In re Steve Zimmer PAIGE

• Decision Date: 21 October 2010
• Docket Number: No. 2:07-CV-822.,2:07-CV-822.
• Parties: In re Steve Zimmer PAIGE, Debtor. Search Market Direct, Inc., and Magnet Media, Inc., Appellants, v. Gary E. Jubber, Trustee of the Bankruptcy Estate of Stephen Zimmer Paige, and ConsumerInfo.com, Inc., Appellees.
• Court: U.S. District Court — District of Utah

439 B.R. 786

In re Steve Zimmer PAIGE, Debtor.

Search Market Direct, Inc., and Magnet Media, Inc., Appellants,

v.Gary E. Jubber, Trustee of the Bankruptcy Estate of Stephen Zimmer Paige, and ConsumerInfo.com, Inc., Appellees.

No. 2:07-CV-822.

United States District Court, D. Utah,Central Division.

Oct. 21, 2010.

COPYRIGHT MATERIAL OMITTED.

Adam S. Affleck, James A. Boevers, Michael N. Zundel, Erin M. Stone, Prince Yeates & Geldzahler, Andrew B. Clawson, Salt Lake City, UT, for Search Market Direct.

Adam S. Affleck, Michael N. Zundel, Erin M. Stone, Prince Yeates & Geldzahler, Andrew B. Clawson, Salt Lake City, UT, for Magnet Media.

Douglas J. Payne, Gary E. Jubber, Fabian & Clendenin, Salt Lake City, UT, for Gary E. Jubber.

Douglas J. Payne, Gary E. Jubber, Fabian & Clendenin, Michael R. Johnson, Ray Quinney & Nebeker, Salt Lake City, UT, Robert E. Richards, SNR Denton US LLP, Chicago, IL, for ConsumerInfo.com.

ORDER ON APPEAL FROM BANKRUPTCY COURT

DEE BENSON, District Judge.

Appellant Search Market Direct, Inc. (“SMDI”) seeks reversal of the bankruptcy court's ruling confirming one Chapter 11 plan (proposed jointly by the Chapter 11 trustee and ConsumerInfo.com) and denying confirmation of SMDI's competing Chapter 11 plan. The court heard oral argument on the matter on August 24, 2010. For the reasons set forth below, the bankruptcy court's decision is AFFIRMED.

BACKGROUND

The debtor, Steve Zimmer Paige, filed this case pro se under chapter 7 of the Bankruptcy Code on September 16, 2005. ¹ Gary Jubber was appointed as the chapter 7 trustee. At some time before September 2005, Mr. Paige was involved in the creation of the internet domain name “FreeCreditScore.com” (the “Domain Name”). However, when Mr. Paige filed his case, he did not list the Domain Name as an asset nor did he list it as something transferred. In early 2006, an assignee of the debtor, without knowledge of the trustee, transferred the Domain Name to SMDI for $350,000. SMDI was not aware of the debtor's bankruptcy case at the time. Mr. Steven May is the principal and owner of SMDI. Subsequent to the SMDI transfer, the trustee became aware of the debtor's interest in the Domain Name and began an investigation as to the estate's rights in the Domain Name. The trustee concluded that the estate had a right to the Domain Name or could recover it, and initiated an adversary proceeding (“AP”) against SMDI, Steven May, and others to recover the Domain Name. In the AP, the trustee alleged that the debtor had wrongfully conveyed his interests in the Domain Name to the defendants, and that such transfer should be declared void.

Aside from being a defendant in the AP, SMDI held unsecured claims in this case which SMDI had acquired from other creditors. SMDI also purchased the residual interest in the estate from the debtor.

Mr. Jubber, as chapter 7 trustee, conducted a marketing effort in the fall of 2006 to sell the Domain Name or an interest in the AP. He then sought the bankruptcy court's approval of an auction to sell the Domain Name or the estate's interest in the AP in September of 2006, which was postponed to October. Prior to the hearing on the auction motion, SMDI's counsel contacted the debtor to arrange a meeting between counsel for SMDI, the debtor, and Mr. Noel Hyde, a bankruptcy attorney. Following that meeting, on October 5, 2006, Mr. Hyde filed a motion on behalf of the debtor to convert his chapter 7 case to a chapter 11 case. That motion was granted on October 6, 2006, and accordingly, the debtor became a debtor-in-possession. Mr. Hyde filed a motion to be approved as counsel for the estate, which was approved on October 13. The day after the court entered its order converting the case to one under chapter 11, Mr. Jubber filed a motion to reconvert the case back to a chapter 7. At an expedited hearing on October 13, the bankruptcy court denied the trustee's motion but found cause and ordered the appointment of a chapter 11 trustee. Mr. Jubber again was selected to be the trustee. As the chapter 11 trustee, Mr. Jubber continued his efforts to sell the Domain Name and/or an interest in the AP. From the date Mr. Jubber was appointed as the chapter 11 trustee, the debtor was no longer a debtor-in-possession. Shortly after the October 13 hearing, Mr. Hyde advised the debtor that he would not be paid from the estate because the trustee had been appointed, and Mr. Hyde told the debtor he could no longer represent him without being paid. The debtor apparently interpreted this to mean that he needed substitute counsel.

