Scott v. Decker (In re Decker)
| Citation | 623 B.R. 417 |
| Decision Date | 30 September 2020 |
| Docket Number | Adv. P. No. 19-05006,Case No. 17-50297 |
| Parties | IN RE: Michael Whitman DECKER, Debtor. W. Stephen Scott, Chapter 7 Trustee, Plaintiff, v. Michael Whitman Decker, Winchester Accounting, LLC, Defendants. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Virginia |
William Edward Callahan, Jr, Gentry Locke Rakes & Moore, Roanoke, VA, for Plaintiff
James P. Campbell, Leesburg, VA, for Defendant
This dispute in this chapter 7 bankruptcy case is over property of the estate and the limits of the "earnings exception" to the definition of property of the estate. The chapter 7 trustee seeks to recover transfers of property of the estate. The debtor insists the property transferred was not property of the estate. The answer depends in large part over which language in section 541(a)(6) describes the property transferred. If the property transferred is "proceeds, product, offspring, rents, or profits of or from property of the estate," section 541(a)(6) defines it as property of the estate, and the trustee may recover it. Conversely, if it is "earnings from services performed by an individual debtor after the commencement of the case," section 541(a)(6) excepts it from property of the estate, and the trustee may not recover it.
W. Stephen Scott (the "Trustee") is the chapter 7 trustee for Michael Whitman Decker. The Trustee filed a complaint against Mr. Decker and his current business, Winchester Accounting, LLC ("Winchester Accounting"). In the complaint, the Trustee seeks (i) avoidance of postpetition transfers pursuant to section 549; (ii) judgment for the amount of the avoided transfers pursuant to section 550; (iii) damages for conversion of property of the estate; and (iv) disallowance or subordination of any claim of the defendants until the judgment is paid in full under section 502(d).
Mr. Decker and Winchester Accounting moved to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). The Court granted in part and denied in part the motion to dismiss. The Court also granted leave to amend the complaint. After that, the Trustee amended his complaint, and Mr. Decker and Winchester Accounting answered it.
Now, the Trustee and both defendants have filed cross motions for summary judgment. Each insists no material facts are in dispute and as a matter of law, this Court should grant judgment in their respective favor. They filed a joint stipulation of facts and exhibits to the stipulation plus separate exhibits in support of their motions. The defendants jointly filed a single motion. In addition to previously filed exhibits, the defendants attached two affidavits in support of their motion for summary judgment. To this, the Trustee objected. He moved to strike the affidavits. Afterwards, the parties resolved the disagreement over the affidavits, and prior to the hearing on the Trustee's motion to strike, the Trustee and defendants' counsel submitted a consent order withdrawing the Trustee's motion to strike. Based on their agreement, the parties waived oral argument and submitted their cross motions for summary judgment to the Court for consideration on the written pleadings.
The Court has jurisdiction over this bankruptcy case by virtue of the provisions of 28 U.S.C. §§ 1334(a) and 157(a), the delegation made to this Court by Order of Reference from the District Court entered on December 6, 1994, and Rule 3 of the Local Rules of the United States District Court for the Western District of Virginia. The Trustee seeks (i) avoidance of postpetition transfers pursuant to Bankruptcy Code section 549 ; (ii) judgment against Mr. Decker and Winchester Accounting for the amount of the avoided transfers pursuant to Bankruptcy Code section 550 ; and (iii) disallowance or subordination of any claim of the defendants until the judgment is paid in full under Bankruptcy Code section 502(d). These proceedings are "core" proceedings under 28 U.S.C. § 157(b)(2)(B), (E), (H), and (O).
The parties ask this Court to determine whether as a matter of law the Trustee may recover funds from the debtor and his corporation formed approximately five months after he filed his bankruptcy petition. Their motions for summary judgment boil down to two fundamental questions. First, if all of the stock in a personal services S Corporation is owned by one individual who files a chapter 7 bankruptcy, are all funds held by the S Corporation "earnings from services performed by an individual debtor after the commencement of the case," regardless of when the services were performed? Second, if all the shares of stock of an S Corporation are property of the estate, are shareholder distributions made postpetition property of the estate as "proceeds, product, offspring, rents, or profits" from the stock?
