In re DeSoto
| Decision Date | 15 May 1995 |
| Docket Number | Bankruptcy No. 92-53552. |
| Citation | 181 BR 704 |
| Court | U.S. Bankruptcy Court — District of Connecticut |
| Parties | In re Richard J. DeSOTO, Antonia M. DeSoto, Debtors. |
Jonathan D. Zabin, Yost & Associates, P.C., New Haven, CT, for trustee.
Timothy D. Miltenberger, Coan, Lewendon, Royston, Deming & Gulliver, New Haven, CT, for debtors.
This contested matter presents a dispute between the Debtors and their Chapter 7 Trustee over control of the shares of stock of a real estate holding corporation. The Debtors have objected to their Chapter 7 trustee's proposed private sale of these shares of stock upon several alternative grounds, including their principal claim that the stock is no longer property of their bankruptcy estate. For the reasons discussed, infra, the Court resolves this dispute in favor of the Trustee's power to sell the stock.
The United States District Court for the District of Connecticut has jurisdiction over the instant contested matter by virtue of 28 U.S.C. § 1334(b); and this Court derives its authority to hear and determine this matter on reference from the District Court pursuant to 28 U.S.C. §§ 157(a), (b)(1). This matter is a "core proceeding" pursuant to 28 U.S.C. §§ 157(b)(2)(A), (N) and (O).
The Court finds the following material facts from (1) its judicial notice and review of the official public record of this case, (2) the parties' "Stipulation of Facts for Trustee's Notice of Sale" dated September 9, 1994 (hereinafter, the "Stipulation"), and (3) the evidence adduced at the hearing of this matter on September 13, 1994.
The instant bankruptcy case was commenced by the filing of the Debtors' joint voluntary petition on October 27, 1992 (hereinafter, the "Petition Date"). Relief thereon was simultaneously ordered by this Court. Byron Paul Yost (hereinafter, the "Trustee") is the duly qualified and acting trustee of the Debtors' resulting bankruptcy estate(s) (hereinafter collectively referred to as the "Estate").1 A meeting of creditors pursuant to 11 U.S.C. § 341(a) and Federal Rule of Bankruptcy Procedure "") 2003(a) was initially held on December 3, 1992, and thereafter adjourned serially to February 24, April 24, May 27, and June 30, 1993, after which the meeting was closed by the Trustee.
The Debtors filed joint and consolidated Schedules to their Petition. In Schedule B the Debtors disclosed as an asset the corporate stock of C.A.M.R., Inc. (hereinafter, the "Stock"), to which they attached a value of "$1.00" coupled with the parenthetical statement "liabilities vastly exceed assets". The Stock was also the subject of a claim of exemption by the Debtors. Their Schedule C again lists the value of the Stock at "$1.00 (liabilities vastly exceed assets)" and claims $1.00 as exempt. The Trustee has not objected to this claim of exemption.
C.A.M.R., Inc. is the owner of an improved parcel of real property commonly known as "The Atrium". As of the Petition Date, the Debtors and C.A.M.R., Inc., inter alia, were defendants in a Connecticut Superior Court civil action commenced by Gateway Bank, n/k/a Shawmut Bank, N.A., seeking, inter alia, to foreclose upon The Atrium (hereinafter, the "Foreclosure Action"). On or about October 26, 1992, the Connecticut Superior Court appointed a receiver of rents (hereinafter, the "Receiver") for The Atrium.
On April 5, 1993, Gateway obtained a judgment of strict foreclosure in the Foreclosure Action. That judgment was timely appealed by the Debtors and C.A.M.R., Inc. (hereinafter, the "Appeal"), and was reversed by the Connecticut Appellate Division on October 19, 1993, based upon the impropriety of certain defaults underlying the judgment. In prosecution of the Appeal, from the Petition Date to September 27, 1993, Debtor Richard DeSoto and C.A.M.R., Inc. incurred obligations to the law firm of Bielizna, Frizzell, Papazoglou, Olivo and Swenson in the amount of $8,198.50, of which sum, $7,298.50 remains due and owing.
On December 20, 1993, C.A.M.R., Inc. filed a pleading titled "Revised and Amended Answer, Special Defense and Counterclaim" in the Foreclosure Action. This pleading was further revised and again filed with the Superior Court on April 19, 1994 (hereinafter, the "Revised Answer"). The Revised Answer states various defenses (hereinafter, the "Defenses") and counterclaims (hereinafter, the "Claims") premised upon the alleged misconduct of Gateway, through its employees and in concert with the Receiver. In connection with its assertion of the Claims and Defenses, C.A.M.R., Inc. has incurred obligations to Attorney Robert A. Ziegler in the amount of $19,465.25, of which only $9,000 has been paid.
