Cole v. Strauss

• Decision Date: 03 January 2017
• Docket Number: No. 2:16-cv-04143-NKL,2:16-cv-04143-NKL
• Parties: NANETTE COLE AND BRUCE COLE, Appellants, v. BRUCE E. STRAUSS, TRUSTEE, Appellee.
• Court: U.S. District Court — Western District of Missouri

NANETTE COLE AND BRUCE COLE, Appellants,
v.
BRUCE E. STRAUSS, TRUSTEE, Appellee.

No. 2:16-cv-04143-NKL

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF MISSOURI CENTRAL DIVISION

January 3, 2017

ORDER

This appeal arises out of an adversary proceeding under title 11 of the United States Code.¹ Appellants Bruce Cole and Nanette Cole argue that the Bankruptcy Court should have advised them of their right to have the proceedings heard by an Article III judge; the Bankruptcy Court did not have authority to enter orders concerning the proceeds of the sale of their residence, and requiring them to dismiss a lawsuit they had filed in California; they should not have been held in contempt; and a third party should have been required to file a separate adversary proceeding. Bruce Cole also moves to adopt Nanette Cole's appeal brief. Doc. 15. The motion is granted. The Court affirms.

I. Statement of Facts

Bruce Cole was the president and CEO of Mamtek U.S., Inc., and Nanette Cole is his wife. On December 15, 2011, several creditors filed an involuntary petition for relief under Chapter 7 of the Bankruptcy Code against Mamtek. Bruce Strauss was appointed Trustee of the Debtor's bankruptcy estate.

In May 2012, the Trustee filed an adversary proceeding against the Coles in which he

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sought, among other things, avoidance of fraudulent and preferential transfers. The Trustee also moved for a temporary restraining order and preliminary injunctive relief, to prevent the Coles from disposing of the proceeds of the sale of their residence in Beverly Hills, California. Based upon Bruce Cole's representation that the property would not be sold before June 27, 2012, the Bankruptcy Court denied the Trustee's request for a TRO and set a hearing on the request for a preliminary injunction for June 22, 2012.²

On June 12, 2012, the Trustee filed a renewed motion for TRO because he had been informed by the broker's counsel that the sale of the real property could close as early as June 15.³ With the Coles' consent, the Bankruptcy Court entered a TRO on June 15. The order provided, in relevant part:

1. All proceeds of the sale of the residence of defendants Bruce and Nanette Cole ... shall be paid to Escrow of the West [a California escrow company] ....

3. The Escrow Agent shall disburse the proceeds of the Residence as follows: ...

(b) to any governmental entities or other taxing authorities in an amount sufficient to satisfy any taxes or fees relating to the Residence or to the sale of the Residence....

4. All proceeds of the sale of the Residence in excess of the amounts set forth in paragraph 3 shall be held by the Escrow Agent pending further order of the United States Bankruptcy Court for the Western District of Missouri.

5. Any attempt by Bruce or Nanette Cole to enter into any agreement or make any instruction that proceeds received hereafter from the sale of the Residence be disbursed to any person or entity other than the Escrow Agent shall be a direct violation of this Order. ....

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Bankr. Doc. 55.⁴

On June 18, 2012, the Bankruptcy Court entered another order, stipulated to by the Trustee and the Coles. It provided, in relevant part, that: (1) the June 15, 2012 order would "remain in force and effect until final judgment is entered in this adversary proceeding;" and (2) Escrow of the West would retain the net proceeds of the sale of the real property "until final judgment is entered in this adversary proceeding, at which time the Court shall enter an order directing the disposition of such proceeds." Bankr. Doc. 61. After entry of the June 2012 orders, Escrow of the West continued to hold the proceeds of the sale.

In December 2012, the Bankruptcy Court granted a motion to withdraw filed by the Coles' attorneys, Neal Sader and Bradley McCormack, and the Coles subsequently proceeded pro se in the adversary proceeding

On August 29, 2013, the Bankruptcy Court granted the Trustee summary judgment on Counts I and III of the adversary complaint, concerning fraudulent and preferential transfers.⁵ The Trustee filed a motion in the Bankruptcy Court on October 16, 2013, asking that the June 2012 orders be modified to direct Escrow of the West to transfer the proceeds to the Trustee so the proceeds could be credited against the Trustee's judgment. The Coles filed an objection in the Bankruptcy Court to the Trustee's motion to modify, on the bases that the judgment was not final in view of the counts still pending in the adversary proceeding and that the proceeds should be used to pay their capital gains taxes relating to the sale of the real property.

