Brandon v. Sherwood (In re Sann)

• Decision Date: 26 February 2016
• Docket Number: Adv No. 15–00023,Case No. 14–61370–7
• Citation: 546 B.R. 850
• Parties: In re Steven Vincent Sann, Debtor. Christy L. Brandon, Plaintiff. v. Michael J. Sherwood and Michael J. Sherwood, P.C., Defendants.
• Court: U.S. Bankruptcy Court — District of Montana

546 B.R. 850

In re Steven Vincent Sann, Debtor.Christy L. Brandon, Plaintiff.

v.Michael J. Sherwood and Michael J. Sherwood, P.C., Defendants.

Case No. 14–61370–7

Adv No. 15–00023

United States Bankruptcy Court, D. Montana.

Signed February 26, 2016

Robert K Baldwin, Trent M. Gardner, Kyle W. Nelson, Goetz, Baldwin & Geddes, P.C., Bozeman, MT, for Plaintiff.

Michael J. Sherwood, Missoula, MT, pro se.

MEMORANDUM OF DECISION

Honorable Ralph B. Kirscher, Chief U.S. Bankruptcy Judge.

At Butte in said District this 26^th day of February, 2016.

In this adversary proceeding, the Court held a hearing after due notice at Missoula on February 4, 2016, on the Motion to Dismiss Amended Counterclaim (Document No. 43), filed on December 21, 2015, by Plaintiff/Trustee Christy L. Brandon ("Brandon" or "Trustee"). The Trustee was represented at the hearing by attorneys Kyle W. Nelson and Trent M. Gardner of Goetz, Baldwin & Geddes, P.C., of Bozeman. Defendant Michael J. Sherwood ("Sherwood") of co-Defendant Michael J. Sherwood, P.C., filed an objection (Doc. 45) and appeared at the hearing in opposition. No testimony or exhibits were offered or admitted. Argument of counsel was heard. At the conclusion of the hearing the Court deemed the matter submitted and took the Trustee's Motion under advisement. After review of the Trustee's Motion, Defendants' objection, and the record, this matter is ready for decision. For the reasons set forth below the Motion to Dismiss Amended Counterclaim will be granted and Defendants' counterclaim will be dismissed under Fed.R.Civ.P. 12(b)(6) (applicable in adversary proceedings under Fed. R. Bank. P. 7012(b) ) for failure to state a claim upon which relief can be granted, without prejudice to Defendants' rights to seek an award of attorney fees under Fed.R.Civ.P. 54(b)(2)(A) (applicable under Fed. R. Bankr.P. 54(d)(2)).

This Court has jurisdiction of the Plaintiff's claims in the above-captioned adversary proceeding, in which the Plaintiff/Trustee Christy L. Brandon seeks recovery of funds and an accounting from Defendants under 11 U.S.C. §§ 542 and 543, under 28 U.S.C. § 1334(b) as arising under Title 11 of the U.S.Code and as related to the above-captioned Chapter 7 bankruptcy. Plaintiffs' claims for relief in this adversary proceeding are core proceedings under 28 U.S.C. § 157(b)(2).

BACKGROUND AND PROCEDURAL HISTORY

There are no disputed issues of fact relating to the Plaintiff's Motion to Dismiss Amended Counterclaim. The above-captioned bankruptcy case was commenced by the Debtor Steven V. Sann ("Sann") on September 29, 2014, when he filed a voluntary chapter 11 petition. The case was converted to a case under Chapter 7 of the Bankruptcy Code on April 29, 2015, for "cause" under 11 U.S.C. § 1112(b)(1) based upon, inter alia, this Court's findings of substantial and continuing loss or diminution of the estate and absence of a reasonable likelihood of rehabilitation, gross mismanagement of the estate, and that conversion rather than dismissal was in the best interests of creditors and the estate because of Sann's guilty pleas to three felonies including wire fraud and money laundering.¹ The Court found that Sann diverted monies which had been subject to an "asset freeze" ordered by the United States District Court for the District of Montana in Cause No. CF 13–3–M–DLC, but from which a $17,844 monthly draw had been carved out in order to pay Sann's living expenses, plus funds to pay two mortgages. Sann diverted those draws instead to pay his attorneys, including the Defendants in the instant adversary proceeding, without authority from this Court or the district court and in violation of the asset freeze.²

Plaintiff was appointed Trustee for Sann's Chapter 7 estate on April 30, 2015. She filed an asset notice, employed attorneys, and commenced the instant adversary proceeding by filing a complaint on July 16, 2015. The complaint sets forth two claims for relief: Count I seeks turnover of approximately $648,352.20 in the Sherwood P.C. IOLTA Trust account ("Trust Funds") pursuant to 11 U.S.C. §§ 542 and 543 ; and Count II requests an accounting of all estate funds over which Sherwood had possession or control pursuant to 11 U.S.C. § 543(b)(2), and requests that the Court order Sherwood to pay the estate for any estate funds which Sherwood wrongfully disbursed under 11 U.S.C. § 543(c).

