WL 36211305, *8. Based on Michael’s testimony, which the Court finds credible, and exhibit demonstration, the Court finds that Debtors satisfied their burden of showing that their plan has a reasonable chance of success.

In re Doty, April 19, 2019, Nik G. Geranios for Doty, Brianne McClafferty for Rocky Mountain Bank

2019 Mont. B.R.136 (April 19, 2019)

Elliott, Chapter 13, Deadline Expired
Case no.19-60333

The Court entered an Order which granted Debtor until September 3, 2019, to file an amended plan. The Order specifically stated that “this case may be dismissed without further notice or hearing” if Debtor failed to file an amended plan by the September 3, 2019, deadline. With regard to the September 3, 2019, deadline, Debtor had two options: (1) file her amended plan by September 3, 2019; or (2) request an extension of the deadlines set forth in the Court’s Order entered August 20, 2019. Debtor did neither, and instead tardily filed her amended plan on September 11, 2019, leaving parties-in-interest only days to file their objections in accordance with the Court’s Order. Such disregard of this Court’s orders is unacceptable. Thus, Debtor and her counsel shall appear and show cause why this case should not be dismissed for Debtor’s failure to timely comply with the Court’s Order

In re Elliott, September 12, 2019

2019 Mont. B.R. 292 (September 12, 2019)

Ernst, Chapter 13, Motion Practice
Case no. 18-60817

The effort Debtors’ counsel put into completing the Application is disappointing. For example, while counsel appropriately used Mont. LBF 1, in the caption of the Application, counsel spells Debtors’ last name as “Earnst” and “Ernst.” Next, in paragraphs 2 and 3, he did not bother to remove the examples that are given in Mont. LBF 1, so that paragraph 2 reads: “The debtor in possession wishes to employ John Ague and Dejon Rainers, Loveless Realty, (“Professional”) in the capacity of a Listing Firm Broker (e.g., attorney, accountant, etc.) to sell the martial homestead.” The foregoing paragraph would read much better if counsel had removed “(e.g., attorney, accountant, etc.)”. Similarly, paragraph 3 would read better if counsel had removed “(State reasons for the selection.)” Additionally, counsel wholly failed to properly complete paragraph 6 by disclosing the terms of employment. According to the attachments, the Listing Renewal has already expired. It would be an exercise in futility to approve an expired listing renewal. For the reasons discussed above, IT IS ORDERED that Debtors’ Application to employ John Ague and Dejon Rainers of Loveless Realty is denied.

In re Ernst, January 29, 2019 Michael R. Klinkhammer for Ernst

2019 Mont. B.R. 17 (January 29, 2019)

Foster v. C4B, LLC, (Myers), Service, Summons
Case no. 17-00050

Civil Rule 4(m), incorporated by Rule 7004(a)(1), provides: If a defendant is not served within 90 days after the complaint is filed, the court--on motion or on its own after notice to the plaintiff--must dismiss the action without prejudice against that defendant or order that service be made within a specified time. But if the plaintiff shows good cause for the failure, the court must extend the time for service for an appropriate period. The application of Rule 4(m) requires a two-step analysis. “First, upon a showing of good cause for the defective service, the court must extend the time period. Second, if there is no good cause, the court has the discretion to dismiss without prejudice or to extend the time period.”

Trustee argues that good cause exists for his failure to properly serve C4B in this adversary proceeding because the complaint and summons were mailed to C4B’s address as listed with the Nevada Secretary of State. However, Trustee’s showing of good cause did not identify and address Trustee’s apparent error in mailing the summons and complaint to a wrongly named entity, CB4, LLC, which makes C4B’s actual knowledge of these proceedings suspect. Trustee concedes he failed to comply with Rule 7004(b)(3) and, as apparent in his own submissions, Trustee had access to the names and addresses of two individuals and one commercial agent who would likely have sufficed for the purpose of complying with Rule 7004(b)(3). But Trustee does not address why service on those individuals failed to occur. While the complaint and summons were mailed to the correct address (though identifying the wrong entity), such mailing does not equate to adequate service or require an inference of actual knowledge or notice. Thus, Trustee’s explanation is inadequate to show actual notice or excusable neglect. Service to the correct address does not excuse Trustee’s deficiencies nor amount here to good cause.

In this case, the applicable statute of limitations has run as more than two years have passed since Debtor filed its petition, and Trustee conceded as much. Doc. No. 16 at 3.4 However, a bar to refiling is not the only factor for the Court to consider. Over four years have expired from the date of the petition, and two years have expired since the time of the filing of this adversary. This delay is excessive. As discussed, there is no evidence that C4B had actual knowledge of the pending adversary. There is also no evidence that the failure to properly serve C4B was the result of C4B’s actions. The record demonstrates Trustee waited nearly two years to bring an adversary proceeding, failed to properly identify the defendant in addressing service of the summons and complaint, and failed to serve the summons to a readily determinable agent or officer of C4B. Given the delay and the lack of justification for these failures, and in the exercise of its discretion, the Court concludes that the deadline for service should not be extended under Civil Rule 4(m).

Foster v. C4B, LLC, November 8, 2019, David B. Cotner for Foster

2019 Mont. B.R. 358 (November 8, 2019)

Foster v. Capcall, LLC, Consolidation, Notice, Procedure
Case no. 17-00028
Trustee filed a motion to consolidate the above captioned case with Foster v. Capital Stack, LLC,  (“Capital Stack Adversary”). Trustee filed the consolidation Motion in the CapCall Adversary; he did not file a similar motion in the Capital Stack Adversary. The Consolidation Motion did not contain a deadline to object in compliance with Mont. LBR 9013-1(e), nor did Trustee set the matter for hearing.

On November 19, 2019, Trustee filed a “notice” in the CapCall Adversary which appears to be a duplicate of the Consolidation Motion without the multiple attachments. The notice does not contain a notice of opportunity to respond. Trustee also filed a “Notice of Consolidation Request” in the Capital Stack Adversary, and attached the Consolidation Motion filed in the CapCall Adversary and the voluminous attachments. This notice is similarly deficient and lacks a notice of opportunity to respond.

Given a review of the record and Trustee’s failure to either comply with Mont. LBR 9013-1(e) or set the matter for hearing on notice to all interested parties, IT IS HEREBY ORDERED that the Consolidation Motion is DENIED without prejudice to filing and properly noticing a future consolidation motion.

Foster v. CapCall, LLC, November 21, 2019, David B. Cotner, Lyle C. Ryan for Foster, Roland Gary Jones, Steven M Johnson for CapCall, LLC

2019 Mont. B.R. 374, November 21, 2019

Foster v. Lex Group Funding LLC, (Myers) Service, Summons
Case no. 17-00041

Civil Rule 4(m), incorporated by Rule 7004(a)(1), provides: If a defendant is not served within 90 days after the complaint is filed, the court—on motion or on its own after notice to the plaintiff—must dismiss the action without prejudice against that defendant or order that service be made within a specified time. But if the plaintiff shows good cause for the failure, the court must extend the time for service for an appropriate period. The application of Rule 4(m) requires a two-step analysis. “First, upon a showing of good cause for the defective service, the court must extend the time period. Second, if there is no good cause, the court has the discretion to dismiss without prejudice or to extend the time period.”

Trustee argues that good cause exists for his failure to properly serve Lex in this adversary proceeding because the complaint and summons were delivered to the “correct” address as listed on the New York Secretary of State’s website as well as on the “contracts between Lex and . . . Shoot the Moon.”However, this Court’s October 11 Order raised concerns over the Court’s own mail being returned as undeliverable at the address of record for Lex, which Trustee identifies as the “correct” address. And in light of the Court’s returned mail, and the complete lack of participation by the defendant, the Court cannot conclude, without more, that Lex had actual knowledge of this proceeding.

Trustee argues in the alternative that the Court has discretion to extend time to properly serve Lex. In this case, the applicable statute of limitations has run as more than two years have passed since Debtor filed its petition, and Trustee conceded as much. However, a bar to refiling is not the only factor for the Court to consider. Over four years have expired from the date of the petition, and two years have expired since the time of the filing of this adversary. This delay is excessive. As discussed, there is no evidence that Lex had actual knowledge of the pending adversary. There is also no evidence that the failure to properly serve Lex was the result of Lex’s actions. The record demonstrates that Trustee waited nearly two years from the bankruptcy filing to bring an adversary proceeding, failed to properly address service to an officer or agent of Lex, failed to demonstrate that Lex received service after it became apparent that the address was undeliverable, and failed to adequately justify the delay in addressing the issue. Therefore, in the exercise of its discretion, the Court concludes the deadline for service should not be extended under Civil Rule 4(m).

Foster v. Lex Group Funding LLC, November 8. 2019, David B Cotner for Foster

2019 Mont. B.R. 352 (November 8, 2019)

Foster v. Conner, United States District Court (Morris), Jurisdiction, Withdrawal of Reference

Case no. 18-cv-00084

Plaintiff Jeremiah J. Foster filed an action in bankruptcy court against defendant Dennis Conner. Conner filed a Motion to withdraw the Reference of the Adversary Proceeding from bankruptcy court. 

District courts possess original jurisdiction over bankruptcy cases and related proceedings. A district court may refer a proceeding arising under title 11, or related to a case under title 11, to the bankruptcy judge for the district. A claimant who brings a claim in bankruptcy, followed by a trustee’s assertion of an adversary action against the claimant, generally “becomes part of the claims-allowance which is triable only in equity.”Such action extinguishes the right to a jury trial once a party has filed a proof of claim in bankruptcy court. The party’s subsequent withdrawal of a proof of claim normally does not deprive the bankruptcy court of its equitable jurisdiction. Conner filed his proof of claim on January 19, 2016. Conner amended his proof of claim on May 31, 2016. Conner’s actions constituted an implication of the claims allowance process in bankruptcy court. Such action normally would constitute Conner’s consent to the bankruptcy court’s equitable power.

The parties negotiated and executed the Tolling Agreement on October 12, 2017. The Tolling Agreement provides that Conner preserves “any right to dispute whether the bankruptcy court has jurisdiction over any or all claims presented by Trustee”.  The Tolling Agreement further states that Conner reserves “any other rights, claims, actions defenses, set-offs, or recoupments[.]”

The Tolling Agreement preserved Conner’s ability to contest the bankruptcy court’s jurisdiction. Conner contested the bankruptcy court’s jurisdiction pursuant to his withdrawal of his proof of claim. The bankruptcy court further determined that no legal prejudice stemmed from Conner’s withdrawal of his proof of claim. This Court agrees with the bankruptcy court’s conclusion. Conner no longer maintains a claim in bankruptcy court. It follows that Conner’s preservation of his right to contest bankruptcy court jurisdiction, combined with the absence of proof of claim in bankruptcy court, must result in a withdrawal of the adversary proceeding in bankruptcy court. The “right to a jury trial is a fundamental constitutional right and, accordingly, should carry a presumption against waiver.”  Accordingly, it is ORDERED that Conner’s Motion to Withdraw the Reference of Adversary Proceeding from bankruptcy court is GRANTED.

Foster v. Conner, July 2, 2019, David B. Cotner for Foster, Cory Laird for Conner

2019 Mont. B.R. 262 (July 2, 2019)

French, Chapter 12, Creditor’s Attorneys Fees
Case no. 18-60485

Charles W. Hingle and the law firm Holland & Hart LLP, counsel for oversecured creditor First Bank, filed a Final Application for Professional Fees and Costs. Applicants request an award of post-petition professional fees in the amount of $24,697.45 plus reimbursement of expenses of $442.48 incurred representing First Bank in this case, as part of First Bank’s secured claim pursuant to 11 U.S.C. § 506(b).

This Court is obligated to review each request for fees and costs to ensure 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.

In addition to reviewing the Application to ensure that applicants provide the requisite detail, fee applications submitted by creditors under 11 U.S.C. § 506(b) require additional consideration.  The Ninth Circuit has held: The language of that section [§ 506(b)] is clear. The creditor is entitled to attorneys' fees if (1) the claim is an allowed secured claim; (2) the creditor is oversecured; (3) the fees are reasonable; and (4) the fees are provided for under the agreement. First Bank’s promissory note, Business Loan Agreement, and mortgage with the Debtor attached to Proof of Claim No. 5 include provisions that the borrower agrees to pay the lender’s attorneys’ fees and expenses, including fees and expenses for bankruptcy proceedings.

The fees sought under this Application are for Hingle, who billed attorney time at an hourly rated of $465.00, Shane P. Coleman at an hourly rate of $445.00, Hannah E. Tokerud at an hourly rate of $215.00, Brianne C. McClafferty at an hourly rate of $220.00, and a paralegal at an hourly rate of $185.00. Applicants demonstrated appropriate billing discretion by providing a number of services at no charge.

“Reasonableness embodies a range of human conduct.” Fees are reasonable if the incurred fees “fall within the scope of the fees provision in the agreement,” and the creditor “took the kinds of actions that similarly situated creditors might reasonably conclude should be taken....” “‘Reasonable’ fees under § 506(b) are as those necessary to the collection and protection of a creditor's claim.”

After review of the Final Application, and in the absence of objection after notice, the Court finds that the fees and costs requested by Applicants are: (i) reasonable in consideration of all the circumstances; (ii) provided for in the agreement, and satisfy the Kord Enterprises requirements for an award of fees and costs for an oversecured creditor under § 506(b). Applicants’ legal services were reasonable in preparing Rocky Mountain Bank’s Proof of Claim, and negotiating a resolution of the Bank’s objections to confirmation of Debtor’s Plan. The Court finds that the $442.48 for UPS shipping costs, lodging and mileage requested are actual, reasonable and necessary costs.

