In re Frantz, Case No. 11-21337-TLM
| Decision Date | 16 April 2015 |
| Docket Number | Case No. 11-21337-TLM |
| Court | U.S. Bankruptcy Court — District of Idaho |
| Parties | IN RE MARTIN D. FRANTZ, CYNTHIA M. FRANTZ, Debtor. |
The facts relevant to the pending matters are taken from the record before the Court in this chapter 72 case and from the hearing on March 30-31, 2015.3
Three and a half years ago, in October 2011, Martin and Cynthia Frantz("Debtors"4) filed a voluntary petition under chapter 11 commencing this case. Their statement of financial affairs ("SOFA") disclosed a 2010 state court "contract action" pending between Debtors and Idaho Independent Bank ("IIB"). It is clear that IIB is Debtors' single largest creditor. IIB's claim arises from Debtors' unsecured guaranties of an IIB loan to an entity in which Debtors held a majority interest. At the time of the bankruptcy filing the lawsuit had been pending for over a year. While discovery had commenced and mediation had been attempted, no motions for summary judgment had been heard in that suit, and no depositions had been taken. Testimony indicated Debtors filed for bankruptcy the day before Martin Frantz' deposition was scheduled to occur.
In March 2012, on Debtors' and IIB's joint motion, the Court appointed Ford Elsaesser, an experienced bankruptcy practitioner and a chapter 7 trustee, as a "mediator" in the chapter 11. The Court subsequently approved the employment of Maggie Lyons and her business, Resolve Financial Group ("Resolve"), to analyze Debtors' financial activities and transactions. Doc. Nos. 82, 100.5 The application to employ Resolve asserted that Elsaesser believed no mediation couldsuccessfully conclude until a financial professional thoroughly evaluated, analyzed and reported on "Debtors' transfers, finances, assets, liabilities, and businesses[.]" Doc. No. 82 at 2.
In February 2013, Elsaesser filed a status report that noted Resolve's "report" had been provided to him, Debtors, IIB and the United States Trustee ("UST") on January 10, 2013,6 and that Debtors and IIB had agreed to a mediation session to occur in March 2013. On March 29, 2013, however, Debtors and IIB filed a joint motion for conversion of the case to chapter 7. Doc. Nos. 185, 187. The case was converted to a liquidation case under chapter 7 on April 23, 2013. Doc. No. 193.
IIB filed an adversary complaint on August 23, 2013, alleging causes of action under §§ 523(a)(2) and (a)(6). Adv. No. 13-07024-TLM.7 IIB sought both a judgment for damages (in an amount not exceeding the full obligations due under the "Eagle Ridge Loan," the "Twin Lakes Construction Loan" and the "Line of Credit" as described therein) and a ruling that such damages, plus interest,attorneys' fees and costs, were nondischargeable. Adv. Doc. No. 1.8
In late September 2013, Debtors moved for an order requiring Trustee to abandon the "counterclaim" they allegedly had against IIB related to the matters asserted in or underlying the adversary proceeding.9 After Trustee objected, Debtors withdrew their abandonment request shortly before a scheduled evidentiary hearing on that matter.
As noted, administration of the chapter 7 case commenced in April 2013. After selling a number of personal property assets, Trustee sought turnover of Debtors' real property in Scottsdale, Arizona. Ultimately, after months of litigation, Trustee was granted authority to sell this property. The disputes involving this request, and Debtors' several alternative litigation strategies in objecting to Trustee's request and attempting to gain control of the Arizona real property, were described in detail in the Court's oral ruling approving sale and in a February 2015 decision denying Debtors' request for a stay pending appeal. Doc.No. 414.10 In addition, it was established at the March 30 hearing that Debtors caused several lis pendens to be filed of record on the Arizona property after the Court ruled. The first such filing was removed following Trustee's protests. The second was removed after the Court entered an order compelling its removal. That was subsequently followed, however, with the filing of a third, post-sale closing, lis pendens.
