In re Tom D. JOHNSON

• Decision Date: 14 October 2010
• Docket Number: No. 94-48884.,94-48884.
• Citation: 439 B.R. 416
• Parties: In re Tom D. JOHNSON, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

439 B.R. 416

In re Tom D. JOHNSON, Debtor.

No. 94-48884.

United States Bankruptcy Court,

E.D. Michigan,

Southern Division.

Oct. 14, 2010.

COPYRIGHT MATERIAL OMITTED.

COPYRIGHT MATERIAL OMITTED.

Robert N. Bassel, Clinton, MI, Sandra A. Hazlett, Hazlett & Associates, P.C., Ann Arbor, MI, for Debtor.

AMENDED OPINION ^* REGARDING DEBTOR'S MOTION FOR DAMAGES FOR COMERICA BANK'S ALLEGED VIOLATIONS OF THE DISCHARGE INJUNCTION

THOMAS J. TUCKER, Bankruptcy Judge.

The Debtor in this Chapter 7 case, Tom D. Johnson, obtained a discharge in 1997. Several years later, he filed a motion seeking more than $3 million in damages for alleged violations of the discharge injunction by a creditor, Comerica Bank (“Comerica”). ¹ The Motion is based on Comerica's alleged attempt to enforce a security interest that Comerica claims to have in Debtor's right to receive disability benefits under his employer's long term disability plan.

The Court construes the Motion as seeking damages for civil contempt, based on a claim that Comerica violated the discharge injunction imposed by 11 U.S.C. § 524(a)(2). In this opinion, after resolving several legal issues in Comerica's favor, the Court concludes that Comerica has an enforceable security interest in Debtor's right to receive disability benefits, which survived Debtor's bankruptcy discharge. As a result, Comerica's alleged attempt to enforce its security interest did not violate the discharge injunction, and Plaintiff's Motion must be denied.

I. Jurisdiction

[1] This Court has subject matter jurisdiction over this bankruptcy case and this contested matter under 28 U.S.C. §§ 157 and 1334, and District Court Local Rule 83.50(a) (E.D.Mich.). This proceeding is a core proceeding under 28 U.S.C. § 157(b)(2)(O). This proceeding is also “core” because a contempt proceeding based on a violation of the § 524(a)(2) discharge injunction is an action “created or determined by a statutory provision of title 11.” See generally Allard v. Coenen ( In re Trans-Industries, Inc.), 419 B.R. 21, 27 (Bankr.E.D.Mich.2009).

II. Procedural History and Factual Background ² A. Debtor's right to receive disability payments

For some 20 years before he filed this bankruptcy case in 1994, Debtor was employed as a sales representative for The Equitable Life Assurance Society of the United States (“The Equitable”). ³ As a benefit of Debtor's employment with The Equitable, he participated in a long term disability plan entitled “The Equitable Life Assurance Society of the United States Employees, Managers and Agents Long Term Disability Plan” (the “Plan” or the “Equitable Plan”). ⁴ Article I of the Plan provides:

The [Plan] provides disability benefits for eligible employees, managers and agents by replacing wages lost by reason of absence from work or inability to perform required duties because of personal injury or illness resulting in total disability. ⁵

Article IX, § 9.2 of the Plan (the “Spendthrift Clause”) provides:

9.2 Spendthrift Clause-To the extent permitted by law, Members are prohibited from anticipating, encumbering, alienating or assigning any of their rights, claims or interest in this Trust or in any of the assets thereof, and no undertaking or attempt to do so shall in any way bind the plan Administrator or the Trustee or be of any force or effect whatsoever. Furthermore, to the extent permitted by law, no such rights, claims or interest of a Member in this Trust or in any of the assets thereof shall in any way be subject to such Member's debts, contracts or engagements, nor to attachment, garnishment, levy or other legal or equitable process. ⁶

The Plan contains a choice of law provision in Article IX, § 9.6 entitled “Construction of the Plan,” which provides:

This Plan shall be construed according to the laws of the State of New York, and all provisions hereof shall be administered according to, and its validity and enforceability shall be determined under the laws of such state, except where pre-empted by ERISA. ⁷

In early 1991, Debtor was found to be disabled, and he began receiving disability benefits under the Plan. He continues to receive disability benefits. ⁸

B. Comerica's security interest

In addition to working for The Equitable, Debtor was engaged in the commercial real estate development business. As the Sixth Circuit noted in an earlier appeal in this case,

In connection with that endeavor, Debtor signed as a comaker, and also guaranteed the repayment of, a note to Comerica (the “Comerica Note”) from Greenwood Centre, Inc. (“Greenwood”), a corporation wholly owned by the Debtor. The Comerica Note is secured by a mortgage on commercial real estate owned by Greenwood as well as a security interest granted [to Comerica] by the Debtor, individually, in his accounts receivable, general intangibles and contract rights.

