Manchester v. Kretchmar (In re Kretchmar)

• Decision Date: 05 October 2018
• Docket Number: Adv. No. 17-01026-JDL,Case No. 16-14337-JDL
• Citation: 591 B.R. 876
• 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, and Kretchmar Farms, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Oklahoma

591 B.R. 876

IN RE: Blake Lawrence KRETCHMAR, Debtor.

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

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

Case No. 16-14337-JDL

Adv. No. 17-01026-JDL

United States Bankruptcy Court, W.D. Oklahoma.

Signed October 5, 2018

Craig M. Regens, G. Blaine Schwabe, III, Gable Gotwals, Susan J. Manchester, Oklahoma City, OK, for Plaintiffs.

Brendon S. Atkinson, Gungoll, Jackson, Box & Devoll, P.C., Enid, OK, Steven W. Bugg, McAfee & Taft, Oklahoma City, OK, for Defendants.

ORDER ON MOTION TO RECONSIDER

Janice D. Loyd, U.S. Bankruptcy Judge

Before the Court is the Plaintiffs' Motion to Reconsider¹ (the "Motion") [Doc. 52], the Response of Danny Kretchmar and Debbie Kretchmar to Plaintiffs' Motion to Reconsider (the "Response") [Doc. 57] and the Plaintiffs' Reply to Kretchmar Parents' Response to Motion to Reconsider [Doc. 58]. The Motion seeks the Court to reconsider its Opinion and Order on Motion to Dismiss entered on February 5, 2018, in which it dismissed without prejudice five (5) of sixteen (16) Claims for Relief and dismissed with prejudice the one Claim for Relief seeking the substantive consolidation of the estates of the Debtor with those of his non-debtor parents. [Doc 43].

Plaintiffs assert that the Court erred in having: (1) dismissed without prejudice Plaintiff Farm Credit of Enid, PCA's ("Farm Credit") Claim for Relief 1 which sought liquidation of Farm Credit's deficiency claim against the Debtor; (2) apparently inadvertently dismiss with prejudice the claim of substantive consolidation against all defendants, including non-debtor entity Kretchmar Farms which had not entered an appearance in the case and was in default; (3) failed to afford Plaintiffs the opportunity to amend their Complaint before dismissing with prejudice the substantive consolidation claim as against Kretchmar Farms; and (4) failed to apply the proper motion to dismiss standard of accepting as true all of Plaintiffs well-pleaded allegations and construing such allegations in the light most favorable to the claimants.

1. Background

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. 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.

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 or Kretchmar Partners. Plaintiffs allege that Kretchmar Farms is an unincorporated association (either as a general partnership or joint venture) through which the Debtor and the Parents as partners conducted the business known as Kretchmar Farms. Plaintiffs allege that all cattle, ranching and farming operations, as well as for custom farming conducted elsewhere, were invoiced on Kretchmar Farms letterhead or invoices.

On June 9, 2017, Plaintiffs, the Chapter 7 Trustee and Farm Credit (the Debtor's largest creditor), filed a forty-five (45) page adversary Complaint comprised of sixteen (16) Claims for Relief against the Debtor, his Parents and/or Kretchmar Farms, including:

Count 1 - Money judgment for liquidated Farm Credit claim against Debtor;

Counts 2-5 - Objection to the Debtor's discharge under 11 U.S.C. § 727(a)(2)-(5) ;²

Counts 6-7 - Objections to Debtor's dischargeability of a debt under § 523(a)(2)(A)-(B);

Count 8 - for turnover of property under § 542;

Count 9 - for substantive consolidation of the estates of Debtor, the Parents and Kretchmar Farms;

Count 10 - action for an accounting under § 105;

Count 11 - action to avoid fraudulent transfers under § 548

The Complaint also included claims arising under Oklahoma state law:

Count 12 - Farm Credit claim for veil-piercing, fraud and injustice;

Count 13 - Farm Credit claim for piercing the veil and for alter ego;

Count 14 - claim by Farm Credit for civil conspiracy;

Count 15 - action by Trustee against Kretchmar Properties for general partnerships and/or joint venture liability; and

Count 16 - action by Farm Credit against Kretchmar Partners for general partnership and /or joint venture liability.

Defendant Parents filed a Motion to Dismiss seeking dismissal of several, but not all, of the Counts. [Doc. 21].