In re French, February 5, 2019, Charles W. Hingle for First Interstate

2019 Mont. B.R. 19 (February 5, 2019)

Graham- Rogers v. Wells Fargo, Montana Supreme Court, Breach of Contract, Trust Instrument, Negligence
Case no. DA-18-0630

For reasons that are not evident from the record, when Tract M was created for mortgage purposes, the Department of Revenue assigned the tract its own tax identification number, REF 54165, separate from the tax identification number for Lot 3, REF 32145. Between 2006 and 2008, property taxes were separately assessed for Tract M. Sometime in 2009, the Department of Revenue deactivated the tax identification number for Tract M.

In support of her argument that disputed material facts remained as to whether Wells Fargo’s actions breached the Deed of Trust and were “necessary,”   Graham-Rogers argues Wells Fargo admitted to breaching the Deed of Trust when, after paying the taxes on Lot 3 and adding them to Graham-Rogers’ debt, it discontinued escrow and tax collection altogether.   Deeds of trust are interpreted according to general contract principles. Contract interpretation is a question of law.  “The rules of contract interpretation require courts to give effect to the mutual intentions of the parties, based, if possible, solely on the provisions of the contract.  ”By its plain terms, Graham-Rogers was required to pay, “in each monthly payment, together with principal and interest as set forth in the Note and any late charges, a sum for (a) taxes and special assessments levied or to be levied against the Property . . . .”   After property taxes were no longer separately assessed against Tract M due to the Department of Revenue’s deactivation of Tract M’s tax identification number, taxes were assessed against Lot 3, including Tract M.   As the District Court noted, “when Lot 3 became subject to a tax lien sale, Tract M, being a part of Lot 3, was also subject to the tax lien sale.” Thus, when the taxes were not paid as required by the Deed of Trust, Wells Fargo was expressly authorized to pay the total tax amount and increase Graham-Rogers’ mortgage payment to reflect the additional debt owed to Wells Fargo.  There is no question that the pending tax sale threatened to deprive Wells Fargo of its interest in the property, and that it was authorized to take action under the Deed of Trust.  Any problem over proper assessment of Tract M was an issue between Graham-Rogers and the taxing authorities.

The Deed of Trust’s authorization for the lender to do “whatever is necessary to protect the value of the Property and Lender’s rights in the Property, including the payment of taxes . . . .” in response to a “legal proceeding,” necessarily contemplates the initiation of a tax lien procedure against the secured property by the taxing authorities. Faced with a procedure to enforce laws and regulations that can lead to “the ultimate sanction of losing title to the property,”   Wells Fargo was authorized to act to pay the taxes and bring the tax lien procedure to a close.

To prevail in an action for negligence, a plaintiff must demonstrate “a duty, breach of that duty, causation, and damages.”  “The existence of a duty is a question of law for determination by the court . . . . Once a duty has been established, the breach of that duty is a question of fact to be resolved by a jury.  Generally, “a bank has no duty to modify or renegotiate a defaulted loan.”  Moreover, the relationship between a bank and its customer generally does not give rise to a fiduciary duty; rather, it is usually “‘described as that of a debtor and creditor.’”  “However, where a bank goes beyond the ordinary role of a lender of money and actively advises customers in the conduct of their affairs, the bank may owe a fiduciary duty”.  The relationship between Wells Fargo and Graham-Rogers as one of bank and customer did not give rise to an additional fiduciary duty in these circumstances.

Graham-Rogers v. Wells Fargo Bank, September 24, 2019, Brian J Miller, Robert Farris-Olsen for Graham-Rogers, Ken Lay, Brett Clark for Wells Fargo

2019 Mont. B.R. 324 (September 24, 2019)

Hagadone, Chapter 12, Cash Collateral, Incur Post Petition Debt
Case no 19-60551

The Court held a preliminary hearing on expedited notice on: (i) the Debtors’ “Motion for Use of Cash Collateral” and, (ii) Debtors’ “Motion for Leave toIncur Secured Debt”. Pursuant to Rule 4001(c), a final hearing on the Cash Collateral Motion and Debt Motions cannot be commenced less than 14 days after service of the Motion. The Motions were served on May 31, 2019. Reduction of time for a final hearing is prohibited by Rule 9006(c)(2). Debtors and American State Bank stipulated that the Bank had a security interest in the Cash Collateral. The parties further stipulated that the Bank was undersecured. As adequate protection of the Bank’s interest in the Cash Collateral Debtors seek to use, Debtor’s proposed a replacement lien under § 1205(b)(2), in Debtors’ 2019 crop and proceeds, federal crop insurance, government payments, and hail loss insurance payments. The Cash Collateral is necessary to get the crop in the ground.

Use of cash collateral is governed by § 363(c)(2) which forbids a debtor from using cashcollateral without either the consent of the secured creditor or the authorization of the Court. In re Heiser, 17 Mont. B.R. 63, 63 (Bankr. D. Mont. 1998) (quoting In re Lough, 163 B.R. 586, 587-88 (Bankr. Idaho 1994). If the creditor does not consent, the Court may approve the use of cash collateral, which will normally require adequate protection for the secured creditor. Payment of expenses totaling $260,750.007 are necessary to prevent irreparable harm during this interim period in order to plant the 4,850 acres that are essential to Debtors’ reorganization effort. Of the $329,894.52 requested amount, approximately $170,000 is prospective, “anticipated funds” that might result from the sale of equipment. To date these sales have not occurred, and the Court will not approve a prospective sale for an unknown amount under § 363(b) or (c) under the guise of the Cash Collateral Motion. Timothy testified that the equipment that he intends to sell is not needed and would not impact planting or harvest of the 2019 crop. However, if as a result of a court approved sale of equipment or otherwise, additional cash collateral becomes available, the Court may increase this amount subject to a progress report from Debtors regarding the status of planting and any impact actual planting has had on the availability and amount of crop insurance and their crop
projections.

The Debt Motion specifically references § 364(d). Ordinarily, debt incurred under §364(d) is secured by a senior or priming lien. However, later the Debt Motion explains that the new debt will be secured “by a second lien position on their 2019 crop, federal crop insurance, government payments, and hail loss insurance payments related to Debtors’ 2019 crop. The second lien position will be behind American State Bank & Trust up to the amount allowed by the Court in its Order regarding Debtors’ Motion for Use of Cash Collateral.” Although inconsistent, Debtors’ appear to be seeking approval of credit in an amount up to $50,000 secured by a junior lien on the 2019 crop under § 364(c)(2)(3).

Notably, the Debt Motion fails to comply with Rule 4001(c), which states: The motion shall consist of or (if the motion is more than five pages in length) begin with a concise statement of the relief requested, not to exceed five pages, that lists or summarizes, and sets out the location within the relevant documents of, all material provisions of the proposed credit agreement and form of order, including interest rate, maturity, events of default, liens, borrowing limits, and borrowing conditions. Rule 4001(c)(2) provides that a final hearing on a motion for authority to obtain credit may be held no earlier than 14 days after service of the motion. To prevent irreparable harm during this period, Debtors are authorized to incur new debt up to $50,000 with new creditor Donald Hagadone secured by a second lien position on their 2019 crop, federal crop insurance, government payments, and hail loss insurance payments related to Debtors’ 2019 crop. Prior to the final hearing, Debtors shall comply with 4001(c) and disclose to the Court the material terms of any credit agreement, as a condition of final approval.

Debtors and the Bank should communicate during this interim period and recognize that despite whatever misgivings one party may have about the other, their economic fates remain intertwined, and dialogue may produce a more satisfactory outcome for both parties than any outcome determined by the Court.

In re Hagadone, June 7. 2019, Gary S. Deschenes and Katherine A Sharp for Hagadone, Charles W. Hingle and Brianne C. McClafferty for American Sate Bank

2019 Mont. B.R. 221 (June 7, 2019)

Hagadone, Videoconference

Case no 19-60551

In the past, this Court has liberally granted requests to appear via video. However, more recently, the Court has concluded that video appearances in contested matters, where the parties intend to examine witnesses or introduce exhibits, is not effective. This Court has explained:

This Court’s prior enthusiasm for permitting video appearances even in contested hearings is waning. Over the last year the Court has advised parties that if they anticipate a hearing will be contested, they should be prepared to appear in person in the courtroom. Although video has been embraced in this District, it has proven to be a poor substitutefor having all counsel, witnesses and the Court in a singular place. Irrespective of the modern technology employed, telephone or video, remote attendance negatively impacts the judicial process, particularly when a hearing is contested.

In re Adkins, 2019 Mont. B.R. 175 (Bankr. D.Mont. 2019).

This Court’s explanation in Adkins, particularly the last sentence, merits an additional comment. The phrase, “when a hearing is contested” might be subject to different interpretations. For example, a hearing might be solely for the purpose of making legal argument. If that is anticipated by the parties, a stronger argument exists for video, and parties should inform the Court of this development. However, when there are disputed factual issues that require the introduction of evidence, either through exhibits or testimony, this Court will be inclined to deny a request to appear by video.

In re Hagadone, August 12, 2019, Brianne C. McClafferty for American State Bank and Trust, Gary S. Deschenes for Hagadone

2019 Mont. B.R. 270 (August 12, 2019)

Jackson, Chapter 13, Motion to Strike, Confirmation, Timely Objection
Case no 19-60013

Debtors filed their Amended Plan on March 1, 2019, to cure the objection of TD Auto Finance, LLC and to cure all but one of the Trustee’s objections to confirmation. Debtors’ Amended Plan still required monthly payments of $546.40 for a term of 60 months but paragraph 11 of Debtors’ Amended Plan was amended to read as follows:

A. As an additional one-time payment, on or before April, 2020, Debtor will either sell or refinance residential real estate in Richland County, Montana to fund this plan. The Debtor's real property shall remain property of the bankruptcy estate. Upon the sale or refinance of the real property, the Debtor will turn over to the Trustee sufficient funds to pay approved administrative expenses and the impaired secured claims against the real property in order of lien priority.
B. Debtors shall promptly employ a licensed real estate sales professional subject to the approval of the Bankruptcy Court for the purpose of selling their real property. Debtors shall inform the Trustee of any changes to, addition to, extensions of or termination of the listing agreement and will immediately inform the Trustee of all offers received. The Debtors will generally cooperate with the Trustee and shall actively market the real property. Any sale or refinance of real property and related fees and costs shall be subject to the approval of the Bankruptcy Court. Sale or refinance of the real property shall not occur without prior authorization of the Bankruptcy Court and notice to the Creditors, and the Trustee shall be given an opportunity to participate in the closing of the sale or refinance. If the sale or refinance of real property does not occur by April, 2020, the Trustee has the option to undertake the sale of the real property himself, to dismiss the case, or to convert the case to a
Chapter 7. Payments shall not be made to the secured creditors from the plan payments required under paragraph 1.


Stockman filed an Objection to Debtors’ Amended Plan on that same date arguing Debtors’ Amended Plan did not provide adequate protection to Stockman. Stockman contends that by April of 2020 it will be owed approximately $326,000. Debtors filed their Motion in response to Stockman’s objection to the Amended Plan arguing Stockman’s objection should be stricken or Stockman should be deemed to have consented to Debtors’ Amended Plan because the treatment of Stockman in the Amended Plan is “fundamentally unchanged” from Stockman’s treatment in Debtors’ original Chapter 13 plan. ” In this case, no creditor could file an objection to confirmation of Debtors’ Amended Plan seven days before Debtors’ confirmation hearing because Debtors filed their Amended Plan on March 1, 2019, which was less than seven days prior to the confirmation hearing that was scheduled for March 7, 2019. Debtors essentially request that this Court elevate form over substance by allowing Debtors to change the treatment of Stockman’s claim, however large or small that change in treatment may be, and preclude Stockman from responding to that change by filing the amended plan within seven days of the confirmation hearing. If Debtors’ treatment of Stockman’s claim was exactly the same between the original plan and the Amended Plan, Debtors’ argument might be persuasive, but that is not the issue before the Court. Debtors’ Amended Plan does change the treatment of Stockman’s claim and Stockman is entitled to an opportunity to respond to that change. In this case, Debtors’ filed their Amended Plan on March 1, 2019, and Stockman objected to the Amended Plan on that same date. Stockman’s objection
to Debtors’ Amended Plan was timely.

2019 Mont. B.R. 122 (March 29, 2019), James A. Patten for Jackson, Mark E. Noennig for Stockman

Johnston, Motion to Modify Plan Denied, Notice
Case no 16-60665

Debtors filed a Motion to Modify Plan and an Amended Chapter 13 Plan. On July 1, 2019, the Court amended its Local Rules and Forms. Mont. LBR 3015-2(b) requires that "the proponent of a modified chapter 13 plan shall file a motion to modify plan using Mont. LBF19-A.” Effective July 1, 2019, Mont. LBF 19-A was amended to conform with F.R.B.P.2002(a)(5) requiring that motions to modify confirmed plans be accompanied by a notice that grants parties-in-interest 21 days to file a written responsive pleading and request a hearing. The Notice attached to Debtor’s Motion only gives parties-in-interest 14 days, rather than 21 days, to respond to Debtors’ Motion. Therefore, Debtors’ Motion is denied; and Debtors are granted leave to refile their Motion and Amended Plan, accompanied by the 21-day notice contemplated by Mont. LBR 3015-2(b), Mont. LBF 19-A and F.R.B.P. 2002(a)(5).

