In re Mcconkey
| Decision Date | 28 March 2016 |
| Docket Number | Case No. 15-60092-7,Case No. 15-60150-12 |
| Court | U.S. Bankruptcy Court — District of Montana |
| Parties | In re WARREN GEORGE MCCONKEY and BETTY JUNE MCCONKEY, Debtors. XL Feeds, LLC, Debtor. |
At Butte in said District this 28th day of March, 2016.
In the above-captioned consolidated bankruptcy cases, the Court held a hearing at Missoula on February 24, 2016, on the "2nd Amended & Substituted Motion to Remove Chapter 7 Trustee" (Document No. 2161 in Case No. 15-60092-7) (hereinafter the "Motion to Remove Trustee") filed by the Debtors and James H. Cossitt, PC, an administrative creditor (together the "Moving Parties"). The Trustee Christy L. Brandon ("Brandon" or "Trustee") filed objections and appeared at the hearing and testified, represented by attorneys Kyle W. Nelson and Robert K. Baldwin of the law firm Goetz, Baldwin & Geddes, P.C. (the "Goetz firm"). The Moving Partieswere represented by attorneys Mary DeNevi and James H. Cossitt ("Cossitt"). Debtor Warren George McConkey ("Warren") testified. Cossitt testified both as a fact witness and as an expert. Cossitt gave opinion testimony on the fiduciary duties of bankruptcy panel trustees and whether Brandon breached her fiduciary duties. Auctioneer for the estate Todd Gardner ("Gardner") testified. Exhibits ("Ex.") A, B, C, D, E, F, G, H, I, J, K, L, M, and Ex. 1 - through - 23, 25, 26, 27, 28, 29, and 32, and 33 were admitted into evidence. At the conclusion of the parties' cases-in-chief, the Court deemed the Motion to Remove Trustee submitted and took it under advisement. After review of the record and applicable law, for the reasons set forth below the Court will deny the Motion to Remove Trustee under 11 U.S.C. § 324.
This Court has jurisdiction of these consolidated bankruptcy cases under 28 U.S.C. § 1334(a). This contested matter is a core proceeding under 28 U.S.C. § 157(b)(2).
Warren George McConkey ("Warren") and Betty June McConkey (together "McConkeys" or "Debtors") are married and reside on a farm located at 3925 Lower Valley Road, Kalispell, Montana. They own co-Debtor XL Feeds, LLC, of which Warren is president, through which they were engaged in the business of manufacturing livestock feed pellets at the same address. Warren testified about crop share arrangements which Debtors had with other persons and, as an example, named Paul Strasden as owner of a two-third's interest in the Debtors' hay crop. Warren recently began receiving social security benefits; his mobility is impaired.
McConkeys contacted Cossitt about litigation they had pending in Montana state court against lienholders and secured creditors, including Whitefish Credit Union ("WCU") andBrophy Farms, Inc. ("BFI"). Cossitt of James H. Cossitt, PC, is an experienced bankruptcy practitioner with several years of practice in this Court and other districts, and a former panel trustee. Cossitt is a member and participates in legal organizations and forums with a focus on bankruptcy law. He is an acknowledged expert in bankruptcy law. The Debtors retained Cossitt and his law firm as their attorney at an hourly fee arrangement.
Cossitt testified that in the summer of 2014 the McConkeys signed a confession of judgment in state court litigation involving a foreclosure action by WCU against them. On February 24, 2015, Cossitt filed McConkeys' Chapter 12 petition, and filed their Schedules and Statement of Financial Affairs on February 27, 2015, listing assets totaling $2,004,307.91 and liabilities totaling $2,284,076.58. Brandon was added to Case No. 15-60092-12 as Chapter 12 Trustee on February 24, 2015. Brandon's law office is located in Bigfork, Montana, which is several miles southeast of Kalispell.
Cossitt filed XL Feeds, LLC's Chapter 12 petition commencing Case No. 15-60150-12 on March 10, 2015. On the same date Debtors filed a motion for substantive consolidation of the two Chapter 12 cases on the grounds their debts and financial affairs were "inextricably intertwined" and consolidation would help them propose a feasible plan. When no objections were filed after notice, on April 1, 2015, the Court granted the motion and substantively consolidated the two cases. Brandon succeeded as Chapter 12 Trustee in the XL Feeds, LLC, bankruptcy case on April 6, 2015.
On June 10, 2015, Cossitt on Debtors' behalf filed an adversary complaint in Adversary Proceeding No. 15-00017 ("AP 15-17") against WCU seeking a money judgment and to avoid WCU's foreclosure judgment as a preference under 11 U.S.C. § 547, and to hold WCU liable foravoided transfers under 11 U.S.C. § 550(a)(1). Debtors filed an amended complaint on June 28, 2015, adding claims for relief against their former attorney Darrell S. Worm ("Worm") and his law firm Ogle & Worm, PLLP ("Ogle & Worm"), for breach of contract, negligence and breach of fiduciary duty in representing Debtors in the confession of judgment.2 By stipulation dated October 13, 2015, Brandon was substituted as plaintiff in AP 15-17, and Cossitt withdrew as plaintiffs' counsel of record.
