December 20, 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
VALDOSTA DIVISION
IN RE: ::
CASE NO. 02-70055
MCGINNIS, SARAH P., : CHAPTER 13
Debtor. :
:
MCGINNIS, SARAH P., : ADVERSARY PROCEEDING
Plaintiff, : NO. 02-7004
:
vs. :
:
PENNSYLVANIA HIGHER EDUCATION :
ASSISTANCE AGENCY, :
Defendant. :
:
PENNSYLVANIA HIGHER EDUCATION :
ASSISTANCE AGENCY, :
Movant. :
MEMORANDUM OPINION
On November 25, 2002, the court held a hearing regarding the
Motion of Pennsylvania Higher Education Assistance Agency
(“Defendant”) for Summary Judgment. At the conclusion of the
hearing, the Court took the matter under advisement. After
considering both parties’ briefs and oral arguments, and the
applicable statutory and case law, the Court makes the following
conclusions of law.
PROCEDURAL HISTORY
On January 14, 2002, Debtor filed a voluntary petition under
Chapter 7 of the Bankruptcy Code (“Code”). Pursuant to Bankruptcy
Rule 7001(6) (“Bankr. Rule 7001(6)”), Debtor filed an adversary
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proceeding on February 28, 2002 to determine the discharageability
of her student loan debt.
Except for the issue of whether Debtor’s situation would give
rise to the level of “undue hardship” required by 11 U.S.C. §
523(a)(8), the parties do not dispute the basic underlying facts.
Debtor received a college degree in music history from Birmingham
Southern College in 1974. Debtor left the work force in 1980 to
care for her two small children. After a divorce, Debtor returned
to school in 1990 to receive training as a court reporter. During
her six years at Brown College of Court Reporting, Debtor received
the loans at issue in this adversary proceeding. Debtor did not
graduate from the Brown College program, nor did she pass the exam
to become a licenced court reporter. In 1998, Debtor was diagnosed
with Guillion Barre’ Syndrome. The extent to which Debtor has
recovered from Guillion Barre’ and how much it affects her current
and future job opportunities is disputed by the parties.
Defendant contends that it is entitled to summary judgment as
a matter of law because the facts, even as asserted by Debtor, do
not rise to the level of undue hardship required by law to
discharge student debt. Defendant argues that even if Debtor meets
her burden on the first prong of the test as explained in Brunner
v. New York State Higher Education Services Corp. (In re Brunner),
831 F.2d 395 (2d Cir. 1987)(“Brunner test”), Debtor cannot sustain
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her burden under the second prong of the Brunner test. Brunner, 831
F.2d at 396. The second prong of the Brunner test requires Debtor
to prove that her dire circumstances will continue for a
significant portion of the repayment period for the student loans.
Id. Defendant urges that with a college education and several
years of court reporter training, Debtor should be able to find
adequate employment at some point in the future. Further,
Defendant argues that Debtor does not carry her burden on the third
prong, the “good faith” prong, of the Brunner test because Debtor
has only made four payments on the student loans. Id. Finally,
Defendant argues that Educational Credit Management Corp. v. Carter
(In re Carter), 279 B.R. 872, (M.D. Ga. 2002) is not
distinguishable factually from this case. Carter, 279 B.R. at 874.
Defendant contends that the cases relied upon by the court in
Carter to determine the undue hardship issue were factually similar
to the present case. Id. at 877-878; see Brightful v. Pennsylvania
Higher Educ. Assistance Agency (In re Brightful), 267 F.3d 324 (3d
Cir. 2001); In re Roberson, 999 F.2d 1132 (7th Cir. 1993). In
fact, Defendant argues that the situations in Brightful and
Roberson were worse than Debtor’s situation here. Brightful, 267
F.3d at 326; Roberson, 999 F.2d at 1133-1134.
Debtor argues that summary judgment should not be granted to
Defendant because there are genuine issues of material fact.
1Debtor is 50.
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First, Debtor argues that a genuine issue exists as to whether
Debtor will be able to maintain a minimal standard of living for
a significant portion of the repayment period if her student loans
are not discharged. Debtor contends that her bout with Guillion
Barre’ has left her with chronic back pain, which interferes with
her ability to perform many types of jobs. Debtor argues that as
time goes by her ability to get a job will decrease because of her
lack of experience, age1, and chronic back pain, factors that are
not within her control. Second, Debtor argues that there is a
genuine issue as to whether she made a good faith attempt to repay
her loans. Debtor urges that under case law, payments are not
required. A good faith effort to obtain employment, maximize
income, and minimize expenses is enough according to Debtor. See
Roberson, 999 F.2d at 1136; In re Mallinckrodt, 274 B.R. 560, 565
(Bankr. S.D. Fla. 2002).
Finally, Debtor contends that Carter is factually distinct
from the present case. Carter, 279 B.R. at 874. In Carter, the
court found that the debtor’s situation would improve over time
because the debtor had a college degree in business administration.
Id. at 878-879. Debtor argues that this is not true for her.
While Debtor has a college degree is in music history, she contends
that she cannot use this degree without additional education.
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Further, Debtor points out that she was unable to complete her
court reporter degree and never passed the required court reporter
exam, even though she tried multiple times. Debtor did begin work
as a court reporter under a judicial permit. However, the judicial
permit could not be renewed without passing the exam and has since
expired.
Additionally, the debtor in Carter had no medical disabilities
or other causes which would interfere with her future employment.
Id. at 878. Again, Debtor contends that this is not true for her.
Debtor argues that her bout with Guillion Barre’ was a key factor
in her inability to pass the court reporting exam during her final
attempts. Further, Debtor urges that chronic back pain, which is
a lingering effect of Guillion Barre’, affects her ability to gain
other types of employment. Debtor contends that she is facing a
“total foreclosure of job prospects in her area of training.” Id.
[quoting In re Webb, 132 B.R. 199, 202 (Bankr. M.D. Fla. 1991)].
Further, Debtor argues that age is a significant factor in the
second prong of the Brunner test, which looks at a debtor’s ability
to pay a substantial amount of the debt. The debtor in Carter was
only 39. Id. at 874. Here, Debtor is 50. Debtor argues, with her
severely restricted ability to earn more than minium wage, it is
unlikely that she will be able to repay a significant amount of her
student loan debt.
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Finally, Debtor contends that Carter does not establish a rule
of law. It states only that the facts in Carter do not meet the
second prong of the Brunner test. Id. at 878-879. Debtor argues
that if her situation does not rise to the level of an undue
hardship, then no case would unless it involved a medical
disability. Debtor contends that if Congress had meant to limit
“undue hardship” to only medical disabilities, it would have.
CONCLUSIONS OF LAW
Under 11 U.S.C. § 523(a)(8), Debtor’s student loans are
nondischarageable unless Debtor can prove that repayment of the
loans would subject her to undue hardship. 11 U.S.C. § 523(a)(8)
(1993 & Supp. 2002). Undue hardship is not defined in the Code but
the term has been analyzed by many courts. See 11 U.S.C. §§ 101,
523 (1993 & Supp. 2002); see also Brightful, 267 F.3d at 327-331;
Roberson, 999 F.2d at 1134-1138; Brunner, 831 F.2d at 396-397;
Carter, 279 B.R. at 875-879.
As spelled out in Brunner, the three-prong test: 1) the
debtor’s current financial situation, 2) future financial
situation, and 3) good faith effort towards repayment is widely
accepted. Brunner, 831 F.2d at 396. In Carter, the district court
set a very high standard for undue hardship. Carter, 279 B.R. at
879.
Under Federal Rule of Civil Procedure 56 (“Rule 56″),
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applicable to Bankruptcy proceedings under Bankruptcy Rule 7056
(“Bankr. Rule 7056″), Defendant is entitled to summary judgment if
there is no genuine issue of material fact and Defendant is
entitled to judgment as a matter of law. FED. R. CIV. P. 56, FED. R.
BANKR. P. 7056. However, in the present case genuine issues of
material fact remain. The parties disagree vastly on what Debtor’s
ability is to generate income in the future. Additional evidence
is necessary for the court to make this determination. Therefore,
summary judgment at this juncture would be inappropriate.
Defendant’s Motion for Summary Judgment is denied. An order
in accordance with this Memorandum Opinion will be entered.
DATED this _________ day of December, 2002
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

Arthur Geeslin, Jr

July 17, 2003

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
CASE NO. 02-42227
Arthur Geeslin, Jr., : CHAPTER 7
Debtor. :
:
Arthur Geeslin, Jr., :
Movant, ::
vs. :
:
Peter Skandalakis, :
Respondent. :
::
MEMORANDUM OPINION
On May 12, 2003, the Court held a hearing on a Motion for
Contempt Against Peter Skandalakis (“Respondent”), a Georgia
District Attorney, (“Contempt Motion”) filed by Arthur Geeslin, Jr.
(“Debtor”). During oral argument, the following issues were
raised: Whether Respondent’s actions to collect the forfeited bail
bond because the principal did not appear for trial are subject to
the automatic stay and the discharge injunction, when Debtor has
received a discharge of debts under Chapter 7 of the United States
Bankruptcy Code (“Code”). Further, if the automatic stay and
discharge injunction apply, whether Respondent can claim 11th
Amendment immunity. The Court took the matters under advisement
and the parties were given an opportunity to submit briefs in
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support of their positions. The Court has considered the parties’
briefs, oral arguments, and the applicable statutory and case law.
BACKGROUND INFORMATION
The parties agree that the facts are not in dispute. Debtor
was a commercial surety on a criminal bail bond in the amount of
$125,000 and the principal was a criminal defendant as specified
under O.C.G.A.§ 17-6-1 et. seq. The criminal defendant failed to
appear before the Superior Court of Meriwether County on the
required date. Georgia law provides that “a bond forfeiture occurs
at the end of the court day upon the failure of appearance of a
principal of any bond or recognizance given for the appearance of
that person.” O.C.G.A. § 17-6-70(a) (1997 & Supp. 2002). Debtor
filed a Chapter 7 bankruptcy petition on September 10, 2002.
Debtor received his discharge on December 30, 2002. Respondent,
the District Attorney for the Coweta Judicial Circuit, has
proceeded with an action to collect the criminal bail bond
forfeiture from Debtor. Debtor brought this Contempt Motion
against Respondent in an effort to prevent Respondent from
obtaining a final judgment on the bond and from recovering the debt
from Debtor.
Debtor contends that the bail bond forfeiture was a
contractual obligation between himself and Respondent. Debtor
asserts that he is protected from collection of the debt by the
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automatic stay under 11 U.S.C. § 362(a). Further, Debtor asserts
that the debt is dischargeable in bankruptcy and that it has been
discharged. Therefore, Respondent is in violation of the automatic
stay and the discharge injunction.
Respondent raised two policy issues in support of his position
that actions to collect on bail bond forfeitures should be exempt
from the automatic stay and the discharge injunction. First,
Respondent argues that federal courts should not interfere with
state government functions whenever possible. Moreover, bankruptcy
laws do not provide exceptions to criminal proceedings. Respondent
cited Younger v. Harris, 401 U.S. 37 (1971), in which the Supreme
Court acknowledged that, in matters of equitable relief, a state’s
administration of its own criminal justice system should be free
from federal interference. Younger, 401 U.S. at 44-45. Respondent
urges that the Code must be read and understood in light of this
federalism.
The second policy reason advanced by Respondent is that the
bail system would be undermined if bail bond forfeitures were not
enforced by courts as an exception to the automatic stay and
discharge injunction. Respondent contends that the effect could
cause danger to the public. Respondent urges that a bail bond is
a way to coerce the defendant’s presence at trial by the threat of
forfeiture. If bail forfeitures could be undermined, it might lead
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to increased evasion of states’ bail bond statutes and third-party
sureties could prevent the effects of paying the forfeiture by
hiding behind the cloak of the Code.
In addition to the above policy arguments, Respondent contends
that criminal bail bond forfeitures fall under 11 U.S.C. §
362(b)(4), an exception to the automatic stay, and are exempt from
discharge under 11 U.S.C. § 523(a)(7). In the alternative,
Respondent has asserted the State of Georgia’s Eleventh Amendment
sovereign immunity.
CONCLUSIONS OF LAW
First, Debtor erred procedurally in his attempt to obtain an
injunction. In pertinent part, Bankruptcy Rule 7001 provides that:
“An adversary proceeding is governed by the rules of this Part VII.
The following are adversary proceedings . . .(7) a proceeding to
obtain an injunction or other equitable relief….” FED. R. BANKR.
P. 7001. The injunctive relief sought by Debtor cannot be obtained
under the clear language of Rule 7001(7). FED. R. BANKR. P. 7001(7).
While the Court cannot grant an injunction at this point, the
Court may inquire whether there was a violation of the automatic
stay under 11 U.S.C. § 362(a) and the discharge injunction under
11 U.S.C. § 524(a)(2). Respondent claims that the Eleventh
Amendment prevents such an inquiry. This Court, like all other
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courts, must refrain from considering a constitutional question
unless it is a required query. See United States v. Clemons, 843
F.2d 741, 750 (3d Cir. 1988) citing Ashwander v. Tennessee Valley
Auth., 297 U.S. 288, 341, 345, 347 (1936) (Brandeis, J.,
concurring); see also Burton v. United States, 196 U.S. 283, 295
(1905); Kranson v. Valley Crest Nursing Home, 755 F.2d 46, 50 (3d
Cir. 1985); Stoner v. Presbyterian Univ. Hosp., 609 F.2d 109, 111
(3d Cir. 1979)(per curiam).
As stated by the court in Commonwealth of Virginia v. Collins
(In re Collins), 173 F.3d 924 (4th Cir. 1999), “A federal court’s
jurisdiction over the dischargeability of debt, just like its
jurisdiction to confirm a plan of reorganization, ‘derives not from
jurisdiction over the state or other creditors, but rather from
jurisdiction over the debtors and their estates.’” Collins, 173
F.3d at 929, quoting State of Maryland v. Antonelli Creditors’
Liquidating Trust, 123 F.3d 777, 787 (4th Cir. 1997). By analogy,
this Court has the fundamental power to determine whether
Respondent’s actions violate the automatic stay, as well as the
discharge injunction. As stated in Collins, this power flows from
this Court’s jurisdiction over Debtor and his estate, not
jurisdiction over Respondent. Id. The Eleventh Amendment is not
implicated because the Court is not asserting in personam
jurisdiction over Respondent. See generally, Chandler v. State of
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Oklahoma (In re Chandler), 251 B.R. 872, 876 (10th Cir. B.A.P.
2000)(held that an adversary proceeding asserted in personam
jurisdiction over state, thus Eleventh Amendment was implicated,
but noted issues, such as discharge, fall under in rem
jurisdiction, an exception to the Eleventh Amendment); but see
Mayes v. Cherokee Nation (In re Mayes), 294 B.R. 145, 152-153 (10th
Cir. B.A.P. 2003)(held that a motion to avoid a judgment lien was
a “suit” for sovereign immunity purposes despite the fact that an
adversary proceeding had not been filed).
As noted by the court in Chandler, the United States Supreme
Court held years ago that bankruptcy courts have in rem
jurisdiction over matters that may affect a state. Chandler, 251
B.R. at 877, citing Gardner v. New Jersey, 329 U.S. 565, 573-575
(1947). Bankruptcy courts do have the fundamental power to
determine violations of the automatic stay and the discharge
injunction. See generally Collins, 173 F.3d at 930. If courts were
to recognize Eleventh Amendment sovereign immunity in this context,
“the bankruptcy system would be seriously undermined.” Id. at 930.
If this Court is to find civil contempt, then clear and
convincing evidence must demonstrate that a willful disregard of
the authority of the court took place. See McGregor v. Chierico,
206 F.3d 1378, 1383 (11th Cir. 2000). According to the Eleventh
Circuit, “The clear and convincing evidence must establish that:
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(1) the allegedly violated order was valid and lawful; (2) the
order was clear and unambiguous; and (3) the alleged violator had
the ability to comply with the order.” Id. Further, Debtor bears
the burden of persuasion on each element that must be proven for
an alleged violation of the automatic stay for damages to be
recovered. See Christakis v. McMahon (In re Christakis), 291 B.R.
9, 18 (Bankr. D. Mass. 2003). Debtor bears the same burden in
order to receive damages when there is an alleged violation of the
discharge injunction. See In re Arnold, 206 B.R. 560, 568 (Bankr.
N.D. Ala. 1997).
11 U.S.C. § 362(a) – The Automatic Stay
In relevant part, 11 U.S.C. § 362(a) states that “[e]xcept as
provided in subsection (b) of this section, a petition filed under
section 301, 302, or 303 of this title… operates as a stay.” 11
U.S.C. § 362(a)(1993 & Supp. 2002). According to the court in
United Sav. Assoc. v. Timbers of Inwood Forest Assoc., Ltd., 484
U.S. 365 (1988), “When a bankruptcy petition is filed, § 362(a) of
the Bankruptcy Code provides an automatic stay of, among other
things, actions taken to realize the value of collateral given by
the debtor.” United Sav. Assoc., 484 U.S. at 369. Moreover, 11
U.S.C. § 362(a) has a twofold purpose. First, it gives the debtor
a “breathing spell” from creditors. Chester v. Parker (In re
Parker), 289 B.R. 779, 781-782 (Bankr. M.D. Ga. 2002)(Walker, J.).
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The stay stops all actions directed at the debtor including efforts
to collect debts. See Independent Union of Flight Attendants v. Pan
Am. World Airways, Inc., 966 F.2d 457, 459 (9th Cir. 1992); see
also Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571
(9th Cir. 1992); H.R. Rep. No. 595, 95th Cong., 1st Sess., at 340
(1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6296-6297. Second,
11 U.S.C. § 362(a) prevents the “race to the courthouse,” so that
creditors will be treated equally. In re Printup, 264 B.R. 169, 173
(Bankr. E.D. Tenn. 2001), citing In re Southwest Equip. Rental,
Inc., No. 1-88-00033, 1990 WL 129972, at *3 (Bankr. E.D. Tenn. Feb.
8, 1990).
The automatic stay provided for in 11 U.S.C. § 362(a) takes
effect immediately upon the filing of a petition by the party
seeking bankruptcy protection. See generally ALAN N. RESNICK ET. AL.,
COLLIER ON BANKRUPTCY § 362.11 (15th ed. 2003). Section 362(h) of the
Code states that “[a]n individual injured by any willful violation
of a stay provided by this section shall recover actual damages,
including costs and attorney’s fees, and, in appropriate
circumstances, may recover punitive damages.” 11 U.S.C. §
362(h)(1993 & Supp. 2002). Damages for a willful violation of the
automatic stay must establish that “the creditor deliberately
carried out the prohibited act with knowledge of the debtor’s
bankruptcy case.” Printup, 264 B.R. at 173, citing Walker v.
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Midland Mortgage Co. (In re Medlin), 201 B.R. 188, 194 (Bankr. E.D.
Tenn. 1996).
The Court must address Respondent’s argument that 11 U.S.C.
§ 362(b)(4) creates an exception under which Respondent’s actions
do not violate the stay. Section 362(b)(4) creates an exception
to the stay for actions taken by a governmental unit to enforce its
police or regulatory power. 11 U.S.C. § 362(b)(4)(1993 & Supp.
2002). If Respondent’s actions fall under this exception, there
is no need to address whether the debt was discharged.
Courts have developed two tests to decide whether governmental
actions fall under this exception: 1) public policy test; 2)
pecuniary interest test. See Chao v. Hospital Staffing Serv., Inc.,
270 F.3d 374, 385-386 (6th Cir. 2001); U.S. v. Commonwealth Cos.,
Inc. (In re Commonwealth Cos., Inc.), 913 F.2d 518, 523-524 (8th
Cir. 1991); Word v. Commerce Oil Co. (In re Commerce Oil Co., 847
F.2d 291, 295 (6th Cir. 1988); McAtee v. The Fla. Bar (In re
McAtee), 162 B.R. 574, 577-578 (Bankr. N.D. Fla. 1993). Under the
public policy test, a proceeding is reviewed to determine whether
it “adjudicates private rights” or “effectuates public policy
considerations.” Chao, 270 F.3d at 385-386. Only those proceedings
that effectuate public policy considerations are exempt from the
stay. See id. at 386. Under the pecuniary interest test, a
proceeding is reviewed to determine whether it furthers the
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governmental unit’s pecuniary interest or matters of public safety.
See id. at 385. Only those proceedings that further matters of
public safety are exempt from the stay. See id.
Many courts look to the legislative history when considering
the issue of whether the stay applies to actions by governmental
units. See McAtee, 162 B.R. at 577. According to legislative
history, 11 U.S.C. § 362(b)(4) should be construed narrowly
allowing only actions by governmental units “to protect public
health and safety and not to apply to actions by a governmental
unit to protect a pecuniary interest in property of the debtor or
property of the estate.” 124 Cong. Rec. S17406 (daily ed. Oct. 6,
1976)(statement of Sen. DeConcini), reprinted in 1978 U.S.C.C.A.N.
6505, 6513; see also McAtee, 162 B.R. at 577.
Here, applying both tests, the Court finds that Respondent’s
actions are pecuniary in nature and that those actions would not
further any public health or safety considerations. Respondent
attempted to collect a bail bond forfeiture from a professional
bail bondsman who declared bankruptcy. The Court has been given
no indication that Debtor is the criminal defendant or a family
member or friend of the criminal defendant for whom the bail bond
was issued. The Court finds that this matter is civil in nature
and that Congress’ intent was for 11 U.S.C. § 362(b)(4) to apply
to criminal matters. Therefore, the exception under 11 U.S.C. §
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362(b)(4) does not apply to Respondent’s actions. The Court is not
persuaded by Respondent’s policy arguments that such a
determination will undermine the underlying purposes of the bail
system. The Court finds that a willful violation of the automatic
stay occurred when Respondent attempted to recover the forfeited
bail bond from Debtor.
11 U.S.C. § 524(a)(2) – The Discharge Injunction
The Court will now address Debtor’s claim that Respondent’s
actions are also in violation of the discharge injunction under 11
U.S.C. § 524(a)(2). Debtor’s request for a determination that the
bail bond forfeiture owed to Meriwether County was discharged may
be obtained without an adversary proceeding despite Rule 7001(6).
FED. R. BANKR. P. 7001(6). The Fourth Circuit, in Collins, held
that an adversary proceeding was not required to determine whether
a debt had been discharged. See Collins, 173 F.3d at 929. However,
as Respondent argued, Collins was criticized by one court because
it disregarded the Federal Rules of Bankruptcy Procedure. See Janc.
V. Coordinating Bd. for Higher Educ. (In re Janc), 251 B.R. 525,
541 (Bankr. W.D. Mo. 2000). This Court agrees with the reasoning
of the Collins court. Collins, 173 F.3d at 929-931. To determine
whether Respondent violated the discharge injunction, a necessary
query is whether the debt was discharged in the first place.
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This query begins with 11 U.S.C. § 727, which provides
exceptions to the discharge order if a debtor is not an individual
or if a debtor has committed certain acts. 11 U.S.C. § 727(a)(1993
& Supp. 2002). It is not alleged that Debtor or his actions fall
under the provisions of § 727(a), therefore the query moves to §
727(b). 11 U.S.C. § 727(b)(1993 & Supp. 2002). Under 11 U.S.C. §
727(b) all pre-petition debts are discharged, except those debts
set forth in 11 U.S.C. § 523(a). 11 U.S.C. §§ 523(a),727(b)(1993
& Supp. 2002); see also In re Crull, 101 B.R. 60, 61 (Bankr. W.D.
Ark. 1989). Briefs submitted on behalf of Debtor and Respondent
directed the Court’s attention to 11 U.S.C. § 523(a)(7) because the
debt was incurred when the criminal defendant absconded and was a
type of forfeiture. In pertinent part, 11 U.S.C. § 523(a)(7)
excepts from discharge any debt “to the extent such debt is for a
fine, penalty, or forfeiture payable to and for the benefit of a
governmental unit, and is not compensation for actual pecuniary
loss.” 11 U.S.C. § 523(a)(7)(1993 & Supp. 2002).
Professional bail bondsmen incur debt when criminal
defendants, for which the bondsmen are sureties, abscond prior to
trial. When dealing with the dischargeability of bail bond
forfeitures where the debtor is the owner of a bail bond company,
courts have ruled that professional bail bondsmen’s obligations are
contractual in nature and do not arise out of the underlying
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criminal activity. See Hickman v. Texas (In re Hickman), 260 F.3d
400, 406 (5th Cir. 2001); Collins, 173 F.3d at 931; County of Berks
v. Damore (In re Damore), 195 B.R. 40, 42 (Bankr. E.D. Pa. 1996);
Pioneer Gen’l Ins. Co. v. Midkiff (In re Midkiff), 86 B.R. 239, 240
(Bankr. D. Colo. 1988); Pioneer Gen’l Ins. Co. v Paige (In re
Paige), No. 86 B 8072, 87 E 194, 1988 WL 62500, *4 (Bankr. D. Colo.
April 15, 1988). Moreover, the monetary obligation does not arise
from the commission of any criminal or penal act. See Collins, 173
F.3d at 932. These same courts have interpreted the leading United
States Supreme Court case dealing with 11 U.S.C. § 523(a)(7), Kelly
v. Robinson, 479 U.S. 36 (1986), to allow discharge for debt
created by bail bond forfeitures that are not penal in nature.
Kelly, 479 U.S. at 50; see Hickman, 260 F.3d at 406; Collins, 173
F.3d at 931-932; Damore, 195 B.R. at 42; Midkiff, 86 B.R. at 240
(adopted reasoning in Paige); Paige, 1988 WL 62500, at *4. The
courts in Collins and Hickman held that Congress did not intend 11
U.S.C. § 523(a)(7) to make criminal bail bond forfeitures nondischargeable,
when the debtor is the surety, not the criminal out
of jail on bond. Hickman, 260 F.3d at 407; Collins, 173 F.3d at
932. The facts in Hickman and Collins are similar to those before
this Court because the cases involved people who ran bail bond
companies, then petitioned for bankruptcy. Hickman, 260 F.3d at
401; Collins, 173 F.3d at 926.
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While numerous cases dealing with professional bail bondsmen
allow for a discharge under 11 U.S.C. § 523(a)(7), courts often
rule the opposite, as pointed out by Respondent, when the bail bond
surety is a friend or family member or if the fees are penal in
nature. See City of Philadelphia v. Nam (In re Nam), 273 F.3d 281,
294 (3d Cir. 2001); United States v. Cox, (In re Cox), 33 B.R. 657,
662 (Bankr. M.D. Ga. 1983)(Hershner, J.). The court in Nam held
that, if 11 U.S.C. § 523 (a)(7) allowed a criminal bail bond
forfeiture to be dischargeable, such action would disregard the
plain meaning of the statute and could disable the bail system.
Nam, 273 F.3d at 283. The facts in Nam differ from the facts here.
Id. at 283-284. In Nam, the son was charged with murder, robbery,
and burglary. Id. at 283. The father, who was the debtor, bailed
his son out of jail and arranged for him to return to South Korea.
See id. at 284. The father subsequently filed for bankruptcy and
the bail bond forfeiture was held to be non-dischargeable. See id.
Respondent also cites to Cox as support for his position. In
that case, a criminal was convicted and ordered by the court to pay
the attorneys’ fees for the government’s prosecution of him. See
Cox, 33 B.R. at 658. The convicted criminal petitioned for
bankruptcy and the bankruptcy court held that the debt was nondischargeable
because his debt to the government under 11 U.S.C.
§ 523(a)(7) was penal in nature. See id. at 662. Once again the
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facts in Cox are distinguishable from the facts here. Id. at 658.
Further, there are policy arguments that support the
dischargeability of debt under 11 U.S.C. § 523(a)(7) for
professional bail bondsmen that out weigh Respondent’s policy
arguments. First, “the most important consideration limiting the
breadth of the definition of [forfeiture] lies in the basic purpose
of the Bankruptcy Act to give the debtor a new opportunity in life
and a clear field for future effort, unhampered by the pressure and
discouragement of pre-existing debt.” Hickman, 260 F.3d at 404,
citing Local Loan Co. v. Hunt, 292 U.S. 234, 244-245 (1934).
Allowing dischargeability of bail bond forfeitures should not be
taken to the extreme where bankruptcy courts become “a haven for
wrongdoers.” Hickman, 260 F.3d at 404, citing Fezler v. Davis (In
re Davis), 194 F.3d 570, 573 (5th Cir. 1999). However, this
concern must be balanced with the potential harm to the bail system
if professional bail bondsmen are not allowed to discharge their
business debt. Such an outcome could lead to the collapse of the
bail system because bondsmen could perceive the risk of doing
business as too high. Accordingly, a policy of not allowing the
discharge of bail bond forfeitures, when the debtor is a
professional bail bondsman, could be detrimental to the bail
system, rather than in furtherance of the policies behind the bail
system.
-16-
Here, as stated above, Debtor’s position is analogous to the
Hickman and Collins cases. Hickman, 260 F.3d at 401; Collins, 173
F.3d at 926. The contractual nature of the bond forfeiture and
significant policy factors weigh in Debtor’s favor. Therefore, the
Court finds that debts incurred by Debtor through his professional
bail bonding company were discharged. Thus, Respondent’s continued
actions, to collect on the bail bond forfeiture after Debtor
received a discharge, violate the discharge injunction.
Remedies
Unlike the inquiry whether Respondent’s actions violated the
automatic stay and the discharge injunction, the recovery of
damages would require the Court to address the Eleventh Amendment
sovereign immunity argument asserted by Respondent. See Chandler,
251 B.R. at 875. However, in accordance with Ex Parte Young, 209
U.S. 123 (1908), federal courts are not precluded from granting
injunctive relief to prevent a continuing violation of federal law.
Young, 209 U.S. at 155-156, 159; see also Seminole Tribe of Fla.
v. Florida, 517 U.S. 44, 73 (1996); Green v. Mansour, 474 U.S. 64,
68 (1985).
Notwithstanding Respondent’s violation of the automatic stay
and the discharge injunction, Debtor has failed to meet his burden
to provide the Court with evidence of actual or punitive damages.
Since damages will not be awarded to Debtor, again the Eleventh
-17-
Amendment sovereign immunity issue will not be reached. Further,
the Court cannot make the necessary inquiry to rule on an
injunction because an adversary proceeding has not been filed.
While the Court has full authority to find Respondent in violation
of the automatic stay and the discharge injunction, enforcement of
that contempt order, as a result of these legal conclusions, is
another question. Whether Debtor will be able to persuade the
Court to award injunctive relief is an issue for another day.
To the extent that there is any existing collateral given by
the criminal defendant to Debtor to hold as surety, Respondent may
collect that collateral in one of three ways: 1) by obtaining
relief from the automatic stay under 11 U.S.C. § 362(d); 2)
collection after abandonment of the property by the Chapter 7
Trustee; or 3) by waiting until after the final closing order is
issued in Debtor’s case.
Finally, the Court recognizes that there is an adversary
proceeding in the this case that was filed by another party
regarding this same bail bond forfeiture under different sections
of 11 U.S.C. § 523 than addressed by the Court in this Memorandum
Opinion. The finding in this Contempt Motion that the bail bond
forfeiture was discharged is not binding on the Court in the
adversary proceeding dealing with allegations of fraud. No
evidence or argument has been made by Respondent that the bail bond
-18-
forfeiture involved fraudulent actions by Debtor. Therefore, the
Court has not ruled on such matters. An order in accordance with
this Memorandum Opinion will be entered.
DATED this ____ day of July, 2003.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