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At some point, the Coles hired Gary Mobley, a California attorney, to assist them in having capital gains taxes paid to the IRS and the California Franchise Tax Board out of the proceeds of the sale of the real property. Mobley did not enter an appearance on behalf of the Coles in the adversary proceeding. But he sent a letter on November 13, 2013 to Escrow of the West, stating that he "represent[ed]" the Coles with respect to the sale proceeds and demanding that payment be made from the proceeds to the IRS and the California Franchise Tax Board, based on the Bankruptcy Court's June 2012 orders. Bankr. Doc. 267, Exhibit A. Through December 17, 2013, Mobley and Escrow of the West's attorney, Daniel Krishel, exchanged numerous letters and emails regarding the Coles' demand for the payment and Escrow of the West's position that such a transfer was unauthorized. Bankr. Doc. 267, Exhibits B-E. The Coles also filed a supplemental brief in the Bankruptcy Court in opposition to the Trustee's motion to modify, but did not disclose the exchanges Mobley was having with Escrow of the West's attorney. Bankr. Doc. 231.

On December 20, 2013, the Bankruptcy Court denied the Trustee's motion to transfer the proceeds, holding that transfer was premature in view of the other pending claims in the adversary proceeding. Bankr. Doc. 239. The Bankruptcy Court added that if circumstances changed, it would consider a motion to modify its orders regarding the proceeds. The Bankruptcy Court also expressly acknowledged the argument the Coles had made in response to the Trustee's motion, i.e., "that taxes related to the sale of the Property are due and owing, and are to be disbursed by the Escrow Agent from the Funds," and ordered:

[The Coles'] assertion in response to the Trustee's motion does not substitute for a motion requesting release of a portion of the Funds. The Court agrees with the Trustee's position that, if the Defendants claim that the Funds should be used to pay their capital gain tax liability, they must submit a formal request to the Court for consideration, asserting all the factual and legal bases for that

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claim, to which the Trustee will have the opportunity to respond. The Court will then decide the matter, holding a hearing, if necessary.

Bankr. Doc. 239, p. 4 (emphasis added).

Krishel sent an email to Mobley on January 6, 2014 about the Bankruptcy Court's order, and stating that the Coles would "need to make a motion to have specific funds released and to whom they are to be released." Bankr. Doc. 267, Ex. F. Mobley responded on January 7, 2014:

The bankruptcy court decision does nothing to change my clients' position, which I believe I have clearly articulated to you. Specifically, your client is holding approximately $900,000 of my clients' money in an escrow account, the bankruptcy court has ordered Escrow of the West to use these funds to pay to the IRS and Franchise Tax Board ("FTB") to pay the capital gains taxes incurred in the sale of the residence, and my clients have specifically requested that your client do so. Under these circumstances, your client has no right to refuse this request or, at a minimum, interplead these funds into a California court.

Id., Ex. G. Mobley also said Escrow of the West had "been stalling" him pending the Bankruptcy Court's decision regarding the disbursement motion and that the Bankruptcy Court had ordered Escrow of the West to pay the capital gains taxes. Id. Mobley threatened to sue Escrow of the West if it did not pay the taxes.

On February 10, 2014, Mobley filed a lawsuit on behalf of the Coles in the Superior Court of California, Orange County, against the Trustee, Escrow of the West, the State of California, and the United States of America concerning the proceeds of the sale of the real property. The first count sought a declaration that Escrow of the West should disburse $175,000 of the funds to the Coles as a homestead exemption, and remaining funds to the United States and the State of California to satisfy the taxes. The second count alleged Escrow of the West had breached a fiduciary duty when it did not comply with the Coles' demands to pay over the funds as the Coles had requested. Bankr. Doc. 267, Exhibit H.

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The Trustee filed an emergency motion on February 25, 2014 in the adversary proceeding before the Bankruptcy Court, to halt the California litigation and asking for modification of the Bankruptcy Court's prior orders and an expedited hearing. The Coles filed a response in the Bankruptcy Court the following day, representing that there was "no emergency or imminent threat of funds being disbursed." Bankr. Doc. 248, p. 2. The Coles filed another response in the Bankruptcy Court on March 4, 2014, arguing that the Bankruptcy Court did not have jurisdiction over the funds held by Escrow of the West, and that they had merely brought the California lawsuit to force Escrow of the West to comply with the Bankruptcy Court's orders. Bankr. Doc. 259, pp. 2 and 10.

The Bankruptcy Court held a hearing by telephone on the emergency motion on March 5, 2014.⁶ The Bankruptcy Court found that the Coles' filing of the California lawsuit was "a clear violation of the Barton Doctrine[⁷]," Bankr. Doc. 265, pg. 9, and that the Coles had "clearly violated this Court's order and are actively trying to circumvent it in at least...