The defendants ask this Court to rule as a matter of law that the Trustee cannot recover any transfers because all property transferred was not property of the estate. The Trustee, on the other hand, asks this Court to rule as a matter of law that the property he seeks to recover is property of the estate, the debtor cannot contest the transfers of the property or the amounts transferred, and accordingly judgment as a matter of law to the Trustee is appropriate.
Federal Rule of Civil Procedure 56(c) is applicable to this proceeding pursuant to Federal Rule of Bankruptcy Procedure 7056. "The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "Facts are ‘material’ when they might affect the outcome of the case, and a ‘genuine issue’1 exists when the evidence would allow a reasonable jury to return a verdict for the nonmoving party." News & Observer Publ'g Co. v. Raleigh-Durham Airport Auth. , 597 F.3d 570, 576 (4th Cir. 2010) (citing Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ). When considering summary judgment, a court determines "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson , 477 U.S. at 251–52, 106 S.Ct. 2505.
The Court will evaluate whether either movant is entitled to judgment as a matter of law under this framework.
Are any material facts in dispute?
The history
This case has been going on, as of now, for over three years. Mr. Decker filed this chapter 7 bankruptcy on March 30, 2017.
Mr. Decker was the sole shareholder of stock in Winchester Accounting and Consulting, Inc. ("WAC"). When Mr. Decker filed his chapter 7 bankruptcy petition, the stock became property of his bankruptcy estate. See 11 U.S.C. § 541.
A few months into the chapter 7 case, the debtor's former employer, Kilmer & Associates, offered to purchase the debtor's stock in WAC from the Trustee. The Trustee, whose duty is to liquidate assets for the benefit of creditors, agreed to the offer and sought court approval to sell the estate's interest in the stock. The debtor cried foul and demanded the Court deny the Trustee approval to sell the stock for the price offered.2 The debtor asserted the sale price would result in a tax liability for the estate. He insisted that the sale should not be allowed because the Trustee had not disclosed the method of determining the tax liability or the means to satisfy any tax liability. And so, at the hearing on his motion for authority to sell the stock, the Trustee requested a continuance to permit his accountant to provide an analysis of the tax liability and to allow for an evidentiary hearing. The Trustee explained that he would need to review WAC's bank statements, plus its books and records, in order to allow his accountant to provide an analysis of the potential tax liability.
The Court granted the Trustee's request and ordered that the hearing be continued to a date which would permit WAC to provide the necessary documents to the Trustee and the Trustee's accountant to provide an analysis of the tax consequences of the potential sale. The Court orally directed Mr. Decker, present at the hearing, to provide copies of the WAC bank statements to the Trustee and to confer with the Trustee before using any funds in the WAC bank account. The Court explained that the purpose of the directive was to allow the Trustee to review whether the expenditures were ordinary and necessary business expenses or profits owing to the shareholder (the estate). This was on August 16, 2017.
Mr. Decker did not provide the documents to the Trustee3 nor confer with the Trustee regarding WAC expenditures and business expenses.
On August 21, 2017, Mr. Decker created Winchester Accounting, a limited liability company in which Mr. Decker is the sole member. After this, Mr. Decker transferred assets held by WAC, including funds in the WAC bank account, to Winchester Accounting, and began operating under Winchester Accounting, in the same location where WAC operated.4
To date, the Court has not held a valuation hearing, nor made findings regarding the value of the stock in WAC, nor determined whether the sale may result in tax liability for the estate, nor held a further hearing on the Trustee's motion to sell. For much of the two years after the Trustee made his request to sell the stock, the Trustee and the debtor battled over the Trustee's discovery requests.5 The debtor, for the most part, objected to the discovery requests asserting the Trustee had no standing to make the requests because earnings of his S Corporation were excluded from his bankruptcy estate. The Trustee, for the most part, contended he had a duty to investigate the financial affairs of the debtor and to liquidate property of the estate and the inquiries were part of his investigation and evaluation process.
The case proceeded for several...
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Decker v. Scott
...the stock? 623 B.R. at 422. The parties stipulated to numerous facts, and the court determined that the material facts are not in dispute. Id. at 424. Debtors' motion for summary judgment First, the court reasoned that bankruptcy code section 541(a)(6) does not exclude earnings from service......