In re Michael

Decision Date17 December 2009
Docket NumberNo. 05-21968-TLM.,05-21968-TLM.
Citation423 B.R. 323
PartiesIn re Robert M. MICHAEL, Gwendolyn K. Michael, Debtors.
CourtU.S. Bankruptcy Court — District of Idaho

Robert M. Michael, pro se.

Gwendolyn K. Michael, pro se.

MEMORANDUM OF DECISION

TERRY L. MYERS, Chief Judge.

Before the Court is a dispute over the effect of a bankruptcy sale of estate assets by a chapter 7 trustee. The matter was presented at an evidentiary hearing on October 6, 2009, argued on October 9, and taken under advisement.

The chapter 7 debtors, Robert and Gwendolyn Michael ("Debtors"), represent themselves. As a result, multiple extraneous issues and theories were argued. Further, the evidentiary record presented by Debtors at hearing made laborious the Court's evaluation of the material facts and issues in this matter.

The Court concludes that Debtors' motion to "reconsider" or set aside the sale should be denied. This Decision constitutes the Court's factual findings and legal conclusions. Fed. R. Bankr.P. 7052, 9014.

BACKGROUND AND FACTS
A. The bankruptcy

On October 13, 2005, Debtors filed a voluntary petition for chapter 7 relief, commencing this bankruptcy case.1 They were at that time represented by counsel. Their discharge was granted on February 8, 2006.

The chapter 7 trustee, C. Barry Zimmerman ("Trustee") later issued, on November 13, 2006, a final report and accounting of his administration of the assets of the estate. It reflected that Trustee had gathered $2,255.54 worth of assets.2 Distribution of that amount in the priorities demanded by the Bankruptcy Code would result in something less than a 2% dividend on creditors' claims. Following notice and lack of objection, the Court issued, on January 12, 2007, an Order allowing Trustee's proposed final accounting and directing distribution. On June 13, 2007, following a supplemental report of Trustee, the Court discharged Trustee and closed the estate.

B. The state court suits

Two lawsuits in the courts of Idaho are material to the present dispute. The Court outlines the same, as best it can from the record.3

1. Leon's Mfg. Co., Inc. v. Robert Michael, et al.

Stephen F. Smith, a Sandpoint, Idaho attorney ("Smith") represented Debtors in this First Judicial District, Boundary County, action, Case No. CV2003-432.4 In this business dispute, Leon's Manufacturing Company ("Leon's") sued for breach of contract. Debtors counterclaimed for overcharges and offset.5 The matter was tried in late August, 2005, and a verdict was rendered in early September, 2005. Leon's recovered a judgment and was awarded costs and fees. A directed verdict was also rendered against Debtors on their counterclaim. The outcome in this case was, Debtors contend, based on Smith's failures in his legal representation in this action, including pleading errors.

As noted, Debtors filed bankruptcy in October, 2005, a little more than a month after the adverse verdict in Leon's Mfg. Co. v. Michael. Their schedule F (unsecured creditors) listed Leon's as holding a disputed claim of $89,000.

2. Michael v. Smith

On August 29, 2007, Debtors filed a malpractice suit against Smith, Case No. CV-2007-312, First Judicial District, Boundary County.6 This suit was filed a little over two months after the closing of their bankruptcy case.

The transcripts of the various hearings before the state court in this action7 reflect that, at a May, 2008 status conference, the court scheduled a January, 2009 jury trial. However, Smith thereafter moved for summary judgment in July, 2008, contending that Debtors lacked standing because the cause of action was an asset of their bankruptcy estate and only the bankruptcy trustee had standing to pursue it, and further arguing that Debtors' assertion of the undisclosed asset should also be barred by judicial estoppel. At hearing on that motion, the state court noted that it deemed an important question to be when Debtor gained knowledge of the existence of the malpractice claim. That court denied the motion on the basis of an unresolved factual issue as to when Debtors knew or should have known of the cause. Ex. 119 at transcript of July 22, 2008 hearing, p. 51-52.

C. Reopening of the bankruptcy

On August 7, 2008, Debtors (now appearing pro se) moved to reopen their bankruptcy case. See Doc. No. 36. They contended that they "recently discovered the asset of a malpractice lawsuit which occurred pre-petition." Id. at 1. In an accompanying affidavit, Doc. No. 37, they indicated that their bankruptcy was in part caused by a state court lawsuit in which they were represented by "the Smiths."8 Debtors contended that, while they felt Smith "did a poor job on the case," they did not have any "reason at the time to believe the ineptness rose to the level of any litigation," and, thus, they scheduled no claim against Smith as an asset in their bankruptcy.