Cossitt also filed on June 10, 2015, on behalf of the Debtors, a complaint against BFI initiating Adversary Proceeding No. 15-00018 ("AP 15-18"). The complaint prayed for avoidance of BFI's judicial liens against their property under 11 U.S.C. § 544(a) as a result of WCU's foreclosure action and to impose liability against BFI for avoided transfers under § 550(a)(1). Debtors filed an amended complaint adding claims for relief based on equitable subordination under 11 U.S.C. § 510(c) and for negligent misrepresentations by BFI regarding its proof of claim. Brandon was substituted as plaintiff in AP 15-18 on October 13, 2015, although she testified that she began working on AP 15-18 on October 6, 2015. Brandon described the two adversary proceedings as "entangled litigation."
WCU filed Proof of Claim No. 19 on July 8, 2015, asserting secured and unsecured claims totaling $1,379,205.89 based on its foreclosure judgment, secured by real estate and other property. Debtors filed an objection to WCU's Proof of Claim on September 9, 2015, on the grounds WCU failed to attach required security documents and the claim is overstated. WCUfiled amended proofs of claim on November 18, 2015, and January 28, 2016. The most recent amended Proof of Claim 19 states the same total claim amount, but reduced the secured claim to $1,149,000 and includes lists of equipment, machinery, tools and cubing equipment.
BFI filed Proof of Claim No. 20 on July 9, 2015, asserting a secured claim in the amount of $175,556.40 secured by real estate and other property perfected by a UCC-1 and a judgment. The attachments to Claim 20 include the foreclosure judgment from the state court case brought against Debtors by WCU, Cause No. DV-13-1291B in the Montana Eleventh Judicial District Court; the stipulated judgment in favor of BFI against XL Feeds in No. DV-12-02 in the Montana District Court for the County of Pondera; the confession of judgment in the same case by the McConkeys; and UCC-1 financing statements listing cubing equipment. Debtors filed an objection to BFI's Proof of Claim on September 9, 2015, alleging that the value of security was overstated, that BFI's lien against real estate was terminated by the judgment and that BFI's lien against other property is not supported by attached security agreement.
Both of Debtors' objections to claims of WCU and BFI were set for hearing in November of 2015. Those hearings were continued; Debtors eventually filed a withdrawal of their objections (Doc. 219).
The McConkeys converted their case voluntarily to Chapter 7 on September 24, 2015. Brandon was removed as Chapter 12 Trustee and was added to the case as Trustee under Chapter 7 on the same date. A § 341 meeting of creditors was scheduled to be held on November 6, 2015.
After the McConkeys' case was converted, Cossitt sent Brandon emails on September 24, 2015, and September 25, 2015, discussing the status of the adversary proceedings and theDebtors' appeal in the Montana Supreme Court, debtor-in-possession ("DIP") bank accounts, postpetition schedules, insurance and livestock. Ex. A. Cossitt testified that Debtors offered to allow the Trustee to inspect the assets in late September of 2015. Cossitt stated that he and the Debtors were available to meet with Brandon on the morning of October 7, 2015, and that he was available to be employed as special counsel to the Trustee on some of the listed matters. Ex. A. He informed Brandon, however, that he would be out of state after October 7, 2015, until at least November 3, 2015.
Brandon testified that, after conversion, her priority was to administer the "litigation assets," i.e., the adversary proceedings and state court appeal. She was facing deadlines set by scheduling orders and had an appellate brief due; she testified that her initial efforts were to investigate the appeal.
Cossitt and Brandon spoke by telephone on September 30, 2015, after which Cossitt sent Brandon a follow up email, Ex. B, discussing Debtors' wishes regarding ongoing utility bills and claims of attorney-client privilege in documents related to the appeal which were to be turned over to the Trustee. Ex. C is an email from Cossitt to Brandon dated October 1, 2015, discussing the McConkeys' claims of privilege, document production, and asking whether Brandon will abandon the real estate and buildings. Cossitt sent Brandon all non-privileged documents on a flash drive.
Brandon testified that, based on her review of the proofs of claims filed and Cossitt's flash drive, she concluded that it was not in the best interests of creditors to hire counsel. She declined to employ Cossitt as special counsel. Instead of litigating the adversary proceedings and prosecuting the Debtors' appeal, Brandon testified, she wanted to negotiate settlements.
Debtors filed their post-conversion amended Schedules and Statements on October 7, 2015. Amended Schedule B...
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