Comerica Bank v. Johnson (In re Johnson), 166 F.3d 1214, 1998 WL 833774, *1 (6th Cir.1998) (unpublished table decision).

Comerica's security interest in Debtor's accounts receivable, general intangibles and contract rights was created by a security agreement that Debtor signed on July 31, 1985. That agreement granted Comerica a “continuing security interest” in, among other things, all of Debtor's “Accounts Receivable.” ⁹ The Security Agreement defines “Accounts Receivable” to “mean[ ] and include[ ] all accounts and general intangibles including, but not limited to ... insurance proceeds, [and] beneficial interests in trusts [.]” ¹⁰ It does not define the terms used in this definition, including the terms “accounts” and “general intangibles.” Section 5.1 under the “Miscellaneous” provisions, provides that the Security Agreement “shall in all respects be governed by and construed in accordance with the laws of the State of Michigan.” ¹¹

C. Debtor's default and bankruptcy

Debtor's company, Greenwood, defaulted under the Comerica Note, and Comerica began collection efforts against Greenwood and Debtor. In February 1994, Comerica sued Debtor, The Equitable, and other entities in the Jackson County, Michigan, Circuit Court, seeking to enforce its security interest.

On September 1, 1994, Debtor filed this bankruptcy case under Chapter 11. At that time, Debtor owed Comerica over $1 million. ¹² Debtor's Chapter 11 case was converted to Chapter 7 on December 31, 1994. ¹³ On May 29, 1996, after holding an evidentiary hearing, Bankruptcy Judge Graves ¹⁴ made rulings on a number of issues, including certain issues related to Comerica's security interest. ¹⁵ Among other things, the Court held that Comerica had a valid security interest in the Debtor's general intangibles, contract rights and accounts receivable. ¹⁶ This was based on the Court's findings that the parties made a written security agreement; that Comerica perfected its security interest by filing the necessary documents with the Michigan Secretary of State; and that the Security Agreement was never terminated. ¹⁷ The Court also held that Debtor's disability benefits under the Plan were exempt under Michigan law. ¹⁸

Judge Graves's rulings, which involved a number of matters in addition to the Debtor's disability benefits, were affirmed on appeal by the district court, except as to the disability benefits. As to those, the district court concluded that “the bankruptcy court did not determine whether the disability payments are subject to a security interest of Comerica, and, if so, whether the Debtor has waived his right to claim an exemption for such benefits under Michigan law.” ¹⁹ In an order dated May 30, 1997, the district court remanded these issues to the bankruptcy court for determination. ²⁰

Next, on October 8, 1997, the Debtor received a discharge. ²¹ Then, in response to the district court's May 30, 1997 remand order, Comerica filed a motion in the bankruptcy court seeking a determination of the remand issues in its favor, on November 25, 1997. ²² Comerica's motion requested, in relevant part, that the Court “[e]nter an Order finding that [T]he Equitable disability payments being received by Debtor are subject to Comerica's security interest; that such disability payments are not exempt under Michigan or Federal law, and directing that [The] Equitable pay such benefits directly to Comerica until its secured claim is paid in full[.]” ²³ Judge Graves held a hearing on September 29, 1998, during which he directed the parties to file proposed findings of fact and conclusions of law. ²⁴ The parties did so, and Debtor later filed a supplemental brief on the issues remanded. ²⁵ But Judge Graves took no further action, and never made a decision on the two issues remanded.

Eventually, the Chapter 7 trustee filed a final report, and the bankruptcy case was closed on May 23, 2001. ²⁶ For the next six years, neither Comerica nor Debtor took any action to reopen the case or to have the bankruptcy court decide the remanded issues.

D. State court litigation between Debtor and Comerica after the bankruptcy case closed

After the bankruptcy case was closed, Debtor and Comerica engaged in litigation in the Jackson County, Michigan, Circuit Court. In connection with that litigation, on March 29, 2006, Scott S. Brinkmeyer, new counsel for Comerica, ²⁷ sent a letter to Peter A. Teholiz, an attorney who had formerly represented AXA Equitable, LLC and its predecessor, The Equitable. ²⁸ The letter is described in some detail here, because Debtor claims that Comerica's sending this letter violated the discharge injunction.

The letter summarized Mr. Brinkmeyer's understanding of the history of litigation between Comerica, The Equitable, and Debtor. The letter erroneously assumed that the remanded issues had been decided by Judge Graves, in Comerica's favor. ²⁹ The letter requested that Mr. Teholiz forward the letter to The Equitable in order to explore a possible resolution. ³⁰ The letter stated, in part:

Insofar as disability benefits, service fees and the applicable interest rate issues are...