20-4917889 Michael E. Collins v. Internal Revenue Serv. (In re Opus Med. Mgmt., LLC), Case No. 14-22960-K
| Decision Date | 04 October 2017 |
| Docket Number | Adv. Proc. No. 16-00075,Case No. 14-22960-K |
| Parties | In re Opus Medical Management, LLC, Debtor. Tax ID/EIN: 20-4917889 Michael E. Collins, Esquire, Chapter 7 Trustee of the estate of the above-named debtor, Plaintiff, v. Internal Revenue Service, Defendant and Third-Party Plaintiff, v. Derek E. Denman and Marnie Denman, Third-Party Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Tennessee |
The following is SO ORDERED:
Chapter 7 (Originally filed under Chapter 11)
This proceeding under 28 U.S.C. § 157(b)(2)(A) arises out of the United States of America's "Motion for Sanctions for Failure [of third-party defendant, Derek E. Denman] to Comply With the Court's Order Compelling Discovery" ("Motion") filed on July 27, 2017, by Sean P. O'Donnell, Esquire, and Kieran O. Carter, Esquire, on behalf of the defendant/third-party plaintiff, the Internal Revenue Service ("IRS"). The United States brings this Motion in the place and stead of its federal agency, the IRS. Christian R. Johnson, Esquire, attorney for third-party defendants, Derek E. Denman ("Mr. Denman") and Marnie Denman ("Mrs. Denman") (collectively, the "Denmans"), filed a written objection/response thereto. All the immediate parties in interest participated at the hearing on the Motion that was held in open court on August 15, 2017, where the parties' attorneys provided the court with oral statements on behalf and in support of their respective clients. At the conclusion of the hearing, the court took the Motion under submission and requested post-trial briefs be filed by the attorneys for each party.
The ultimate question for judicial determination here is whether this court should impose sanctions (e.g., rendering a default judgment) pursuant to FED. R. BANKR. P. 7037 and FED. R. CIV. P. 37(b)(2)(A)(vi) on a party (Mr. Denman), who assertedly failed to sufficiently comply with the court's prior Order compelling Mr. Denman to respond to the discovery requests of the United States by a date certain.
As noted earlier, this is a core proceeding under 28 U.S.C. § 157(b)(2)(A). It is expressly observed that no objection has been filed by a party to this court having the statutory and/or constitutional authority to hear and determine this particular Motion subject to the traditional statutory appellate provisions and procedures under 28 U.S.C. § 158(a) and Part VIII of the Federal Rules of Bankruptcy Procedure. The following shall constitute the court's findings of fact and conclusions of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure.
The pre- and postpetition background facts and circumstances and procedural history are not in substantial dispute and may be summarized, in relevant part, as follows.1
On March 20, 2014 (the "Petition Date"), the above-named debtor, Opus Medical Management, LLC ("Opus"), and related entities, Reggie White Cardio-Pulmonary Rehabilitation Center, LLC ("Reggie White Cardio-Pulmonary Rehab"), Sleep Diagnostics, LLC ("Sleep Diagnostics"), and O2 Medical, LLC ("O2 Med") (collectively, "the Debtors"), each filed a voluntary Chapter 11 case in this Judicial District. At that time, Opus was the sole member of the Debtors: Reggie White Cardio-Pulmonary Rehab, Sleep Diagnostics, and O2 Med. Mr. Denman was the managing member, shareholder, and president of the Debtors from August 21, 2012, to February 20, 2014. Third-party defendant, Mrs. Denman, is the wife of Mr. Denman.
On October 16, 2014, the United States Trustee for Region 8 ("United States Trustee") filed a "Motion to Appoint Chapter 11 Trustee" under 11 U.S.C. § 1104(a). (Docket No. 74.) An "Objection to United States Trustee's Motion to Appoint Chapter 11 Trustee" was filed on October 24, 2014, by Steven N. Douglass, Esquire, acting as counsel for Opus. (Docket No. 82.) The court subsequently granted the United States Trustee's § 1104(a) motion on October 29, 2014. (Docket No. 88.) Michael E. Collins, Esquire ("Mr. Collins") was appointed by the United States Trustee for Region 8 as Chapter 11 Trustee of the estate of the Debtors on October 30, 2014. (Docket No. 94.)
Thereafter, on November 11, 2014, the Chapter 11 Trustee in the Opus case filed a "Motion to Substantively Consolidate the Debtors' Bankruptcy Cases." (Docket No. 108); see FED. R. BANKR. P. 1015(b) and its accompanying Advisory Committee Note (1983). On December 17, 2014, after notice and hearing, this court entered an "Order Granting Chapter 11 Trustee's Motion to Substantively Consolidate the Debtors' Bankruptcy Cases." (Docket No. 120.) The substantive consolidation of such cases essentially resulted in an implied unitary administration of the various § 541(a) estates of the Debtors. It is noted that a substantive consolidation, as distinguished from a joint administration, is neither authorized nor prohibited by FED. R. BANKR. P. 1015(b). See, for example, Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215 (1941).