ROSEMARY DOUGLAS

March 14, 2007

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE MIDDLE DISTRICT OF GEORGIA
VALDOSTA DIVISION
IN RE: :
:
ROSEMARY DOUGLAS : CASE NO. 05-70649 JTL
: CHAPTER 7
Debtor. :
________________________________________________:
:
ROSEMARY DOUGLAS :
:
Plaintiff, : A.P. NO. 05-7021
:
vs. :
: A.P. NO. 05-7022
EDUCATIONAL CREDIT MANAGEMENT CORP. :
:
Defendant, :
:
UNITED STATES OF AMERICA on behalf of :
UNITED STATES DEPARTMENT OF EDUCATION :
:
Defendant. :
:
_____________________________________________________________________________________________
2
MEMORANDUM OPINION
This matter is before the Court on complaint of Debtor, Rosemary Douglas, to determine the
dischargeability of various student loans. On June 28, 2006, the Court held a bench trial of the issues
presented. The Court heard evidence and argument from counsel for Debtor and counsel for the two
Defendants to the complaint. Following the hearing, the Court took the matter under advisement,
inviting counsel for each party to submit briefs. Defendant Educational Credit Management Corp.
(“ECMC”) submitted its brief to the Court on July 14, 2006. No other briefs were filed with the
Court. The issue for the Court to decide is whether Debtor’s repayment of her student loan debt
would impose an “undue hardship” upon Debtor and Debtor’s son as that term is used in 11 U.S.C. §
523(a)(8).1 The Court, having carefully considered the evidence presented at the hearing, the
argument of counsel, the brief submitted, and the applicable statutory and case law, holds that,
consistent with the reasoning set forth below, excepting Debtor’s student loan debt from discharge
would impose an undue hardship upon Debtor and her dependent son.
FINDINGS OF FACT
At the June 28, 2006 trial, the parties presented the Court with a stipulation of facts. The
Court adopts those stipulations as part of its findings. The Court will make other findings in
accordance with evidence presented at trial.
A. Findings by Stipulation
Defendant ECMC is the holder of nineteen consolidated, guaranteed student loans of Debtor.
Those loans are educational loans made, insured, or guaranteed by a governmental unit as described
1 Further reference to provisions of the Bankruptcy Code will be made only to the section number of the provision. It
should be assumed that statutory references are to the Bankruptcy Code found at Title 11 of the United States Code
unless otherwise indicated.
3
in § 523(a)(8). The total amount disbursed on the loans held by ECMC was $26,120.00. As of July
10, 2005, the total amount owed by Debtor on ECMC’s nineteen loans was $59,857.36. The longest
foreseeable time period for repayment of ECMC’s loans is 300 months.
Defendant United States of America on behalf of the U.S. Department of Education (“DOE”)
is the holder of thirteen consolidated, guaranteed student loans. These loans are also educational
loans made, insured, or guaranteed by a governmental unit as described in § 523(a)(8). The total
amount disbursed on the loans held by the DOE was $21,998.00. As of June 15, 2006, the total
amount owed by Debtor on the DOE’s thirteen loans was $30,726.85.
Debtor is qualified and eligible for the William D. Ford Repayment Program (“Ford
Program”), through which Debtor can consolidate the student loans at issue and service her total debt
with a single monthly payment. Debtor has been advised that she is qualified for the Ford Program.
Congress created the Ford Program in 1993. The Ford Program is administered by the DOE.
The Ford Program offers four different repayment options: (1) Standard; (2) Extended; (3)
Graduated; and (4) Income Contingent. The terms and conditions of the four repayment options are
set forth in the Code of Federal Regulations at 34 C.F.R. § 685.208 through 685.210. A party
participating in the Ford Program may change from one repayment option to another at any time.
Table 1 summarizes the term of each repayment option and the payment Debtor would be required to
make on the loans held by ECMC.
TABLE 1—ECMC Loans
Repayment Plan Term (Months) Initial Monthly
Payment
Total Payments
(Interest + Principle)
Standard 120 $679.68 $81,561.60
Extended 300 $404.17 $121,251.00
Graduated 300 $339.84 $129,382.90
Income Contingent 300 Based on Income Based on Income
4
The term of each repayment option and each option’s corresponding payment for the loans held by
the DOE are set forth below in Table 2.
TABLE 2—DOE Loans
Repayment Plan Term (Months) Initial Monthly
Payment
Total Payments
(Interest + Principle)
Standard 120 $268.74 $32,248.80
Extended 240 $174.58 $41,899.20
Graduated2 240 $134.37 $44,927.28
Income Contingent3 300 Based on Income Based on Income
Debtor could elect to combine the payments and make a single payment to the Ford Program to
service both the ECMC and the DOE loans. Under the Graduated option, the payments would
gradually increase for each debt every two years during the repayment period.
Under the Income Contingent Repayment Plan (“ICRP”) option, the monthly payment is
calculated based upon the borrower’s adjusted gross income and family size. The monthly payment
amount is calculated in one of two ways: (1) the amount that would be paid if the borrower repaid
the loan in 300 months, multiplied by an adjusted gross income minus the poverty level for the
borrower’s family size; or (2) 20% of the borrower’s “discretionary income,” which is defined as the
borrower’s adjusted gross income minus the poverty level for the borrower’s family size. If the
calculation yields a monthly payment between $0.00 and $5.00, the monthly payment is $5.00, unless
the borrower’s income is less than or equal to the poverty level for borrower’s family size, in which
case the payment would be $0.00. If the monthly payment is less than the amount of the interest that
accrues on the loans, the interest is capitalized, i.e., added to the principal, once per year until the
2 According to the parties’ stipulation, this is an estimated monthly repayment amount for the first two months of the
term and based upon total loan repayment. The monthly payment amount will generally increase every two years,
based on the graduation factor in the graduated repayment rules.
3 The parties’ stipulation provides that the payment under the “Income Contingent” option will be calculated
annually and is subject to change based on the poverty guidelines for family size as determined by the U.S.
5
principal balance reaches 10% more than the original principal balance.4 At that point, interest
continues to accrue but is not added to the principal balance. Under the ICRP, the repayment period
for Debtor would be 300 months, at the end of which the entire debt would be cancelled. The parties
stipulate that payments under the ICRP can never exceed 20% of the borrower’s discretionary
income, which is defined above.
The parties stipulate and agree that Debtor’s student loans held by the DOE can be
consolidated under the Ford Program along with those held by ECMC and that there are no obstacles
to such consolidation.5 Payment amounts under the ICRP can be determined using a loan calculator
currently available at the following web address:
www.ed.gov/offices/OSFAP/DirectLoan?RepayCalc/form2.html.
Debtor’s family is composed of two people, Debtor and Debtor’s minor child. The poverty
level for a family of two was $12,830.00 in 2005 and $13,200.00 in 2006. The applicable poverty
level is that determined and published by the U.S. Department of Health and Human Services.6
In addition to the four different types of repayment options, Debtor may seek deferment of
repayment or forbearance under the Ford Program. A deferment or postponement of payments may
be granted where a borrower is conscientiously seeking, but unable to find, full-time employment
(for up to three years) or where a borrower is experiencing an economic hardship as defined by
federal law (also for up to three years).
Forbearance allows a borrower to stop or reduce monthly payments for a limited, specific
period, during which time interest on the loans accrues. If the interest is not paid, it is added to the
Department of Health and Human Services. The Income Contingent option has a maximum term of 25 years.
4 Stipulation at ¶ 8(d) (citing 34 C.F.R. § 685.209).
5 Id. at ¶ 10 (citing 34 C.F.R. 685.220).
6 Id. at ¶ 12 (citing Vol. 69, Fed. Reg. No. 30, pp. 7336-38; Vol. 70, Fed. Reg. No. 33, Feb. 18, 2005, pp. 8373-75;
6
principal balance. Forbearance may be granted based upon a borrower’s poor health, temporary
financial hardship, or if the borrower is obligated to make payments on federal student loans that are
equal to or greater than 20% of monthly gross income or for other reasons acceptable to the DOE.7
To the best of Debtor’s knowledge, she would be eligible and qualified for forbearance or deferment
once she is accepted into the Ford Program.8
B. Findings From Evidence Presented at Trial
When Debtor was 15 or 16 years old she lived with her father in Madison, Florida. While
living in Madison, Debtor was involved in an abusive relationship with an older man. The man
abused Debtor on almost a daily basis. One evening, following a high school football game, Debtor
walked with a group of people to a friend’s house. Debtor’s boyfriend followed the group in his car.
To avoid the man, the group walked to a friend’s older sister’s house, believing the man would not
bother them there. The man kept driving by the house of the friend’s older sister. Debtor decided
that for safety sake, she needed to make her way home. Before leaving the older sister’s house,
Debtor went into the kitchen and armed herself with a knife. While walking down the older sister’s
driveway, Debtor was attacked by her boyfriend who threw her to the ground. Debtor swung the
knife at the man and in the process cut him in the groin area. The man died later from his injury.
Debtor was retained in a youth detention center.
Debtor was prosecuted for the man’s death. She pled guilty to a lesser charge of
manslaughter and served one year and one week in prison. Debtor’s conviction does appear on her
criminal record. While in prison, Debtor received her GED. After Debtor was released, she attended
Abraham Baldwin Agricultural College (“ABAC”) in 1991. Later, she applied and was accepted to
Vol. 71, Fed. Reg. No. 15, Jan. 24, 2006, pp. 3848-49).
7 Id. at ¶ 15 (citing 35 C.F.R. § 685.205).
7
Valdosta State University (“VSU”). While attending VSU, Debtor studied early childhood education
and upon completing her studies received a degree in the same in 1994.
Debtor sat for the Georgia Teacher Certification Test in 1994 and received her certificate to
teach in January of 1995. The certificate expired in 1999 and Debtor did not seek a continuance of
her certification or reinstatement. In May of 2005, Debtor applied to have her certification
reinstated, but has not been notified of whether her application will be granted. While certified,
Debtor applied for teaching positions with the Valdosta City School System, the Cook County
School System, and the Georgia state prison system. Debtor was not hired. It was the unchallenged
testimony of Debtor that she was told by the Valdosta City School System that she was not being
hired because her felony conviction made her too much of a liability when it came to working with
children. The Cook County School System told Debtor the same. Debtor has worked only as a
substitute teacher at Valdosta City and Lowndes County schools, but Debtor testified that she can no
longer substitute because of her criminal conviction. The Georgia Professional Standards
Commission took no negative action against Debtor while she was certified to teach.9 Debtor
testified that simply because a person has a teaching certificate does not guarantee that person a
teaching position.
Debtor testified that when it became apparent that she would not be able to find a teaching
position, she decided to return to school. Beginning in the winter quarter of 1995, Debtor enrolled in
a number of business administration classes. Debtor took business classes at VSU until 1997 when
she became pregnant and was diagnosed with HIV, which is discussed below. Debtor financed her
8 Id. at ¶ 16 (citing 34 C.F.R. § 685.204; 34 C.F.R. § 685.205).
9 The Georgia Professional Standards Commission regulates the teaching profession in Georgia. The Commission
issues teaching certificates in the state.
8
business courses through loans made by the DOE. Debtor withdrew from at least some of the
business courses she had enrolled in after disbursements on the DOE student loans had been made.
Debtor testified that the monies disbursed under the DOE loans were used for class related expenses
such as tuition and books.
Debtor attributes her inability to find a teaching position to her felony conviction. Debtor
also believes that because of her conviction, her teaching certification is not likely to be reissued.
Debtor states that she was never advised that her felony conviction would make finding a teaching
position so difficult. As recently as two months prior to the hearing, Debtor testified that some
official associated with the issuance of teaching certificates told Debtor that the felony conviction
should have been addressed when she first applied to be certified to teach. Debtor testified that the
felony conviction is not so much of an issue with lower paying positions, but is for higher paying
jobs.
Debtor presently raises her 9-year-old son as a single parent. Debtor is 45 years old. Debtor
was married in 1992 or 1993, but officially divorced in 2004. Debtor has received $308.00 per
month in child support from her son’s father since 1997. Debtor’s son’s father also provides partial
health insurance for the child. While pregnant with her son in 1995, Debtor was diagnosed with
HIV, which requires Debtor to undergo medical testing every three months. Since her diagnosis,
Debtor’s illness has escalated to the status of AIDS, but since taking medication, the illness has
remitted back to the status of HIV only. Debtor’s most recent set of tests cost Debtor $770.00.
Debtor is personally responsible for the cost of the quarterly tests and must pay for the tests in
installments. Debtor has no health insurance. Debtor does have the benefit of a government drug
program through which she receives her needed medicines with no co-payment. Debtor’s son also
9
participates in a government drug program, but Debtor is required to pay a small co-payment on
drugs purchased for her son. The drug program Debtor participates in does not assist Debtor in
paying for other medical expenses such as doctor’s visits or the medical tests required by her health
condition. Shortly after being diagnosed with HIV, Debtor applied for Social Security Insurance
benefits but was denied. Debtor testified that if asked by a potential employer about her illness she
would respond truthfully. Debtor believes that her illness would be a factor in her securing another
position.
Since 2003, Debtor has been employed as a receptionist at the Quality Inn. Debtor presently
works an average of 32 hours per week. Debtor testified that to work more hours would cause her to
incur childcare expenses for her son, resulting in a reduction of her net income. Debtor’s net
monthly income is approximately $1,332.00 including the $308.00 received each month in child
support. Debtor’s Schedule J indicated that her monthly expenditures totaled $1,157.00, including
$450.00 per month in rent, a lean $200.00 per month food allowance, and $48.00 per month for
cable. Debtor’s cable cost includes service to a cable modem connected to Debtor’s son’s computer.
The computer was given to Debtor’s son by his father. Debtor’s son uses the cable connection to
access the Internet for school-related purposes and for his entertainment. Debtor stated that she did
not use the computer and that the computer was located in her son’s room.
Despite Debtor’s Schedule J, she testified at trial that her actual monthly expenses currently
total approximately $1,600.00.10 Debtor testified that her monthly electricity bill is usually around
$85.00, a reduction from the $125.00 per month given in her schedules. Debtor testified that she is
extremely conservative with her use of electricity in order to keep the cost down. Regarding
10 The Court’s addition of the expenses testified to at trial yields a total of $1,678.00.
10
increases in her monthly expenses, Debtor testified that her monthly water and sewage expense is
generally $46.00 to $49.00, costs for food are actually $340.00 to $350.00 per month, clothing
expenses are usually $100.00 to $125.00 (Debtor stated that this money was spent on her son and not
on her self), laundry and dry cleaning generally cost around $50.00, and transportation (gas and
maintenance) generally cost approximately $140.00. Debtor testified that during some months, she
must borrow food from friends in order to feed her and her son. The largest adjustment to her
account of monthly expenses was for medical and dental expenses. Because of the quarterly testing
required by her HIV condition, Debtor’s medical expenses, when the costs are broken down per
month, are approximately $300.00. Debtor also testified that an additional $10.00 or $11.00 per
month is generally spent for Debtor’s son’s extracurricular activities, including school field trips and
participation in the school chorus. Accounting for the increases to expenses testified to by Debtor at
the trial, Debtor’s monthly expenses exceed her net monthly income by approximately $346.00.
Debtor does not have a cellular phone. Debtor drives a 1991 Oldsmobile Cutlass Sierra
automobile that is paid for. Debtor does not have renter’s insurance. Debtor testified that she could
not afford even the smallest of additional expenses. Debtor does not have money saved should an
emergency arise. When emergency expenses do arise, Debtor testified that she must cut from other
categories of spending in order to cover the expense. Regarding her transportation expense and
vehicle, Debtor testified that she will drive her vehicle until she has a blow-out before replacing the
tires and that when she does replace the tires on her vehicle it is usually one or two tires at a time.
Debtor’s income history is reflected below in Table 3.
TABLE 3—Debtor’s Income History
Tax Year Adjusted Gross Income
1999 $4,919.00
2000 $8,540.00
11
2001 $16,065.00
2002 $16,503.00
2003 $7,059.0011
2004 $12,519.00
2005 $13,370.56
As mentioned above, Debtor has worked at the Quality Inn as a receptionist since 2003 and
works an average of 32 hours per week. Prior to working at the Quality Inn, Debtor worked at the
Belks Department Store as a customer service representative. The position at Belks required Debtor
to stand a majority of the time she worked. At some point, Debtor developed a back condition,
which required surgery in 2003. Following the surgery, Debtor could no longer work in a position
requiring her to stand for extended periods of time, so she resigned her position at Belks. She
remained unemployed for a period of 8 to 9 months before becoming a receptionist at the Quality
Inn.
The debt represented by ECMC’s nineteen consolidated guaranteed student loans was
incurred by Debtor as she pursued her degree in early childhood education at VSU from 1991 to
1994. Debtor incurred the debt represented by the DOE’s thirteen consolidated guaranteed student
loans as she pursued studies in business administration at VSU from 1995 to 1997. Debtor testified
that she made a very small number of voluntary payments toward her ECMC student loans in 2001.
Debtor mailed those payments, which she believes were from $40.00 to $60.00 per month, to NCO
Financial Services at an address in Philadelphia, Pennsylvania. Debtor made no voluntary payments
toward her DOE loans. Debtor defaulted on both her ECMC and her DOE loans. Following default,
involuntary payments were made toward Debtor’s DOE loans via two wage garnishment payments
11 Debtor testified that the reason for the low income in 2003 was that she was unemployed for 8 to 9 months
following back surgery.
12
and four treasury offsets against Debtor’s federal income tax refunds. Total involuntary payments to
the DOE on its loans totaled over $4,000.00.
Debtor testified that she filed her tax returns each year following her default knowing that any
refund she would be entitled to would be seized and paid toward her student loans. Debtor stated
that filing her tax returns each year, despite knowing any refund would be seized, was her way of
paying something towards her student loans. Debtor testified that the treasury offset provided a
larger payment toward the loans than she could have afforded to pay out of her pocket during the
year. Rather than the treasury offset, Debtor testified that she probably could have paid $10.00 to
$15.00 per month.
Once the wage garnishments began, Debtor testified that she contacted the garnishor asking if
there were other options for repayment available to her. It was the unchallenged testimony of Debtor
that she was told there was no other option available other than the monthly payment of 20-25% of
her gross income.
A witness for the DOE testified that upon default, borrowers are sent an initial notice of
default. If the borrower does not respond to that initial notice, a second notice of default is sent
which addresses the rehabilitation of the borrower’s loans and consolidation. The DOE would have
sent thirteen notices to Debtor on account of her thirteen loans with the Department.
Debtor did not contact the DOE after the notices were sent and Debtor’s loans were
transferred to the DOE’s collection department. Debtor never undertook to rehabilitate or
consolidate her DOE loans. The representative from the DOE testified that borrowers in default are
sent letters from time to time outlining various repayments options and programs like the Ford
13
program, but the witness had no personal knowledge of whether such a letter was sent specifically to
Debtor.
Debtor testified that the first time she learned of alternative methods for paying either her
ECMC or DOE loans was after this adversary proceeding was filed. Debtor stated she learned of the
Ford Program from her attorney who relayed the information to Debtor from a letter dated September
2, 2005, sent by counsel for ECMC. Debtor stated that she had requested deferment of all of her
student loans while she was in school and that in 2002 or 2003 she received a letter stating that she
was in default. Debtor also testified that the letter offered consolidation as an option. Debtor did not
state whether the letter was sent by ECMC or the DOE or which entity’s loans the letter addressed.
There is no dispute that Debtor was in default of her loan payments to both ECMC and the DOE.
On September 15, 2005, Debtor submitted to the DOE a “Loan Discharge Application” based
upon alleged false certification by VSU despite a disqualifying status (i.e., Debtor’s criminal
conviction). In that application, Debtor alleged that at the time VSU certified or originated her loans,
she was unable to meet the “legal requirements for employment” as a teacher in Georgia because of
her criminal record.12 Although called for in the application, Debtor did not provide any information
regarding Georgia’s legal requirements for employment that would have disqualified her from being
hired in the state as a teacher.13 Debtor attached a report of the incident in Florida but nothing else.
By letter dated September 21, 2005, the DOE acknowledged its receipt of Debtor’s loan discharge
application and stated that Debtor had not established that VSU falsely certified Debtor’s eligibility
to borrow and that Debtor had not provided proof that Georgia’s legal requirements barred Debtor’s
12 Debtor’s Loan Discharge Application at 1 (ECMC’s Exhibit 11).
13 Id.
14
employment as a teacher. Debtor did not challenge this decision and did not send in information
supporting her contention.
After learning of the various repayment options through counsel for ECMC, Debtor has not
looked further into payment under the Ford Program. She testified that she could not afford any
payment, no matter how small the amount. Under the ICRP of the Ford Program, Debtor would have
to apply annually to qualify. Debtor testified that she could not afford the basic expenses associated
with making that annual application (i.e., postage, paper, etc.).
DISCUSSION AND CONCLUSIONS OF LAW
Discharging student loan debt in bankruptcy is a difficult proposition and requires a finding
of extreme circumstance by the court. Section 523(a)(8) of the Federal Bankruptcy Code (“Code”)
provides that an educational loan is not dischargeable in bankruptcy “unless excepting such debt
from discharge . . . would impose an undue hardship on the debtor and the debtor’s dependents.”14
The term “undue hardship,” is not defined in the Code. The term, therefore, has been considered by
many courts across the nation with two primary standards emerging: the totality of the circumstances
test and the Brunner test. The Brunner test, which was originally articulated by the Second Circuit
Court of Appeals in 1987, provides that proving undue hardship requires a three-part showing: (1)
the debtor cannot maintain, based on current income and expenses, a minimal standard of living for
herself and her dependents if forced to repay the loans; (2) additional circumstances exist indicating
that this state of affairs is likely to persist for a significant portion of the repayment period of the
student loans; and (3) the debtor has made good faith efforts to repay the loans.15
14 11 U.S.C. § 523(a)(8) (2006).
15 Brunner v. New York State Higher Educ. Serv’s. Corp. (In re Brunner), 831 F.2d 395, 396 (2nd Cir. 1987).
15
In the 2003 case of Hemar Insurance Corp. of America v. Cox (In re Cox),16 the Eleventh
Circuit Court of Appeals joined the majority of circuits around the nation and adopted the Brunner
test as its standard for determining undue hardship under § 523(a)(8). In adopting the Brunner test,
the Eleventh Circuit noted the Seventh Circuit Court of Appeals’ observation in In re Roberson17
that:
The government is not twisting the arms of potential students. The
decision of whether or not to borrow for a college education lies with
the individual; absent an expression to the contrary, the government
does not guarantee the student’s future financial success. If the
leveraged investment of an education does not generate the return the
borrower anticipated, the student, not the taxpayers, must accept the
consequences of the decision to borrow.18
The Eleventh Circuit, considering the 1998 amendments to the Code (which left proof of undue
hardship as the only method for relief), recognized that Congress’s intent “was to make it harder for
the student to shift his debt responsibility onto the taxpayer . . . .”19 The Brunner test, said the
Eleventh Circuit, is the most effective tool for identifying those debtors whose income and
circumstances would make it most unlikely that they could repay their student loan obligations while
still maintaining a minimal standard of living.20 Under the Brunner test, the debtor bears the burden
of proving each of the three prongs by a preponderance of the evidence. Each of the three prongs or
factors must be proven in order for this Court to find that an undue hardship exists, thus warranting
discharge of the debt.
A. Brunner Prong 1—Minimal Standard of Living
16 338 F.3d 1238 (11th Cir. 2003). In the case of McGinnis v. Penn. Higher Educ. Assistance Agency, 289 B.R. 257
(Bankr. M.D. Ga. 2003) (Laney, J.), this Court applied the Brunner test, just a few months prior to the Eleventh
Circuit’s adoption of the standard in Cox.
17 999 F.2d 1132 (7th Cir. 1993).
18 Cox, 338 F.3d at 1242 (citing In re Roberson, 999 F.2d 1132, 1137 (7th Cir. 1993)).
19 Id.
16
Under the first Brunner prong, Debtor must prove that she cannot maintain, based on current
income and expenses, a minimal standard of living for herself and her dependent son if forced to
repay her student loans. In order for the Court to apply this prong, the Court must determine what is
a “minimal standard of living.” The Court agrees with the Bankruptcy Court for the Northern
District of Alabama that a minimal standard of living is a “measure of comfort, supported by a level
of income, sufficient to pay the costs of specific items recognized by both subjective and objective
criteria as basic necessities.”21 As in most student loan repayment situations, some level of sacrifice
is required in order to stay current on payments. A debtor is not required, however, to sacrifice in
such a degree that the debtor and/or the debtor’s dependents are cast into an existence where some
minimal standard of living cannot be obtained. In other words, a debtor is not required, under the
undue hardship standard, to live in “abject poverty” in order to service a student loan debt.22 The
Brunner test strikes a proper balance by “safeguard[ing] the financial integrity of . . . student loan
program[s] by not permitting debtors who have obtained the substantial benefits of an education
funded by taxpayer dollars to dismiss their obligation merely because repayment of the borrowed
funds would require some major personal and financial sacrifices.”23
For purposes of applying the first prong of the Brunner test, the Court adopts the six specific
elements necessary for a minimal standard of living in modern American society as enumerated by
the bankruptcy court in In re Ivory:
1. People need shelter, shelter that must be furnished, maintained,
kept clean, and free of pests. In most climates it also must be
heated and cooled.
20 Id.
21 Ivory v. United States Dept. of Educ. (In re Ivory), 269 B.R. 890, 899 (Bankr. N.D. Ala. 2001).
22 Penn. Higher Educ. Assistance Agency v. Faish (In re Faish), 72 F.3d 298, 305 (3d Cir. 1995). See Brunner, 831
F.2d 395.
23 Faish, 72 B.R. at 306.
17
2. People need basic utilities such as electricity, water, and natural
gas. People need to operate electrical lights, to cook, and to
refrigerate. People need water for drinking, bathing, washing,
cooking, and sewer. They need telephones to communicate.
3. People need food and personal hygiene products. They need
decent clothing and footwear and the ability to clean those items
when those items are dirty. They need the ability to replace them
when they are worn.
4. People need vehicles to go to work, to go to stores, and to go to
doctors. They must have insurance for and the ability to buy tags
for those vehicles. They must pay for gasoline. They must have
the ability to pay for routine maintenance such as oil changes and
tire replacements and they must be able to pay for unexpected
repairs.
5. People must have health insurance or have the ability to pay
for medical and dental expenses when they arise. People must
have at least small amounts of life insurance or other financial
savings for burials and other final expenses.
6. People must have the ability to pay for some small diversion or
source of recreation, even if it is just watching television or
keeping a pet.24
As the finder of fact, the Court must apply its common sense knowledge gained from ordinary
observations in daily life and general experience to determine whether Debtor’s expenses are
reasonable and necessary.25 If Debtor expends funds for items not necessary for the maintenance of a
minimal standard of living or if Debtor expends too much for an item that is needed to maintain that
minimal standard, then it is unlikely that, given Debtor’s present circumstance, the first prong of the
Brunner test is satisfied where such overpayment would permit Debtor to cover the expense of her
student loan debt without sacrificing a minimal standard of living for her and her son.
24 Id. (emphasis added).
25 Id. (citing Pacific Emp. Ins. Co. v. Orren, 160 F.2d 1011 (5th Cir.1947); Southern Shipyard Corp. v. The Tugboat
Summitt, 294 F. 284, 285 (4th Cir.1923); Luna v. Luna, 592 N.W.2d 557, 565 (N.D.1999); Gross v. Connecticut
Mut. Life Ins. Co., 361 N.W.2d 259, 269-270 (S.D.1985); Kenney v. Rust, 17 Mass. App. Ct. 699, 462 N.E.2d 333,
338 (1984), review denied, 391 Mass. 1106, 464 N.E.2d 73 (1984); Richmond v. Richmond, 340 Mass. 367, 164
N.E.2d 155, 157 (1960); Mendoza v. Rudolf, 140 Cal.App.2d 633, 295 P.2d 445, 447 (1956); Johnson v. Snyder, 99
Cal.App.2d 86, 221 P.2d 164, 167 (1950); H.F. Wilcox Oil & Gas Co. v. Johnson, 184 Okla. 198, 86 P.2d 51, 53
(1937); Cary-Glendon Coal Co. v. Carmichael, 258 Ky. 411, 80 S.W.2d 29, 31 (1935). overruled in part on other
grounds, Kentucky Mountain Coal Co. v. Hacker, 412 S.W.2d 581 (Ky.1967); Fitzgerald v. McDonald, 81 Colo.
18
At trial, Debtor’s unrefuted testimony was that her expenses had increased since the time she
filed her original Schedule J. The Court calculated that Debtor’s actual monthly expenses (i.e., those
testified to at trial) totaled approximately $1,678.00, $346.00 more than Debtor’s monthly net
income of $1,332.00. Debtor testified that her monthly expenses included $450.00 for rent, $85.00
for electricity, $30.00 for water/sewer, $34.00 for telephone service, and $48.00 for cable. Debtor
testified that she spends approximately $340.00 to $350.00 per month on food. There have been
occasions when Debtor has been unable to provide food for her and her son and she has been forced
to borrow food from friends. Debtor testified that she spent approximately $100.00 to $125.00 on
clothing for her and her son and approximately $50.00 per month for dry cleaning. According to
Debtor’s testimony, the money spent on clothing is spent purchasing items for Debtor’s son and
usually not for Debtor herself. Debtor’s monthly medical expenses total $300.00 or more each
month, due in most part to Debtor’s HIV condition and her having no health insurance. Debtor has
no automobile payment, but testifies that she spends approximately $140.00 per month on gas and
maintenance for her 1991 Oldsmobile. She spends only $43.00 per month to insure her vehicle.
Debtor states in her Schedule J that she spends nothing per month on recreation, charitable
contributions, homeowner’s or renter’s insurance, life insurance, or health insurance. Debtor’s
remaining expenses are $22.00 per month for her son’s school lunches and $10.00 to $11.00 per
month for her son’s school related activities such as field trips and chorus. Debtor has no money
saved in order to pay for emergency expenses that may arise.
It is the finding of this Court that Debtor’s budget, even at the higher amounts testified to at
trial, is severely limited and bare. What necessities the budget does provide for, it does so in very
conservative amounts. There are items that this Court considers necessary for a minimal standard of
413, 255 P. 989, 991 (1927)).
19
living that Debtor’s budget does not make provision for—including health and renter’s insurance and
surpluses for under-budgeted or emergency expenses. Further, Debtor’s budgeted expenditures on
behalf of her son and his care and education are minimal at best. The limited nature of Debtor’s
budget is understandable considering that Debtor’s income for 2005 only exceeded the national
poverty level by approximately $540.00. The expenses Debtor testified to are certainly reasonable.
By way of oral argument and through its post-trial brief, creditor ECMC suggests that while
Debtor does not live a lavish lifestyle, she could afford to pay the $0.00 to $9.00 per month cost of
servicing her student loan debt by eliminating the $48.00 per month cable television expense.
ECMC also states that the $0.00 to $9.00 per month payment would have virtually no effect on
Debtor’s standard of living.26 Although tempting, the Court cannot agree with ECMC’s contentions.
It does appear at first glance that all debtors could afford to pay at least something toward their
student loan debt, but that is not the standard for discharge. The standard that the Code calls courts
to consider is whether payment of the student loan would impose an undue hardship upon the debtor.
In the Eleventh Circuit, the first consideration is whether payment would prevent the debtor from
maintaining a minimal standard of living. With regard to the repayment of student loans, Congress
has decided not to demand certain levels of sacrifice from debtors.27 The $48.00 Debtor expends
each month to provide basic cable television and cable modem service to her home is an extremely
reasonable price in the Court’s experience. This cable television service provides some small
recreational benefit to Debtor and her son and the cable modem service provides an educational
benefit to Debtor’s son. The Court does not believe that such a service, especially at the price it is
obtained by Debtor, is inconsistent with a minimal standard of living. Even if the Court were to rule,
26 ECMC’s Letter Brief at 3.
27 Ivory, 269 B.R. at 912.
20
however, that the cable expense was unnecessary to maintain a minimal standard of living, Debtor’s
other necessary expenses still exceed her income by several hundred dollars even without the
inclusion of the cable television and modem service expense.
The Court, therefore, concludes that Debtor’s expenses as testified to at trial and as listed in
Schedule J (i.e., those amounts not amended by trial testimony) are reasonable and necessary for
maintaining a minimal standard of living for Debtor and her son. Debtor’s lifestyle is far from lavish
and something less than minimal. Other than the expense for cable television and modem service,
Debtor reports no spending for recreational items. Further, Debtor does not have a cellular
telephone, a usual expense in our society, and Debtor’s vehicle is a fifteen-year-old Oldsmobile on
which she owes nothing. The Court finds that considering Debtor’s current income and expenses,
she does not maintain a minimal standard of living even without being required to service her student
loan debt. Despite Debtor’s extremely conservative lifestyle, a sizeable deficit exists each month
between Debtor’s income and her reasonable and necessary expenses, even without the addition of a
student loan payment. The Court holds, therefore, that Debtor has carried the burden of proving,
under the first prong of the Brunner test, that she cannot maintain, based upon her current income
and expenses, a minimal standard of living for herself and her son if forced to repay her student
loans, no matter how small the payment amount may be. Satisfaction of this prong is not dependent
on the payment amount, but rather a determination by the Court of whether the debtor can maintain a
minimal standard of living if being required to service the student loan.
B. Brunner Prong 2—Additional Circumstances
The second prong of the Brunner test asks whether there are additional circumstances that
exist suggesting that the debtor’s state of affairs is likely to persist for a significant portion of the
21
repayment period of the student loan. The state of affairs referred to in the second prong is the
determination made in the first prong, i.e., that the debtor cannot maintain, based upon current
income and expenses, a minimal standard of living for herself and her dependents if required to repay
her student loan.
Applying prong 2 “does not necessarily require future income predictions.”28 Instead, prong
2 focuses on “the present existence of circumstances—circumstances in addition to a present lack of
ability to pay—that strongly suggest an inability to pay the loan over an extended period of time . . .
.”29 Simply stated, under prong 2, the debtor must prove by a preponderance of the evidence that her
financial situation is not likely to improve. The debtor is not required to prove that her financial
situation will persist due only to a serious illness, psychological problem, disability, or other
exceptional circumstance; other types of circumstances could apply as well. In making its
determination, a court should consider factors such as the debtor’s age, age of the debtor’s
dependents, debtor’s education, work and income history, physical and mental health, and other
relevant circumstances.30 Satisfaction of prong 2 should be based upon a “certainty of hopelessness”
into the future, “not simply a present inability to fulfill [a] financial commitment.”31 A “‘bleak
forecast of the near future . . . [where] the debtor’s straits are only temporary’ is insufficient to
demonstrate undue hardship under the second prong of Brunner.”32 Meeting the standard set forth
under prong 2 is not an easy task for a debtor.33
28 Ulm v. Educ. Credit Mgmt. Corp. (In re Ulm), 304 B.R. 915, 921 (S.D. Ga. 2004).
29 Id.
30 See Ulm, 304 B.R. at 921; Educ. Credit Mgmt. Corp. v. Boykin (In re Boykin), 313 B.R. 516, 521 (M.D. Ga.
2004).
31 Educ. Credit Mgmt. Corp. v. Carter (In re Carter), 279 B.R. 872, 877 (M.D. Ga. 2002) (citing Roberson, 999 F.2d
at 1136) (emphasis added).
32 Id. at 878 (citing Roberson, 999 F.2d at 1137). In Carter, the District Court ruled that prong 2 of Brunner had not
been satisfied since although the debtor was unemployed at the time, there were no impediments to her obtaining
gainful employment in the future—the debtor suffered from no major disabilities, the debtor graduated with a
22
ECMC and the DOE (“creditors”) argue that there is neither a “certainty of hopelessness” in
Debtor’s case, nor any unique or extraordinary circumstance that would cause Debtor to be unable to
honor her student loan obligations into the future.34 According to the creditors, Debtor is young,
intelligent, articulate, and holds a marketable college degree.35 The creditors recognize Debtor’s
allegation that her 1982 manslaughter conviction prevents her from obtaining work in a position that
would allow her to repay her student loans. The conviction, argue the creditors, should not be
considered an “additional circumstance” because it existed long before Debtor incurred the student
loan debt at issue. In support of this proposition, ECMC cites in brief the case of Thoms v. Educ.
Credit Mgmt. Corp.36 from the Southern District of New York.
In Thoms, the debtor received student loans to obtain her bachelor’s degree in psychology and
her master’s degree in social work. The debtor earned approximately $48,000.00 per year with her
net monthly income being $2,878.58. The debtor’s five-year-old son lived with debtor along with
her thirteen-year-old sister and nine-year-old-brother. The debtor received no child support from her
son’s father and had not attempted to compel a contribution. The debtor was not the legal guardian
of her siblings and received no financial contribution for her siblings’ support.37
In its consideration of the second prong of the Brunner test, the court in Thoms stated that the
debtor must show evidence of a continuing inability to repay her student loans over an extended
business degree and a 3.0 grade point average, the debtor had worked managing business records, the debtor had one
year of accounting education, and the debtor’s children (ages three and six) would soon grow old enough to attend
school and therefore pose less of a financial burden. The District Court held that with regards to a likely divorce in
the future, the debtor had not carried her burden of proving how that event would prevent her from making her loan
payments. Id. at 878-79.
33 Id. (citing In re Mallinckrodt, 274 B.R. 560, 567 (S.D. Fla. 2002)).
34 ECMC Letter Brief at 4.
35 Id.
36 257 B.R. 144 (S.D.N.Y. 2001).
37 Id. at 147.
23
period of time, marked by additional, exceptional circumstances.38 The court said that the type of
“additional circumstance” contemplated was a “circumstance that impacted on the debtor’s future
earning potential but which was either not present when the debtor applied for the loans or has since
been exacerbated.”39 The court reasoned that otherwise, “the debtor could have calculated that
factor into [her] cost-benefit analysis at the time [she] obtained the loan.”40 As examples of this type
of additional circumstance, the court listed the debtor’s experiencing an illness, developing a
disability, or becoming responsible for a large number of dependents after receiving the loan.41 In
Thoms, the court held that the second prong of Brunner had not been satisfied since the debtor’s
financial situation was likely to improve, there was a surplus in the debtor’s budget, and certain
expenses were to be eliminated in the near future.42
Here, the evidence relevant to a determination under prong 2 of Brunner is as follows:
Debtor was 45 years old at the time of the trial and Debtor’s son was 9 years old. Debtor’s income is
insufficient to support a minimal standard of living for her and her son and such has been the case
since at least 1999, the earliest year that evidence of income was submitted. The evidence strongly
suggests that the financial distress Debtor is currently suffering will continue into the future.
Although Debtor has earned a bachelor’s degree in early childhood education, it was the
unchallenged testimony of Debtor that she has been refused employment in the field of teaching,
despite her certification, by two school systems in her area and by the Georgia prison system. It was
also the unchallenged testimony of Debtor that when she inquired why she was not being hired, she
38 Id. at 148.
39 Id. at 149.
40 Id.
41 Id.
42 Id. at 149-50.
24
was told that her manslaughter conviction made her too much of a liability. Although Debtor did at
one time work as a substitute teacher, her testimony was that she can no longer work as a substitute
teacher because of her criminal conviction and changes in the hiring standard. The Court finds
Debtor’s testimony credible that she was unable to find a position in her field of expertise because of
her past criminal conviction.
Because of her criminal background, it is apparent from the evidence that Debtor has been
forced to settle for lower-paying positions such as retail service work and the position of motel
receptionist in which she is currently employed. Due to back surgery, Debtor was forced to resign
her position in retail for a position that did not require extended periods of standing. Debtor’s
options, in the way of quality, well-paying positions, are severely limited.
Debtor testified, and it was not challenged, that she was never informed, prior to pursuing her
degree in early childhood education, that her criminal conviction would be a hindrance to her finding
a position as a teacher. Although this is understandable, considering that it appears no Georgia
statute or regulation prohibits an individual previously convicted of a felony from being employed as
a teacher, Debtor pursued her degree with the reasonable expectation that she would be able to find
employment in her chosen field. The Court accepts the unrefuted testimony of Debtor that finding a
quality job outside the realm of teaching is more difficult because of her criminal conviction. Debtor
testified that she allowed her teacher certification to lapse in 1999 because her experience convinced
her that she would not be able to find a position due to her criminal conviction. In May of 2006,
Debtor reapplied for certification and at the time of trial, she had received no response. Debtor’s
unchallenged testimony was that she had been told regarding her application that all of the details
surrounding her conviction would have to be investigated. Despite Debtor’s application for
25
certification, the Court is persuaded by Debtor’s testimony of her past experience, that even if the
certificate is reissued, Debtor will probably not be hired as a teacher. The Court cannot, of course,
be certain of this, but the Court considers truthful Debtor’s testimony that she was told by various
school systems that she could not be hired in the area of early childhood education because of the
liability her conviction would create.
Debtor’s situation is further complicated and worsened by her 1997 diagnosis that she had
contracted HIV. In the past, her condition has worsened to AIDS, but later downgraded back to HIV
as Debtor began a medicinal regimen. Common knowledge of the illness indicates that it is
degenerative in nature. Relevant, however, is the evidence presented that Debtor’s condition
requires that she undergo testing every quarter, which costs approximately $770.00. Also, Debtor is
required to take medication to treat her condition. Debtor testified that the medication leaves her
feeling fatigued. Debtor does receive the benefit of a drug program, which assists in the purchase of
her medications, but Debtor does not have the benefit of health insurance and is, therefore,
personally responsible for the expenses related to her quarterly testing. Although the Court does not
rest its determination under prong 2 on Debtor’s illness, it is necessary to consider Debtor’s medical
condition, the costs associated with that condition, and the current effects of the condition, as factors
in determining whether her financial distress is likely to persist.
The Court concurs with the creditors that Debtor appears to be intelligent and articulate.
However, the Court disagrees with ECMC and the DOE that Debtor has a marketable college degree.
Although Debtor does have a college degree, the evidence in this matter is clear that, because of her
criminal conviction, Debtor’s degree has not been marketable. The Court agrees that a college
degree is in itself generally marketable, but the evidence in this case supports a finding that any
26
benefit Debtor would otherwise receive from the degree has been cancelled by the plague of her past
conviction.
Regarding the Thoms standard for “additional circumstance” suggested by the creditors, the
Court first notes that the standard is not mandatorily applicable in this district or circuit, but the
Court recognizes the general usefulness of the standard in considering prong 2 of Brunner. Applying
the Thoms standard, the Court concludes that Debtor’s health condition, both her back problems and
her HIV diagnosis, post-dated the student loans in question and therefore qualify as additional
circumstances under Thoms. As to Debtor’s criminal conviction, the Court believes that although the
“condition” of her conviction preexisted her student loan debt, the effect of that condition was
exacerbated by Debtor’s attempts to find employment in the field of early childhood education.
Debtor’s testimony was that she had not received any warning that her criminal background would
negatively affect her being able to find a position as a teacher. It would be difficult, therefore, for
Debtor to have taken her criminal background into account when conducting the cost-benefit analysis
discussed in Thoms.
Debtor has been hindered greatly by her criminal conviction, somewhat by her back injury
and surgery, and in some degree by her serious medical condition. Debtor has been stuck in the
poverty range since 1999 and there appears to be no promise of that situation improving. Time will
certainly not remove Debtor’s criminal conviction, nor will Debtor’s physical condition improve
with time. The only reasonable conclusion that can be reached from the evidence presented is that
Debtor is in dire straights financially and, because of the additional circumstances identified above,
Debtor is most likely to remain there from this time forward. This being so, the Court holds that
Debtor has satisfied her burden of proving, by a preponderance of the evidence, that additional
27
circumstances exist suggesting that Debtor’s state of affairs is likely to persist for a significant
portion of the repayment period of the student loan. Debtor has thus satisfied prong 2 of the Brunner
test.
C. Brunner Prong 3—Good Faith
“With the receipt of a government-guaranteed education, the student assumes an obligation to
make a good faith effort to repay those loans, as measured by his or her efforts to obtain
employment, maximize income, and minimize expenses.”43 Satisfaction of this third prong of the
Brunner test requires a showing that the debtor made efforts “to satisfy the debt by all means—or at
least by some means—within the debtor’s reasonable control.”44 A lack of bad faith is not the
applicable test for deciding the third prong of Brunner.45 Actual payments are not required to prove
good faith.46 The debtor is tasked with proving that either a good faith effort was undertaken to
repay the student loans or “that the forces preventing repayment [were] truly beyond his or her
reasonable control.”47 “Since a debtor’s good faith is interpreted in light of his ability to pay, a
complete failure to make even minimal payments on a student loan does not prevent a finding of
good faith where the debtor never had the resources to make payments.”48 The “good faith” prong of
Brunner has been described as:
a moving target that must be tested in light of the particular
circumstances of the party under review . . . . [T]he characterization
of that effort must reflect not only a party’s objective conduct, but
also the environment in which that conduct occurs. In those instances
in which the debtor cannot maintain a minimal standard of living
43 Roberson, 999 F.2d at 1136 (citation omitted); In re Wallace, 259 B.R. 170 (C.D. Cal. 2000).
44 Ulm, 304 B.R. at 922.
45 Id.
46 McGinnis, 289 B.R. at 267 (citing In re Mallinckrodt, 274 B.R. at 568).
47 Brunner, 46 B.R. at 755; see Wallace, 259 B.R. at 183 (citing Lebovits v. Chase Manhattan Bank (In re Lebovits),
223 B.R. 265 (Bankr. E.D.N.Y. 1998)).
48 Lebovits, 223 B.R. at 274.
28
even without payment of student loans, the demonstration of good
faith does not necessarily command a history of payment. It does
require a history of effort to achieve repayment, such as when a
borrower diligently uses a deferment period to attempt the
reorganization of her financial affairs.49
At issue with regard to this third prong are the creditors’ contentions that Debtor cannot be
found to have made good faith efforts to repay her student loans since Debtor made only nominal
payments towards her loans and because Debtor failed to avail herself of the Income Contingent
Repayment Plan (“ICRP”) or some other repayment option available under the Ford Program. As to
the general requirement of proof under this “good faith” prong of Brunner—that good faith is
demonstrated by a debtor’s efforts to maintain employment, maximize income, and minimize
expenses—the evidence and conclusions of the Court are as follows. The evidence shows that
Debtor has been steadily employed since 1999, other than for a eight to nine month period of
unemployment following back surgery. Debtor has worked at her current position with the Quality
Inn since 2003. There is no evidence that Debtor has worked a forty-hour per week schedule, but
Debtor explains that added childcare costs would not justify additional hours. Debtor currently
works approximately 32 hours per week.
Debtor testified that she has been unable to find quality, higher paying positions due to her
criminal background. As mentioned above, Debtor testified that she applied for employment as a
teacher with two school systems and the Georgia prison system but was told she could not be hired
because of the liability she posed due to her criminal conviction. After being told that she could not
be hired as a teacher by the two school systems and the prison system, it was reasonable that Debtor
did not apply for other teaching positions and turned her efforts toward finding some other type of
49 Wallace, 259 B.R. at 184 (citing Maulin v. SallieMae (In re Maulin), 190 B.R. 153, 156 (Bankr. W.D.N.Y.
1995)).
29
position instead. It is the Court’s finding that considering the negative effect Debtor’s criminal
conviction has on her ability to find quality, higher paying positions, Debtor has obtained
employment and remained employed and has maximized her income under the circumstances she is
faced with. The Court is certain that if the opportunity to work as a teacher had not been foreclosed,
Debtor’s financial position would be improved. Referring back to the Court’s discussion under the
first prong of Brunner, it is clear from Debtor’s budget and expenses that Debtor has minimized her
expenses.
As to the creditors’ first contention that there was no good faith effort to repay since Debtor
made few payments on her loans, the evidence is clear that Debtor has made very few voluntary
payments toward her ECMC loans and no voluntary payments toward her DOE loans. Over
$4,000.00 has been paid involuntarily, however, toward the DOE loans by way of two wage
garnishments and several federal income tax refund set-offs. Debtor testified that she filed her
federal income tax returns knowing that she would be due a refund and knowing that the DOE would
seize the refund. Debtor stated that filing her returns knowing that the refunds would be seized was
her way of paying something toward her student loan debt being as she could not otherwise afford to
make payments.
As mentioned above, “the demonstration of good faith does not necessarily command a
history of payment” but “does require a history of effort to achieve repayment.”50 Here, the evidence
is that Debtor has not been able to make payments on her student loans while maintaining a minimal
standard of living for her and her son. The Court will not, therefore, find that Debtor did not make a
good faith effort to repay simply because only nominal voluntary payments were made to ECMC.
50 Id. (citing Maulin, 190 B.R. at 156).
30
Although the fact that Debtor made only nominal payments is an important factor in determining
whether Debtor made a good faith effort to repay, other evidence should be considered in this case.
ECMC and the DOE also argue against a determination of “good faith” based upon Debtor’s
failure to research and avail herself of the various repayment options available under the Ford
Program. As discussed above, under the Ford Program, qualifying borrowers can repay their student
loans under one of four repayment options. Under the ICRP, one of the four repayment options, the
monthly payment is calculated based upon the borrower’s adjusted gross income and family size.
The specifics of the payment calculation are set forth above, but relevant to this discussion is the
parties’ stipulation that based upon Debtor’s adjusted gross income and family size, the monthly
payment on her student loans would be somewhere between $0.00 and $9.00. Even after the
presentation of evidence, the Court is still unable to determine exactly what the monthly payment
would be.
It was the testimony of Debtor that she did not learn of the Ford Program or of the ICRP until
after her bankruptcy case had been filed and the instant action commenced. Debtor stated that she
was made aware of each through a letter sent by counsel for ECMC. The evidence shows that
Debtor’s only attempt to explore repayment options was after a wage garnishment was initiated,
when Debtor contacted the listed garnishor and inquired into other repayment options. Debtor’s
unchallenged testimony was that she was told there was no other repayment option other than the
payment of 20-25% of Debtor’s monthly gross income, which Debtor testified she could not afford.
In its brief, ECMC cites various cases in support of its position that the failure of a debtor to
avail herself of the repayment options available militates against the finding of a good faith effort to
repay. The Court agrees that in many situations that is indeed true. One of the primary cases cited
31
by ECMC was U.S. Dept. of Educ. v. Wallace (In re Wallace).51 In Wallace, the debtor had paid his
loans for several years while working as an attorney. When the debtor was unable to pay, he sought
and obtained deferments. The debtor also made an $8,000.00 lump sum payment on his loans. The
court in Wallace stated that these facts indicated an earlier good faith effort to repay. The real issue
in Wallace, with regard to the “good faith” prong of Brunner, was whether the debtor continued in
his good faith efforts to repay after he initiated the adversary proceeding seeking discharge of his
student loan debts. The court in Wallace explained that “[a] debtor’s good faith can be measured by
evaluating how he responded to repayment opportunities that were presented to him.”52
In Wallace, the debtor reviewed literature describing the various repayment options, but
concluded that under the ICRP, his payment would be $390.00 per month. The court stated that
“[b]ecause he could not afford payments of such magnitude, he reasonably did not pursue the
‘income contingent’ plan.”53 The debtor was later informed by counsel for one of his student loan
creditors that his payments could be as low as $369.00 per month under the ICRP. The debtor
testified that he did not choose to participate in the ICRP at that point because his disposable income
was less than $100.00 per month and even under the ICRP, payment would have caused his standard
of living to fall well below the minimal standard of living.54 The debtor advised his creditor’s
counsel of that fact.55 At a later hearing, counsel for the same creditor represented to the debtor that
he had the further option of applying under a “special circumstances” regulation. The hearing was
continued to allow the debtor to explore and/or apply for such a repayment option, but there was no
evidence the debtor ever did. Again, at a subsequent hearing, the counsel for the creditor made
51 Wallace, 259 B.R. 170.
52 Id. at 184.
53 Id. at 184 (emphasis added).
54 Id.
32
another concession, which would allow the debtor’s payment of $369.00 per month to be
apportioned between it and Hemar, another student loan creditor. The result would be that the debtor
would make one payment, rather than the $369.00 payment plus another payment to Hemar. There
was no indication that Hemar would accept the proposal, however. There was no evidence that the
debtor contacted Hemar or attempted any further negotiations with the creditors.56 Although the
court in Wallace concluded that it appeared the debtor ceased his good faith efforts to repay after the
filing of the adversary proceeding when he failed to apply for or inquire about the alternate
repayment options offered by the creditor’s counsel, the court nonetheless remanded the issue to the
bankruptcy court for further development of the record regarding whether the debtor’s good faith
efforts continued.57
Here, Debtor inquired into other repayment options when she contacted the garnishor. It was
the undisputed testimony of Debtor that she was told there were no options other than paying 20-
25% of her monthly gross income. Considering the discussion above regarding Debtor’s budget,
Debtor, like the debtor in Wallace, reasonably concluded that she could not afford such a payment
and filed for bankruptcy protection. The rule from Wallace that good faith efforts to repay should
continue after the case filing and even after the filing of an adversary proceeding on dischargeability
of the student loans, is a sound and reasonable rule. The facts in the case at bar are distinguishable
from those in Wallace, however. Here, the evidence is that Debtor learned of the ICRP by a letter
from counsel for ECMC sent to Debtor’s counsel after the commencement of this adversary
proceeding. The evidence is that Debtor failed to apply for participation in the ICRP. Again, like in
55 Id.
56 Id.
57 Id. at 186.
33
Wallace, Debtor’s inaction was reasonable given her inability to afford any payment toward her
student loans at the time the offer of the ICRP was made. The ability of a debtor to pay should be a
primary factor considered by courts in determining whether a debtor made a good faith effort to
repay.
Considering Debtor’s financial distress and the actions that she did take to repay her student
loans and to inquire into alternative payment solutions, the Court finds that Debtor has satisfied her
burden under prong 3 of Brunner. Debtor’s financial situation is grave and the prospects of that
situation improving are non-existent. Debtor’s activity with regard to her student loans must be
considered within the context of this larger situation. The Court finds it reasonable that after being
told by the garnishor that the only repayment option was to pay 20-25% of her monthly gross income
that Debtor considered her chances of finding a suitable repayment option hopeless. The Court also
finds it reasonable that after being notified by ECMC’s counsel that the ICRP was an available
option that Debtor took no action considering her inability to afford even a minimal standard of
living for her and her son.
CONCLUSION
This is a very difficult case for the Court, as most cases concerning the discharge of student
debt are. The heightened standard for discharging student loans is absolutely necessary to prevent
abuses of the educational loan system and to safeguard the financial integrity of that system in order
to preserve its benefits for future students who will rely on the system as the means for obtaining a
college education. The discharge of student loans is reserved for those most extreme instances of
financial destitution. It is the Court’s finding that this debtor finds herself in such a situation.
34
For the reasons stated above, the Court holds that Debtor has carried her burden of proving,
under the standard set forth in In re Brunner and adopted by the Eleventh Circuit Court of Appeals in
In re Cox, that excepting Debtor’s student loan debt from discharge would impose an undue hardship
on Debtor and her dependent son. As such, the student loan debt at issue, representing loans made
by ECMC and the DOE, is held to be dischargeable.

SYLVESTER W. DEPASTURE

November09, 2000

IN THE UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: )
) CASE NO.: 04-70470- JTL
SYLVESTER W. DEPASTURE, )
)
Debtor. ) CHAPTER 7
)
________________________________________________________________________
SYLVESTER W. DEPASTURE, ) ADVERSARY PROCEEDING
)
Debtor, ) CASE NO.: 09-07006
)
vs. )
)
UNITED STATES OF AMERICA, )
)
SIGNED this 09 day of November, 2009.
________________________________________
JOHN T. LANEY, III
________________________________C_H_IE_F_ U_N_I_TE_D_ S_T_A_T_E_S_ B_A_N_K_R_UP_T_C_Y_ J_U_D_G_E
Defendant, )
_________________________________ )
Memorandum Opinion
This matter comes before the court on Sylvester W. Depasture’s (“Debtor”)
motion for summary judgment requesting that the tax liability of the Debtor for years
1994 and 1995 be declared discharged pursuant to 11 U.S.C. § 727. This is a core matter
within the meaning of 28 U.S.C. § 157(b)(2)(I).
This adversary case was filed on February 17, 2009. Debtor filed his motion for
summary judgment on August 21, 2009, which included a statement of uncontested facts.
On September 14, 2009, the United States on behalf of the Internal Revenue Service
(IRS) filed its Opposition to Debtor’s Motion For Summary Judgment and Cross Motion
for Summary Judgment, including its own statement of uncontested facts. On October 6,
2009, Debtor filed his response to the IRS’ opposing brief. No oral argument was heard
on the motions.
Statement of Facts
The facts in this case are undisputed. According to Internal Revenue Service
(IRS) official records, Debtor filed his 1994 and 1995 federal income tax returns on April
12, 1995 and April 13, 1996, respectively. (Def.’s Ex. A & C, Certificates of Official
Record). Section 6501(b) of the Internal Revenue Code provides that a return filed before
its deadline is deemed filed on April 15th of the relevant year. Hence, the IRS deemed the
1994 and 1995 tax returns filed on April 15, 1995, and April 15, 1996.
Debtor entered into an agreement with the IRS with respect to tax years 1994 and
1995 to extend the statute of limitations on tax assessments until December 31, 1999. The
IRS issued a statutory Notice of Deficiency proposing to assess deficiencies in tax for
each of these years on October 19, 1999. Pursuant to I.R.C. § 6213, Debtor petitioned the
United States Tax Court with respect to his proposed tax deficiencies for 1994 and 1995
on January 18, 2000, 90 days after issuance of the notice of deficiency. The Tax Court
issued a decision determining those liabilities on July 1, 2003. The Debtor did not appeal
the Tax Court decision. The IRS assessed the additional tax liabilities as determined by
the Tax Court on January 16, 2004. Debtor filed a Chapter 7 petition on March 30, 2004.
The Court granted Debtor a discharge on July 9, 2004. Neither the Debtor nor the IRS
filed a Complaint to determine the dischargeability of the tax debt. On January 28, 2009,
Debtor reopened this case seeking a determination of his tax liabilities for tax years 1994
and 1995 pursuant to 11 U.S.C. § 505(a).
Conclusions of Law
Under § 505 of the Bankruptcy Code, the bankruptcy court “may” determine the
amount and legality of any tax, fine or penalty whether or not contested before a judicial
or administrative tribunal of competent jurisdiction. 11 U.S.C. § 505(a). Thus, the power
of a bankruptcy court to determine a Debtor’s tax liability is discretionary and may or
may not be exercised based on the equities of the particular case. In re Galvano, 116 B.R.
367, 372 (Bankr. E.D. N.Y. 1990).
The court has considered, among other things, “the complexity of the tax issues to
be decided, the need to administer the bankruptcy case in an orderly and efficient manner,
the burden on the bankruptcy court’s docket, the length of time required for trial and
decision, the asset and liability structure of the Debtor, and the prejudice to the taxing
authority.” Starnes v. United States ( In re Starnes ), 159 B.R. 748, 750 (Bankr. W.D.
N.C. 1993) (citing In re Hunt, 95 B.R. 442, 445 (Bankr. N.D. Tex. 1989)). One other
factor to be considered is the Debtor’s “fresh start” provision. In re Thornton, 1995 WL
442192 at 6 (Bankr. M.D. Ga. 1995).
In the instant case, the Court agrees with Debtor’s assertion that the determination
of the tax issues in this case are not of such complexity that it requires the expertise of the
Tax Courts. Furthermore, the burden on the bankruptcy docket is low and the length of
time required for decision is short. The Debtor here has sought relief in this Court to
determine whether or not he is eligible for a discharge of his 1994 and 1995 tax
liabilities. In order to grant this Debtor a fresh start, it is necessary to determine whether
the assessment on January 16, 2004 conformed to the legal requirements set forth in the
Internal Revenue Code.
The IRS assessments were timely made.
As a general rule, taxes must be assessed within three years after a return is filed.
I.R.C. § 6501(a). Debtor’s 1994 and 1995 federal income tax returns were deemed filed
on April 15, 1995, and April 15, 1996, respectively. I.R.C. § 6501(b). Therefore, pursuant
to § 6501(a), the IRS had until April 15, 1998, and April 15, 1999, respectively, to assess
additional tax for these tax years. Pursuant to § 6501(c)(4),1 this 3-year period may be
extended by the consent in writing of the Secretary and the taxpayer, and the expiration
period thus extended may be further extended by subsequent timely agreements in
1 “Where, before the expiration of the time prescribed in this section for the assessment of any tax
imposed by this title, except the estate tax provided in chapter 11, both the Secretary or his delegate
and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed
at any time prior to the expiration of the period agreed upon. The period so agreed upon may be
extended by subsequent agreements in writing made before the expiration of the period previously
agreed upon.” 26 U.S.C. § 6501(c)(4).
writing. In this case, the Debtor and the IRS entered into a valid consent agreement
(Form 872) extending the assessment period to December 31, 1999.2 I.R.C. § 6501(c)(4).
I.R.C. § 6503(a)(1) suspends the 3-year § 6501(a) limitations period (as
extended) upon the issuance of a statutory notice of deficiency. § 6503(a)(1) provides in
pertinent part:
The running of the period of limitations provided in § 6501 * * * shall (after the
mailing of the notice under § 6212(a)) be suspended for the period during which the
Secretary is prohibited from making the assessment or from collecting by levy or a
proceeding in court (and in any event, if a proceeding in respect of the deficiency is
placed on the docket of the Tax Court, until the decision of the Tax Court becomes
final), and for 60 days thereafter.(emphasis added)
A contractually extended limitations period, authorized by § 6501(c)(4), is a
limitations period within the meaning of § 6501. Meridian Wood Products, Inc. v. United
States, 725 F.2d 1183, 1186 (9th Cir. 1984). Therefore, the extended limitations period is
subject to the suspension provision of § 6503(a). Id. As provided by § 7481(b), a
decision of the Tax Court becomes “final” upon the expiration of 90 days after the
decision is entered. I.R.C. § 7481(b).
The Tax Court entered its decision against the Debtor on July 1, 2003, and the
Debtor did not appeal the decision. Therefore, the Tax Court decision became final 90
days from the date of the decision, on September 29, 2003, pursuant to I.R.C. § 7481(b).
Pursuant to § 6503, the limitations period would be further suspended for an additional
2 There was initially some confusion between the parties as to whether the agreement signed was a
Form 872-A rather than a Form 872. The difference between the two documents is significant. Form
872-A is an open-ended agreement with no definite expiration date. Because there is no definite
expiration period, the issuance of a notice of deficiency marks the end of the expiration period. The
facts show that Debtor and IRS agreed to extend the expiration period to a definite date, December 31,
1999. Furthermore, Debtor’s prior stipulation to the United States Tax Court includes a reference to
Form 872. Thus, this Court finds that Debtor could only have signed a Form 872 to extend the
expiration period to December 31, 1999.
60 days (November 28, 2003). This is the point at which the parties’ disagreement comes
to a head. The Debtor contends that the IRS may not “tack on” the remaining 73 days of
the limitation period that was extended pursuant to the § 6501(c)(4) agreement (Form
872). The IRS contends that the 73 days remaining in the limitations period between the
October 19, 1999 notice of deficiency and the December 31, 1999 expiration date should
be tacked on or continued to run when the suspension ends, effectively extending the
limitation period to February 9, 2004, rendering the January assessment timely.
It has long been held that it is appropriate to add or “tack on” the days remaining
when the limitations period was interrupted or suspended by the issuance of a notice of
deficiency. Ripley v. Comm’r, 105 T.C. 358, 363 (1995) (unexpired portion of original
period of limitations held properly “tacked” onto suspension period of section 6503);
Meridian Wood Products, Inc. v. United States, 725 F.2d 1183, 1186 (9th Cir. 1984)
(finding that extended limitations period is subject to suspension provision of § 6503(a));
see also Bales v. Commissioner, 22 T.C. 355, 359 (1954) (quoting Olds & Whipple v.
United States, 86 Ct. Cl. 705, 22 F. Supp. 809, 819 (1938) (interpreting section 277(b) of
the 1926 Revenue Act, the predecessor of section 6503(a)(1): “We think the language of
the statute is not reasonably susceptible to any other construction. It plainly states that the
running of the statute of limitation shall be suspended and this can only mean that when
the period of suspension ceases the limitation period again commences to run.”)).
The Debtor is focused on the actual language in the first paragraph of Form 872,
which provides that if a notice of deficiency in tax for any period is sent to the taxpayer,
then the time for assessing the tax will be further extended by the number of days the
assessment was previously prohibited, plus 60 days. The Debtor believes this to mean
that because the IRS was previously prohibited from making an assessment until
September 29, 2003 (150 days after the entry of the Tax Court’s decision), the IRS only
had 60 days thereafter to make an assessment.
This belief is erroneous in the wake of preceding case law. In Ramirez v. U.S.,
the court addressed the timeliness of an assessment, considering the language in the first
paragraph of Form 8723 extending the period for assessment in the event that a timely
notice of deficiency is issued and the statutory suspension of § 6503(a)(1). 210 Ct.Cl.
537, 538 F.2d 888, 890-893 (1996). The court clearly elaborated as follows:
Section 6503(a)(1) suspends the running of the period of limitations, when a
notice of deficiency is sent, for the period during which an assessment is
prohibited and for 60 days thereafter. In light of the striking similarity between
section 6503(a)(1) and the proviso contained in the agreement, we think the latter
was designed to foster the policy underlying the former. Id.
In reaching this conclusion, the court reasoned that the word “extend” is
tantamount to “suspend” given that section 277(b) of the Revenue Act of 1924,
precursor to section 6503(a)(1) of the current Code, used the word ‘extended’ to achieve
the same effect that ‘suspended’ achieves in the current section of the Code. Id.
Moreover, the Debtor is confusing how a suspension of a statute of limitations
operates. Once the suspension under either the proviso of Form 872 or the statutory
language of § 6503 comes to an end, the limitations period begins to run again. The
Debtor seems to have confused the 60-day suspension provided in either § 6503 or Form
872 as a grace period during which the IRS may make an assessment. This is an
erroneous interpretation of the law. The 60-day period of extension/suspension is a
3 Form 872 states in pertinent part: “However, if a notice of deficiency in tax for any such period(s) is
sent to the taxpayer(s) on or before that date, then the time for assessing the tax will be further
extended by the number of days the assessment was previously prohibited, plus 60 days.” (emphasis
added).
period of time in which the IRS is forbidden from making an assessment. See Ramirez,
538 F.2d 890-893. Thus, once that period ends, the statute of limitations will continue to
run its course. Id.
The assessment limitations period was tolled by statute in Debtor’s case as follows:
• For the 90 days after the notice of deficiency was mailed. I.R.C. §6213;
• Plus the period during which the Tax Court case was pending. I.R.C. § 6503(a);
• Plus 90 days after the Tax Court issued its decision in Debtor’s § 7463 “small
case” until that decision became final. I.R.C. § 7481(b);
• Plus 60 days. I.R.C. § 6503(a)(1) or Form 872 proviso.
This brings the end of the tolling period to November 28, 2003. The issuance of
the notice of deficiency on October 19, 1999 in no way truncated the agreed upon
expiration date of December 31, 1999. Therefore, the 73 days left remaining between the
October 19, 1999 issuance of the notice of deficiency and the agreed upon limitation
date of December 31, 1999 would be tacked onto the date the suspension ended. This
results in the assessment period coming to an end on February 9, 2004. Because the IRS
assessed the Debtor’s tax liabilities for 1994 and 1995 on January 16, 2004, the tax
assessments were timely made. Given that the IRS’ tax assessment is deemed timely
under the standard 3-year statute of limitations, the Court need not delve into whether
the IRS was entitled to a six-year statute of limitations under I.R.C. § 6501(e).
The tax liabilities are nondischargeable pursuant to 523(a)(1)(A) and 507(a)(8)(ii).
11 U.S.C. 523(a)(1)(A) provides that a “discharge under section 727 . . . of this
title does not discharge an individual Debtor from any debt for a tax or a customs duty of
the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title,
whether or not a claim for such tax was filed or allowed.” 507(a)(ii) tax claims are those
assessed within 240 days before the date of the filing of the petition. 11 U.S.C.
507(a)(ii). The Debtor filed his Chapter 7 petition on March 30, 2004, less than 240 days
after January 16, 2004. Because the 1994 and 1995 tax liabilities were assessed fewer
than 240 days before the date of Debtor’s Chapter 7 petition, the tax liabilities are
nondischargeable as a matter of law pursuant to sections 523(a)(1)(A) and 507(a)(8)(ii)
of the Bankruptcy Code.
Accordingly, the Debtor’s motion for summary judgment will be DENIED and
the United States’ cross-motion for summary judgment will be GRANTED. An order in
accordance with this Memorandum Opinion will be entered.

