In re Applegate

• Decision Date: 20 November 2008
• Docket Number: Bankruptcy No. 05-67759.,Adversary No. 07-6217.
• Citation: 414 B.R. 209
• Parties: In re Gregory Alan APPLEGATE, Debtor. Anthony J. DeGirolamo, Plaintiff, v. Tricia K. Applegate, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

414 B.R. 209

In re Gregory Alan APPLEGATE, Debtor Anthony J. DeGirolamo, Plaintiff, v. Tricia K. Applegate, Defendant.

Bankruptcy No. 05-67759.

Adversary No. 07-6217.

United States Bankruptcy Court, N.D. Ohio, Eastern Division.

November 20, 2008.

COPYRIGHT MATERIAL OMITTED

David S. Blocker, James W. Ehrman, Kohrman Jackson & Krantz PLL, John P. Archer, Cleveland, OH, for Plaintiff.

William C. Fithian, III, Mansfield, OH, for Defendant.

MEMORANDUM OF OPINION

RUSS KENDIG, Bankruptcy Judge.

Now before the Court is the Motion to Abstain, filed September 19, 2008 by Defendant Tricia K. Applegate ("Defendant"), seeking to have this Court abstain from exercising jurisdiction over this controversy. Plaintiff Anthony J. DeGirolamo ("Plaintiff), the Chapter 7 trustee in this case, filed his response on October 6, 2008. Defendant filed an untimely reply on November 12, 2008. For the reasons set forth below, the Court denies Defendant's motion.

The Court has jurisdiction of this proceeding pursuant to 28 U.S.C. §§ 1334 and the general order of reference entered in this district on July 16, 1984. Venue in this district and division is proper pursuant to 28 U.S.C. § 1409. This is a core proceeding under 28 U.S.C. § 157(b)(2)(F) and (H). The following constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

FACTUAL AND PROCEDURAL BACKGROUND

In 2001, Debtor Gregory Alan Applegate ("Debtor") began operating a Ponzi scheme. Debtor enticed investors with oral guarantees of tax-free returns if they would invest in a hedge fund operated through his company, Applegate Investments. Debtor claimed that he would take any surplus above the guaranteed rate of return on the securities in which he proposed to invest as his fee, and that if returns fell below that guaranteed rate, he would make them up out of his own pocket. Debtor did not invest any of his investors' money in the securities; instead, he paid prior investors with the funds received from new investors. He also diverted considerable sums to his own purposes.

The Ponzi scheme began to unravel in August of 2005, when an investor's financial advisor examined one of the false monthly statements Applegate produced for his clients. The advisor discovered that the dividends and share prices on the statement did not match the actual market prices for the securities putatively held by Debtor's hedge fund. As more and more facts began to come to light, Applegate voluntarily went to the Ashland Police Department and the FBI and provided them with a written statement admitting that he had run a Ponzi scheme and knew that it was an illegal investment practice. On June 7, 2006, Applegate began a five-year prison sentence.

On October 11, 2005, creditors commenced an involuntary Chapter 7 filing against Debtor. Defendant was the wife of Debtor at that time, but had already filed a divorce action in the Ashland County Court of Common Pleas, Domestic Relations Division (the "domestic relations court"). That action, Case No. 05-DIV-237, had been filed September 21, 2005, but was stayed by the automatic stay when this involuntary bankruptcy was filed. Defendant moved for relief from the automatic stay on April 13, 2007 to proceed with the divorce action in the domestic relations court. This Court granted relief from the stay in an order entered July 18, 2007. However, in that order, the Court provided that

the State Court shall not determine the division of property that is property of the estate (as such term is defined at 11 U.S.C. § 541) or issue any order purporting to transfer or obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.

Relief from stay was granted for the purposes of dissolution, establishment of domestic support obligations, and establishment of child custody and visitation rights.

On November 16, 2007, Plaintiff filed the instant adversary proceeding under 11 U.S.C. §§ 547 and 548 and O.R.C. §§ 1336.04 and 1336.05, alleging that numerous transfers from Debtor's accounts to Defendant's were either preferential or fraudulent. These transfers included her annual salary of $30,000.00 paid through the Ashland Community Arts Center from 2001 to 2005, $50,000 from a retirement account, and $11,000 from an IRA and stocks purchased for Chadwick and Connor Applegate. In total, the trustee seeks relief of at least $200,000.00 against Defendant.

