In re Fraden
Decision Date | 08 November 2004 |
Docket Number | No. 02-41498-HJB.,02-41498-HJB. |
Citation | 317 B.R. 24 |
Parties | In re Enrique M. FRADEN, Sr., Debtor. |
Court | U.S. Bankruptcy Court — District of Massachusetts |
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Michael J. Early, Haverhill, MA, Richard D. Gaudreau, for Debtor.
M. Ellen Carpenter, Roach & Carpenter, P.C., Boston, MA, for Windsor Thomas Group.
David M. Nickless, Nora K. McLaughlin, Nickless & Phillips, P.C., Fitchburg, MA, for Chapter 7 Trustee.
Before this Court are cross motions for partial summary judgment. The underlying dispute arises from the objection of David M. Nickless as Chapter 7 trustee (the "Trustee") to the secured claim filed by creditor Windsor Thomas Group, Inc. ("Windsor Thomas"). Windsor Thomas claims to hold a security interest in the realized proceeds from the Trustee's sale of the income stream from a winning Massachusetts lottery ticket ("the Sale"). The issue to be determined here is whether Windsor Thomas' claim is secured either by a perfected security interest or by an equitable lien arising from one or more prepetition state court orders.1
1. SUMMARY JUDGMENT STANDARD
Summary judgment is proper if "there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law." Fed. R.Civ.P. 56©; Fed. R. Bank. P. 7056. The court must "scrutinizfe the record in the light most flattering to the nonmovant and indulgfe all reasonable inferences in that party's favor." Maldonado-Denis v. Castillo-Rodriguez, 23 F.3d 576, 581 (1st Cir. 1994) (citing Brennan v. Hendrigan, 888 F.2d 189, 191 (1st Cir.1989)); see also Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
The Trustee objects to Windsor Thomas' claim in several respects. Above all else, however, the Trustee argues that Windsor Thomas does not hold a secured claim. Because this issue colors all others, the parties chose, at the Court's urging, to have this determined first. And with respect to this issue, both of the parties have met their preliminary burden to demonstrate that no triable issue of fact exists; no material fact is here disputed. This Court therefore reaches its conclusions as a matter of law.
II. FACTS AND TRAVEL OF THE CASE
In 1995, Enrique M. Fraden (the "Debtor") purchased a winning "Wild Millions" lottery ticket issued by the Commonwealth of Massachusetts Lottery Commission (the "Lottery Commission"). The ticket entitied the Debtor to receive twenty annual payments of $50,000 (approximately $35,000 after taxes) (the "Lottery Payments").
From January 1996 through October 1998, Windsor Thomas made monetary advances to the Debtor. Coincident with the last advance, the Debtor signed an "Integrated and Restated Promissory Note" (the "Note") in favor of Windsor Thomas for $136,504.00—representing the total of advances made up to and including that date. The Debtor also executed a security agreement (the "Security Agreement") to secure payment of the Note. The Security Agreement purported to "assign, transfer, and set ... over" a security interest in the Debtor's "right, title, power, privilege and beneficial interest" in "those sixteen (16) annual payments ... due him as a result of winning the ... State Lottery" and "the rights of the Debtor in that certain ... State Lottery ... award."2
After the Debtor defaulted, Windsor Thomas filed a complaint (the "Complaint") against the Debtor in the Commonwealth of Massachusetts Superior Court Department of the Trial Court, Essex Division (the "Superior Court") in the summer of 1999, seeking to collect on the Note.3 Approximately one year later, on May 10, 2000, Windsor Thomas filed a "Motion for Preliminary Injunction and for Reach and Apply" (the "First Injunction Motion"), seeking to enjoin the Lottery Commission from disbursing Lottery Payments to the Debtor, and seeking to enjoin the Debtor from dissipating the next payment installment.4
After a hearing, the Superior Court found that the preliminary injunction was warranted and ordered the Debtor to "deposit the full amount of the proceeds of any check received by him from the Lottery into Court within three days of receipt of such check" (the "First Injunction"). The request for an injunction against the Lottery Commission, however, was denied without prejudice.