On May 26, 1993, Debtor Richard DeSoto subscribed a letter to Gateway on The Atrium letterhead seeking to obtain a $150,000 payment in exchange for, inter alia, C.A.M.R., Inc.'s agreement to (1) not assert the Claims and Defenses, and (2) otherwise permit the sale of The Atrium to a buyer identified by Gateway. It is clear that Gateway was, and still is, anxious to obtain title to The Atrium and convey it to a prospective purchaser to facilitate the satisfaction of its mortgage interest therein.
As early as April, but not later than July, 1993, the Trustee was engaged in negotiations with Gateway concerning Gateway's possible purchase of the Estate's interest in the Stock. In July 1993, the Trustee conditionally accepted Gateway's offer of $10,000 for the Stock, and on July 29, 1993, the Trustee filed a Notice of Sale of certain assets, including the Stock (hereinafter, the "July Notice of Sale"). The Trustee did not proceed with a sale of the Stock pursuant to the July Notice of Sale due to a technical defect in that notice. On October 18, 1993, the Trustee filed a new Notice of Sale (hereinafter, the "October Notice of Sale"). By its terms the October Notice of Sale seeks to sell the Stock to Gateway for the sum of $10,000, subject to higher and better offer. The October Notice of Sale prompted the Debtors' objection, which gave rise to this contested matter.
The Debtors' objection to the Trustee's October Notice of Sale (hereinafter, the "Debtors' Objection") was originally premised solely upon their assertion that the Stock was no longer property of the bankruptcy estate due to the Trustee's failure to interpose a timely objection to their claim of exemption therein. Later memoranda filed in support of the Debtors' Objection assert as an additional ground for the Debtors' belief that the Stock is no longer an asset of their bankruptcy estate, that all, or substantially all, of the present value of the Stock was created through the post-petition effort and earnings of the Debtors. At the September 13, 1994 hearing of this matter, counsel for the Debtors orally presented argument for a third theory barring the Trustee's sale, namely, that such a sale would constitute a fraudulent conveyance of the assets of C.A.M.R., Inc. to the creditors of the Debtors.
Since the Debtors' Objection challenges the Trustee's power to sell putative property of the estate under 11 U.S.C. § 363(b), the burden of proof is governed by 11 U.S.C. § 363(o) in the first instance. That subsection provides as follows:
11 U.S.C. § 363(o) (emphasis supplied). Accordingly, as the entity (other than the Trustee) asserting an interest in the subject property, the Debtors bear the burden of proving to this Court the validity, priority and/or extent of such interest(s).
The Bankruptcy Code's allocation of the burden of proof is supported by the specific Bankruptcy Rules governing this contested matter. Fed.R.Bank.P. 6004(b) states that "an objection to . . . a . . . proposed . . . sale . . . of property is governed by Rule 9014." In other words, the Debtors' Objection, not the Trustee's October Notice of Sale, is deemed to be the "motion" which prayed for relief and commenced the instant contested matter. See Fed.R.Bank.P. 9014 (). Thus Section 363(o)(2) distributes the burden of proof in a manner consistent with the general rule that a movant bears the burden of proving the basis for the relief requested in its motion. E.g., In re Flick, 14 B.R. 912, 914 (Bankr.E.D.Pa.1981); see, e.g., Maxwell Land-Grant Co. v. Dawson, 151 U.S. 586, 604, 14 S.Ct. 458, 463, 38 L.Ed. 279 (1894); Lodge 743, Int'l Ass'n of Mach., AFL-CIO v. United Aircraft Corp., 299 F.Supp. 877, 890 (D.Conn.1969), modified on other grounds, 534 F.2d 422 (2d Cir.1975); In re City of Bridgeport, 129 B.R. 332, 334 (Bankr. D.Conn.1991).
Despite the Debtors' protestations, this is not an instance where the Trustee is seeking to sell property to ameliorate his failure to timely object to exemption claims, and thereby shift to the Debtors the burden of proof that he would have borne in an exemption objection matter under Fed.R.Bank.P. 4003(c). In point of fact, the Trustee does not object to the Debtors' exemption claim, and he is fully prepared to recognize their $1.00 claimed exemption interest in the Stock.
The filing of a joint petition under 11 U.S.C. § 302(a) creates an estate or estates comprised of, inter alia, "all legal or equitable interests of . . . each debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The Bankruptcy Code permits debtors to exempt from their estates certain interests in property. 11 U.S.C. § 522(b). Toward that end, the...
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