Brandon v. Sherwood (In re Sann)
| Decision Date | 15 August 2016 |
| Docket Number | Case No. 14–61370–7,Adv No. 15–00023 |
| Parties | In re Steven Vincent Sann, Debtor. Christy L. Brandon, Plaintiff. v. Michael J. Sherwood and Michael J. Sherwood, P.C., Defendants. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Montana |
Robert K. Baldwin, Trent M. Gardner, Kyle W. Nelson, Goetz Baldwin & Geddes PC, Bozeman, MT, for Plaintiff.
David B. Cotner, Missoula, MT, for Defendants.
Michael J. Sherwood, Missoula, MT, pro se.
Honorable Ralph B. Kirscher
At Butte in said District this 15th day of August, 2016.
In this adversary proceeding the Plaintiff/Trustee Christy L. Brandon (“Brandon”) seeks judgment, pursuant to 11 U.S.C. § 542(a)
,1 against the Defendants Michael J. Sherwood (“Sherwood”) and his law firm Michael J. Sherwood, P.C. (together “Defendants”), and turnover of $53,532 in funds which Defendants disbursed to the Debtor from Defendants' IOLTA trust account in three monthly draws in the amounts of $17,844, after the above-captioned bankruptcy case was converted to a case under Chapter 7 of the Bankruptcy Code. Defendants deny liability under § 542(a) on the grounds that the funds were repaid to the Trustee by the Debtor and that Defendants disbursed the funds to the Debtor pursuant to a Stipulated Preliminary Injunction Order (“SPI”) entered in the United States District Court for the District of Montana, Cause No. CV–13–3–M–DLC (hereafter the “FTC action”). The Court held a trial in this adversary proceeding at Missoula on May 5, 2016. The parties appeared or were represented at trial by counsel. Witness testimony and exhibits were admitted into evidence. At the conclusion of the parties' cases-in-chief the Court granted the parties time to file post-trial briefs and reply briefs, which have been filed and reviewed by the Court, together with the record and applicable law. This matter is ready for decision. For the following reasons, Judgment shall be entered against the Defendants in the amount of $53,532.00 under § 542(a).
This Court has jurisdiction of the above-captioned Chapter 7 bankruptcy under 28 U.S.C. § 1334(a)
. Plaintiff's First Amended Complaint (“FAC”) includes a claim for turnover of property of the estate under § 542(a) of the Bankruptcy Code, which is a civil proceeding arising under Title 11, U.S.C., and related to the Chapter 7 case under 28 U.S.C. § 1334(b). Plaintiff's claim for turnover of property of the estate is a core proceeding under
28 U.S.C. § 157(b)(2)(E)
. This Memorandum of Decision includes findings of fact and conclusions of law in accordance with Fed.R.Civ.P. 52(a) ().
The Plaintiff/Trustee Brandon appeared at trial and testified, represented by attorney Kyle W. Nelson of Goetz, Baldwin & Geddes, P.C., of Bozeman, Montana. Defendants were represented by attorneys Michael J. Sherwood of Michael J. Sherwood, P.C., and by Sarah J. Rhoades of Missoula. Sherwood testified, as did Terry Sann, who is the spouse of the above-named Debtor Steven Vincent Sann (“Sann” or “Debtor”) (together “Sanns”).
The following Exhibits (“Ex.”) were admitted into evidence: Plaintiff's Ex. 1, 2, 3, 4, 5, 6, 7, 10, 11, 12, 13, 14, 15, 16, 18, 19, 21, 22, 23, 24, 25, 26, 29, 32, 34, 35, 40, 41, 42; and Defendants' Ex. A, B, C, D, E, F, G, H, I, J, K, L, M, N, O, P, Q, R, T, U, V, W, X, Y, Z, AA, BB, CC, DD, EE, FF, MM, PP, and QQ.
The facts relevant to this adversary proceeding date from January 8, 2013, when the United States of America, Federal Trade Commission (“FTC”) filed a civil complaint against Sann, his spouse and other defendants in the U.S. District Court for the District of Montana, No. CV 13–3–M–DLC. The FTC's complaint sought injunctive and equitable relief against Sann for deceptive business practices which allegedly resulted in “cramming” unauthorized charges onto consumers' monthly telephone bills for services that they neither requested nor authorized, in violation of the FTC Act, 15 U.S.C. § 45(a)
. The complaint alleged that the cramming by Sann totaled over $70 million and resulted in net revenues to defendants of more than $26 million.
Defendant Michael J. Sherwood (“Sherwood”) is an attorney admitted to practice in Montana, whose law office is Michael J. Sherwood, P.C. Sherwood has practiced primarily criminal law since 1987; he testified that he did not know much about bankruptcy law prior to this case. Initially Sherwood represented Sann in a medical marijuana case and later became involved in the FTC action.
