Manchester v. Kretchmar (In re Kretchmar)

• Decision Date: 05 February 2018
• Docket Number: Case No. 16–14337–JDL,Adv. Proc. No. 17–01026–JDL
• Citation: 579 B.R. 924
• Parties: IN RE: Blake Lawrence KRETCHMAR, Debtor. Susan Manchester, Trustee and Farm Credit of Enid, PCA, Plaintiffs, v. Blake Lawrence Kretchmar, Danny Kretchmar, Debbie Kretchmar, Kretchmar Farms, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Oklahoma

579 B.R. 924

IN RE: Blake Lawrence KRETCHMAR, Debtor.

Susan Manchester, Trustee and Farm Credit of Enid, PCA, Plaintiffs,

v.Blake Lawrence Kretchmar, Danny Kretchmar, Debbie Kretchmar, Kretchmar Farms, Defendants.

Case No. 16–14337–JDL

Adv. Proc. No. 17–01026–JDL

United States Bankruptcy Court, W.D. Oklahoma.

Signed February 5, 2018

Brendon S. Atkinson, Gungoll, Jackson, Box & Devoll, P.C., Enid, OK, for Debtor.

Susan J. Manchester, Oklahoma City, OK, pro se.

OPINION AND ORDER ON MOTION TO DISMISS

Janice D. Loyd, U.S. Bankruptcy Judge

I. Introduction

This case once again presents one of the most controversial and difficult to apply concepts in bankruptcy law: substantive consolidation of debtors and non-debtors. This is an adversary proceeding brought by the Chapter 7 Trustee and creditor Farm Credit of Enid, PCA ("Farm Credit")(collectively the "Plaintiffs") seeking the substantive consolidation of the non-debtor parents and the family farm operation into the bankruptcy estate of the Debtor/son. This matter comes on for consideration upon the Motion to Dismiss and Brief in Support (the "Motion") filed by Defendants, Danny Kretchmar and Debbie Kretchmar (the "Parents") [Doc. 21]¹ ; Plaintiffs' Response to Defendant Parents' Motion to Dismiss filed by the Trustee and Farm Credit [Doc. 27]; the Reply Brief In Support of Motion to Dismiss filed by the Parents (the "Reply") [Doc. 34] and the Plaintiffs' Omnibus Sur–Reply to Defendant Parents' Motion to Dismiss et. cetera [Doc. 40].

In their Motion, the Parents argue that the Complaint should be dismissed on two grounds: (1) substantive consolidation of non-debtors circumvents the stringent procedures and protections relating to involuntary bankruptcy cases imposed by § 303 of the Bankruptcy Code² , i.e., in the words of the Parents, the Plaintiffs are "unlawfully seeking to commence an involuntary bankruptcy petition against the Parents" and (2) the Plaintiffs' other claims against the Parents "are state law claims against the non-debtor entities over which the Court lacks jurisdiction." In response, Plaintiffs argue that (1) the Court has jurisdiction over the Plaintiffs' state law claims, (2) that the remedy of substantive consolidation is not subject to the requirements governing involuntary petitions and (3) the Parents' Motion fails to argue the applicable standards for a motion to dismiss. In reply, the Parents assert that substantive consolidation is not applicable when it attempts to consolidate an individual debtor with an individual(s) non-debtor(s). The following constitutes the Court's findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052 and 9014.³

II. Jurisdiction

The Court has jurisdiction over this proceeding under 28 U.S.C. §§ 157(a) and 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O). The jurisdiction of the bankruptcy courts is set forth in 28 U.S.C. § 1334, which provides, in pertinent part, that "the district courts shall have original jurisdiction but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11". 28 U.S.C. § 1334(b). Title 28 U.S.C. § 157(b) provides that "[b]ankruptcy judges may hear and determine all cases arising under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title."

III. The Complaint

As will be discussed in greater detail below, since a motion to dismiss is judged on the well-pled allegations of a complaint being accepted as true, the substantive allegations of Plaintiffs' Complaint need be examined.⁴

Debtor is an individual farmer residing in Medford, Grant County, Oklahoma. He lives and conducts a cattle, ranching and/or farming operation on a half-section of land in Grant County, the title to which is held by his mother, Defendant Debbie Kretchmar. The Debtor owns no real property in his individual name. Debtor also conducts cattle, ranching and/or farming operations on additional tracts of land in Grant County, Oklahoma, which are titled in the name of both his mother and his father, Defendant Danny Kretchmar (Defendants Danny and Debbie Kretchmar being collectively identified as the "Parents"). The Parents reside in Cleveland, Pawnee County, Oklahoma. Debtor's farming operations as well as those of the Parents were sometimes conducted under the name of Kretchmar Farms, Kretchmar Partners or the names of the Debtor or Parents. Plaintiffs allege that Kretchmar Farms is an unincorporated association (either as a general partnership or joint venture) through which the Debtor and the Kretchmar Partners conducted Kretchmar Farms. All cattle, ranching and farming operations, as well as for custom farming conducted elsewhere, were invoiced on Kretchmar Farms letterhead or invoices, but neither Debtor nor Kretchmar Farms paid rent for the home in which Debtor lived or for the agricultural land on which Debtor or Kretchmar Farms conducted operations.