In re Johnston, September 26, 2019, Andrew W. Pierce for Johnston

2019 Mont. B.R. 345 (September 26, 2019)

Jones, Chapter 13, Objection to Claim, Excise Tax
Case no. 19-60110

The IRS timely filed a proof of claim, and later amended it (“Amended Claim”). Of the total amount, the IRS asserts that $1,995.18 is entitled to priority, and the remaining $110.50 is characterized as a general unsecured claim. The “priority” portion of the Amended Claim has two components: $1,018.18 attributable to income tax; and, $977 attributable to excise tax. The parties agree that the $977 is related to the Debtors’ failure to pay the Shared Responsibility Payment (“SRP”), required under 26 U.S.C. § 5000A. Even though 26 U.S.C. §5000A describes the SRP as a “penalty,” the IRS argues that it functions as an excise tax, and is entitled to priority treatment under §507(a)(8)(E).

26 U.S.C. § 5000A(a) requires individuals to maintain minimum essential health care coverage “each month after 2013.” If an individual fails to maintain the minimum essential coverage, “a penalty with respect to such failures” is imposed. This “penalty,” called the “Shared Responsibility Payment,” is imposed on the individual and “included with a taxpayer’s return…for the taxable year which includes such month.”“Allowed unsecured claims of governmental units” receive priority status under the Bankruptcy Code if such claims are specified in § 507(a)(8), or one of its subsections. § 507(a)(8). Under §§ 507(a)(8)(E)(i) and (ii), a claim based on an excise tax may be entitled to priority. Specifically, a claim will be entitled to priority if it is attributable to “an excise tax on…a transaction occurring before the date of the filing of the petition for which a return, if required, is last due, under applicable law or under any extension, after three years before the date of filing the petition,” or “if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the petition.”

The term “excise” and “excise tax” are not defined in the Bankruptcy Code, so the Court must determine whether a claimed excise tax asserted by the government is indeed an excise tax under § 541(a)(8)(E), or some other type of payment obligation. The Ninth Circuit has generally defined an excise tax as one “imposed on the performance of an act…or the enjoyment of a privilege.”To determine whether a claim qualifies as an excise tax for bankruptcy purposes, the Ninth Circuit developed a four-part test. A payment is an excise tax if it is: (1) an involuntary pecuniary burden, regardless of name, laid upon individual or property; (2) imposed by or under the authority of the legislature; (3) for public purposes, including the purposes of defraying expenses of government or undertakings authorized by it; and (4) under the police or taxing power of the state. In 2004, the Ninth Circuit added a fifth element to the Lorber test, holding that if a private creditor similarly situated to the government can be hypothesized under the relevant statute, the claim cannot be considered an excise tax.

As stated above, § 507(a)(8)(E)(i) and (ii) allow priority status for an excise tax imposed “on a transaction occurring before the date of the filing of the petition for which a return, if required, is last due, under applicable law or under any extension, after three years before the date of filing the petition,” or “if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the petition. The Supreme Court has recognized the unique nature of the SRP and its imposition, pointing out that the payment is one “that the Federal Government imposes for an omission, not an act. While the Ninth Circuit has yet to explicitly define the term “transaction” as used in § 507(a)(8)(E)(i) and (ii), it has reasoned that “the failure to make the transaction of purchasing workers' compensation insurance (or applying for self-insured status),” does not satisfy § 507(a)(8)(E)(i)’s transaction requirement. Reading Lorber III, George, Bailey, and Huenerberg, together, the Court finds that the term “transaction” cannot be read to capture the Debtors’ “inaction, deliberate or otherwise.” Indeed, here it was Debtors’ “failure to make the transaction” required under 26 U.S.C. § 5000Athat triggered their liability for the SRP (i.e. they did not purchase or otherwise acquire “minimum essential health care coverage.”). Therefore, the Court concludes that while the SRP qualifies as an excise tax under the Ninth Circuit’s Lorber test, it is not imposed on a transaction as required under § 507(a)(8)(E).

In its supplemental briefing, the IRS raised an “alternative” argument for the first time arguing that if the SRP does not qualify as an excise tax on a transaction under § 507(a)(8)(E), it is still entitled to priority status as a tax measured by income under § 507(a)(8)(A).Notably, if the Court were to consider this alternative argument, it would likely fail because IRS form 1040 indicates that the SRP is not an income tax. If the Court were to consider the alternative argument, the argument would not be persuasive. The determinative factor regarding whether the SRP is entitled to priority treatment is whether the SRP is premised “on a transaction,” as required under § 507(a)(8)(E). The SRP is neither premised on, nor tied to a transaction. To the contrary, it is the consequence of a failure to participate in a transaction. Therefore, the IRS’ priority claim will be disallowed with respect to its $977 “excise tax” claims and the $977 will be allowed as an unsecured nonpriority claim.

In re Jones, November 13, 2019, Edward A. Murphy for Jones, Chad C Spraker for the Internal Revenue Service

2019 Mont. B.R. 364 (November 13, 2019)

Kapor v. RJC Investment, Inc., Montana Supreme Court, UCC Release, Waiver, Estopple, Surplus Proceeds
Case no. DA 18-0208

RJC resold the mobile home in April 2015, without notice to Kapor, for $53,500, which Kapor alleges is $13,708.20 more than the principal she owed when she returned the mobile home. RJC did not refund any surplus to Kapor, and disputes that a surplus was in fact realized. Kapor sued RJC for failing to pay her the surplus allegedly realized on the resale of the mobile home as required by Article 9 of the Uniform Commercial Code (“U.C.C.”).

The fundamental tenet of modern contract law is freedom of contract’—parties are free to ‘agree to terms governing their private conduct as long as those terms do not conflict with public laws.’” Under generally applicable laws of contract, a creditor may agree to extinguish a debtor’s obligations through a release. The U.C.C. is meant “to simplify, clarify, and modernize the law governing commercial transactions.” The parties here do not dispute that the U.C.C. governed the original sale of the mobile home and underlying security agreement. The District Court relied on principles of general contract law when it concluded that the Release Kapor signed terminated the U.C.C.’s application because Kapor no longer was a debtor once she relinquished her interest in the mobile home and reasoned that the Release was a discharge or settlement of Kapor’s obligation and that Kapor’s “removing [her] name off of the contract” eliminated any security interest. The court rejected the notion that the U.C.C. does not allow a mutual release.

Title 30, chapter 9A, part 6, MCA, governs default in secured transactions. Sections 30-9A-608(1)(d) and -615(4)(a), MCA, provide that a “secured party shall account to and pay a debtor for any surplus” from proceeds of the sale of collateral. Section 30-9A-602(5), MCA, expressly forbids a debtor from waiving protections the U.C.C. provides for accounting for payment of surplus proceeds of collateral. The U.C.C.’s provision regarding waiver and variance is specific and displaces general provisions of law regarding release, as it states expressly that a party may not waive her right to recover surplus proceeds of collateral. Except as allowed under other U.C.C. provisions, that discharge or release cannot, however, waive or vary RJC’s duty to account for or Kapor’s right to receive any surplus proceeds from the resale of the mobile home. The express statutory provision in the U.C.C. displaces other non-U.C.C. contract law that could result in a waiver of the duties or rights associated with the accounting for and payment of the surplus proceeds of collateral.

Kapor’s relationship to RJC was one of debtor to creditor through a secured transaction governed by U.C.C. Article 9. When Kapor defaulted on her obligations under the Contract, RJC’s rights and responsibilities as a creditor also were governed by U.C.C. Article 9. We conclude that the District Court erred when it granted RJC summary judgment on the ground that the U.C.C. no longer applied after Kapor signed the Release.

After a debtor defaults, a secured creditor in possession of the collateral has three options. First, the creditor may file suit on the obligation and reduce its claim to judgment. Section 30-9A-601(1)(a), MCA (a secured party “may reduce a claim to judgment, foreclose, or otherwise enforce the claim [or] security interest . . . by any available judicial procedure”). Second, the creditor “may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing.”  Third, the creditor “may accept collateral in full or partial satisfaction of the obligation it secures[.]

“[A] purported or apparent acceptance” of the collateral is ineffective unless “the secured party consents to the acceptance in an authenticated record or sends a proposal to the debtor.” In turn, the debtor either must consent in writing to the “terms of the acceptance” after default or, if the creditor sends a written proposal for acceptance in full satisfaction, will be deemed to have consented if the debtor fails to notify the creditor in writing within twenty days.  Like its statutory right to surplus, a debtor may not waive or vary the rules for acceptance of collateral in satisfaction of obligation provided in §§ 30-9A-620 through -622, MCA.

Section 30-9A-620, MCA, was enacted to prescribe “the conditions necessary to an effective acceptance (formerly, retention) of collateral in full or partial satisfaction of the secured obligation.” The statute precludes “a mere delay in collection or disposition of collateral” from effectuating “a ‘constructive’ strict foreclosure.” The reason for eliminating “constructive” strict foreclosure was to prevent the debtor from seeking to bar a deficiency judgment when the creditor never agreed to acceptance in satisfaction of the debt.

Absent the secured party’s written proposal, subsection (3) requires that the debtor “agree[] to the terms of the acceptance[.]” “All that is required for strict foreclosure to occur is that the debtor agree to the acceptance of collateral in full satisfaction of the debt in writing after default and the secured party consent to satisfaction in an authenticated record.” The Release Kapor signed said precisely nothing about RJC’s “acceptance,” its waiver of rights or protections under the Contract, or Kapor’s “satisfaction” of the debt. The Release did not establish “RJC’s acceptance” or set forth the terms of any such acceptance. Given the specific process outlined in § 30-9A-620, MCA, the protections embodied in the uniform laws of the U.C.C., the fact that a debtor cannot waive its right either to a surplus or to the strict foreclosure procedures, and the protection the statute offers for both debtor and creditor, it is not unreasonable to require a purported release to include the secured party’s “terms of acceptance” and the debtor’s assent to those terms.

Section 30-1-103, MCA, however, expressly mentions estoppel as one of the general principles of law that can supplement the U.C.C. unless other U.C.C. provisions displace that principle. We conclude that the doctrine of equitable estoppel may apply to cases governed by the U.C.C. unless displaced by specific U.C.C. provisions. Equitable estoppel is a common law doctrine based on the principle that “a party cannot, through his intentional conduct, actions, language, or silence, induce another to unknowingly or detrimentally alter his position and then subsequently deny the just and legal consequences of his intentional acts.” A party must demonstrate the following six elements through clear and convincing evidence to establish equitable estoppel:

(1) there must be conduct, acts, language, or silence amounting to a
representation or a concealment of a material fact; (2) the facts must be
known to the party to be estopped at the time of that party’s conduct, or at
least the circumstances must be such that knowledge of facts is necessarily
imputed to that party; (3) the truth must be unknown to the other party at the
time the representation was acted upon; (4) the representation must be made
with the intent or expectation that it will be acted on by the other party; (5)
the representation must be relied upon by the other party, leading that party
to act upon it; and (6) the other party must in fact rely on the representation
so as to change its position for the worse,


The District Court noted that the facts known to Kapor at the time of signing the document were the facts stated in the plain language of the Release. There was no other admissible evidence to suggest what Kapor knew at the time she executed the Release. Kapor expressly knew that she would not be entitled to possess the home or to a refund of any payments she had made. There was no language in the document to suggest that Kapor knew of her rights under the U.C.C. or knew that the Release was an attempt to waive all of her rights under the U.C.C. RJC therefore has not proven that any representation Kapor made led it to sell the mobile home to a third party or that it changed its position for the worse based on the Release. Because all six elements of equitable estoppel cannot be satisfied, the District Court erred in granting RJC summary judgment based on its determination that Kapor was equitably estopped from pursuing her claims.

Kapor v. RJC Investment, Inc., February 12, 2019, E Michael Eakin for Kapor, Christopher T. Sweeney, Peter M. Damro for RJC Investment

2019 Mont B.R. 23 (February 12, 2019)

Ladd, Chapter 13, Bad Faith, Dismissal with Prejudice
Case no, 17-60673

A hearing was held on the Debtor’s motion to dismiss and objections filed by the Chapter 13 Trustee and by Bank of America, N.A. and on the Chapter 13 Trustee’s application to approve employment of realtor to market and sell Debtor’s real property pursuant to the terms of Debtor’s confirmed Plan. The Court read its oral findings of fact and conclusions of law into the record at the hearing. The Court rejected the contention of Debtor’s counsel that the bad faith exception to the Debtor’s right to dismiss under 11 U.S.C. § 1307(b) from Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764, 773-94 (9th Cir. 2008) was weakened or eliminated by Law v. Siegel, __ U.S. __, 34 S.Ct. 1188, 188 L.Ed.2d 146 (2014). The Court proceeded to make findings under "Leavitt actors" that inform a decision whether to dismiss or convert a case for bad faith: (1) whether the debtor misrepresented facts in his petition or plan, unfairly manipulated the bankruptcy code, or otherwise filed his chapter 13 petition in an inequitable manner; (2) the debtor's history of filings and dismissals; (3) whether the debtor only intended to defeat state court litigation; and (4) whether egregious behavior is present.

