Bernhard v. Kull (In re Bernhard)
| Decision Date | 22 February 2022 |
| Docket Number | Bky. 11-15799 ELF,Adv. 19-167 |
| Parties | In re GARY BERNHARD Debtor v. BRIAN KULL THERESA KULL PAUL BUCCO, et al. Defendants GARY BERNHARD Plaintiff |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania |
In this adversary proceeding, Gary Bernhard ("the Debtor") seeks a determination that Defendants Brian Kull ("Mr Kull") and his wife, Theresa B. Kull (collectively "the Kulls"), along with the Kulls' attorneys ("the Bucco Defendants"), [1] are in contempt of the discharge order ("Discharge Order") entered in this chapter 7 bankruptcy case on December 15, 2011. As remedies, the Debtor seeks the entry of an order requiring the Defendants to cease all collection activity, and attorney's fees.[2] There is no question that the Defendants attempted to collect a prepetition debt after the entry of the discharge. But the back story is far more complicated because the Debtor failed to list the Kulls as creditors in his bankruptcy schedules and made numerous payments to the Kulls on the debt after the entry of his discharge order.
The Defendants also maintain that this underlying prepetition debt was the product of the Debtor's fraud. Consequently, based on the discharge exception found in 11 U.S.C. §523(a)(3)(B), the Defendants seek to justify their post-discharge collection actions on the ground that the discharge order entered in the Debtor's bankruptcy case did not discharge the subject debt.
The Debtor disputes the applicability of §523(a)(3). He asserts that even though the Kulls were not scheduled as creditors and received no notice of the filing from the court, he told Mr. Kull of his bankruptcy filing in time for the Kulls to file a nondischargeability claim and therefore, §523(a)(3) is inapplicable.
Finally, the Defendants argue that even if their conduct violated the Debtor's bankruptcy discharge order, they lacked the necessary scienter to hold them in contempt under the standard stated by the U.S. Supreme Court in Taggart v. Lorenzen, 139 S.Ct. 1795, 1801 (2019).
For the reasons explained below, I conclude the following:
The Debtor filed a chapter 7 bankruptcy case on July 24, 2011. He received his bankruptcy discharge on December 15, 2011. The court closed his case the same day.
On April 27, 2016, on the Debtor's motion, the court reopened the case to permit the Debtor to seek to avoid a judicial lien pursuant to 11 U.S.C. §522(f). It appears that court did not re-close the case after the entry of the lien avoidance order.[3]
On August 23, 2019, the Debtor commenced this adversary proceeding by filing an adversary complaint. The Kulls filed an answer to the complaint on September 25, 2019, and, with leave of court (over the Debtor's objection), an amended answer on December 23, 2019. The Bucco Defendants filed an answer to the complaint on October 10, 2019, and an amended answer on October 30, 2019.
On February 19, 2020, the Debtor filed a motion for summary judgment. All Defendants contested the motion. The last summary judgment submission was filed on April 5, 2020. On June 10, 2020, by oral bench opinion and accompanying order, I denied the Debtor's motion for summary judgment.
On August 20, 2020, the court held and concluded the trial. The parties presented testimony from three (3) witnesses: the Debtor, Mr. Kull, and Defendant Paul Bucco. The parties offered thirty-three (33) exhibits into evidence.
After the conclusion of the trial, the Debtor and the Bucco Defendants filed proposed findings of fact, conclusions of law, memoranda, and reply memoranda, the last of which was filed on November 20, 2020.[4]
1. From 1988 to 2011, the Debtor operated a company known as GB Excavating ("GBE"), which provided real property site development services as a subcontractor. (Notes of Testimony at 94-95, 156) ("N.T.").
2. In June 2005, GBE, with the aid of an equipment broker, Metrix Financial Group ("Metrix"), entered into a Sale/Lease Back Agreement (the "Blackstone Lease") with Blackstone Equipment Financing, L.P. ("Blackstone") whereby GBE sold to and leased back certain equipment from Blackstone. (Joint Pretrial Statement ¶ 8) ("JPS").
3. The purpose of the transaction was to pay off existing debt on certain pieces of equipment and provide GBE with additional capital. (N.T. at 157).
4. The Blackstone Lease was for a term of five (5) years, requiring GBE to make monthly payments of $5, 794.23. (Pl.'s Ex. 29).
5. The Debtor and Susan Bernhard personally guaranteed the GBE payment obligation under the Blackstone Lease. (Pl.'s Ex. 29).