On December 27, 2007, Defendant filed an answer and counterclaim, denying the allegations of Plaintiff's complaint, asserting setoff rights against Plaintiff, and claiming that Plaintiff was in possession of property that is rightfully Defendant's personal property. This property includes part of the proceeds from the sale of real and personal property jointly owned by Debtor and Defendant, as well as funds of an unknown amount in bank accounts now in the trustee's possession. On March 10, 2008, Defendant amended her counterclaim to add a demand for an accounting of the latter accounts.

On January 16, 2008, Plaintiff filed his answer to Defendant's counterclaims, denying the relevant substantive allegations and asserting a number of affirmative defense. Inter alia, Plaintiff asserts that Defendant had knowledge that Debtor was perpetrating a Ponzi scheme and that she was the beneficiary of the illicitly obtained funds from that scheme, and also that all of the disputed assets are property of the bankruptcy estate and therefore subject to distribution only as permitted by the Bankruptcy Code. On May 16, 2008, in response to Defendant's amendment of her counterclaim, Plaintiff amended his answer to the counterclaim admitting that he had issued subpoenas to the financial institutions referenced in Defendant's amended counterclaim, and had received information in response, but otherwise denying all new allegations in the amended counterclaim. Plaintiff also reiterated the same list of affirmative defenses he raised in his original answer.

On April 14, 2008, the parties submitted a joint motion for referral to mediation. The Court granted this motion on May 13, 2008. On June 9, 2008, Richard Baumgart was designated as the mediator. The mediation conference was held on August 1, 2008; Baumgart filed his report to the ADR administrator on August 14, 2008. The mediation was unsuccessful. Paragraphs 2 and 3 of Baumgart's report left little hope for resolution through further ADR efforts:

2. Reportable agreements and/or stipulations consented to by the parties: No settlement was reached. One side has unreasonable expectations.

3. Recommendations as to future ADR processing that might assist in resolving the dispute: none.

(Notice of ADR Administrator 1.) The case was thus returned to the court at that time.

On September 19, 2008, Defendant filed the instant Motion to Abstain. Defendant requests that the Court abstain from exercising jurisdiction over this dispute, deferring instead to the domestic relations court determine what is personal property of Defendant's. Defendant alleges that Plaintiff intends to use the Bankruptcy Code "as a weapon in what is properly a marital dispute." (Mot. to Abstain 2.) She claims that she "is not making a claim against estate property: she desires to regain her property that was seized by the plaintiff." Id.

Plaintiff filed an objection to Defendant's Motion to Abstain on October 6, 2008. Plaintiff alleges that Defendant is simply forum-shopping, that Defendant's motion is untimely, that she had already admitted that the Court had jurisdiction over this adversary, and that her motion fails to satisfy the requirements for mandatory abstention under the Bankruptcy Code. In addition, plaintiffs objection asks this Court to impose a constructive trust containing some or all of the marital assets before allowing the domestic relations court to proceed.

LEGAL ANALYSIS

I. Mandatory Abstention

Mandatory abstention in bankruptcy proceedings is governed by 28 U.S.C. § 1334(c)(2), which provides in full:

Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.

The Sixth Circuit has interpreted this provision to mean that

[f]or mandatory abstention to apply, a proceeding must: (1) be based on a state law claim or cause of action; (2) lack a federal jurisdictional basis absent the bankruptcy; (3) be commenced in a state forum of appropriate jurisdiction (4) be capable of timely adjudication; and (5) be a non-core proceeding.

Lowenbraun v. Canary et al. (In re Lowenbraun), 453 F.3d 314, 320 (6th Cir.2006). Plaintiff specifically alleges that Defendant's motion to abstain fails the "timeliness" requirement of § 1334(a)(2), and the Court also interprets Plaintiff as generally alleging that this is not a non-core proceeding as required by the fifth element of the Lowenbraun test. Plaintiff argues that "[a]ll of the causes of action in the complaint — recovery of preferences, turnover of property of the estate, and recovery of fraudulent conveyances — arise under title 11 of the United States Code ... and are specifically named in the list of core proceedings in 28 U.S.C. § 157(b)(2)." (Obj. to Mot. to Abstain 1-2.)

A. Timeliness

The Code does not define what makes a motion "timely" within the meaning of 28 U.S.C. § 1334(c)(2). Plaintiff argues that the Court should look to the time limit for filing remand actions in 28 U.S.C. § 1447(c) (30 days) as a guideline for what is timely when filing a motion to abstain, which would have The...