In re Bailey

• Decision Date: 21 December 2022
• Docket Number: 22-10013,ADV. 22-01001
• Parties: IN RE STEVEN K. BAILEY DEBTOR v. STEVEN K. BAILEY DEFENDANT REBECCA BAILEY PLAINTIFF
• Court: U.S. Bankruptcy Court — Eastern District of Kentucky

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IN RE STEVEN K. BAILEY DEBTOR

REBECCA BAILEY PLAINTIFF v. STEVEN K. BAILEY DEFENDANT

No. 22-10013

ADV. No. 22-01001

United States Bankruptcy Court, E.D. Kentucky, Ashland Division

December 21, 2022

CHAPTER 13

MEMORANDUM OPINION GRANTING JUDGMENT TO DEFENDANT

Tracey N. Wise Bankruptcy Judge

I. Introduction.

Defendant/Debtor Steven K. Bailey and Plaintiff/Creditor Rebecca Bailey were divorced in August 2016. The family court's divorce decree set out the ex-spouses' obligations to each other. Plaintiff filed a proof of claim in Debtor's chapter 13 bankruptcy case. In this adversary proceeding, she avers that Debtor has failed to satisfy his financial obligations to her such that she is entitled to relief against him, including a judgment that Debtor's debt to her should be excepted from his discharge.

The Court previously issued a memorandum opinion and order resolving the parties' dispositive motions. [ECF No 54.]^[1] Upon entry thereof, the claims remaining in the case are (a) Plaintiff's request that the Court impose an equitable lien on certain real property awarded to Debtor in the divorce decree that remains titled in Plaintiff's name, (b) her claim to except a debt from Debtor's Chapter 13 discharge as a debt for embezzlement under § 523(a)(4),^[2] (c) her claim to except a debt from Debtor's discharge as a debt obtained by fraud under § 523(a)(2)(A), and (d) her claim to except a debt from Debtor's discharge as one obtained via a divorce decree under § 523(a)(15). The Court also entered an order identifying questions it had regarding the viability of these four claims and requiring supplemental briefing to determine whether the Court could grant a judgment on the claims under Civil Rule 56(f), incorporated herein through Bankruptcy Rule 7056. [ECF No. 55.]

Plaintiff filed a supplemental brief that did not discuss her claims under § 523(a)(2)(A) or (a)(15). [ECF No. 58.] At oral argument on November 9, 2022, the Court heard Plaintiff's position concerning these two claims and advised that Debtor would be awarded a summary judgment on those claims under Civil Rule 56(f). Following oral argument and further review of the record, the Court determined that a decision could be reached as a matter of law on Plaintiff's equitable lien claim. The parties declined any further opportunity to brief the equitable lien issue. Accordingly, the Court conducted a trial on November 30, 2022, only on Plaintiff's embezzlement claim. [ECF No. 63.]^[3]

II. Facts.

The Court's prior opinion, which granted Debtor's motion for a judgment on the pleadings in part and denied Plaintiff's motion for a partial summary judgment in full, outlined pertinent facts derived from documents entered in the family court divorce case that Plaintiff attached to her initial pleading. [ECF No. 54.] The facts stated in the prior opinion are incorporated and taken into consideration with the additional findings from trial below to the extent they bear on Plaintiff's embezzlement claim under § 523(a)(4). In addition, the parties tendered joint stipulations prior to the trial that establish basic facts about the dissolution of the parties' marriage and the basis for the debt that is sought to be excepted from Debtor's discharge. [ECF No. 67.] That debt relates to the income of the parties' jointly owned business that Debtor did not deposit in an account during the pendency of the divorce proceedings in violation of an order of the family court. [Id. at 6.]

III. Jurisdiction.

This Court has jurisdiction over this proceeding. 28 U.S.C. § 1334(a). Venue is proper in this District. 28 U.S.C. § 1409. This is a core proceeding. 28 U.S.C. § 157(b)(2)(A), (I), (K), and (O). The parties consent to the Court's entry of final orders.^[4]

IV. Debtor is entitled to a summary judgment on Plaintiff's § 523(a)(2)(A) and (a)(15) claims.

The Court identified its concerns with Plaintiff's claims under § 523(a)(2)(A) and (a)(15) in a prior order. [ECF No. 55.] The Court also advised it would consider entering a summary judgment on those claims under Civil Rule 56(f) and afforded Plaintiff an opportunity to offer legal and factual support for those claims. [Id.] Civil Rule 56(f) provides:

(f) Judgment Independent of the Motion. After giving notice and a reasonable time to respond, the court may:

(1)grant summary judgment for a nonmovant;

(2)grant the motion on grounds not raised by a party; or (3) consider summary judgment on its own after identifying for the parties material facts that may not be genuinely in dispute.

Fed. R. Civ. P. 56(f).