ANGEL LUIS CRUZ

October 2000

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: : CASE NO: 94-40692
:
ANGEL LUIS CRUZ, :
SSN: 584-86-2920 ::
CHAPTER 13
ZORAIDA CRUZ, :
SSN: 091-56-8511 ::
Debtors. ::
ANGEL LUIS CRUZ and :
ZORAIDA CRUZ, ::
Movants, ::
vs. ::
EDUCATIONAL CREDIT :
MANAGEMENT CORPORATION and :
ALLIED INTERSTATE, INC. ::
Respondents. :
MEMORANDUM OPINION
On September 6, 2000, the court held a hearing on Debtors’
motion for contempt against Educational Credit Management
Corporation and Allied Interstate (“ECMC”). The court took under
advisement the issues of whether ECMC’s interception of Debtors’
tax refund was in violation of the discharge injunction and
whether collateral estoppel barred ECMC’s actions. The court has
considered the evidence, ECMC’s brief, and the applicable
statutory and case law. For the reasons that follow, the court
will deny Debtors’ motion.
-2-
FACTS
On May 22, 1987, Debtor Angel Cruz obtained an educational
loan in the amount of $2625.00 evidenced by a Promissory Note
(“Note”). ECMC is the holder of the Note.
On June 24, 1994, Debtors filed a voluntary petition under
Chapter 13 of the Bankruptcy Code (“Code”) and on September 16,
1996, ECMC filed a Proof of Claim for $2271.90. On February 26,
1998, Debtors objected to this Proof of Claim. ECMC did not
respond to the objection and, on July 9, 1998, this court entered
an order disallowing the claim. The order stated that the claim
was disallowed and that the “claim has been paid in full.” Doc.
#46.
After completing their Chapter 13 plan payments, Debtors
received a discharge on June 17, 1999. The order discharging
Debtors excepted any debt “for a student loan . . . as specified
in 11 U.S.C. § 523(a)(8).” Doc. #58. On July 16, 1999, the
court entered a final decree closing the case.
On March 3, 2000, ECMC intercepted Debtors’ federal income
tax refund in the amount of $1522.00. ECMC applied the tax
refund to Debtor Angel Cruz’s student loan balance. On July 12,
2000, this court granted Debtors’ motion to re-open their Chapter
13 case to pursue the present contempt action.
ECMC disputes that its claim was paid in full. The court’s
order, dated July 9, 1998 disallowing the claim, did not
-3-
determine the dischargeability of the claim. According to ECMC,
dischargeability may be determined only by an adversary
proceeding. ECMC further asserts that its failure to object to
the disallowance of the claim does not matter because student
loans are presumptively nondischargeable. Moreover, because
there has been no determination of dischargeability, ECMC also
argues that collateral estoppel does not bar its actions.
Debtors, however, argue that collateral estoppel does bar
ECMC’s actions. The language in the July 9, 1998 order is clear;
the “claim has been paid in full.” Therefore, Debtors assert
that the school debt was discharged. Debtors dispute that an
adversary proceeding is required. They argue that this case is
not any different merely because a school loan is involved; the
fact that such loans are presumptively nondischargeable is
irrelevant. As Debtors’ counsel argued at the hearing,“[i]f any
other creditor had failed to respond to an order stating the
‘claim has been paid in full,’ estoppel would apply.”
On the issue of damages, Debtors assert that ECMC should be
ordered to return the $1522.00 the tax refund that it
intercepted. Debtors also request punitive damages in the sum of
at least $500.00 for aggravation and agony that they allege has
resulted from ECMC’s letters and phone calls.
DISCUSSION
The issue before the court is whether the court’s order
-4-
disallowing ECMC’s claim discharged that debt. Also before the
court is whether ECMC’s failure to object to the court’s
disallowing its claim collaterally estops ECMC from collecting
post-bankruptcy. For reasons that follow, the court finds in
favor of ECMC on both issues.
This court and other courts within this circuit have held
that the disallowance of a claim does not necessarily discharge
that debt. See Bell v. ECMC, 236 B.R. 426 (N.D. Ala. 1999);
Pearson v. U.S. Dep’t of Educ. and ECMC (In re Pearson), No. 95-
30158, AP No. 99-3051 (Bankr. M.D. Ga. filed Sept. 1,
2000)(Hershner, C.J.); Mathis v. Nebraska Student Loan Program,
Inc. (In re Mathis), No. 95-41678, AP No. 97-4003 (Bankr. M.D.
Ga. filed Nov. 20, 1997)(Laney, J.); In re Shelbayah, 165 B.R.
332, 335 (Bankr. N.D. Ga. 1994)(holding that “the allowance or
disallowance of claims is unrelated to the dischargeability of
those claims under section 523.”). The court agrees with this
line of cases.
As ECMC points out, Bell and Mathis were decided on facts
very similar to the case before the court. In both cases, a
student loan creditor filed a Proof of Claim to which debtors
objected. Also, the creditors in each case did not respond to
the objection. In Bell, the court reduced the claim and in
Mathis, this court disallowed the claim. See Bell at 428; Mathis
at 4. The court in Bell held that the order reducing the claim
did not reduce the debt owed by Bell. 236 B.R. at 430.
-5-
Likewise, this court in Mathis held that the disallowance of the
claim did not discharge the debt. See Mathis at 6 (citing In re
Shelbayah, holding that claim disallowance and dischargeability
are different concepts).
The reasoning from these cases is clear in the plain
language of § 1328(a) of the Code. In pertinent part, that
subsection provides:
(a). . . the court shall grant the debtor a discharge of all
debts provided for by the plan or disallowed under section
502 of this title, except any debt–
. . .
(2) of the kind specified in paragraph (5), (8), or (9)
of section 523(a) of this title;
11 U.S.C. § 1328(a).
Furthermore, the court’s June 17, 1999 discharge order tracked
this language. As ECMC noted, that discharge order specifically
excepted from discharge any debt “for a student loan or
educational benefit overpayment as specified in 11 U.S.C. §
523(a)(8).” Doc. #58.
Therefore, the court finds that its July 9, 1998 order
disallowing ECMC’s claim did not effectuate a discharge of
Debtors’ debt to ECMC. Educational loans are presumptively
nondischargeable and Debtors will need to file an adversary
proceeding to determine the dischargeability of their debt to
ECMC.
The court now turns to the issue of collateral estoppel.
“Collateral estoppel or issue preclusion forecloses relitigation
-6-
of an issue of fact or law that has been litigated and decided in
a prior suit.” I.A. Durbin, Inc. v. Jefferson National Bank, 793
F.2d 1541, 1549 (11th Cir. 1986). In order for collateral
estoppel to apply, the following four elements must be satisfied:
(1) the issue at stake must be identical to the one decided
in the prior litigation;
(2) the issue must have been actually litigated in the prior
proceeding;
(3) the prior determination of the issue must have been a
critical and necessary part of the judgment in the earlier
decision; and
(4) the standard of proof in the prior action must have been
at least as stringent as the standard of proof in the later
case.
See In re Mathis at 7; See also Merrill v. Walter E. Heller &
Company of Alabama, 594 F.2d 1064, 1067 (5th Cir. 1979)(holding
that the debtor has the burden of showing that collateral
estoppel applies).
Under the first element, the court finds that the issue at
stake is not identical. The issue in the prior litigation
involved a claim objection while the latter one entails the
dischargeability of a student loan.
Under the second element, the court finds that the issue has
not been actually litigated. As the court in Mathis noted,
sustaining Debtors’ objection to the claim was more akin to a
default judgment which typically renders collateral estoppel
inapplicable. See Mathis at 8.
Similarly, the court finds that the third element has not
-7-
been established. The court disallowed the claim because of no
response. Therefore, the determination could not have been a
critical and necessary part of the judgment. Id. at 9.
The court finds that the burden of proof is the same in both
proceedings and accordingly, the fourth element has been
established. However, given the fact that the three other
elements have not been established, the court finds that ECMC is
not collaterally estopped from collecting on the debt postbankruptcy.
In conclusion, the court finds that its order disallowing
ECMC’s claim did not discharge Debtors’ liability to ECMC.
Dischargeability may be determined by an adversary proceeding.
The court also finds that ECMC’s interception of Debtors’ tax
refund was not barred by collateral estoppel. Therefore, the
court finds that ECMC did not violate the court’s order.
Accordingly, the court will deny Debtors’ motion for contempt.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this ______ day of October, 2000.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

CROMER FARMS, INC

July 18, 2000

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
ALBANY DIVISION
IN RE: CASE NO. 99-10321-JTL
CROMER FARMS, INC.,
DEBTOR.
CROMER FARMS, INC., ADVERSARY PROCEEDING
NO. 99-1015-JTL
PLAINTIFF,
V.
TY TY PEANUT COMPANY, INC.,
DEFENDANT.
MEMORANDUM OPINION
Procedural History and Default Judgment Issue
Debtor filed this Adversary Proceeding on March 30, 1999
seeking the recovery of certain allegedly preferential
payments. Defendant, Ty Ty Peanut Company, Inc. (“Ty Ty”),
answered and counterclaimed for its debt to be determined
nondischargeable under § 523 of the Bankruptcy Code (“Code”).
Debtor did not timely answer the counterclaim. The clerk
entered a default against Debtor on the counterclaim on June
10, 1999. (Doc. 8.)
Subsequently, counsel for both parties submitted and the
court signed a consent order with an attached stipulation
-2-
extending the time in which Debtor could answer the
counterclaim. (Docs. 10 and 9.) Debtor answered within the
time allowed by the consent order. (Doc. 11.) Based upon the
language of the consent order, the default judgment was
therefore waived unless Ty Ty can succeed in arguing either
that the Chapter 12 case would not have been dismissed upon
motion of Debtor, or that even if the Chapter 12 case had been
dismissed upon Debtor’s motion, the court would have retained
jurisdiction over this Adversary Proceeding and entered a
default judgment.
Under the first argument, the court agrees with cases that
hold that a debtor’s right to voluntarily dismiss a Chapter 12
case is not unlimited. See Graven v. Fink (In re Graven), 936
F.2d 378 (8th Cir. 1991) (court may delay action on debtor’s
voluntary dismissal until fraud is investigated; if fraud is
shown, court may convert case to Chapter 7 despite debtor’s
motion to dismiss); In re Goza, 142 B.R. 766 (Bankr. S. D.
Miss. 1992) (court may delay action on debtor’s voluntary
dismissal until debtor provides an accounting). These cases
stand for the proposition that it was not Congress’s intent in
enacting §1208(b) of the Code that chapter 12 become “a
frequently traveled thoroughfare for the unscrupulous seeking
to hinder, delay and defraud their creditors.” 142 B.R. at
771. The court in Graven discussed the interaction between
subsections 1208(b) and (d) of the Code:
-3-
We conclude that the broad purpose of the bankruptcy
code, including Chapter 12, is best served by
interpreting section 1208(d) to allow a court to
convert a case to Chapter 7 upon a showing of fraud
even though the debtor has moved for dismissal under
subsection (b). . . . Once fraud is found, the
provisions of section 1208(d) are triggered and the
court has the authority, under subsection (d), to
dismiss the case or convert it to Chapter 7.
936 F.2d at 385.
Accordingly, for Ty Ty to succeed under the first
argument, it would have to prove that Debtor had abused the
purposes of chapter 12 by engaging in fraud. Ty Ty has failed
to present the court with evidence of Debtor’s attempting to
defraud its creditors. Therefore, this chapter 12 case would
have been dismissed upon Debtor’s motion.
Under the second argument available to Ty Ty in the
consent order, the counterclaim asks that Ty Ty’s debt be
excepted from the discharge that may be entered upon completion
of a plan in this case. If the case had been dismissed upon
Debtor’s motion, the court would have found this Adversary
Proceeding to be moot, as no discharge would be possible, and
would have refused to retain jurisdiction over this Adversary
Proceeding. Therefore, because Ty Ty cannot succeed on either
argument available to it under the consent order allowing a
late answer to the counterclaim, the court denies Ty Ty’s
request for a default judgment.
In reaching the merits of the parties’ claims, the court
is guided by its order of December 29, 1999. (Doc. 16.) This
-4-
order memorializes the agreement of counsel that the court may
decide the case based upon the Stipulation of Facts (“Stip.”),
(Doc. 17), the deposition of Royce Cromer (“Depo.”), (Doc. 18),
and any admissions in the pleadings. The following will be
findings of fact and conclusions of law based upon the evidence
before the court as if there had been a complete trial of the
case.
FACTS
Royce and Ann Cromer are each 50% shareholders of Cromer
Farms, Inc. (Depo. at 5.) Royce Cromer is the Secretary-
Treasurer of the corporation, (Depo. at 8), and makes all of
the day-to-day decisions regarding the operation of the farm.
(Depo. at 79-80.) In June 1998, Ty Ty sued Debtor and Royce
Cromer individually. (Stip. ¶ 3.) Debtor admits that on or
about August 18, 1998, Debtor executed a note and security
agreement that granted to Ty Ty a security interest in all
Debtor’s inventory, equipment, accounts receivable, livestock,
and all crops grown or to be grown on any of its farming
operations. The security agreement provided that Debtor would
not sell, transfer, lease, or dispose of any of the collateral
except with Ty Ty’s prior written consent. (Stip. ¶ 2.)
In September 1998, Debtor and Royce Cromer resolved Ty
Ty’s lawsuit with a confession of judgment, which was an
extension, renewal, and refinancing of the August 1998 note.
-5-
(Stip. ¶¶ 3, 4.) The confession of judgment is before the
court as “Exhibit A” to the Answer and Counterclaim of
Defendant, (Doc. 4), and as “Exhibit A-2″ to the Stipulation of
Facts. (Doc. 17.)
Paragraph 3 of the confession of judgment provides:
Defendants acknowledge and agree that this agreement
is made in order that they may refinance and
restructure their obligations and acknowledge and
agree that, under all circumstances, that defendants’
obligation to repay $60,000.00 shall be and is
nondischargeable under the provisions of the
Bankruptcy Code of 1978, as amended and codified at
11 U.S.C.A. § 101-1330, and, agree that, if they
subsequently file bankruptcy, said obligation shall
be deemed nondischargeable as contemplated in 11
U.S.C.A. § 523. Defendants further acknowledge and
agree that, should they default in any way in their
obligations hereunder, that the entire indebtedness
set forth herein, plus interest, shall be
nondischargeable.
During negotiations regarding the confession of judgment,
Royce Cromer stated, “Everyone will get paid. All I need is
some time.” (Stip. ¶ 5.) At his deposition, Royce Cromer
testified that he understood that under the confession of
judgment, any monies received by the farming operation were to
go to pay Ashburn Bank for its first lien, and anything left
over would be divided 50% to Ty Ty and 50% to other creditors.
(Depo. at 17.) Since 1994, however, Ashburn Bank had allowed
Mr. Cromer to use some of its funds to pay laborers and other
operating and personal expenses without requiring any prior
approval, and Mr. Cromer continued this practice. (Depo. at
36-37.)
-6-
After the confession of judgment, Ashburn Bank had not
been paid back in full, and although Mr. Cromer had paid Ty Ty
with some of the money, he stopped paying Ty Ty when they got
“nasty” with him. (Depo. at 38.) Debtor and Royce Cromer
breached the terms of the confession of judgment by failing to
remit to Ty Ty 50% of the farming operation proceeds in excess
of Ashburn Bank’s lien. (Stip. ¶ 10). These proceeds included
F.S.A. payments and disaster payments for 1998 crops received
by Debtor after the confession of judgment. (Stip. ¶¶ 14-20.)
As of the date of the Stipulation of Facts, Debtor had made no
payment to Ty Ty since August 1998. (Stip. ¶ 11.)
Ty Ty now claims that the debt it is owed for the proceeds
it should have received under the confession of judgment is
nondischargeable under § 523(a)(2)(A), (4), and (6) of the
Code. For the reasons that follow, the court finds that the
debt is dischargeable under each of these subsections.
DISCUSSION
§ 523(a)(2)(A)
Under Grogan v. Garner, 498 U.S. 279 (1991), Ty Ty has the
burden on each of the counts under § 523(a) by a preponderance
of the evidence. Ty Ty’s argument under § 523(a)(2)(A)is that
when Mr. Cromer stated during negotiations for the confession
of judgment that everyone would get paid and all he needed was
time, Mr. Cromer had no intent at that time to repay everyone,
-7-
including Ty Ty. In proving a false representation, Ty Ty
must prove that Debtor, through Royce Cromer, misrepresented
its intent to pay the debt to Ty Ty. See American Express
Travel Related Servs. Co., Inc. v. Rusu (In re Rusu), 188 B.R.
325, 329 (Bankr. N.D. Ga. 1995). Representations regarding a
debtor’s intentions are actionable only when fraud is proved by
showing the debtor had no intention to perform its promise at
the time the representation was made. See Kuper v. Spar (In re
Spar), 176 B.R. 321, 327 (Bankr. S.D.N.Y. 1994).
Ty Ty has failed to prove by a preponderance of the
evidence that, at the time Mr. Cromer, who was the Secretary-
Treasurer of Debtor and its de facto chief operating officer,
made the statement referred to, he had no intent to repay
everyone including Ty Ty. The conduct of Debtor subsequently
in not making payments to Ty Ty when it was paying other
operating expenses could be considered some evidence that the
statement was a false representation known to be false at the
time it was made. However, the court does not find that this
satisfies the burden of proof. Based upon the evidence, the
court finds by a preponderance that Mr. Cromer believed the
statement to be true when he made it.
§ 523(a)(4)
Under this subsection, Ty Ty alleges that Debtor
embezzled Ty Ty funds by failing to remit proceeds from the
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farming operation, and that Debtor committed fraud while acting
in a fiduciary capacity. First, Ty Ty has not established that
the proceeds were funds of Ty Ty’s that could be embezzled.
For purposes of this subsection, embezzlement “is the
fraudulent appropriation of property of another by a person to
whom such property has been entrusted or into whose hands it
has lawfully come.” Teamsters Local 533 v. Schultz (In re
Schultz), 46 B.R. 880, 889 (Bankr. D. Nev. 1985). Under this
subsection, Ty Ty must establish that Debtor was not entitled
under the law to use the funds as they were used. First State
Ins. Co. v. Bryant (In re Bryant), 147 B.R. 507, 512 (Bankr. W.
D. Mo. 1992). When debtors use funds to try to keep their
business operations functioning, courts hesitate to find the
necessary fraudulent intent. Id.
In this case, the receipt of funds after the confession of
judgment did not constitute funds of Ty Ty. Debtor was not
required to segregate any of the proceeds, and while Debtor’s
use of the funds to pay operating and some personal expenses
violated the agreement with Ty Ty, it was not unlawful in any
other sense. Also, Ty Ty has not proved that Mr. Cromer acted
with the necessary fraudulent intent. Therefore, the court
finds that Debtor did not embezzle the proceeds.
Second, under this subsection, Ty Ty must establish that
there was an express trust before Debtor or Royce Cromer can
qualify as fiduciaries who may have committed fraud in a
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fiduciary capacity. See Davis v. Aetna Acceptance Co., 293
U.S. 328, 333 (1934) (under the Bankruptcy Act of 1841, debtor
must have been a trustee before the wrong and without reference
thereto; statute refers to technical trusts, not trusts implied
from contract); Betz v. Gay (In re Gay), 117 B.R. 753, 754
(Bankr. M.D. Ga. 1989) (“[T]he concept of fiduciary . . .
should be narrowly defined and limited in its application to
what may be described as technical or express trusts.”). The
court does not find that Ty Ty’s evidence shows an express
trust as to the funds that were received by the farming
operation after the confession of judgment. Therefore, the
debt is dischargeable under this subsection.
§ 523(a)(6)
Under § 523(a)(6), Ty Ty alleges that Debtor willfully and
maliciously injured Ty Ty by deliberately expending funds that
Ty Ty was entitled to receive. The Supreme Court has ruled
that in order to prevail under this subsection, the creditor
must establish “a deliberate or intentional injury, not merely
a deliberate or intentional act that leads to injury.”
Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). This exception to
discharge requires that the actor intend the consequences, not
just the act. Id. at 61-62. A knowing breach of contract will
not qualify. Id. at 62.
The evidence in this case shows that Debtor received funds
-10-
and paid back some of the crop loan to Ashburn Bank, and used
some of the funds for other farm expenses. Mr. Cromer
testified that he paid Ashburn Bank some of the money he
received from his crops, but also paid some current farm and
personal expenses in accordance with the procedure he had
followed at Ashburn Bank since 1994. It is undisputed that
Debtor had obligated itself to pay Ashburn Bank’s current crop
loan in full and then to pay 50% of the remaining funds to Ty
Ty. Debtor did not do so. However, the court finds that Ty Ty
has not carried its burden to show that this failure was with
intent to injure Ty Ty or its property. Therefore, the court
finds that Ty Ty has failed to carry the burden as to the
nondischargeability of this debt under subsections
523(a)(2)(A), (4), and (6).
Collateral Estoppel
Finally, Ty Ty argues that the language regarding
nondischargeability in the confession of judgment collaterally
estopps Debtor from asserting the dischargeability of Ty Ty’s
debt. It is important to note that the confession of judgment
contains only legal conclusions and has no findings of fact to
support nondischargeability.
The court is guided by the Eleventh Circuit’s decision in
Halpern v. First Georgia Bank (In re Halpern),810 F.2d 1061
(11th Cir. 1987). The facts in Halpern are similar to the
-11-
facts in this case, but in Halpern, the consent judgment at
issue contained detailed findings of fact that contained all
the elements necessary for a § 523(a)(2)(A) claim. Id. at
1063. The court in Halpern’s decision to apply collateral
estoppel to the admitted facts, which it then considered as
evidence of nondischargeability, was affirmed by both the
district court and the Eleventh Circuit.
In this case, however, there are only bare conclusions of
law that the debt is nondischargeable. Such conclusions are
not binding on this court. See id. at 1063-64 (distinguishing
between findings of fact in state court consent judgment, which
may be entitled to preclusive effect, and ultimate issue of
nondischargeability, which is exclusively for the bankruptcy
court to determine). As Judge Kahn stated in his opinion
below, “[T]hose provisions of the consent order in which
[debtor] promised to forgo a discharge and agreed that the debt
was nondischargeable are completely without legal effect.”
First Georgia Bank v. Halpern (In re Halpern), 50 B.R. 260, 262
(Bankr. N.D. Ga. 1985), aff’d, 810 F.2d 1061 (11th Cir. 1987).
Accordingly, the court finds that collateral estoppel does not
apply to the assertion of nondischargeability in the confession
of judgment.
CONCLUSION
First, the court finds that Ty Ty has not presented the
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evidence necessary to entitle it to a default judgment under
the wording of the consent order allowing a late-filed answer
to the counterclaim. Second, under § 523(a)(2)(A), (4), and
(6), the court finds that Ty Ty has not carried its burden of
proof and therefore the debt is dischargeable. Finally, the
court finds that collateral estoppel does not apply to the
conclusion of nondischargeability in the confession of
judgment.
Accordingly, the court will enter a judgment in favor of
the Plaintiff-Debtor on this counterclaim. Because the main
action has been dismissed with prejudice, this Adversary
Proceeding is now concluded. Each party will bear its own
costs. An order will be entered in accordance with this
Memorandum Opinion.
DATED this 18th day of July 2000.
___________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

WAYNE BARBER

August 17, 2004

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
VALDOSTA DIVISION
IN RE: ::
WAYNE BARBER, : CASE NO. 03-71139
: CHAPTER 7
Debtor. ::
WILLIAM BASS, CAROLYN BURGESS, : ADVERSARY PROCEEDING
AND HAVEN HILL ESTATES : A.P. 03-7062
:
Plaintiffs, ::
vs. ::
WAYNE BARBER, ::
Defendant. :::
MEMORANDUM OPINION
On June 29, 2004, a Final Pre-Trial Conference was held
in the Adversary Proceeding No. 03-7062, William Bass, Carolyn
Burgess, and Haven Hill Estates (“Plaintiffs”) versus Wayne
Barber (“Defendant”). The complaint in the adversary
proceeding was to determine the dischargeability of a debt.
Plaintiffs conceded that, while they did have a state court
default judgment against Defendant, collateral estoppel did
not apply to whether the judgment was non-dischargeable.
However, Plaintiffs contended that if this Court were to find
in favor of Plaintiffs, as to the non-dischargeable nature of
the debt, collateral estoppel would apply to the amount of
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damages. Thus, the state court default judgment would be
determinative of the amount of the non-dischargeable debt.
Both parties were asked to submit briefs on the issue. The
Court has considered the parties’ briefs, as well as
applicable case law. Based on the reasons set forth in this
Memorandum Opinion, the Court finds that collateral estoppel
would not apply to the amount of the judgment. Therefore, the
state court judgment would not be determinative of the amount
of the non-dischargeable debt should the Court find in favor
of Plaintiffs.
BACKGROUND INFORMATION
In May 2000, Defendant was hired to provide paving
services at Haven Hill Estates Subdivision in Norman Park,
Georgia. An agreement was reached and reduced to writing. In
exchange for the paving services and materials necessary to
complete the job, Defendant was to be paid $60,000. On or
about May 18, 2000, Defendant informed Plaintiffs that he had
completed the job. Plaintiffs contend that Defendant was paid
but that Defendant did not complete the job as specified in
the agreement. Defendant does not dispute that a ‘prime
coating’ was not laid down as part of the paving services he
rendered. However, Defendant contends that the agreement was
altered orally. Defendant contends that he completed all
-3-
services as agreed upon in the orally modified agreement.
On April 25, 2002, Plaintiffs filed suit against Defendant
in the Superior Court of Cook County, Georgia. Plaintiffs’
complaint alleged fraud, breach of contract, breach of
warranty, and negligent construction. Additionally,
Plaintiffs asked for $31,430 for the repair of the allegedly
defective paving, $3,500 for loss of rental income, $250,000
in punitive damages, as well as attorneys fees and costs.
Defendant concedes that he received notice of the lawsuit, did
not file a response to the complaint, and the lawsuit went
into default. After the bar date passed to reopen the
default, the Superior Court of Cook County held a hearing on
damages. No evidence has been presented to this Court on
whether Defendant received notice of the hearing on damages.
The court entered a judgment for Plaintiffs against Defendant
in the amount of $40,474.50 in actual damages and $50,000 in
punitive damages.
Defendant contends that his financial condition was
deteriorating at the time of the state court litigation and he
was advised by his defense counsel to file for bankruptcy
protection, rather than incur the cost of the litigation.
Defendant subsequently filed for bankruptcy protection under
Chapter 7 of the United State Bankruptcy Code (“Code”) on July
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17, 2003. This adversary proceeding was filed on October 9,
2003.
CONCLUSIONS OF LAW
When deciding whether collateral estoppel applies to an
issue, this Court must apply the law of the state in which the
judgment was entered. See In re St. Laurent, 991 F.2d 672,
675-676 (11th Cir. 1993); Sterling Factors, Inc. v. Whelan (In
re Whelan), 236 B.R. 495, 501 (Bankr. N.D. Ga. 1999). Under
Georgia law, three elements must be present for collateral
estoppel to apply. See Kent v. Kent, 265 Ga. 211, 212, 452
S.E.2d 764, 766 (Ga. 1995). First, the Court must determine
whether the issue is identical to issue already resolved in
the state court. See id. Second, the Court must look to see
whether the issue was “actually and necessarily” litigated in
the state court case. Id. Third, the Court must decide
whether the resolution of the issue was essential to the state
court case. See id.
Plaintiffs concede that collateral estoppel is not
applicable as to the issue of whether the state court judgment
is non-dischargeable. However, Plaintiffs attempt to
distinguish the issue of the amount of the state court
judgment because an evidentiary hearing was held on the issue
of damages, the court considered the evidence, and the court
-5-
entered a judgment in a dollar amount that was different from
Plaintiffs’ prayer for relief.
In support of this proposition, in addition to other
authority on collateral estoppel and fraud, Plaintiffs’
submitted one unpublished opinion and one published opinion
written by the Chief Bankruptcy Court Judge in this District.
Jackson v. Hensley (In re Hensley), No. 95-51784, A.P. No. 95-
5068 (Bankr. M.D. Ga. Oct. 4, 1996)(Hershner, C.J.); Fincher
v. Holt (In re Holt), 173 B.R. 806 (Bankr. M.D. Ga.
1994)(Hershner, C.J.). In Hensley, during the state court
proceeding, the debtor actively participated in pre-trial
motions and hearings but failed to show up on the day of the
trial. Hensley, slip op. at 2-3. In Holt, the debtor filed
the complaint in the state court proceeding but failed to
respond to a motion for summary judgment and requests for
admissions filed by the opposing party. Holt, 173 B.R. at 811.
The state court dismissed the debtor’s complaint, granted
summary judgment to the opposing party on two of her three
counterclaims, and went on to conduct a trial on the third
counterclaim against the debtor. See id. The debtor failed to
show up on the day of trial. See id. In both Hensley and
Holt, the state courts heard and considered evidence prior to
entering the judgments against the debtors. Hensley, slip op.
-6-
at 3; Holt, 173 B.R. at 811-812. In both cases, the
bankruptcy court determined that collateral estoppel applied
to the issues before the court and did not conduct a separate
trial as to the non-dischargeability of the state court
judgment. See Hensley, slip op. at 15; Holt, 173 B.R. at 816-
818. Thus, in both cases, the court declared the state court
judgments, except for attorneys fees in the Holt case, to be
non-dischargeable. See id.
In response, Defendant submitted a case, also decided by
Chief Judge Hershner, in which the court ruled that collateral
estoppel did not apply because the debtor did not engage “in
dilatory and deliberately obstructive conduct” in the state
court proceeding, despite the fact that he had participated in
the proceeding prior to the default judgment being entered.
Chevy Chase Bank, FSB v. Harkins (In re Harkins), 302 B.R.
927, 929 (Bankr. M.D. Ga. 2003); Hensley, slip op. at 1; Holt,
173 B.R. at 808. In Harkins, the debtor claimed to have
relied on the advice of counsel when he did not respond to the
request for admissions because he was preparing to file for
bankruptcy. Harkins, 302 B.R. at 929. The state court struck
the debtor’s answer and entered a default judgment against the
debtor. See id. at 928. The state court did not hear evidence
to determine the amount of damages prior to entering the order
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which set the amount of the default judgment. See id.
The case before this Court is different from the three
cases cited by the parties. In those cases, the debtors
participated in the state court actions. See id.; Hensley,
slip op. at 2; Holt, 173 B.R. at 811. In the two cases cited
by Plaintiffs, collateral estoppel was applied when an
evidentiary hearing occurred after the debtors participated
extensively in the state court proceeding but failed to attend
the trial. See Hensley, slip op. at 3; Holt, 173 B.R. at 811.
In the case cited by Defendant, collateral estoppel was not
applied when an evidentiary hearing was not held. See Harkins,
302 B.R. at 928.
The case before this Court lies some where in between the
two scenarios presented by the parties. Here, Defendant did
not answer the state court complaint and the case went into
default. However, a hearing was held on damages and evidence
was heard by the state court, prior to the court’s entering a
judgment in a specific amount against Defendant. Plaintiffs
concede that collateral estoppel does not apply to the issue
of non-dischargeability of the state court judgment.
Plaintiffs have failed to direct the Court to authority which
supports their position that collateral estoppel should apply
to the amount of the state court judgment because the state
-8-
court held an evidentiary hearing to set the amount, prior to
entering the judgment against Defendant, when it concededly
does not apply to substantive liability issues.
The Court is persuaded that the situation in this case is
more like the one in Harkins, where the court did not apply
collateral estoppel to the state court judgment. Id., 302 B.R.
at 929. The Court reaches this conclusion because, while
there was a hearing after which the state court determined the
amount of the damages, there was no hearing to determine if
Defendant was liable. Instead, the substantive liability
issue was determined by default. Therefore, the issue of
Defendant’s liability was not “actually and necessarily”
litigated in the state court. Kent, 265 Ga. at 212; 452 S.E.2d
at 766. Some courts do reason that a debtor cannot blatantly
ignore a state court proceeding, then get a “second bite at
the apple” in a bankruptcy proceeding. Bush v. Balfour Beatty
Bahamas, Ltd (In re Bush), 62 F.3d 1319, 1324 (11th Cir.
1995); see also Jones v. Wilson (In re Wilson), 72 B.R. 956,
959 (Bankr. M.D. Fla. 1987). However, Defendant acted on
advice of counsel when he chose to allow the lawsuit to go
into default and file for bankruptcy protection, rather than
incur the cost of litigation. The Court is not persuaded that
Debtor did anything deliberate that could be considered an
-9-
abuse of the judicial process. See Bush, 62 F.3d at 1324.
Therefore, the Court will not apply collateral estoppel
to the issue before the Court. If the Court should find in
favor of Plaintiffs and against Defendant on the issue of nondischargeability,
collateral estoppel will not establish the
amount of any non-dischargeable judgment. An order in
accordance with this Memorandum Opinion will be entered.
DATED this 17th day of August, 2004.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY
JUDGE

DARRYL HUFF

October 5, 2005

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
DARRYL HUFF : 04-40055 JTL
: CHAPTER 13
Debtor. :
MEMORANDUM OPINION
This case is before the Court on the motion of the debtor,
Darryl Huff, to allow the substitution of collateral. On
September 1, 2005, the Court held a hearing on the matter and
at the conclusion of the hearing, took the matter under
advisement. After considering oral arguments, as well as
applicable statutory and case law, the Court, for the reasons
given below, denies Debtor’s motion to substitute collateral
and hereby directs that all insurance proceeds due and payable
by USAA Casualty Insurance Company as a result of the postconfirmation
destruction of Debtor’s 1998 Pontiac Grand Prix
automobile be paid to secured creditor AmeriCredit Financial.
FACTS
On January 8, 2004, Darryl Huff (hereinafter, “Debtor”)
filed a Voluntary Petition under Chapter 13 of the United
States Bankruptcy Code. Debtor’s Chapter 13 Plan (hereinafter,
the “Plan”) was confirmed on April 23, 2004. The only
creditor, secured or otherwise, listed in Debtor’s Plan was
AmeriCredit Financial (hereinafter, “AmeriCredit”). The Plan
indicates that AmeriCredit was owed a debt of $14,357.00
2
secured by a first priority security interest in Debtor’s 1998
Pontiac Grand Prix automobile. The automobile is co-titled in
the names of Debtor and his wife, Vicki Lynn Hill. Debtor’s
confirmed Plan values the Grand Prix automobile at $7,025.00
for purposes of repayment under the Plan. In accordance with
the Plan, the Trustee is to make monthly payments of $184.00 to
AmeriCredit for the four-year, eight-month term of Debtor’s
Plan. As of September 1, 2005, the remaining balance owed to
AmeriCredit was $6,109.71.
Debtor and his wife, Vicki Lynn Huff, purchased the Grand
Prix automobile on April 9, 2001 as evidenced by the “Retail
Installment Contract and Security Agreement” (hereinafter,
“Sales Agreement”).1 AmeriCredit filed the Sales Agreement
with the Court on April 20, 2004 as part of its Proof of
Claim.2 The Grand Prix automobile was purchased from Carl
Black Pontiac/Buick/GMC/Isuzu, which assigned the contract and
security agreement to AmeriCredit via an assignment clause
located on page 1 of the Sales Agreement.3
Page 2 of the Sales Agreement contains “Additional Terms
of Th[e] Contract and Security Agreement.” The paragraph
titled “INSURANCE” provides in pertinent part as follows:
1 Retail Installment Contract and Security Agreement
(hereinafter, “Sales Agreement”), attached to Proof of Claim
No. 003.
2 Proof of Claim No. 003.
3
You [the purchaser] agree to buy property
insurance on the Property protecting against
loss and physical damage . . . . You will
name us [AmeriCredit] as loss payee on any
such policy . . . . You may purchase or
provide the insurance through any insurance
company reasonably acceptable to us. You
will keep the insurance in full force and
effect until this contract is paid in full.4
Debtor’s wife, Vicki Lynn Hill, in compliance with the
terms of the Sales Agreement, purchased property insurance on
the Grand Prix automobile from USAA Casualty Insurance Company
(hereinafter, “USAA”).5 Vicki Lynn Hill is named on the Policy
as the “Insured.” The policy period is stated as “MAY 04 2005
to NOV 04 2005.”6 The Grand Prix automobile is identified as
vehicle 02 in the Policy, with “AMERICREDIT FINANCIAL, DALLAS
TX” listed in a notation as the “LOSS PAYEE” for “VEH 02.”7
Debtor’s name appears on the Policy only as an “operator” of
the vehicles insured and as “co-owner” of vehicle 04, which is
identified as a 1985 Chevrolet S10 pickup truck.8
3 Sales Agreement, p.1.
4 Id. at p.2 (emphasis added).
5 The particulars of the insurance coverage secured by
Debtor=s wife, Vicki Lynn Hill, are evidenced by the insurance
policy (hereinafter, the “Policy”) that was admitted into
evidence as Movant’s Exhibit 2 during the hearing on the motion
to substitute collateral held by the Court September 1, 2005.
6 Movant’s exhibit 2, Policy, p.1.
7 Id.
8 Id.
4
Part D of the Policy, titled “Physical Damage Coverage,”
contains specifics on the payment of proceeds from the Policy
in case of loss.9 The paragraph in this part titled “Loss
Payable Clause” states in pertinent part:
Loss or damage under this policy will be
paid, as interest may appear, to the named
insured and the loss payee shown in the
Declarations . . . . When we [the insurer]
pay the loss payee we will, to the extent of
payment, be subrogated to the loss payee’s
rights of recovery.10
Debtor’s vehicle was totally destroyed in an automobile
accident. The insurance proceeds due and payable by USAA are
$5,180.35.11 Debtor filed Motion to Substitute Collateral on
July 5, 2005 asking that the Court permit Debtor to use the
proceeds paid by USAA to purchase a “substantial substitute of
collateral for the lien holder . . . .” and to “substitute that
collateral for the collateral presently listed with AmeriCredit
Financial.”12
DISCUSSION AND CONCLUSIONS OF LAW
Debtor’s motion to substitute collateral must be denied in
order for the Court to be consistent with the relevant
9 Part D begins on page 13 of the Policy.
10 Movant’s exhibit 2, Policy, p.15.
11 Response of AmeriCredit, p.2; Testimony in hearing
September 1, 2005.
12 Debtor=s Motion to Substitute Collateral, p.1.
5
controlling authority on this issue. The Chapter 13 estate is
comprised of “all legal or equitable interests of the debtor in
property as of the commencement of the case.”13 These
interests include “proceeds, product, offspring, rents, or
profits of or from property of the estate.”14 Where insurance
proceeds are determined to be property of the bankruptcy
estate, then in accordance with 11 U.S.C. ‘ 1327(a),15 the
confirmed Chapter 13 Plan will dictate how the proceeds are to
be disbursed.16 Alternatively, where insurance proceeds are
not property of the bankruptcy estate, then disbursement is
determined by the terms of relevant agreements that give rise
to particular legal interests in the proceeds.17
The answer to whether the insurance proceeds are property
of the debtor’s bankruptcy estate depends on whether the debtor
13 11 U.S.C. § 541(a)(1) (2005).
14 11 U.S.C. § 541(a)(6) (2005).
15 11 U.S.C. § 1327(a) states that “the provisions of a
confirmed plan bind . . . each creditor, . . . whether or not
such creditor has objected to, has accepted, or has rejected
the plan.”
16 Ford Motor Credit Co. v. Stevens, 130 F.3d 1027, 1029
(11th Cir. 1997); In re Arkell, 165 B.R. 432, 434 (Bankr. M.D.
Tenn. 1994) (Lundin, J.).
17 First Fidelity Bank v. McAteer, 985 F.2d 114 (3d Cir.
1993) (holding that proceeds from credit life insurance policy
were not property of the bankruptcy estate; therefore, secured
creditor could recover all proceeds paid, even the amount
exceeding the “crammed down” value of secured creditor=s
collateral listed in the debtor=s confirmed Chapter 13 Plan).
6
has an interest in the proceeds.18 Where the debtor and
secured creditor “share” an interest in the proceeds, the
proceeds constitute property of the bankruptcy estate and
disbursement will follow the dictates of the confirmed Chapter
13 Plan.19 The courts considering this issue agree that the
proper exercise for determining the respective rights of the
parties in insurance proceeds is to consider the “nature and
type of . . . insurance policy involved, and its relationship
to the property of the bankruptcy estate.”20 In cases where
the secured creditor was named as “loss payee” in the insurance
policy covering the secured collateral, the secured creditor
was deemed to have an interest in the insurance proceeds.21
See Stevens, 130 F.3d at 1029.
18Stevens, 130 F.3d at 1029. It is important to note that
simply because the debtor has a property interest in the
insurance policy, does not necessarily mean that the debtor has
a property interest in the proceeds of that policy.
19 Stevens, 130 F.3d at 1030 (citing In re Feher, 202 B.R.
966, 970 (Bankr. S.D. Ill. 1996)). See In re Arkell, 165 B.R.
at 435 (holding that “casualty insurance proceeds from the
destruction of property of a Chapter 13 estate are property of
the Chapter 13 estate”).
20Stevens, 130 F.3d at 1030; In re Feher, 202 B.R. 966
(Bankr. S.D. Ill. 1996) (citing In re Hill, 174 B.R. 949, 951
(Bankr. S.D. Ohio 1994)).
21 In re Witherspoon, 281 B.R. 321 (Bankr. S.D. Ala. 2001);
In re Feher, 202 B.R. 966 (Bankr. S.D. Ill. 1996); In re
Habtemichael, 190 B.R. 871 (Bankr. N.D. Mo. 1996); In re Suter,
181 B.R. 116 (Bankr. N.D. Ala. 1994); McCauley v. Chrysler
Credit Corp., 173 B.R. 453 (Bankr. M.D. Ga. 1994) (Hershner,
C.J.). See In re Bailey, 314 B.R. 103 (Bankr. N.D. Miss.
2004); Robinson v. Citizens Bank & Trust Co., 2003 WL 1728414
7
It should be noted that mere ownership of the insurance
policy by the bankruptcy estate does not necessarily mean that
the bankruptcy estate has sole interest or ownership of the
proceeds of that insurance policy.22 Situations may exist
where “a creditor or beneficiary other than the debtor may be
entitled to [insurance] proceeds . . . .”23 Where a secured
creditor is deemed to have an interest in insurance proceeds,
that interest “flowing from the destruction of the secured
collateral@ cannot exceed the secured creditor’s interest in
the collateral itself.24 The secured creditor’s interest in
the proceeds would be “defined at the time of the confirmation
of the Chapter 13 plan . . . .”25 In sum, where both the
debtor (via the bankruptcy estate) and the secured creditor
(via the insurance policy) have an interest in the insurance
proceeds, the secured creditor shall be paid the value of its
interest in accordance with the confirmed Chapter 13 Plan and
(Bankr. S.D. Ga. 2003); In re Coker, 216 B.R. 843 (Bankr. N.D.
Ala. 1997); Carey v. General Motors Acceptance Corp., 202 B.R.
796 (Bankr. M.D. Ga. 1996) (Hershner, C.J.); In re Arkell, 165
B.R. 432.
22 Stevens, 130 F.3d at 1029.
23 Id. (citing First Fidelity Bank v. McAteer, 985 F.2d
114,117 (3d Cir. 1993); In re Louisiana World Exposition, 832
F.2d 1391, 1399 (5th Cir. 1987)).
24 Id. at 1030 (citing In re Feher, 202 B.R. 966, 970-71
(Bankr. S.D. Ill. 1996); In re Arkell, 165 B.R. 432, 434
(Bankr. M.D. Tenn. 1994)).
8
any remainder shall be paid to the debtor as the party in whom
the automobile revested when the Chapter 13 plan was
confirmed.26
A. AmeriCredit Financial Services, as named “loss payee”
under the insurance Policy, does have an interest in
the insurance proceeds.
As mentioned above, “[i]n order to determine the parties
respective rights with regard to the insurance proceeds from
the destruction of the [secured collateral], one must consider
the nature and type of insurance policy involved, and its
relationship to the property of the bankruptcy estate.”27 This
test was laid out in the case of Ford Motor Credit Co. v.
Stevens where the Eleventh Circuit Court of Appeals considered
circumstances similar to those in the case at bar. In Stevens,
Ford Motor Credit, the secured creditor, was named as “loss
payee” in the debtor’s insurance policy covering the debtor’s
Ford pickup truck. When the pickup truck was destroyed postconfirmation
and the insurance company paid out the proceeds
due under the policy, the Eleventh Circuit held that proceeds
25Id.
26 In re Habtemichael, 190 B.R. 871, 873 (citing In re
Moore, 181 B.R. 522 (Bankr. D. Idaho 1995); In re Suter, 181
B.R. 116 (Bankr. N.D. Ala. 1994); In re McCauley, 173 B.R. 453
(Bankr. M.D. Ga. 1994) (Hershner, C.J.); In re McDade, 148 B.R.
42 (Bankr. S.D. Ill. 1992); In re Pourtless, 93 B.R. 23 (Bankr.
W.D. N.Y. 1988); In re Tucker, 35 B.R. 35 (Bankr. M.D. Tenn.
1983)). See also Stevens, 130 F.3d 1027.
27Stevens, 130 F.3d at 1030.
9
were payable to Ford Motor Credit to the extent it was still
owed under the debtor’s confirmed Chapter 13 Plan. The excess,
the Eleventh Circuit held, was payable to the debtor.
In reaching its conclusion, the Eleventh Circuit
considered the “nature and type” of the insurance policy and
the policy’s “relationship to the property of the bankruptcy
estate.” The court stated that the insurance policy was
“intended to protect both the owner and the secured creditor”
should the secured collateral be destroyed.28 The proceeds of
the policy, the court held, “act as a substitute for the
insured collateral.”29 Ford Motor Credit, therefore, had an
interest in the proceeds in accordance with the terms of the
policy. The court limited Ford Motor Credit’s interest in the
proceeds to the value of its interest in the secured collateral
itself—the amount Ford Motor Credit was still owed under the
debtor’s confirmed Chapter 13 Plan.
In the case at bar, AmeriCredit was Debtor’s secured
creditor as to Debtor’s 1998 Pontiac Grand Prix automobile.30
AmeriCredit required Debtor “to buy property insurance on the
Property protecting against loss and physical damage” and to
28 Id.
29 Id.
30 Debtor’s Chapter 13 Plan.
10
name AmeriCredit as loss payee on any such policy.31 Debtor’s
wife purchased insurance on the automobile. AmeriCredit was
named in the insurance Policy covering the Grand Prix
automobile as “loss payee” for that vehicle. Therefore, like
in Stevens, it can be concluded that the Policy in this case
was “intended to protect both the owner and the secured
creditor” should the Grand Prix automobile be destroyed.
31 Sales Agreement, p.2 (emphasis added).
The Grand Prix automobile was in fact destroyed and
insurance proceeds are now due and payable in accordance with
the Policy. Because AmeriCredit was named in the insurance
Policy as “loss payee” for proceeds paid on the Grand Prix
automobile and, like in Stevens, the Policy was intended to
protect AmeriCredit in case its collateral was destroyed,
AmeriCredit does have an interest in the insurance proceeds
paid as a result of the post-confirmation, total destruction of
Debtor’s Grand Prix automobile.
B. It is unnecessary to determine whether Debtor or his
bankruptcy estate has an interest in the insurance
proceeds.
11
A Chapter 13 bankruptcy estate is made up of “all legal or
equitable interests of the debtor in property as of the
commencement of the case,” which includes “proceeds, product,
offspring, rents, or profits of or from property of the
estate.”32 Where the debtor owns an insurance policy (i.e.,
the debtor is named as the “insured” on the policy), the policy
is property of the debtor’s bankruptcy estate.33 However,
simply because the policy is property of the estate does not
necessarily mean that the proceeds of the policy are property
of the estate.34 The language of the policy or other
circumstances may entitle a creditor or other beneficiary to
the proceeds.35 Should it be determined that the debtor does
in fact have an interest in the proceeds, then the “proceeds
are considered property of the bankruptcy estate and
distribution of the proceeds is governed according to the terms
of the bankruptcy plan.”36
In most cases that address the issue at hand, the courts
are considering insurance policies owned by the debtor (i.e.,
debtor is named as “insured”). In those cases, even where one
32 11 U.S.C. § 541 (a)(1), (6) (2005).
33 Stevens, 130 F.3d at 1029.
34 Id.
35 Id.
36 Id.
12
of the debtor’s secured creditors is named loss payee under the
policy, the debtor, and thus his bankruptcy estate, can still
be held to have an interest in the proceeds.37 Determining
whether the debtor himself has an interest in the proceeds is
important where the proceeds paid as a result of the secured
collateral’s destruction exceed the amount owed to the secured
creditor under the confirmed Chapter 13 Plan. The issue in
those cases is whether the debtor is entitled to any excess or
if the secured creditor is entitled to the full amount of the
proceeds, including any excess.
An example of this type of case is McCauley v. Chrysler
Credit Corp., where Chief Judge Hershner held that the debtor’s
secured creditor and named loss payee under debtor’s insurance
policy must turn over insurance proceeds paid to the secured
creditor that exceeded the amount of the secured creditor’s
confirmed claim.38 In that case, the insurance policy showed
the debtor as the owner of the secured collateral vehicle and
the secured creditor as loss payee. The vehicle was destroyed
post-confirmation and the insurance company issued a check for
the proceeds jointly payable to the debtor and the secured
creditor. The debtor in McCauley conceded that the balance of
the secured creditor’s claim should be paid from the proceeds,
but the debtor demanded return of the excess. Chief Judge
37 Id. at 1029-30.
13
Hershner held that the secured creditor, as named loss payee,
was entitled to the amount representing the unpaid portion of
its claim under the debtor’s confirmed Chapter 13 plan, and the
debtor was entitled to any excess.
Unlike in McCauley, Debtor in this case is not the owner
per se of the Policy. Debtor’s name is not listed as the
“insured” on the Policy. Further, the “Loss Payable Clause” in
the Policy states that “Loss or damage under this policy will
be paid, as interest may appear, to the named insured and the
loss payee shown in the Declarations . . . .”39 It is
undisputed that the Grand Prix automobile was co-owned by
Debtor and his wife and that the automobile was property of
Debtor’s bankruptcy estate. What is unclear is whether the
proceeds of the insurance Policy are property of Debtor’s
bankruptcy estate. Such a distinction is unnecessary in
deciding this case since the monies due and payable by USAA
under the Policy do not exceed the balance of AmeriCredit’s
claim under Debtor’s confirmed Chapter 13 Plan.
Respondent AmeriCredit urges that “because [AmeriCredit]
is the loss payee of the insurance policy, the proceeds of the
policy are not property of the estate.”40 AmeriCredit relies
38 McCauley, 173 B.R. at 455.
39 Movant’s exhibit 2, Policy, p.15.
40 Response of AmeriCredit, p. 2.
14
on the case In re Suter for this proposition. The court in
Suter held “because [secured creditor] was the loss payee of
the insurance policy, the proceeds of the policy are not
property of the bankruptcy estate and are payable to [secured
creditor], at least to the extent of [secured creditor’s]
interest in the property insured.”41 In Suter, the insurance
proceeds exceeded the balance of the secured creditor’s claim
under the confirmed Chapter 13 Plan and the debtor was awarded
recovery of the excess.
The holding in Suter, however, is inconsistent with one of
the conclusions of Stevens where the Eleventh Circuit, under
circumstances similar to those in Suter, held that “the
disbursement of insurance proceeds caused by the destruction of
the [secured collateral] fell within the property of the
bankruptcy estate.”42 However, the Eleventh Circuit went on to
hold in Stevens that “[h]aving a confirmed secured claim with
regard to the [vehicle], [secured creditor] was certainly
entitled to collect on its claim from the insurance proceeds as
substitute collateral. [Secured creditor] was not entitled,
however, to recover more than the amount of its secured claim
as confirmed by the Chapter 13 plan.”43 Therefore, even though
41 In re Suter, 181 B.R. at 119 (emphasis added).
42 Stevens, 130 F.3d at 1031.
43 Id.
15
AmeriCredit is incorrect, because of the holding in Stevens, to
rely on Suter for authority that the proceeds are not property
of Debtor’s bankruptcy estate and, therefore, the rightful
property of AmeriCredit, the courts in both cases reached the
same result. Both courts ultimately held that secured creditors
with confirmed secured claims are entitled to payment from
insurance proceeds to the extent of their claims where they are
named loss payees on the policies.
In the case at bar, secured creditor AmeriCredit has a
balance of $6,109.71 owed on its confirmed claim. Upon
destruction of Debtor’s Grand Prix automobile, USAA Casualty
Insurance Company owed $5,180.35 under the Policy, an amount
less than the amount owed to AmeriCredit on its confirmed
claim. Unlike those cases where it is vital to determine
whether the debtor has interest in the insurance proceeds
exceeding the secured creditor’s confirmed claim, such a
decision is unnecessary in the case at bar. Should such a
decision be required, the Court would be called to consider
issues such as whether Debtor’s not being named an insured on
the insurance policy would affect the outcome of the case. No
such inquiry is required today, however.
The Court, by this opinion, is not making the broad
statement that substitution of collateral will be disallowed in
all circumstances where a secured creditor’s collateral is
16
destroyed and insurance proceeds are paid or are payable. The
Court cautions that this holding is limited to the facts of
this case and that the outcome may differ in cases where the
collateral has not revested in the debtor by the time the
collateral is destroyed. Such would be the case where
destruction occurs pre-confirmation44 or where a provision in
the debtor’s Chapter 13 Plan states the collateral does not
revest in the debtor upon confirmation.
CONCLUSION
AmeriCredit was named as loss payee in the insurance
Policy covering Debtor’s 1998 Pontiac Grand Prix automobile.
The automobile secured AmeriCredit’s confirmed claim against
Debtor’s bankruptcy estate. The automobile was destroyed postconfirmation.
AmeriCredit’s confirmed claim totals less than
the insurance proceeds paid for the destroyed vehicle. In
accordance with the decision of the Eleventh Circuit in Ford
Motor Credit Co. v. Stevens, it is concluded for the foregoing
reasons that AmeriCredit, as named loss payee on the insurance
Policy, is entitled to payment of all the insurance proceeds
due and payable, such payment to serve as substitute for its
collateral. Debtor’s Motion to Substitute Collateral will be
DENIED and an order will be entered in accordance with this
memorandum opinion.
44 See Carey, 202 B.R. 796.
17
DATED this 5th day of October, 2005.
/S/ JOHN T. LANEY III
JOHN T. LANEY III
UNITED STATES BANKRUPTCY JUDGE