On May 31, 2001, the Superior Court endorsed the Second Injunction Motion as "allowed" (the "Second Injunction").8 Shortly thereafter, on October 9, 2001, the Superior Court granted summary judgment in favor of Windsor Thomas.9
On March 12, 2002, Windsor Thomas filed an involuntary Chapter 7 petition against the Debtor. The Debtor failed to answer or otherwise respond, and this Court entered an Order for Relief on April 30, 2002. Soon thereafter, the Trustee filed a "Motion to Compel Turnover of Lottery Proceeds" (the "Motion to Compel Turnover"). After a hearing, and no objections having been raised, this Court granted the Trustee's Motion to Compel Turnover on September 3, 2002.10
On March 13, 2003, the Trustee filed with this Court a "Motion By Trustee For Authority To Sell (Proceeds of a Winning Massachusetts Lottery Wild Millions Ticket) Estate Property Free and Clear of all Liens and Encumbrances" (the "Motion to Sell") and a "Notice of Intended Private Sale of Estate Property to Street Capital of Proceeds of a Winning Massachusetts Lottery Wild Millions Ticket" (The "Notice of Sale"). Again, no objections were raised. Following a hearing on June 3, 2003, this Court entered an order granting the Trustee's Motion to Sell and authorizing the sale of the Lottery Payments to Settlement Funding (a higher offeror) in the amount of $401,500.00.
Subsequent to the filing of the Motion to Sell and Notice of Sale, but prior to the actual order authorizing such sale, Windsor Thomas filed a Proof of Claim in the amount of $326,539.25 (plus additional interest and costs), based on "money loaned." 11 The Proof of Claim states that the claim is secured by "an equitable lien on the lottery proceeds from the reach and apply injunctive relief granted in state court." The Trustee objected to Windsor Thomas' assertion that it holds a secured claim in the Lottery Proceeds. Windsor Thomas filed its "Motion for Summary Judgment on the Trustee's Amended Omnibus Objection to Claims" (the "Summary Judgment Motion") asking this Court to find that its claim is secured. The Trustee responded with a "Memorandum of Law in Support of Trustee's Opposition to Motion of Windsor Thomas Group, Inc. for Summary Judgment on the Trustee's Amended Omnibus Objection to Claims and Trustee's Cross Motion for Summary Judgment" (the "Trustee's Motion").
III. POSITIONS OF THE PARTIES
Windsor Thomas first claims that it holds a valid and perfected security interest in the Lottery Payments pursuant to the Security Agreement and the late-filed financing statement. The Trustee argues that the Security Agreement was ineffective to create any security interest because the Security Agreement constituted a prohibited assignment of the Lottery Payments under Massachusetts General Laws ch. 10, § 28. Pursuant to that statute, "no right of any person to a prize shall be assignable.."12 M.G.L. ch. 10, §28 (2000).13 The Trustee relies on recent decisions by the Massachusetts Supreme Judicial Court (the "SJC") and the Massachusetts Appeals Court for the proposition that M.G.L. ch. 10, § 28 creates a brightline rule prohibiting voluntary assignments of lottery prizes, including the pledge of lottery prizes as collateral under promissory notes and security agreements.14
Windsor Thomas argues that this case is distinguishable because it holds a security interest not in the prize but in "the proceeds of the Debtor's ownership interest in lottery payments." Once issued to the winner, Windsor Thomas says, a creditor may hold a secured interest in the proceeds of the prize. Because Windsor Thomas believes that it holds a valid and perfected security interest, it claims that the interest attached to the proceeds of the Sale. The Trustee responds by noting the absence of legal authority for Windsor Thomas' position, by demonstrating similarities between the security agreement at issue in Midland States and the Security Agreement in this case, and by dismissing Windsor Thomas' attempt to differentiate the "proceeds" of the Debtor's interest in the income stream from the Lottery Commission from the Lottery Payments. Finally, the Trustee argues that even if Windsor-Thomas had perfected a prepetition security interest in the Lottery Payments, 11 U.S.C. § 552(b)(1) precludes the extension of that perfected pre-petition lien to the proceeds of the...
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