First, the Parents argued that Count 9 should be dismissed because substantive consolidation of non-debtors circumvented the stringent procedures and protections relating to involuntary bankruptcy cases imposed by § 303 of the Bankruptcy Code. Second, Parents argued that numerous other Counts of the Complaint were state law claims against non-debtor entities over which the bankruptcy court lacked jurisdiction. On February 5, 2018, the Court entered its Opinion and Order on Motion to Dismiss [Doc. 43] in which it dismissed with prejudice the Plaintiffs' Claim for Relief 9 for substantive consolidation.³ The Court rejected the Parents contention that substantive consolidation was only available under the remedy of an involuntary bankruptcy proceeding pursuant to § 303. The Court further found that while substantive consolidation of an individual debtor and affiliated business entities or a business entity debtor with non-debtor affiliates was available as an equitable remedy in certain rare instances, substantive consolidation was not available to consolidate individual debtors and individual non-debtors as was sought in the present case. Accordingly, the Court dismissed the substantive consolidation claim (Claim 9) with prejudice, finding that the legal deficiency of the consolidating individual debtors and individual non-debtors could not be rectified by amendment.

The Parents' Motion to Dismiss also sought dismissal of the following Claims for Relief of Plaintiff, Farm Credit (as opposed to the Plaintiff Trustee): (1) Claim 10, Accounting; (2) Claim 12, Veil Piercing: Fraud and Injustice (3) Claim 13, Piercing the Veil: Alter Ego; (4) Claim 14, Civil Conspiracy; (5) and Claim 16, Partnership/Joint Venture. The Parents asserted these were simply state law claims by which Farm Credit sought to collect money from third party non-debtors (the Parents) and over which the Bankruptcy Court did not have jurisdiction. In response, Farm Credit argued these state law claims were "related to" the bankruptcy over which this Court has jurisdiction. 28 U.S.C. § 157(a)(4). The Court found Claims 12, 13, 14 and 16 were not related to the bankruptcy because they did not seek the recovery of money against the Debtor, were not necessary to the administration of the bankruptcy estate and, by virtue of the Court's rejection of the claim of substantive consolidation, did not seek the recovery of property of the bankruptcy estate. In re Gardner , 913 F.2d 1515 (10th Cir. 1990) ; Personette v. Kennedy (In re Midgard Corp.) , 204 B.R. 764, 771 (10th Cir. BAP 1997) ; In re Mordini , 491 B.R. 567, 571 (Bankr. D. Colo. 2013). The Court also dismissed the claim for Relief 1 which the court viewed as a state law claim as well.

The Plaintiffs' Motion to Reconsider does not challenge the Court's dismissal of Claims for Relief 12, 13, 14 and 16. What Farm Credit does challenge is the Court's dismissal as a state law claim its Claim for Relief 1 which sought to liquidate its monetary, and potentially non-dischargeable, claim against the Debtor and Claim for Relief 9 which sought substantive consolidation against all defendants, including non-debtor Kretchmar Farms.

2. Reconsideration of the Court's Dismissal of Plaintiff's Claim 1 for the Liquidation of Its Claim Against the Debtor .

The Parents in their Motion to Dismiss did not seek dismissal of Claim for Relief 1. In its Opinion and Order, the Court acknowledged that the Parents had not sought dismissal of Count 1 [Doc. 43, pg. 25 n. 10], but the Court found that Claim 1 was a state Court claim that did not affect the bankruptcy estate. That finding was in error. A claim to liquidate a debt against a debtor is a core proceeding over which this Court should exercise jurisdiction, 28 U.S.C. § 157(b)(2)(B) ; In re Hirsch , 339 B.R. 18, 25 (E.D.N.Y. 2006) ("The estimation of allowance or disallowance of claims against a debtor's estate are core proceedings over which a bankruptcy court has jurisdiction.").

Furthermore, despite a long history of conflicting authorities, there now appears to be virtual unanimity among courts that bankruptcy courts have both subject matter jurisdiction and constitutional authority to liquidate debts in the context of dischargeability actions. See Johnson v. Riebesell (In re Riebesell), 586 F.3d 782, 793-94 (10th Cir. 2009) ; In re Lang , 293 B.R. 501, 516-17 (10th Cir. BAP 2003) ("In accordance with these other circuits, we conclude that under the broad congressional grant of jurisdiction given to bankruptcy courts under 28 U.S.C. § 157, bankruptcy courts have the jurisdiction to award money damages in a § 523(a) proceeding."); Heckert v. Dotson (In re Heckert) , 272 F.3d 253, 257 (4th Cir. 2001). "Because liquidation of a claim is, most times, integral to the determination of non-dischargeability of that claim, as well as determination of the debtor-creditor relationship in the bankruptcy case, the liquidation of the claim is tied to the core jurisdiction of the bankruptcy court as well because the dispute and its complete resolution invoke the court's equitable jurisdiction." In...