On February 27, 2015, just three days after the Court denied their motion for a stay pending appeal, and with rescheduled trial in the IIB adversary looming in May,11 Debtors filed a Motion to Dismiss or Reconvert to Chapter 11, Doc. No. 421 (the "Dismissal/Reconversion Motion"). Debtors' Dismissal/Reconversion Motion is terse, and simply states: The Dismssal/Reconversion Motion was served on all creditors. Id. at 2-5.12
An hour and a half after filing their Dismissal/Reconversion Motion, Debtors filed a Motion for Relief from Stay, Doc. No. 425 (the "Stay Relief Motion"). The Stay Relief Motion seeks relief "for the purpose of determining [in state court] the amount, if any, the Frantzes owe putative creditor Idaho Independent Bank[.]" Debtors specifically disclaim any desire to pursue their counterclaim, and only seek relief to assert "their defenses and affirmative defenses" to IIB's claim.13
At a hearing on March 3, the Court identified a March 30 hearing date for Debtors' two motions and set pre-hearing evidentiary disclosure deadlines. Under Rule 2002(a)(4), a hearing on dismissal or conversion of a chapter 7 case (with exceptions not relevant here) requires 21 days' notice to all creditors and parties in interest. The date selected by the Court for hearing allowed Debtors to issue a notice of hearing on proper notice. Debtors never provided a notice of hearing to creditors. Nevertheless, the Dismissal/Reconversion Motion and the Stay Relief Motion came on for hearing on March 30, 2015. The Court has considered all thetestimony presented14 and the documentary evidence admitted.
In many ways, the motions could be resolved on the basis of the record alone, but over the course of the two day hearing, the parties specifically raised and established a number of facts, some of which the Court highlights below.
Debtors made serial amendments to their schedules and statements throughout the case. The clear weight of the evidence was that all such amendments were triggered by Debtors' undisclosed or inadequately explained assets and transactions, as identified in the Resolve report, or were in response to the questions and objections raised by creditors, the UST and Trustee. In short, Debtors' amendments were not independently initiated or proactive.
When such issues came to light, Frantz said he would advise his attorneys15 of what needed to be changed, added or deleted. He would later receive signature pages to sign regarding the amendments, but he did not necessarily review the amendments or verify their accuracy when executing the verifications.
In October 2010, approximately a year before the bankruptcy filing and several months after the start of the IIB state court suit, Martin Frantz settled apromissory note in the face amount of $1,050,000 owed to Debtors by their son, Tyson Frantz, and his wife, Melissa. Ex. 222.16 On the original SOFA, this was disclosed as a "sale" of a note to Tyson for "an equivalent interest in [the Frantz Family Investment Group, LLC or "FIG"] and $110,000.00" and that this was "in the ordinary course of business." Ex. 202 at 21. Testimony indicated it was a settlement of the obligation owed to Debtors, not a sale of the note.17 Debtors later "explained" to Resolve that they accepted a 19% interest in FIG and cash in satisfaction of the note. See Ex. 223.
As part of this settlement agreement, the parties amended the FIG operating agreement to entitle Debtors to a "priority distribution of $50,000 annually prior to any other distributions." Ex. 224. The distributions were to start 5 years later (i.e., in 2015) with any portion of the payments not made being added to future payments "until paid in full."
Martin Frantz testified he could not recall the amount due on the note. The amortization schedule attached to the note, however, shows total payments of $52,420 and a balance due of $1,066,316.34 as of March 2007. Given thisbalance, and since there is no absolute amount noted in the settlement agreement, it appears the $50,000 payments will exist for an extended period.
Martin Frantz admitted that the right to this income stream was an asset of the bankruptcy estate and is subject to Trustee's administration. The right to these payments has never been disclosed in any schedule B. Though the separate FIG ownership interest was scheduled, the details varied significantly.18
In the January 2012 MOR, Debtors disclosed receipt of $89,619.89 as management or partner fees, with a notation of "GP FEE INCOME AMMON ASSOC." Ex. 228. A settlement statement on this transaction regarding Ammon Associates, Ex. 121, indicates Martin Frantz was paid an "exit fee" of $65,250.00 and a $24,369.89 repayment of a "loan" he had made to the entity.
Debtors' 1% partnership interest in Ammon Associates was disclosed elsewhere in this MOR as worth $80,000. Subsequent MORs failed to reference an ownership interest in Ammon Associates. See Ex. 229. Hand-written notes on the settlement statement, Ex. 121, suggest the "exit fee" was paid for services rendered, and that nothing was paid "for" Frantz' general partner interest becauseall proceeds under the agreement (net of taxes, secured creditors and closing) had to be first paid to limited partners. The post-bankruptcy "sale" and satisfaction or termination of the general partner interest were not disclosed to or approved by the Court.19
Martin Frantz testified that he had made loans to at least two partnerships during the chapter...
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