The Court found that there is substantial evidence of the Leavitt factors to support a finding of bad faith by this Debtor. However, the evidence also showed that, if Debtor’s motion to dismiss is denied and the Chapter 13 Trustee sells the Debtor’s residence, the proceeds in all likelihood will be insufficient to pay all secured claims, with nothing left over for distribution to unsecured creditors. Based upon the evidence admitted at the hearing, this Court concluded that dismissal of the case is appropriate and in the best interests of creditors. However, the Court further ordered that dismissal shall include a two year bar against the Debtor refiling any petition for bankruptcy relief, so that BANA can conclude its foreclosure proceedings and sheriff’s sale, and get through most if not all of Debtor’s right of redemption. This two year bar against refiling came as no surprise to Debtor’s counsel, who stated on the record at the hearing that he anticipated it, and the Debtor agreed to a two year bar shortly before a break. the Court deems a two year prohibition against refiling to be a necessary and appropriate exercise of its equitable powers under 11 U.S.C. § 105(a) to prevent an abuse of the bankruptcy process. Accordingly, pursuant to the Debtor’s right to dismiss under § 1307(b), and this Court’s equitable powers under § 105(a), and this Court’s oral findings of fact and conclusions of law read into the record in open court on January 10, 2019.

In re Ladd, January 10, 2019, Danial S. Morgan for Ladd, Robert Drummond, Trustee

2019 Mont B.R. 13 (January 10, 2019)

Mack, Chapter 12, Professional Conduct
Case no. 18-60927

Debtors filed a Motion for Rule 2004 Examination. The Motion seeks to examine Amber Saylor, a loan officer at Garfield County Bank.  A motion for a Rule 2004 exam is a matter that is routinely granted with a right to request a hearing, consistent with Mont. LBR 9013-1(g)(2)(C). Further, the Motion represents that the Bank does not oppose the Motion. It appears to the Court that the Bank intends to examine debtor, Eric Mack. and, this Motion seeks to examine Saylor in the same location. The Motion will be granted.

In conjunction with granting the Motion, the Court notes that the record reflects interactions between counsel have been less than professional to date and from the Court’s view disappointing. At the 341 Meeting, counsel for the Debtor and Bank began to squabble, resulting in at least one instance of the Debtors refusing to answer questions by the Bank’s counsel. This Court will not indulge in gross deviations from the norms of professional conduct, and takes a dim view of pejorative characterizations of one counsel by another. Such behavior will not be tolerated. Counsel are reminded that “abuse of the Rule 2004 process is sanctionable and can include dismissal of a matter or expenses.”

In re Mack, March 6, 2019, Doug James, Keturah Shaules for Garfield County Bank, Gary S. Deschenes, Katherine A. Sharp for Mack

2019 Mont. B.R. 120 (March 6, 2019)

Martin, Chapter 13, Objection to Claim
Case no 19-60550

The Trustee filed an Objection to Proof of Claim objecting to Proof of Claim No. 10 filed by Citizens Bank, N.A. The Trustee’s
Objection does not comply with Mont. LBR 3007-1, which provides: “a trustee, debtor or other party in interest may file an objection to a creditor’s proof of claim in accordance with Fed. R. Bankr. P. 3007, by using Mont. LBF 28.” Effective July 1, 2019, Mont. LBR 28 was amended to require that objections to claims contain the following notice:


NOTICE OF OBJECTION TO CLAIM AND OPPORTUNITY TO RESPOND
AND REQUEST A HEARING
An objection to your claim in this bankruptcy case has been filed. The objection
may result in your claim being reduced, modified or eliminated. If you do not
want your claim modified or eliminated, you must file a written responsive
pleading and request a hearing within thirty (30) days of the date of the objection.
The responding party shall schedule the hearing on the motion at least twenty-one
(21) days after the date of the response and request for hearing and shall include
in the caption of the responsive pleading in bold and conspicuous print the date,
time and location of the hearing by inserting in the caption the following
NOTICE OF HEARING
Date: __________________
Time:__________________
Location:_______________

If no objections are timely filed, the Court may reduce, modify, or eliminate the
claim.

The Trustee’s Objection to Proof of Claim No. 10 filed by Citizens Bank, N.A. is overruled without prejudice.

In re Martin, August 15, 2019, Kraig Kazda for Martin, Robert Drummond, Trustee

2019 Mont. B.R. 273 (August 15, 2019)

McVicker, Chapter 13, Add Joint Debtor Denied
Case no 19-60255-13

Debtor explains in the Motion that the requested extension is needed because Debtor intends to amend her petition to add her spouse, Joseph Andrew McVicker.1 The Motion asks the Court to “add Joseph Andrew McVicker, to the Petition as Debtor #2.” Debtor filed her petition in her individual capacity under § 301. She cannot amend her petition, and convert her case to a joint case under § 302 because a Fed. R. Bankr. P. 1009(a) amendment cannot be used to commence a joint case under § 302(a).

She further indicates that the additional time is needed to retain counsel. This is a worthy endeavor and the Court will grant Debtor additional time to retain counsel and file the complete schedules and supporting documents. Debtor’s complete schedules and missing documents must be filed sufficiently in advance of her 341 meeting to allow the Chapter Trustee to review the documents. Debtor’s 341 Meeting is April 30, 2019. As a result, Debtor will be granted a limited extension to April 23, 2019.

In re McVicker, April 12, 2019, Jennifer LO. McVicker pro se

2019 Mont. B.R. 134 (April 12, 2019)

Morris, Chapter 7, Settlement Denied Approval
Case no. 18-60598

The Trustee employed Mike Eakin and Eakin, Berry,& Grygiel, PLLC to pursue the claim against RJC Investment, Inc. As set forth in the Trustee’s Motion, Debtor agrees to waive any conflict of interest with regard to Mike Eakin and Eakin, Berry,& Grygiel, PLLC’s representation of the estate and agrees to cooperate fully inall matters required for settlement or trial, including signing of documents, offering testimony, providing information and releases, etc. In exchange, Debtor is entitled to claim 20% of any net proceeds from any recovery as exempt. Objecting Party opposes approval of the Trustee’s agreement with Debtor arguing Debtor has a duty to cooperate, regardless of any agreement with Trustee, and no statutory basis exists for allowing Debtor an exemption in any recovery.

In deciding whether to approve a settlement under F.R.B.P. 9019, 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.

Considering all relevant factors, particularly the paramount interest of the creditors and a proper deference to their reasonable views, the Court finds that the Trustee’s agreement is not "fair and equitable" as required by In re A&C Properties. In particular, the Trustee’s agreement with Debtor alters the distribution scheme set forth in the bankruptcy Code by allowing Debtor an exemption, where none exists, thereby allowing a potential distribution to Debtor, prior to the payment in full of her creditors.

In re Morris, May 28, 2019, Joe Womack Trustee, Jennifer Beardsleyfor Morris

2019 Mont. B.R. 205 (May 28, 2019)

Moses, Credit Counseling, Motion for Reconsideration Denied
Case no. 19-60861

Debtor commenced this Chapter 7 case on August 28, 2018, by filing a voluntary Chapter 7 bankruptcy petition. Debtor filed a Certificate of Counseling which showed that Debtor completed her credit counseling on February 18, 2019. The Court dismissed this case on August 30, 2019, because Debtor had received her Certificate of Counseling more than 180 days prior to her petition date which meant that Debtor was ineligible to be a debtor under 11 U.S.C. § 109(h)(1) which reads in part “an individual may not be a debtor . . . unless such individual has, during the 180-day period ending on the date of filing of the petition by such individual (emphasis added), received from an approved nonprofit budget and credit counseling agency . . . an individual or group briefing . . . that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.” On August 30, 2019, Debtor filed a Motion for Reconsideration requesting that the Court reconsider the dismissal of this case. Debtor’s Motion was accompanied by a new Certificate of Counseling which showed that Debtor completed a second credit counseling on August 30, 2019.

Debtor is still ineligible to be a debtorin this case because she did not complete a credit counseling course within the 180-day period that ended on her petition date. As the Court explained in its Order entered August 30, 2019, “Debtor may want to consider completing another credit counseling class and filing a new bankruptcy case within 180 days of completion of her new credit counseling.”

In re Moses, September 3, 2019, Phillip R. Oliver for Moses

2019 Mont. B.R. 288 (September 3, 2019)

Mountain Divide, LLC, Settlement
Case no. 16-61015

Debtor filed its Motion for Approval of Compromise Settlement Pursuant to Rule 9019. The proposed settlement agreement is between Mountain Divide and American Pipe & Supply Co. and their affiliated companies, and is intended to resolve the claims between them and asserted in the Montana Ninth Judicial District Court, Glacier County. No objection and request for hearing on the settlement has been filed after notice, which is deemed an admission that the relief requested should be approved.

This Court addressed the test for compromise and settlement under Rule 9019(a) in In re Schrock, 9 Mont. B.R. 414, 416-417 (1991) saying: Although the bankruptcy court has great latitude in authorizing a compromise, it may only approve a proposal that is ‘fair and equitable.’ Woodson v. Fireman’s Fund Ins. Co., 839 F.2d 610, 620 (9th Cir. 1988) (citing Martin v. Kane (In re A & C Properties), 784 F.2d 1377, 1380-81 (9th Cir.) cert. denied sub nom. Martin v. Robinson, 479 U.S. 854, 107 S.Ct. 189, 93 L.Ed. 2d 122 (1986). In evaluating a settlement, the Court must consider: (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; (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises. As explained in the A & C Properties case:

The purpose of a compromise agreement is to allow the trustee and the creditors to avoid the expenses and burdens associated with litigating sharply contested and dubious claims. The law favors compromise and not litigation for its own sake, and as long as the bankruptcy court amply considered the various factors that determined the reasonableness of the compromise, the court's decision must be affirmed. Id. at 1380-81 (citations omitted).

Based on the Court’s review of the Motion and the attached Settlement Agreement, the Court finds the proposed settlement is fair and equitable as required by In re A&C Properties.

In re Mountain Divide, April 19, 2019, Jeffrey Hunnes and Laura T. Myers for Mountain Divide

2019 Mont. B.R. 141 (April 19, 2019)

Mullin, Chapter 12, Recusal
Case no. 18-60691-12

Creditors Richard S. Twete and Farm Credit Services of North Dakota, PCA, jointly filed a Motion to Convert Chapter 12 case to Chapter 7 case on March 29, 2019. The Motion requests conversion pursuant to 11 U.S.C. §1208(d), and alleges Debtor has engaged in fraud in connection with the case. Included in the Motion are references to A&C Soaring Eagle, et al. v. AGCO Finance, LLC et al. before the Montana Thirteenth Judicial District Court, Yellowstone County. I was counsel of record in the Agco Case. Recusal is required under F.R.B.P. 5004(a) and 28 U.S.C. § 455(a) because a reasonable, knowledgeable person may question my impartiality in matters in which I have had prior dealings with one of the parties in the case. Further, the explicit reference in the Motion to the Agco Case implicates 28 U.S.C. § 455(b)(2). IT IS ORDERED that the undersigned is disqualified and recused from presiding in this case and its associated Adversary Proceeding; and, this case and the associated Adversary Proceeding are assigned to the Honorable Jim D. Pappas, United States Bankruptcy Judge for the
District of Idaho, for all future proceedings.

In re Mullin, March 3, 2019, Gary S. Deschenes for Mullin, Jeffery A Hunnes and Josseph A Soudeki for Twete, William D. Lamdin and Lindy M Lauder for Farm Credit Services

2019 Mont. B.R. 128 (April 3, 2019)

Mullin, Chapter 11, (Pappas), Dismissal
Case no. 18-60691
Debtor and Twete have been engaged in non-stop, contentious, expensive litigation in state and federal bankruptcy courts since February 19, 2015.With the appeal pending in the North Dakota Supreme Court, Debtor commenced this bankruptcy case under Chapter 12 of the Bankruptcy Code. It quickly became obvious to the Court from subsequent proceedings, that Debtor, even if Debtor could come up with a feasible plan, he was not eligible to reorganize under Chapter 12. Following a hearing, and frankly, against the Court’s better judgment, but at the urging of all parties, including Twete, the Court granted a motion to convert filed by Debtor, thereby converting this case to a Chapter 11 case under the Bankruptcy Code. Debtor filed a Notice indicating his inability to file an amended disclosure statement. Presumably because, based upon Debtor’s lack of success in the North Dakota litigation, Debtor’s Notice was followed by the UST Motion seeking dismissal, and shortly thereafter by Twete’s Motion seeking conversion to Chapter 7.

The parties agreed that good cause had been shown for the Court to dismiss or convert this case to a Chapter 7 case, but they disagreed as to the appropriate relief. Debtor and the UST seek dismissal; Twete insists that conversion to Chapter 7 is best. While there are arguments for either course, after review of the facts, record and arguments of the parties, in the exercise of its discretion, the Court confidently agrees with Debtor and the UST.

Section 1112(b)(1) provides, in relevant part, that "the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause . . . ." If cause is established, the decision whether to convert or dismiss the case falls within the sound discretion of the court. And, if the bankruptcy court determines that cause exists to convert or dismiss, it must also: (1) decide whether dismissal, conversion, or the appointment of a trustee or examiner is in the best interests of creditors and the estate; and (2) identify whether there are unusual circumstances that establish that dismissal or conversion is not in the best interests of creditors and the estate.

If this case is converted, a Chapter 7 trustee will be tasked with administering what is at this time, an uncertain estate, largely for Twete’s benefit. Twete will undoubtedly “volunteer” to act on the trustee’s behalf, while continuing his efforts to deny Debtor a discharge. In short, it appears Debtor will not receive a “fresh start” in a converted case, and it is highly debatable whether there will be any significant benefits to flow to creditors, other than perhaps to Twete, whose monetary claims dwarf those of other unsecured creditors. What is not subject to debate, though, is that any Chapter 7 case will surely be a slow and expensive one, characterized by complicated, costly litigation with Debtor’s related entities. Secured creditors will liquidate their collaterals; unsecured creditors other than Twete will wait in the wings, justifiably doubtful they will enjoy any distributions ever. Indeed, Twete and his counsel, if allowed to proceed on the estate’s behalf, may be the sole and ultimate beneficiaries of any recoveries. That outcome is not what bankruptcy is designed to accomplish.

