In re Morgan
| Decision Date | 16 April 2020 |
| Docket Number | Bankruptcy No. 10-26708 |
| Parties | In re: Troy R. Morgan, Debtor. |
| Court | U.S. Bankruptcy Court — District of Utah |
Honorable William T. Thurman
This matter came before the Court by way of two separate motions that are interrelated: 1) Troy Morgan's ("Troy") motion to reopen his bankruptcy case and for contempt and sanctions for alleged violation of his discharge injunction and 2) Brent Morgan's ("Brent") motion to dismiss Troy's bankruptcy case - Brent's motion is better characterized as a motion to reclose the case. Both motions present identical issues and arguments; therefore, the Court combined these motions to be heard at one joint evidentiary hearing. The Court does not customarily refer to parties by their first names, but here, since their surnames are identical, the Court elects to use first names. To briefly summarize, the primary issues are whether this case should be reclosed, whether any obligation Troy had to Brent was discharged, whether Brent knew about the bankruptcy, and if so, should Brent be sanctioned for violating the discharge. The Court conducted an evidentiary hearing on February 10, 2020, and heard closing oral argument on March 9, 2020. Blake Miller and Craig Howe appeared on behalf of the Troy and Stephen Christiansen appeared on behalf of Brent. The Court took the matter under advisement and makes its findings of fact and conclusions of law here within.
Brent and Troy are brothers-in-law in a close-knitted family, the Morgans - Brent married Christa Morgan ("Christa") and took the Morgan surname. The Morgans would often have family gatherings every other week and on holidays. Further, from the testimony provided to the Court, it is clear the Morgans are very involved with each other's lives. Brent and Troy both ran separate lending businesses: Summit Development (Brent's) and Ezama (Troy's). Both Summit and Ezama were hard money lenders, meaning the loans were generally high risk with short repayment terms. Brent and Troy often conferred with one another in their lending business. In 2009, Brent and Troy had a falling out which changed the way the family interacted. While Brent and Troy were not on speaking terms, Troy, Brent, and Christa remained close with other members of the Morgan family and frequently attended family gathers - several witnesses testified that Brent and Troy always kept a respectful distance from each other at these gatherings and at most, engaged in small talk.
This bankruptcy case began on May 18, 2010, when Troy filed for bankruptcy under Chapter 7 of the Bankruptcy Code, 11 U.S. Code §701 et al. Troy filed his statement of financial affairs and schedules (the "Schedules") on that same date and did not schedule Brent as a creditor. On August 16, 2010, the Chapter 7 Trustee filed a report certifying that there was no property to be distributed and that the estate had been fully administered, which rendered it a no-asset case. No objections were filed, and Troy received a discharge under 11 U.S. Code § 727 on September 1, 2010. On September 20, 2010, the Court noted the filing of the Trustee's final account and closed Troy's bankruptcy case.
On August 26, 2014, the Utah Department of Commerce, Division of Securities (the "Division"), initiated an Order to Show Cause in an administrative proceeding against Brent and Summit alleging violations of Utah securities laws in connection with his investment business. The events which formed the basis for the Division's action occurred in 2007. The Division eventually imposed a fine against Brent and Summit. Brent and Summit appealed the Division's decision; however, the Utah Court of Appeals upheld the Division's fine in 2018. At the evidentiary hearing in this Court, evidence was presented indicating that the Brent and Summit reached an agreement in 2019 with the Division, whereby they agreed to pay a reduced amount of $68,166.00 in order to resolve the fine. Evidence was also presented that such amount has now been paid.
On July 31, 2018, Brent filed an action against Troy in a Utah state court ("State Court Action") based on theories of indemnity and unjust enrichment resulting from the Division's fine. In the complaint, Brent alleges that the fine imposed by the Division arose because Troy's actions in June 2007. The summons and complaint were served on the Troy on August 2, 2018. Troy was twice given additional time to file a response to the complaint, which he failed to do. On September 25, 2018, Brent obtained a default judgment against Troy for $140,395.00. That amount was identical to that fine originally imposed by the Division.
