Rosetta Stone Commc'ns, LLC v. Gordon (In re Chambers), Bankruptcy No. 10–90157–CRM.

• Decision Date: 10 October 2013
• Docket Number: Adversary No. 13–5063–CRM.,Bankruptcy No. 10–90157–CRM.
• Citation: 500 B.R. 221
• Parties: In re Jill Elisa CHAMBERS, Debtor. Rosetta Stone Communications, LLC, Plaintiff, v. Neil C. Gordon, Chapter 7 Trustee for the Estate of Jill Elisa Chambers, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

500 B.R. 221

In re Jill Elisa CHAMBERS, Debtor.Rosetta Stone Communications, LLC, Plaintiff,

v.Neil C. Gordon, Chapter 7 Trustee for the Estate of Jill Elisa Chambers, Defendant.

Bankruptcy No. 10–90157–CRM.

Adversary No. 13–5063–CRM.

United States Bankruptcy Court,

N.D. Georgia,

Atlanta Division.

Oct. 10, 2013.

Robert F. Dallas, Casey Gilson, P.C., Atlanta, GA, for Plaintiff.

Neil C. Gordon, Arnall Golden Gregory LLP, Atlanta, GA, for Defendant.

ORDER

C. RAY MULLINS, Bankruptcy Judge.

THIS MATTER is before the Court on the Chapter 7 Trustee's Motion to Dismiss (the “Motion”). Rosetta Stone Communications, LLC filed an adversary seeking a declaration that certain property of the estate can only be distributed to creditors that provided campaign services to the Debtor. This matter constitutes a core proceeding pursuant to 28 U.S.C. § 157. For the reasons stated below, the Court finds that dismissal is appropriate.

I. FACTS

Jill Elisa Chambers (the “Debtor”) is the former representative to the Georgia General Assembly for District 81. When she filed her chapter 13 case, the Debtor was campaigning for re-election, using funds from a campaign account with Wachovia Bank. In re Chambers, 451 B.R. 621, 622 (Bankr.N.D.Ga.2011). The Debtor did not incorporate her campaign. Id. Rosetta Stone Communications LLC (“Rosetta Stone”) provided pre-petition campaign services to the Debtor.¹

During the chapter 13 case, the Court entered an order finding that the campaign funds held by the Debtor were part of her bankruptcy estate. Chambers, 451 B.R. 621. The Court considered the scope of section 541(a) of the Bankruptcy Code and found that the Debtor had a property interest in the campaign funds; therefore, per section 541(a), the campaign funds constituted property of the estate. The Court further found that “[a]lthough Georgia law restricts the use of the campaign funds, the anti-alienation provision [in section 541(c)(2) of the Bankruptcy Code] prevents state law from excluding the funds from becoming property of the estate.” Id. at 624. The spendthrift trust exception to the anti-alienation provision does not apply because there is no evidence of a writing creating an express trust, let alone an express trust containing a valid spendthrift provision. Id. at 625. The Court concluded that while the Georgia campaign finance law restricts use, it does not determine ownership. Id. at 626. The opinion did “not reach the issue of whether certain creditors (e.g. campaign creditors) have priority claims with respect to campaign funds.” Id. at 624. The Debtor thereafter converted her case to chapter 7. Neil Gordon was appointed as the Chapter 7 Trustee and Rosetta Stone filed a proof of claim (claim no. 7), asserting an unsecured claim for $44,707.84.

Rosetta Stone filed this adversary proceeding, seeking a determination that the campaign funds held by the Chapter 7 Trustee (the “trustee”) can only be distributed to campaign creditors. The trustee filed the Motion,² contending that the campaign funds became property of the estate and, absent a security interest in property of the estate, he is required to distribute estate assets pursuant to the priority order established in section 726 of the Bankruptcy Code. Rosetta Stone argues that by virtue of Georgia campaign finance laws, the campaign funds held by the trustee, while property of the estate, are subject to a constructive trust in favor of campaign creditors. The Court held a hearing on the Motion. After hearing argument from counsel, the Court took the matter under advisement. The Court must now determine whether Rosetta Stone has stated a plausible claim for relief. For the reasons stated below, the Court finds that dismissal is appropriate.

II. MOTION TO DISMISS STANDARD

Federal Rule of Civil Procedure 12(b), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012(b), governs motions to dismiss. Pursuant to rule 12(b)(6), a defendant may move to dismiss a complaint for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b); Fed. R. Bankr.P. 7012. The party moving for dismissalhas the burden of showing that no claim has been stated. 2–12 James Wm. Moore et al., Moore's Fed. Practice § 12.34 (3d ed. 1999).