On the other hand, if the case is dismissed, Debtor will not receive a discharge. Twete has a variety of remedies available to recover avoidable transfers and to challenge Debtor’s conduct under applicable state law. Secured creditors can foreclose their liens, and unsecured creditors can, based upon their individual circumstances, decide if further efforts to collect from Debtor are worth the effort and expense. Looking back, the Court regrets that it did not dismiss this case when it became apparent that Debtor could not achieve relief under Chapter 12. However, the parties, including Twete, the major secured creditors, and Debtor all represented that, if the case proceeded under Chapter 11, they could craft a consensual plan for liquidation of Debtor’s assets. Because conversion of this case to Chapter 7 will not promote basic bankruptcy goals or significantly enhance any of the parties’ interests, the Court will not bypass another opportunity to dismiss this case and redirect the parties to their other options under these dismal facts.

In re Mullin, November 27, 2019, Gary S. Deschenes, Katherine A. Sharp for Mullin, Jeffrey Hunnes, Joseph A Soueidi for Twete, Brett R. Cahoon for United States Trustees

In re Mulln, 2019 Mont. B.R. 394 (November 27, 2019)

Olson, Chapter 12, Dismissal, Conversion
Case no. 19-60465

Section 1208(d) allows a court, upon request by a party in interest and after notice and a hearing, to dismiss a Chapter 12 case or convert it to one under Chapter 7 “upon a showing that the debtor has committed fraud in connection with the case.” The party seeking conversion of a case under § 1208(d) bears the burden of proof and must establish fraud by “clear and convincing evidence. As the movant, FSA must show that Debtor acted with fraudulent intent, not that he merely “took actions that happened to prejudice a creditor. The remedy is “the most potent sanction a bankruptcy court may impose on a family farmer.”It is also the only provision in the Code that authorizes involuntary conversion to chapter 7 where the debtor is a farmer. Due to the extreme nature of § 1208(d)’s remedy, it is to be enforced against “the very few debtors who refuse to cooperate, are not forthcoming, and who evidence not only bad faith, but dishonest conduct. ”Courts have applied § 1208(d) and involuntarily converted cases to Chapter 7 when a debtor has acted illegally, lied, hidden or diverted assets to family members in connection with a Chapter 12 case. Generally, §1208(d) should be used cautiously and sparingly, and “only the most severe transgressions can support an involuntary conversion of a family farmer’s case under Code § 1208(d).”

The evidence at the hearing focused almost entirely on Debtor’s pre-petition conduct. FSA presented compelling evidence that Debtor engaged in forgery and conversion. However, FSA did not show that those acts were done “in the case or in connection with this case.” In this case, Debtor’s alleged fraud—forgery of checks and transfer of encumbered collateral—all occurred several months prior to Debtor’s Chapter 12 filing. FSA failed to establish a nexus between these acts and this case that would permit involuntary conversion to chapter 7 under § 1208(d). While the evidence introduced at the hearing centered on forgery and conversion, FSA also alleged in its brief that Debtor failed to account for crop sales or insurance proceeds during his bankruptcy and that Debtor made false representations during his § 341 meeting of creditors. The evidence presented at the hearing does not support these allegations. At the request of Debtor, the Court took judicial notice of his amended schedules. The crop sales and insurance proceeds were disclosed in his amended schedules.

FSA’s real complaint appears to be that by asserting his Fifth Amendment privilege at his 341 meeting, Debtor misrepresented his financial picture or concealed assets triggering §1208(d)’s potent sanction. “Under the Fifth Amendment, a person has the right to remain silent without suffering any penalty for such silence, which means the imposition of any sanction that makes the assertion of the Fifth Amendment privilege ‘costly.’ ”In this case, this Court cannot not conclude rom the record that Debtor’s assertion of the Fifth Amendment privilege at his § 341 meeting was in furtherance of efforts to misrepresent his financial picture, conceal assets or part of a broader fraud in connection with the case.

Involuntary conversion of a chapter 12 case to chapter 7 is governed by § 1208(d) and requires more than bad faith. Strangely, despite the clear requirement under § 1208(d) that conversion requires more than bad faith. Creditors may move to dismiss Chapter 12 cases for cause such as bad faith under § 1208(c), but § 1208(c) does not permit conversion for cause. Unlike § 1307(c) which permits conversion or dismissal for cause, conversion of a Chapter 12 case to Chapter 7 simply is not contemplated under § 1208(c).  Any request by FSA for conversion of this case based upon §1208(c) is denied.

Under § 1208(c) a case may be dismissed for cause.  “[T]he Bankruptcy Code contains an implied requirement of good faith in the filing of any bankruptcy petition.”FSA relies on the Leavitt factors noting that “[i]n this circuit, bankruptcy courts make good faith determinations on a case-by-case basis, after considering the totality of the circumstances. ”The Leavitt factors are:

(1) Whether the debtor misrepresented facts in his petition or plan, unfairly manipulated
the bankruptcy code, or otherwise filed his chapter petition in an inequitable manner;
(2) the debtor's history of filings and dismissals; (3) whether the debtor only intended to
defeat state court litigation; and (4) whether egregious behavior is present.

This Court may consider the Leavitt factors, or the test outlined in Marsch, when evaluating the Debtor’s relative bad faith when filing his chapter 12 petition.

While this Court expects debtors will file their schedules accurately and completely the first time, amendments are permitted. Debtor has assisted his counsel and his counsel has diligently amended the schedules as errors were discovered. The Court declines to construe these errors as indicia of bad faith.  Similarly, Debtor does not have a history of filings and dismissals. While FSA alleges the petition was filed to avoid a foreclosure by Western, the record does not show that defeating state court litigation was the impetus for filing the chapter 12 petition. Even if it was, avoiding a foreclosure is not synonymous with bad faith. Typically, in cases involving a petition filed in bad faith, a debtor enjoys the benefit of the stay immediately after filing, but does not much else to advance the case, and shirks the burdens imposed by the Code.  In this case, Debtor has proceeded diligently towards confirmation. Although the provisions of §§ 1221 and 1224 contemplate confirming a Chapter 12 plan within 135 days of the petition date, this gold standard is rarely achieved in this District. More often, confirmation occurs at the second or third confirmation hearing in chapter 12 cases, 165-195 days after the petition was filed.  In this case Debtor appears to be striving for a speedy, efficient reorganization.

In re Olson, November 22, 2019, James A. Patten, Molly Considine for Olson, Victoria Francis, Tyson Lies for FSA

2019 Mont. B.R. 378 (November 22, 2019)

Olsson, Chapter 7, Fee Waiver, Attorneys Fees
Case no. 19-60357

Debtor filed a chapter 7 case, without paying the filing fee. On that same date, Debtor filed an application for waiver of the chapter 7 filing fee for individuals who cannot pay the filings fee in full or in installments. Debtor’s income is less than 150% of the income official poverty line for 2019 as defined by the Office of Management and Budget. Despite having “no current income,” Debtor paid Duncan Law Offices (“DLO”) $1,500. The source of this payment was described as “friend.” This Court has difficulty reconciling a debtor’s request for a fee waiver when it appears the attorney representing Debtor has obtained a full fee. While the Court applauds DLO’s willingness to assist those that are insolvent, it has noted that DLO, more so than other law firms requests fee waivers for its clients while at the same time receiving compensation of $1,500. The Court reviews fee waiver applications and notes that the DLO practice is unique. Often when this Court reviews a fee waiver application submitted by a debtor that is represented by counsel, the attorney’s disclosure of compensation will reflect $600 or an otherwise reduced amount. It is much easier for the Court to reconcile a fee waiver request by a debtor represented by counsel when counsel’s fee is $600, not $1,500. If Debtor can pay DLO $1,500, Debtor should be capable of paying a filing fee of $335. Alternatively, if Debtor cannot pay DLO $1,500 and pay a filing fee of $335, DLO should consider accepting $1,165 in compensation, so that its client can pay the $335 filing fee.

IT IS ORDERED that Debtor’s application for waiver of the chapter 7 filing fee for individuals who cannot pay the filing fee in full or in installments is denied; DLO shall consider the Court’s suggestion above to amend its disclosure of compensation to reflect $1,165, so as to permit Debtor to use the $335 for the filing fee; and, if its unwilling to do so or there are circumstances that present it from doing so on or before April 26, 2019, DLO will be afforded the opportunity to explain to the Court why counsel should be entitled to a fee of $1,500, the filing fee waived and the resulting Chapter 7 Trustee’s fee reduced to $0, as a result of the waiver, at a hearing

In re Olsson, April 23, 2019, Gregory W. Duncan for Olsson

2019 Mont. B.R. 160 (April 23, 2019)

Oritz, Chapter 7, Pro se Debtor, Service by Mail, Time, FRBP 9006(f)
Case no. 18-60941

Debtors, who are pro se, filed a “Motion to Vacate Order Granted to Modify Stay”. The Court entered the Order granting Dubuque Bank and Trust Company’s motion to modify stay after the 14-day notice period referenced in the notice attached to Dubuque Bank and Trust Company’s motion to modify stay and as provided under Montana Local Bankruptcy Rule (“Mont. LBR”) 9013-1(f) had expired. However, Fed. R. Civ. P. 9006(f) also applied. These Debtors are pro se and were served with Dubuque Bank and Trust Company’s motion to modify stay by first class mail on January 28, 2019. Pursuant to Rule 9006(f), where there is a right or requirement to act or undertake some proceeding within a prescribed period after being served by mail, three days are added after the prescribed period which would otherwise expire. Since these Debtors were not allowed the extra three days for mailing as provided in Rule 9006(f), entry of the Court’s Order on February 12, 2019, was in error.

In re Ortiz, February 20, 2019, Jason J. Henderson for Dubuque Bank and Trust, Jirza and Oscar Ortiz, pro se

2019 Mont. B.R. 57 (February 20, 2019)

Pedzark, Chapter 13, Motion to Shorten Time Denied
Case no. 19-60715

Creditor Horizon Credit Union filed an Amended Motion to Modify Stay accompanied by a Motion to Shorten Time to Expedite Notice and Hearing (“Motion to Shorten”).The Motion to Shorten Time does not refer to a rule or other authority. Fed. R. Bankr. Pro. 9006(c)(1) provides that the Court may in its discretion reduce the time to respond for cause shown. According to the Motion, absent a shortened notice period and expedited hearing, Creditor will miss its final opportunity to conduct a pending non judicial foreclosure sale scheduled for October 15, 2019.

The sale was initially scheduled for July 17, 2019, but was postponed as permitted by Mont. Code Ann. § 71-1-315(3). Pursuant to Mont. Code Ann. § 71-1-315(3), “all postponements, in the aggregate, may not exceed 120 days.”The Court has reviewed the Amended Motion to Modify Stay, and it alleges that the outstanding debt is $125,666.97 and the fair market value of the collateral is $185,000. Assuming Creditor’s allegations are correct, there is approximately$60,000 in equity in the property subject to the Amended Motion to Modify Stay. Further, although Debtor missed 13 payments as of the petition date, Creditor does not seem to be alleging that there has been a post-petition default. At best it appears the facts in this case are similar to the facts in many chapter 13 cases. The Court cannot discern facts that support a finding of cause and justify reducing the time to respond in this case. Indeed, creditors regularly reschedule non-judicial foreclosure sales as a result of an intervening bankruptcy. This result is to be expected, and absent circumstances that support a finding of cause, Debtor’s time to respond will not be reduced and the hearing will not be held on expedited notice.

In re Pezdark, September 25, 2019, Julie R. Sirrs for Horizon Credit Union, Daniel S. Morgan for Pezdark

2019 Mont. B.R. 343 (September 25, 2019)

Pro Tank Products, Inc., Extension of Time, Deadline
Case no. 17-61181

Debtor requests an extension of time to file an Amended Disclosure Statement and Plan. This case was filed December 12, 2017. As of today, it has been pending for 444 days, and has progressed at a glacial pace.

The Debtor has sought extensions of time or continuances at every critical juncture. The efficient administration of a bankruptcy case necessitates adherence to deadlines. Although this Court has accommodated Debtor’s prior requests, continuing to do so is difficult to justify. While the Court previously acknowledged Debtor’s case had been impacted by unfortunate events, the immediate request suggests this case has not received adequate concentrated effort and focus to move it towards confirmation. Debtor justifies the immediate request with the vague explanation, “due to the press of other matters.” This is an insufficient explanation for the immediate request, given the 444 days the case has already been pending, and the pattern of requested extensions suggests Debtor lacks the requisite ambition to confirm a
plan.

To the extent Debtor explains the immediate delay is attributable to the “insurance claim” and the “adjustment” of it, this explanation is no longer persuasive, given the passage of more than 7 months since the tornado occurred. At the December 12, 2018 hearing, concerns were expressed regarding the pace at which Mr. Marsh and his professionals were proceeding with the insurance claim. Although the government shutdown may have initially prevented Debtor from working with the U.S. Trustee, the government shutdown ended January 25, 2019. More than a month has elapsed since the shutdown ended. Having reviewed the filings in this case, prior hearings and prior representations made to the Court, in conjunction with the Motion, the Motion will be granted reluctantly with the following proviso. Debtor shall use this limited extension to resolve issues or otherwise incorporate language as requested by other parties, finalize the disclosure statement and plan and be prepared to go forward with a confirmation hearing on April 11, 2019. There will be no further extensions or continuances in this case following entry of this Order, and the dates specified below shall be adhered to by all parties.