Plaintiff's supplement omitted any discussion of her § 523(a)(2)(A) and (a)(15) claims. [ECF No. 58.] Thus, Plaintiff abandoned the claims. See, e.g., Brown v. VHS of Mich., 545 Fed.Appx. 368, 372 (6th Cir. 2013) (explaining the "jurisprudence on abandonment of claims is clear: a plaintiff is deemed to have abandoned a claim when a plaintiff fails to address it in response to a motion for summary judgment.").

Alternatively, a summary judgment in Debtor's favor on these claims is warranted for the reasons stated in the Court's prior order. Plaintiff had the burden to respond to the Court's invocation of Civil Rule 56(f) by establishing her claims are legally viable and sufficient evidence exists to prove all elements of the claims. See, e.g., Ceruti v. Woodhouse (In re Woodhouse), Adv. Pro. No. 15-2125, 2022 Bankr. LEXIS 540, at *14 (Bankr. D. Utah March 3, 2022) ("where the Court has moved to consider summary judgment on its own under [Civil] Rule 56(f)(3) in favor of [the defendant], [the plaintiff] must come forward with evidence showing the existence of a genuine dispute regarding her claims."). Plaintiff failed to do so. The Court finds Debtor is entitled to a summary judgment in his favor on these claims because (a) the record lacks sufficient evidence to establish the elements of a claim under § 523(a)(2)(A), and (b) § 1328 does not except any debt from a chapter 13 discharge to the extent it falls under § 523(a)(15).

V. Debtor is entitled to a summary judgment dismissing Plaintiff's request for this Court to impose an equitable lien on real property.

As noted above, the Court denied Plaintiff's motion for a partial summary judgment on her request that the Court impose an equitable lien on real property currently titled in her name. [ECF No. 54 at 9-11.] Plaintiff thereafter filed a supplemental brief addressing this issue, as ordered. [ECF No. 58.]^[5] And, Plaintiff noted at the subsequent oral argument that her summary judgment motion also cited three bankruptcy cases involving equitable liens. [ECF No. 36.] After a review of the authority contained in Plaintiff's filings and performing further research, the Court concludes Plaintiff is not entitled to the relief requested as a matter of law. While a bankruptcy court may recognize and enforce an equitable lien granted in another proceeding, it may not impose one. See In re Blume, 582 B.R. 178 (Bankr. E.D. Mich. 2017).

In Blume, before the debtors filed their bankruptcy petition, a state divorce court had advised that "based on Michigan law, there may be grounds to impose, and the court may in the future impose, an equitable lien in favor of the [c]reditor on the [d]ebtors' real property[;]" however, the divorce court's "ultimate decision and future action on that issue would depend upon, and would have to await, the final disposition of the [c]reditor's pending [separate collections] lawsuit against the [d]ebtors[.]" Id. at 179. After the debtors sought bankruptcy protection, the creditor requested relief from the automatic stay under § 362 to further pursue the debtors in state court. In deciding to grant stay relief, the Blume court explained:

2. … [A]n equitable lien, if imposed by the state court in the Divorce Case, would amount to a constructive trust under Michigan law.

3. Under cases decided by the United States Court of Appeals for the Sixth Circuit, this Bankruptcy Court cannot impose a constructive trust (or an equitable lien) on the [d]ebtors' [real] Property, or on any other property of the [d]ebtors. See XL/Datacomp, Inc. v. Wilson (In re Omegas Group., Inc.), 16 F.3d 1443, 1449, 1451, 1453 (6th Cir. 1994); Kitchen v. Boyd (In re Newpower), 233 F.3d 922, 935-37 (6th Cir. 2000); Poss v. Morris (In re Morris), 260 F.3d 654, 666 (6th Cir. 2001).

4. But with respect to the cases just cited, the Court interprets the Newpower and Morris cases to have clarified and narrowed the Sixth Circuit's holding in the earlier Omegas Group case. The Court interprets Newpower and Morris to mean that unlike the bankruptcy court, the state court could impose a constructive trust (equitable lien) on the [d]ebtors' [real] Property, which would be valid and enforceable in this bankruptcy case, if all three of the following requirements were met: (a) this Court first granted relief from the automatic stay to permit litigation to go forward in the state court, of the type granted by the order below; and (b) the state court decided to impose the constructive trust (equitable lien); and (c) the state court ruled that the effective date of the constructive trust (equitable lien) was, under state law, a date before June 29, 2017 (the date on which the [d]ebtors filed this bankruptcy case). (Any such action by the state court would, of course, be subject to any available rights of appeal in the state court system.)

Id. at 180 (footnote omitted). Thus, the bankruptcy court found cause existed to grant stay relief and allowed the creditor to ask the state court to impose an equitable lien on real property in the creditor's favor. Id. at 180-81. The discussion in Blume of the Omegas Group, Newpower, and Morris decisions comports with this Court's understanding of the law;...