Manchester v. Funderburgh (In re Funderburgh)
| Decision Date | 02 February 2015 |
| Docket Number | BAP Nos. WO–14–023,Bankruptcy No. 07–10192.,Adversary No. 07–01144.,WO–14–024. |
| Citation | 526 B.R. 361 |
| Parties | In re James A. FUNDERBURGH, also known as Jim Funderburgh, also known as Jim's Maintenance, and Joyce Funderburgh, Debtors. Susan Manchester, Trustee, Plaintiff–Appellee, v. James A. Funderburgh and Joyce Funderburgh, Defendants–Appellants, and David R. Bell and Ed Munoz, Defendants. In Re James A. Funderburgh, also known as Jim Funderburgh, also known as Jim's Maintenance, and Joyce Funderburgh, Debtors. James A. Funderburgh and Joyce Funderburgh, Appellants, v. Susan Manchester, Trustee, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Tenth Circuit |
Submitted on the briefs:*
Philip A. Hurtt of Branch & Hurtt Law Firm P.C., Oklahoma City, OK, for Appellants.
Susan Manchester, Oklahoma City, OK, pro se.
Before MICHAEL, ROMERO, and JACOBVITZ, Bankruptcy Judges.
Rules make wonderful servants and terrible masters.
In the American system of justice, a litigant is entitled to his or her day in court. This rather unremarkable phrase lies at the center of the appeal presently before us. Our debtors were found to have committed acts of fraud sufficient to prohibit the entry of a discharge. The order denying their discharge was entered after all parties were given a full and fair opportunity to litigate the relevant issues. On appeal, debtors do not dispute the factual underpinnings that support the decision to deny their discharge. Instead, they contend that a poor choice of words by the bankruptcy trustee prohibited litigation upon the merits of the trustee's claim, and that the bankruptcy court committed reversible error by granting the trustee relief from her misstep. Debtors also posit that a bankruptcy trustee does not have the right to distribute any of the estate's assets to creditors prior to the conclusion of the bankruptcy case. These positions are meritless.
James and Joyce Funderburgh (“Debtors”) owned a cleaning business incorporated in the 1990's as Jim's Maintenance and Sons, Inc. (“Jim's Maintenance”), with each of them holding 50% of the stock. In 2000, Debtors formed Jim's Commercial Cleaning LTD (“Jim's Commercial”), again with each owning 50% of the corporation's stock. In 2001, Jim's Maintenance and/or Jim's Commercial entered into contracts with Target Corporation to provide cleaning services to 68 stores located in six states.2 The Target contracts were summarily terminated in May 2006, effectively putting Debtors' cleaning companies out of business.
Debtors and/or their corporations then became defendants in five different legal actions. Former employees of the cleaning business filed two lawsuits in Texas federal district courts alleging violations of the Fair Labor Standards Act. Creditor Arvest Bank instituted two lawsuits in Oklahoma district court for failure to make timely payments pursuant to a commercial credit card agreement and were granted judgment in both.3 Secured creditor JP Morgan Chase Bank filed a lawsuit in Oklahoma district court to recover payments due under four notes and to foreclose a mortgage.
Debtors sought Chapter 7 relief on February 27, 2007. Susan Manchester was appointed as Chapter 7 trustee (“Trustee”). Debtors' schedules listed assets of approximately $114,000 and liabilities in excess of $2,000,000. Debtors claimed virtually all of their assets as exempt.