In re Pro Tank Products, Inc., March 2, 2019, Gary S. Deschenes for Pro Tank, Brett R. Cahoon for UST, Eli J. Patten for Stockman Bank

2019 Mont. B.R. 112 (March 1, 2019)

Pro Tank Products Inc., Chapter 11 Confirmation, Good Faith
Case no. 17-61181

A plan proponent bears the burden of proving by a preponderance of the evidence that all the requirements for confirmation of a chapter 11 plan are met. This requires proof either that the plan meets all requirements of § 1129(a) or, if the only § 1129(a) requirement not satisfied is § 1129(a)(8), that the plan satisfies the cramdown alternative of § 1129(b).

Section 1129(b)(1) provides that if all the requirements of subsection (a) of § 1129 other than (8) are met, a proposed plan must be confirmed if it “does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.” With respect to a class of unsecured creditors, a plan is fair and equitable if:
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section.


Real Builders first asserts that Debtor’s Plan has not been proposed in good faith. A plan is proposed in good faith under § 1129(a)(3) where it fairly achieves a result consistent with the objectives and purposes of the Code. Good faith is to be determined based on the totality of the circumstances in each particular case.

Debtor is liquidating all of its assets. That Stockman Bank possibly has other collateral that it can look to for payment of its debt does not equate to bad faith on the part of this Debtor. The Court finds that the Debtor’s Plan has been proposed in good faith and not by any means forbidden by law in satisfaction of 11 U.S.C. § 1129(a)(3).

Next, because at least one impaired class of creditors has rejected Debtor’s Plan, Debtor is seeking confirmation under 11 U.S.C. § 1129(b). There are two conditions for a judicial cram down under §1129(b). First, all requirements of § 1129(a) must be met, save for the plan's acceptance by each impaired class of claims or interests, see § 1129(a)(8). Secondly, the objection of an impaired creditor class may be overridden only if “the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.”  As to a dissenting class of impaired creditors, such a plan may be found to be "fair  and equitable" only if the allowed value of the claim is to be paid in full or in the alternative, if “the holder of any claim or interest that is junior to the claims of such [impaired unsecured] class will not receive or retain under the plan on account of such junior claim or interest any property.”

First, all requirements of § 1129(a) are met in this case, save for the Plan's acceptance by each impaired class of claims or interests. Therefore, the first condition for a judicial cram down under § 1129(b) is satisfied. Secondly, no holder of a claim against Debtor that is junior to Real Builders’ claim or the Class V creditors, is receiving payment ahead of Real Builders under Debtor’s Plan. Debtor’s Plan contemplates that Real Builders’ claim will be paid pro rata with all other unsecured creditors. Debtor’s Plan does not discriminate unfairly, and it is fair and equitable under § 1129(b)(2)(B)(ii). IT IS THEREFORE ORDERED that the Debtor’s Fifth Amended Plan of Liquidation filed on April 18, 2019, at ECF No. 365, as amended below, is confirmed.

In re Pro Tank Products Inc., May 6. 2019, Gary S. Deschenes for Pro Tank, Laura T. Myers for Real Builders, Eli J. Patten for Stockman Bank, Steven Johnson for Brensdal

2019 Mont. B.R. 167 (May 6, 2019)

Reese, Chapter 13, Attorney’s Fees
Case no. 15-60809

The attorney for the Debtors, filed on December 21, 2018, an Interim Application for Professional Fees and Costs requesting an award of interim professional fees in the sum of $6,322.00 plus costs of $435.07. Interim fee awards are authorized by 11 U.S.C. § 331. This Court liberally allows interim payments under § 331 to alleviate economic hardship in protracted causes and thereby facilitate competent and efficient administration. The relief awarded under § 331 in no way restricts a bankruptcy court’s ability to craft a final award under 11 U.S.C. § 330, because interim awards are always subject to the court’s reexamination and adjustment during the course of a case.

Pierce’s services in this case resulted in confirmation of Debtors’ modified Chapter 13 Plan, most recently by Order entered on May 19, 2019, with the Chapter 13 Trustee’s consent. Pierce billed his attorney time at hourly rates ranging from $250 to $275, and billed for paralegal time at hourly rates of $125 and $135. The confirmed Plan requires plan payments for 60 months, and provides that holders of unsecured claims will share a distribution of at least $20,000. Pierce demonstrated appropriate billing discretion by delegating a substantial portion of the professional services provided to paralegals at a lower billing rate. in light of the above policy authority the Court will award Pierce the interim award of fees in the amount
requested, $6,322.00 plus costs of $435.07. Pierce is authorized to apply the $4,000 received from the Debtors and Chapter 13 Trustee against this award, and the remainder shall be payable as an
administrative expense through the confirmed Plan. Final approval of this and any future award shall await the filing of Pierce’s final fee application.

In re Reese, January 7, 2019, Andrew W. Pierce for Reese

2019 Mont. B.R. 1 (January 7, 2019)

Rickert, Chapter 13, Standing, Negotiable Instrument, Relief from Stay
Case no. 18-60937

SLS filed Proof of Claim No. 5 asserting a secured claim of $59,681.28, including an arrearage of $13,797.11. Debtor listed Wells Fargo Bank, N.A. as having an unimpaired secured claim, secured by Debtor’s homestead. In those plans, Debtor listed the arrearage owing to Wells Fargo Bank, N.A. as $13,797.11, which coincidentally, is the arrearage listed by SLS in its Proof of Claim No. 5. Wells Fargo Bank, N.A. has not filed a claim in this case.  Ollier testified that SunTrust Mortgage was the original creditor lender, but that the Note was transferred to SLS for servicing on about May 23, 2017. Ollier testified that in May of 2017, SLS took possession of the Note. The Note was indorsed in blank. SLS is both the servicer and custodian of the Note.

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.” Debtor confirmed that she signed the Note dated March 26, 2014, and the Deed of Trust. SunTrust Mortgage indorsed the Note in blank. A promissory note qualifies as a negotiable instrument under Montana law. Indorsement” means a signature made on an instrument for the purpose of negotiating the instrument. An indorsement constitutes a “blank indorsement” if the indorsement does not identify the person to whom the instrument is made payable. An instrument indorsed in blank is payable to the bearer of the instrument, and it may be negotiated by transfer of possession of the instrument alone. A person who is the holder of a negotiable instrument endorsed in blank is the person entitled to enforce the instrument. In this case, the Note is indorsed in blank. SLS has possession of the original Note. Ollier testified possession of the Note was transferred to SLS. She explained that she had retrieved the Note from the vault in connection with the hearing. Thus, SLS is the holder of the instrument and is entitled to enforce it.

Pursuant to Mont. Code Ann. § 71-1-305, mortgage law applies to trust indentures. Under Mont. Code Ann. § 71-1-110 the “assignment of a debt secured by mortgage carries with it the security.” The attachments to SLS’s Proof of Claim No. 5 show that various assignments of the Deed of Trust were made in conjunction with the transfer of the Note to SLS.

SLS has established it is the party with the right to enforce the Note. As noted in Veal, Debtor should not care who owns the Note. Debtor’s singular inquiry should be the identity of the party “entitled to enforce the note” without regard to their characterization as servicer, creditor, or owner. For the reasons discussed above the Court concludes that SLS executed and filed its proof of claim in accordance with the Federal Rules of Bankruptcy Procedure. Thus, its proof of claim provided prima facie evidence as to the validity and amount of its claim and the burden was thus on Debtor to supply sufficient evidence “tending to defeat the claim by probative force equal to that of the allegations of the proofs of claim themselves.”

SLS seeks relief from the state under 11 U.S.C. § 362(d), but fails to identify a particular subsection. Debtor has, by SLS’s own admission, equity in her home. Therefore, § 362(d)(2) is not applicable. This case is not a single asset real estate case and thus, § 362(d)(3) is not applicable, and finally, SLS has not argued that Debtor commenced this case as part of scheme to
delay, hinder or defraud SLS. Consequently, § 362(d)(4) is not applicable. This leaves remaining § 362(d)(1), which provides that “the Court shall grant relief rom the stay . . . for cause.”

Although this case had been pending now for more than 6 months, Debtor has not confirmed a plan, and in a more recent filing, the Debtor asserts, “the most accurate and truthful plan submitted under perjury would not show any entity as a Secured Creditor as the alleged debt for both Federal Home Loan Mortgage and Specialized Loan Servicing, LLC does nor exist and is moot. Rather than subject SLS to further delay that results from frivolous pleadings, delay that increases its attorney’s fees and costs and otherwise prejudices it, Debtor’s failure to make post-petition payments coupled with her pattern of presenting legal theories devoid of any merit to the Court, cause exists for granting SLS stay relief. SLS’s Motion to Modify Stay is granted.

In re Rickert, April 29, 2019, Leilani Hope Rickert, pro se, Brian Porter for SLS

2019 Mont. B. R. 144 (April 29, 2019)

Rickert, Chapter 13, Attorney Signature, ECF, Claim Preclusion
Case no. 18-60937

The Court must have a clear indication of the author of a pleading so that it can impose discipline when a pleading violates Fed. R. Bankr. P. 9011. At the hearing, the Court sought clarification from Belue, whether as counsel prepared to prosecute the Objection and Amended Objection, Belue adopted the legal and factual positions included in the filings as if he had signed and submitted the filings himself. In response, he explained that he was not “thoroughly familiar with the objection.” This is not acceptable and at odds with the standard of practice expected of counsel appearing in this Court.

To eliminate any confusion and ensure compliance with applicable rules, any further participation in this case by Belue must be predicated on his disclosure of the scope of his representation and compensation to the Court and Chapter 13 Trustee. Further, any agreement that limits the scope of representation of Debtor by Belue must avoid being so limited as to violate the competent representation requirement of Mont. R. Pro. Conduct 1.1, which provides:

A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.

Irrespective of any limitations on the scope of Belue’s representation of Debtor, Belue must sign every pleading he prepares to avoid misleading the Court. Should Belue intend to file pleadings with the Court, he must comply with Mont. LBR 1001-1(e) by registering and using the Courts electronic case filing system. Future filings by Belue that are submitted conventionally will be stricken from the record for failure to comply with the local rules.

Pursuant to Mont. LBR 3007-1, a “debtor . . . may file an objection to a creditor’s proof of claim in accordance with Fed. R. Bankr. P. 3007, by using Mont. LBF 28.” Although the Objection was filed using Mont. LBF 28, the hearing was scheduled less than 30 days after the filing date. Only 22 days passed between the filing and hearing. The Amended Objection similarly violated Fed. R. Bankr. P. 3007, by only allowing 3 days between the filing and the hearing date.

In addition to being procedurally defective, Debtor’s Amended Objection reflects a fundamental misunderstanding of bankruptcy and the claims allowance process. “A proof of claim executed and filed in accordance with [the Federal Rules of Bankruptcy Procedure] shall constitute prima facie evidence of the validity and amount of the claim.” Santander was granted stay relief on December 11, 2018. That Order is final and non-appealable. Santander amended its Proof of Claim to reflect that it had sold Debtor’s 2014 Toyota RAV4 for $12,300.00 and had incurred auction fees of $278.00, resulting in an unsecured deficiency claim of $5,076.50. Debtor’s Amended Objection does not appear to dispute Santander’s unsecured deficiency claim of $5,076.50. Debtor’s attack on Santander’s secured claim at this late date is barred by claim preclusion or res judicata. Furthermore, the Toyota RAV4 is no longer property of the Estate.

In re Rickert, May 3, 2019, Charles Belue for Rickert

2019 Mont. B.R. 162 (May 3, 2019)

Rickert, Chapter 13, Hybrid Representation
Case no 18-60937-13

Debtor filed a “Motion for Reconsideration - Re: New Court hearing for Objection to Proof of Claim Number One” and an “Objection to Proof of Claim”. First, Debtor’s Motion does not comply with Mont. LBR 9013-1, which requires that motions contain a notice granting parties 14 days to file a response and notice the matter for hearing. Debtor’s Motion is subject to denial for procedural reasons. Second, the Court’s Order ECF No. 162 overruled Debtor’s Objection to Santander Consumer USA’s Proof of Claim No.1 for procedural and substantive reasons. Debtor’s instant Motion addresses not one of the substantive reasons her prior objection was overruled. Finally, Debtor filed this case pro se, and filed the instant Motion and Objection pro se. However, attorney Clarence Belue has filed a notice of limited appearance indicating he is appearing in this case to represent Debtor regarding her objection to Proof of Claim No. 5 filed by Specialized Loan Servicing, LLC and her objection to Proof of Claim No. 1 filed by Santander Consumer USA. Belue is either representing Debtor with regard to Proof of Claim No. 1 or he is not. Section 1654 is written in the disjunctive, i.e., a party may represent himself or be represented by counsel. This section does not confer a right upon a party to do both simultaneously, which is often called ‘hybrid representation.’” As a result of Belue’s representation of Debtor, Debtor is precluded from filing and signing the Motion. Debtor’s instant Motion and Objection are subject to being stricken from the record because they are not signed by her counsel, Belue.