SGE MORTGAGE FUNDING CORPORATION

November 2001

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
VALDOSTA DIVISION
IN RE: ::
CASE NO. 99-71191
SGE MORTGAGE FUNDING :
CORPORATION, : CHAPTER 11
:
Debtor, : ADVERSARY PROCEEDING
: NO. 00-7013
SGE MORTGAGE FUNDING :
CORPORATION ::
Plaintiff, ::
vs. ::
ACCENT MORTGAGE SERVICES, :
INC., et al. ::
Defendants. :
MEMORANDUM OPINION
On July 13, 2001, the court held a hearing on the motions
for partial summary judgment of First Family Financial Services,
Inc., Associates Financial Services of America, Inc., and
Associates Home Equity Services, Inc., (collectively,
“Associates”), and the Committee of Investors Holding Unsecured
Claims (“Committee”). The parties filed briefs, response briefs,
affidavits and stipulations of fact. At the conclusion of the
hearing, the court took the motions for partial summary judgment
under advisement. The court has considered the parties’ briefs,
affidavits, stipulations of fact, oral arguments, and the
applicable statutory and case law. For reasons that follow, the
1 The Associates and the Committee stipulate that Exhibit “A”
contains some sample Investor Contracts which do not differ in any
material respect from all of the Investor contracts entered into by
SGE with each individual investor. (Id. Stipulations of Fact at ¶ 3).
Although SGE agrees that all “known” transactions were memorialized
into written contracts, SGE avers that there may exist Investor
Contracts that do not mirror the language in the sample Investor
Contracts. (See Doc. #605 at ¶¶ 3-5).
-2-
court will grant in part and deny in part, the Associates’ motion
and will deny the Committee’s motion.
FACTS
The prepetition debtor, SGE Mortgage Funding Corporation
(“SGE”), was a residential mortgage broker licensed in Georgia.
A large portion of SGE’s business involved SGE’s solicitation and
origination of loans to potential borrowers desiring to obtain
loans secured by real estate. SGE funded its mortgage loan
origination business through cash investments made by individual
investors. The transactions between SGE and these investors were
memorialized in a written contract (“Investor Contract”). (Doc.
#559, Exh. “A”).1
Each Investor Contract provided that the investor would loan
SGE a certain amount of money. SGE would utilize these funds in
its lending business to individual borrowers. In return for the
investors’ loan, SGE would pay the investor a monthly amount
based on an interest rate designated in the Contract. (Exh. “A”
at ¶ 1).
Each Investor Contract also identified a specific borrower
and loan which SGE represented that it had made using the
-3-
investor’s funds. If for some reason, the loan to the borrower
did not close, the Contract provided that the funds advanced to
SGE by the investor would either be returned to the investor or
the funds would be used for some other transaction. Upon closing
the loan to the specific borrower identified, the Contract
further provided that SGE would “transfer and assign all of its
right, title, and interest in and to Borrower’s Note and deed to
secure debt to [the] [investor].” (Id. at ¶ 5). This transfer
and assignment was to be recorded in the county where the real
estate was located. Although the loan documents were to remain
the property of SGE, these documents were to serve “as
collateral. . . for repayment of the debt owed by [SGE] to [the]
[investor].” (Id.). Moreover, the Contract required SGE to
deliver the original documents to the investor if the investor so
requested. Unless the investor requested otherwise, SGE would
serve as the servicing agent for the loan that SGE had made to
the borrower with the investor’s funds. (Id. at ¶¶ 2-5).
The Associates are consumer lending companies licensed in
Georgia. One aspect of the Associates’ business is to make bulk
purchases of portfolios of real estate loans from mortgage
brokers. All three of the Associates entities engaged in bulk
purchases of loans from SGE. First Family Financial Services
purchased approximately 230 mortgage loans for which it paid SGE
approximately $3.5 million. (Id. at ¶ 23). Associates Financial
Services of America purchased approximately 30 mortgage loans
-4-
from SGE at a purchase price of approximately $1.3 million. (Id.
at ¶ 24). Associates Home Equity Services paid SGE approximately
$564,000.00 for approximately 26 loans it purchased from SGE.
(Id. at ¶ 25). The transactions between these entities and SGE
were memorialized into written agreements. (Doc. #559, Exh. “B”,
“C” and “D”). After the Associates purchased the loans from SGE,
the Associates assumed all aspects of loan management. (Doc. #559
at ¶ 19).
However, before SGE sold these loans to the Associates and
other bulk purchasers, SGE had been engaged in a classic Ponzi
scheme. Upon closing a mortgage loan to an individual borrower,
SGE would assign that loan to not only one investor, but numerous
investors. Like many Ponzi schemes, SGE used funds obtained from
later investors to pay the monthly principal and interest
payments due to the earlier investors. SGE drew the Associates
into its fraudulent scheme by selling loans to the Associates
which SGE had “double-booked” to numerous investors.
On September 27, 1999, an involuntary petition under Chapter
7 of the Bankruptcy Code (“Code”) was commenced against SGE. On
December 10, 1999, this case was converted to a Chapter 11 case.
On June 28, 2000, SGE as debtor-in-possession, filed this
adversary proceeding to determine the validity, priority, and
extent of the interest in the loans claimed by the investors and
the bulk purchasers. Numerous investors and consumer lending
companies such as the Associates were named as defendants.
-5-
After several months of discovery, the Committee and the
Associates filed motions for partial summary judgment to which
several consumer lending companies, investors, and SGE
responded. These motions present two issues: (1) whether the
Uniform Commercial Code (“UCC”) or the Georgia real estate
recording statutes (“recording statutes”) governs the priority of
interests in the loan transactions; and (2) whether the
Associates are holders in due course of the loans they purchased
from SGE.
DISCUSSION
In dealing with motions for summary judgment, Federal Rule
of Civil Procedure 56 is made applicable to adversary proceedings
in bankruptcy cases by Federal Rule of Bankruptcy Procedure 7056.
Summary judgment is proper “if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to
judgment as a matter of law.” FED R. CIV. P. 56(c); Celotex Corp.
v. Catrett, 477 U.S. 317, 322 (1986). Like a district court, a
bankruptcy court must determine that there are no issues of
material fact and accept all undisputed facts as true in order to
find that summary judgment is warranted as a matter of law. Gray
v. Manklow (In re Optical Technologies, Inc.), 246 F.3d 1332,
1334 (11th Cir. 2001). An issue is “material” if it affects the
2 This entity consists of approximately 100 individual investors who are
present and former clients of Carlyle Wealth Planning, Inc. These
individuals invested approximately $6,000,000.00 in the Casko
Investment Company to fund the lending to individual borrowers. SGE
was the “servicing agent” for the Carlyle/Casko investments. (See
Doc. #559, Exh. “A”).
-6-
outcome of the case under the applicable law. Redwing Carriers,
Inc. v. Saraland Apartments, 94 F.3d 1489, 1496 (11th Cir. 1996).
In the typical motion for summary judgment, the court must
apply the undisputed facts to the applicable law. However, the
first issue before the court requires it to determine which law
is the applicable law.
The Committee and the Carlyle/Casko investor entity
(“Carlyle/Casko Investors”2), argue that the recording statutes,
not the UCC, is the applicable law. The Committee contends that
the investors and bulk purchasers, such as the Associates, failed
to record the assignments of the deeds to secure debt. As a
result, these entities have no ownership interest in the loans
superior to that of the trustee. Therefore, the Committee and
the Carlyle/Casko Investors contend that the loans are property
of the estate. The Committee also argues that the Associates’
interests are likewise unperfected. Although the Associates may
have purchased the notes of which they have possession, the
Committee contends that the Associates failure to record the
assignments is fatal to their perfection.
The Associates and SGE argue that the UCC is the applicable
law. Although real estate was involved in the transactions
3 The court notes that Accent Mortgage Services, Inc. (“AMS”), another
consumer lending company defendant filed a response to the Committee’s
Motion. In their response, AMS adopted the Associates’ brief in full.
Therefore, the court’s reference to the Associates encompasses AMS as
well.
-7-
between SGE and the investors, the Associates contend that the
UCC governs because the transactions entailed the transfer of
promissory notes, which are negotiable instruments.3
Similar to the Carlyle/Casko Investors, individual investors
James and Debra Mills (“Mills”) filed a response to the
Associates’ and the Committee’s motions maintaining that the UCC
is not the applicable law. The Mills assert that the mortgages
assigned to them by SGE were not included in the ones that SGE
assigned to the Associates in their bulk purchase. Even if this
is not the case, the Mills argue that SGE executed an assignment
of the actual security deed to them which they then recorded.
Under the applicable recording statutes, the Mills maintain that
recording the deed and assignment is sufficient to perfect their
interest. The Mills further insist that having possession of the
original notes is not necessary to perfect their interest in the
collateral.
Under Georgia law, transactions that result in the “creation
or transfer of an interest in or lien on real estate . . .” are
excluded from Article 9 of the UCC. O.C.G.A. § 11-9-104(h)(1994
& Supp. 2000). Therefore, the focal point of the issue before
the court is whether the transactions between SGE, the
-8-
Associates, and the investor entities create or transfer an
interest in real estate.
The Associates rely on the case of Chen v. Profit Sharing
Plan, 216 Ga. App. 878, 456 S.E.2d 237 (1995). In a case
involving a transaction similar to the one between SGE and the
investor entities, the Georgia court of appeals concluded that
the parties’ transaction did not involve a creation or transfer
of an interest in real estate. See Chen, 216 Ga. App. at 881,
456 S.E.2d at 241. Therefore, the court held that the UCC was
the applicable law. Id.
In Chen, Blankenship granted a security interest in his real
property to Chen. This security interest was evidenced by
Blankenship’s executing a promissory note and security deed to
Chen. Under the terms of the promissory note, Blankenship was to
pay Chen 120 monthly installments. Before Chen received the
first payment from Blankenship, Chen entered into an agreement
with the Profit Sharing Plan (“Plan”). In exchange for a loan
from Plan, Chen assigned it the first 60 payments under the
Blankenship note. Chen also assigned to Plan the Blankenship
note and security deed. In addition to these assignments, Chen
executed a document which provided that Plan would be the
servicing agent of the Blankenship note. Plan agreed to reassign
the note and security deed to Chen after Plan received the 60
payments. Id. at 879, 456 S.E.2d at 239.
Approximately two years after this agreement, Plan made
-9-
another loan to Chen whereby Chen pledged the Blankenship note
and security deed as collateral. Chen executed a transfer and
assignment of the note and security deed. Along with the
transfer and assignment, Chen also executed an addendum in which
Chen agreed to sell the remaining 60 installments to Plan. The
addendum contained a default provision allowing Plan to retain
the collateral in the event Chen failed to make the payments.
After making 18 payments to Plan, Chen defaulted on the second
loan and Plan sent a letter to Chen indicating its intent to
retain the collateral. Id. at 878-79, 456 S.E.2d at 239.
The central issue in Chen was whether Plan’s letter to Chen
was adequate notice under O.C.G.A. § 11-9-505(2). The trial
court found that the notice did satisfy the requirements of § 11-
9-505(2). Id. at 882, 456 S.E.2d at 241. On appeal, Plan argued
that Chen was not entitled to notice under § 11-9-505(2) because
pursuant to § 11-9-104(h), the transaction was excluded from
Article 9 of the UCC.
Reversing the trial court, the court of appeals rejected
Plan’s argument that its transaction with Chen was excluded from
Article 9. Id. at 881, 456 S.E.2d at 241. The court concluded
that this transaction did not involve the “creation” or
“transfer” of an interest in real estate, but instead involved
the “pledge of collateral or ‘lien’ against negotiable
instruments.” Id. The court explained that a “pledge creates a
lien on the property by the pledgee while legal title remains in
-10-
the pledgor.” Id. Simply stated, “possession passes, but not
title.” Id. As to the transfer and assignment that Chen
executed, the court analyzed the documents which were executed
and concluded that these acts were done so that Plan could hold
the security deed and note as security for the loan. Id.
Furthermore, “title to these instruments never vested in Profit
. . . [therefore,] [Plan] only acquired a lien against the
commercial paper, i.e., the security deed and note.” Id.
Accordingly, the court held that Article 9 of the Georgia
Commercial Code was applicable to the transaction. Id.
Chen is consistent with the vast majority cases and
commentators who have dealt with this issue. See Fogler v. Casa
Grande Cotton Finance Co. (In re Allen), 134 B.R. 373 (B.A.P. 9th
Cir. 1991); Ryan v. Zinker (In re Sprint Mortgage Bankers Corp.),
177 B.R. 4 (E.D.N.Y. 1995); First National Bank of Boston v.
Larson (In re Kennedy Mortgage Company), 17 B.R. 957 (Bankr.
D.N.J. 1982); Army National Bank v. Equity Developers, Inc., 245
Kan. 3, 774 P.2d 919 (1989); Rodney v. Arizona Bank, 172 Ariz.
App. 221, 836 P.2d 434 (1992); 4 James J. White & Robert S.
Summers, Uniform Commercial Code, § 30-7 at 45-49 (4th ed. 1995);
Jan Z. Krasnowiecki, et al., The Kennedy Mortgage Co. Case: New
Light Shed on the Position of Mortgage Warehousing Banks, 56 AM.
BANKR. L.J. 325 (1982).
Most of the above authorities base their reasoning on UCC §
9-102(3) and Official Comment 4 to that subsection which makes
4 The court notes that Georgia, unlike many other states, has not
adopted the Official Comments to the UCC. However, because O.C.G.A. §
11-9-102(3) was adopted verbatim from UCC § 102(3), due consideration
is to be given to the official comments. See Roswell Bank v. Atlanta
Utility Works, Inc., 149 Ga. App. 660, 255 S.E. 2d 124 (1979);
Warren’s Kiddie Shoppe, Inc. v. Casual Slacks, Inc., 120 Ga. App. 578,
171 S.E.2d 643 (1969).
-11-
Article 9 applicable to “realty paper.” See e.g., In re Allen,
134 B.R. at 375; White & Summers, supra, § 30-7 at 45. In
pertinent part, Official Comment 4 provides:
[T]he owner of Blackacre borrows $10,000 from his neighbor
and secures his note by a mortgage on Blackacre. [Article 9]
is not applicable to the creation of the real estate
mortgage. However, when the mortgagee in turn pledges this
note and mortgage to secure his own obligation to X,
[Article 9] is applicable to the security interest thus
created in the note.4
In following Comment 4 to UCC § 9-102(3), courts generally have
concluded that Article 9 governs perfection in a note secured by
a real estate mortgage and that no action needs to be taken with
regard to the mortgage; it is best “to concentrate on the note.”
Allen, 134 B.R. at 375; see also Rodney, 172 Ariz. App. at 223,
836 P.2d at 436 (holding “that a debt for purchase of real
property (and the promissory note that is evidence of that debt)
cannot be separated from the mortgage (or deed of trust) securing
that debt.”).
However, the analysis does not end there. The court agrees
with the commentators that in analyzing this issue, one must
recognize that the parties to these types of transactions live in
two separate worlds; the “mortgagor’s world” and the “mortgagee’s
world.” See Krasnowiecki, supra, at 334. As Krasnowiecki
-12-
explains:
[A]t one end are the interests of the mortgagor in the land
and those who take interests in the land from the mortgagor.
At the other, the interests of the mortgagee are evidenced
by the note and the mortgage. . . . At the mortgagor’s end,
the land can be sold subject to the mortgage (or with
assumption of the mortgage), or the mortgagor may pay off
the mortgage and secure a satisfaction of record and then
either keep the land or sell it. . . . At the mortgagee’s
end, the mortgagee . . . may sell the mortgage and note
outright to someone else or he may pledge it as a security
for [a] loan . . . .”
Krasnowiecki, supra, at 334. White & Summers have adopted
Professor Krasnowiecki’s view. See White & Summers, supra, § 30-
7 at 46.
The primary case upon which Krasowiecki bases his position
is the case of In re Kennedy Mortgage Company, 17 B.R. at 957.
Kennedy’s principal activity involved originating loans to
mortgage applicants. In addition to lending its own money to
these mortgage applicants, Kennedy loaned funds that it obtained
from various lenders. These funds were in the form of
“warehousing” lines of credit. One such lender was First
National Bank of Boston (“FNBB”). In exchange for the
warehousing line of credit from FNBB, Kennedy executed
assignments of mortgages to FNBB which were delivered to FNBB
along with the corresponding promissory notes. FNBB failed to
record the assignments. Id. at 958-59.
Because the notes were negotiable instruments which are
perfected by possession, the court held that FNBB was perfected
-13-
by taking possession. Id. at 965. Moreover, the court concluded
that FNBB’s failure to record the assignments were not fatal to
FNBB’s perfection. Id. The court explained that “FNBB has a
perfected lien on the note and the mortgage is only collateral to
the note. The mortgage without the debt is of no effect.” Id.
The court in Kennedy also addressed the second sentence of
Official Comment 4 to UCC § 9-102(3) which reads, “[t]his Article
leaves to other law the question of the effect on rights under
the mortgage of delivery or non-delivery of the mortgage or the
recording or non-recording of the mortgagee’s interest.” The
court explained that the “other law” refers to the real estate
recording laws which exist to “establish priorities and rights of
individuals who are affected by the chain of title or
encumbrances on the real estate.” Id. at 964. In other words,
the “other law” protects those in the “mortgagor’s world.” See
White & Summers, supra, § 30-7 at 48. The court noted that under
New Jersey real estate recording laws, mortgages and assignments
of mortgages may be recorded. Kennedy at 964. However, merely
because the real estate recording laws provide that assignments
may be recorded, “this fact does not affect the validity of an
assignment of a mortgage which has not been recorded.” Id.
Adopting the Kennedy approach as well as Krasnowiecki’s
analysis, the Kansas supreme court in Army National Bank
concluded that the recording statutes were intended to protect
-14-
the mortgagor and those dealing with the underlying land. 245
Kan. at 15, 774 P.2d at 928.
In Army National Bank, Equibank acquired nine notes which
were secured by nine corresponding mortgages on real property.
In exchange for a loan from the Bank of Kansas City (“BOKC”),
Equibank pledged the nine notes to BOKC and assigned the nine
mortgages to BOKC. Because BOKC was a creditor of the mortgagee,
not a creditor of the mortgagor, the court held that perfection
could be effected only by possession of the notes. Id. at 19,
774 P.2d at 930. If BOKC had been the creditor of the mortgagor,
the court noted that BOKC would have been required to record the
mortgage in order to have been perfected. Id. The court
explained that this approach is consistent with the purposes of
the recording acts, which is to protect the interests of the
mortgagor. Id.
The court notes the case of Peoples Bank of Polk County v.
McDonald (In re Maryville Savings & Loan), 743 F.2d 413 (6th Cir.
1984), clarified on reconsideration, 760 F.2d 119 (1985). In
this case, Peoples Bank loaned money to Maryville. As collateral
for this loan, Maryville assigned a mortgage and note to Peoples
Bank. Peoples Bank recorded the assignment, but failed to take
possession of the note. The bankruptcy court concluded that
Peoples Bank did not perfect its interest. In re Maryville, 27
B.R. 701, 709 (Bankr. E.D. Tenn. 1983). The district court,
however, reversed the bankruptcy court and held that since the
-15-
recording was accomplished, this was sufficient for perfection
under Tennessee law. In re Maryville, 31 B.R. 597, 599 (E.D.
Tenn. 1983).
Affirming in part and reversing in part, the Sixth Circuit
split the perfection of the mortgage from the perfection of the
note. Maryville, 743 F.2d at 415-16 (6th Cir. 1984). The court
concluded that Article 9 applied to Peoples Bank’s interest in
the promissory notes and, because it failed to take possession of
the notes, Peoples Bank’s security interest in the notes was
unperfected. Id. at 416-17. The court further concluded,
however, that Article 9 did not apply to Peoples Bank’s interest
in the mortgage. Therefore, because the assignments were
properly recorded, Peoples Bank was perfected as to the mortgage.
Id. at 417.
After the court’s ruling, the bankruptcy trustee received
funds from “non-foreclosure sources.” In an attempt to clarify
how these funds were to be handled, the trustee moved for
reconsideration. Maryville, 760 F.2d 119, 120 (6th Cir. 1985).
In a supplemental opinion, the court found that the funds paid to
the trustee were proceeds of the notes. Id. at 121. Because
Peoples Bank failed to perfect its interest in the notes, the
court held that the trustee must prevail. Id. The court noted
that the result “might be to the contrary” if the funds were
foreclosure funds stemming from the mortgage, an interest in
which Peoples Bank was perfected. Id.
-16-
A great deal of the majority line of cases are critical of
the result in Maryville. See, e.g., Allen, 134 B.R. at 375
(concluding that the result in Maryville “produces the worst of
both worlds. . . .”); Army National Bank, 245 Kan. at 18, 774
P.2d at 929-30 (reasoning that “a mortgage cannot exist
separately from the note it secures.”). In Army National Bank,
the court explained that splitting the perfection of the note and
the mortgage could create a situation whereby two separate
parties are simultaneously and respectively perfected in the note
and the mortgage. Id. This situation, in turn, may result in
the respective parties having a “note absent its security or a
mortgage which may be worthless.” Id.
White and Summers also criticize Maryville. See White &
Summers, supra, § 30-7 at 49. They propose that splitting the
perfection of the note and mortgage would effectively require the
mortgagor to pay twice to get free and clear title to his real
property. Id.
The court agrees with the reasoning of the majority line of
cases and commentators. In applying that reasoning to the facts
of this case, the court must first determine whether the
transaction occurred in “mortgagor’s world” or the “mortgagee’s
world.”
As to the transactions between SGE and the investor
entities, the court finds that these transactions occurred in the
world of SGE, the “mortgagee’s world.” Similar to the majority
5 Due to the vast number of individual investors in this adversary
proceeding, they have been designated either group “A”, “B”, or “C” in
the court docketing system. “Group C” consists of approximately 26
individual investor entities which are represented by the law firm of
Sims, Fleming & Spurlin, P.C.
-17-
line of cases, SGE pledged the mortgages and notes as collateral
for SGE’s own obligation to the investors. Although the
assignments of the mortgages and the Investor Contract described
the property and the individual borrower, the court nevertheless
finds that the transaction occurred in SGE’s world.
At oral arguments, however, “Group C”5 of the individual
investors addressed this very point. Given the fact that the
Investor Contract identifies a specific borrower and a specific
tract of land, Group C argues that each investor intended to fund
a particular loan, thereby taking an interest in a particular
parcel of real property. Furthermore, SGE was to return their
money to them if the loan to the individual borrower failed to
close. Group C argues that these facts distinguishes them from
the majority line of cases.
The court acknowledges that these distinctions do not seem
to be addressed by any of the cases. For example, in Chen, the
underlying real estate transaction between Chen and Blankenship
already had been consummated before Chen pledged the note to
Profit. Therefore, unlike the investors’ loan to SGE, Profit’s
loan to Chen was not contingent on whether Chen’s loan to
Blankenship closed. Likewise in Sprint Mortgage, there was no
-18-
attempt by the debtor/mortgagee to earmark the specific loans
made to the mortgagee to the specific mortgages that the debtor
assigned. Group C argues that these factual differences are
sufficient to distinguish them from the majority line of cases.
Although these are meritorious distinctions, the court finds
that, at all times, the investors’ interest was a money
investment interest. The language of the Investor Contract is
clear: “[t]he loan documents . . . shall be considered as
collateral or security for only for repayment of the debt owed by
[SGE] to [the investor].” (Doc. #559, Exh. “A” at ¶ 5)(emphasis
added). At all times, the investors were dealing with SGE and
never took an “interest[] in the land from the mortgagor.” See
Krasnowiecki, supra, at 334. Therefore, the court finds that
SGE’s assignment to the investors did not a create or transfer an
“interest in or lien on real estate . . . .” O.C.G.A. § 11-9-
104(h).
The fact that the assignments were or were not recorded has
no bearing on perfection. See Kennedy at 964. The Mills argue,
however, that O.C.G.A. § 44-14-60 is specific authority governing
the transfer of security deeds. They assert that this code
section “fully anticipates that an assignment should be
recorded.” (Mills’ Mem. In Opp’n, Doc. #617). The court agrees
with the Mills that § 44-14-60 provides the manner in which the
assignment of a security deeds may be recorded. However, as the
-19-
court in Kennedy recognized, “[t]he fact that [the recording
statutes provide that] assignments of mortgages may be recorded
does affect the validity of an assignment of a mortgage which has
not been recorded.” Kennedy at 964 (emphasis added). The
purpose and intent of the recording statutes are to protect those
in the “mortgagor’s world.” See, e.g., Army National Bank at 19.
These transactions occurred in the “mortgagee’s world” which is
outside the scope which § 44-14-60 is intended to protect.
Accordingly, the court rejects the Mills’ argument.
The court finds that Article 9 of the Georgia UCC applies to
the transactions between SGE and the investor entities. As a
result, the investor entities are perfected only to the extent to
which they have possession of promissory notes.
The court notes that because of the fraudulent conduct of
the prepetition debtor, very few if any of the investor entities
are in possession of the original promissory notes. Therefore,
the court realizes that this is an unfortunate result for the
investor entities. However, the court must apply the law based
on the facts which are presented.
The court finds that Article 9 also applies to the
transactions between SGE and the Associates. Like the
transactions with investor entities, the transactions between SGE
and the Associates occurred in the “mortgagee’s world.” Although
the notes were purchased by the Associates and not pledged to
6 This is the former version of § 11-3-302 as it read prior to July 1,
1996. Because all transactions in question took place prior to July
1, 1996, the pre-1996 version is the applicable law. See Choo Choo
Tire Services, Inc. v. Union Planters Nat’l Bank, 231 Ga. App. 346,
498 S.E.2d 799 (1998).
7 See supra note 6.
-20-
them like the investors, this distinction is immaterial. In
addition to pledging a mortgage and note, transactions within the
mortgagee’s world includes “sell[ing] the mortgage and note
outright. . . .” See Krasnowieki, supra, at 334.
The court now turns the issue of whether of the Associates
are holders in due course of the promissory notes which they
purchased from SGE. Pursuant to O.C.G.A. § 11-3-302:6
(1) A holder in due course is a holder who takes the
instrument:
(a) For value; and
(b) In good faith; and
(c) Without notice that it is overdue or has been
dishonored or of any defense against or claim to it on
the part of any person.
O.C.G.A. § 11-3-302(1).
A “[h]older [is defined as] a person who is in possession of a
document of title or an instrument . . . .” O.C.G.A. 11-1-
201(20).7 Therefore, to the extent that the Associates are in
possession of the notes which they purchased from SGE, the court
finds that the Associates are “holders” as defined under Georgia
law. The court will now examine the three other requirements
under § 11-3-302(1).
-21-
A holder takes an instrument for value “[t]o the extent that
the agreed consideration has been performed or that he acquires
a security interest in or a lien on the instrument otherwise than
by legal process. . . .” O.C.G.A. § 11-3-303(a).
A holder must also take the instrument in good faith.
O.C.G.A. § 11-3-302(1)(b). Good faith is defined as “honesty in
fact in the conduct or transaction concerned.” O.C.G.A. § 11-1-
201(19). To constitute bad faith, a purchaser must have acquired
the instrument “with actual knowledge of its infirmity or with a
belief based on the facts or circumstances as known to [the
purchaser] that there was a defense or [the purchaser] must have
acted dishonestly.” Citizens & Southern Nat’l Bank v. Johnson,
214 Ga. 229, 231, 104 S.E.2d 123, 126 (1958); Commercial Credit
Equipment Corp. v. Reeves, 110 Ga. App. 701, 704, 139 S.E.2d 784,
787 (1964).
Lastly, a holder must take the instrument without notice of
default or defense. O.C.G.A. § 11-3-302(1)(c).
A person has ‘notice’ of a fact when:
(a) He has actual notice of it; or
(b) He has received a notice or notification of it; or
(c) From all the facts and circumstances known to him
at the time in question he has reason to know that it
exists.
O.C.G.A. § 11-1-201(25). See also Hopkins v. Kemp Motors Sales,
Inc., 139 Ga. App. 471, 473, 228 S.E.2d 607, 609 (1976)(holding
that knowledge of a fact as defined in the UCC is actual
-22-
knowledge).
In this case, the Associates, the Committee, and several of
the investor entities have stipulated that the Associates
collectively paid SGE approximately $5.36 million for
approximately 306 loans. (Doc. #559 at ¶¶ 23-25). Therefore, the
court finds that the Associates took the notes for value.
As to good faith and notice, these issues are not quite as
clear. Along with their brief in support of their original
motion for partial summary judgment, the Associates filed
affidavits executed by Michelle A. Bryan, Marilyn D. Britwar,
Kathleen A. Timkin, and Kathleen A. Larson. (Doc. #449, Exhs. “A”
& “C”-“E”). Among other things, these affidavits attested to the
Associates’ good faith and lack of notice that the notes which
they purchased from SGE were subject to other claims.
However, because these affidavits were not originals, but
were copies of affidavits submitted in another court action, SGE
objected to their being part of the record. On May 17, 2001, the
court entered an order sustaining SGE’s objection and disallowing
the affidavits. (Doc. #532). Remarkably, other than these
disallowed affidavits, the Associates never filed any supporting
documentation attesting to their good faith and lack of notice.
Furthermore, in the Committee’s response to the Associates’
original motion, the Committee submitted affidavits executed by
8 The court notes that Affiant Sanford A. Cohn is an investor/claimant
in this case and Affiant Kevin B. Buice is an attorney of record for
numerous parties in interest. (See Exh. “A” at ¶ 11; Exh. “B” at ¶ 2).
-23-
Sanford A. Cohn and Kevin B. Buice.8 (Doc. #489, Exhs. “A” &
“B”). These affidavits attest to a lack of good faith and notice
on behalf of the Associates in their purchase of the notes from
SGE. Although SGE did not submit any evidence, SGE asserts that
issues of material fact exist as to good faith and notice. (Doc.
#604 at pp. 3).
The court agrees with SGE and finds that issues of material
fact do exist as to good faith and notice. Under Federal Rule of
Civil Procedure 56, the moving party bears the initial burden of
demonstrating the absence of any genuine issue of material fact.
See Celotex, 477 U.S. at 324; see also Clark v. Coats & Clark,
Inc., 929 F.2d 604, 608 (11th Cir. 1991)(holding that the moving
party has the burden of establishing its right of summary
judgment). In this case, the Associates have failed to carry
their burden. Therefore, the court finds that issues of material
fact exist as to whether the Associates took the notes which they
purchased from SGE in good faith and without notice of default or
defense.
The court will render a separate memorandum opinion on SGE’s
motion for summary judgment.
CONCLUSION
The UCC is the applicable law to the transactions between
-24-
the Associates, the investor entities, and SGE. None of these
transactions involved the creation of an interest in real estate.
Therefore, the court will grant the Associates’ motion for
partial summary judgment as to that issue only. Regarding the
issue of whether the Associates are holders in due course of the
notes which they purchased from SGE, the court finds that issues
of material fact exist as to the elements of good faith and
notice. The court will deny the Committee’s motion for partial
summary judgment.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this ____ day of November, 2001.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

WILLIE N. SCOTT

June 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
WILLIE N. SCOTT : CASE NO. 01-41914
BESSIE M. SCOTT, ::
CHAPTER 13
Debtors. :::
WILLIE N. SCOTT :
BESSIE M. SCOTT, ::
Movant, ::
vs. ::
WELLS FARGO HOME MORTGAGE, :
INC., ::
Respondent. :
MEMORANDUM OPINION
On April 15, 2002, the court held a hearing on the motion of
Willie and Bessie Scott (“Debtors”) to compel Wells Fargo Home
Mortgage, Inc. (“Respondent”) to pay the premium on a mortgage
insurance policy. At the conclusion of the hearing, the court
took under advisement the issue of whether Debtors are entitled
to recover attorney fees from Respondent. The parties were given
an opportunity to submit briefs. After considering the evidence,
the parties’ oral arguments and briefs, and the applicable
statutory and case law, the court will deny Debtors’ request for
attorney fees.
1 Although the parties do not dispute that Respondent acquired the Mortgage
after 1995, the court notes that Debtors’ schedules reflect that Debtors
incurred their indebtedness to Respondent in 1989. (See Schedule “D”).
-2-
FACTS
On or about February 4, 1987, Debtors purchased real
property located at 2405 Dawson Street, Columbus, Georgia, 31903
(“property”). This purchase was financed by a loan from Georgia
Federal Bank, FSB. Debtors granted to Georgia Federal Bank, a
security interest in the property by executing a Security Deed.
(See Debtors’ Motion, Doc. #12, Exh. “A”). The mortgage was
later acquired by First Union Mortgage Corporation (“First
Union”). Sometime after 1995, Respondent acquired the mortgage.
Apparently, these transfers of Debtors’ mortgage to First Union
and subsequently, to Respondent were a result of an assignment or
these entities becoming successors in interest.1
On or about September 27, 1995, Debtors purchased a Disaster
Mortgage Protection Policy (“DMP”) from Ace USA (“Ace”). The DMP
provided for a payoff of the mortgage in the event of certain
defined disasters which rendered the property uninhabitable. The
premium for the DMP was $3.23 per month.
On August 1, 2001, Debtors filed a voluntary petition under
Chapter 13 of the Bankruptcy Code (“Code”). In a letter dated
November 30, 2001, Ace notified Debtors that effective January 1,
2002, the DMP would be canceled for non-payment of premiums. (See
-3-
Doc. #12, Exh. “B”).
On December 12, 2001, Debtors filed a motion to compel
Respondent to pay the DMP premium. On January 16, 2002,
Respondent filed a response. Although Debtors had already filed
their motion, they sent a letter to Respondent indicating that
they would have to “seek a ruling” from the court if Respondent
did not reinstate the DMP. (See Doc. #17, Exh. “2”). After
several continuances, the court held a hearing Debtors’ motion on
April 15, 2002.
According to Debtors, the Security Deed requires Respondent
to remit payments to Ace from escrow. Debtors argue that
Respondent’s failure to make these payments creates a false
mortgage default. Therefore, Debtors allege that this conduct is
an attempt by Respondent to collect on a prepetition debt.
Respondent, however, contends that it had a right to
terminate payments to Ace in spite of the Debtors’ bankruptcy.
Respondent argues that it terminated payment to Ace because of
Debtors post-petition default, not for Debtors failure to make
payments on a prepetition debt. Respondent also asserts that it
has no duty to pay DMP premiums through escrow because the
“mortgage insurance payments” to which the Security Deed refers
do not apply to the DMP payments. (Doc. #12, Exh. “A”, para. 2).
Basically, the DMP was not an item required to be paid through
escrow. The DMP was a policy which Debtors voluntarily
purchased. Had the DMP been a requirement pursuant to the
-4-
Security Deed as Debtors assert, the policy would have been in
effect since 1987, when the Security Deed was originally
executed.
On or about March 1, 2002, Respondent reinstated the DMP by
paying the premium. Therefore, Debtors concede that their motion
is now moot. However, the issue of whether Debtors are entitled
to attorney fees has not been resolved.
Debtors argue that bringing this motion and litigation were
the only means they had to force Respondent to reinstate the DMP.
Accordingly, Debtors contend that they are entitled to recover
$921.78 in attorney fees from Respondent. This amount represents
7.2 hours at $125.00 per hour plus out-of-pocket expenses of
$21.78.
Respondent argues, however, that there was no need for
Debtors to bring this motion. Debtors never contacted Respondent
upon receiving the notice of cancellation to explain that postpetition
payments were to be funded through the Chapter 13
Trustee’s office. Had Debtors attempted such contact, Respondent
submits that this issue could have been resolved easily without
litigation. Furthermore, it is agreed that neither the contract
nor the Code authorizes attorney fees in a motion to compel
proceeding. Accordingly, Respondent argues that Debtors should
not be allowed to recover attorney fees.
-5-
DISCUSSION
Under the “American Rule,” “the prevailing litigant is
ordinarily not entitled to collect a reasonable attorneys’ fee
from the loser.” Alyeska Pipeline Service Co. v. Wilderness
Society, 421 U.S. 240, 247 (1975). However, wilful violation of
a court order, bad faith or oppressive conduct, or recovery of a
common fund for the benefit of others may operate as an exception
to the American Rule. See id. at 562 n.6. Also, the Court has
recognized statutory or contractual provisions which authorize
attorney fees to the prevailing party as exceptions to the
American Rule. Id.
In this case, the only possible exception is whether there
is an applicable statute authorizing attorney fees. Therefore,
the court must determine whether federal or state law would
govern. This inquiry depends on whether the underlying dispute
involves a question of state contract law or solely a question of
federal bankruptcy law. See BankBoston v. Sokolowski (In re
Sokolowski), 205 F.3d 532, 535 (2d Cir. 2000); see also Johnson
v. Righetti (In re Johnson), 756 F.2d 738, 741 (9th Cir.
1985)(noting that state law applies with respect to attorney fees
in breach of contract disputes).
Because this issue involves a dispute over Respondent’s
obligation pursuant to a provision in the Security Deed, the
court finds that this issue amounts to a breach of contract
-6-
dispute. Because the Security Deed was executed in Georgia and
concerns Georgia real estate, Georgia law is applicable.
Debtors rely on O.C.G.A. sections 13-6-9 and 13-6-11.
O.C.G.A. § 13-6-9 provides that “[a]ny necessary expense which
one of two contracting parties incurs in complying with the
contract may be recovered as damages.” Typically, Georgia courts
have interpreted this code section to apply to those “reasonable
and necessary costs” of fulfilling the contract. See Gainesville
Glass Company v. Don Hammond, Inc., 157 Ga. App. 640, 642, 278
S.E.2d 182, 185 (1981); (citing Crawford & Assoc., Inc. v.
Groves-Keen, Inc., 127 Ga. App. 646, 194 S.E.2d 499 (1972). This
means the measure of damages suffered by the failure of one party
to perform its part to the other party. See id. (citing State
Highway Dep’t v. Knox-Rivers Constr. Co., 117 Ga. App. 453, 160
S.E.2d 641 (1968).
The pertinent question is whether “damages” in O.C.G.A. §
13-6-9 encompasses attorney fees, however, the court does not
need to get to that inquiry. As the court in Gainesville Glass
held, the plaintiff has the burden of proving that the items of
expense it incurred were necessary under the contract. See id.
As Respondent points out in its brief, Debtors have failed to
show that Respondent even had a duty under the Security Deed to
pay the premium. In the absence of evidence that Respondent had
such an obligation under the Security Deed, the court finds that
Debtors have failed to meet their burden under this subsection.
-7-
The other subsection on which Debtors rely provides that:
The expenses of litigation generally shall not be allowed as
a part of damages; but where the plaintiff has specially
pleaded and has made prayer therefor and where the defendant
has acted in bad faith, has been stubbornly litigious, or
has caused the plaintiff unnecessary trouble and expense,
the jury may allow them.
O.C.G.A. § 13-6-11. The law is clear that an award of attorney
fees under this statute are “ancillary and recoverable only where
other elements of damages are recoverable.” Barnett v. Morrow,
196 Ga. App. 201, 202, 396 S.E.2d 11, 12 (1990); See also Cleary
v. Southern Motors, et al., 142 Ga. App. 163, 165, 235 S.E.2d
623, 625 (1977); Willis v. Kemp, 130 Ga. App. 758, 761, 204
S.E.2d 486, 490 (1974).
The court acknowledges those cases which allow the recovery
of attorney fees in equity where no monetary damages were
recovered but equitable relief such as an injunction or specific
performance was granted. See Clayton v. Deverell, 257 Ga. 653,
655, 362 S.E.2d 364, 366 (1987); Golden v. Frazier, 244 Ga. 685,
687, 261 S.E.2d 703, 705 (1979); Adams v. Cowart, 224 Ga. 210,
215, 160 S.E.2d 805, 809 (1968).
However, in those cases, the plaintiffs prevailed and
obtained the equitable relief which they sought. “There is no
authority for the proposition that merely seeking equitable
relief, which for whatever reason is unobtainable, entitles one
to recovery under O.C.G.A. § 13-6-11.” Barnett, 196 Ga. App. at
203, 396 S.E.2d at 13.
-8-
In the instant case, there is no evidence demonstrating that
Debtors would have prevailed in their motion to compel. Merely
because Debtors sought such relief which became moot when
Respondent agreed to reinstate the premium does not amount to
prevailing as defined under the cases.
As to the other arguments under O.C.G.A. § 13-6-11 asserted
by Debtors, they are likewise unpersuasive. Debtors argue that
Respondent was stubbornly litigious and there was no bona fide
dispute as to Respondent’s obligation under the Security Deed.
First, a refusal to pay a disputed claim or debt is not the
equivalent of being stubbornly litigious. See Gordon v. Ogden,
154 Ga. App. 641, 642, 269 S.E.2d 499, 501 (1980)(holding that a
refusal to pay a disputed claim is not equivalent to stubborn
litigiousness nor does it amount to unnecessary trouble and
expense); Palmer v. Howse, 133 Ga. App. 619, 621, 212 S.E.2d 2,
4 (1974).
In the case before the court, Respondent merely refused to
pay a disputed claim. The evidence demonstrates that there was
a genuine dispute as to Respondent’s liability under the Security
Deed. Therefore, Respondent was merely refusing to pay the
premium because it disputed that it had an obligation to do so.
Accordingly, the court finds that Respondent was not being
stubbornly litigious in this regard.
As to Debtors’ assertion that there was no bona fide
dispute, this is contrary to the evidence. At the motion
-9-
hearing, Respondent argued that the language in the Security Deed
was not applicable to the policy at issue. Therefore, a bona
fide dispute remained as to whether Respondent had an obligation
under the Security Deed to reinstate the policy. The fact that
Respondent later agreed to pay the premium and reinstate the
policy does not indicate that there was an absence of a bona fide
dispute. Based on the evidence, the court finds that there was
a bona fide dispute.
CONCLUSION
The court finds that neither O.C.G.A. § 13-6-9 nor O.C.G.A.
§ 13-6-11 authorize Debtors to recover attorney fees. Under §
13-6-9, Debtors have failed to demonstrate that Respondent had a
duty to pay the premium. Therefore, Debtors have failed to meet
their burden to show that the motion to compel was a necessary
expense.
The court also finds that Respondent was not stubbornly
litigious as defined under § 13-6-11. Accordingly, the court
will deny Debtors request to recover attorney fees from
Respondent.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this _____ day of June, 2002.
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____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

PICKLE LOGGING, INC

November 18, 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
ALBANY DIVISION
IN RE: ::
CASE NO. 02-10824
PICKLE LOGGING, INC., ::
CHAPTER 11
Debtor. ::
DEERE CREDIT, INC., ::
Movant, ::
vs. ::
PICKLE LOGGING, INC., ::
Respondent. :
MEMORANDUM OPINION
On October 10, 2002, the court held a hearing on the Motion
of Deere Credit, Inc. to Reconsider Order on Motion for Adequate
Protection and to Reconsider Order on Motion to Determine Secured
Status, both orders dated September 3, 2002. At the conclusion of
the hearing, the court took the matter under advisement. After
considering the evidence presented at the hearing on August 16,
2002 and the continued hearing on August 21, 2002 hearing, the
parties’ briefs and oral arguments, as well as applicable statutory
and case law, the court makes the following findings of fact and
conclusions of law.
-2-
FACTS
Pickle Logging, Inc. (“Debtor”) is an Americus, Georgia based
company doing business in the tree logging industry. In an effort
to cure an arrearage to Deere Credit, Inc. (“Movant”), Debtor
refinanced eight pieces of equipment. The refinancing was done
with Movant.
On April 18, 2002, Debtor filed for Chapter 11 bankruptcy
protection. Prior to the bankruptcy filing, in addition to the
refinancing mentioned above, Debtor had put the same eight pieces
of equipment, as well as other assets, up as collateral in
transactions with other creditors. Because there were multiple
security interests in the eight pieces of equipment, Debtor filed
motions to determine the secured status of a number of different
creditors. After consent orders resolved much of the conflict
between secured creditors as to priority and extent of security
interests, the final issue remained as to the value of the eight
pieces of equipment. The values assigned to each piece of
equipment would determine the amount due to the secured creditors
for adequate protection.
At a hearing held on August 16, 2002 and the continued hearing
on August 21, 2002 to determine the value of the eight pieces of
equipment, the present issue was raised: whether Movant had a
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perfected security interest in one specific piece of equipment, a
548G skidder serial number DW548GX568154 (“548 G skidder”), which
had been mislabeled in both the financing statement and the
security agreement as a 648G skidder, serial number DW648GX568154.
After hearing testimony from expert witnesses that a 548G skidder
is substantially different in appearance, performance, and price
from a 648G skidder, the court held that Movant did not have a
perfected security interest in the 548G skidder because of the
mislabeling. Therefore, Movant was an unsecured creditor as to the
548G skidder. The court did not assign a value to the 548G skidder
for adequate protection payments. Movant has asked the court to
reconsider its September 3, 2002 orders regarding adequate
protection payments and the secured status of Movant as to the 548G
skidder.
Movant contends that the mislabeling is not seriously
misleading because it is off by only one digit. Movant urges that
a person of ordinary business prudence would be put on notice to
inquire further about the 548G skidder despite the mislabeling.
Therefore, Movant has a perfected security interest in the 548G
skidder and would not be subordinate to Debtor.
Debtor argues first that the 548G skidder owned by Debtor is
not listed in the security agreement or the financing statement,
therefore Movant does not have a security interest in the 548G
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skidder. Furthermore, Debtor argues that a person of ordinary
business prudence would know that a 548G skidder differs
substantially from a 648G skidder. Debtor contends that the
mislabeling is seriously misleading because of the difference in
the two models. Debtor argues that there is nothing patently
erroneous about the serial number listed on the security agreement
or the financing statement to put a person of ordinary business
prudence on notice to inquire further. Finally, Debtor contends
that, in order for a secured party to have a security interest in
a piece of collateral, the security agreement must include a valid
description of the collateral. Under contract law, Movant might
have the right to reform the contract. However, because of the
Chapter 11 bankruptcy proceeding, this remedy is not available to
Movant. Even with reformation, Debtor, with the status of a lien
creditor, would have higher priority than Movant would receive with
a reformed security agreement.
CONCLUSIONS OF LAW
Under the Bankruptcy Code (“Code”), a debtor-in-possession has
the same rights and powers as a trustee. See 11 U.S.C. § 1107.
Additionally, under the “strong arm” provision of 11 U.S.C. §
544(a)(1), a debtor-in-possession acquires the status of a
hypothetical lien creditor, deemed to be perfected as of the filing
date of the bankruptcy petition. 11 U.S.C. § 544(a)(1); see also
-5-
First American Bank & Trust Company of Athens, Georgia v. Harris
(In re Stewart), 74 B.R. 350, 353-354 (M.D. Ga. 1987).
Under Georgia law, the definition of a lien creditor includes
a trustee in bankruptcy. See O.C.G.A. § 11-9-102(a)(53)(C). Since
a debtor-in-possession acquires the same rights and powers as a
trustee, a debtor-in-possession has the status of a lien creditor
under Georgia law as well. See generally, WWG Industries, Inc. v.
United Textiles, Inc. (In re WWG Industries, Inc.), 772 F.2d 810,
811-812 (11th Cir. 1985). Further, under Georgia law, a party with
an unperfected security interest is subordinate to a lien creditor.
See O.C.G.A. § 11-9-317(a)(2)(B). The question is whether Movant’s
security interest in the 548G skidder is perfected despite the
mislabeling on the security agreement and the financing statement.
Pursuant to O.C.G.A. § 11-9-203(b)(3)(A), a security interest
in collateral is not enforceable against the debtor or third
parties unless the debtor has signed, executed, or otherwise
adopted a security agreement that contains a description of the
collateral. O.C.G.A. § 11-9-203(b)(3)(A); see also O.C.G.A. § 11-9-
102(a)(7). The description of the collateral in the security
agreement and the financing statement, if required, must comport
with O.C.G.A. § 11-9-108(a). O.C.G.A. § 11-9-108(a); see also
O.C.G.A. § 11-9-504(1). The description of collateral is
sufficient if it reasonably identifies what is described. See
-6-
O.C.G.A. § 11-9-108(a). “The question of the sufficiency of [a]
description of [collateral] in a [recorded document] is one of
law….” Bank of Cumming v. Chapman, 245 Ga. 261, 264 S.E.2d 201
(1980), quoting First National Bank of Fitzgerald v. Spicer, 10 Ga.
App. 503(1), 73 S.E. 753 (1911).
Any number of things could be used to describe collateral and
satisfy O.C.G.A. § 11-9-108(a). A physical description of the
collateral, including or excluding a serial number, could be used
so long as it “reasonably identifies what is described.” O.C.G.A.
§ 11-9-108(a). The description merely needs to raise a red flag
to a third party indicating that more investigation may be
necessary to determine whether or not an item is subject to a
security agreement. See Abney v. I.T.T. Diversified Credit
Corporation (In re Environmental Electronic Systems, Inc.), 11 B.R.
965, 967 (N.D. Ga. 1981). A party does not lose its secured status
just because the description includes an inaccurate serial number.
See Yancey Brothers Company v. Dehco, Inc., 108 Ga. App. 875, 877,
134 S.E.2d 828, 830 (1964). However, if the serial number is
inaccurate, there must be additional information that provides a
“key” to the collateral’s identity. Id.
Here, the description in the security agreement and the
financing statement are identical. (See Movant’s Ex. 1). Both
documents list a 648G skidder with the serial number DW648GX568154.
-7-
(See id.). There is nothing obviously wrong with the model number
or the serial number. 648G is a model number for one type skidder
sold by Movant. (See id.). The serial number listed for the
disputed skidder is in accordance with other serial numbers issued
by Movant. (See id.). The insurance value listed on the security
agreement for the disputed skidder is only $10,000 less than the
648G skidder, serial number DW648GX564990 (“648G-4990 skidder”).
(See id.). With the $35,000 difference in insurance values between
the 648G-4990 skidder and the 648G skidder, serial number
DW648GX573931 (“648G-3931 skidder”), a $10,000 difference in
insurance values would not raise a red flag. (See id.).
According to testimony at the August 16, 2002 hearing, Debtor
owned more than one of Movant’s skidders, including at least two
548G skidders and at least two 648G skidders. There is nothing in
either the financing statement or the security agreement that
raises a red flag to a third party. A potential purchaser of the
548G skidder in dispute here could easily assume that the skidder
is not covered by either the security agreement or the financing
statement.
If just the model number was incorrect or if just the serial
number was incorrect, the result may be different. It is apparent
from the other items listed on the security agreement and the
financing statement that the model number is reflected in the
-8-
serial number. If the model number was not repeated in the serial
number, then it would be apparent that something was wrong with one
of the two numbers. At a minimum it should raise a red flag to a
person of ordinary business prudence that further investigation is
necessary. However, with both of the numbers reflecting a 648G
skidder, there is nothing to indicate that there was a mistake.
Therefore, the court’s order dated September 3, 2002 will not
be changed. The 548G skidder is misdescribed in both the security
agreement and the financing statement. The rights of Debtor, as
a hypothetical lien creditor, are superior to the rights of Movant.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this _____ day of November, 2002.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

