In re Equator Corp.

• Decision Date: 20 February 2007
• Docket Number: Bankruptcy No. 06-30414.,Adversary No. 06-3581.
• Citation: 362 B.R. 326
• Parties: In re EQUATOR CORP., Debtor. Kenneth R. Havis, Chapter 7 Trustee, Plaintiff, v. Susan C. Norman, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Texas

362 B.R. 326

In re EQUATOR CORP., Debtor Kenneth R. Havis, Chapter 7 Trustee, Plaintiff, v. Susan C. Norman, Defendant.

Bankruptcy No. 06-30414.

Adversary No. 06-3581.

United States Bankruptcy Court, S.D. Texas, Houston Division.

February 20, 2007.

COPYRIGHT MATERIAL OMITTED

David Ronald Jones, Porter and Hedges LLP, Houston, TX, for Plaintiffs.

Harold Allen Chamberlain, Attorney at Law, Houston, TX, for Defendants.

MEMORANDUM OPINION

FINDINGS OF FACT AND CONCLUSIONS OF LAW CONCERNING ORDER GRANTING PARTIAL SUMMARY JUDGMENT

WESLEY W. STEEN, Bankruptcy Judge.

Plaintiff Trustee, Kenneth R. Havis, filed this adversary proceeding to recover an alleged unauthorized post-petition payment to Defendants. Both Plaintiff and Defendants moved for summary judgment. The Court finds that there is no genuine dispute of material fact and that judgment as a matter of law can be issued on some, but not all, issues. Prior to the filing of the bankruptcy petition, Defendant Frankoff did not own the funds in question; Debtor had an interest in those funds, and the funds became property of the estate. Therefore the trustee can avoid the transfer. However, there is insufficient summary judgment evidence to address the Defendants' allegations that Defendants have a lien on the funds and that they have rights superior to the trustee with respect to some or all of the funds. And there is insufficient summary judgment evidence and insufficient briefing concerning Plaintiff s claim for damages for violation of the automatic stay. Therefore, partial summary judgment is granted in favor of Trustee by separate written judgment issued this date and the Court will issue a scheduling order for determination of the remaining issues.

I. JURISDICTION

This is an adversary proceeding, a civil proceeding, arising in a case under title 11 and arising under title 11 of the United States Code. The United States District Court has jurisdiction under 28 U.S.C. § 1334(b) and (e). By Order dated August 9, 1984, superseded by General Order 2005-6 on March 10, 2005, under authority granted by 28 U.S.C. § 157(a), the United States District Court for the Southern District of Texas referred all such proceedings to the bankruptcy judges for the district. This is a core proceeding as defined by 28 U.S.C. § 157(b)(2)(F). The bankruptcy judge may hear and may determine core proceedings, 28 U.S.C. 157(b)(1). No party has objected to the exercise of core jurisdiction by the undersigned bankruptcy judge.

II. STANDARDS FOR SUMMARY JUDGMENT

Summary judgment is warranted if a party establishes that there is no genuine dispute about any material fact and that the law entitles it to judgment. Fed. R.Civ.P. 56(c). Rule 56(c) mandates "the entry of summary judgment, after adequate time for discovery and upon motion, against any party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). Fed.R.Civ.P. 56(c) is incorporated into the Federal Rules of Bankruptcy Procedure by rule 7056.

All justifiable inferences will be drawn in the nonmovant's favor, see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986), but conclusory affidavits will not suffice to create or negate a genuine issue of fact. See Reese v. Anderson, 926 F.2d 494, 498 (5th Cir.1991); Shaffer v. Williams, 794 F.2d 1030, 1033 (5th Cir.1986). Unless there is sufficient evidence to return a verdict in the nonmovant's favor, there is no genuine issue for trial. See Anderson v. Liberty Lobby, Inc., 106 S.Ct. at 2511. Admissibility of evidence on a motion for summary judgment is subject to the standards and rules that govern evidence at trial. See Rushing v. Kansas City Southern Railway Co., 185 F.3d 496 (5th Cir. 1999), cert. denied, 528 U.S. 1160, 120 S.Ct. 1171, 145 L.Ed.2d 1080 (2000).

Rule 56 of the Federal Rules of Civil Procedure provides:

(c) ... The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

(e) ... When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for the trial.

III. FACTS

Prior to the commencement of this bankruptcy case, Steven Frankoff, attorney at law, and Equator Corporation ("Debtor"), signed an agreement for Frankoff to file a lawsuit for Debtor against Merloni.¹ The agreement provided for a contingency fee.