Shortly after the default judgment had been entered, on September 28, 2018, Troy emailed Brent and Brent's counsel, alerting them to the fact that the underlying actions which formed the basis of Brent's State Court Action claim were discharged in Troy's 2010 bankruptcy case. See Brent's Exhibit M. Over the next several months; Troy continued to reiterate the point of his original email - that the underlying debt Brent sought to collect on was discharged. See Troy's Exhibit 12. On November 12, 2018, Troy's counsel who assisted him with his bankruptcy petitionin 2010 filed a notice of bankruptcy in the State Court Action, and on December 3, 2018, wrote a letter to Brent's counsel once again alerting him to the fact that any obligation owing to Brent had been discharged. See Troy's Exhibits 13 and 14.
On January 2, 2019, Brent filed an application for a writ of garnishment in the State Court Action. See Brent's Exhibit OO. The state court conducted an ex parte hearing, without Troy's appearance, on February 13, 2019, on Brent's application for the writ. See Id. The state court issued the writ on February 14, 2019. Id. However, Brent did not immediately begin garnishing Troy's wages pursuant to the writ. According to testimony by Brent, Troy, and Mark Rose ("Mark"), the parties entered into negotiations attempting to settle this matter. See also Brent's Exhibit BB. These negotiations fell through, and Brent began to garnish Troy's wages, with the first garnishment taking place on May 2, 2019. See Brent's Exhibit YY.
On May 7, 2019, Troy submitted a request for an order to show cause with the state court challenging Brent' garnishment of his wages. See Brent's Exhibits N and OO. Troy's argument for challenging Brent's garnishment was that the underlying debt had been discharged in his bankruptcy. See Brent's Exhibit N. Brent objected to the order to show cause on the grounds that Troy's arguments attacked the underlying judgment which could not be challenged in garnishment proceedings. See Troy's Exhibit 15. On May 15, 2019, the state court conducted a hearing on the order to show cause and denied Troy's objection to garnishment for the reasons raised by Brent. See Brent's Exhibit OO and Troy's Exhibit 15. Since that time, Troy alleges Brent has garnished Troy's employer, The Village Cobler, around $4,700.
Subsequently, Troy filed his motion to reopen his 2010 bankruptcy case in this Court and sought an order for contempt and sanctions against Brent for his alleged violation of the discharge injunction on July 8, 2019. See Docket No. 18. Brent and his counsel attested that they stoppedgarnishing Troy's wages after Troy filed his motion. In addition to objecting to Troy's motion, Brent filed an alternative motion, that if the case was reopened, then Brent had the right to assert that the state court judgment is non-dischargeable under 11 U.S. Code §523 (a).
The Court conducted a preliminary hearing on this matter on August 29, 2019. The Court granted Troy's motion only to the extent as to reopen the case. The Court did not make any findings on the substantive aspects of either parties' arguments, entered a scheduling order setting up an evidentiary hearing to take place on November 8, 2019, and mentioned that Brent could file a motion to dismiss the bankruptcy case if he desired. Brent filed his motion to dismiss citing the same positions he took in objecting to reopening Troy's bankruptcy case. The Court heard oral argument for Brent's motion on November 6, 2019. While labeled as a motion to dismiss, Brent clarified that the motion is simply to reclose the bankruptcy case.
Brent raised several theories for reclosing Troy's bankruptcy case, and one was that of res judicata, where he argued that the matter had already been decided which barred Troy from pursuing sanctions for violation of the discharge injunction. At oral argument, the Court took the issue of res judicata under advisement - leaving the other arguments to be dealt with later at an evidentiary hearing if the Court decided that it needed one in light of the res judicata ruling.
On December 5, 2019, the Court issued a bench ruling addressing the issue of res judicata and found res judicata was not applicable in this case and rescheduled the evidentiary hearing for February 10, 2020, to address the remaining issues. At the final pretrial hearing, the Court limited the issues to only Troy's motion for sanctions, Brent's equitable defenses, and whether the Court needed to distinguish this case from Watson v. Parker (In re Parker), 264 B.R. 685, 693-95 (10th Cir. BAP 2001) which discusses the dischargeability of a debt not scheduled and when a claim arises. The Court further determined that any claims seeking to revoke Troy's discharge, under 11U.S. Code § 727, or to determine dischargeability under 11 U.S. Code § 523 would need to be addressed in an adversary proceeding and not in this main case. See Federal Rule of Bankruptcy Procedure 7001(4) & (6). At that pretrial hearing, Brent mentioned that he intended to file an adversary proceeding, but as of this date, no adversary proceeding has been commenced.
The Court conducted the evidentiary hearing on February 10, 2020, and heard final arguments on the remaining issues in Brent and Troy's motions on March 9, 2020. The parties'...
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