NOAH J. PETERSON

June 3, 2004

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
NOAH J. PETERSON, : CASE NO. 03-40732
CONNIE C. PETERSON, : CHAPTER 13
:
Debtors. ::
UNITED STATES DEPARTMENT OF : CONTESTED MATTER
TREASURY, INTERNAL REVENUE :
SERVICE, ::
Movants, ::
vs. ::
NOAH J. AND CONNIE C. PETERSON, ::
Repsondents. ::
NOAH J. AND CONNIE C. PETERSON, ::
Movants, ::
vs. ::
UNITED STATES DEPARTMENT OF :
TREASURY, INTERNAL REVENUE :
SERVICE, ::
Respondents. ::
MEMORANDUM OPINION
On April 6, 2004, the Court held a hearing on the Motion
of U.S.A./I.R.S. for Relief from the Automatic Stay to
Exercise the Right of Setoff and the Motion of Noah J. and
Connie C. Peterson (“Debtors”) for Contempt against the United
-2-
States Department of Treasury and the Internal Revenue Service
(“U.S.A./I.R.S.”). At the request of the parties, at the
conclusion of the hearing, the court took the matter under
advisement. The Court has considered the parties’ briefs and
oral arguments, as well as applicable statutory and case law.
For the reasons that follow, the Court finds that
U.S.A./I.R.S. did not waive its right of setoff.
CONCLUSIONS OF FACT
Both parties are in agreement regarding the facts.
Debtors filed a Chapter 13 Bankruptcy petition on March 14,
2003. On July 18, 2003, U.S.A./I.R.S. filed a proof of claim
in the amount of $68,416.82. Debtors filed their 2002 tax
return on or about October 28, 2003, which entitled them to a
refund in the amount of $4,226.00. On March 10, 2003,
U.S.A./I.R.S. filed its Motion for Relief from the Automatic
Stay to Exercise Right of Setoff. On March 15, 2003, Debtors
filed their Motion for Contempt against U.S.A./I.R.S.
CONCLUSIONS OF LAW
Debtors concede that U.S.A./I.R.S. has satisfied all of
the requirements under 11 U.S.C. § 553 for setoff. 11 U.S.C.
§ 553 (1993 & Supp. 2003). However, Debtors now argue that
U.S.A./I.R.S. waived its right of setoff because it did not
assert a claim to a setoff in its proof of claim. Debtors
-3-
cite to Tavormina v. ITT Comm. Fin. Corp. (In re Aquasport,
Inc.), 115 B.R. 720 (Bankr. S.D. Fla. 1990) as support for
this contention. Aquasport, 115 B.R. at 721-722.
U.S.A./I.R.S. responded by arguing that the Aquasport case is
factually distinct from the case before the Court. Id. at 721.
Further, U.S.A./I.R.S. cited to other cases that support its
position that failure to assert the right of setoff in the
proof of claim did not waive its right of setoff. See Weems v.
U.S. (In re The Custom Ctr., Inc.), 163 B.R. 309, 316-317
(Bankr. E.D. Tenn. 1994); In re Sound Emporium, Inc., 48 B.R.
1, 2 (Bankr. W.D. Tex. 1984) aff’d, 70 B.R. 22 (W.D. Tex.
1987).
Unfortunately for Debtors, their argument is not
persuasive because the case they cited in support of their
argument was reversed on that specific point by the district
court. See In re Aquasport, 155 B.R. 245, 247 (S.D. Fla.
1992), aff’d, ITT Comm. Fin. Corp. v. Tavormina, 985 F.2d 579
(11th Cir. 1993). The district court did uphold the
bankruptcy court’s decision that the creditor was not entitled
to a setoff. See id. at 249. However, the district court
specifically stated, “A review of these arguments, the
pertinent portions of the record, and the relevant case law
leads this Court, in accordance with the standard of appellate
-4-
review that this Court must follow, to a conclusion at odds
with the one reached by the bankruptcy court. In effect, this
Court determines that ITT did not procedurally waive its right
to setoff in the instant case.” Id. at 247 (emphasis added).
Further, the Court finds the Custom Ctr. decision, cited
by U.S.A./I.R.S., to be more persuasive. Custom Ctr., 163 B.R.
at 316-317. The court in Custom Ctr. stated that “The
bankruptcy statutes and the rules of procedure do not require
a rule that a creditor waives setoff by failing to assert it
in the original proof of claim. However, setoff can be denied
on equitable grounds that would normally justify denying
setoff.” Id. at 316 (citations omitted). The court went on to
state, “The creditor’s actions or failure to act during the
bankruptcy case may give rise to equitable grounds for denying
setoff.” Id. In analyzing the case law on point, the court
observed that other courts’ decisions often did not focus on
the failure to assert a right of setoff in a proof of claim,
but on the creditor’s continued failure to assert the setoff
as the bankruptcy case progressed. See id. The court
concluded that there is “no hard and fast rule that a creditor
waives setoff by failing to assert it in the creditor’s
original proof of claim.” Id. at 317.
-5-
Here, U.S.A./I.R.S. was unaware of Debtors’ entitlement
to a refund until Debtors’ filed their 2002 tax return, which
occurred after U.S.A./I.R.S. filed its proof of claim. In
fact, Debtors did not file their 2002 tax return until after
the 180 day bar date for government entities to file a proof
of claim. U.S.A./I.R.S. filed its Motion for Relief from the
Automatic Stay to Excise Right of Setoff once it became aware
of Debtors’ 2002 tax refund. None of U.S.A./I.R.S.’s actions
can be construed to be a waiver of its right of setoff.
Therefore, the Court finds in favor of U.S.A./I.R.S. The
Court grants U.S.A./I.R.S.’s Motion for Relief from the
Automatic Stay to Exercise Right of Setoff and denies Debtors’
Motion for Contempt Against U.S.A./I.R.S. An order in
accordance with this Memorandum Opinion will be entered.
DATED this _____ day of June, 2004.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY
JUDGE

JOHNSON, ARLENE J.,

December 6, 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
CASE NO. 02-41260
JOHNSON, ARLENE J., : CHAPTER 13
Debtor. :
:
JOHNSON, ARLENE J., : ADVERSARY PROCEEDING
Plaintiff, : NO. 02-4026
:
vs. :
:
SPEEDEE CASH OF COLUMBUS, INC., :
Defendant. :
:
SPEEDEE CASH OF COLUMBUS, INC., :
Movant. :
MEMORANDUM OPINION
On November 29, 2002, the court held a hearing regarding the
Motion of Speedee Cash of Columbus, Inc. (“Defendant”) for Summary
Judgment. At the conclusion of the hearing, the court took the
matter under advisement. After considering Defendant’s brief and
uncontroverted Stipulation of Uncontested Facts, both parties’ oral
arguments, and the applicable statutory and case law, the court
makes the following conclusions of law.
FACTS AND PROCEDURAL HISTORY
The facts for the most part are not in dispute here. On
January 20, 2001, Arlene J. Johnson (“Debtor”) entered into a
contract with Defendant pursuant to a title pawn transaction.
Debtor pledged to Defendant the Certificate of Title to a 1992
-2-
Lexus 300 ES (“Lexus”) in exchange for $1,000. The contract
indicated that the pawn was for a period of thirty days, which
could be extended in thirty-day increments if mutually agreed upon.
However, the maturity date listed on the contract was March 21,
2001, a period of approximately sixty days. The first thirty days
of the pawn contract were “free,” after which the fee was 25% of
the total loan amount per month. Additionally, the contract
provided for a ten-day grace period after the maturity date during
which Defendant promised not to sell the property and Debtor was
entitled to redeem the property by paying the outstanding balance,
plus any fees and charges incurred. Debtor did not pay Defendant
in full by the maturity date. Instead, Debtor made payments and
extended the pawn contract through January of 2002.
Debtor filed her first Chapter 13 petition on December 26,
2001. Pursuant to 11 § U.S.C. 362, an automatic stay was in
effect. Defendant did not attempt to recover the Lexus while the
stay was in effect. During the pendency of Debtor’s first Chapter
13 case, Defendant did not receive any monies from Debtor or the
Chapter 13 trustee. However, after Debtor’s first Chapter 13 case
was dismissed on April 29, 2002 and the automatic stay was lifted,
Defendant repossessed Debtor’s Lexus using the self-help procedure
allowed by Georgia law. Debtor had made no payment to Defendant
since November 2001.
-3-
On May 31, 2002 Debtor filed her second Chapter 13 petition
and subsequently filed this adversary proceeding. After an
emergency hearing for turnover of the Lexus on June 3, 2002, the
court ordered Defendant to return the Lexus to Debtor upon proof
of full insurance naming Defendant as loss payee. By June 7, 2002,
Debtor had paid $1,000 toward the balance due. On July 2, 2002,
Defendant filed an answer and counter-claim. The parties proceeded
with this adversary proceeding for final determination of the
complaint and counter-claim. On October 15, 2002, Defendant filed
the motion for summary judgment on the complaint and counter-claim
that is currently before the court.
Defendant contends that it has shown that there is no genuine
issue of material fact and that it is entitled to summary judgment
as a matter of law. Under the Georgia Pawnshop Act (“Act”),
Defendant had all possessory and legal ownership rights as of the
day of repossession. Therefore, Debtor had no right to bring the
Lexus back into the bankruptcy estate. Pursuant to O.C.G.A. § 44-
14-403(b)(3), Georgia law transferred ownership of the Lexus to
Defendant when Debtor failed to redeem the car within the grace
period. Defendant argues that the Lexus is not part of Debtor’s
estate and should be returned to Defendant.
Debtor argues that summary judgment should not be granted to
Defendant for three reasons. First, Defendant has failed to prove
-4-
that it is a licensed pawn dealer in the state of Georgia, which
is required before Defendant is entitled to special treatment under
the Act. Second, since the Act is in derogation of the common law,
the Act must be strictly complied with before a pawn dealer can
receive the special treatment provided for by the Act. The
contract did not comply with the Act in two different ways: 1) the
length of the initial contract was sixty days; and 2) the grace
period listed on the contract was for ten days, not thirty days as
required by Georgia law. Since the Act’s contractual requirements
were not strictly complied with, Defendant should not receive the
favored treatment that pawn dealers typically receive under the
Act. Third, the Act is in violation of the Federal Constitution
because it does not afford adequate due process protections to
Debtor.
CONCLUSIONS OF LAW
Under Federal Rule of Civil Procedure 56, applicable to
Bankruptcy proceedings under Bankruptcy Rule 7056, a party is
entitled to summary judgment if there is no genuine issue of
material fact and the moving party is entitled to judgment as a
matter of law. FED. R. CIV. P. 56, FED. R. BANKR. P. 7056. The
parties have agreed that there is no genuine issue of material
fact.
In Georgia, common-law rights, such as the English common-law
-5-
right to void a usurious contract, have been codified. See
generally Houser v. The Planters’ Bank of Fort Vally, 57 Ga. 95
(1876). In fact, in Georgia, the act of charging usurious interest
rates has even been criminalized. See O.C.G.A. § 7-4-18. The Act
allows Defendant to collect interest, charges, and fees on personal
property pawns that would otherwise be considered usurious and
criminal. Compare O.C.G.A. § 44-12-131 with O.C.G.A. § 7-4-18.
Further, pawnbrokers are exempted from O.C.G.A. § 7-4-18. O.C.G.A.
§ 7-4-18(a). Rights created by statute in derogation of the common
law must be “exercised in the way which the [s]tatute prescribes,
and in no other way….” Persons v. Hight, 4 Ga. 474 (1848); see
also Diggs v. Swift Loan and Finance Company, Inc., 154 Ga. App.
389, 391, 268 S.E.2d. 433, 435 (1980). Therefore, the Act must be
strictly complied with before Defendant would be entitled to
summary judgment as a matter of law.
The contract between Debtor and Defendant does not comply with
the Act in two ways. First, the contract is for approximately
sixty days, twice as long as allowed for in the Act. See O.C.G.A.
§ 44-12-131(a)(1). While Defendant may have been trying to give
Debtor, or all of its customers for that matter, a “break” by
allowing the first thirty days to be “free,” this contract term is
in violation of O.C.G.A. § 44-12-131(a)(1). Defendant argues that
the contract is for thirty days, with a renewal of thirty days.
-6-
However, the contract is dated January 20, 2001, with a maturity
date of March 21, 2001, making the contract length approximately
sixty days. (See Aff. of Ron Meeks, Doc. 7, Ex. A).
Second, pursuant to O.C.G.A. § 44-14-403(b)(1), the grace
period for pawn transactions involving automobiles is thirty days.
O.C.G.A. § 44-14-403(b)(1). The contract only grants a ten-day
grace period. (See Aff. of Ron Meeks, Doc. 7, Ex. A). Defendant
argues that it gave Debtor the benefit of the thirty-day grace
period. This argument is not persuasive on the Motion for Summary
Judgment. Regardless of whether Debtor received more than the ten
days stated in the contract, this contract term is in violation of
O.C.G.A. § 44-14-403(b)(1). Defendant is not entitled to summary
judgment as a matter of law because the contract is in clear
violation of the statutory requirements for automobile title pawns.
Defendant’s Motion for Summary Judgment is denied. An order
in accordance with this Memorandum Opinion will be entered.
DATED this _________ day of December, 2002
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

STEPHANIE M. DAVIS

July 8, 2004

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
STEPHANIE M. DAVIS, : CASE NO. 02-42744
: CHAPTER 7
Debtor. ::
GEORGIA POWER CO., : ADVERSARY PROCEEDING
: A.P. 04-4003
Movant/Defendant, ::
vs. ::
STEPHANIE M. DAVIS, ::
Respondent/Plaintiff. :::
MEMORANDUM OPINION
On June 18, 2004, the Court held a hearing on the Motion
of Georgia Power Co. (“Defendant”) for Summary Judgment. At
the conclusion of the hearing, the Court took the matter under
advisement. The Court has considered Defendant’s briefs and
both parties’ oral arguments, as well as applicable statutory
and case law. For the reasons that follow, the Court denies
Defendant’s Motion for Summary Judgment because it is not
entitled to judgment in its favor as a matter of law.
PARTIES’ CONTENTIONS
Defendant contends that it did not violate the automatic
stay when it demanded that Stephanie M. Davis (“Plaintiff”)
-2-
pay the amount she owed Defendant from the time she filed her
Chapter 13 petition to the date of the conversion of her case
to Chapter 7, plus a deposit, as provided for in 11 U.S.C. §
366. 11 U.S.C. § 366 (1993 & Supp. 2003). Defendant argues
that it is entitled to the past due amount plus the deposit
because 11 U.S.C. § 348(d), which treats post-petition preconversion
debts as having been incurred just prior to the
original petition date, excludes administrative expense
claims. 11 U.S.C. § 348 (1993 & Supp. 2003). Defendant argues
that the debt incurred by Plaintiff for electric service
during the pendency of her case prior to the conversion is an
actual and necessary expense. Therefore, Defendant argues
that its claim for the post-petition pre-conversion amount is
automatically entitled to priority status as an administrative
expense.
Further, Defendant argues that the conversion did not
impose a new automatic stay. Defendant maintains that it is
not in violation of the automatic stay for attempting to
collect on the post-petition pre-conversion debt, in addition
to a deposit. Defendant argues that it did not need to wait
twenty days post-conversion prior to making the demand, as
required in 11 U.S.C. § 366, because, under 11 U.S.C. §
348(a), the conversion did not affect the date of the original
-3-
order for relief. 11 U.S.C. §§ 348, 366.
Plaintiff argues that 11 U.S.C. § 348(d) provides for the
discharge of post-petition pre-conversion debts. 11 U.S.C. §
348. Therefore, Defendant was not entitled to collect the
post-petition pre-conversion debt at the time it requested the
deposit. Defendant was in violation of the automatic stay by
doing so. As to Defendant’s administrative expense claim
argument, Plaintiff argues that there is nothing automatic
about the status of an administrative expense claim. Even if
Defendant was entitled to an administrative expense claim, it
would have only received a higher priority claim. However,
the debt still would have been dischargeable.
CONCLUSIONS OF FACT
Stephanie M. Davis (“Plaintiff”) did not respond to
Defendant’s Statement of Uncontested Facts. Therefore, the
facts as alleged in Defendant’s Statement of Uncontested Facts
are deemed admitted by Plaintiff. Defendant began providing
Plaintiff with electric service some time in or around April
2000. Plaintiff did not have a good payment history with
Defendant. Plaintiff was issued numerous warnings by
Defendant that her electric service would be turned off if she
did not pay her account current. Plaintiff also submitted six
checks to Defendant that were returned for insufficient funds.
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Plaintiff filed a Chapter 13 Bankruptcy petition on
October 29, 2002. It was not established whether Plaintiff
owed Defendant any money at the time of the filing of her
Chapter 13 petition. However, Defendant did not receive
notice of the Chapter 13 filing. If Defendant had received
notice of the Chapter 13 filing, per Defendant’s standard
practice, it would have “finaled out” the previous account and
created a new post-petition account to avoid inadvertent
violations of the automatic stay.
On December 26, 2003, Defendant was informed through
Plaintiff’s counsel that Plaintiff intended to convert her
case to Chapter 7. On December 30, 2003, Plaintiff filed a
Notice of Voluntary Conversion to Chapter 7. On January 8,
2004, Defendant notified Plaintiff that she was required to
pay her outstanding bill of $532.77 plus a security deposit to
prevent her electric service from being terminated. Plaintiff
did not pay Defendant. On January 13, 2004, Defendant
terminated Plaintiff’s service.
On January 14, 2004, Defendant informed Plaintiff, through
counsel, that she would need to pay the balance due plus the
security deposit to reestablish service. On the same day,
Plaintiff filed this adversary proceeding seeking an order
from this Court to require Defendant to reestablish electric
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service, for the Court to set a security deposit, and asking
for actual and punitive damages, as well as attorneys fees.
On January 16, 2004, the Court held an Emergency Hearing
during which the parties agreed that Defendant would
reestablish Plaintiff’s electric service and set a security
deposit. The parties did not agree that Defendant was legally
required to do so.
CONCLUSIONS OF LAW
Section 348 of the United States Bankruptcy Code (“Code”)
provides for the effect upon conversion of a case from one
chapter to another under the Code. 11 U.S.C. §348. The
conversion constitutes an order for relief under the chapter
converted to but conversion does not affect “the date of the
filing of the petition, the commencement of the case, or the
order for relief.” 11 U.S.C. § 348(a). Section 348(d)
specifically provides for the treatment of post-petition preconversion
debts. 11 U.S.C. §348(d). “A claim against the
estate or the debtor that arises after the order for relief
but before conversion in a case that is converted under
section…1307 of this title, other than a claim specified in
section 503(b) of this title, shall be treated for all
purposes as if such claim had arisen immediately before the
date of the filing of the petition.” Id.
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While Defendant makes a valid argument that the postpetition
pre-conversion debt may be eligible to receive
priority status as an administrative expense, the Court does
not read the Code to provide this status automatically. See 11
U.S.C. §§ 348(d), 503(b) (1993 & Supp. 2003); see also
Martinez v. Public Serv. Co. of Colo. (In re Martinez), 92
B.R. 916, 918 (Bankr. D. Colo. 1989). Section 503(b)
specifically requires notice and a hearing prior to the
determination that a post-petition debt is entitled to
priority status as an administrative expense. 11 U.S.C. §
503(b). Further, even if Defendant’s argument on this issue
were correct, nothing in the Code allows Defendant to attempt
to collect the debt via self-help, as it did in this case. See
11 U.S.C. § 503.
The Court is persuaded to agree with Defendant that it did
not have to wait twenty days from the conversion date to
demand a deposit from Plaintiff. See 11 U.S.C. §§ 348(a), 366.
Section § 348 “does not effect a change in the date of the
filing of the petition, the commencement of the case, or the
order for relief.” 11 U.S.C. § 348(a). However, the Court is
not persuaded to agree with Defendant that reading 11 U.S.C.
§ 366 in conjunction with 11 U.S.C. §§ 348(d) and 503(b)
somehow allows Defendant to demand payment of the post-
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petition pre-conversion debt, in addition to a deposit, to
continue utility service post-conversion. In fact, the case
law on point is to the opposite. See Smith v. GTE North
Inc.(In re Smith), 170 B.R. 111, 113, 115 (Bankr. N.D. Ohio
1994); Martinez, 92 B.R. at 917-918; In re Deiter, 33 B.R.
547, 548 (Bankr. W.D. Wisc. 1983). Under 11 U.S.C. § 366,
Defendant was entitled only to the deposit. 11 U.S.C. § 366.
Nothing in 11 U.S.C. §§ 348 or 503 entitled Defendant to
anything more at the time the demand was made. 11 U.S.C. §§
348, 503.
Finally, if a hearing would have been held to determine
whether Defendant was entitled to an administrative expense
claim for the post-petition pre-conversion debt, it is
unlikely that the Court would have made such a determination.
The Chapter 7 Trustee in this case has filed a “Report of No
Distribution.” (See Doc. #20). There are no assets from which
administrative expense claims could be paid. Therefore, a
motion for allowance of an administrative expense claim would
likely be denied.
For the reasons stated above, Defendant is not entitled
to judgment as a matter of law. Therefore, the Court denies
Defendant’s Motion for Summary Judgment. An order in
accordance with this Memorandum Opinion will be entered.
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DATED this 8th day of July, 2004.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY
JUDGE

BARBARA CUNNINGHAM

April 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
VALDOSTA DIVISION
IN RE ::
BARBARA CUNNINGHAM : CASE NO. 01-71080
:
Debtor. : CHAPTER 7
:
BARBARA J. CUNNINGHAM : ADVERSARY PROCEEDING
: NO. 01-7051
Plaintiff, ::
vs. ::
GEORGIA DEPARTMENT OF :
REVENUE, ::
Defendant. :
MEMORANDUM OPINION
On February 7, 2002, the court held a hearing on the Georgia
Department of Revenue’s (“State of Georgia”) motion to dismiss
Debtor’s complaint for the determination of tax liability.
During the hearing, the court raised the issue of abstention and
allowed the parties to submit letter briefs addressing the
abstention issue. At the conclusion of the hearing, the court
took under advisement the issue of abstention and the State of
Georgia’s motion to dismiss. After considering the parties’
briefs and the applicable statutory and case law, the court will
abstain from making a determination of Debtor’s tax liability to
the State of Georgia.
1 However, the court notes that in Debtor’s response to the State of Georgia’s
Request for Admissions, Debtor admits that she did have authority to sign
checks on the company’s accounts and did sign checks on the company’s
accounts. (Pl.’s Resp. to Req. for Admis., ¶¶ 5, 6).
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FACTS
Prior to January 1997, Debtor’s husband entered into a
franchise agreement to own and operate a Popeye’s restaurant. In
January 1997, Debtor’s husband formed J.C. & B.C., Inc.
(“Company”) to operate the franchise. Apparently, the
appropriate documentation was never filed with the Secretary of
State in order to properly incorporate the Company under Georgia
law. (See Pl.’s Resp. to Interrog.). Therefore, no corporation
was ever formed. Debtor was to be the vice-president and
Debtor’s husband was to be the president of the Company.
Although she was purported to be the vice-president of the
Company, Debtor contends that she had no say in its operation.
Debtor states that her assistance in the operation of the
franchise was limited to cleaning, preparing food, and paying
the bread supplier. (See id. at ¶ 1). Debtor further states that
she had no authority to hire and fire employees. (See id. at ¶
13). In addition, Debtor denies any involvement in the Company’s
bookkeeping or payroll. (See id. at ¶¶ 16-17). According to
Debtor, her husband was the only person authorized to sign on the
company’s account or issue payroll checks. (See id. at ¶¶ 8,
17).1
-3-
On July 9, 2001, Debtor filed a voluntary petition under
Chapter 7 of the Bankruptcy Code. In Schedule E, Debtor listed
the State of Georgia as an unsecured priority creditor with a
$104,985.38 claim which is disputed.
On October 17, 2001, Debtor filed a complaint against the
State of Georgia for determination of dischargeability of debt.
The complaint alleges that the State of Georgia has wrongly
assessed Georgia sales and use taxes against Debtor. Debtor
contends that these taxes should be assessed against the Company,
which she apparently contends is a sole proprietorship of her
husband.
On November 20, 2001, the State of Georgia filed its answer.
On January 14, 2002, the State of Georgia filed a motion to
dismiss Debtor’s complaint and a brief in support of its motion.
In its answer and motion, the State of Georgia contends that it
is immune from suit in federal court pursuant to the Eleventh
Amendment of the United States Constitution. The State of
Georgia has not filed a proof of claim, therefore, it asserts
that it has not waived its Eleventh Amendment immunity. (See
Mims’ Aff., Doc. #12, Adv. Proc. subfile).
On January 18, 2002, Debtor filed a motion to amend its
complaint in order to clarify that she was seeking only a
determination of tax liability and was not seeking a
determination of the dischargeability of debt. (See Doc. #13,
Adv. Proc. subfile). On February 7, 2002, the court entered an
2 In Debtor’s amended complaint, she asserts that no discharge has been
entered in this case. (See Doc. #18, ¶ 1,Adv. Proc. subfile). However, the
court notes that Debtor’s discharge was entered on November 6, 2001. (See
Doc. #28, main case file).
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order allowing Debtor’s amendment to her complaint. (See Doc.
#16, Adv. Proc. subfile). On February 19, 2002, Debtor filed her
amended complaint. (See Doc. #18, Adv. Proc. subfile).2
In response to the State of Georgia’s motion to dismiss,
Debtor argues that the determination of tax liability is not a
suit as defined under the Eleventh Amendment. Debtor also argues
that the State of Georgia waived its sovereign immunity by opting
out of the federal bankruptcy exemptions in § 522 of the Code and
adopting its own exemptions.
At the hearing on February 7, 2002, the court noted that
this case is a no-asset case. Therefore, the court raised the
issue of whether abstention would be proper. The court referred
the parties to a few cases on this issue and allowed the parties
to address this authority in letter briefs before ruling on the
matter.
In Debtor’s letter brief filed on February 18, 2002, Debtor
argues that abstention in this case would undermine the purpose
of Chapter 7 which is to give debtors a fresh start. Further,
Debtor argues the State of Georgia would not suffer any prejudice
if the court does not abstain. According to Debtor, whether the
creditor would be prejudiced is a key concern in determining
whether abstention is appropriate. Therefore, looking solely to
-5-
the fact that this case is a no-asset case overlooks a key
concern.
The State of Georgia, however, argues that abstention is
appropriate in this case. The State of Georgia contends that
courts generally abstain from make a tax liability determination
in no-asset cases because no bankruptcy purpose would be served.
DISCUSSION
The issues before the court are (1) whether the Eleventh
Amendment of the United States Constitution divests the court of
jurisdiction to determine Debtor’s tax liability to the State of
Georgia, and (2) whether the court should abstain from making a
determination of Debtor’s tax liability. Without making any
conclusions as to the Eleventh Amendment immunity issue, the
court will abstain from determining Debtor’s tax liability to the
State of Georgia.
Pursuant to § 505 of the Code, the court “may determine the
amount or legality of any tax. . . .” 11 U.S.C. § 505(a)(1).
The power of the bankruptcy court to determine a debtor’s tax
liability under this code section is discretionary with the only
restraint being a previous prepetition determination made by
another competent tribunal. See 11 U.S.C. § 505(a)(2); see also
Gossman v. United States (In re Gossman), 206 B.R. 264, 266
(Bankr. N.D. Ga. 1997)(Murphy, J.); In re R-P Packaging, Inc., In
-6-
re Plicon, Corp., Nos. 99-42537, 00-41153 (Bankr. M.D. Ga. filed
March 21, 2002)(Laney, J.).
In deciding whether a court should abstain from making a
determination under § 505 of the Code, courts typically analyze
several factors including, but not limited to efficient and
orderly case administration, the complexity of the tax issues,
the asset and liability structure of the debtor, and prejudice to
the debtor and the taxing authority. See Gossman at 266; R-P
Packaging at *15; Wood v. United States (In re Wood), No. A93-
72186, 1994 WL 759753, at *1 (Bankr. N.D. Ga. Nov. 21,
1994)(Brizendine, J.). In analyzing these factors, courts
primarily have considered whether a bankruptcy purpose would be
served if a tax determination is made. See Wood at *1.
The weight of authority demonstrates that abstention is
generally appropriate in no-asset Chapter 7 cases. This is
because no bankruptcy purpose would be served by a tax
determination if no distribution will be made. See Thornton v.
United States (In re Thornton), No. 92-40405, 1995 WL 442192, at
*6 (Bankr. M.D. Ga. June 23, 1995)(citing Kaufman v. United
States (In re Kaufman), 116 B.R. 367, 372 (Bankr. E.D.N.Y. 1990);
Starnes v. United States (In re Starnes), 159 B.R. 748, 750-51
(Bankr. W.D.N.C. 1993)(holding that abstention was proper in noasset
post-discharge case);; Byerly v. Internal Revenue Service
(In re Byerly), 154 B.R. 718, 720 (Bankr. S.D. Ind. 1992); Cain
v. United States (In re Cain), 142 B.R. 785, 788-89 (Bankr. W.D.
-7-
Tex. 1992); In re Diez, 45 B.R. 137, 139 (Bankr. S.D. Fla. 1984).
The court agrees with the above the authority and finds it
applicable to the facts of this case. This case is a no-asset
case in which no distribution will be made. While the court
agrees with Debtor that prejudice to the creditor is a factor to
be considered, Debtor’s argument is misplaced. As the Second
Circuit has held, when the debtor is the only party that would
benefit from a § 505 determination, abstention is proper. See
New Haven Projects LLC. v. City of New Haven, et al. (In re New
haven Projects, LLC), 225 F.3d 283, 289 (2d Cir. 2000). Because
the discharge has already been entered in this case, Debtor is
the only party who would benefit from a tax determination.
As to Debtor’s argument that abstention would undermine
Debtor’s ability to obtain a fresh start, the court regrets that
Debtor failed to contest the tax assessment under Georgia
procedures. However, that fact does not require the court to
make a determination of her tax liability when that determination
can have no effect upon the estate. The court finds that no
bankruptcy purpose would be served in this case by determining
Debtor’s tax liability to the State of Georgia. Therefore, the
court will exercise its discretion to abstain from making such
determination.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this ____ day of April, 2002.
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____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

SAMMY A. CAVES

April 22, 2004

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
SAMMY A. CAVES : CASE NO. 03-41518
Debtor. : CHAPTER 11
::
COLUMBUS BANK & TRUST CO., : CONTESTED MATTER
Movant, ::
vs. ::
SAMMY A. CAVES :
Respondent. :::
MEMORANDUM OPINION
On January 26, 2004, the Court held the final day of
a multi-day hearing on the Motion of Columbus Bank & Trust
Co. (“Movant”) for Relief from the Automatic Stay. The
main issue was whether Movant should be granted relief from
the stay to pursue its state court action against Sammy A.
Caves (“Respondent”) and other co-defendants. At the
conclusion of the hearing, the Court took the matter under
advisement. The Court has considered the evidence, the
parties’ briefs and oral arguments, as well as applicable
statutory and case law. Under the test set out in In re
South Oakes Furniture, Inc., 167 B.R. 307 (Bankr. M.D. Ga.
1994)(Walker, J.), the Court finds that Movant is not
entitled to relief from the automatic stay. South Oakes
-2-
Furniture, 167 B.R. at 309 (citations omitted).
THE PARTIES’ CONTENTIONS
Movant contends that Respondent has not satisfied the
three prongs of the test set out in South Oakes Furniture.
Id. Movant argues that Respondent has not met his burden
to prove that the continuance of the state court action
will greatly prejudice either Respondent’s bankruptcy
estate or Respondent personally. Movant further contends
Respondent failed to prove that any potential prejudice to
Respondent’s bankruptcy estate or Respondent, if forced to
proceed in state court, would considerably outweigh the
hardship to Movant, by maintenance of the stay. Finally,
Movant contends that it has established “a probability of
prevailing on the merits of [its] case” by showing that
Respondent either knew of or had a duty to know of criminal
acts Movant alleges were committed by Preferred Alliance,
Inc. (“P.A.I.”) and/or its agents, a corporation of which
Respondent was a shareholder and director. Id.
Respondent contends that his bankruptcy estate and
himself personally will be greatly prejudiced if the state
court action is allowed to move forward. Respondent argues
that he has not been able to participate in discovery or
file dispositive motions, such as a motion for summary
-3-
judgment, because of the automatic stay. Further,
Respondent argues that if the state court proceeding is to
move forward, that he will be unfairly associated with the
other defendants. If Respondent should lose in the state
court proceeding, collateral estoppel may prevent the
Bankruptcy Court from deciding the issue of
dischargeability of the debt. Additionally, judicial
economy calls for the consolidation of the action in
Bankruptcy Court. As to the second prong of the test in
South Oakes Furniture, Respondent argues that the prejudice
to Respondent, if the state court action moves forward,
considerably outweighs any hardship to Movant, if forced to
move forward in Bankruptcy Court. Id.
Finally, Respondent argues that Movant has not
established “a probability of prevailing on the merits of
[its] case” because Movant has not proven by clear and
convincing evidence, as required by Georgia’s Racketeer
Influenced and Corrupt Organizations (“R.I.C.O.”) law, that
Respondent is guilty of R.I.C.O. violations. O.C.G.A. §§
16-14-1 through 16-14-15 (2003); South Oakes Furniture, 167
B.R. at 309 (citations omitted); see Simpson Consulting,
Inc. v. Barclays Bank PLC, 227 Ga. App. 648, 654, 490
S.E.2d 184, 190-191 (1997). Respondent argues Movant has
-4-
proven, at most, that Respondent was not a very attentive
investor and director. Respondent urges that this does not
meet the higher standard required to find Respondent guilty
of criminal conduct, which is required by Georgia’s
R.I.C.O. law. See Avery v. Chrysler Motors Corp., 214 Ga.
App. 602, 604, 448 S.E.2d 737, 739 (1994).
FINDINGS OF FACT
While the facts are contested, from depositions, the
Court was able to discern a timeline of events that led to
Movant’s Motion for Relief from the Automatic Stay. Prior
to August 2000, Respondent became aware of P.A.I. through
an acquaintance of his, Dr. Murray Newlin. Respondent
testified at his deposition that about a year after he had
heard of P.A.I., but with no investigation into P.A.I. or
its business operations, he invested in the company.
Respondent admits that he knew very little about
P.A.I.’s business practices. Respondent understood that
P.A.I. sold discounted services marketed through
independent contractors. It was Respondent’s understanding
that there was money to be made through renewals of the
discounted service packages. Respondent was aware that
P.A.I. sold discounted healthcare service and vacation
pacakges. Respondent admits he knew that approximately
-5-
one-third of P.A.I.’s customers would request refunds.
However, Respondent contends his understanding was that
this level of requests for refunds was typical in
telemarketing operations. Respondent admits to
participating in telephone conferences regarding sales
figures but stated in his deposition that he knew little
about P.A.I.’s day-to-day operations.
Respondent’s initial investment was approximately
$50,000 to $100,000, after which he owned approximately 5-
8% of the company. After later investments, Respondent
owned approximately 16-17% of the company. In total,
Respondent invested approximately $400,000 in P.A.I. This
amount excludes a $200,000 transaction that is
characterized by Respondent as a transaction for tax
purposes, completed at the suggestion of Respondent’s
accountant.
In August 2000, Respondent held a P.A.I. Shareholders’
Meeting at his home. While Respondent is not sure when, he
was appointed as a director of P.A.I. During the summer or
fall of 2000, a line-of-credit was established for P.A.I.
at SunTrust Bank (“SunTrust”). Eventually, Dr. Newlin and
Respondent assumed liability on the SunTrust line-ofcredit.
Of money paid by Respondent towards the SunTrust
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line-of-credit, P.A.I. re-paid Respondent $50,000, after
P.A.I. began doing business with Movant.
In March 2001, P.A.I. set up a merchant account with
Movant, so that P.A.I. could process credit card
transactions. On May 23, 2001, Respondent signed a
personal guaranty on the merchant account. In August 2001,
Respondent held a second Shareholders’ Meeting at his home.
Also in August 2001, Movant asked to speak with Respondent
regarding charge-back requests on P.A.I.’s merchant
account. Movant contends that Respondent told Dr. Newlin
to tell Movant to deal directly with P.A.I., not with
Respondent, regarding the charge-back issue. Respondent
does not deny this because at the time he felt that he did
not know enough about P.A.I. to discuss financial matters
with Movant. In middle to late 2001, Respondent visited a
P.A.I. call center in Connecticut which primarily dealt
with customers’ requests for charge-backs and membership
terminations. During that visit, Respondent observed call
center employees dealing with customers over the phone.
In December 2001, Respondent put $200,000 into a P.A.I.
account at SunTrust. In January 2002, the money was
removed from the P.A.I. account and returned to Respondent.
As stated previously, Respondent characterized this
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transaction as one for tax purposes. Also in January 2002,
Respondent attended two meetings with Movant regarding the
high number of charge- back requests Movant was getting on
P.A.I.’s merchant account. After the meetings, Movant
discontinued processing credit card transactions for
P.A.I.. Some time after Movant discontinued processing
P.A.I.’s credit card transactions, Respondent resigned as
a director of P.A.I. Movant contends that Respondent knew
of alleged fraudulent and criminal actions taken by
P.A.I.’s agents and employees. However, Movant failed to
submit any admissible evidence to contradict Respondent’s
deposition testimony that he was unaware of P.A.I.’s dayto-
day operations and that, if any fraudulent or criminal
activity occurred at P.A.I., he was unaware of it.
In March 2002, Movant initiated a lawsuit in Muscogee
County Superior Court against Respondent and other codefendants,
based on contract claims and Georgia R.I.C.O.
violations. During the pendency of the state court action,
but prior to the commencement of Respondent’s bankruptcy
proceeding, the trial court ruled in favor of Movant on the
contract claims on a motion for partial summary judgment.
Respondent filed an appeal of the decision prior to filing
for bankruptcy protection. The State of Georgia, at some
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point, intervened in the state court proceeding, but has
since settled its dispute with Respondent.
Respondent filed a Chapter 11 bankruptcy proceeding
under title 11 of the United States Code (“Code”) on June
17, 2003. 11 U.S.C. §§ 1101 through 1174 (1993 & Supp.
2003). Movant received relief from the automatic stay on
July 18, 2003, for the limited purpose of completing the
appeals process. Prior to the Georgia Court of Appeals’
decision on the contract issues, Movant filed its Motion
for Relief from the Automatic Stay to pursue its Georgia
R.I.C.O. claims. The Georgia Court of Appeals later
affirmed in part and reversed in part the decision of the
trial court on the contract issues. The Georgia Court of
Appeals decision was rendered after the first hearing date
on Movant’s Motion for Relief from the Automatic Stay,
September 19, 2003, but before the continued hearing date,
January 26, 2004. The result is that some of the contract
claims are still at issue.
CONCLUSIONS OF LAW
As the Court stated in Scott v. Williams (In re
Williams), 302 B.R. 923 (Bankr. M.D. Ga. 2003)(Laney, J.),
the party opposing a motion for relief from the automatic
stay bears the burden of persuasion on all issues except as
-9-
to equity. Williams, 302 B.R. at 926; see also 11 U.S.C. §
362(g)(1993 & Supp. 2003). However, implicit in this
statement is that Movant must first make a prima facia
showing that it is entitled to the relief requested. See
generally, Overhead Door Corp. v. Allstar Bldg. Prod., Inc.
(In re Allstar Bldg. Prod., Inc.), 834 F.2d 898, 900 (11th
Cir. 1987). The Court finds that Movant met this initial
burden.
The burden falls on Respondent to rebut the showing
made by Movant. As both parties are aware, this Court has
adopted the test in South Oakes Furniture as the test to
apply in situations where a movant requests relief from the
automatic stay to move forward with a state court
proceeding. South Oakes Furniture, 167 B.R. at 309
(citations omitted); see Williams, 302 B.R. at 926. “The
test developed by courts to determine if it is appropriate
to lift the automatic stay and allow the continuation of
[a] lawsuit pending in state court is whether: a) Any
‘great prejudice’ to either the bankrupt estate or the
debtor will result from continuation of a civil suit, b)
the hardship to the [non-debtor party] by maintenance of
the stay considerably outweighs the hardship to the debtor,
and c) the creditor has a probability of prevailing on the
-10-
merits of his case.” South Oakes Furniture, 167 B.R. at 309
(citations omitted).
It is evident to the Court that there would be
prejudice to Respondent and his bankruptcy estate if the
automatic stay is lifted and the state court proceeding
goes forward. However, it is also clear to the Court that
Movant would suffer a hardship if the automatic stay is not
lifted and it is forced to proceed in this Court with its
action against Respondent. On balance, these two factors
cancel each other out. The Court will focus on the third
prong of the test, as did the parties in their briefs and
oral arguments. Id.
The third prong of the test requires Respondent to
prove that Movant does not have a probability of prevailing
on the merits of the underlying case. Id. Respondent
argues that Movant must have a higher likelihood of
prevailing on the merits of its case than a probability
because the underlying Georgia R.I.C.O. action requires
clear and convincing evidence of R.I.C.O. violations before
Movant would be able to recover at the state level. See
Simpson Consulting, 227 Ga. App. at 654, 490 S.E.2d at 190-
191. The Court agrees with Respondent that the underlying
Georgia R.I.C.O. action requires the higher clear and
-11-
convincing evidentiary standard. See id. However, the
Court has found no authority that the there is a burden on
Movant to show a substantial likelihood of prevailing on
the merits of its case, as Respondent urges.
The higher evidentiary standard of the underlying
Georgia R.I.C.O. action was not considered by the Court in
the initial hearing. Movant responded at the continued
hearing and in its reply brief by arguing that Respondent
either knew of alleged criminal activity being conducted at
P.A.I. or, as a director of P.A.I., Respondent is charged
with knowledge of such activities. Therefore, Movant
argues that Respondent would be guilty of Georgia R.I.C.O.
violations under conspiracy or enterprise liability because
of his status as a shareholder and director of P.A.I.
However, Movant did not submit case law which would
persuade the Court to come to that same conclusion.
On balance, the Court finds that Movant does not have
a probability of prevailing by proving, by clear and
convincing evidence, that Respondent committed the alleged
Georgia R.I.C.O. violations. See id. The Court must be
careful to not a make a decision on the merits. This is,
after all, a motion for relief from the automatic stay, not
an adversary proceeding to determine the ultimate issue
-12-
involved in the pending litigation. However, the Court
must review the facts to determine if they show a
probability of Movant prevailing on the merits of its case.
See South Oakes Furniture, 167 B.R. at 309 (citations
omitted). The Court finds that the evidence does not show
that Movant has a probability of prevailing on the merits
of the underlying Georgia R.I.C.O. claims. Therefore,
Movant’s Motion for Relief from the Automatic Stay is
denied as to the Georgia R.I.C.O. claims.
This ruling should not be construed to be determinative
of the ultimate issue in the pending litigation. After a
dispositive motion or full trial, in the Bankruptcy Court,
the Court could rule in favor of either party. This ruling
should only be construed to indicate that Respondent, as
the party opposed to relief from the automatic stay, met
its burden, not that the Court has ruled in favor of
Respondent as to the merits of the underlying Georgia
R.I.C.O. action.
Since the Court is denying Movant’s request for relief
from the automatic stay as to the Georgia R.I.C.O. claims,
the Court will also deny relief from the automatic stay as
to the contract claims. The remaining issues regarding the
contract claims can be resolved through the claims
-13-
objection process in the Bankruptcy Court.
An order in accordance with this Memorandum Opinion
will be entered.
DATED this ____ day of April, 2004.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY
JUDGE

CLARENCE CHESTER BROWN, SR

January 30, 2004

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
CLARENCE CHESTER BROWN, SR., : CASE NO. 03-41647
Debtor. : CHAPTER 13
:
CLARENCE CHESTER BROWN, SR., : ADVERSARY PROCEEDING
Plaintiff, : NO. 03-4069
:
vs. ::
SPEEDEE CASH OF GEORGIA, INC., :
Defendant. ::
SPEEDEE CASH OF GEORGIA, INC., :
Movant. :
MEMORANDUM OPINION
On January 9, 2004, the Court held a hearing regarding the
Motion of Speedee Cash of Georgia, Inc. (“Defendant”) to
Dismiss. At the hearing, the parties agreed that Count Two of
the Adversary Proceeding should be dismissed because the
contract in dispute exceeds $3,000.00 and, therefore, does not
fall under the Georgia Industrial Loan Act (“G.I.L.A.”). See
O.C.G.A. §§ 7-3-1 through 7-3-29 (1997 & Supp. 2003). At the
conclusion of the hearing, the Court took the remaining matter
under advisement. The Court has considered the pleadings,
Defendant’s Motion to Dismiss, both parties’ oral arguments,
and the applicable statutory and case law. Under this Court’s
-2-
reasoning in In re Johnson (Johnson v. Speedee Cash of
Columbus, Inc.), 289 B.R. 251 (Bankr. M.D. Ga. 2002)(Laney,
J.), the Court will deny Defendant’s Motion to Dismiss as to
Count One of Clarence Chester Brown, Sr.’s (“Debtor”)
Complaint and grant Defendant’s Motion to Dismiss as to Count
Two of Debtor’s Complaint.
BACKGROUND AND PROCEDURAL HISTORY
On December 19, 2002, Debtor and another party entered
into a contract with Defendant pursuant to a title pawn
transaction. Debtor pledged to Defendant the Certificate of
Title to a 1999 Ford Expedition (“Ford”) in exchange for
$3,500. The contract provided for a ten-day grace period
after the maturity date during which Defendant promised not to
sell the property and Debtor was entitled to redeem the
property by paying the outstanding balance, plus any fees and
charges incurred. Debtor filed a Chapter 13 Petition on July
1, 2003 and subsequently filed this Adversary Proceeding to
determine the validity of Defendant’s lien on the Ford. On
December 22, 2003, Defendant filed its Answer and the Motion
to Dismiss.
Defendant contends that Debtor cannot challenge the
validity of Defendant’s lien on the Ford because the contract
does not fall under G.I.L.A. See O.C.G.A. §§ 7-3-1 through 7-
-3-
3-29 (1997 & Supp. 2003). Without G.I.L.A., Defendant argues
that Debtor has no grounds to void the contract or the lien.
Therefore, Defendant urges the Court to grant its Motion to
Dismiss as to Count One of Debtor’s Complaint as well.
Debtor contends that, under Johnson, he has stated a claim
upon which relief can be granted. Johnson, 289 B.R. at 253-
254. Debtor argues that Defendant holds, at most, an
unsecured claim in the principal amount of $3,500. Therefore,
Debtor urges the Court to deny Defendant’s Motion to Dismiss
as to Count One of Debtor’s Complaint.
CONCLUSIONS OF LAW
The Court has reviewed Johnson, as well as Hooks v. Cobb
Ctr. Pawn & Jewelry Brokers, Inc., 241 Ga. App. 305, 527
S.E.2d 566 (1999), and the statutory scheme for pawn brokers
found at O.C.G.A. §§ 44-12-130 through 44-12-138 & 44-14-403.
O.C.G.A. §§ 44-12-130 through 44-12-138 & 44-14-403 (2002 &
Supp. 2003); Johnson, 289 B.R. at 253-254; Hooks, 241 Ga. App.
at 306-307, 527 S.E.2d at 568-569. The Court does not change
its position from the ruling in Johnson. Johnson, 289 B.R. at
253-254. “Rights created by statute in derogation of the
common law must be ‘exercised in the way which the [s]tatute
prescribes, and in no other way….’ Persons v. Hight, 4 Ga.
474 (1848); see also Diggs v. Swift Loan and Finance Company,
-4-
Inc., 154 Ga. App. 389, 391, 268 S.E.2d. 433, 435 (1980).” Id.
Pursuant to O.C.G.A. § 44-14-403(b)(1), the grace period
for pawn transactions involving automobiles is thirty days.
O.C.G.A. § 44-14-403(b)(1) (2002 & Supp. 2003). The contract
in question grants only a ten-day grace period. (See Compl. &
Def.’s Mot. to Dismiss). Therefore, Debtor has stated a claim
upon which relief could be granted. However, at this stage
procedurally, it is not appropriate for the Court to determine
the validity of the lien. Nothing in this Memorandum Opinion
should be construed as doing so.
Defendant’s Motion to Dismiss is granted as to Count Two
of Debtor’s Complaint and is denied as to Count One of
Debtor’s Complaint. An order in accordance with this
Memorandum Opinion will be entered.
DATED this _________ day of January, 2004.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY
JUDGE