In re Rickert, May 20, 2019, Clarence Belue for Rickert

2019 Mont B.R. 181 (May 20, 2019)

Rickert, Chapter 13, Motion to Recuse Judge
Case no. 18-60937

I declined Debtor’s invitation to voluntarily recuse myself for the reasons discussed below. First, 28 U.S.C. § 144 does not apply to bankruptcy judges. Bankruptcy court judges are subject to recusal only under 28 U.S.C. § 455. Pursuant to 28 U.S.C. § 455(a), a federal judge shall disqualify himself in “any proceeding in which his impartiality might reasonably be questioned” or “[w]here he has a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding.” Subsection (a) is a “catchall” provision covering “interest and relationship” and “bias and prejudice” requiring an objective evaluation. Terms “bias” and “prejudice” as used in recusal statutes connote a favorable or unfavorable disposition or opinion that is somehow wrongful or inappropriate, either because it is undeserved or because it rests upon knowledge that the subject ought not to possess or because it is excessive in degree; “extrajudicial source” doctrine is one application of the pejorativeness requirement of the terms.

Under § 455(b), “He shall also disqualify himself in the following circumstances: (1) Where he has a personal bias or prejudice concerning a party, or personal knowledge or disputed evidentiary facts concerning the proceeding . . . .” The other provisions of §455, (b)(2) through (b)(5), objectively and specifically set forth the “interest” and “relationship” grounds of recusal covered by § 455. The substantive standard under § 455, is “whether a reasonable person with knowledge of all the facts would conclude that the judge’s impartiality might reasonably be questioned.” Importantly, “a judge has as strong a duty to sit when there is no legitimate reason to recuse as he does to recuse when the law and facts require.”

The matters about which Debtor complains occurred in the course of these proceedings and do not show that I relied upon knowledge acquired outside these proceedings or that I have a deep-seated and unequivocal antagonism that would render fair judgment impossible. A reasonable person with knowledge of all the facts would conclude that I have afforded Debtor every possible opportunity to confirm a plan and proceed with this Chapter 13 case, consistent with applicable bankruptcy law. Further, a reasonable person would also conclude that the impetus for the motion to recuse was an adverse ruling, and adverse rulings do not support recusal.

In re Rickert, June 19, 2019, Lialani H. Rickert, pro se

2019 Mont. B.R. 256 (June 19, 2019)

Robbins, Chapter 13, Creditor Fee Application
Case no. 18-60612-13

At the initial hearing, the Court outlined on the record its concerns regarding the Application, specifically, (1) whether the agreement between Applicants and Fifth Third Bank provided for hourly fees or flat rates for specific matters; and, (2) the specific attorneys fees provision in the loan documents that entitles Fifth Third Bank to attorney’s fees. More importantly, the Court could not conclude based solely on the Application that Applicants were entitled to recover attorneys’ fees.
The Ninth Circuit has held:

The language of that section [§ 506(b)] is clear. The creditor is entitled to attorneys' fees if (1) the claim is an allowed secured claim; (2) the creditor is oversecured; (3) the fees are reasonable; and, (4) the fees are provided for under the agreement.

Kord Enters. II v. California Commerce Bank (In re Kord Enters. II), 139 F.3d 684, 687 (9th Cir.1998).

It is the last element, “fees are provided for under the agreement” that was the initial impetus for setting a hearing. The Court anticipated asking counsel where in the loan documents was the fee provision that they were relying on, counsel would identify a provision and that would be the end of the inquiry.  At the hearing, the Court was directed to Paragraph 9(b) of the Deed of Trust. Counsel recited the following as the operative language: If there is a legal proceeding that might significantly affect Lender’s interest in the Property and/or rights under this Security Instrument (such as a proceeding in bankruptcy . . . . .)

In this case, the proof of claim filed by Fifth Third Bank shows that there was no pre-petition arrearage to be paid through the plan, and the Plan treated Fifth Third Bank as an unimpaired secured creditor. Debtor did not object to Fifth Third’s proof of claim, or otherwise challenge in any way Fifth Third’s claim, or more importantly, Fifth Third’s interest in the property securing its claim. If this Court were to construe the language of Paragraph 9(b) as permitting fees under the circumstances of this case, the provision would be tantamount to a $650.00 charge triggered solely by filing bankruptcy, without regard to the substance or facts of the case. This Court will not indulge such a construction.

Finally, even if the underlying loan documents included a provision that would permit fees under the facts in this case, denial would remain appropriate. “Reasonableness embodies a range of human conduct.” Reasonable’ fees under § 506(b) are those necessary to the collection and protection of a creditor's claim.” However, this Court has a corresponding duty to exercise its discretion and disallow fees that are unreasonable. In Applicants’ effort to submit a fee application that set forth hourly rates, instead of fixed fees, Applicants represented that they incurred 1.3 hours of time at $300.00/hour performing the following tasks:
Review post-petition fees incurred and filed proof of claim.
Correspond with client regarding recoverable fees. Prepare and file fee application.
Prepare and file national form notice of post-petition fees.

The total compensation sought for these tasks is $350.00. Thus, as a practical matter, Fifth Third Bank incurred $350.00 in fees trying to recover $300.00 from a borrower in bankruptcy. This strikes the Court as unreasonable, and even if a legal basis existed for permitting the fees, under the circumstances of this case, allowance of the fees sought would be unreasonable. IT IS ORDERED the Application for Professional Fees filed on November 29, 2018, by attorneys for secured creditor Fifth Third Mortgage Company is DENIED.

In re Robbins, March 8, 2019, Mark Hilario for Robbins, Hillary R. McCormak for Fifth Third Bank

2019 Mont. B.R. 130 (March 8, 2019)

Shalom Farms, Chapter 12, Creditors Attorney’s Fees
Case no. 17-60046

Audio File

Notwithstanding this settlement between Debtor and IB, the Court proceeded to recite the history of this case, and a related adversary proceeding, on the record, including the Court’s previous Order which awarded IB a total of $40,000.00 in fees and costs under § 506(b), which the Court frankly stated it had expected would be the last request for fees by IB in this case. The Court recited cases from this Court and other courts which construed §506(b). The Court cited Dalessio in particular for its observation that “[a]n oversecured creditor should not be paid attorney's fees for unnecessary or redundant tasks or for doing the very thing any creditor, unsecured as well as secured, is entitled to do under the Bankruptcy Code.” The Court noted that in almost all applications for fees under § 506(b), the supporting time records begin with something like “Draft Notice of Appearance” and end with “Finalize application for fees.”

The last case the Court cited with approval was In re 900 Corp., 327 B.R. 585(Bankr. N.D. Tex. 2005), which this Court agrees with not only for its statement that the reasonableness requirement of § 506(b) is to ensure that an oversecured creditor is not given a “blank check” to incur attorneys’ fees, but also that § 506(b) applies only through the date of confirmation and “cannot provide the basis for any recovery of fees and expenses first incurred post-confirmation.” After the recess, IB’s counsel announced that IB and the Debtor agreed to reduce their stipulated amount of fees and costs for IB under §506(b). The Court approved the new agreement and awarded IB $5,686.50 at the hearing.

In re Shalom Farms, Gary S. Deschenes for Shalom Farms, Martin S. Smith for Independence Bank

2019 Mont B.R. 202 (May 28, 2019)

Shoot the Moon, LLC., (Myers), Withdrawal of Claim
Case no 15-60979

Rule 3006 allows for the withdrawal of a creditor’s claim, subsequent to the filing of an adversary proceeding against such creditor, upon order of the Court. Further, “[t]he order of the court shall contain such terms and conditions as the court deems proper.” Conner’s decision to seek such an order allowing withdrawal of his claim is motivated by the impact of that claim on the adversary proceeding. The general considerations to be taken into account when addressing a requested withdrawal of claim are those applicable to analyzing a voluntary dismissal under Federal Rule of Civil Procedure 41(a). Those Rule 41(a) standards require the Court to decide whether allowing a voluntary dismissal results in the defendant suffering some actual “legal prejudice.” The burden of showing such legal prejudice is on the objecting party.

Given Trustee’s newly asserted lack of opposition to granting the motion for withdrawal of the claim, the Court is not asked to directly rule on the existence of “legal prejudice” as a prerequisite to granting the motion. However, Trustee’s request that the Court make such withdrawal “subject to this Court’s retention of jurisdiction” certainly raises similar if not equivalent issues. The underlying motion to withdraw the reference has not yet been ruled upon. However, the prospect that trial of the adversary proceeding may be before the District Court, or that it may be conducted as a jury trial, does not amount to “legal prejudice.” The Court will grant Conner’s now-unopposed motion to withdraw his claim. The Court will impose no conditions on that withdrawal. Given that result, the time has come to address the motion to withdraw reference filed in Adv. No. 17-00064. Under Mont. LBR 5011-1(b) and (c), that motion must be assigned to and decided by a U. S. District Judge.

In re Shoot the Moon, January 9, 2009, David B. Cotner for Trustee, Cory R Laird for Conner

2019 Mont. B.R. 6 (January 9, 2019)

Somerfeld and Sons Land and Livestock LLC, Chapter 12, Extension of Time
Case no. 18-61148

Pursuant to 11 U.S.C. § 1221, a Chapter 12 “debtor shall file a plan not later than 90 days after the order for relief[.]” The court “may extend such period if the need for an extension is attributable to circumstances for which the debtor should not justly be held accountable. And, except for cause, the hearing [on confirmation of the Plan] shall be concluded not later than 45 days after the filing of the plan. 11 U.S.C. § 1224. The plain language of these statutes demonstrates that absent circumstances for which a debtor should not justly be held accountable as to § 1221 and good cause under § 1224, this combined 135-day period should not be extended. This statutory framework and the time periods defined at §§ 1221 and 1224 are not aspirational. There are consequences for failing to confirm a plan within this 135-day period. Absent confirmation, cause to dismiss a chapter 12 case might exist.

Debtors filed motions for extension of time to file their Chapter 12 plan. Along with the Extension Motions, Debtors also filed motions to consolidate the above cases for administrative purposes. If the Court were to grant the relief requested, both as to the extensions and consolidation, confirmation would not occur within the 135-days set forth in the Bankruptcy Code. The Debtors offer no explanation as to why the motions to consolidate were not filed sooner, so as to enable Debtors to file their plans within the 90-day period provided under § 1221. The facts justifying consolidation and the corresponding request for an extension have been known to Debtors since heir bankruptcy petitions were filed.

Although on the face of the Extension Motions, it appears those Motions are subject to being denied because Debtors have not alleged any “facts” for which they would not be justly held accountable, the Court notes that the Chapter 12 Trustee has consented to the motion. Going forward, the Trustee’s consent will not be accepted as a substitute for factual allegations in pleadings that show the basis for a requested extension under § 1221 is attributable to circumstances for which the debtor should not be held justly accountable. IT IS THEREFORE ORDERED that the Debtors’ Motions for Extension of Time to File Chapter 12 Plans are granted.

In re Somerfeld and Sons Land and Livestock LLC, March 5, 2019, Gary S. Deschenes, Katherine A Sharp for Somerfeld

2019 Mont. B.R. 117 (March 5, 2019)

Takata, Compromise, Defenses
Case no. 17-60969

The Trustee filed a Motion to Approve Compromise and Settlement pursuant to Fed. R. Bankr. P. 9019(a) and Notice. Trustee seeks approval of a settlement agreement between the Estate and CitiGroup, Inc.. The Complaint alleges that payments totaling $3,000 were made by the Debtor to Citi within 90 days of the petition date and those payments are preferences subject to being set aside pursuant to 11 U.S.C. § 547(b). Despite demand, Citi failed and refused to respond to the Trustee. Citi’s failure to respond forced the Trustee to file the adversary suit. The Trustee recites the 4 A & C Factors in the Motion, and notes that the first and fourth factors are at issue in this case. Citi has asserted affirmative defenses that allegedly create legal and factual issues. The Trustee reasons that litigation will delay any recovery and erode funds available to distribute to creditors. This presumes that Citi’s alleged defenses have merit. Any defenses Citi asserts are subject to Fed. R. Bankr. P. 9011. Debtor’s Schedules disclose payments that Debtor made to Citi within 90 days of filing bankruptcy. These issues seem straightforward to the Court and capable of quick resolution. The Court will not permit Citi to use the specter of undisclosed defenses and the threat of litigation to diminish the Estate’s recovery to $600, if in fact the Estate is entitled to recover $3,000. If Citi has defenses available to it that merit approval of this settlement for a measly $600, Citi shall retain local counsel and file an explanation of those defenses with Court as a supplement to the Motion, so that the Court may fully consider the A & C factors and evaluate the propriety of approving this Settlement.

In re Takata, November 18, 2019, Joseph V. Womack, Trustee

2019 Mont. B.R. 376 (November 18, 2019)

Varner, Chapter 13, Stipulation, Signature
Case no. 19-60852

The Court finds that the electronic signatures on the Stipulation do not comply with Mont. LBR 5005-2(c), which reads: Signature Compliance. The authorized CM/ECF user log-in and password required to submit documents to CM/ECF serve as the user's signature on all electronic documents filed with the Court. The log-in and password also serve as a signature for purposes of Fed. R. Bankr. P. 9011, and for any other purpose for which a signature is required in connection with proceedings before the Court. Filing by electronic means requires that the signature of any persons, individually or on behalf of an entity, shall conform to either a cursive signature on the signature line or a conformed signature using a /s/ and then the typewritten name. Examples follow of acceptable signatures: "/s/(name of person filing document)" (typed name of person); or /s/ Joseph P. Smith Joseph P. Smith

A signature, whether original, photocopied, scanned or conformed, shall constitute the person's verification that such person has read the contents of the pleading and certification that Fed. R. Bankr. P. 9011(b) has been satisfied.

In particular, the signatures are not in cursive nor are they preceded by /s/.

