Global Injury Funding, LLC v. Knight (In re Knight)

• Decision Date: 31 March 2015
• Docket Number: ADV. PRO. NO. 12–02013,CASE NO. 11–23428
• Citation: 538 B.R. 191
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re: Jesse K. Knight, Debtor. Global Injury Funding, LLC, Plaintiff v. Jesse K. Knight, Defendant.

538 B.R. 191

In re: Jesse K. Knight, Debtor.

Global Injury Funding, LLC, Plaintiff

v.Jesse K. Knight, Defendant.

CASE NO. 11–23428

ADV. PRO. NO. 12–02013

United States Bankruptcy Court, D. Connecticut.

Signed March 31, 2015

Houston Putnam Lowry, Esq., Julie A. Morgan, Esq., Brown & Welsh, P.C., 530 Preston Avenue, Box 183, Meriden, CT 06450–0183, Attorneys for Plaintiff

Lawrence S. Dressler, Esq., Law Offices of Lawrence S. Dressler, 516 Ellsworth Avenue, New Haven, CT 06510, Attorney for Debtor/Defendant

MEMORANDUM OF DECISION ON COMPLAINT TO DETERMINE DISCHARGEABILITY OF DEBT

ALBERT S. DABROWSKI, United States Bankruptcy Judge

I. INTRODUCTION

Through Count One of the Amended Complaint in the instant adversary proceeding Global Injury Funding, LLC (hereinafter, the “Plaintiff”) seeks under Bankruptcy Code Section 523(a)(2) (without citation to subsections (A) or (B) a determination of nondischargeability of a debt arising from a certain alleged secured obligation (hereinafter, the “Obligation”) of Jesse K. Knight (hereinafter, “Knight” or the “Debtor”) to the Plaintiff as established in what was titled by the Plaintiff as a “Sale of Proceeds—Contingent Advance Agreement,”¹ to which was attached an Attorney & Client Lien Acknowledgment and an Exhibit “A”—Schedule Worksheet (hereinafter, together, the “Agreement”). Under the Agreement, the Debtor obtained a sum of money from the Plaintiff in anticipation of his recovery through a settlement or award of monetary proceeds in a pending state court personal injury action known as Jesse K. Knight v. Ernest Weiss (hereinafter, the “State Court Action”) with repayment to the Plaintiff of that sum plus certain fees out of the proceeds of any such settlement or award. As a preliminary position, and notwithstanding the specific relief of nondischargeability of a debt sought in Count One of the Amended Complaint, the Plaintiff asserts that the Obligation does not constitute a debt subject to the Debtor's discharge, which, if so, renders the determination of nondischargeability sought in Count One unnecessary.

Through Count Two of the Amended Complaint the Plaintiff seeks a declaratory judgment that the Agreement is valid and enforceable in accordance with its terms notwithstanding the Debtor's bankruptcy case, and a further determination that the Plaintiff owns that part of the State Court Action described in the Agreement free and clear of any claims by the Debtor.

For the reasons stated more fully hereinafter, the Court determines that the Obligation of the Debtor to the Plaintiff is a debt, the debt is subject to the Debtor's discharge in this bankruptcy case, and any lien or assignment in the proceeds of the personal injury action arising under the Agreement is invalid and unenforceable. Accordingly, a Judgment (i) determining the debt arising from the Obligation of the Debtor to the Plaintiff to be dischargeable shall enter as to Count One, and (ii) an Order denying the request for relief for a declaratory judgment shall enter as to Count Two.

II. JURISDICTION

The United States District Court for the District of Connecticut has jurisdiction over the instant proceeding by virtue of 28 U.S.C. § 1334(b) ; and this Court derives its authority to hear and determine the matter on reference from the District Court pursuant to 28 U.S.C. §§ 157(a), (b)(1). This is a “core proceeding” pursuant to 28 U.S.C. §§ 157(b)(2)(I).

III. PROCEDURAL HISTORY

On December 6, 2011, the Debtor commenced the instant bankruptcy case, Case No. 11–23428, by the filing of a voluntary petition under Chapter 7 of Title 11 of the United States Bankruptcy Code. On January 24, 2012, the Chapter 7 Trustee, John J. O'Neil (hereinafter, the “Trustee”) filed a Chapter 7 Trustee Report of No Distribution (“No Asset Report”). An Order Discharging Debtor Under Bankruptcy Code § 727 (hereinafter, the “Discharge”), ECF No. 27, was entered by the Court on March 14, 2012.

Prior to entry of the Discharge, on March 5, 2012, the Plaintiff initiated the instant adversary proceeding through the filing of a Verified Complaint to Determine Dischargeability of Debt Pursuant to 11 U.S.C. § 523(a)(2) (hereinafter, the “Complaint”), Adv. ECF No. 1 accompanied by Exhibit A, a copy of the Agreement, Adv. ECF No 1–1. Through the Complaint the Plaintiff sought a determination by the Court that the Obligation of the Debtor to the Plaintiff was nondischargeable because the “debt [was] obtained by false pretenses or where the debtor used a statement that is materially false, respecting the debtor's financial condition on which the creditor [Plaintiff] relied, that the debtor caused to be made or published with the intent to deceive.” Complaint, ¶ 16. On April 20, 2012, the Debtor filed Defendant's Answer to the Complaint and asserted five affirmative defenses. Adv. ECF No. 16.