On July 18, 2007, Trustee filed an adversary proceeding seeking to avoid and recover fraudulent transfers for the benefit of the estate and to deny Debtors a discharge (“Complaint”). Due to technological difficulties with electronic filing, Trustee's Complaint was erroneously filed twice, and therefore docketed as two separate adversary proceedings numbered # 07–1143 and # 07–1144. Summons were issued in proceeding # 07–1144.4 The following day, the duplicate filing was brought to the Trustee's attention by the clerk of the bankruptcy court. In response, the Trustee's office attempted to remedy the situation by filing a dismissal of proceeding # 07–1143 (“Dismissal”), which stated in its entirety, “COMES NOW Susan Manchester, Trustee, and hereby dismisses the above styled Adversary Proceeding with prejudice since it was filed in duplicate . ”5
On August 17, 2007, Debtors filed a motion to quash service in proceeding # 07–1144 and dismiss Trustee's Complaint (“Motion to Dismiss”). Relying on principles of res judicata, collateral estoppel, and retraxit, Debtors argued Trustee's Dismissal of proceeding # 07–1143 terminated the bankruptcy court's jurisdiction and precluded Trustee from pursuing the same claims against the same parties in proceeding # 07–1144.6 None of the other defendants (the recipients of the allegedly fraudulent transfers) joined in the Motion to Dismiss. The Trustee responded by asking the bankruptcy court to set aside the Dismissal on equitable grounds (“Motion to Set Aside Dismissal”).7 On November 27, 2007, the bankruptcy court entered an order granting Trustee's Motion to Set Aside Dismissal (“Order Setting Aside Dismissal”).8
In the Order Setting Aside Dismissal, the bankruptcy court described the circumstances that led to the filing of the Dismissal:
According to Trustee, on July 18, 2007, her assistant was in the process of electronically filing an adversary complaint against [Debtors] when the CM/ECF website quit responding. Trustee's assistant “had no idea the ... Adversary Complaint had been filed because the website did not respond.” She closed the website then logged in again and started the filing procedure anew, with the same adversary complaint. The next day, Deputy Court Clerk Penny Wallis contacted Trustee's assistant, informing her that duplicate adversary proceedings had been electronically filed. The case numbers for these proceedings were 07–1143 and 07–1144. That same day, Trustee's assistant electronically filed a Dismissal With Prejudice in case number 07–1143, “since it was filed in duplicate.”9
The bankruptcy court found it “abundantly clear from the pleadings, affidavits, and circumstances, that what is involved here is simply a computer glitch, compounded, perhaps, by operator panic.”10 The bankruptcy court concluded that “it would be wholly inequitable to require Trustee to be bound by her Dismissal With Prejudice, when it is patently obvious that the sole intent was to correct a duplicate filing.”11 The bankruptcy court denied the Motion to Dismiss, allowing the adversary proceeding to proceed to trial. Debtors then filed a motion to reconsider, which the bankruptcy court rejected, noting that “denying Trustee the right to pursue her several causes of action would be manifestly unjust and conflict with the purpose of the Bankruptcy Code.”12 Debtors attempted to appeal the bankruptcy court's Order Setting Aside Dismissal to this Court, but the appeal was dismissed as interlocutory.13
Trial of the adversary proceeding was held in November 2010. Trustee sought to avoid the following transfers made by Debtors and/or their corporations as fraudulent and to recover the property for the benefit of the estate: 1) a 2001 Chevrolet Corvette to their son Bryan Funderburgh; 2) two 2006 Toyota trucks to employees of the cleaning business; 3) corporate assets including cleaning contracts, accounts receivable, equipment, and supplies to a new corporate entity, JMSI, LLC, created in August 2006 and owned by Bryan Funderburgh; 4) five acres of real property located in Choctaw, Oklahoma to Bryan Funderburgh; 5) five acres of real property located in Oklahoma County, Oklahoma to Bryan Funderburgh; and 6) a Pearson cruiser houseboat located in Key West, Florida to their son James Funderburgh.
Trustee also asked the bankruptcy court to deny Debtors a discharge pursuant to 11 U.S.C. § 727(a)(2)(A) and (a)(5),14 alleging they transferred or concealed assets with the intent to hinder, delay, or defraud creditors. Among the assets not disclosed were: 1) a Rolex watch; 2) an ownership in Funderburgh Horton LLC which paid dividends of $27,435 after the Chapter 7 petition was filed that were not turned over to Trustee; 3) season tickets to the University of Oklahoma football games; 4) valuable University of Oklahoma football memorabilia; 5) office furniture; and 6) jewelry.
During the trial, Trustee reached a settlement with Debtors' son, Bryan Funderburgh, who turned over all of the stock and assets in JMSI, LLC, as well as the part of the Oklahoma County real property that had not been previously sold.15 Additionally, the 2001 Corvette was sold and the proceeds therefrom were used by Debtors to partially fund a settlement that resolved objections by Trustee and creditors to Debtors' exemption of their houseboat as homestead.16
The bankruptcy court entered its order and judgment in the adversary proceeding on May 28, 2014, denying Debtors a discharge (“Order Denying Discharge”). The bankruptcy court found Debtors were insolvent as of May 25, 2006, and had litigation pending against them when the property transfers in question were made. The bankruptcy court concluded the transfers of the Corvette and the Oklahoma County real property to Bryan Funderburgh were fraudulent and avoided them. The bankruptcy court further concluded that Debtors' transfers of property and concealment of assets warranted denying them a discharge pursuant to § 727(a)(2)(A) and (a)(5).17
On March 17, 2014, while the bankruptcy court's decision in the adversary proceeding was under advisement, Trustee filed a motion for authority to make an interim distribution to creditors (“Motion to Distribute”).18 In the Motion to Distribute, the Trustee stated that the majority of the estate's assets had been collected and reduced to cash, and that she was holding approximately $139,000. She also advised the bankruptcy court that the deadline for filing claims had passed, that all filed claims had been examined, and all objections to...
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