In re Varner, September 9, 2019, Stuart Whitehair for Varner

2019 Mont. B.R. 290 (September 9, 2019)

Wells Fargo v. Bowler, United States District Court, (Christiansen), Judicial Foreclosure
Case no. CV-18-49-DLC

Wells Fargo conclusively asserts that it is entitled to judgment on the Note and a decree of foreclosure on the Deed of Trust "as a matter of law" without providing any law. And, for his part, Bowler simply concedes that Wells Fargo has "dutifully recited the undisputed facts that are relevant to obtaining an order of judicial foreclosure" but asserts that there are reasons the Court should refrain from entering summary judgment at this time. Although Wells Fargo failed to provide any law establishing that it is entitled to judgment as a matter of law, it has provided undisputed facts that entitle it to that relief.

The Deed of Trust executed in this case has the effect of "transferring the title of the borrower to a private trustee to be held by the trustee to secure the performance of the obligation by the borrower." This trust indenture is permitted by Montana's Small Tract Financing Act ("the Financing Act") in lieu of a traditional mortgage. Consistent with the Financing Act, the Deed of Trust in this case "grants and conveys to Trustee, in trust, with power of sale, the property" with the legal description provided above. "Such instruments have the effect of transferring the title of the borrower to a private trustee to be held by the trustee to secure the performance of the obligation by the borrower."

A trust indenture may be foreclosed upon in one of two ways: "by advertisement and sale" or, "at the option of the beneficiary, by judicial procedure as provided by law for the foreclosure of mortgages on real property." When the foreclosure is completed via advertisement and sale, the Financing Act expressly prohibits the entry of a deficiency judgment. On the other hand, the judicial foreclosure of a mortgage is typically attended by the debtor's rights of possession and redemption for the year following the foreclosure and can also result in a deficiency judgment. But, in the context of a judicial foreclosure on occupied, singlefamily residential property pursued under the authorization of the Financing Act, the Montana Supreme Court has determined that the typical legal consequences of a judicial foreclosure-the lender's entitlement to a deficiency judgment and the borrower's entitlements to a one-year period of redemption and possession -do not apply.

To make a prima facie case for foreclosure, Wells Fargo is obligated to prove the following three elements: (1) Bowler's debt; (2) nonpayment of the debt; and (3) Wells Fargo's present ownership of the debt. It is undisputed that Bowler borrowed money as reflected in the Note and Deed of Trust.

Bowler raises two disputes as to the amount of the debt. First, he disputes the day to which interest is claimed to have been calculated to. The Court finds that this is an error in transcription on the part of Wells Fargo, but that there is not a material dispute as to when interest was calculated through. Accordingly, the Court will calculate any additional interest as of February 1, 2019. Based on the foregoing, the Court finds that there is no dispute of material fact regarding Bowler's debt. As to the remaining two elements of a prima facie case for foreclosure, Bowler has stipulated to Wells Fargo's present ownership of the debt and does not dispute that he has failed to make payments owed under the
Note.

Bowler alleges that Wells Fargo will receive a windfall through foreclosure because of the amount of money Bowler has put into the property. This argument also lacks merit. The Court, in its judgment, is responsible for applying "the proceeds of the sale" in accordance with the law. § 71- 1- 222(1). The law does not entitle Wells Fargo to any surplus from the foreclosure sale. See § 71-1-316( 1 )(b) ( describing procedure for dispersion of surplus funds after foreclosure sale).

When a party is opposing requested relief, it is incumbent on the opposing party to provide the legal basis upon which they believe the relief should be denied. In this case, neither party met its respective burden. The Court has expended significantly more time than necessary for resolution of this matter. In the future, should this deficiency be repeated, the requested relief will be denied without analysis.

Wells Fargo v. Bowler, May 14, 2019, Brianne C McClafferty and W. Scott Mitchell for Wells Fargo, Colleen M Dowdall and Jon R. Binney for Bowler

2019 Mont. B.R. 183 (May 14, 2019)

Western Capital Partners LLC v. Sandoval, (Myers), Evidence
Adversary no. 09-60452

In light of the volume and detail of the objections to the depositions and transcript under consideration here, the Court begins by addressing the evidentiary rules and procedures applied to determine the admissibility of each.

A. Legal Standards
1. Relevance
A court’s decision to admit or exclude evidence from the record is necessarily informed by its duty to construe the rules of evidence so as to “administer every proceeding fairly [and] eliminate unjustifiable expense and delay . . . to the end of ascertaining the truth and securing a just determination.” Fed. R. Evid. 102. “Evidence is relevant if . . . it has any tendency to make a fact more or less probable than it would be without the evidence [and] the fact is of consequence in determining the action.” Fed. R. Evid. 401. Courts have discretion to exclude even relevant evidence if its probative value is substantially
outweighed by a danger of, among other things, unfair prejudice, confusion, undue delay, or waste of time. Fed. R. Evid. 403. Federal Rule of Evidence 403 assumes that a trial judge is able to discern and weigh the improper Accordingly, the Court will weigh and determine the relevance of all evidence, excluding improper inferences based on irrelevant evidence, in issuing its final decision. As such, the relevance objections registered by each party in regard to the subject depositions will be overruled, much as their relevance objections were at trial.

2. Foundation

Evidence offered by a party must have a proper foundation. Fed. R. Evid. 602. Non-expert witnesses may testify to matters only after “evidence [has been] introduced sufficient to support a finding that the witness has personal knowledge of the matter.” Id. Personal knowledge is “knowledge produced by the direct involvement of the senses.” The Court has applied these rules in deciding whether to sustain or overrule each objection based on a lack of foundation.

3. Hearsay
Hearsay is an out of court statement that a party offers to prove the truth of the matter asserted in the statement. Fed. R. Evid. 801(c). Hearsay statements are inadmissible unless an exception based on federal statute, the Federal Rules of Evidence, or a Supreme Court rule, provides otherwise. Fed. R. Evid. 802. Federal Rules of Evidence 803 and 804 provide a list of exceptions to the hearsay rule. The Court has applied these hearsay rules, as well as all other applicable Federal Rules of Evidence, in determining whether to sustain or overrule each hearsay objection.

4. Depositions
The use of depositions is governed by Civil Rule 32, which is incorporated by Rule 7032. The deposition of a witness who is unavailable for trial because the witness is more than 100 miles from the trial location may be used for any purpose. Civil Rule 32(a)(4)(B). “A deposition lawfully taken and, if required, filed in any previous federal or state court action may be used in a later action involving the same subject matter between the same parties, or their representatives or successors in interest, to the same extent as if taken in a later action.” Civil Rule 32(a)(8). If a party only offers part of a deposition into evidence, an adverse party may request the introduction of other parts of the deposition as fairness requires. Civil Rule 32(a)(6). Civil Rule 32(a) is an independent exception to the hearsay rule.

5. Prior testimony
Federal Rule of Evidence 804(b)(1) provides that former trial testimony is not excluded by the rule against hearsay if the declarant is unavailable as a witness and where the prior trial testimony is offered against a party who had “an opportunity and similar motive to develop it by direct, cross-, or redirect examination.” As explained by the Ninth Circuit, the “similar motive” requirement does not mean the party must have had identical motive. Rather, the “similar motive” analysis is “‘inherently a factual inquiry’ based on ‘the similarity of the underlying issues and on the content of the . . . questioning.’”

It is uncontested that Blixseth was “unavailable as a witness” in this matter and that WCP had an opportunity to examine Blixseth at the time of her prior testimony. The question is whether, at that time, WCP had “similar motive” to develop Blixseth’s testimony. Having reviewed the records in this adversary case and the Prior Case, and given the differences between the two, the Court determines WCP did not have similar motive to develop Blixseth’s testimony in the Prior Case. Accordingly, admission of Blixseth’s prior testimony, which is hearsay, is denied.

CONCLUSION
The designated portions of Annex’s and Rhodes’ depositions to which no objections were raised are admitted. Rulings on each specific objection to the designated portions of those depositions are provided in Exhibits 1 and 2 of this Decision. Blixseth’s prior testimony is not admitted.

Western Capital Partners LLC v. Sandoval. Robert W Hatch, Ron Warren for Western Capital Partners, Curt Hineline and James Morrison for Sandoval

2019 Mont. B.R. 77 (February 27, 2019)

Western Capital Partners LLC v. Sandoval, (Myers), Letter Agreement, Breach of Contract, Divisibility
Adversary no 09-00105

The parties expressly agreed California law would apply to any issues or disputes regarding the Letter Agreement. Under California law, a cause of action for breach of contract is comprised of the following elements: (1) the contract, (2) the plaintiff’s performance or excuse for nonperformance, (3) the defendant’s breach, and (4) the resulting damages to the plaintiff. Under the Letter Agreement, Sandoval guaranteed to Blixseth that the first $5 million of xPatterns obligation would be paid when due, “no matter what may happen.” This was a “continuing guarantee” until the $5 million was paid in full. However, Blixseth no longer has any rights under the Letter Agreement since it (along with other collateral) was foreclosed upon by WCP.

Generally speaking, under California law only a party to the contract may sue for its breach. That rule, however, has exceptions. One exception is that an assignee may sue for breach of contract. WCP foreclosed its lien against that collateral and became the holder, and effectively the assignee, of the As the assignee of Blixseth’s rights under the Letter Agreement, WCP has standing pursuant to California law to sue on the alleged breach of the Letter Agreement’s terms.

Whether multiple obligations in an agreement are divisible or severable—cases on the issue tend to use those terms interchangeably—is a question of state law. In this case, under California law, the intentions of the parties control whether parts of a contract or lease, or part performance thereunder, can be separated and treated as independent legal obligations. If the contracting parties intend an entire contract, not a severable one, the courts will not find it divisible. Even when a contract includes a severability clause, the “contract is not divisible where there is a showing that it was the intention of the parties to treat [their] agreement as an entire contract, and where it appears that their engagements would not have been entered into except upon the clear understanding that the full object of the contract should be performed.”

Having considered all the trial evidence, especially the plain language of the Letter Agreement and the uncontroverted testimony of Sandoval, the Court concludes the Letter Agreement must be construed as an entire contract, rather than a divisible one.

The question, under California law, is whether WCP has met its burden of proving the “plaintiff’s performance [of the ontract] or excuse for nonperformance.” On the record presented, WCP had not met its burden of affirmatively proving Blixseth’s performance or an excuse for nonperformance of her obligations under the Letter Agreement. Thus, WCP has failed to meet its burden of proving its claim against xPatterns and Sandoval for breach of contract. This, as noted, is a condition precedent to its ability to enforce the Guarantee. Upon the foregoing, the Court concludes that relief on the Third-party Complaint is not warranted under the facts and applicable law, and that the Third party Complaint will be dismissed.

Western Capital Partners LLC v. Sandoval. Robert W Hatch, Ron Warren for Western Capital Partners, Curt Hineline and James Morrison for Sandoval

2019 Mont. B.R. 88 (February 27, 2019)

Western Capital Partners v. Sandoval, Ninth Circuit Bankruptcy Appellate Panel,(Unpublished),(Faris, Brand, Hercher), Summary Judgment
Case no. 09-60452, Adversary no. 09-00105

(Affirming Western Capital Partners v. Sandoval, 2019 Mont. B.R. 88 (February 27, 2019))

WCP argues that the bankruptcy court erred in finding that it could not enforce the Guaranty because Ms. Blixseth breached the Letter Agreement. We disagree. “The elements of a breach of contract action under California law are: (1) the existence of a contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) damages to plaintiff as a result of the breach.”

The bankruptcy court correctly determined that Ms. Blixseth’s breaches of the nondisclosure and nondisparagement provisions and the Performance Fee obligation were material.  “Normally the question of whether a breach of an obligation is a material breach, so as to excuse performance by the other party, is a question of fact.” The bankruptcy court properly accepted extrinsic evidence about the materiality of the breach. WCP argues that there is a legally significant difference between a breach of a material term of a contract, on the one hand, and a material breach of the contract, on the other. This is sophistry. WCP relies on Superior Motels, but that case merely stands for the well-accepted proposition that not every breach of a contract is material.

The language of the agreement and the intent of the parties determine whether the provisions are dependent or independent. The bankruptcy court properly considered the language of the Letter Agreement and Mr. Sandoval’s testimony and found that the parties did not intend that Ms. Blixseth’s obligations were independent from Mr. Sandoval’s Guaranty. Nothing in the language of the Letter Agreement indicates that the parties intended that it was actually two or more separate agreements. The court also relied on Mr. Sandoval’s testimony. This was not error; extrinsic evidence is admissible to determine whether the parties intended the agreement to contain dependent or independent promises. Therefore, the bankruptcy court did not err in holding that the Letter Agreement was a unified contract and that Mr. Sandoval’s obligations under the Guaranty were dependent on Ms. Blixseth’s performance of the cited provisions of the Letter Agreement.

The bankruptcy court correctly held that the phrase “no matter what may happen” had “two arguable interpretations.” The court employed a correct analytical process to decide which interpretation was correct. The bankruptcy court properly considered the nature of a guaranty. As the court noted, the Guaranty made Mr. Sandoval liable for a portion of xPatterns’ debt. This implies that Mr. Sandoval was liable under the Guaranty only to the extent that xPatterns was liable to Ms. Blixseth. xPattern’s debt, and Mr. Sandoval’s Guaranty, became unenforceable when Ms. Blixseth committed material breaches of the Letter Agreement. The bankruptcy court did not err in entering judgment in Mr. Sandoval’s favor on WCP’s third-party complaint.

Western Capital Partners v. Sandoval, December 16, 2019, Robert W Hatch II, for Western Capital, Curt Hineline for Sandoval

2019 Mont. B.R. 410 (December 16, 2019)

 

 

 

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