In re Marill Alarm Systems, Inc.
| Decision Date | 01 December 1987 |
| Docket Number | 85-02034-BKC-SMW.,No. 87-6450-CIV,85-02033-BKC-SMW,87-6450-CIV |
| Citation | 81 BR 119 |
| Parties | In re MARILL ALARM SYSTEMS, INC., and Marill Security Services, Inc., Debtors. MARILL ALARM SYSTEMS, INC., Marill Security Services, Inc., Eddy Marill and Mirtha Marill, Plaintiffs/Appellees, v. EQUITY FUNDING CORPORATION, Theodore Moss and Donald Braverman, Defendants/Appellants. |
| Court | U.S. District Court — Southern District of Florida |
Michael Winer, Ft. Lauderdale, Fla., for plaintiffs/appellees.
Chad P. Pugatch, P.A., Ft. Lauderdale, Fla., for defendants/appellants.
This adversary proceeding is before the Court on defendants/appellants' appeal from a final judgment of the United States Bankruptcy Court for the Southern District of Florida, awarding plaintiffs/appellees $260,500.44 in damages, 68 B.R. 399. The bankruptcy court held that defendants/appellants violated the Florida RICO statute, Fla.Stat. §§ 895.01 et seq., by their scheme to charge usurious interest on a loan to plaintiffs/appellees.
Plaintiffs/appellees Marill Security Services, Inc., Marill Alarm Systems, Inc., and owners Eddy and Mirtha Marill (hereinafter collectively referred to as "Marill") provide security systems and protection to condominiums, shopping centers and industrial parks. Defendant/appellant Donald Braverman ("Braverman") acted as Marill's accountant since shortly after the inception of the business. In 1982 Marill began to experience the first of a series of financial difficulties. Braverman met with defendant/appellant Theodore Moss ("Moss") and arranged for financing from an organization known as Open Door Corporation ("Open Door") and Open Door's owner, Richard Stein, defendants below, procuring an initial loan of $20,000 at a stated interest rate of 18%. On the same date that this initial loan transaction was closed, Braverman created Equity Funding Corporation ("Equity Funding"), another defendant/appellant herein. Braverman represented to the Marills that they were required to make additional payments on the loan in order to secure a relationship with Open Door and to keep open the possibility of additional financing. These "additional loan payments" were paid to Equity Funding and collected by Braverman. Over the next three years, Open Door loaned additional funds to Marill until, ultimately, Marill had borrowed a total of approximately $175,000 from Open Door. Throughout that time period, a pattern developed whereby the amount collected by and paid to Equity Funding in "additional loan payments" increased each time Open Door loaned more funds to Marill. Ultimately, Marill paid a total of $86,833.48 to Equity Funding in additional payments.1
Marill Alarm Systems and Marill Security Services filed a voluntary petition for bankruptcy under Chapter 11 in the United States Bankruptcy Court for the Southern District of Florida on September 9, 1985. On October 11, 1985, Eddy and Mirtha Marill also filed for voluntary bankruptcy under Chapter 11 in the same court. On February 3, 1986, this adversary proceeding was filed. The Complaint alleges that Open Door and Equity Funding, through Moss and Braverman, conspired to charge and/or collect usurious interest from Marill on the Open Door loans. Count I claims that appellants violated Fla.Stat. § 687.071 (the Florida usury statute) and prays that Open Door's notes be cancelled and that all principal and interest paid be returned to Marill. Count II alleges that appellants' conduct constitutes a "pattern of racketeering activity" pursuant to Fla.Stat. § 895.02(1)(a) (Florida RICO) and prays for treble damages thereunder. Count III prays for a determination as to the validity and priority of Open Door's liens. Count IV seeks an order enjoining appellants from collecting the debt. On October 3, 1986, Marill amended its complaint by adding two counts. Count V alleges that the funds paid to Equity represent a fraudulent conveyance under 11 U.S.C. § 548 and Count VI makes a similar claim under Florida's fraudulent transfer statute (as made applicable through 11 U.S.C. § 544(b)). Marill settled with Open Door and Richard Stein prior to trial.
On November 3 and November 6, 1986, a trial was held before the Honorable Sidney M. Weaver in the United States Bankruptcy Court for the Southern District of Florida. After trial, the Court permitted Marill to amend its complaint to conform to the evidence by adding a claim under Fla.Stat. § 817.035 ().