Debtors' motion was granted and the case reopened by Order entered August 19, 2008. Under Fed. R. Bankr.P. 5010, the Court ordered the United States Trustee to appoint a trustee, and the U.S. Trustee subsequently reappointed Trustee Zimmerman. Doc. No. 38.9

D. Michael v. Smith (continued)

In its July, 2008 ruling, the state court had also alluded to a question of the absence of an indispensable party, i.e., Trustee. Smith moved to dismiss the action on that ground, and that motion came before the state court in September, 2008, and again in October, 2008. At the latter hearing, the state court stated that it would not rule until it "ha[d] something from [Trustee]" to clarify the bankruptcy status. Id. at transcript of Oct. 15, 2008 hearing, p. 77-78.

E. Bankruptcy sale

Though Debtors never did amend their bankruptcy schedules to disclose the malpractice lawsuit as an asset, their motion to reopen and their communications with Trustee provided Trustee notice of its assertion.10

On November 6, 2008, Trustee issued a "Notice of Sale by Trustee." Doc. No. 46. The notice indicated that, at an auction to occur on December 8, 2008, Trustee would sell "[a]ll right, title and interest in the cause of action In Re: Michael v. Smith, CV07-312, First District Court of the State of Idaho." Id. Trustee also stated: "Estimated value [of the asset] is unknown as it is a lawsuit to be prosecuted. The trustee has weighed the cost of litigating, requirement of expert witnesses and other costs. In his judgment this sale is the best resolution for the estate." Id.

F. The sale

The sale occurred as scheduled. Miles and Debtor Robert Michael participated, and were the only bidders. After starting with an opening offer of $2,500.00 and bidding back and forth, Smith, through Miles, purchased the estate's interest in the lawsuit for $16,600.00. See Doc. No. 48 (report of sale) (indicating that Smith purchased "All right, title and interest in the bankruptcy estate's interest in Case No. CV07-312[.]") (emphasis added).

1. The bill of sale

Trustee issued a bill of sale to Smith on December 19, 2008. See Ex. 102. It conveyed to Smith:

All right title and interest of the estate in the cause of action between the debtor(s) Robert M. Michael, Plaintiff, v. Stephen F. Smith, Attorney at law, Chartered, and [sic] Idaho Corporation; Stephen F. Smith, an individual, Case No. CV07-312 in the District Court of the First Judicial District of the State of Idaho, in and for the county of Boundary.

Id. (emphasis added).

G. Advising the state court

In order to accommodate the state court's desire for an explanation of the treatment of the claim as a bankruptcy asset, Miles prepared an affidavit for Trustee's review and signature. Ex. 100. Trustee testified that he reviewed a draft of this document before signing it, and noticed only one problem—it referred to him as the "United States Trustee" rather than properly as the chapter 7 trustee. With that correction, Trustee executed the affidavit. Id.

The affidavit, however, varied from the notice of sale, the report of sale, and the bill of sale in its description of the property sold. The affidavit stated, in part:

3. I [Trustee] took control of all right, title, and interest to this [sic] causes of action in the case of Robert M. Michael v. Stephen Smith, et al. Case No. CV07-312 in the District Court of the First Judicial District in and for the County of Boundary.

. . .

5. I sold all the right, title, and interest to this cause of action of Robert M. Michael v. Stephen Smith, et al. to Stephen Smith on December 8, 2008, at a bid sale. I gave Stephen Smith a Bill of Sale for all Plaintiff's causes of action.

Ex. 100 (emphasis added).11

The language of the affidavit was inconsistent with the Trustee's bankruptcy documents, which qualified and limited what was sold to "the estate's interest" in the litigation. Trustee failed to correct this language before signing the affidavit.12

As discussed further below, Debtor's primary argument on the Motion now before this Court is that Trustee's affidavit expanded what was, or what could be, properly sold. Debtors claim in submissions to this Court that the state court litigation included certain "post-petition" causes of action that could not be sold by Trustee. They argue that the state court was misled by the affidavit and related submissions from Smith.

H. Hearings before the state court

Debtors, and to a lesser degree Smith, characterized what transpired in state court. Neither party provided this Court with much in the way of evidence, and reconciling their various descriptions has proven to be largely impossible. In this regard, the Court concludes that what the state court itself said is of more value than the reports and interpretations of the litigants.

On January 21, 2009, the state court in No. CV-2007-312, entered a "Memorandum of Decision and Order granting Defendant's Motion to Dismiss" (the "Dismissal Decision"). On March 16, 2009, that same court entered in such case a "Memorandum Decision and Order: 1) Denying Plaintiff's Motion for Reconsideration...

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