On June 12, 2014, prior to the appointment of the Chapter 11 Trustee, the United States Trustee filed a "Motion to Dismiss or, in the Alternative, Convert Chapter 11 Case to Case Under Chapter 7." (Docket No. 41); see 11 U.S.C. § 1112(b). After several continuances, the final hearing on the United States Trustee's § 1112(b) motion to convert the Chapter 11 case to a case under Chapter 7 was held on February 20, 2015. An "Order Converting Case to a Case Under Chapter 7" was entered by the court on February 25, 2015. (Docket No. 140.) On February 26, 2015, Mr. Collins was appointed by the United States Trustee as the Chapter 7 Trustee of the consolidated estates of the Debtors and currently serves in such capacity. (Docket No. 142.) On March 16, 2015, Mr. Collins filed a § 327(a) "Application to Employ Manier & Harod, P.C. as Attorney for the Chapter 7 Trustee." (Docket No. 149.) The court granted Mr. Collins' application on March 17, 2015, and Robert W. Miller, Esquire, of Manier & Harod, P.C. was appointed by the court as counsel for Mr. Collins in his capacity as Chapter 7 Trustee. (Docket No. 151.)
Almost one year later, on March 16, 2016, the Chapter 7 Trustee ("Plaintiff"), through counsel, filed a Part VII adversary proceeding ("Complaint") against the defendant, Internal Revenue Service ("IRS" or "Third-Party Plaintiff"), seeking to avoid certain prepetition transfers and recover property under 11 U.S.C. §§ 502, 544, 547, 548, 549, 550, and 551, (Adv. Proc. No. 16-00075, Docket No. 1), as core proceedings under 28 U.S.C. § 157(b)(2)(A), (B), (F), (H), (K), and (O). The Complaint alleged, inter alia, that prior to the Petition Date, the consolidated Debtors paid many of Mr. and Mrs. Denman's personal expenses and liabilities, including liabilities owed to the Defendant/IRS. The Complaint further alleged that neither Mr. Denman nor Mrs. Denman ever reimbursed the Debtors for the prepetition payments made for and on behalf of their benefit. (Id.) The Complaint also stated that the consolidated Debtor was insolvent on a cash flow and/or balance sheet basis on the date(s) of the payments, causing the payments to be avoidable and recoverable transfers under the Bankruptcy Code. (Id. at ¶ 13); see, for example, 11 U.S.C. §§ 544(b), 547, 548, and 549. On April 21, 2016, the United States, acting for and on behalf of the Defendant, IRS, filed an "Answer" to the Complaint. (AP Docket No. 6.)
Subsequently, on May 4, 2016, the United States filed a "Third-Party Complaint" against Mr. Denman and Mrs. Denman to implead them into the above-captioned adversary proceeding pursuant to FED. R. BANKR. P. 7014 and FED. R. CIV. P. 14(a)(1). (AP Docket No. 8.) The Third-Party Complaint stated, inter alia, that Mr. Denman was the president of the Debtors at the time of the asserted fraudulent transfers (payment of joint personal tax liabilities of Mr. and Mrs. Denman) alleged by the Chapter 7 Trustee in the original adversary proceeding. (Id. at ¶¶ 6-7.) In addition, the United States alleged that due to Mr. Denman's title in Opus, LLC case as the Tax Matters Member, he was responsible for ensuring that Opus properly and timely filed and paid all tax liabilities in accordance with the Internal Revenue Service laws. (Id. at ¶ 10.) Further, the United States argued that Mr. and Mrs. Denmans would be unjustly enriched to the extent the Chapter 7 Trustee recovers any funds as fraudulent or preferential transfers from the government. (Id. at ¶ 12.) An "Answer" to the Third-Party Complaint was filed by Bo Luxman, Esquire, prior counsel for the Denmans, on July 19, 2016. (AP Docket No. 20.) On September 14, 2016, the United States Trustee filed a "Report of the Parties' Planning Meeting Under Federal Rule of Bankruptcy Procedure 7026(f)," which was signed by all parties, discussing discovery deadlines and trial preparation deadlines. (AP Docket No. 21.)
Thereafter, the United States sent Mr. Denman, after the Chapter 11 cases were converted to Chapter 7, written discovery requests on January 31, 2017. (See AP Docket No. 22-4, Ex. 1, Email Sending Discovery Requests to Denman; see also AP Docket No. 22-5, Ex. 1A, United States' First Set of Interrogatories.) No discovery responses were sent by Mr. Denman. On March 13, 2017, after having received no response and multiple attempts to confer with Mr. Denman's counsel, the United States filed a "Motion to Compel" discovery responses to its interrogatories and requests for production. (AP Docket No. 22.) An "Order" granting the United States' motion to compel was entered by the court on April 10, 2017, giving Mr. Denman until April 18, 2017, at 5:00...
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