In the FTC action before Hon. Dana L. Christensen, Chief Judge, United States District Court for the District of Montana, the FTC sought a preliminary injunction, disgorgement of ill-gotten gains, and other equitable relief including a permanent injunction. Ex. A. On May 8, 2013, prior to Sann's bankruptcy case, the district court entered the SPI, Ex. A. Among other things, the SPI imposed an asset freeze upon Sann and other defendants, but authorized Sann and his wife to use frozen funds to pay mortgage, personal and business expenses totaling $17,844 each calendar month. Ex. A., p. 11. Sherwood testified that the SPI includes a “spendthrift” or “carve-out” provision, which he understood to mean that he could write checks to Sanns, if they asked, and could write checks to anyone else if the district court ordered it or the FTC and Sann agreed by stipulation.
Certain proceeds from the sale of apartments owned 99 percent (99%) by Sann, which required the FTC's consent for sale, were deposited into Defendants' IOLTA trust account at the insistence of the FTC in order to preserve them. Ex. 21, pp. 41–42. A total of $648,352.20 in sale proceeds was deposited into Sherwood's trust account (hereinafter the “trust funds”) on February 6, 2014, with the FTC's consent. Ex. B is an email exchange dated February 6, 2014, between Sherwood and FTC's lead counsel wherein Sherwood proposed to deposit the proceeds in his trust account, and he asked the FTC for a letter to the title company directing it to deposit the funds into Sherwood's trust account. FTC's counsel responded that FTC has no objection to the proposal. Ex. B. Sherwood testified that he did not consider the words “no objection” to constitute a stipulation by the FTC, but that Ex. C, a letter from FTC's counsel to the title company dated February 6, 2014, provided FTC's consent to the closing and the deposit of the proceeds into Sherwood's trust account subject to the asset freeze provided in the SPI.
Sann file a voluntary chapter 11 petition (Ex. 9) commencing the instant bankruptcy case in Las Vegas, Nevada, on September 29, 2014. Sann and his spouse Terry Sann both claimed Nevada residency. The FTC moved to transfer venue of Sann's bankruptcy case to the District of Montana, which was granted by order dated November 20, 2014, and accomplished on December 12, 2014.
Sherwood testified that he was aware of Sann's bankruptcy filing before November 14, 2014, and thereafter. On November 24, 2014, in the FTC case Sann's attorneys Samuel A. Schwartz (“Schwartz”) and Sherwood filed a motion for order approving the transfer of all assets to this Court. Ex. 4 is a supporting memorandum and has Sherwood's name and address in the caption. Sherwood testified that he was local counsel for Sann in the FTC case, and he was prepared to argue Sann's motion.
Brandon testified that Sherwood began making the $17,844 living expense payment to the Debtor from Sherwood's IOLTA account on November 25, 2014. Sherwood testified that he had asked FTC's counsel for a stipulation authorizing Sherwood to make the monthly draws to the Debtor, since he could move trust funds only if the district court ordered it or the FTC consented in writing. When the FTC responded affirmatively to his satisfaction, Sherwood began sending the Debtor the monthly draws from the trust funds.
On November 5, 2014, Debtor filed his bankruptcy Schedules. Schedule B (Ex. 3) lists four checking accounts at U.S. Bank with account numbers ending in 7212, 6474, 1045, and 7818; and one U.S. Bank savings account ending in 6505. Item 3 of Schedule B on Ex. 3 describes “Money held in IOLTA account with Michael Sherwood, Esq.” in the amount of $648,352.20. Brandon testified that, in her opinion, all the funds in these accounts, including the trust funds in Sherwood's IOLTA account, are property of the estate. Debtor did not claim an exemption in the trust funds on Schedule C. On Schedule I, line 8h, Debtor listed his living expense allowance of $17,844 received under the SPI. Ex. 3, p. 30.
Debtor's Statement of Financial Affairs (“SOFA”) listed at item 10 (“Other transfers”), the $648,352.20 transferred to Michael J. Sherwood, P.C., in February 2014 from the sale of Porter apartments to Defendants' trust account. Ex. 3, p. 39. At item 4 (“Suits ...”) Debtor listed the FTC action. Ex. 3, p. 37.
The case docket for Case No. 14–61370 reflects at Document No. 125 that a “Notice of Commencement of Chapter 11 Case and Meeting of Creditors” was filed on December 17, 2014. The Bankruptcy Noticing Center (“BNC”) mailed the Notice of Commencement by first class mail on December 19, 2014,2 to Defendant Michael J. Sherwood, PC, at “401 North Washington, P.O. Box 8358, Missoula, MT 59807,” which is the address of record for both Defendants. Sherwood testified that he had notice of the Chapter 11 bankruptcy within a month after Debtor filed his bankruptcy petition. Therefore, this Court finds that Defendants had notice of Debtor's bankruptcy case since December 2014 and had knowledge of this bankruptcy in November 2014.
On December 19, 2014, the district court entered a decision, Ex. 42/Ex. G, denying Sann's motions to modify the SPI and transfer all his assets to the bankruptcy court. The district court noted several changes since the FTC action began, including criminal charges against Sann, his bankruptcy filing, and the court wrote that the FTC action...
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