On December 30, 1986, Judge Weaver entered his Findings of Fact and Conclusions of law and entered Final Judgment on the adversary complaint for Marill in the amount of $260,500.44 (representing $86,833.48 in damages, trebled). This appeal followed.
The bankruptcy judge based his findings and conclusions solely on Marill's Florida RICO claim. The judge found that the facts and circumstances surrounding the financial arrangement between appellants and Marill indicated that appellants were in fact charging Marill interest at a usurious rate. He also found that there was a fraudulent practice here because Braverman collected the payments under false pretenses, thus violating Fla.Stat. § 817.035.
Specifically, the judge doubted the credibility of Braverman's testimony that the payments to Equity Funding represented "consulting fees" and not additional interest. The judge did find Marill's testimony to be credible in light of the circumstantial evidence presented at trial. The payment history, presented at trial, as to both Open Door and Equity Funding, reflected a tie-in as to amounts and dates of payments which he believed to be more than coincidental. Equity Funding, with its purported consulting arrangement, was incorporated on the very same date that the first loan was made by Open Door. Braverman's testimony as to the consideration for the "consulting arrangement" contradicted the actual payments. There was no comprehensive billing arrangement, engagement letter or other documentation reflecting the basis for the purported consulting arrangement. Moreover, there was no satisfactory explanation of services provided to warrant the amount of fees claimed in excess of charges for normal accounting services.
Accordingly, the judge concluded that either of these violations (usury or obtaining property under false pretenses) would support liability under Florida's RICO statute as a pattern of racketeering activity. Because he awarded treble damages in the amount of $260,500.44, the judge further concluded that this award encompassed all damages sustained by Marill and found it unnecessary to reach the remainder of Marill's claims.
Appellants argue that the bankruptcy judge was without jurisdiction to enter a dispositive judgment in this action because it is a related, "non-core" proceeding and his jurisdiction was limited by 28 U.S.C. § 157(c)(1).2 Pursuant to this section, the bankruptcy judge must determine, on his own motion or by the motion of a party, whether an adversary proceeding is core or non-core. See 28 U.S.C. § 157(b)(3). In the case at bar, the bankruptcy judge did not make this critical determination. On March 25, 1986, Open Door filed its Motion for Determination of Nature of Proceedings with the bankruptcy judge, which requested that he determine whether the proceeding was core or non-core. The judge denied Open Door's Motion without prejudice on April 16, 1986.3 Therefore, this action proceeded to trial without a determination as to the nature of the proceedings.
It is a critical and mandatory duty of the bankruptcy judge to determine the nature of an adversary proceeding pursuant to 28 U.S.C. § 157(b)(3). If the bankruptcy judge enters a final judgment without having made such a determination, it must be invalidated. In In re Nell, 71 B.R. 305 (D.Utah 1987), the court held that even if the parties do not move for a determination as to the nature of the proceedings, the ultimate responsibility to do so lies with the bankruptcy judge, and stated:
Section 157(b)(3) of title 28 requires the bankruptcy judge to initially determine whether the proceeding is core or non-core; it does not prescribe when that determination is to be made. When parties fail to timely move the bankruptcy court for an early determination of whether the proceeding is core or non-core, they waive their right to object to the reference of a non-core matter to the non-article III tribunal. The parties\' failure to so move the court, however, does not alter the statutory limits on the bankruptcy court\'s jurisdiction. Section 157(b)(3) still requires the bankruptcy judge to determine the nature of the proceeding, and section 157(c)(1) still places limits on the bankruptcy judge\'s jurisdiction in non-core matters. Rather, failure to timely move the court places the timing of that determination entirely within the discretion of the bankruptcy judge. The bankruptcy judge need not make the sua sponte determination until the time when either the final order or proposed findings are to be prepared.
In re Nell, 71 B.R. at 311 (emphasis added). See also In re STN Enterprises, Inc., 73 B.R. 470, 479 (Bankr.D.Vt.1987); In re Nanodata Computer Corp., 52 B.R. 334, 341 (Bankr.W.D.N.Y.1985).
The reason this function is so critical stems from the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipeline Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). In Marathon, a plurality held that Congress' Bankruptcy Reform Act of 1978 involved an unconstitutional grant of power because it empowered an article I bankruptcy court to hear controversies required by the constitution to be heard by an article III co...
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