6. Fourteen (14) pieces of equipment were the subject of the Blackstone Lease, including two (2) items referred to as a 1995 Bomag roller ("the Roller") and a Caterpillar crawler loader ("the CAT Crawler"). (Pl.'s Ex. 29, Schedule A).
7. The Blackstone Lease purports to be a "true lease and not a lease intended as security," but it also provided for Blackstone to file a UCC-1 security agreement in the event the lease was determined to serve as security. (Pl.'s Ex. 29).
8. No provision of the Blackstone Lease provided GBE with the right to repurchase the equipment at the end of the lease term. (Id.).
9. Nevertheless, at the time of the transaction, the Debtor believed that GBE continued to own the equipment, with the equipment serving to secure GBE's repayment obligation to Blackstone and that GBE would regain full ownership of the equipment for $1.00 at the end of the lease term. (N.T. at 96).[5]
10.In 2008, GBE was experiencing financial difficulties. The Debtor approached Mr. Kull for a loan. (N.T. at 158).
11.Mr. Kull and the Debtor were lifelong friends, and the Debtor was godfather to the Kulls' son. (N.T. at 178).
12.On July 17, 2008, the Kulls wrote a check to "G-B Excavating Inc." in the amount of $10, 000.00. (Pl's Ex. 5).
13. On April 10, 2009, the Kulls wrote a second check to "G-B Excavating" in the amount of $50, 000.00. (Id.).[6]
14.The Debtor or his agent deposited the monies issued to GBE in GBE bank accounts and the transaction was accounted for on the books and records of GBE (on the corporate balance sheet). (JPS ¶ 13).
15.At the time the Debtor borrowed the $50, 000.00 from the Kulls, he believed the payoff to Blackstone would be $1.00 at the end of the lease term. (N.T. at 103).
16.On or about June 10, 2009, the Debtor signed a promissory note in the amount of $60, 000.00, wherein he promised to repay to Mr. Kull $60, 000.00, plus interest (the "2009 Note"). (JPS ¶10).[7]
17.Initially, GBE made repayments to the Kulls. (Id.).
18.At the time the Debtor signed the 2009 Note, he intended to repay the debt to the Kulls. (Id.).
19.The 2009 Note stated that the Debtor and Mr. Kull executed the 2009 Note "for value received on March 13, 2009, and to be repaid in full, to include interest." (Pl.'s Ex. 3.1; Bucco Ex. 6).
20.When the Debtor and Mr. Kull signed the 2009 Note, Kull requested that the Debtor provide an appraisal of the equipment that the Debtor intended to use as security for the loan. (N.T. at 111-12).
21.Attached to the 2009 Note as an exhibit was an equipment appraisal conducted by CD Valuation Services listing twelve (12) items, two (2) of which were circled: the Roller and the CAT Crawler. (Bucco Ex. 6).[8]
22.The Debtor and Mr. Kull intended that the Roller and Crawler serve as security for repayment of the 2009 Note. (N.T. at 181).
23.From August 2009 through December 2009, the Debtor or GBE paid the Kulls $3, 500.00. (Pl.'s Ex. 4).
24.On October 22, 2009, Blackstone sent the Debtor a lease payoff quote of $53, 828.11 or a six percent (6%) discounted payoff of $50, 880.01, if paid by October 31, 2009. (Pl.'s Ex 8).
25.Upon payment, Blackstone agreed to release its security interest in the equipment. (Id.).
26.Believing the payoff quote was incorrect, the Debtor disputed the amount. (Id. at 101).
27.Following expiration of the Blackstone Lease on July 1, 2010, GBE neither turned over the equipment to Blackstone nor satisfied the payoff quote.
28.On November 10, 2010, Blackstone filed a complaint against the Debtor and Susan Bernhard in the United States District Court for the Central District of California, Blackstone Equip. Fin., L.P. v. Bernhard, No. SACV 10-01733 (the "California Litigation"), asserting that they owed Blackstone $195, 007.31, pursuant to the terms of the Blackstone Lease, because GBE retained possession of other pieces of equipment after the expiration of the Blackstone Lease. The complaint also raised a claim for conversion because the Debtor had sold three (3) pieces of equipment at auction.
29.The Debtor and Susan Bernhard filed a counterclaim against Blackstone alleging usury, fraud, negligent misrepresentation, breach of contract, breach of the duty of good faith and fair dealing, and violations of various California consumer protection laws
30.Blackstone...
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