Between October 13 and December 7, 2006, the debtor, without Mr. Hyde's knowledge or involvement, initiated contacts with ConsumerInfo and/or its counsel by telephone conferences, voice mail messages and/or text messages. The debtor sought a financial arrangement from ConsumerInfo by way of a consulting agreement, but was unsuccessful. The debtor also advised ConsumerInfo and its attorneys that he was without representation and asked for assistance in obtaining new counsel. Numerous contacts were made by the debtor with ConsumerInfo. Having already sold his residual interest in the bankruptcy estate to SMDI, the debtor was contemporaneously evading SMDI. In fact, on November 22, 2006, SMDI's counsel sent an e-mail to the debtor indicating its frustration with the debtor's non-responsiveness from which SMDI's counsel inferred that the debtor had no further interest in proposing a joint plan of reorganization. As the bankruptcy court noted, the debtor's actions during this time period indicated that he was more concerned about securing his personal interests rather than those of the creditors.

Eventually, ConsumerInfo agreed to assist the debtor in obtaining substitute counsel. At the time, ConsumerInfo was negotiating with the trustee to make an offer for the Domain Name and was considering offering the trustee enough to pay all creditors in full. ConsumerInfo was concerned about the amounts that were owed to the creditors because the debtor's statement of financial assets and schedules were questionable. ConsumerInfo agreed to fund a retainer for debtor's substitute counsel in the amount of $20,000. Accordingly, ConsumerInfo wire transferred $20,000 to Mr. Duane Gillman, the debtor's new counsel.

On November 14, 2006, the trustee filed a motion to sell the estate's interest in the AP to ConsumerInfo for $1.8 million pursuant to an Asset Purchase Agreement (the “APA”). SMDI objected to this motion. The hearing was set for December 7, 2006. To add confusion to who represented the debtor, Mr. Hyde also filed an objection to the sale motion on behalf of the debtor on or about December 4, 2006. Four days later, Mr. Hyde and Mr. Gillman filed a notice of withdrawal of counsel and notice of substitution.

On December 7 and 8, 2006, the bankruptcy court conducted evidentiary hearings on the sale motion. At the conclusion of the hearing, the bankruptcy court issued a memorandum decision approving the trustee's sale of a co-interest in the AP to ConsumerInfo for $1.9 million. An order approving the sale (the “Sale Order”) was entered on December 13. Pursuant to the Sale Order and the approved APA, ConsumerInfo would be entitled to the ownership of the Domain Name, if the AP was successful, plus 25% of any damages award. SMDI did not appeal the Sale Order.

In addition to holding a co-interest in the AP, ConsumerInfo also acquired an assignment of various proofs of claims, including proof of claim 1 formerly held by Arrow Moving & Storage, proof of claim 32 formerly held by Magic Nickel, and proof of claim 27 formerly held by CCB Data Corp. (“CCB Data”), in the amount of $131,180, which it acquired on January 22, 2007.

On January 31, 2007, ConsumerInfo filed proof of claim 42, which represented a claim it had purchased from CCB Data. Through proof of claim 42, ConsumerInfo alleged that it had purchased all the potential interest in the Domain Name previously held by CCB. ConsumerInfo further alleged that at the time of filing, the debtor had legal title to the Domain Name as CCB Data's agent. Accordingly, ConsumerInfo initially claimed, through claim 42, that the Domain Name was not property of the estate because equitable title was held by CCB Data. Subsequently, ConsumerInfo amended proof of claim 42 on July 3, 2007, to assert only an unsecured claim for $2.1 million alleging that the debtor had converted the Domain Name pre-petition from CCB Data, had breached his fiduciary duties to CCB Data, and had been unjustly enriched by CCB Data's development of the website. CCB Data also filed proof of claim 27, which ConsumerInfo purchased, asserting an unsecured claim against the debtor but under a different theory.

SMDI and the trustee and ConsumerInfo filed competing chapter 11 reorganization plans. SMDI and its affiliate, Magnet Media, filed the SMDI Plan in June 2007. Subsequently, ConsumerInfo and the trustee filed their Joint Plan. Each of the plans proposed to pay unsecured creditors 100% of their allowed claims plus 10% interest. However, the plans were quite different.

The SMDI Plan

SMDI's plan proposed to place enough money of its own with the plan trustee to pay all claims in full. Evidence presented indicated that this would be approximately $2.6 million. Additionally, under SMDI's plan, the plan trustee, SMDI, or any other party in interest with a financial stake in the outcome of an objection to any claim would have standing to object to claims following confirmation. Further, SMDI's plan would require a dismissal of the AP and conveyance to SMDI of any claim that the estate might have to the Domain Name. Finally, the SMDI Plan required the chapter 11 trustee to turn over all assets in his possession to the SMDI plan trustee. From all of the funds on hand plus additional funding from SMDI, the plan trustee would pay ConsumerInfo $1,825,000, which SMDI alleged is the amount required under the APA if...