“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). A complaint is plausible on its face when the plaintiff pleads factual content necessary for the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Twombly, 550 U.S. at 556, 127 S.Ct. 1955. The plausibility standard “asks for more than a sheer possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations. Id. at 679, 129 S.Ct. 1937. The court must accept the plaintiff's factual allegations as true but conclusory allegations or legal conclusions are not entitled to the assumption of truth. Id.

III. ANALYSIS

The Court has already determined that the campaign funds are property of the estate. Rosetta Stone has a general nonpriority unsecured claim—it does not have a security interest in the campaign funds. Further, Rosetta Stone has not alleged facts that warrant the finding of a constructive trust. The Court does not have the power to grant Rosetta Stone the relief it seeks.

a. Distribution under the Code

Commencement of a bankruptcy case creates an “estate.” The estate becomes the temporary legal owner of all the debtor's property. It consists of all property in which the debtor has any interest as of the commencement of the case. 11 U.S.C. § 541(a); United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). Once the property is swept into the estate, it is subject to distribution according to the terms of section 726 of the Bankruptcy Code. See Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 161, 67 S.Ct. 237, 91 L.Ed. 162 (1946) (“In determining what claims are allowable and how a debtor's assets shall be distributed, a bankruptcy court does not apply the law of the state where it sits.”).

Section 726 details the distribution scheme for chapter 7 liquidation cases. The statutory language is plain and unambiguous. See Barnhart v. Sigmon Coal Co., 534 U.S. 438, 450, 122 S.Ct. 941, 151 L.Ed.2d 908 (2002) (citing Robinson v. Shell Oil Co., 519 U.S. 337, 340, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997)); Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 253–54, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992). Pursuant to section 726(a), there are six classes of claims; each class must be paid in full before the next lower class is paid anything. Section 726(a) provides for ordered distribution in the following manner: 1) priority claims; 2) unsecured claims that were either timely filed or tardily filed where creditor did not have proper notice of bankruptcy but was able to file in time to permit payment; 3) tardily filed unsecured claims where creditor did have proper notice but failed to file in time to permit payment; 4) claims for fines, penalties, and forfeitures relating to punitive damages; 5) claims for appropriate interest; and 6) any remaining assets to debtor. 11 U.S.C. § 726(a). Section 726(b) contains distribution rules when there is more than one claim within a particular class and provides that unsecured non-priority creditors filing timely claims generally have equal priority and share pro rata in distribution. 11 U.S.C. § 726(b).

The statutory priority scheme is mandatory; Congress did not authorize the courts to exercise discretion and bankruptcy courts may not create priorities within classes. “Bankruptcy courts are not free to rearrange Congress' priorities for the treatment of creditors based on equitable grounds[.]” In re Chewning & Frey Sec., 328 B.R. 899, 917 (Bankr.N.D.Ga.2005). Had Congress wanted the bankruptcy courts to fashion their own priorities for distribution of assets, it might have omitted sections 507 and 726 from the Bankruptcy Code. Instead, the Bankruptcy Code and its prior iterations contain an elaborate scheme of priorities. By clearly and specifically articulating priorities, Congress provided a mandate for proper distribution of estate funds, thereby preventing the exercise of discretion. See Varsity Carpet Servs. v. Richardson (In re Colortex Indus.), 19 F.3d 1371, 1383 (11th Cir.1994) (citing Nathanson v. NLRB, 344 U.S. 25, 29, 73 S.Ct. 80, 97 L.Ed. 23 (1952) (explaining that courts cannot prefer one creditor over another unless specifically directed to do so; “if one claimant is to be preferred over others, the purpose should be clear from the statute.”)). Thus, “[t]he priority scheme set forth in the Bankruptcy Code must be applied regardless of the fault of the professionals or the equities of the situation.” In re Wilson–Seafresh, Inc., 263 B.R. 624, 632 (Bankr.N.D.Fla.2001).

Notwithstanding this clearly articulated distribution scheme, Rosetta Stone argues that the trustee should administer property of the estate according to a different distribution scheme. Rosetta Stone fails to provide any persuasive authority for this position. The campaign funds, as property of the estate, are subject to distribution pursuant to section 726. This Court is not free to rearrange Congress' priorities for the treatment of creditors based on equitable grounds. Moreover, requiring the trustee to administer a different distribution scheme would be difficult and time consuming. The Court will nevertheless consider whether Rosetta Stone has a security interest in the campaign funds, is entitled to priority status, or has alleged facts that if...