In the First Affirmative Defense, the Debtor alleged that the Agreement was void by reasons of champerty and maintenance. In the Second Affirmative Defense, the Debtor alleged that the Agreement, if characterized as a “loan” is void under the laws of usury but if characterized as an “investment,” the proceeds of the lawsuit would be property of the bankruptcy estate. In the Third Affirmative Defense, the Debtor alleged that whether characterized as a loan or an investment, the Plaintiff is not licenced to make such agreements under the banking laws of the State of Connecticut. In the Fourth Affirmative Defense, the Debtor alleged that the Agreement constituted unfair and deceptive acts and violated the Connecticut Unfair Trade Practices Act. In the Fifth Affirmative Defense, the Debtor asserted that the Agreement was void as unconscionable and predatory.² Also on April 20, 2012, the Debtor filed Defendant's Amended Answer, Adv. ECF No. 17, in which he added a Sixth Affirmative Defense, alleging that the Plaintiff was barred from recovery by the doctrine of unclean hands.

On October 25, 2012, the Debtor filed Defendant's Motion to Dismiss Complaint (hereinafter, the “Motion to Dismiss”), Adv. ECF No. 23, under Fed. R. Civ. P. 12(b)(6) (made applicable by Fed. R. of Bankr. P. 7012(b) ) seeking a dismissal of the Complaint for failure to state a claim upon which relief can be granted. In particular, through the Motion to Dismiss the Debtor asserted that as the Plaintiff claimed that by the terms of and language throughout of the Agreement the Obligation was not a loan, but rather was an “investment,” the Plaintiff was not entitled to a determination of nondischargeability as to the Obligation as a “debt” within the meaning of Code §§ 101(12) and 523(a)(2). On that same day, the Plaintiff responded by filing an Objection to Motion to Dismiss, Adv. ECF No. 25, arguing that the Motion to Dismiss was untimely filed. At a hearing held on November 29, 2012, the Court denied the Motion to Dismiss, see Adv. ECF No. 32, noting that its substance had already been pled in the Debtor's six affirmative defenses and that the issues could more easily and expeditiously be considered at trial, as expressly permitted by Fed. R. Civ. P. 12(h)(2)(C).

On January 4, 2013, the Plaintiff filed a Motion to Amend Pretrial Order and Complaint (hereinafter, the “Motion to Amend”), Adv. ECF No. 34, in which it sought permission to file an amended complaint in response to what it alleged were “new theories” raised by the Debtor in the Motion to Dismiss. The Motion to Amend also sought to extend the answer date, discovery bar date and set a rescheduled trial date. In the proposed amended complaint, the Plaintiff added a Second Count. In that count, the Plaintiff requested the Court to enter a declaratory judgment that the Agreement remained valid and enforceable according to its terms, and that Global “owns that part of the ... personal injury action [State Court Action] described in the Agreement,” notwithstanding the Debtor's attempt to exempt a portion of the contingent and unliquidated proceeds.

On January 6, 2013, the Debtor filed an Objection to the Plaintiff's Motion to Amend Pretrial Order and Complaint (hereinafter, the “Objection to Motion to Amend”), Adv. ECF No. 35, primarily on the grounds of its being untimely but also because the proposed amended complaint requested a declaratory judgment to which the Court either lacked jurisdiction or which would more properly be heard and decided in state court. Thereafter, on January 24, 2013, the Court granted the Motion to Amend insofar as it requested permission to file an amended complaint, Adv. ECF No. 38, and overruled the Objection to Motion to Amend on timeliness grounds, Adv. ECF No. 39. With the agreement of the parties to proceed with trial commencing February 11, 2013, and the Debtor's express waiver, through his attorney, of his right to file a renewed motion to dismiss to assert the Court's alleged lack of jurisdiction to consider the Second Count of the Amended Complaint, the Plaintiff withdrew its request to extend the answer date, discovery bar date and set a rescheduled trial date. See Adv. ECF No. 39 (noting those requests moot).

On February 11, 2013, the Plaintiff filed its two count Amended Complaint to Determine Dischargeability of Debt Pursuant to 11 U.S.C. § 523(a)(2) And For Declaratory Relief (heretofore and hereinafter, the “Amended Complaint”), Adv. ECF No. 42, accompanied by Exhibit A, a copy of the Agreement. Count One of the Amended Complaint is identical to the original one count Complaint. Count Two of the Amended Complaint sought the aforesaid declaratory relief.

Trial on the Amended Complaint was held on February 11, 2013³ (hereinafter, the “Trial”), notwithstanding that neither the Debtor nor Attorney Dressler appeared.⁴ At the Trial the Court admitted into evidence the Agreement as Plaintiff's Exhibit A, and a copy of the Customer Open Balance dated June 17, 2012 as Plaintiff's Exhibit B, and received testimony from Plaintiff's witness, Mark A. Stuhmer (hereinafter, “Stuhmer”), the managing member of the Plaintiff.

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