JOHNNY BOZEMAN

January 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
THOMASVILLE DIVISION
IN RE: ::
CASE NO. 97-60549
JOHNNY BOZEMAN, :
JEANNIE BOZEMAN, a/k/a : CHAPTER 13
JEANNIE SHANK, :
Debtors, : ADVERSARY PROCEEDING
: NO. 00-6015
JOHNNY BOZEMAN :
JEANNIE BOZEMAN, a/k/a :
JEANNIE SHANK, :
Plaintiffs, ::
vs. ::
DEPARTMENT OF REVENUE OF THE :
STATE OF FLORIDA, ::
Defendant. :
MEMORANDUM OPINION
On July 11, 2001, the court held a hearing on the motion to
dismiss the Department of Revenue of the State of Florida (“State
of Florida”) as a defendant, the motions to dismiss the United
States of America (“USA”), and the motion for summary judgment of
the Dale County Alabama Child Support Unit (“Alabama”). At the
conclusion of the hearing, the court granted USA’s motions to
dismiss, continued Alabama’s motion, and took under advisement
the State of Florida’s motion. Since the time of the hearing,
the court granted Alabama’s motion for summary judgment.
Therefore, the sole issue before the court is whether the
Eleventh Amendment to the United States Constitution provides
-2-
immunity to the remaining defendant in this case. At the
conclusion of the hearing, the court asked the parties to submit
briefs discussing the issue of sovereign immunity under the
Eleventh Amendment. After considering the parties’ oral
arguments, briefs, and the applicable statutory and case law, the
court will grant the State of Florida’s motion to dismiss.
FACTS
On July 11, 1997, Debtors Johnny and Jeannie Bozeman
(“Plaintiffs”) filed a voluntary petition under Chapter 13 of the
Bankruptcy Code (“Code”). On August 21, 2000, Plaintiffs filed
their initial complaint for violation of § 362 of the Code,
damages, and declaratory and injunctive relief. In this initial
complaint, only USA and Alabama were named as defendants.
Plaintiffs allege that the Internal Revenue Service violated §
362 of the Code by offsetting Plaintiffs’ 1997 and 1998 federal
income tax refunds to pay Plaintiff Johnny Bozeman’s delinquent
child support obligation to Alabama. The demand letter and
notice to offset which were sent to Plaintiff Johnny Bozeman came
from the Offset Coordinator in the Ft. Myers, Florida office.
However, the State of Florida was not named as a defendant in
Plaintiffs’ initial complaint. (Compl. Exhs. “1” & “4”).
Plaintiffs amended their complaint several times in which
they added as defendants, the State of Florida, Charles O.
-3-
Rossotti, Commissioner of the Internal Revenue Service
(“Rossotti”), and Paul O’Neill, Secretary of the Treasury
Department (“O’Neill”). USA filed motions to dismiss USA,
Rossotti and O’Neill as defendants. Alabama filed a motion for
summary judgment and an amended motion for summary judgment. The
State of Florida also filed a motion to dismiss it as a
defendant.
On July 11, 2001, the court held a hearing on the motions to
dismiss USA and the State of Florida as defendants and Alabama’s
motion for summary judgment. At the conclusion of the hearing,
the court granted USA’s motions to dismiss USA, Rossotti, and
O’Neill, and continued the hearing on Alabama’s motion to
September 19, 2001. On September 24, 2001, the court entered an
order granting Alabama’s motion for summary judgment thereby
leaving the State of Florida as the sole defendant in this
adversary proceeding. The court took under advisement the State
of Florida’s motion to dismiss.
In its motion, the State of Florida contends that the
Eleventh Amendment to the United States Constitution provides
immunity to the claims of the Plaintiffs. The State of Florida
makes an alternative argument that the offset refunds were not
property of the estate, therefore, those funds are not subject to
the automatic stay under § 362 of the Code. The court notes that
the State of Florida did not address this alternative argument in
its brief. (See Doc. #62).
-4-
Plaintiffs, however, argue that the State of Florida waived
its sovereign immunity. Plaintiffs assert that when the State of
Florida utilized the federal income tax refund offset program,
the State of Florida entered into an area regulated by federal
statute and thereby waived its sovereign immunity. Plaintiffs
further argue that the State of Florida waived its sovereign
immunity when it sought and received funds from the United
States.
DISCUSSION
The Eleventh Amendment to the United States Constitution
provides:
The Judicial power of the United States shall not be
construed to extend to any suit in law or equity, commenced
against one of the United States by Citizens of another
State, or by Citizens of any Foreign State.
U.S. CONST. amend XI.
Accordingly, states have immunity from suits brought by citizens
of another state. See Edelman v. Jordan, 415 U.S. 651, 662
(1974); Seminole Tribe of Florida v. Florida, 517 U.S. 44, 54
(1996). Although the text of the Eleventh Amendment does not
appear to bar suits brought by citizens against their own state,
it has long been recognized to bar such suits. See Hans v.
Louisiana, 134 U.S. 1 (1890).
While state immunity from suit is extensive, it is not
absolute. However, the United States Supreme Court has
-5-
recognized only two instances in which an individual may sue a
state. See College Savings Bank v. Florida Prepaid Postsecondary
Education Expense Board, et al., 527 U.S. 666, 670 (1999).
First, Congress may abrogate a state’s sovereign immunity. Id.
In order to validly abrogate the immunity, Congress must
“unequivocally express[] its intent to abrogate the immunity,”
and it must also act “pursuant to a valid exercise of power.”
Seminole Tribe, 517 U.S. at 55. The Supreme Court has recognized
the “valid exercise of power” to be Congress’s power to enforce
the provisions of the Fourteenth Amendment. College Savings
Bank, 527 U.S. at 670 (citing Fitzpatrick v. Bitzer, 427 U.S.
445 (1976)). Second, a state may waive its sovereign immunity by
consenting to being sued. See Clark v. Barnard, 108 U.S. 436,
447 (1883). The “test for determining whether a State has waived
its immunity from federal-court jurisdiction is a stringent one.”
Atascadero State Hop. v. Scanlon, 473 U.S. 234, 241 (1985). See
also Pennhurst State School and Hosp. v. Halderman, 465 U.S. 89,
99 (1984)(holding that a state’s consent to suit must be
“unequivocally expressed”).
The courts are split on whether Congress has validly
abrogated state sovereign immunity by enacting § 106 of the Code.
See Mitchell v. Franchise Tax Bd. (In re Mitchell), 209 F.3d
1111, 1112 (9th Cir. 2000)(holding that § 106 does not validly
abrogate a state’s sovereign immunity); Sacred Heart Hosp. v.
Pennsylvania (In re Sacred Heart Hosp.), 133 F.3d 237, 245 (3d
-6-
Cir. 1998); Schlossberg v. State of Maryland, Comptroller of the
Treasury (In re Creative Goldsmiths), 119 F.3d 1140, 1146-47 (4th
Cir. 1997)(same); Peterson v. State of Florida, Dep’t of Revenue
(In re Peterson), 254 B.R. 740, 745 (Bankr. N.D. Ill.
2000)(same); Wilson v. South Carolina State Educ. Assistance
Auth. (In re Wilson), 258 B.R. 303, 310 (Bankr. S.D. Ga.
2001)(Dalis, C.J.)(holding that § 106 validly abrogates state
sovereign immunity as an exercise of Congress’s power under the
Privileges and Immunity Clause of the Fourteenth Amendment);
Hood v. Tennessee Student Assistance Corp. (In re Hood), 262 B.R.
412, 414 (B.A.P. 6th Cir. 2001)(holding that as a part of the
plan of the Constitutional Convention, the States ceded their
sovereign immunity to Congress).
However, Plaintiffs do not advance an abrogation argument.
Instead, Plaintiffs argue that the State of Florida waived its
immunity by its actions in offsetting Plaintiffs’ tax refund.
There is no suggestion that the State of Florida consented to
suit. Therefore, the narrow issue is whether the State of
Florida impliedly or constructively waived its sovereign
immunity.
Initially, the court notes that the parties do not dispute
that the Department of Revenue of the State of Florida is an
agency of the state for Eleventh Amendment purposes. In
Peterson, the court held that Florida’s Child Support Enforcement
Office of the Department of Revenue is “unquestionably an arm of
1 The court notes that Intra Coastal Transportation has been recognized as
overruled in Vieux Carre Property Owners, et al. v. Brown, 875 F.2d 453, 457
(5th Cir. 1989). Also, WJM has been abrogated by Reopell v. Massachusetts,
936 F.2d 12 (1st Cir. 1991).
-7-
the state for the purposes of the amendment.” Peterson, 254
B.R. at 743. The court also held that an adversary proceeding
seeking a turnover of funds from the Department of Revenue is a
“suit” for Eleventh Amendment purposes. Id. Accordingly, the
court finds that this case is a suit against a unit of the state
as defined in the Eleventh Amendment.
Plaintiffs rely on several circuit cases for the proposition
that the State of Florida constructively waived its immunity by
“entering into an area regulated by federal statute . . . .”
(Pls.’ Br. at pp. 6-7, Doc. #90)(citing Sullivan v. Town &
Country Home Nursing Services, Inc. (In re Town & Country Home
Nursing Services), 963 F.2d 1146 (9th Cir. 1992); WJM, Inc. v.
Mass. Dep’t of Public Welfare, 840 F.2d 996 (1st Cir. 1988);
Intra Coastal Transportation, Inc. v. Decatur County, 482 F.2d
361 (5th Cir. 1973).1
Town & Country, like the case before the court, involved the
offset of funds by the federal government on behalf of a unit of
the state. The debtor in Town & Country was entitled to receive
reimbursements from the federal government pursuant to the
Medicare Act, 42 U.S.C. §§ 1395-1395ccc. As a result of an
overpayment of allowed reimbursements to the debtor, the state
fiscal intermediary, through the Department of Health and Human
-8-
Services, offset the amount due against the debtors
reimbursements. Town & Country, 963 F.2d at 1147.
The Ninth Circuit held that the state fiscal intermediary
waived its sovereign immunity. Id. at 1153. Relying on Parden
v. Terminal Ry., 377 U.S. 184 (1964), the court noted that a
state “may waive its sovereign immunity by affirmatively engaging
in a federally regulated activity in which Congress clearly has
made waiver of immunity a necessary condition of state
participation.” Town & Country, 963 F.2d at 1153 n.3.
However, in College Savings Bank, the Supreme Court
expressly overruled Parden. 527 U.S. at 680. In College Savings
Bank, the court noted that it had begun to retreat from Parden as
early as 1973. Id. at 677 (citing Employees of Dep’t of Public
Health and Welfare of Mo. v. Department of Public Health and
Welfare of Mo., 411 U.S. 279 (1973)). In Employees, the majority
refused to find that the state of Missouri constructively waived
its sovereign immunity in a suit under the Fair Labor Standards
Act. 411 U.S. at 485-86. The Court reasoned that the statute
did not express “with clarity Congress’s intention to supersede
the States’ immunity from suits brought by individuals.” Id. at
285. Writing for the majority in College Savings Bank, Justice
Scalia pointed out that the absence of clarity in the statute was
the same reason that four of the Justices in Parden dissented.
527 U.S. at 677.
One year after Employees, the Court in Edelman observed that
2 See 26 U.S.C. § 6402(c) and 42 U.S.C. § 664. These two statues provide that
when a state agency notifies the U.S. Dep’t of Treasury of an individual’s
past-due child support obligation, the Dep’t of Treasury is required to offset
monies from such individual’s income tax refund and remit those funds to the
state agency.
-9-
“there is ‘no place’ for the doctrine of constructive waiver in
our sovereign immunity jurisprudence . . . .” Id. at 678 (citing
Edelman, 415 U.S. at 651). In comparing Parden-style waivers
with other constitutionally protected privileges, the Court in
Edelman noted that “[c]onstructive consent is not a doctrine
commonly associated with the surrender of constitutional rights.”
415 U.S. at 673. Therefore, in overruling Parden, the court held
that “Parden stands for an anomaly in the jurisprudence of
sovereign immunity, and indeed in the jurisprudence of
constitutional law.” College Savings Bank, 527 U.S. at 680.
The court finds that the Supreme Court’s rationale in
College Savings Bank is applicable to this case. Even if there
was a place for constructive Parden-style waivers of sovereign
immunity, the statutes at issue,2 do not express with clarity
that a state waives its sovereign immunity by its participation
in the federal regulated activity. Accordingly, the court finds
that the State of Florida did not waive its sovereign immunity by
participating in the offset program.
The Plaintiffs present another constructive waiver argument.
Plaintiffs maintain that seeking funds from the federal
government through the offset program constitutes a waiver of
-10-
sovereign immunity. For support, Plaintiffs rely on the case of
Hatmaker, et al. v. Georgia Dep’t of Transp., 973 F. Supp. 1047
(M.D. Ga. 1995).
In Hatmaker, the court held that the Georgia Dep’t of
Transp. waived its Eleventh Amendment immunity when it requested
and received federal funds under the Federal-Aid Highways Act.
973 F. Supp. at 1053. The court in Hatmaker relied on the case
of Named Individual Members of the San Antonio Conservation
Society v. Texas Highway Dep’t of Transp., 446 F.2d 1013, 1028
(5th Cir. 1971). However, in San Antonio Conservation Society,
the issue of “Eleventh Amendment immunity was neither raised nor
discussed . . .” therefore, that case is “unpersuasive and not
controlling.” Daye v. Pennsylvania, 344 F. Supp. 1337, 1346
(E.D. Pa. 1972). See also Road Review League v. Boyd, 270 F.
Supp. 650 (S.D.N.Y. 1967); DeLong Corp. v. Oregon State Highway
Comm’n, 233 F. Supp. 7 (D. Ore. 1964), aff’d 343 F.2d 911 (9th
Cir. 1965)(holding that the state does not waive its immunity
from suit by participating in the federal highway program and
seeking funds from that program).
Given the overwhelming authority contrary to Hatmaker and
the fact that the Supreme Court has disavowed constructive
waivers of state sovereign immunity, the court rejects the
reasoning in Hatmaker. Therefore, the court finds that the State
of Florida did not waive its sovereign immunity by requesting
federal funds from the federal government.
-11-
CONCLUSION
None of the actions taken by the State of Florida
constitutes a waiver of its Eleventh Amendment immunity. In the
absence of waiver of sovereign immunity, the court is without
jurisdiction to entertain a suit against the State of Florida.
Therefore, the court will grant the State of Florida’s motion to
dismiss.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this ____ day of January, 2002.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

AYERS AVIATION HOLDINGS, INC.

July 25, 2002

UNITED STATE BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
ALBANY DIVISION
IN RE: ::
CASE NO. 00-11881
AYERS AVIATION HOLDINGS, INC. ::
CHAPTER 11
Debtor. ::
FIRST NATIONAL BANK OF : ADVERSARY PROCEEDING
SOUTH GEORGIA, ::
NO. 01-1003
Plaintiff, ::
vs. ::
AYERS AVIATION HOLDINGS, INC., :
GATX CAPITAL CORPORATION, :
ZLATAVA DAVIDOVA, TRUSTEE OF :
LET, a.s. AND GENERAL ELECTRIC :
COMPANY, ::
Defendants. :
ORDER REGARDING THE CONTROLLING LAW AS TO CERTAIN ISSUES
On May 17, 2002, the court held a Final pre-Trial Conference
in the above captioned adversary proceeding. At the hearing, the
parties raised the issue of which law should govern the validity,
priority, and extent of the liens in the property central to this
adversary proceeding. The court agreed with the parties that it
should rule on this issue before the trial is conducted.
Therefore, in the court’s May 17, 2002 order approving the Final
Pre-Trial Order which also set the trial date for August 7-8,
-2-
2002, the court directed the parties to submit briefs on this
issue within 15 days. The order also allowed 10 days for
responsive briefs.
Plaintiff First National Bank of South Georgia (“Plaintiff”)
and Debtor/Defendant Ayers Aviation Holdings, Inc. (“Debtor”)
contend that the Georgia Uniform Commercial Code governs the
validity and priority of the interests in the subject property.
Initially, Defendant GATX Capital Corporation (“GATX”)
maintained the same position as Plaintiff and Debtor. In its
initial brief, GATX acknowledged the possible application of
three international conventions. However, GATX pointed out that
the Convention on International Civil Aviation, December 7, 1944,
61 Stat. 1180 and the Convention of International Recognition of
Rights, June 19, 1948, 4 U.S.T. 1830 did not apply because the
Czech Republic were not signatories to these conventions. GATX
further noted that although the Czech Republic is a signatory
state to the United Nations Convention on Contracts for the
International Sale of Goods, 15 U.S.C. App., Article 2 of that
convention excludes aircraft.
Zlatava Davidova, Trustee of LET, a.s. (“LET Trustee”)
contends that the law of the Czech Republic is the governing law.
Contrary to the assertion of GATX, LET Trustee points out that as
of August 24, 1998, the Czech Republic became a signatory state
to the Convention on the International Recognition of Rights in
-3-
Aircraft. (See Exh. “A”, LET Trustee’s Supp. Br.). In pertinent
part, that Convention provides that property rights in aircraft,
including a security interest, “shall be determined in accordance
with the law of the State where the aircraft was registered….”
Convention on the International Recognition of Rights in
Aircraft, Art. I, para. 1. Because no dispute exists that the
subject aircraft was registered in the Czech Republic, LET
Trustee contends that the law of the Czech Republic is the
controlling law.
General Electric Company (“General Electric”) agrees with
LET Trustee that the Convention on the International Recognition
of Rights in Aircraft is applicable. Therefore, General Electric
maintains that the law of the Czech Republic should govern this
case.
In response to LET Trustee’s brief, GATX agrees with LET
Trustee and now admits that the Convention on the International
Recognition of Rights in Aircraft is applicable. Further, GATX
admits that it did not record its interest in the subject
property in the Czech Republic. Accordingly, GATX concedes that
it has an unperfected interest in the subject property and
maintains that it should be dismissed from this adversary
proceeding.
The court has considered all the briefs and exhibits
submitted by the parties. The court finds that the law of the
-4-
Czech Republic is the controlling law regarding the validity,
priority, and extent of the liens in the subject property.
SO ORDERED this 25th day of July, 2002.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

PORSCHA CAMPBELL

April 29, 2010

IN THE UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
VALDOSTA DIVISION
IN RE: )
) CASE NO.: 09-71049- JTL
PORSCHA CAMPBELL, )
)
Debtor. ) CHAPTER 7
Memorandum Opinion
This matter comes before the court on unsecured creditor Clinton Timmons’
Motion to Reopen Case for the purpose of seeking limited relief from the permanent
discharge injunction pursuant to 11 U.S.C. §524 in order to seek a judgment of liability
against the debtor so that he may proceed against the debtor’s liability insurer. For the
reasons set forth below, this court GRANTS Mr. Timmons’ Motion to Reopen the Case.
Background
Porscha Campbell filed a Chapter 7 voluntary petition with this court on July 2,
2009. A discharge order was entered on September 29, 2009. A law suit was initiated
against the debtor on June 17, 2009 to recover damages incurred when the debtor’s
SIGNED this 29 day of April, 2010.
________________________________________
JOHN T. LANEY, III
________________________________C_H_IE_F_ U_N_I_TE_D_ S_T_A_T_E_S_ B_A_N_K_R_UP_T_C_Y_ J_U_D_G_E
vehicle struck an automobile that the plaintiff was driving. Permanent General Assurance
Corporation, debtor’s automobile insurer at the time of the accident, hired counsel to
represent the debtor in the state court claim. Mr. Timmons filed a “Petition to Lift
Permanent Stay” on January 25, 2010, and a “Motion to Reopen Bankruptcy Case” on
February 12, 2010. The debtor’s state court counsel filed an objection in the debtor’s
name. A hearing was held on the motions on March 31, 2010. The debtor’s insurance
counsel had not been served with the creditor’s petition; thus, the court allowed the
debtor’s attorney for the state court claim 15 days to file a letter brief, which was
submitted to the court on April 15, 2010. The debtor’s bankruptcy attorney stated in open
court that the debtor consented to the reopening of the case and the limited relief
requested because the debtor would incur no injury other than inconvenience if the relief
requested is granted.
Conclusions of Law
The Eleventh Circuit Court of Appeals has held that a creditor can seek relief
from the discharge injunction to pursue a judgment of liability against the debtor for the
sake of recovering against the debtor’s insurer. See In re Jet Florida Systems, Inc., 883
F.2d 970 (11th Cir. 1989) (A discharge will not act to enjoin a creditor from taking action
against another who also might be liable to the creditor). In In re Jet Florida Systems,
Inc., the creditor and former employee of Jet Florida System, Inc. asserted a defamation
claim and conceded that he could not proceed against the assets of the bankruptcy estate.
See 883 F.2d at 973. However, the creditor did contend, and the court agreed, that he
could proceed against the debtor to establish the debtor’s liability in order to recover from
the debtor’s insurer. Id. In determining whether the creditor should be permitted to
proceed with his claim, the court began its analysis with 11 U.S.C. §524(a), noting that
§524 explicitly renders judgments void only for the “personal liability of the debtor.” Id.
Because the statutory language, on its face, does not preclude the determination of the
debtor’s liability for the purpose of recovering from a third party, the court held that the
permanent injunction could be lifted. See id.
The Eleventh Circuit also relied upon 11 U.S.C. §524(e) for the proposition that a
creditor may seek relief from the permanent injunction in order to establish liability of the
debtor to recover from a third party. 11 U.S.C. §524(e) provides as follows:
Except as provided in subsection (a)(3) of this section, discharge of a debt of the
debtor does not affect the liability of any other entity on, or the property of any
other entity for, such debt.
The court also cites the following excerpt from Collier:
the provisions of 524(a) apply only with respect to the personal liability of the
debtor. When it is necessary to commence or continue a suit against a debtor in
order, for example, to establish liability of another, perhaps a surety, such suit
would not be barred. Section 524(e) was intended for the benefit of the debtor but
was not meant to affect the liability of third parties or to prevent establishing such
liability through whatever means required.
See 883 F.2d at 973 (citing 3 R. Babitt, A. Herzog, R. Mabey, H. Novikoff, & M.
Sheinfeld, Collier on Bankruptcy ¶ 524.01 at 524-16 (15th ed.1987) (alteration in
original)).
The court comes to the conclusion that the obligation of an insurer must certainly
fall within the cited parameters. See 883 F.2d at 973. The debtor also contends that Mr.
Timmons’ motion and petition are untimely filed pursuant to state law. However, the
cited state court cases offer no support. In Roy v. Garden Ridge, L.P., plaintiffs filed a
personal injury tort action against a corporation which later filed for protection under
Chapter 11 of the bankruptcy code. See 283 Ga. App. 74 (2006). Rather than seek relief
from the discharge injunction in the bankruptcy court, plaintiffs attempted to prosecute
their action in state court despite the injunction. See id. Accordingly, the Georgia Court
of Appeals correctly held that the bankruptcy injunction prevented prosecution of the
state court action and any challenge to the discharge injunction would have to be made in
the bankruptcy court. See id. In this case, the creditor plaintiff is following proper
procedure by seeking relief from the discharge injunction in the bankruptcy court;
accordingly, the court can find no parallel between the cases cited and the instant case.
Conclusion
This court finds that the cases cited in support of the allegation that Mr.
Timmons’ claim is untimely are not on point and lend no support to the debtor’s position.
The bankruptcy court is a court of equity, and; consequently, this court exercises its
discretion to grant the creditor’s motion and lift the permanent injunction for the limited
purpose of enabling the creditor to seek a liability judgment against the debtor as a
prerequisite to recover from the insurer. An order in accordance with this memorandum
opinion will be entered.

SUWANNEE SWIFTY STORES, INC.,

March 22, 2000

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
THOMASVILLE DIVISION
IN RE:
SUWANNEE SWIFTY STORES, INC., CASE NO. 96-60807
EIN: 58-0434460, CHAPTER 11
DEBTOR.
MEMORANDUM OPINION
On February 14 and 15, 2000, the court held a hearing on
Debtor’s objection to claim number 302 of McLane Company, Inc.
(McLane) and McLane’s response to the objection. At the
conclusion of the evidence and argument, counsel for McLane
asked for and was given an opportunity to submit a brief.
Debtor and the Official Committee of Unsecured Creditors filed
briefs in response. The court has considered all the briefs
filed, the evidence, the argument of counsel, and the
applicable statutory and case law. The court will sustain
Debtor’s objection based on the following findings of fact and
conclusions of law.
FACTS
Most of the relevant facts have been stipulated by the
parties in Document number 1548. In addition to those facts,
the court finds by a preponderance of the evidence that McLane
knew Debtor was not paying other suppliers’ bills as they
became due, at least as early as June 1996. The court finds
1
Section 546(c) of the Code provides:
(c) Except as provided in subsection (d) of this
section, the rights and powers of a trustee under
sections 544(a), 545, 547, and 549 of this title are
subject to any statutory or common-law right of a
seller of goods that has sold goods to the debtor, in
the ordinary course of such seller’s business, to
-2-
overwhelming evidence that McLane knew this by November 1996.
McLane was keeping a close watch on Debtor to make sure it paid
McLane within, or close to, contractual terms. The evidence
established that this close watch was based on McLane’s
knowledge that other suppliers were not being paid on time and
also that McLane’s older bills were not being paid.
The court also finds that McLane voted in favor of
Debtor’s plan. Document number 918 is McLane’s ballot
accepting the plan. The plan incorporates the disclosure
statement, which clearly says that there is no provision in the
plan to pay reclamation claims. The court finds that McLane
could have objected either to the disclosure statement or to
the plan incorporating the disclosure statement, but McLane did
neither. Instead, McLane voted in favor of the plan, which was
confirmed. See Doc. no. 993 (Order Confirming the Plan).
DISCUSSION
In order to withstand Debtor’s objection to its claim,
McLane has the burden of proof of establishing by a
preponderance of the evidence that it is entitled to
reclamation under § 546(c)1 of the Bankruptcy Code (“Code”).
reclaim such goods if the debtor has received such
goods while insolvent, but–
(1) such a seller may not reclaim any such goods
unless such seller demands in writing
reclamation of such goods–
(A) before 10 days after receipt of such
goods by the debtor; or
(B) if such 10-day period expires after the
commencement of the case, before 20 days
after receipt of such goods by the debtor;
and
(2) the court may deny reclamation to a seller
with such a right of reclamation that has made
such a demand only if the court–
(A) grants the claim of such a seller
priority as a claim of a kind specified in
section 503(b)of this title; or
(B) secures such claim by a lien.
11 U.S.C. § 546(c)(as amended 1994).
2
O.C.G.A. § 11-2-702 provides in part:
(2) Where the seller discovers that the buyer has
received goods on credit while insolvent he may
reclaim the goods upon demand made within ten days
after the receipt, but if misrepresentation of
solvency has been made to the particular seller in
writing within three months before delivery the tenday
limitation does not apply. Except as provided in
this subsection the seller may not base a right to
reclaim goods on the buyer’s fraudulent or innocent
misrepresentation of solvency or of intent to pay.
(3) The seller’s right to reclaim under subsection
(2) of this Code section is subject to the rights of
a buyer in ordinary course or other good faith
purchaser or lien creditor under this article (Code
Section 11-2-403). Successful reclamation of goods
-3-
McLane failed to carry its burden as to several aspects of its
case.
First, the court finds that Official Code of Georgia
Annotated (“O.C.G.A.”) § 11-2-7022 does require that a creditor
excludes all other remedies with respect to them.
O.C.G.A. § 11-2-702(2), (3) (1994). The Florida Statute
dealing with reclamation is substantively identical to the
Georgia statute except that it does not contain the words “or
lien creditor” in subsection (3). See FLA. STAT. ANN. § 672.702
(1993).
-4-
establish that it discovered a debtor’s insolvency within the
ten days following delivery of the goods. The language of the
statute is clear that lack of knowledge of insolvency is an
element of a reclamation claim under Georgia law. The seller
must discover that the buyer received goods while insolvent.
This necessarily means that the seller did not know the buyer
was insolvent when it shipped the goods. See In re Haugabook
Auto Co., Inc., 9 U.C.C. Rep. Serv. 1095 (M.D. Ga. 1971)
(Bootle, C.J.). In Haugabook Auto, the court found no error in
reading a reliance requirement into Ga. Code Ann. § 109A-2-702,
the precursor to O.C.G.A. § 11-2-702. The court stated:
It is a well settled principle of law that one
charging fraud against another must prove reliance on
the fraudulent act alleged to have been committed
before any recovery is authorized. The Comments to
the Official Text on the Uniform Commercial Code
(Comment 2) in referring to what is Ga. Code Ann. §
109A-2-702 indicates the close relationship of that
code section to the general fraud remedies long
recognized in law. . . . A seller who knows of the
buyer’s insolvency or knows that the buyer
misrepresented his solvency, and who nevertheless
engages in credit transactions with the buyer, is in
no position to complain.
Haugabook Auto, 9 U.C.C. Rep. Serv. at 1096.
In this case, the evidence established that McLane knew by
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June 1996 that Debtor was insolvent under the U.C.C. in the
sense that it was not paying its bills as they came due.
Therefore, McLane cannot satisfy the Georgia statutory test for
reclamation and is not entitled to reclaim under § 546(c) of
the Code.
Second, McLane failed to carry its burden to identify and
quantify what goods from the previous ten days’ deliveries were
still in Debtor’s stores on the date of demand. See Flav-ORich,
Inc. v. Rawson Food Serv., Inc. (In re Rawson Food Serv.,
Inc.), 846 F.2d 1343, 1344 (11th Cir. 1988) (“We conclude that
an implicit requirement of a § 546(c) reclamation claim is that
the debtor must possess the goods when the reclamation demand
is made and therefore that the seller must prove possession as
part of its prima facie case.”). It may be possible for a
creditor to carry its burden in this regard by proof of
industry standards for turns of particular items. See Rawson
Food Serv., 846 F.2d at 1350 n.11 (“There is support in the
cases that the court can look to evidence of the normal
turnover time of goods to determine whether the goods remained
in the debtor’s possession as of the reclamation demand. See
In re Landy Beef Co. Inc., 30 B.R. at 21.”).
However, that burden was not carried in this case. It is
certainly likely that a large amount of goods delivered within
the preceding ten days remained in the stores on the date of
demand. Unfortunately for McLane, under the evidence
-6-
presented, it is impossible to quantify that amount. McLane’s
controller of its Georgia division made an effort to take
industry data and apply it only to the Georgia stores in order
to come up with a percentage of goods remaining for all of the
Georgia and Florida stores. This simply left the quantity too
indefinite. Therefore, McLane also cannot satisfy this prong
of § 546(c) even if it could pass muster under the Georgia
statutory requirements for reclamation.
Third, the parties stipulated that NationsBank (now Bank
of America) had a blanket lien on Debtor’s inventory that
exceeded the value of its inventory at the date of demand
(which was the same day as the date of filing). However,
McLane could possibly prevail if it could require NationsBank
to marshal and look to other collateral for payment in full of
its secured claim. See In the Matter of Leeds Bldg. Prods.,
Inc., 141 B.R. 265, 270 (Bankr. N.D. Ga. 1992) (holding that a
seller may have a right to reclaim notwithstanding a secured
creditor with priority if the seller can show the right to
reclaim would have some value outside of bankruptcy).
McLane’s argument in this regard might be well taken if
McLane had filed an adversary proceeding joining NationsBank as
a party. Here, however, we merely have an objection to claim
involving no parties other than Debtor and McLane. Therefore,
the court cannot order NationsBank to marshal.
In this court’s opinion, it is a close call whether
-7-
McLane, as an unsecured creditor, can invoke marshaling against
a secured creditor. A recent decision, Galey & Lord Inc. v.
Arley Corp. (In re Arlco, Inc.), 239 B.R. 261 (Bankr. S.D.N.Y.
1999), holds that only a secured creditor can invoke marshaling
under circumstances very similar to the facts in this case.
However, Judge Cotton in In re Maddox, 84 B.R. 251, 258 (Bankr.
N.D. Ga. 1987), allowed a party who was not a creditor at all
but who had an interest in part of the debtor’s property to
utilize the doctrine. This court is inclined to follow the
reasoning in Maddox. However, the point is academic in this
case because NationsBank has not been joined in this action.
Finally, as discussed in the court’s fact findings, McLane
voted for Debtor’s plan which incorporated the disclosure
statement’s mandate that no reclamation claims were provided
for in the plan. McLane is now bound by this language in the
confirmed plan.
The Eleventh Circuit discussed the preclusive effect of an
order confirming a chapter 11 plan in Wallis v. Justice Oaks
II, Ltd. (In re Justice Oaks II, Ltd.), 898 F.2d 1544 (11th
Cir. 1990). The court stated:
Claim preclusion applies to an order or judgment when
four conditions are satisfied. First, the prior
judgment must be valid in that it was rendered by a
court of competent jurisdiction and in accordance
with the requirements of due process. Second, the
judgment must be final and on the merits. Third,
there must be identity of both parties or their
privies. Fourth, the later proceeding must involve
the same cause of action as involved in the earlier
-8-
proceeding.
Id. at 1550 (citations omitted).
All four elements are satisfied in this case. First,
there has been no challenge to the court’s jurisdiction or to
the procedure followed in confirming Debtor’s plan. Second, it
is well established that a bankruptcy court’s order of
confirmation is entitled to the same effect as any district
court final judgment on the merits. Id. Third, Debtor and
McLane were parties to the confirmation proceeding and McLane
had an opportunity to object to its treatment during that
proceeding. Fourth, McLane’s reclamation claim is based on the
same transaction that gave rise to its treatment in the plan.
Therefore, because the four requirements for claim preclusion
are met in this case, the confirmation order is a complete bar
to McLane’s reclamation claim. See Sanders v. GIAC Leasing
Corp. (In re Sanders), 81 B.R. 496, 498 (Bankr. W.D. Ark. 1987)
(“An order confirming a chapter 11 plan from which there is no
appeal is generally regarded as an order that is entitled to
full faith and credit by other courts and is res judicata as to
all questions pertaining to such plan which were raised or
could have been raised.”).
CONCLUSION
The facts and the law in this case do not allow for
McLane’s reclamation claim against Debtor. Accordingly,
McLane’s total claim of $807,466 (as stipulated at ¶58 of Doc.
-9-
no. 1548) will be allowed as unsecured. Debtor’s objection
will be sustained.
An order in accordance with this Memorandum Opinion will
be entered.
DATED this 22nd day of March 2000.
________________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

R-P PACKAGING,INC

March 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
R-P PACKAGING,INC. : CASE NO. 99-42537
d/b/a COLUMBUS PACKAGING, : CHAPTER 11
:
Debtor. ::
PLICON CORPORATION, : CASE NO. 00-41153
: CHAPTER 11
Debtor. ::
MEMORANDUM OPINION
On October 12, 2001, the court held a hearing on the
objection to claims and motion for determination of tax liability
of R-P Packaging, Inc. and Plicon Corporation (collectively,
“Debtors”) to the Muscogee County Tax Commissioner
(“Commissioner”). At the conclusion of the presentation of the
evidence, the court asked the parties to submit proposed findings
of fact and conclusions of law. The court has considered all the
briefs and proposed findings and conclusions filed by the
parties, the evidence, and the applicable statutory and case law.
The court will sustain Debtors’ objection to the extent that the
Commissioner’s claim is inconsistent with the following findings
of fact and conclusions of law.
PROCEDURAL HISTORY
On November 12, 1999, R-P Packaging, Inc. filed a voluntary
petition under Chapter 11 of the Bankruptcy Code (“Code”). On
1 Unless otherwise indicated, references to court documents are those filed
in R-P Packaging, Inc., Case No. 99-42537.
-2-
June 1, 2000, Plicon Corporation filed its Chapter 11 petition.
Debtors continued in the management and operation of their
businesses as debtors-in-possession pursuant to § 1107 and § 1108
of the Code. No order for joint administration of Debtors’ cases
has been entered. However, in accordance with the Joint Plan of
Liquidation which was confirmed on August 3, 2001, a single
unitary estate has been established. (Doc. 164)1.
During the course of Debtors’ operations, Debtors owned
certain personal property consisting of, among other things,
machinery, equipment, and inventory (“personal property”). The
personal property was used at Debtors place of business located
at 4949 Schatulga Road, Columbus, Muscogee County, Georgia.
On December 17, 1999, the Commissioner filed her initial
proof of claim in which she asserted a priority claim in the
amount of $481,625.99. (claim #28). The Commissioner amended her
claim several times and on March 29, 2000, she filed a final
amended claim in the amount of $588,700.99. (See claim #108;
Doc. #97, Exh. “A”). This claim consists of taxes which the
Commissioner alleges are due for the years of 1996 through 2000.
On June 30, 2000, the court entered an order authorizing the
sale of substantially all of Debtors’ personal property to
Plystar, Inc. (“Plystar”) for a purchase price of $1,785,000.00.
(Doc. #76). The order provided that the personal property would
-3-
be sold free and clear of all liens and encumbrances. The
Commissioner’s tax liens attached to the proceeds of the sale.
On March 19, 2001, Debtors filed their objection to the
Commissioner’s claim and a motion for determination of tax
liability pursuant to § 505 of the Code. Debtors contend that
the valuation of the personal property was too high and in excess
of its fair market value for the 1996 through 2000 tax years.
Debtors assert that the best evidence of fair market value is the
price that could be obtained at an arms length sale. Moreover,
Debtors argue that at least a portion of the personal property
may not have been subject to tax for the entire period in
question because Debtors were entitled to tax abatements.
On June 6, 2001, the court entered a consent order
authorizing Debtors to disburse $250,000.00 to the Commissioner.
(Doc. #120). This order provided that the disbursement was to be
applied to the Commissioner’s claim.
On October 11, 2001, the Commissioner filed a trial brief in
support of her position on Debtors’ objection and § 505 motion.
In her brief, the Commissioner disputes that Debtors were
entitled to any tax abatements. In addition, the Commissioner
asserts that the fair market value for ad valorem tax purposes is
generally ascertained by multiplying the cost of the property by
a depreciation factor.
On October 12, 2001, the court held a hearing on Debtors’
objection to the Commissioner’s claim and motion for
-4-
determination of tax liability. The following constitutes the
court’s Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
The parties have entered into a number of stipulations. As
of October 20, 2001, the parties agree that the Commissioner’s
records indicate that Debtors are indebted to the Commissioner
for accrued taxes, interest, and penalties in the amount of
$429,423.33, the unpaid portion of which continues to accrue
interest. This amount is inclusive of the $250,000.00 court
authorized disbursement. The parties also agree that the
Commissioner’s calculations are based on Debtors’ tax returns.
The parties also have stipulated that the millage rate for the
period in question is 0.041. Therefore, if the court were to
accept the appraisal value of Mr. Oliver Juhan, the parties agree
that the Commissioner’s records would accurately reflect Debtors’
tax liability. On the other hand, if the court were to accept
the appraisal value proposed by Mark Wilenkin, the parties agree
that Debtors’ total outstanding tax liability would be
$161,114.11. This amount is exclusive of any penalties and
interest.
The parties have further stipulated to the value of the
inventory. As a result, the value of the inventory for each year
in question is as follows: $46,952.00 in 1996; $28,954.00 in
-5-
1997; $21,624.00 in 1998; $15,468.00 in 1999; and $219,133.00 in
2000. Therefore, the sole issue before the court is the value of
the machinery and equipment (“Equipment”) excluding the
inventory.
At the hearing, Ms. Jane Worthington testified for the
Debtors. Since October 2000, Ms. Worthington has served as the
president of the Debtors. Prior to that time, Ms. Worthington
served as the director of human resources and the customer
service manager. To some extent, Ms. Worthington was involved in
the asset sale to Plystar. However, based on Ms. Worthington’s
testimony, the court finds that she has insufficient knowledge to
testify as to the value of the Equipment.
The court likewise finds Mr. Marel Stewart incompetent to
testify as an expert as to the value of the Equipment. Mr.
Stewart testified that he was employed by Debtors for over forty
years where he worked directly with the Equipment. Nevertheless,
his testimony failed to demonstrate a satisfactory knowledge as
to the valuation of the Equipment.
As to the testimony of Mr. Mark Wilenkin, the court finds
him competent to testify as an expert. Although Mr. Wilenkin
holds no license or professional designation, he has several
years of experience in buying, selling and appraising equipment
like that at issue in this case. In addition to conducting all
appraisals for his own company, Mr. Wilenkin performs evaluations
and appraisals for other companies and accountants.
2 Mr. Wilenkin defined a “bench-top” appraisal as one which is based solely
on a list and/or pictures of machinery or equipment.
-6-
However, the court does not find Mr. Wilenkin competent to
testify as to whether the specific pieces of equipment contained
in his appraisal were actually in Debtors’ possession at the
times in question. While Mr. Wilenkin did inspect the Equipment
on November 9, 2000, this was after the sale of the Equipment to
Plystar. Therefore, Mr. Wilenkin never inspected all of the
Equipment while it was in Debtors’ possession. According to his
testimony, Mr. Wilenkin’s “bench-top”2 appraisal was based on
lists of the Equipment supplied to him by Debtors’ counsel and
Norman Adler of Norman Levy Associates. (See also Wilenkin Dep.
at 11-12).
Nonetheless, Mr. Wilenkin held firm to his bench-top
appraisal and testified that the present value of the Equipment
was $1,998,380.00 as of February 1999. Mr. Wilenkin defined
present value as the value of the Equipment if sold in place to
a willing buyer by a willing seller. (See also Movant’s Exh.
“1″). Mr. Wilenkin chose the February 1999 date because it was
a reasonable mid-point for the period in question. Furthermore,
he testified that the value would not have substantially changed
during that period.
Mr. Oliver Juhan testified for the Commissioner. The court
finds Mr. Juhan competent to testify as an expert on the
Equipment. Mr. Juhan is the chief for the personal property
-7-
division of the Muscogee County Board of Tax Assessors (“Tax
Assessors”). He has been a member of the American Society of
Appraisers since 1984. From 1974 until the time at which Mr.
Juhan joined the Tax Assessors, Mr. Juhan had been an appraiser
for the Georgia Department of Revenue. Mr. Juhan testified that
since October 1997, he has visited the Debtors’ facility each
year. During these visits, he personally inspected the
Equipment.
Mr. Juhan testified that Georgia law requires taxpayers to
return their personal property for fair market value. Mr. Juhan
explained that taxpayers such as the Debtors are required to
return a Business Personal Property Report (“Return”). (See
e.g., Exh R-1). In the Return, taxpayers are required to include
the cost of the property with the applicable depreciation. From
the information contained in the Return, the Tax Assessors assess
the value. If no challenge or appeal is made by the taxpayer
within thirty (30) days, this amount constitutes the assessed
value which is then forwarded to the Commissioner for the
calculation of the amount of tax due.
During the 1996 through 2000 tax years, Mr. Juhan testified
that the Tax Assessors office used the depreciated cost method in
determining the value of Debtors’ Equipment. According to Mr.
Juhan, the depreciated cost method is the most fair and equitable
method for valuing commercial personal property. Although other
methods such as sales comparison and income approach are
-8-
available, Mr. Juhan testified that these methods would not
result in the best estimate of the fair market value. For
example, Mr. Juhan explained that his appraisal included the cost
and installation of the Equipment using non-union labor. The
sale of similar equipment in New York likely would be installed
with unionized labor. Therefore, a sales comparison in New York
would not be very comparable. Furthermore, Mr. Juhan testified
that the Georgia Department of Revenue uses the cost depreciation
method in determining the value of personal property like that in
question in this case.
Mr. Juhan acknowledged, however, that the depreciated cost
value does not always result in the best estimate of the fair
market value. In many cases, it is often necessary to consider
other relevant factors including, but not limited to obsolescence
and whether a ready market for the property exists. In the
instant case, Mr. Juhan testified that all relevant information
provided by Debtors was considered in determining the fair market
value of Debtors’ Equipment.
For the tax years in question, Mr. Juhan also testified that
the value of the Equipment was based on two tax accounts: account
number 00135201 (“201 account”) and account number P0420401 (“P
account”). Only a W & H Olympia 726 CL Press and a General 51″
Vacuum Metalizer were included in the P account. The remaining
Equipment at issue was included in the 201 account.
For the 1996 tax year, Mr. Juhan testified that the Tax
-9-
Assessors initially determined that Debtors’ Equipment had a fair
market value of $6,513,839.00. Primarily, this amount was based
on Debtors’ own tax return. In addition to depreciation, Mr.
Juhan testified that obsolescence factors were applied. Because
of idle equipment and capitalized labor, which presumably were
not considered, Debtors appealed the Tax Assessors’ valuation to
the Muscogee County Board of Equalization (“board of
equalization”). As a result, the fair market value of the
Equipment was reduced to $5,883,773.00. (See Exh. R-1). Mr.
Juhan indicated that this value pertained only to the Equipment
in the 201 account. Mr. Juhan explained that although a value of
$2,599,857.00 on the Equipment in the P account had been
assessed, the tax liability resulting from that value had been
paid by Debtors. Therefore, there is no issue regarding the
valuation of the Equipment in the P account for the 1996 tax
year. (See Doc. #97, Exh. “A”).
As to the 1997 tax year, the Tax Assessors valued Debtors’
Equipment at $4,753,029.00. According to Mr. Juhan, this amount
was exclusive of some idle machinery that was out of service.
Also, this amount did not include some machinery which Debtors
abandoned when they moved their plant to another location. For
these reasons, Mr. Juhan testified that a straight line
depreciation method would be fair and equitable as to that year’s
valuation. (See Exh. R-2).
However, on cross examination, Mr. Juhan testified that the
-10-
tax liability for the 1997 tax year was based on a $2,414,155.00
assessed value on the Equipment in the P account and a
$5,668,102.00 assessed value on the Equipment in the 201 account.
The sum total of the valuations on both tax accounts total
$8,082,257.00, an amount which differs from Mr. Juhan’s direct
examination testimony by $3,329,228.00. Remarkably, Mr. Juhan
provided no explanation for this rather large difference in the
valuations.
For the 1998 and 1999 tax years, Mr. Juhan testified that he
was personally involved in the valuation of Debtors’ Equipment.
After some adjustments to the 1998 valuation, the Tax Assessors
valued the Equipment at $5,073,181.00. (See Exh. R-3). A hearing
before the board of equalization was conducted. According to Mr.
Juhan, the board of equalization valued the Equipment in the P
account at $1,050,000.00. As to the Equipment in the 201
account, a new value of $2,320,256.00 was assessed. The Tax
Assessors appealed to the superior court, but this appeal was
interrupted by the filing of Debtor’s bankruptcy case.
For the 1999 tax year, some revaluations occurred. Mr.
Juhan testified that he discovered a laser device which had not
been previously reported. After the revaluations, the Tax
Assessors determined the total value of all equipment and
inventory to be $5,806,830.00. Mr. Juhan testified that Debtors
never challenged this assessed amount. (See Exh. R-5). Mr. Juhan
further testified that the P account Equipment was valued at
-11-
$1,864,623.00 and the 201 account Equipment was valued at
$4,812,177.00. The increased value in the 201 account was a
result of the newly discovered laser. Based on the account
information, the total assessed value of the Equipment excluding
the inventory was $6,676,800.00. However, similar to the 1997
valuations, Mr. Juhan provided no explanation for the discrepancy
between $5,806,830.00 and $6,676,800.00. Further, if the
$15,468.00 value of the inventory, an amount on which both
parties agree, is deducted from the $5,806,830.00 amount, a
greater discrepancy results.
For the 2000 tax year, the Tax Assessors valued all of
Debtors’ personal property at $4,862,172.00. Mr. Juhan testified
that this amount included the Equipment, fixtures and inventory.
Accordingly to Mr. Juhan, Debtors never challenged this amount.
Despite Mr. Juhan’s testimony, Debtors’ 201 account Return
provides that all personal property was valued at $4,022,636.00.
(See Exh. R-6). Mr. Juhan testified that no return was filed on
the P account for the 2000 tax year, therefore, the same value as
the prior year without any depreciation would be assessed.
Accordingly, $1,864,623.00 was assessed to the P account. As to
the Equipment in 201 account, $4,232,458.00 was assessed to that
account.
CONCLUSIONS OF LAW
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The authority for the court to determine tax liability is
found in § 505 of the Code. In pertinent part, § 505(a) of the
Code provides:
(a)(1) Except as provided in paragraph (2) of this
subsection, the court may determine the amount or legality
of any tax, any fine or penalty relating to a tax, or any
addition to tax, whether or not previously assessed, whether
or not paid, and whether or not contested before and
adjudicated by a judicial or administrative tribunal of
competent jurisdiction.
(2) The court may not so determine-
(A) the amount or legality of a tax, fine, penalty, or
addition to tax if such amount or legality was
contested before and adjudicated by a judicial or
administrative tribunal of competent jurisdiction
before the commencement of the case under this title;
. . .
11 U.S.C. § 505(a); see also In re Koger Properties, Inc., 172
B.R. 351, 352 (Bankr. M.D. Fla. 1994)(holding that except for the
limitation in § 505(a)(2) of the Code, “the bankruptcy court has
jurisdiction to determine the amount or legality of any tax, fine
or penalty for which the debtor is liable.”). Although the
parties have raised the issue of abstention, neither party has
addressed the jurisdictional issue which § 505(a)(2)(A) of the
Code presents. Thus, the court will first address jurisdiction
under this subsection.
Under § 505(a)(2)(A), the court is without jurisdiction to
determine the tax liability if such determination was
“adjudicated by a judicial or administrative tribunal” before the
case was filed. See In re Onondaga Plaza Maintenance Co., 206
B.R. 653, 656 (Bankr. N.D. N.Y. 1997)(holding that the court was
-13-
without authority pursuant to § 505(a)(2)(A) to determine the
debtors’ tax liability because the tax liability was contested
and adjudicated by the city’s assessment board of review before
the case was filed); In re Washington Mfg. Co., 120 B.R. 918,
919-20 (Bankr. M.D. Tenn. 1990)(no authority because the county
board of equalization denied debtors’ prepetition request for a
lower appraisal); In re Ishpeming Hotel Co., 70 B.R. 629, 632
(Bankr. W.D. Mich. 1986)(res judicata on tax liability issue
because the debtor contested the assessors’ valuations and
appeared before the municipal board of review prior to its
bankruptcy case).
In this case, the evidence demonstrates that the board of
equalization adjudicated the valuation of Debtors’ Equipment for
the 1996 and 1998 tax years. There is no direct evidence as to
whether the 1996 and 1998 determination by the board of
equalization occurred prepetition. However, given Mr. Juhan’s
testimony that a taxpayer has thirty (30) within which to appeal
to the board of equalization, the court must conclude that the
1996 determination occurred prepetition. Therefore, the court
finds that the court is without jurisdiction to determine
Debtors’ tax liability for the 1996 tax year.
As to the 1998 tax year, Mr. Juhan testified that the filing
of Debtors’ case interrupted the Tax Assessors’ appeal of the
valuation by the board of equalization. Because that
determination has been appealed, the court finds that the 1998
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tax liability has not been fully adjudicated as defined in §
505(a)(2)(A) of the Code. See Texas Comptroller of Public
Accounts v. Trans State Outdoor Advertising Co. (In re Trans
State Outdoor Advertising Co.), 140 F.3d 618, 621-22 (5th Cir.
1998)(holding that debtor’s tax liability could have been
determined by the bankruptcy court if debtor had filed its
petition before the decision of the Comptroller became final);
Lipetzky v. the Dep’t of Revenue of the State of Montana (In re
Lipetzky), 64 B.R. 431, 434 (Bankr. D. Mont. 1986)(holding that
the bankruptcy court has jurisdiction to determine debtor’s tax
liability because no final decision had been entered in the state
court appeal). Accordingly, the court has jurisdiction to review
the 1998 valuations and make a tax liability determination for
that year.
As to the abstention issue raised by the parties, the court
agrees with Debtors that abstention would not be appropriate.
Under § 505(a)(1) of the Code, the court may abstain from making
a determination of tax liability. Because § 505(a)(1) provides
that the court “may” determine tax liability, the exercise of
jurisdiction under this subsection is discretionary. However,
courts typically have analyzed several factors before determining
whether abstention is proper. See Thornton v. United States (In
re Thornton), No. 92-40405, 1995 WL 442192, at *6 (Bankr. M.D.
Ga. June 23, 1995)(Laney, J.); Gossman v. United States (In re
Gossman), 206 B.R. 264, 266 (Bankr. N.D. Ga.)(Murphy, J.). As
-15-
Debtors have pointed out, this court in Thornton looked at
factors such as the complexity of the tax issues, efficient and
orderly case administration, the court’s docket, and trial time.
Thornton at *7; see also Gossman at 266. In evaluating these
factors, courts primarily consider whether a bankruptcy purpose
would be served. See Gossman at 267.
In the instant case, the court agrees with Debtors’ analysis
of these factors. Accordingly, the court will not abstain from
exercising its jurisdiction under this subsection.
In determining the tax liability under § 505(a)(1), the
court must apply the substantive aspects of state law. See Blue
Cactus Post, L.C. v. Dallas County Appraisal District (In re Blue
Cactus Post), 229 B.R. 379, 386 (Bankr. N.D. Tex. 1999)(citing
Arkansas Corp. Comm’n v. Thompson, 313 U.S. 132, 142 (1941)).
The fact that a debtor/taxpayer did not comply with the
procedural requirements under state law in contesting a tax
assessment is irrelevant under § 505(a)(1) of the Code. See id.
at 386-87. Accordingly, the court will apply Georgia law.
Pursuant to O.C.G.A. § 48-5-6, taxpayers are required to
return their property at its fair market value for the purposes
of ad valorem taxation. Georgia law defines “fair market value”
as the amount “a knowledgeable buyer would pay for the property
and a willing seller would accept for the property at an arm’s
length, bona fide sale.” O.C.G.A. § 48-5-2(3). As to the
valuation of equipment and machinery in which no ready market
-16-
exists, “value may be determined by resorting to any reasonable,
relevant, and useful information available including, but limited
to, the original cost of the property, any depreciation or
obsolescence. . . .” Id.
In this case, the court finds that Mr. Wilenkin’s bench-top
appraisal was consistent with Georgia law. Pursuant to Mr.
Wilenkin’s testimony, he defined “present value,” the term used
in his appraisal, as the value of the Equipment if sold in place
to a willing buyer by a willing seller. Thus, “present value” is
sufficiently consistent with “fair market value” as defined in
O.C.G.A. § 48-5-2(3). Also, Mr. Wilenkin’s use of comparable
sales in arriving at his appraisal qualify as “reasonable,
relevant and useful information” as contemplated in O.C.G.A. §
48-5-2(3). However, the court notes that Mr. Wilenkin did not
personally appraise the Equipment at issue. Morever, he assigned
the same value to the Equipment for each year in question
contending that the value of the Equipment would not have
substantially changed during the period in question.
The court also finds that the Tax Assessors complied with
Georgia law in determining the value of Debtors’ Equipment. In
addition to straight line depreciation, the evidence demonstrates
that the Tax Assessors used cost and obsolescence factors when
applicable. See O.C.G.A. § 48-5-2(3). This is not to say, as
pointed out by Debtors, that the Tax Assessors enjoy a
presumption of correctness. See Macon-Bibb County Brd. of Tax
-17-
Assessors v. J.C. Penney Co., Inc., 239 Ga. App. 322, 324, 521
S.E.2d 234, 236 (1999). In contrast to Mr. Wilenkin’s appraisal,
the Tax Assessors personally inspected the Equipment and valued
the Equipment for each year in question. The court disagrees
with the Tax Assessors on the use of comparable sales. The Tax
Assessors should have considered comparable sales.
The primary difficulty, however, with the Tax Assessors’
valuation is the discrepancy in their own valuations for each
year in question. Given this discrepancy and the fact the Tax
Assessors failed to consider comparable sales factors, the court
will give some weight to the appraisal of Mr. Wilenkin.
For the 1997 tax year, the Tax Assessors assessed Debtors’
tax accounts at $8,082,257.00 but testified that they valued the
Equipment at $4,753,029.00. The court can make no conclusion
regarding this disparity. For each year in question, Mr.
Wilenkin appraised the Equipment at $1,998,380.00. In the prior
year, Debtors accepted $2,599,857.00 as the value for just two
pieces of Equipment. Accordingly, the court cannot accept Mr.
Wilenkin’s value but will give Debtors the benefit of the Tax
Assessors lowest valuation. Therefore, the court finds the value
of the Equipment for the 1997 tax year to be $4,753,029.00.
As to the 1998 tax year, the court accepts the valuation of
the Equipment as set forth by the board of equalization. This
gives some weight to Mr. Wilenkin’s appraisal which considered
comparable sales. As a result, the court finds that the value of
-18-
the Equipment for the 1998 tax year is $3,370,256.00.
For the 1999 tax year, Mr. Juhan testified that the assessed
value increased from the prior year because of a laser device he
discovered which was not reported in prior years. Mr. Wilenkin’s
appraisal mentions nothing about the laser. As a consequence,
the court will give Mr. Wilenkin’s appraisal no weight.
Nevertheless, because the Tax Assessors failed to consider any
comparable sales factors, the court again will give Debtors the
benefit of the Tax Assessors lowest appraisal which is
$5,806,830.00.
As to last year in question, the Tax Assessors have
testified to two different valuations. Further, the Tax
Assessors have presented Debtors 201 account Return for 2000
which shows yet a third valuation amount. (See Movant’s Exh. 6.)
The court finds this unremarkable. Because Mr. Wilenkin’s
appraisal did not include the laser, the court cannot accept his
appraisal. The evidence shows that Debtors did not challenge the
assessed value for the 2000 tax year. Therefore, the court will
accept the value as indicated in their 201 account Return for the
2000 tax year. Given the $4,022,636.00 value for all personal
property less the undisputed value of the inventory, the court
finds the value of the 201 account equipment to be $3,803,503.00.
The only testimony as to the value of the equipment in the P
account was $1,864,623.00. Accordingly, the total value for the
Equipment for the 2000 tax year is $5,668,126.00.
-19-
CONCLUSION
As to the 1996 tax year, § 505(a)(2) of the Code prohibits
the court from determining Debtors’ tax liability. For the
remaining years in question, the court will value the Equipment
as follows:
1997 $4,753,029.00
1998 $3,370,256.00
1999 $5,806,830.00
2000 $5,668,126.00
Therefore, the court will sustain Debtors’ objection to the
Commissioner’s claim to the extent that the Commissioner’s claim
is inconsistent with these values.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this _____ day of March, 2002.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