Atul Vir ("Vir") and Debtor are separate and distinct entities. Vir owned Debtor. Debtor owned the cause of action against Merloni. Debtor was the party to the contingency fee agreement, not Vir.

On August 16, 2005, Debtor signed a settlement agreement with Merloni (the "Merloni Settlement").² Under that agreement, Equator received a total of $725,000, payable $375,000 immediately and an additional $350,000 on January 17, 2006. But the agreement also provided for Merloni to provide to Debtor certain parts for repairs to equipment and for Merloni to release Debtor from certain liability.

The contingency fee was 40%. Forty percent of $725,000 is $290,000. The contingency fee agreement does not clearly define whether the contingency fee also applies to non-cash payments, such as hard asset "parts" or release of liability.

The first payment was a check made payable jointly to Frankoff and Debtor.³ The check was endorsed and was deposited in Frankoff's client account. Frankoff alleges that he and Vir agreed that Frankoff would take his fee out of the second payment. That agreement was not documented. Frankoff alleges that the $375,000 was disbursed to pay Debtor's debts.

On January 17, 2006, the second payment ($350,000) was made.⁴ A dispute arose between Frankoff and Vir over Frankoff's fee. The entire fund was deposited into the IOLTA account of Peter Riga, Vir's counsel for the fee dispute.⁵

About February 3, 2007, "S. Soe, Individually" sued "Doe Corp." and "John Doe 1, Individually" in state court for breach of contract.⁶ Plaintiff and Defendants in this adversary proceeding appear to concede that the real parties to this lawsuit were Frankoff, Vir, and Debtor; Frankoff s counsel argued in a hearing in this Court that the real names of the parties were not disclosed to avoid any publicity over the fact that Frankoff was suing a client. No summary judgment evidence was submitted in support of that allegation.

Two days after the state court lawsuit was filed, Equator filed its petition for relief under chapter 11 of the Bankruptcy Code commencing this bankruptcy case. By filing the petition, Equator became "Debtor".

Four days later, in state court, Debtor (designated as "Doe Corporation, a chapter 11 debtor") and "John Doe 1, non-debtor," filed an answer and plea in intervention in which:

John Doe individually confesses to judgment in the amount of $262,500.00 which he tenders unconditionally to Plaintiff in full release and satisfaction of all claims that were perfected by contract and lien, which acceptance extinguishes all claims against John Doe 1.

The Court notes a number of peculiarities:

1. Frankoff, Vir, and Debtor are not identified by the state court pleadings. One must take their word for the fact that Frankoff was "S. Soe Individually", that Vir was "John Doe 1 Individually", and that Debtor was "Doe Corp."

2. Forty percent of $725,000 is $290,000. Nevertheless, in the "confession of judgment" Frankoff is allegedly agreeing to accept $262,500.

3. Frankoff never signed the document to accept the payment in satisfaction of claims, but the document alleges that he has made the release.

4. Vir, individually, had no claim to the money. Yet it is Vir that is allegedly confessing judgment. The document does not even suggest that Debtor agrees to the settlement or to the disbursement of funds from Riga's account.

Riga disbursed $196,875 to Defendant Frankoff and $65,625 to Defendant Norman. Norman was Frankoff's attorney in the fee dispute. The two checks, added together, total $262,500. There is no written instrument by which Debtor agrees to the disbursement. This payment was not disclosed to the Bankruptcy Court and was not approved by the Bankruptcy Court.

Frankoff asserts that the money deposited in Riga's IOLTA account was never property of the estate because Frankoff had ownership of the funds, as his fee, prior to the time that the bankruptcy petition was filed. Frankoff asserts that since the money was never property of the estate, payment of the money to him was not a transfer that the trustee can avoid.

IV. ISSUES

A. Unauthorized Post-Petition Transfer of Estate Property

Bankruptcy Code § 549 provides that a trustee may avoid any unauthorized post-petition transfer of property of the estate. The Trustee must prove (1) that a transfer occurred; (2) that the transfer occurred after the commencement of the case; (3) that the transfer was made without court authority; and (4) that the property transferred was property of the estate. 11 U.S.C. § 549.

1. Post-petition Transfer

Bankruptcy Code § 101(54) defines a transfer as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property." Debtor filed its bankruptcy petition February 5, 2006. Money was disbursed from Riga's trust account by check to Defendants. Both checks were issued February 9, 2006, and were honored that day or the...