Insofar as directly related to the claim of substantive consolidation, the Complaint alleges among other things:

1. Although Kretchmar Farms operated as general partners and/or joint venturers and held themselves out to customers as Kretchmar Farms, when dealing with certain creditors, including Farm Credit, Kretchmar Partners pretended to be separate entities and operations in order to borrow money and obtain other advantages. [Complaint ¶ 72].

2. Kretchmar Partners treated money and other assets as fungible or interchangeable amongst Kretchmar Partners. [Complaint ¶ 73].

3. It is impossible to segregate and ascertain the individual assets and liabilities of the individual Kretchmar Partners stemming from their operations as a general partnership and/or joint venture. [Complaint ¶ 75].

4. Debtor and Danny Kretchmar, individually and/or for the benefit of Kretchmar Farms and the individual Kretchmar Partners, engaged in multiple transfers of assets, to include for payment of debts, without observing legal formalities required of separate entities. [Complaint ¶ 76].

5. Debtor and the Parents' assets (including those used by Debtor and/or Kretchmar Farms, but for which bare title is held by them individually) and liabilities are so intertwined and co-mingled that separating them is prohibitive and prejudices all interested parties. [Complaint ¶ 78].

6. Debtor and Parents so thoroughly disregarded legal formalities required a separate entities that they created contractual expectations of unitary liability among some or all creditors, such that substantive consolidation is a necessary and proper remedy. [Complaint ¶ 79].

7. Debtor and Danny Kretchmar acted as sales representatives for Pioneer Hi–Bred International, Inc., and held themselves out to Pioneer and Pioneer's customers as being part of the same entity or entities in selling Pioneer's products. [Complaint ¶ 80].

8. The affairs of Kretchmar Partners, Kretchmar Farms and Debtor were so closely linked, intertwined and co-mingled that they are effectively one entity. Debtor was merely the alter ego for the other Kretchmar Partners and Kretchmar Farms. [Complaint ¶ 82 & 83].

9. The Parents have assets sufficient not only to satisfy all the creditors of the Debtor, but also their own creditors, if any, and still have remaining assets thereafter. The Parents receive income from royalty payments from their mineral interests, farming operations and other sources such that "no creditor will be harmed by substantive consolidation, and most if not all creditors shall materially benefit." [Complaint ¶ 148].

IV. Analysis

Normally, a motion to dismiss requires the court to analyze the complaint to determine whether the plaintiff has stated facts supporting all the required constituent elements for a particular claim for relief, here substantive consolidation. In the present case, however, the Parents' primary argument is not that the Plaintiffs have alleged all the necessary indicia to support substantive consolidation, but that dismissal is appropriate because, as a matter of law, the only way to achieve the effect of substantive consolidation of a non-debtor is the filing of an involuntary bankruptcy against it. That issue presents a purely legal question, and courts have the authority to "fully resolve any purely legal question" on a motion to dismiss at the Fed.R.Civ.P.12(b)(6) stage. Marshall County Health Care Authority v. Shalala , 988 F.2d 1221, 1226 (D.C. Cir. 1993). Therefore, the Court must address two separate issues here. The threshold issue is whether the Court has the authority to substantively consolidate a debtor with a non-debtor other than through the filing of an involuntary petition under § 303. If the answer to this question is no, then the Court need not proceed any further in its analysis and the Complaint so far as it relates to Claim for Relief 9 for substantive consolidation must be dismissed. On the other hand, if the Court does recognize substantive consolidation as an action separate and apart from an involuntary proceeding, then it must determine whether the Complaint pleads facts which could plausibly sustain this claim for relief.

1. Must Substantive Consolidation Only be Achieved Through the Filing of an Involuntary Bankruptcy

There is little doubt in this Court's mind that the ultimate effect of substantive consolidation results in the same draconian outcome as would an involuntary proceeding without affording the non-debtor target the numerous procedural protections of § 303⁵ . No doubt requiring compliance with § 303 would substantially limit, if not eliminate, the remedy of substantive consolidation. Accordingly, many courts that discuss § 303 in connection with non-debtor substantive consolidation have held against substantive consolidation. For example, a fellow court in the Tenth Circuit in In re Circle Land & Cattle...