JERRY HAMPTON

January 2001

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
THOMASVILLE DIVISION
IN RE: : CASE NO. 99-60376
:
JERRY HAMPTON, :
SSN: 258-94-1125, : CHAPTER 12
:
Debtor. :
MEMORANDUM OPINION
On November 1, 2000, the court held a hearing on Trustee’s
objection to claim number 0013 of Lasseter Tractor Company, Inc.
(“Lasseter”) as a secured claim and Lasseter’s response to the
objection. At the conclusion of the hearing, the parties were
given an opportunity to submit letter briefs. Trustee filed a
letter brief. Lasseter and Debtor filed letter briefs in
response. After considering the parties’ briefs and the
applicable statutory and case law, the court will sustain
Trustee’s objection.
FACTS
On November 20, 1995, Debtor purchased a model 8200 John
Deere Tractor (“tractor”) from Lasseter at which time Debtor
entered into a security agreement with Deere & Company.
(“Deere”). On November 22, 1995, Deere filed a UCC-1 financing
statement in the Colquitt County Clerk’s office describing its
security interest in the tractor. (Exh. “A”).
On May 3, 1999, Deere filed a UCC-3. Presumably, Deere
1 Id. Deere’s representative, Roberta J. Petty, signed under
“Secured Parties” and Tina Arrington, a representative from Lasseter,
signed under “Signature of Debtor(s).”
2 The parties have stipulated that these documents were filed in the
Colquitt County Clerk’s office in April 2000, however, the court notes
that there is no “Filed” stamp from the Clerk’s office indicating the
date and time of the filing. The only date reference is the April 7,
2000 date in the affidavit. See Exh. “C”.
-2-
executed this filing attempting to assign its interest in the
tractor to Lasseter because the “Assignment” box was checked.
(Exh. “B”). However, the box and sentence indicating an
“Assignment” was crossed through and the “Termination” block was
checked. Id. Furthermore, the reference specifically describing
that an assignment to Lasseter was being made, was also crossed
through and initialed by Lee Ann P. Williams, an employee of
Lasseter. Id. Representatives from Lasseter and Deere signed
the UCC-3.1 The original UCC-1 filed on November 22, 1995 was
stamped “terminated 5-3-99.” (Exh. “A”).
On May 7, 1999, Debtor filed a voluntary petition under
Chapter 12 of the Bankruptcy Code. (“Code”). On September 8,
1999, Lasseter filed a proof of claim as secured in the amount of
$63,104.30 describing the tractor as its collateral. On January
31, 2000, the court confirmed Debtor’s Chapter 12 plan which
treated Lasseter as secured. (Doc. No. 78).
In April 2000, Lasseter filed an amended UCC-3. Attached to
the amended UCC-3, Lasseter submitted an affidavit indicating
that the May 3, 1999 termination was in error.2
On August 2, 2000, Trustee objected to the proof of claim as
-3-
being secured. Trustee maintains that at the time Debtor’s
petition was filed, no valid financing statement existed.
Therefore, Lasseter had an unperfected security interest in the
tractor. Trustee does not object to the allowance of the claim
as unsecured.
On September 26, 2000, Debtor filed his response to
Trustee’s objection. In both his response and letter brief,
Debtor agrees with Trustee and maintains that equity would be
better served if Lasseter’s claim was treated as unsecured.
On August 30, 2000, Lasseter filed its response to Trustee’s
objection. Lasseter asserts that the termination of the original
UCC-1 was done in error and executed without Lasseter’s
authority. In its brief, Lasseter maintains that it lacked
authority to execute a termination statement and further asserts
that equitable reformation is proper.
DISCUSSION
The issue before the court is whether Lasseter held a
perfected a security interest in the tractor at the time Debtor
filed his Chapter 12 petition. Because this issue has arisen in
the context of an Objection to Claim, Rule 3007 of the Federal
Rules of Bankruptcy Procedure governs. However, “[i]f an
objection to a claim is joined with a demand for relief of the
kind specified in Rule 7001, it becomes an adversary proceeding.”
FED. R. BANKR. P. 3007 (2000). Conceivably, Trustee’s Objection to
-4-
Claim seeks “to determine the validity, priority, or extent of
a lien . . . .” FED. R. BANKR. PROC. 7001(2)(2000).
Although the court finds that the Objection to Claim may not
be the proper procedure for presenting this issue, this is a
procedural defect and not a jurisdictional defect, which may be
waived. In re Felker, 181 B.R. 1017, 1020 (Bankr. M.D. Ga.
1995)(Walker, J.). “The failure of any party to raise this issue
either at the hearing or subsequently at the Court’s invitation
to brief the issues evidences such waiver by the parties.” Id.
(citing In re Duke, 153 B.R. 913, 914 (Bankr. N.D. Ala. 1993).
Because none of the parties in this case raised this issue either
at the hearing or in their letter briefs, the court finds that
all parties waived this procedural defect.
Even if there had been no waiver, the court nevertheless
finds that, given the facts of this case, an adversary proceeding
is not required. If a creditor fails to file documentation
supporting the existence of a security interest, an adversary
proceeding is not required “to reduce the claim to an unsecured
claim; a less formal objection to the claim is sufficient.” In re
Therneau, 214 B.R. 782, 785 (Bankr. E.D.N.C. 1997); See also In
re Merry-Go-Round Enterprises, Inc., 227 B.R. 775, 778 (Bankr. D.
M.D. 1998)(holding that an objection to secured status is not the
type of relief specified in Rule 7001(2)). In this case,
Lasseter did not file a UCC-1 with its proof of claim and Trustee
is seeking only to reduce the claim to an unsecured status.
-5-
Therefore, the court finds that the Objection to Claim is
sufficient.
A properly filed proof of claim is prima facie evidence of
the validity and amount of the claim. FED. R. BANKR. P. 3001(f)
(2000). Therefore, the party objecting to the claim has the
burden of overcoming this evidentiary effect. Cherry v. General
Motors Acceptance Corp. (In re Cherry), 116 B.R. 315, 317 (Bankr.
M.D. Ga. 1990)(Laney, J.). This burden is met when the objecting
party has presented “sufficient evidence to place the claimant’s
entitlement at issue[,]” at which time the burden then shifts to
the claimant. Id. (quoting In re Taylor, 99 B.R. 371, 373
(Bankr. S.D. Ohio 1989).
Trustee’s objection clearly raises the issue of Lasseter’s
entitlement as a secured creditor. The court finds that Lasseter
executed the May 3, 1999 termination in error and therefore, the
court agrees with the cases cited by the Trustee. See Crestar
Bank v. Neal (In re Kitchin Equipment Company of Virginia), 960
F.2d 1242 (4th Cir. 1992); In re Silvernail Mirror and Glass,
Inc., 142 B.R. 987 (Bankr. M.D. Fla. 1992). Although the
termination statement was filed in error and did not reflect the
intent of the parties, anyone who conducted a search of the
public records between May 3, 1999 and April 2000 would have
concluded that no security interest existed. Kitchin at 1249;
Silvernail at 989-90. The court finds that Lasseter’s security
interest was not perfected at the time of Debtor’s filing and was
3 Although no assignment was executed, the court finds that the May 3,
1999 UCC-3 was most likely an attempt by Deere to assign its interest
to Lasseter.
-6-
ineffective as against Trustee. Accordingly, the court finds
that Trustee has met its burden and thus the burden of persuasion
shifts to Lasseter. See In re Cherry, 116 B.R at 317.
Lasseter’s asserts that it did not have the authority to
terminate the UCC-1. Deere was the secured party which, at the
time the termination was made, had not assigned its interest to
Lasseter.3 Citing Eleventh Circuit authority, Lasseter maintains
that because no agency relationship existed between Lasseter and
Deere, Lasseter had no authority to execute a termination
statement on behalf of Deere, the secured party. Borg-Warner
Acceptance Corp. v. Davis, 804 F.2d 1580, 1583 (11th Cir. 1986).
Furthermore, Lasseter distinguishes Kitchin and Silvernail by
pointing to the fact that the erroneous termination in those
cases were performed by the secured parties themselves.
However, the court disagrees with Lasseter and finds Borg-
Warner to be inapplicable. In this case, unlike Borg-Warner, the
termination statement was signed by a representative of both
Lasseter and Deere. Deere’s employee, Roberta J. Petty, signed
as the secured party while Lasseter’s employee, Tina Arrington,
signed under the heading, “Signature(s) of Debtors(s).” Although
Ms. Arrington incorrectly signed as Debtor, she nevertheless
signed the UCC-3. (Exh. “B”). The fact that Debtor did not sign
-7-
is immaterial. There is no requirement that a debtor sign a UCC-
3 termination statement in order for it to be effective.
Moreover, Lee Ann P. Williams, another Lasseter employee, crossed
through the reference to the assignment and initialed the cross
through. Id. Because both parties signed the UCC-3, the court
finds that sufficient authority existed to execute the
termination statement. Accordingly, Lasseter has not met its
burden of persuasion.
In conclusion, the court finds that Lasseter’s security
interest in the tractor was unperfected at the time Debtor filed
his petition. Therefore, the court will sustain Trustee’s
objection to claim number 0013 as being secured and will allow
the claim as unsecured. Because Debtor’s Chapter 12 plan was
confirmed treating Lasseter as secured, the court will direct
Debtor to file a modification to his Chapter 12 plan.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this _____ day of January, 2001.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

RICHARD W. PASCHEN

August 2000

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: CASE NO. 99-42771-JTL
RICHARD W. PASCHEN CHAPTER 13
SSN: 267-33-7941
DOREEN A. PASCHEN
SSN: 263-67-3718,
DEBTORS.
MEMORANDUM OPINION
American General Finance (“American General”) objected to
confirmation of Debtors’ chapter 13 plan on the grounds of
valuation and lack of good faith. American General also
disagrees with Debtors’ treatment of its claim under §
1322(c)(2) of the Bankruptcy Code (“Code”). After a hearing on
June 22, 2000, the court took under advisement the issues
related to American General’s objection to confirmation. The
parties have submitted briefs, and American General has
stipulated as to how Debtors would testify. For the reasons
that follow, the court will rule in Debtors’ favor on the legal
issue regarding the treatment of American General’s claim under
§ 1322(c)(2) of the Code. The court will consider the other
grounds for objection at the continued confirmation hearing
scheduled for Friday, August 25, 2000 in the Bankruptcy
Courtroom, 901 Front Avenue, Suite 309, Columbus, Georgia.
DISCUSSION
The parties are in agreement that Debtors’ note with
-2-
American General is secured solely by real estate that is
Debtors’ principal residence, and the final payment on that
note is due before the final payment under their chapter 13
plan. Accordingly, the parties also agree that this situation
is covered by § 1322(c)(2) of the Code. Section 1322(c)(2)
provides:
(c)Notwithstanding subsection (b)(2) and applicable
nonbankruptcy law–
. . .
(2) in a case in which the last payment on
the original payment schedule for a claim
secured only by a security interest in real
property that is the debtor’s principal
residence is due before the date on which
the final payment under the plan is due,
the plan may provide for the payment of the
claim as modified pursuant to section
1325(a)(5) of this title.
11 U.S.C. § 1322(c)(2).
The parties disagree, however, as to the meaning of §
1322(c)(2). Debtor argues that § 1322(c)(2)creates an
exception to § 1322(b)(2) by allowing the bifurcation and
cramdown of the secured claims on certain short-term mortgages
as with any other secured claim not covered by § 1322(b)(2).
For support, Debtor relies on the vast majority of cases that
deal with this issue. See First Union Mortgage Corp. v.
Eubanks (In re Eubanks), 219 B.R. 468 (B.A.P. 6th Cir. 1998);
In re Sexton, 230 B.R. 346 (Bankr. E.D. Tenn. 1999); In re
Reeves, 221 B.R. 756 (Bankr. C.D. Ill. 1998); In re Mattson,
-3-
210 B.R. 157 (Bankr. D. Minn. 1997); In re Young, 199 B.R. 643
(Bankr. E.D. Tenn. 1996). American General argues that §
1322(c)(2)’s language, “payment of the claim as modified,”
means only the payment, and not the claim, can be modified. In
support of its position, American General relies on the Fourth
Circuit case of Witt v. United Companies Lending Corp. (In re
Witt), 113 F.3d 508 (4th Cir. 1997).
This court agrees with the reasoning of the majority line
of cases, as explained in Eubanks. In that case, the court
addressed and dismissed the rationale of Witt: “The cross
reference to § 1325(a)(5) in § 1322(c)(2) is an unequivocal
statement of congressional intent that Chapter 13 debtors are
empowered by § 1322(c)(2) to bifurcate the special real estate
secured claims that this new section excepts from the
modification protection in § 1322(b)(2).” Eubanks, 219 B.R. at
473. See also 8 Collier on Bankruptcy, ¶ 1322.16 (Matthew
Bender 15th Ed. Revised 2000) (“Section 1322(c)(2) thus
expressly provides that certain mortgages may be modified and
provided for under section 1325(a)(5).”)
Similarly, this court has rejected the idea that §
1322(c)(2) only allows debtors to modify payments rather than
claims: “To the contrary, the court agrees with cases finding
that the application of § 1322(c)(2), which references §
1325(a)(5), allows for modification of an oversecured short-
4-
term home mortgage claim including its interest rate.” In re
Leola Terrell, Case No. 99-70556-JTL (Bankr. M.D. Ga. Aug. 20,
1999) (holding that a market rate of interest is appropriate on
claims modified pursuant to § 1322(c)(2)).
This court’s reasoning in Terrell was not limited to
situations where the mortgage lender is oversecured. As the
court in Eubanks pointed out, the phrase “provide for payment
of the claim as modified pursuant to section 1325(a)(5)”
plainly contemplates that undersecured claims can be bifurcated
and dealt with as any other secured claim that is not secured
solely by a mortgage on the debtor’s principal residence.
Eubanks, 219 B.R. at 471-72. This means the claim can be
stripped down to the value of the collateral and paid at a
market rate of interest.
Therefore, the court will allow American General’s claim
to be modified pursuant to § 1322(c)(2) as discussed above.
The court will consider valuation and good faith at the
confirmation hearing now scheduled for Friday, August 25, 2000
at 9:00 A.M. in the United States Bankruptcy Courtroom, 901
Front Avenue, Suite 309, Columbus, Georgia.
DATED this ___ day of August 2000.
________________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE
-5-

DANNY LAWRENCE DUPREE

November 7, 2002

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
IN RE: ::
CASE NO. 02-41586
DANNY LAWRENCE DUPREE ::
CHAPTER 13
Debtor. ::
ASHLEY COOPER MCKENNA AND :
EDYTHE DUPREE ::
Movants, ::
vs. ::
DANNY LAWRENCE DUPREE ::
Respondent. :
MEMORANDUM OPINION
On October 24, 2002, during the continuation of a
confirmation hearing, the court heard Ashley Cooper McKenna’s and
Edythe Dupree’s objections to Danny Lawrence Dupree’s proposed
Chapter 13 Plan. At the conclusion of the hearing, the court
took the matter under advisement and confirmation was continued
to a future date and time. After considering the evidence
presented at the confirmation hearing, the parties’ oral
arguments and stipulations, as well as applicable statutory and
case law, the court makes the following findings of fact and
conclusions of law.
FACTS
On June 5, 2000, the Superior Court of Muscogee County
(“Superior Court”) entered a final judgement in Danny Lawrence
-2-
Dupree (“Debtor”) and Mrs. Dupree’s divorce action. On June 26,
2000, Debtor filed a motion for a new trial with the Superior
Court. On August 14, 2000, a contempt action was filed against
Debtor by Mrs. Dupree. On September 22, 2000, the Superior Court
denied Debtor’s motion for a new trial. On October 19, 2000,
Debtor was found in contempt of court in the Superior Court,
ordered to pay a fine, and was incarcerated. Despite the
contempt order, Debtor was released without paying the fine.
According to Debtor, also on October 19, 2000, his
application for discretionary review of his denied motion for a
new trial was filed with the Supreme Court of Georgia. However,
at the October 24, 2002 confirmation hearing, Debtor offered into
evidence only a faxed copy of a docket sheet for the
discretionary application purportedly from the Supreme Court of
Georgia. Opposing counsel objected to the exhibit and the
objection was sustained. Debtor’s request was granted to hold
open the record until the Monday, October 28, 2002 to give him
the opportunity to submit a certified copy of the docket sheet,
as well as time to submit a letter brief on the issues before the
court. Debtor asked for and received one additional day,
extending the deadline to Tuesday, October 29, 2002. Debtor
failed to submit either a certified copy of the docket sheet from
the Supreme Court of Georgia or a letter brief.
In 2001, after falling behind in child support payments,
-3-
Debtor moved back in with Mrs. Dupree at her residence sometime
during late spring or early summer. Mrs. Dupree had inherited
the residence from her mother. Debtor paid no rent to Mrs.
Dupree but assisted with the upkeep on the house and the yard.
While it is disputed as to the level of assistance Debtor
provided to Mrs. Dupree, she did agree that Debtor did assist at
times with the house and yard work. This arrangement went on for
approximately seven months until December 2001.
Additionally, during this same time frame, Debtor began to
care for the Debtor and Mrs. Dupree’s minor child. Eventually,
the child was removed from daycare and Debtor was the primary
care giver for the child while Mrs. Dupree was at work. The
reason why the child was removed from daycare is in dispute.
However, both parties are in agreement that Mrs. Dupree did in
fact take the child out of daycare which saved Mrs. Dupree $85
per week in child care costs.
Ms. McKenna objected to confirmation of Debtor’s proposed
Chapter 13 plan. Ms. McKenna contends that she has a $250 nondischargeable
priority claim for attorney’s fees pursuant to the
contempt order in Superior Court. Ms. McKenna objects to the
proposed treatment of her claim in Debtor’s Chapter 13 plan.
Mrs. Dupree also objected to confirmation of Debtor’s
proposed Chapter 13 plan. Mrs. Dupree contends she has a $2,900
non-dischargeable priority claim for back child support, not
-4-
subject to the $1,500 off-set as proposed in the plan. Mrs.
Dupree objects to the proposed treatment of her claim in Debtor’s
Chapter 13 plan.
Regarding the attorney’s fees awarded in the contempt order,
Debtor asserts that pursuant to O.C.G.A. § 5-6-35(h) the Superior
Court lacked jurisdiction to enter and enforce the contempt order
because Debtor had filed his application for discretionary review
with the Supreme Court of Georgia. O.C.G.A. § 5-6-35(h).
Therefore, Debtor argues that Ms. McKenna’s claim is invalid.
Regarding the child support arrearage, at the confirmation
hearing, Debtor orally agreed that he owes Mrs. Dupree $2,900 in
back child support. However, Debtor alleges that he is entitled
to a set-off on the amount for child care services rendered to
Mrs. Dupree in the year 2001. Debtor contends that new case law
allows for equitable reduction of child support when both parents
have come to an agreement as to the reduction. Debtor contends
he and Mrs. Dupree came to an oral agreement that she would
reduce the child support arrearage in exchange for his child care
services. Additionally, he contends not only was the agreement
reached, it was fully executed. Debtor provided the child care
services which reduced Mrs. Dupree’s monthly expenses. Debtor
contends that Mrs. Dupree accepted and encouraged this
arrangement. In addition to the child care for their son, Debtor
also took care of the house, the yard, and helped with Mrs.
-5-
Dupree’s other two children. Debtor contends that both parties
agreed to and benefitted from the arrangement.
Ms. McKenna contends that the Superior Court did not lose
jurisdiction over Debtor and Mrs. Dupree’s divorce action merely
because Debtor filed an application for discretionary review with
the Supreme Court of Georgia. The application was for a
discretionary review, not an appeal as of right. Trial court
jurisdiction is not lost until the Supreme Court of Georgia
grants the discretionary appeal. Additionally, the record was
never sent up to the Supreme Court of Georgia. Therefore, the
Superior Court never lost jurisdiction over the Duprees’ divorce
case. Thus, the contempt order and attorney’s fees which were
awarded in association with that order are valid. Ms. McKenna
contends that she has an enforceable non-dischargeable priority
claim which is not properly dealt with in Debtor’s proposed
Chapter 13 plan.
Mrs. Dupree contends that even if courts allow parents to
come to an independent agreement regarding child support, there
was no agreement in this case. There was no agreement, oral or
written, that Mrs. Dupree would off-set what Debtor owed her in
back child support for the child care services Debtor rendered
while he was living at Mrs. Dupree’s home in 2001. Mrs. Dupree
did not want to take the child out of daycare but did so only
after Debtor failed to take the child to the daycare facility for
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a month or so. Additionally, Mrs. Dupree disputes how much
Debtor assisted with work around the house and the yard.
Therefore, absent an agreement, Debtor would not be entitled to
an off-set even if the law is as Debtor suggests. Mrs. Dupree
contends that she has an enforceable non-dischargeable priority
claim for $2,900 which is not properly dealt with in Debtor’s
proposed Chapter 13 plan.
CONCLUSIONS OF LAW
Debtor bears the burden to prove that his Chapter 13 plan is
in conformity with the statutory requirements for confirmation.
See generally In re Groves, 39 F.3d 212, 214 (8th Cir. 1994); In
re Hendricks, 250 B.R. 415, 420 (M.D. Fla. 2000). Ms. McKenna
and Mrs. Dupree made objections to the treatment of their claims
under Debtor’s proposed Chapter 13 plan. Debtor bears the burden
to overcome the objections. If Debtors fails to do so, he must
modify his Chapter 13 plan to provide for adequate treatment of
Ms. McKenna’s and Mrs. Dupree’s claims.
According to O.C.G.A. § 5-6-35(h), the filing of an
application for appeal acts “as a supersedas to the extent that
a notice of appeal acts as supersedas.” O.C.G.A. § 5-6-35(h). A
supersedas writ suspends the trial court’s power to execute a
judgment that has been appealed. BLACK’S LAW DICTIONARY 1437 (6th ed.
1990). Under Georgia law, the Superior Court had no power to
execute or enforce the contempt order against Debtor.
-7-
Typically, res judicata would prevent Debtor from attacking
a state court judgment in the bankruptcy court. However, under
Pepper v. Litton, 308 U.S. 295 (1939), inherent in the bankruptcy
court’s equitable powers is the ability to look into the validity
of any claim asserted against a debtor’s bankruptcy estate.
Pepper, 308 U.S. at 305. Further, if the bankruptcy court
determines that another court’s judgment is invalid, the judgment
claim may be disallowed. See id. This concept has been followed
in bankruptcy courts in other circuits, as well as in our own.
See In re Kovalchick, 175 B.R. 863, 872 (E.D. Pa. 1994)(despite
the doctrines of res judicata and collateral estoppel, a court
may not be bound by another court’s judgment if it was rendered
without proper jurisdiction); Reilly v. McCracken (In re
Brickyard, Inc.), 36 B.R. 569, 573 (S.D. Fla. 1983) (state court
judgment could be collaterally attacked because the state court
lacked jurisdiction to render the judgment).
Debtor did not submit to the court a certified copy of the
docket sheet from the Supreme Court of Georgia. In failing to do
so, Debtor cannot prove that the Superior Court lacked
jurisdiction to render the contempt order. Therefore, Ms.
McKenna’s claim for $250 is valid and non-dischargeable. The
claim must be treated as such in Debtor’s Chapter 13 plan.
Regarding the child support arrearage off-set, Debtor failed
to convince the court that he and Mrs. Dupree reached any
-8-
agreement, oral or otherwise, that Debtor’s child support
arrearage would be reduced while he stayed with Mrs. Dupree and
cared for their minor child. Further, even if Debtor had proved
such an agreement, he failed to show that this court has the
power to amend a child support arrearage claim. As stated above,
this court may have the equitable power to disallow a judgment
claim if lack of jurisdiction is shown. However, Debtor has
failed to prove that this court can go behind a valid state court
judgment regarding child support to modify a child support
arrearage. Therefore, Mrs. Dupree’s claim is valid and nondischargeable
for the full amount of $2,900. The claim must be
treated as such in Debtor’s Chapter 13 plan.
Conclusion
The court finds that Debtor failed to prove that Ms.
McKenna’s claim for attorney’s fees associated with the contempt
order is invalid. Therefore, Ms. McKenna’s objection to
confirmation of Debtor’s proposed Chapter 13 plan is sustained.
Debtor is directed to modify his Chapter 13 plan to give proper
treatment to Ms. McKenna’s claim in accordance with this
Memorandum Opinion within 20 days.
Further, the court finds there was no agreement reached
between Debtor and Mrs. Dupree to reduce the child support
arrearage. Even if such an agreement had been proved, the court
finds that Debtor has failed to meet his burden to prove that
-9-
this court has the power to modify a claim for child support
arrearage. Therefore, Mrs. Dupree’s objection to confirmation of
Debtor’s proposed Chapter 13 plan is sustained. Debtor is
directed to modify his Chapter 13 plan to give proper treatment
to Mrs. Dupree’s claim in accordance with this Memorandum Opinion
within 20 days.
An order in accordance with this Memorandum Opinion will be
entered.
DATED this _____ day of November, 2002.
____________________________
JOHN T. LANEY, III
UNITED STATES BANKRUPTCY JUDGE

LESTER BEN DASHER

October 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

THOMASVILLE DIVISION

IN RE: : CASE NO. 00-60397-JTL

:

LESTER BEN DASHER, :

SSN: 255-86-5206 ::

CHAPTER 13

BRENDA JOYCE DASHER, :

SSN: 252-94-9147 ::

Debtors. ::

WILLIAM H. WASDEN, ::

Movant, ::

vs. ::

LESTER BEN DASHER and :

BRENDA JOYCE DASHER, ::

Respondents. :

MEMORANDUM OPINION

On September 26, 2000, the court held a hearing on

confirmation of Debtors’ proposed plan and William H. Wasden’s

(“Movant”) objection to confirmation. At the conclusion of the

hearing, the court took the matter under advisement. After

considering the evidence and the applicable statutory and case

law, the court, for reasons indicated below, will overrule

Movant’s objection to confirmation.

FACTS

Movant agreed to sell a one acre tract of land to Debtors

for the sale price of $10,000.00. Debtors made a $1000.00 down

1 Debtors have agreed that they would pay Movant at the contract rate of

10% per annum.

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payment and, as evidenced by a deed to secure debt and a

promissory note, Movant financed the remaining $9000.00.

(Movant’s Exh. “A”). According to the terms of this agreement,

Debtors were to pay $100.00 per month commencing on January 1,

1998 until the maturity date of December 1, 1999, at which time

Debtors were to make a final “balloon” payment of $8785.85.

Debtors defaulted in making this final balloon payment.

On May 15, 2000, Debtors filed a voluntary petition under

Chapter 13 of the Bankruptcy Code. In Debtors’ Chapter 13 plan

(“Plan”), they proposed to pay Movant in full over the life of

the fifty-seven month Plan plus interest at a rate of 9% per

annum.1 On May 25, 2000, Movant filed his objection to

confirmation and on August 2, 2000, Movant filed a letter brief

(“Movant’s Br.”) in support of his objection.

DISCUSSION

Movant argues that Debtors’ attempt to modify his rights by

deferring the final balloon payment over the life of the Plan on

a note that matured prepetition, is prohibited under the Code.

See Nobleman v. American Savings Bank, 508 U.S. 324 (1993).

Movant agrees that § 1322(c)(2) permits the modification of

claims secured only by a security interest on Debtors’ principal

residence when the last payment on the original payment schedule

2 Section 1322(b)(2) provides, in pertinent part:

(b) Subject to subsections (a) and (c) of this section, the plan may–

. . .

(2) modify the rights of holders of secured claims, other than a claim

secured only by a security interest in real property that is the

debtor’s principal residence . . .

11 U.S.C. § 1322(b)(2).

-3-

is due before the date on which the final payment under the Plan

is due. See 11 U.S.C. § 1322(c)(2).

However, Movant asserts that § 1322(c)(2), an “exception” to

§ 1322(b)(2),2 does not apply in this case and therefore, §

1322(b)(2) is the applicable law. Since there was only a balloon

payment due, Movant argues that § 1322(c)(2) does not contemplate

the present situation. Moreover, Movant is an individual

creditor who relied on the payment and modification would be

“grossly unfair” forcing him to make a loan that he could not

afford. See In re Lobue, 189 B.R. 216, 219 (Bankr. S.D. Fla.

1995)(Cristol, J., dictum).

Debtors argue that the plain language of § 1322(c)(2) is

clear. That subsection allows for the payment of the full amount

of a short term mortgage over the life of the plan provided that

Debtors pay the full amount of the allowed secured claim. The

fact that Movant is an individual creditor is irrelevant.

Debtors further argue that under § 1322(b)(3), a plan may

“provide for the curing or waiving of any default;” 11 U.S.C. §

1322(b)(3).

The issue before the court is whether a balloon payment that

3 All cases filed after October 22, 1994, are subject to the amendments

under this Act.

-4-

matured prepetition can be modified and paid out through the life

of the Plan. Before the Bankruptcy Reform Act of 19943 (“Reform

Act”), it was impermissible for Debtors to modify such claims.

See Nobleman, 508 U.S. at 332. However, the revised § 1322(c)(2)

under the Reform Act carved out an exception to § 1322(b)(2).

Although the Eleventh Circuit has not ruled on this issue,

bankruptcy courts within this circuit as well as courts in other

circuits have held that § 1322(c)(2) applies to balloon payments

that matured prepetition. See In re Eason, 207 B.R. 238 (N.D.

Ala. 1996); In re Miller, 191 B.R. 487 (Bankr. S.D. Fla. 1995);

In re Sarkese, 189 B.R. 531 (Bankr. M.D. Fla. 1995); In re Chang,

185 B.R. 50 (Bankr. N.D. Ill. 1995); In re Escue, 184 B.R. 287

(Bankr. M.D. Tenn. 1995);

The court in In re Escue ruled that § 1322(c)(2) was

specifically created to deal with short term or balloon payments

which matured prepetition. 184 B.R. at 292. Similarly, the

court in In re Chang held that § 1322(c)(2) permits a debtor to

cure a mortgage which ballooned prepetition over the life of the

plan. 185 B.R. at 53. In re Miller and In re Eason were cases

which involved individual creditors as opposed to mortgage

companies.

In Miller, the court held that chapter 13 debtors could

modify an individual creditor’s claim which fully matured

-5-

prepetition by paying in full over the life of the plan. 191

B.R. at 489. Although Miller did not involve a balloon payment,

the court relied on the plain language of § 1322(c)(2). Id. The

fact that the creditor was an individual appeared to be

inconsequential to the court.

Unlike Miller, Eason did involve a balloon payment but

because Eason was a pre-Reform Act case, the court held that the

debtor could not pay the final balloon payment through the

proposed plan. 207 B.R. at 239. The court did, however, address

the amendments to § 1322 in the Reform Act and stated, “Eason,

unfortunately, appears to be a victim of bad timing in the filing

of her petition; nevertheless, she is unable to receive the

benefit of § 1322(c) as amended.” Id. at 240. Impliedly, had

this been a post-Reform Act case, the court would have permitted

the payment of the final balloon payment through the plan. Like

Miller, the Eason court gave no particular attention to the fact

that the creditor was an individual.

The court agrees with the above line of cases that §

1322(c)(2) allows debtors to provide a creditor with payment of

a prepetition matured balloon over the life of the Plan. As

explained in Escue and Chang, § 1322(c)(2) is designed to deal

with short term mortgages and balloon payments which mature

prepetition. The court disagrees with Movant and dictum in Lobue

that a different outcome should result because Movant is an

individual creditor who relied on the balloon payment.

-6-

In Lobue, the court was concerned about an individual lender

forced to make a loan “which the lender possibly could not afford

to make.” 189 B.R. at 219. At the hearing, Movant testified

that he relied on the balloon payment to make some investments in

stock. Movant did not show that he relied on the balloon payment

for basic living expenses. Therefore, the court finds that

Movant did not demonstrate the kind of reliance about which the

court in Lobue was concerned.

The court finds that § 1322(c)(2) is applicable in this case

and Debtors may pay Movant with the balloon payment over the life

of the Plan. Therefore, the court will overrule Movant’s

objection to confirmation.

An order in accordance with this Memorandum Opinion will be

entered.

DATED this _____ day of October, 2000.

____________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

JACKIE G. WILLIAMS

December 8, 2003

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

VALDOSTA DIVISION

IN RE: ::

JACKIE G. WILLIAMS, : CASE NO. 03-70974

PATRICIA A. WILLIAMS, : CHAPTER 11

Debtors, ::

CIRCLE B ENTERPRISES, INC., : CASE NO. 03-71461

Debtor. : CHAPTER 11

::

SAMUEL P. SCOTT, :

Movant, ::

vs. ::

JACKIE G. WILLIAMS, :

PATRICIA A. WILLIAMS, :

Respondents, ::

CIRCLE B ENTERPRISES, INC., :

Respondent. :

MEMORANDUM OPINION

On November 24, 2003, the Court held the final day of a

multi-day hearing on two Motions of Samuel P. Scott (“Movant”)

for Relief from the Automatic Stay. The main issue was

whether Movant should be granted relief from the stay for

cause to pursue his state court action against Jackie and

Patricia Williams and Circle B Enterprises, Inc. (“Circle

B”)(collectively “Respondents”). At the conclusion of the

hearing, the Court took the matter under advisement. The

Court has considered the evidence, the parties’ briefs and

oral arguments, as well as applicable statutory and case law.

-2-

Under the test set out in In re South Oakes Furniture, Inc.,

167 B.R. 307 (Bankr. M.D. Ga. 1994)(J. Walker), the Court

finds that cause has been shown and Movant should be granted

relief from the stay. Id. at 309 (citing In re Pro Football

Weekly, Inc., 60 B.R. 824, 826 (N.D. Ill. 1986)).

THE PARTIES’ CONTENTIONS

Movant contends that relief should be granted because all

three prongs of the South Oaks Furniture test favor granting

the relief sought. Id. Movant urges that no great prejudice

will occur to Respondents’ and their bankruptcy estates if the

case is allowed to proceed in state court. Further, Movant

contends that the hardship to Movant of starting over again in

Bankruptcy Court would considerably outweigh any hardship

suffered by Respondents if the case proceeds in state court.

Finally, Movant argues based on the record that he has a

probability of prevailing on the merits of his case.

Respondents contend that the debtors and the two

bankruptcy estates will suffer great hardship if the case

continues in state court. Not only do Respondents contend

that the costs will be higher in Atlanta, Respondents allege

they will not receive fair treatment in Fulton County Superior

Court (“Superior Court”). Respondents cite the special

setting of the trial, which they contend took their litigation

attorney by surprise, as an example of the potential for

-3-

unfair treatment. Further, Respondents contend they were not

ready for trial because Movant had not returned Respondents’

business documents in time for Respondents’ expert witness to

review them adequately. Respondents contend that the hardship

to Movant if the matter is moved to the Bankruptcy Court will

not outweigh the burden on Respondents if the matter is left

in state court. Respondents argue that the Bankruptcy Court

would provide an efficient and orderly forum to litigate and

liquidate all claims against the bankruptcy estates, including

alleged additional lawsuits that may or may not have already

been filed against Respondents. Last, Respondents argue,

based on a number of legal arguments, that Movant does not

have a probability of prevailing on the merits.

FINDINGS OF FACT

Jackie and Patricia Williams have been involved with

companies doing business in the mobile home and/or

manufactured home industry since the late 1950’s. While the

specifics are disputed, a series of events took place during

the years 2000 and 2001 involving Jackie Williams and actions

he preformed as a principal in two companies named Sweetwater

and Apple Valley, as well as transfers that Jackie Williams

personally made to Patricia Williams. Movant was a minority

shareholder in Sweetwater. A legal merger of the Sweetwater

and Apple Valley entities never occurred. However, the

-4-

accounting of the two companies were combined under the name

Sweetwater at the end of 1999 and/or the beginning of 2000.

Subsequent to the accounting merger, all assets were

transferred out of Sweetwater and eventually ended up as

assets of Circle B, a corporation later formed by Jackie

Williams.

These events led to Movant filing suit against Jackie and

Patricia Williams in Superior Court, located in Atlanta,

Georgia. At a later date, Circle B was added as a defendant

to the action. Pre-trial activities were conducted for over

one and a half years in the state court action. Without

argument by Respondents’ litigation attorney, the matter was

specially set for trial in June 2003. Counsel for Movant has

agreed to seek a final pretrial order from the Superior Court

before proceeding to set the case for trial if this Court

grants his request for relief from the stay.

Jackie and Patricia Williams filed for relief under

Chapter 11 of the United States Bankruptcy Code (“Code”) on

June 17, 2003 in the Middle District of Georgia, Valdosta

Division. The filing of the petition instituted an automatic

stay, which prohibited the trial from proceeding in Superior

Court on the assigned date. Movant filed a motion for relief

from the stay in Jackie and Patricia Williams’ bankruptcy case

on July 24, 2003 and asked this Court to determine that the

-5-

automatic stay did not apply to Circle B. On September 12,

2003, the day Movant’s motion was set for hearing in this

Court, Circle B filed for relief under Chapter 11 of the Code

in the same district and division as Jackie and Patricia

Williams. The hearing was continued until a later date so

Movant could file a motion for relief from the stay in the

Circle B case, allowing for both motions to be heard at the

same time. The Court held the hearing over a number of days,

which concluded with closing arguments on November 24, 2003.

CONCLUSIONS OF LAW

As an initial matter, the party opposing a motion for

relief from the stay bears the burden of persuasion on all

issues except as to equity. See 11 U.S.C. § 362(g)(1993 &

Supp. 2002). Therefore, Respondents bear the burden to show

that relief should not be granted.

The Court agrees that the test to be applied here is as

articulated in South Oakes Furniture. South Oakes Furniture,

167 B.R. at 309. “The test developed by courts to determine

if it is appropriate to lift the automatic stay and allow the

continuation of [a] lawsuit pending in state court is whether:

a) Any ‘great prejudice’ to either the bankrupt estate or the

debtor will result from the continuations of a civil suit; b)

the hardship to the [non-debtor party] by maintenance of the

stay considerably outweighs the hardship to the debtor; and c)

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the creditor has a probability of prevailing on the merits of

his case.” Id.

Respondents have not presented evidence which would

persuade the Court to believe that the burden on Respondents

to continue in state court would outweigh the hardship to

Movant if he were required to start over again in Bankruptcy

Court. Except for the issue of dischargeability of a possible

judgement in favor of Movant, this is a complicated matter of

state law. The issue of dischargeability can be determined by

this Court at a later date once the claim is liquidated in the

state court proceeding. Adversary Proceedings are pending in

both Chapter 11 cases and this Court will determine the res

judicata effect of any findings in the state court action.

Both Movant and Respondents have already invested almost two

years of time on this matter in state court. Now that

Respondents have had time to prepare their expert witness, the

matter is poised for trial in Superior Court.

Last, under the third prong of the test set out in South

Oakes Furniture, Respondents have failed to refute the

evidence put on by Movant. Id. As the court in South Oakes

Furniture stated, the third prong does not require this Court

to determine that Movant will prevail on his claims. Id. at

310. It only requires that a “probability of success” has

been demonstrated. Id. Respondents do not dispute that

-7-

Sweetwater’s assets became Circle B’s assets through actions

taken by Jackie Williams and that certain transfers from

Jackie Williams to Patricia Williams did occur. The issue of

whether these transfers are enough for Movant to actually

prevail should not, on a motion for relief, be decided by this

Court. The issue should be left for the state court where

litigation has already started.

This Court does not find grounds to keep the automatic

stay in effect, which would require Movant to start over in

Bankruptcy Court with his lawsuit. Respondents have not met

their burden as spelled out in the Code and under the test in

South Oakes Furniture. See 11 U.S.C. § 362(g)(1993 & Supp.

2002); South Oakes Furniture, 167 B.R. at 309. Therefore, the

Court will grant Movant’s Motion for Relief from the Automatic

Stay in both cases. An order in accordance with this

Memorandum Opinion will be entered.

DATED this _____ day of December, 2003.

____________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

HELEN LOUISE SHEPPARD

January 6, 2000

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: CASE NO. 99-41085-JTL

HELEN LOUISE SHEPPARD, CHAPTER 13

SSN: 257-21-5277,

DEBTOR.

HELEN LOUISE SHEPPARD,

MOVANT,

V.

PIGGLY WIGGLY,

RESPONDENT.

MEMORANDUM OPINION

On December 3, 1999, the court held a hearing on Debtor’s

motion for contempt against Piggly Wiggly (“Respondent”) for

violation of the automatic stay of § 362 of the Bankruptcy Code

(“Code”) based on Respondent’s having a warrant issued

postpetition for Debtor’s arrest as a consequence of Debtor’s

having written a bad check prepetition. No one appeared on

behalf of Respondent, and Debtor presented evidence in support

of her motion.