On September 25, 2016, Defendants filed an answer and counterclaim.³ On December 3, 2016, Defendants filed an amended answer, counterclaim, and Third Party Complaint. The defenses in the amended answer aver: (1) That Defendants' actions were in compliance with the prior orders of the U.S. District Court and at the direction of the United States Federal Trade Commission ("FTC"); (2) that Defendants paid all remaining funds in their IOLTA Trust Account to Plaintiff in August of 2015, and delivered an accounting of those funds, which constitutes accord and satisfaction;⁴ (3) that estoppel bars Plaintiff's unilateral demand for payment because the Trust Funds were in Defendants' possession as gratuitous bailees, who would not transfer the funds without a further order of the district court or express direction from both the Debtor and FTC; (4) that Plaintiff failed to join Sann as a necessary party; (5) failure to state a claim for which relief can be granted.

Defendants' counterclaim against the Trustee alleges that she is an agent of the United States, and that the complaint was presented for the improper purpose of coercing Defendants to deliver funds which Plaintiff was not yet entitled to receive under district court orders. Defendants allege that the Trustee was not authorized to unilaterally demand that Defendants turn over funds under 11 U.S.C. § 543, and that Defendants as bailees and otherwise under Montana statutes had no duty to deliver funds absent a demand by both Sann and the FTC. Because the complaint was unjustified and was presented for an improper purpose, Defendants' counterclaim requests an award of reasonable attorney fees and costs under the Equal Access to Justice Act ("EAJA"), Bankruptcy Rules of Procedure and this Court's inherent power, to compensate for Defendants' attorney time and costs expended in defending against the "premature" complaint which Plaintiff refused to dismiss.

The Trustee filed her Motion to Dismiss Amended Counterclaim on December 21, 2015, seeking dismissal of the counterclaim under F.R.Civ.P. Rule 12(b)(6) for failure to state a claim upon which relief can be granted. The Trustee contends that as a private trustee she is not, as a matter of law, an agent of the United States for purposes of the EAJA, and that the counterclaim for attorney fees is premature and is a potential remedy only, not a cause of action, which cannot be awarded unless Defendants are prevailing parties. Plaintiff argues that under the "American Rule," under which each litigant pays his or her own legal fees unless a statute or contract provides otherwise, applies in bankruptcy, and 11 U.S.C. §§ 542 and 543 do not provide for an award of attorney fees. As for the bad faith exception to the American Rule, the Trustee repeats that Defendants' counterclaim is premature and ultimately may be moot.

Defendants' response (Doc. 45) argues that this Court must take all the allegations of the amended counterclaim as true under F.R.Civ.P Rule 12(b)(6), and contends that the Plaintiff's complaint was filed for an improper purpose and in bad faith and is vexatious or spurious. Therefore, they contend, this Court may award Defendants attorney fees under F.R.Civ.P. Rule 54, under this Court's inherent sanction authority, and Fed. R. Bankr.P. 9011. Defendants contend that the Trust Funds clearly were not the property of Sann subject to turnover to Plaintiff because of the litigation initiated by the FTC and that Sherwood had been obliged to comply with the district court's order and as bailee not to release them.

Defendants contend they are entitled to reasonable attorney fees under the EAJA because Plaintiff filed her complaint with no justification and because the Plaintiff is an "official of the United States" under the EAJA because she was appointed as Trustee. Thus, they argue, pursuant to § 6 of the Restatement (Second) of Agency Plaintiff is an agent of the United States under the reasoning of Bell v. Thornburg, 743 F.3d 84 (5th Cir.2014) (construing the federal removal statute 28 U.S.C. § 1442(a)(1) ) which concluded that a private trustee acted under officers of the United States and fell within the federal officer removal statute's purview. Defendants oppose denial of their counterclaim to avoid any argument that they have waived their claim for attorney fees, and based on case law which predates a 2014 change in Fed. R. Bank. P. 7054.

Plaintiff's reply repeats that she is not an agent of the United States, that she has not taken the position of the United States, and that Defendants' seek to extend the EAJA beyond what Congress intended. As for Defendants' counterclaim seeking attorney's fees under the bad faith exception to the American Rule, Plaintiff repeats that it is not a cause of action and that this Court has already ordered the turnover of Trust Funds which she sought in her complaint. Plaintiff concedes that Defendants may request attorney fees at the conclusion of this adversary proceeding if they are the prevailing party, but argues that Defendants' counterclaim is premature and potentially moot.

DISCUSSION

Plaintiff's Motion to Dismiss Amended Counterclaim is based on F.R.Civ.P. Rule 12(b)(6) for failure to state a claim upon which relief can be granted.

I. F.R.Civ.P. Rule 12(b)(6).

The United States Supreme Court explained the applicable standard under F.R.Civ.P. Rule 12(b)(6) as follows:

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." [Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127

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