The applicable case law is Barnette v. Evans, 673 F.2d

1250 (11th Cir. 1982), and cases construing Barnette, such as

Tenpins Bowling, Ltd. v. Alderman (In the Matter of Tenpins

Bowling, Ltd.), 32 B.R. 474 (Bankr. M.D. Ga. 1983). Barnette

-2-

involved a debtor who, as in this case, had issued worthless

checks. Barnette basically established a two-prong test for

determining whether the court should enjoin a state criminal

prosecution of a debtor on the ground that the prosecution will

frustrate the bankruptcy judge’s jurisdiction to discharge

debt. First, a debtor must establish that the criminal

prosecution is brought in bad faith. Tenpins Bowling, Ltd., 32

B.R. at 480 (discussing the application of Barnette). Second,

a debtor must establish that it would be no defense to the

criminal prosecution that the prosecution was brought for the

purpose of collecting a debt. Id. In Barnette, under Alabama

law, the debtor could have defended the criminal prosecution by

showing that the prosecution for theft was really a subterfuge

for the collection of a debt. Barnette, 673 F.2d at 1252.

Applying this case law, and after considering the evidence

and argument of counsel, the court announced findings of fact

and conclusions of law from the bench. The court ruled that

Debtor had met her burden of proof with regard to the first

prong of the Barnette test by proving that Respondent acted in

bad faith in having a criminal warrant issued for Debtor’s

arrest postpetition. However, the court reserved ruling on the

second prong of the Barnette test, which is whether Debtor

could have asserted as a defense to the criminal action in

Georgia that the criminal action was brought as a subterfuge

for collecting the debt. Debtor’s counsel requested that the

-3-

court reserve ruling on this issue to allow him to supplement

his argument and evidence.

After the hearing, counsel submitted a brief along with

two exhibits in support of Debtor’s position. Exhibit “A” to

Debtor’s brief is an affidavit by the Solicitor General of the

State Court of Muscogee County, Georgia verifying that it would

be no defense to a deposit account fraud (bad check)

prosecution that the warrant was issued for the purpose of

collecting the money due. Exhibit “B” to Debtor’s brief is a

copy of the index to Chapter 3 of the Official Code of Georgia

Annotated, which shows that no defense listed relates to the

fact that a warrant in a deposit account fraud case was issued

only for the purpose of collecting the debt.

After considering counsel’s brief and the exhibits

thereto, the court finds that Debtor has met the second prong

of Barnette and will grant Debtor’s motion. The court finds

that Respondent did willfully violate the automatic stay of §

362 of the Code. The court will order Respondent to pay

damages in the amount of $750 attorney fees in addition to

$183.70 in actual damages. The court does not find that the

appropriate circumstances exist in this case to justify

punitive damages under § 362(h) of the Code.

An order in accordance with this Memorandum Opinion will

be entered.

DATED this 6th day of January 2000.

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_______________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

PEACH AUTO PAINTING & COLLISION, INC.

March 2001

1 This motion is actually captioned as “Motion for Reconsideration and/or

Rehearing.” However, given the substance of the motion, the court will

consider this motion as a request for an additional evidentiary hearing.

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: : CASE NO. 00-41598

:

PEACH AUTO PAINTING & : CHAPTER 11

COLLISION, INC. :

Debtor, :::

RONALD E. WAGES, :

Movant, ::

vs. ::

PEACH AUTO PAINTING & :

COLLISION, INC. :

Respondent. :

MEMORANDUM OPINION

On March 7, 2001, the court held a hearing on the motion of

Ronald E. Wages (“Movant”) to compel Debtor to surrender leased

premises. At the conclusion of the hearing, the parties were

given an opportunity to submit briefs. Movant filed a brief and

Debtor filed a letter brief in response. On March 16, 2001,

Movant filed an additional motion requesting an evidentiary

hearing to determine Debtor’s interest in the subject property.1

After considering the parties’ briefs and the applicable

statutory and case law, the court will deny Movant’s motion to

compel Debtor to surrender the leased premises. The court will

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also deny Movant’s request for an evidentiary hearing.

FACTS

On January 21, 1994, Movant entered into an agreement (“the

lease”) with Lenward C. Wilbanks, Jr. (“Wilbanks”) in which

Wilbanks leased from Movant, the property located at 3556

Lawrenceville Highway, Tucker, GA (“leased premises”). After

the lease was executed but prior to Debtor’s bankruptcy petition,

Wilbanks, who is the equity owner of Debtor, allowed Debtor to

use the premises as an automobile body paint and repair shop. On

July 25, 2000, Debtor filed a voluntary petition under Chapter 11

of the Bankruptcy Code. (“Code”).

On September 15, 2000, Debtor filed a motion to extend the

time to accept or reject the lease. (Doc.# 23). On September 18,

2000, the court entered an order extending the time to October

12, 2000. On October 12, 2000, the court entered an another

order extending the time to December 1, 2000. (Doc.# 38). This

latter extension expired and Debtor never moved to accept or

reject the lease.

On December 11, 2000, Movant filed a motion for relief from

the automatic stay based on alleged violations of lease

provisions resulting in the deterioration of the property. On

January 19, 2001, the court held a hearing on Movant’s motion

which was granted allowing Movant to pursue its remedies in state

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court. Soon thereafter, Movant filed a state court dispossessory

complaint against Debtor and Wilbanks. At the relief from stay

hearing, it was conceded that because Debtor did not assume the

lease or move to assume the lease before the last extension

expired, the lease was deemed rejected by operation of law.

Therefore, any rights that Debtor may have had in the lease, were

terminated at that time.

At the March 7, 2001 hearing, the parties confirmed these

facts established at the relief from stay hearing. Both parties

stipulated that Wilbanks was the holder of the leasehold because

there had been no written assignment of the lease and that

Debtor’s rights in the leasehold were terminated once the lease

was deemed rejected.

Movant asserts that the court should compel Debtor to

surrender the leased premises pursuant to § 365(d)(4) of the

Code. He maintains that Wilbanks assigned the lease to Debtor

therefore, resulting in a valid sublease. Movant also presents

an estoppel argument based on Movant’s acceptance of rent from

Debtor.

Debtor, however, asserts that its rights in the lease,

sublease or otherwise, were terminated when the lease was deemed

rejected. Debtor explains that it is occupying the leased

premises with the express permission of Wilbanks. Debtor argues

that its right to occupy this property is completely dependent

upon the rights of Wilbanks, which are being determined in the

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case currently pending in state court. Debtor further asserts

that it would be premature for the bankruptcy court to order

Debtor to surrender the leased premises before the state court

determines Wilbanks’ right to remain as a tenant.

DISCUSSION

Section 365(d)(4) of the Code provides:

[I]f the trustee [or debtor-in-possession] does not assume

or reject an unexpired lease of nonresidential real property

under which the debtor is the lessee within 60 days after

the date of the order for relief, or within such additional

time as the court, for cause, within such 60-day period,

fixes, then such lease is deemed rejected, and the trustee

shall immediately surrender such nonresidential real

property to the lessor.

11 U.S.C. § 365(d)(4).

Applying the above statutory provision to the facts of this case,

it is clear that Debtor’s interests in the lease were terminated

on December 1, 2000. Debtor did not move to accept or reject the

lease, nor did Debtor request additional time within which to

file such motion. Therefore, the court finds that on December 1,

2000, the lease was deemed rejected pursuant to § 365(d)(4).

The focus in this case, however, is whether the bankruptcy

court has the authority to order a debtor out of the leased

premises. Some courts have held that a deemed rejection under §

365(d)(4) “merely places the creditor [lessor] in a position to

pursue remedies under the state law. . . .” In re Adams, 65 B.R.

646, 649 (Bankr. E.D. Pa. 1986); See also In re Re-Trac, 59 B.R.

-5-

251 (Bankr. D. Minn. 1986). However, this court rejects that

view and adopts the “majority and far more persuasive view. . .”

that the bankruptcy court can issue such an order. Anderson v.

Elm Inn, Inc. (In re Elm Inn, Inc.), 942 F.2d 630, 634 (9th Cir.

1991); See also In re U.S. Fax, 114 B.R. 70 (Bankr. E.D. Pa.

1990)(rejecting In re Adams); In re Chris-Kay Foods East, Inc.,

118 B.R. 70 (Bankr. E.D. Mich. 1990); In re Damianopoulos, 93

B.R. 3, 6 (Bankr. N.D.N.Y. 1988)(holding that a deemed rejected

lease is no longer property of the estate).

The difficulty in this case is the fact that there is a

third party involved. If Wilbanks and his agreement with Movant

were not in the picture, this would be a straightforward

application of the above authority. Movant would be entitled to

an order requiring Debtor to surrender the leased premises.

However that is not the case – Debtor is occupying the premises

at the permission of Wilbanks – a third party who is rightfully

entitled to possess the premises.

Therefore, the court agrees with Debtor and finds that

Debtor’s right to possess the premises is dependent upon

Wilbanks’ right. If the state court finds that Wilbanks’ right

to possession should be terminated and Debtor then still remains

in possession, the Movant would be entitled to a surrender order

from the bankruptcy court. However, such an order would not be

needed because Debtor is a party to the state court dispossessory

action.

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As to Movant’s motion to request an additional evidentiary

hearing, Movant relies on In re Elm Inn for the proposition that

the court should conduct a hearing to determine Debtor’s interest

in the lease. Although the Ninth Circuit in In re Elm Inn did

remand for such purposes, there was a dispute in that case

whether the holder of the leasehold assigned its interests in the

lease to the debtor corporation. In this case, there is no such

dispute. The parties have stipulated that Wilbanks is the holder

of the leasehold and that Debtor is possessing the leased

premises with the permission of Wilbanks. Therefore, the court

finds that no dispute exists requiring the court to conduct such

a hearing.

Accordingly, the court will deny Movant’s motion to compel

Debtor to surrender the leased premises. The court will also

deny Movant’s request for an additional evidentiary hearing.

An order in accordance with this Memorandum Opinion will be

entered.

DATED this _____ day of March, 2001

____________________________

JOHN T. LANEY III

UNITED STATES BANKRUPTCY JUDGE

DAVID C. NIVENS

July 2001

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: : CASE NO. 00-42992

:

DAVID C. NIVENS : CHAPTER 13

SSN: 443-78-8111 ::

SHARON A. NIVENS :

SSN: 450-69-7303 ::

Debtors. :::

DAVID C. NIVENS and :

SHARON A. NIVENS ::

Movants, ::

vs. ::

LOANS FOR MILITARY ::

Respondent. :

MEMORANDUM OPINION

On June 5, 2001, the court held a hearing on Debtors’ motion

for contempt against Loans For Military (“Respondent”) for

failure to pay Debtors’ attorney’s fees and costs pursuant to a

prior order of the court. The court took under advisement the

issue of whether Debtors’ counsel’s recourse was filing a fi. fa.

rather than obtaining another contempt order. At the conclusion

of the hearing, Debtors’ counsel was given an opportunity to

submit a letter brief. After considering Debtors’ brief and the

applicable statutory and case law, the court will deny Debtors’

1 The language of the order regarding the attorney’s fees award read

“Movant’s attorney is awarded attorney’s fees and costs in the total

amount of $250.00, pursuant to 11 U.S.C. §§ 105(c), 362(h), to which

let judgment issue against Respondent(s).”

-2-

motion for contempt.

FACTS

In August 2000, Debtors obtained a personal unsecured loan

from Respondent in which monthly payments in the amount of

$245.46 were to be made. Debtors made these payments to

Respondent by way of an allotment which was deducted from the

husband debtor’s U.S. Army payroll. On December 26, 2000,

Debtors filed their voluntary petition under Chapter 13 of the

Bankruptcy Code (“Code”). On January 29, 2001, Debtors’ counsel

mailed Respondent a letter requesting that Respondent turn over

any payments received post-petition for payment on any

prepetition debt. (Doc.# 6, Exh. “A”).

On March 6, 2001, Debtors filed a motion for civil contempt.

On April 6, 2001, the court held a hearing on Debtors’ motion and

found Respondent in contempt. Respondent did not appear at this

hearing. The court ordered Respondent to turn over $981.84 to

Debtors. This amount represented four payments which Respondent

had received post-petition. The court also awarded Debtors

attorney’s fees and costs in the amount of $250.00. (Doc.# 8).1

On April 19, 2001 Debtors’ counsel received a check from

Respondent in the amount of $981.84. (Doc.# 9, Exh. “M-1″).

However, Respondent failed to remit the $250.00 attorney’s fees

-3-

award. In a phone conversation between Debtors’ counsel and

Respondent on April 17, 2001, Respondent indicated that it

contested the attorney’s fees award and would “forward it over to

their legal counsel.” (Doc.# 9, Exh. “M-2″).

On May 8, 2001, Debtors’ counsel filed a second motion for

contempt based on Respondent’s failure to pay the $250.00

attorney’s fees which was awarded in the court’s April 6, 2001

order. On June 6, 2001, the court held a hearing on Debtors’

motion. Like the prior hearing, Respondent did not appear at

this hearing. The court inquired into the issue of whether its

April 6, 2001 order was a money judgment in which Debtors’

counsel needed to file a fi fa or whether another contempt order

was proper. At the conclusion of the hearing, the court gave

Debtors’ counsel an opportunity to brief this issue.

DISCUSSION

The law is clear that a court may use the remedy of contempt

to enforce a prior judgment entered by that court. See Combs v.

Ryan’s Coal Co., 785 F.2d 970, 980 (11th Cir. 1986). “It is

equally clear that when a party fails to satisfy a court imposed

money judgment the appropriate remedy is a writ of execution, not

a finding of contempt.” Combs, 785 F.2d at 980 (citing FED. R.

CIV. P. 69(a) (“Rule 69(a)”) which provides, “[p]rocess to enforce

a judgment for the payment of money shall be a writ of execution,

-4-

unless the court directs otherwise.”). As to the “otherwise”

language, the court held that this clause is to be read narrowly.

Id. (citing 7 JAMES WM. MOORE ET AL., MOORE’S FEDERAL PRACTICE ¶ 69.02[2]

at 69-10 to -10.1 (2d ed. 1985) providing that “a federal court

should not . . . enforce a money judgment by contempt or methods

ther [sic] than a writ of execution, except in cases where

established principles so warrant.”).

In Combs, the order in question was a consent order.

However, this fact was inconsequential. The order provided for

the payment of money due and owing, the amount was not

contingent, and the obligation to pay was not conditioned on the

appellants’ purging themselves of contempt. Therefore, the court

held that “the consent decree [was] properly characterized as a

money judgment.” Id. Accordingly, the court held that the

consent decree was not enforceable by contempt. Id.

In the case before the court, the court finds that the April

6, 2001 order relating to the award of Debtors’ attorney’s fees

is in the nature of a money judgment. The order provided that

the amount of $250.00 was due and owing, an amount which was

neither contingent nor conditioned on Respondent’s purging itself

of contempt. Therefore, the award of attorney’s fees is not

enforceable by contempt.

2 See Gokey v. McIntosh (In re McIntosh), 137 B.R. 967 (D. Colo.

1992)(order compelling Plaintiff’s counsel to pay sanctions to Debtors’

counsel within 10 days); Waldschmidt v. Columbia Gulf Transmission Co.

(In re Fulghum), 20 B.R. 925 (Bankr. M.D. Tenn. 1982)(discovery order

compelling Defendant to pay attorney’s fees to trustee).

-5-

Unlike the cases2 cited by Debtors’ counsel, the language in

the order pertaining to the Debtors’ award of attorney’s fees

does not direct Respondent to pay Debtors’ counsel. Instead, the

order reads “[m]ovant’s attorney is awarded . . . $250.00 . . .

to which let judgment issue against Respondent(s). (emphasis

added). Accordingly, the court finds those cases inapplicable.

Debtors further argue that enforcement by contempt should be

allowed because “[r]espondent has no tangible money, property or

other assets subject to levy or execution . . . .” (Debtors’

Brief pp. 2 at (j)). The bankruptcy court for the Southern

District of Georgia has indirectly addressed this narrow issue.

See Eickhoff v. Eickhoff (In re Hickhoff), 258 B.R. 234 (Bankr.

S.D. Ga. 2000)(Davis, J.).

In Eickhoff, the debtor and his former spouse reached a

consent agreement regarding nondischargeability litigation costs

and attorney’s fees. The debtor’s former spouse moved for

contempt based on the debtor’s failure to pay the attorney’s

fees. Relying on Combs and Rule 69(a), the debtor argued that a

writ of execution was proper and that the remedy of contempt was

not available. The debtor’s spouse, however, contended that

there was an exception to Rule 69(a). Because all of the

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debtors’s assets could not reached by writ of execution, the

former spouse asserted that the remedy of contempt was available.

The fact that there may have been no assets subject to levy

or execution added nothing to the court analysis. Consequently,

the court denied the former spouse’s motion for contempt.

Eickhoff, 259 B.R. at 238. The court further explained: “It is

true Rule 69 severely limits the right of the Court to employ the

contempt power for the collection of a money judgment and that

the Combs decision reinforces that provision.” Id. at 236.

Similarly, the court finds Debtors’ argument to be without

merit. The fact that Respondent has no tangible property or

assets subject to levy or execution is no exception to the

Eleventh Circuit’s analysis of Rule 69(a).

Finally, Debtors’ argue that the remedy of contempt should

be allowed because the “prior contempt order that was disobeyed

was a non-final, interlocutory order. . . .” (Debtors’ Brief, pp.

2 at (l)). The court likewise finds this argument without merit.

In order for an order in bankruptcy to be final, it “must end the

litigation on the merits and leave nothing more for the court to

do but execute the judgment . . . for purposes of appeal.”

Wicheff v. Baumgart (In re Wicheff), 215 B.R. 839, 843 (B.A.P.

6th. Cir. 1998). A civil contempt order is final as long as a

finding of contempt is issued and a sanction is imposed. See id.

As to the order in question in this case, nothing about the

order was interlocutory or non-final. It resolved the issue on

-7-

the merits, a finding of contempt was issued and sanctions were

imposed. Accordingly, the court finds that its April 6, 2001

order was final and appealable.

In conclusion, the court finds that its April 6, 2001, order

awarding Debtors attorney’s fees and costs was a money judgment

which is not enforceable by contempt. The court further finds

that the April 6, 2001 order was a final order. Therefore, the

court will deny Debtors’ motion for contempt.

An order in accordance with this Memorandum Opinion will be

entered.

DATED this _____ day of July, 2001.

_________________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

ROHIT N. DESAI

July 25, 2002

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

ALBANY DIVISION

IN RE: ::

CASE NO. 02-10238

ROHIT N. DESAI ::

CHAPTER 11

Debtor. :::

SOUTHWEST GEORGIA BANK ::

Movant, ::

vs. ::

ROHIT N. DESAI ::

Respondent. :

MEMORANDUM OPINION

On April 24, 2002, the court held a hearing on the motion of

SouthWest Georgia Bank (“SWGA”) for relief from the automatic

stay and SWGA’s motion to dismiss the case. At the conclusion of

the hearing, the court took the matters under advisement. The

parties were given an opportunity to submit briefs. The court

has considered the evidence, the parties’ briefs and oral

arguments, and the statutory and case law. The court will deny

both motions.

FACTS

The pertinent facts are not disputed. On or about February

5, 1997, Rohit N. Desai (“Debtor”) executed a Security Deed and

Agreement and a UCC-1 financing statement in exchange for SWGA’s

1 Rohit N. Desai, Case No. 99-78033; Desai Enterprises Inc., Case No. 99-

78034.

-2-

loan to Debtor. (See Exhs. M-B & M-C). SWGA’s loan is secured by

Debtor’s real and personal property used in connection with

Debtor’s hotel operation which is located at 600 U.S. Highway 19

South in Camilla, Georgia. The hotel is operated by Desai

Enterprises, Inc. (“Desai Enterprises”).

Between 1998 and 1999, Debtor’s hotel operation began to

decline. This decline in business resulted in Debtor’s default

to, among others, the Small Business Administration (“SBA”) and

SWGA, the two largest secured creditors of Debtor’s hotel

operation. Debtor and Desai Enterprises’ attempts to negotiate

with SBA and SWGA were unsuccessful.

On or about December 6, 1999, Debtor and Desai Enterprises

filed voluntary petitions under Chapter 11 of the Bankruptcy Code

(“Code”) in the Bankruptcy Court for the Northern District of

Georgia.1 Although those cases were not consolidated, Debtor and

Desai Enterprises filed a Joint Chapter 11 Plan of Reorganization

(“plan”) on March 6, 2000. The proposed plan reflected SWGA’s

secured claim as an impaired claim on which settlement was being

negotiated. (See Exh. “A” of Exh. M-D).

On or about October 16, 2000, Debtor and Desai Enterprises

entered into a Commercial Installment Promissory Note and

Security Agreement with SWGA thereby restructuring the debt.

According to the terms of the restructured debt, Debtor and Desai

-3-

Enterprises were to pay to SWGA a principal amount of $883,153.38

at 10% per annum. The principal and interest was to be paid over

59 months in monthly installments of $8522.25. On October 16,

2005, a balloon payment equal to the amount of the remaining

unpaid principal and interest would be due. (See Exh. M-A).

On October 23, 2000, the terms of this restructured debt

agreement were incorporated into the plan by the plan’s Fifth

Amendment. (See Exh. “F” of Exh. M-D). Also incorporated into

the Fifth Amendment of the plan was the following language:

In addition, for a period of time from the Confirmation Date

through the fifth (5th) anniversary of the Confirmation Date,

the [Debtor and Desai Enterprises], separately or together,

do not oppose and consent to a lifting of the automatic stay

in any other bankruptcy or insolvency case or proceeding

affecting the collateral subject to [SWGA’s] Security Deeds

and other security documents. . .

. . . [Debtor and Desai Enterprises] agree that neither

[Debtor] nor [Desai Enterprises] shall commence, or cause or

assist in the commencing of, a proceeding under the

Bankruptcy Code within one hundred eighty (180) days from

the Confirmation Date.

(See id. at § 5.5(A)(5))

On November 9, 2000, the bankruptcy court confirmed the plan

by a consent order which was consented to by Debtor, Desai

Enterprises, SWGA, SBA, and the United States Trustee. (See id.).

On February 5, 2002, the bankruptcy court entered a Final Decree

in Debtor’s individual case. No evidence was presented as to

when a final decree was entered in Desai Enterprises’ case.

Debtor defaulted on his obligations under the confirmed plan

-4-

and SWGA commenced foreclosure proceedings. On February 5, 2002,

Debtor filed in this court the instant case under Chapter 11 of

the Code.

The parties stipulate that Debtor is currently indebted to

SWGA in an amount of $905,035.76. However, the issue before the

court is whether the above language in Debtor’s plan from his

prior case is enforceable against Debtor in his current case.

SWGA argues that the terms of the plan’s language in

Debtor’s prior case were negotiated and consented to by Debtor.

Because these terms specifically contemplated what would happen

in a future bankruptcy filing, SWGA contends that these terms

should be enforced in the instant case. SWGA further argues that

Debtor’s current case should be dismissed as a bad faith filing.

In addition to the terms of the plan, SWGA points out that Debtor

filed the current case the day before the foreclosure sale was to

take place. Also, this was the same day the final decree was

entered in his prior case.

Debtor, however, disagrees that the terms in the plan in his

prior case are enforceable in this case. Debtor concedes that

“prepetition waivers” such as those in his prior plan may be

enforced. Nevertheless, Debtor argues that such waivers cannot

be enforced per se; certain factors must be present in order for

them to be enforced. Moreover, prepetition waivers are

especially unenforceable when they affect third-party creditors

-5-

who were not party to the original agreement. In support of this

latter contention, Debtor cites Lewis Autry, a pro se creditor

who appeared at the hearing and opposed SWGA’s motions.

In responding to the court’s inquiry, Mr. Autry stated that

he held claims against Debtor based on some notes which he signed

with Debtor. Mr. Autry indicated that he signed one note for

approximately $45,000.00 whereby he was jointly liable for money

that was loaned to Debtor. On clarification from the court, Mr.

Autry agreed that he had a contingent claim against Debtor for

any loss the creditor on this note may incur. Presumably, this

creditor is Family Bank. (See Schedule “F”). Family Bank is

secured by a second lien on the real property used in Debtor’s

hotel operation. In addition, Mr. Autry stated he has an

unsecured claim against Debtor in the amount of approximately

$50,000.00 for a “couple of notes” Debtor signed.

Although Mr. Autry responded to the court questions when he

appeared, he never testified under oath nor did any party call

him as a witness. Therefore, this is not evidence. The only

evidence in the record regarding Mr. Autry’s claim is Debtor’s

plan from his prior case. (See Exh. M-D, § 3.6). The plan

provides that Mr. Autry is a Class 6 secured creditor holding a

claim of approximately $13,000.00. This claim is secured by

Debtor’s automobile. (See id.) Morever, Debtor’s schedules in

his present case show Mr. Autry as a secured creditor on the

-6-

automobile loan and as a co-debtor. (See Schedules “D” & “H”).

DISCUSSION

A number of courts have addressed the issue of the

enforceability of prepetition waivers. However, research has

produced no cases by the Eleventh Circuit or Middle District of

Georgia courts addressing this point. Accordingly, this is an

issue of first impression in this district.

While some courts have held that such waivers are valid,

other courts have held to the contrary. See In re Excelsior

Henderson Motorcycle Mfg. Co., 273 B.R. 920 (Bankr. S.D. Fla.

2002) (enforcing prepetition agreement); In re Shady Grove Tech

Ctr. Assoc. Ltd. P’ship, 216 B.R. 386 (Bankr. D. Md. 1998)

(setting forth several factors whether cause exists to warrant

relief from stay); In re Atrium High Point Ltd. P’ship, 189 B.R.

599 (Bankr. M.D.N.C. 1995)(holding that prepetition waivers are

enforceable in appropriate cases); In re Priscilla Cheeks, 167

B.R. 817 (Bankr. D.S.C. 1994)(enforcing prepetition forbearance

agreement); In re Jenkins Court Assoc. Ltd. P’ship, 181 B.R. 33

(Bankr. E.D. Pa. 1995)(holding that prepetition agreement would

not enforced without further development of the facts); In re Sky

Group Int’l, Inc., 108 B.R. 86 (Bankr. W.D. Pa. 1989)(holding

that prepetition waiver was not self-executing or per se

enforceable); In re Club Tower, L.P., 138 B.R. 307 (Bankr. N.D.

2 Like the courts in Atrium and Excelsior, the court finds this fact

significant. Each of these courts seem to distinguish the fact that the

prepetition waiver was agreed upon in the context of negotiating a plan

provision. “Enforcing the Debtor’s agreement under these conditions does not

violate public policy concerns. This is not a situation where a prohibition

to opposing a motion to relief was inserted in the original loan

documents….” Excelsior at 924 (citing Atrium at 607).

-7-

Ga. 1991)(holding that prepetition waivers are enforceable).

The court finds that the facts in the Excelsior and Atrium

cases are most analogous to the facts in the instant case. The

debtors in Excelsior and Atrium entered into prepetition

agreements as a result of a negotiated provision of a plan of

reorganization in a prior bankruptcy case.2

In Atrium, the debtor managed and leased commercial office

space in a two-story building. After several years of this

operation, the debtor encountered difficulty in servicing its

mortgage on the building. Although the debtor’s mortgage holder

allowed the debtor to modify its obligation several times, the

debtor nevertheless ended up in Chapter 11. As a part of the

plan in its Chapter 11 case, the debtor and its mortgage holder

entered into an agreement whereby the debtor would not oppose

relief from the stay to the mortgage holder in any subsequent

case that the debtor might file. See Atrium at 602-03.

Just as before, the debtor was unable to meet its expenses

and defaulted on its obligation to its mortgage holder. Soon

thereafter, the debtor filed a second Chapter 11 case. Based on

the plan provision in the prior case, the mortgage holder

-8-

promptly moved for relief from stay. However, the debtor opposed

the motion and presented affidavits of third-party creditors who

objected to the mortgage holder’s motion. The court noted that

all but one of these objecting third-party creditors assented to

the debtor’s plan in its prior case. See id. at 604, n.2.

After a thorough review of the authority on both sides of

the issue, the court held that “prepetition waivers are

enforceable in appropriate cases.” Id. at 607. First, the court

discounted the notion that prepetition waivers in single asset

cases are effectively a prohibition to filing bankruptcy. The

court explained that up until relief is granted to the creditor

who is a party to the prepetition agreement, the debtor has

received the protection of the stay. Moreover, the debtor

receives the benefit of the stay as to the other creditors, and

retains all the rights provided to a debtor in bankruptcy. See

id. at 607 (citing Club Tower, 138 B.R. at 311-12).

Second, the court addressed the bargain-for-exchange

principle involved in arriving at the agreement in the prior

case. The court noted that the debtor received a low interest

rate and extension in exchange for the debtor’s covenant not to

oppose relief in a subsequent case. See id.

Lastly, the court turned to the issue of objecting thirdparty

creditors and held that a debtor’s prepetition waiver of

relief from stay cannot bind third parties. See id. Therefore,

-9-

in the presence of objecting third parties, the court concluded

that it must consider all the factors as to whether sufficient

“cause” exists to warrant relief from stay. This includes the

circumstances under which the prepetition waiver arose, the

substance of the third-party objections and whether there is

equity in the collateral. Because there was equity in the

collateral, the court found that the objections of the thirdparty

creditors outweighed the prepetition waiver. Accordingly,

to the extent that the mortgage holder’s motion for relief was

based on the debtor’s prepetition waiver, the court denied relief

from stay. See id. at 608.

Similar to the debtor in Atrium, the debtor in Excelsior

experienced difficulty servicing its loan which resulted in the

debtor filing a Chapter 11 petition. Pursuant to the debtor’s

Chapter 11 plan, the debtor restructured debt to its secured

creditor. The debtor also agreed on a plan provision whereby the

debtor would not oppose relief from stay as to that secured

creditor in any subsequent bankruptcy case for three years. The

plan was confirmed by the bankruptcy court. See Excelsior at

921.

Approximately one year after the effective date of its plan,

the debtor defaulted under the terms of the restructured debt.

The secured creditor sought and obtained a judgment against the

debtor. On the day the public auction of the collateral was to

-10-

take place, the debtor filed a second Chapter 11 case. In

accordance with the plan provision in the debtor’s prior case,

the secured creditor moved for relief from stay. See id. at 922.

Relying on the holding in Atrium, the court in Excelsior

found that the debtor’s prepetition waiver of the automatic was

enforceable. See id. at 924. Accordingly, the court granted the

secured creditor’s motion for relief from stay. See id. at 924-

25. However, unlike Atruim, there were no third party creditors

objecting to relief from stay and there was no discussion of the

issue of equity.

The court finds that the reasoning from the court in Atrium

is sound. Although prepetition agreements waiving the protection

afforded by the automatic stay are enforceable, such waivers are

not per se enforceable, nor are they self-executing. See e.g.,

In re Sky Group, 108 B.R. at 86. The court further finds that in

deciding whether relief from stay should be granted based on such

waivers, the following factors should be considered: (1) the

sophistication of the party making the waiver; (2) the

consideration for the waiver, including the creditor’s risk and

the length of time the waiver covers; (3) whether other parties

are affected including unsecured creditors and junior

lienholders, and; (4) the feasibility of the debtor’s plan. See

Shady Grove at 390 (quoting from In re Merridale Gardens Ltd.

P’ship, No. 95-1-3091 (Bankr. D. Md. October 19, 1995) aff’d No.

-11-

S-95-3334 (D. Md. Feb. 28, 1996).

In the instant case, Debtor entered into an agreement in

which he would not oppose relief from stay in any subsequent case

that he might file. This agreement was negotiated in the context

of arriving at a consensual plan where both Debtor and SWGA were

represented by counsel. Therefore, the court finds that Debtor,

through counsel, was sufficiently sophisticated to enter into

this agreement.

As to the consideration for entering into the agreement, the

court finds that adequate consideration was exchanged on both

sides of the agreement. Debtor received a 5-year extension of

the maturity date of a loan in exchange for Debtor’s promise not

to oppose relief from stay in any subsequent case Debtor might

file within 5 years. Based on these conditions, SWGA agreed to

accept Debtor’s plan.

Given the current stage of Debtor’s case, the feasibility of

Debtor’s plan cannot be determined.

The court now turns to the factor of how granting relief

from stay based on Debtor’s waiver may affect other parties. At

the hearing, Mr. Autry, a pro se creditor appeared and objected

to relief from stay. As Debtor points out, Mr. Autry was not a

party to the consent order confirming Debtor’s plan which

contained the waiver. Therefore, based on the holding in Atrium,

Debtor argues that relief from stay based on Debtor’s waiver

-12-

should not be granted over Mr. Autry’s objection.

However, unlike the instant case, there were nine objecting

creditors in Atrium who submitted affidavits and the parties

stipulated to their admission. See Atrium at 608, n.6. As

demonstrated above, the only evidence in this case as to Mr.

Autry’s claim is that, in Debtor’s prior case, Mr. Autry held a

$13,000.00 claim secured by Debtor’s automobile. Based on this

evidence, Mr. Autry has no interest in the property on which SWGA

is seeking relief from stay. The court finds that granting

SWGA’s motion for relief from stay would have a minimal effect on

Mr. Autry’s claim. Therefore, in balancing Mr. Autry’s objection

with Debtor’s agreement to not oppose SWGA’s relief from stay,

the court must give Debtor’s waiver greater weight.

As to whether there is any equity in the property, SWGA has

the burden of proof on this issue. See 11 U.S.C. 362(g)(1). At

the hearing, Mr. Andy Webb, SWGA’s senior vice-president

testified there is no equity in the property. However, Mr. Webb

testified that he had no knowledge of the current value of the

property. Furthermore, he acknowledged that an appraisal done in

1997 indicated a value of $1.2 million.

Debtor testified that the current value of the property is

approximately $1.2 million. He based this value on an appraisal

done in Debtor’s prior case. Moreover, Debtor testified that he

received of an offer of $1.2 million to purchase the property.

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This potential purchaser later agreed on a purchase price of $1.4

million, but the purchaser could not obtain financing. Debtor

further testified that he has made several improvements to the

property and the hotel’s occupancy rate has increased.

Based on this evidence, the court finds that SWGA has not

carried its burden of showing that there is no equity in the

property. Although some of the factors weigh in SWGA’s favor,

the court will not grant relief from stay at this time.

Therefore, the court will deny SWGA’s motion for relief from

stay. Pursuant to the court’s Interim Cash Collateral Order

entered on June 11, 2002, the court will direct Debtor to

continue making adequate protection payments to SWGA in the

amount of $7000.00 per month due on the last day of each month.

In accordance with the parties’ announcement at the Cash

Collateral hearing held on June 6, 2002, Debtor will be held in

strict compliance of making these payments.

As to SWGA’s motion to dismiss the case, the court will also

deny that motion. SWGA asserts that Debtor filed the instant

case in bad faith. However, the evidence fails to demonstrate

that Debtor has “no realistic possibility of an effective

reorganization . . . or that the [D]ebtor seeks merely to delay

or frustrate the legitimate efforts of secured creditors to

enforce their rights . . . .” Albany Partners Ltd. v. W.P.

Westbrook, Jr., et al., 749 F.2d 670, 674 (11th Cir. 1984). SWGA

-14-

relies on the case of Phoenix Piccadilly, Ltd. v. Life Insurance

Company of Virginia, 849 F.2d 1393 (11th Cir. 1988). In applying

the standard pronounced in Albany Partners, the court in Phoenix

set forth several factors in determining whether a petition is

filed in bad faith. See Phoenix at 1394-95. Based on the facts

of that case, the court found bad faith and therefore, affirmed

the dismissal of the case. See id. at 1395.

Although some of the factors espoused in Phoenix are

present, the evidence in the instant case “lacks the aggravating

elements which were present in Phoenix . . . .” In re Clinton

Fields, Inc., 168 B.R. 265, 271 (Bankr. M.D. Ga. 1994)(Walker,

J.)(distinguishing Phoenix). Moreover, a mechanical application

of these factors in the instant case does not result in a

determination of bad faith. See id. Unlike the debtor in

Phoenix, Debtor in the instant case attempted to negotiate with

SWGA after he experienced a downturn in the travel industry.

After these negotiations were unsuccessful, Debtor filed his

current petition. Merely because Debtor filed the current case

the day before the foreclosure sale was to take place does not

amount to a bad faith filing as defined in the Eleventh Circuit

cases.

SWGA further argues that Debtor’s case should be dismissed

because Debtor filed the current case while his prior case in the

bankruptcy court for the Northern District of Georgia was still

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pending. The court agrees that a debtor cannot have two

simultaneous Chapter 11 cases. However, given the fact that

Debtor filed his present case on the same day the final decree

was entered in his prior case, any overlap in the two cases is de

minimis. Therefore, the court rejects SWGA’s argument that the

timing of Debtor’s filing amounts to a bad faith filing.

Accordingly, the court finds that Debtor did not file the instant

case in bad faith.

An order in accordance with this Memorandum Opinion will be

entered this date.

DATED this 25th day of July, 2002.

____________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

JABARI B. COBB

June 17, 2002

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

COLUMBUS DIVISION

IN RE: ::

JABARI B. COBB : CASE NO. 02-40475

LEQUSIHA SERRENA COBB ::

CHAPTER 13

Debtors. ::

GE CAPITAL AUTO :

FINANCIAL SERVICES ::

Movant, ::

vs. ::

JABARI B. COBB :

LEQUSIHA SERRENA COBB ::

Respondents. :

ORDER

In accordance with the Memorandum Opinion issued this date,

the court grants GE Capital Auto Financial Services’ motion for

relief from the automatic stay.

ORDERED this 17th day of June, 2002.

____________________________

JOHN T. LANEY, III

UNITED STATES BANKRUPTCY JUDGE

SUWANNEE SWIFTY STORES, INC.

May 2001

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF GEORGIA

THOMASVILLE DIVISION

IN RE: ::

SUWANNEE SWIFTY STORES, INC. : CASE NO. 96-60807

EIN: 58-0434460 ::

CHAPTER 11

Debtor, ::

ADVERSARY PROCEEDING

SUWANNEE SWIFTY STORES, INC., : NO. 98-6078

:

Plaintiff, ::

vs. ::

GEORGIA LOTTERY CORPORATION, ::

Defendant. :

MEMORANDUM OPINION

On September 21, 2000, the court held a hearing on cross

motions for summary judgment regarding Debtor’s complaint against

Georgia Lottery Corporation (“GLC”) to recover post-petition

transfers under § 549 and § 550 of the Bankruptcy Code (“Code”).

The parties filed briefs, reply briefs, affidavits, and a final

pretrial order. At the conclusion of the hearing, the court took

the motions for summary judgment under advisement. The court has

considered the evidence, affidavits, and the parties’ briefs and

oral arguments, as well as the applicable statutory and case law.

For reasons that follow, the court will grant GLC’s motion for

summary judgment and will deny Debtor’s motion for summary

judgment. Accordingly, the court will not allow Debtor to

recover the post-petition transfers.

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FACTS

Debtor operated approximately 109 retail stores in South

Georgia and North Florida. Seventy of these stores were located

within the state of Georgia. On September 17, 1993, Debtor

entered into a Retailer Contract with GLC for the sale of On-Line

lottery tickets in connection with the State of Georgia’s

Lottery. On October 19, 1994, Debtor entered into another

Retailer Contract with GLC for the sale of Instant Game lottery

tickets (“Instant Tickets”). In addition to the terms of each

contract, the course of dealings between Debtor and GLC were

governed by the Georgia Lottery for Education Act (“Lottery

Act”). O.C.G.A. § 50-27-1 (1982 & Supp. 2000) et seq. Pursuant

to the Lottery Act, GLC may establish rules, policies, and

procedures regulating the conduct of lottery games. O.C.G.A. §

50-27-10.

On December 12, 1996, Debtor filed a voluntary petition

under Chapter 11 of the Bankruptcy Code. On December 11, 1998,

Debtor filed this adversary proceeding. Only the Instant Ticket

transactions are at issue in this proceeding. Therefore, the

procedure by which the Instant Tickets were provided to and sold

by Debtor is pertinent to the analysis.

Pursuant to GLC’s Policies and Procedures, Instant Tickets

are delivered to the retailer in packs which are assigned a bar

code so that the retailer can scan them for status purposes.

-3-

Upon shipment to the stores, but before they are delivered,

Instant Ticket packs maintain the status of “Issued.” An “Issued

Pack” is one which has been assigned and shipped to a specific

retailer. Once a pack has been delivered, the retailer is

required to scan the pack thereby changing the status from

“Issued” to “Confirmed.” Scanning is done with a bar code reader

at the retailer’s location which is connected on-line to GLC.

“Confirmation” of a pack is absolute proof that the retailer has

received the pack from GLC.

Prior to the sale of an individual Instant Ticket from a

“Confirmed” pack, the retailer is again required to change the

status of the pack from “Confirmed” to “Activated.” This is done

by scanning the pack a second time. An “Activated” pack

indicates to GLC that Instant Tickets are being sold from that

pack.

The status of an “Activated” pack changes to “Settled” on

the earlier of either (1) 21 days after “Activation”; or (2) the

date the retailer consciously makes a choice to “Settle” a pack,

whether the Instant Tickets have been sold or not. A “Settled”

pack enables GLC to bill (or “Settle”) the retailer’s account.

The Lottery Act and the Retailer Contract also require that

the retailer maintain a separate Trust Account at Bank of America

(“BOA”) to deposit proceeds from the sale of Lottery tickets.

O.C.G.A. § 50-27-2. On the Tuesday following any fiscal week,

which ran from Sunday through Saturday, GLC electronically sweeps

1 The Instant Total is the amount swept each week which represents the

amount “Settled” less Returns (tickets returned to GLC by Debtor), less

Validations (cash payments to winners), less Sales Commissions (Debtor’s

commission for selling tickets), less Cashing Commissions (Debtor’s 2%

commission for cashing winning tickets).

-4-

the Instant Total1 and On-line Total from the account. The

Lottery Act and regulations further require the retailer to

deposit proceeds into this Trust Account no later than the next

business day after the sale of the Instant Tickets.

However, Debtor did not deposit the proceeds from the sale

of Instant Tickets on a daily basis, a fact which is not in

dispute. Although Debtor maintained a separate Trust Account at

BOA located in Albany, Georgia, each of Debtor’s retail stores

maintained a separate “store account” in the community where the

store was located. Each store deposited all of its general

receipts as well as proceeds from lottery ticket sales into its

store account. On the day prior to GLC’s weekly sweep of the

Trust Account, GLC routinely advised Debtor, by facsimile, of the

amount that was going to be swept. Upon receipt of this weekly

facsimile from GLC, Debtor withdrew funds from other accounts and

deposited into the Trust Account the amount to be swept.

During the fiscal week covering the period that Debtor filed

its voluntary petition, commencing December 8, 1996 and ending on

December 14, 1996, (“Week I”), Debtor “settled” $201,600.00 in

Instant Ticket sales. During Week I, Debtor was credited with

$13,133.00 for Returns, $114,060.00 for Validations, $9,840.30

2 The Instant Total amount added to $96,578.74, the On-line Total for

that week, resulted in $158,864.24; the total amount to be swept on

that date. Also, on January 30, 1997, Thomas A. Schroeder, an in-house

attorney with GLC, transmitted a facsimile to Debtor’s Chief

Operating Officer, Wayne Boone, detailing Instant and On-line

transactions for Week I.

3 Of the $72,186.74, $29,711.34 was on account of Instant Tickets and

$42,475.40 was on account of On-line Tickets. (Pretrial Order, Exh.

“E”).

-5-

for Sales Commissions, and $2,281.20 for Cashing Commissions.

(“applicable credits”). Accordingly, the amount to be swept for

Instant Tickets was $62,285.50.2 This sweep failed because of

the lack of funds in the Trust Account. (Pretrial Order Exh.

“D”).

Because Debtor filed its voluntary petition on December 12,

1996, both Debtor and GLC agreed to pro-rate Instant and On-line

Ticket sales as of the close of business on December 11, 1996.

(Stipulation of Facts, Doc. No. 58). Of the $158,864.24 due to

GLC, $72,186.74 was due for the period of December 8, 1996

through December 11, 1996. Therefore, on December 18, 1996,

Debtor wire transferred to GLC $86,677.50 out of its general

operating account. This left a balance of $72,186.74.3

Between December 15, 1996 and December 21, 1996, (“Week

II”), Debtor settled $191,700.00 in Instant Tickets. After the

applicable credits were applied, a balance due of $61,902.48

resulted, which GLC swept from the Trust Account on December 24,

1996.

-6-

During the next fiscal week commencing on December 22, 1996

and ending on December 28, 1996, (“Week III”), Debtor settled

$193,800.00 in Instant Ticket Sales. The amount of $68,785.02

was the resulting balance due after applicable credits were

applied. On December 31, 1996, GLC swept this amount from the

Trust Account.

Between December 29, 1996 and January 1, 1997, (“Week IV”),

$107,100.00 in Instant Tickets were settled. After applicable

credits were applied, a balance of $43,904.22 resulted which was

swept from the Trust Account by GLC on January 7, 1997. Although

Week IV is not a full week, January 1, 1997 was the last day of

the 21-day period for which any Instant Ticket packs that were

activated pre-petition could have been settled. However, neither

party can point to any evidence indicating to what extent Instant

Tickets, which were activated pre-petition, were sold prepetition

or post-petition. (Pretrial Order, pp. 17).

On December 17, 1996, the court entered an order allowing

Debtor to use cash collateral to pay operating expenses, which

included disbursements to GLC. (Doc. No. 39). On January 6,

1997, the court entered a similar order Authorizing Continued Use

of Cash Collateral. (Doc. No. 100). This latter order expired

on January 23, 1997.

On December 24, 1996, after a preliminary hearing on

Debtor’s Motion to Assume Executory Contracts, the court entered

an order allowing Debtor to continue selling lottery tickets

-7-

under its contract with GLC. (Doc. No. 67). In this order, the

court found that Debtor owed GLC “approximately $73,000.00” for

pre-petition lottery sales. Id. Similarly, on March 3, 1997,

the court entered an Interim Order allowing Debtor to operate as

a lottery retailer. (Doc. No. 266). Furthermore, this order set

Plaintiff’s total pre-petition arrearage to GLC at $72,187.00.

Id.

On December 11, 1998 Debtor filed its complaint to recover

post-petition transfers. Debtor asserts that funds transferred

to GLC during Weeks I through IV were on account of pre-petition

Instant Ticket sales. Because Instant Tickets are not settled

until 21 days after they are activated, Debtor maintains that any

Instant Tickets settled during this time period were activated

(i.e., sold) pre-petition. Based on this, Debtor contends that

the pre-petition arrearage owed to GLC on account of Instant

Ticket sales is $562,787.06, not $29,711.34. Accordingly, Debtor

maintains that $533,075.72 was erroneously paid which is

recoverable as property of the estate.

GLC contends that the pre-petition arrearage amount of

$72,186.74, of which $29,711.34 was on account of Instant

Tickets, is the correct figure. GLC maintains that this prepetition

figure was determined by the court in its March 3, 1997

order. Moreover, all post-petition transfers were on account of

post-petition sales which were authorized by the court.

Furthermore, it is GLC’s position that all Instant Tickets and

-8-

the proceeds from the sale of Instant Tickets are property of a

trust and therefore, cannot be property of the estate. Debtor,

however, maintains that any trust character was destroyed due to

the commingling of the ticket sales proceeds with its stores’

general receipts.

DISCUSSION

In dealing with cross motions for summary judgment in a

contested matter, Federal Rule of Bankruptcy Procedure 9014

incorporates Federal Rule of Bankruptcy Procedure 7056, which in

turn incorporates Federal Rule of Civil Procedure 56. Summary

judgment is proper “if the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to judgment

as a matter of law.” FED R. CIV. P. 56(c). An issue is “material”

if it affects the outcome of the case under the applicable law.

Redwing Carriers, Inc. v. Saraland Apartments, 94 F.3d 1489, 1496

(11th Cir. 1996)(citing Anderson v. Liberty Lobby, Inc., 477 U.S.

242, 248 (1986)).

In this case, the applicable law is § 549 and § 550 of the

Code. Under those sections, only the transfer of property of the

estate may be avoided and recovered. Therefore, the central

issue to be determined by the court is whether the post-petition

transfers to GLC on December 18, 1996, December 24, 1996, January

-9-

7, 1997, and January 14, 1997, were subject to a trust, thus

excluding the transfers from the property of the estate. See

United States v. Whiting Pools, Inc., 462 U.S. 198, 205, n.10

(1983)(noting that property held in trust for a third party does

not become property of the estate).

In determining whether the transferred funds were subject to

a trust, the court must first determine whether a trust existed.

This inquiry requires looking to the language of the Lottery Act,

which provides in part:

All proceeds from the sale of lottery tickets or shares

shall constitute a trust fund until paid to the

corporation. . . . Proceeds shall include unsold

instant tickets received by a lottery retailer and cash

proceeds of the sale of any lottery products, net of

allowable sales commissions and credit for lottery

prizes.”

O.C.G.A. § 50-27-21(a).

The Lottery Act also requires retailers to deposit all lottery

proceeds in a separate trust account, which “[a]t the time of

such deposit, lottery proceeds shall be deemed to be the property

of the corporation.” O.C.G.A. § 50-27-21(b).

The court finds that O.C.G.A. § 50-27-21(a) creates a

statutory trust in favor of GLC. See Georgia Lottery Corporation

v. Daniel (In re Daniel), 225 B.R. 249, 251-52 (Bankr. N.D. Ga.

1998)(holding that § 50-27-21 sets forth all the elements of a

technical trust). As far as what constitutes property held in

trust for GLC, the plain language of O.C.G.A. § 50-27-21(a) is

clear. “All proceeds . . . shall constitute a trust . . . [and]

-10-

[p]roceeds shall include unsold instant tickets received by a

lottery retailer and cash proceeds . . . net allowable sales

commissions and credit[s]. . . .” O.C.G.A. § 50-27-21(a).

Because GLC’s Policies and Procedures define “Confirmed” Instant

Tickets as absolute proof that the retailer has received the

tickets, the courts finds that, in addition to tickets sold, all

tickets “Confirmed” constitute property held in trust. Next, the

court must determine whether the funds transferred to GLC during

Weeks I through IV were subject to the statutory trust.

Debtor argues that any trust character of the funds was

destroyed when Debtor commingled Instant Ticket sales proceeds

with Debtor’s general store account funds. Debtor further

asserts that the trust fails because there is no identifiable

trust res. Research has produced no cases on this precise

point. Therefore, this is an issue of first impression for the

court. However, the court agrees with GLC and finds that Begier