Adell v. John Richards Homes Bldg. Co. (In re John Richards Homes Bldg. Co.)

475 B.R. 585

In re JOHN RICHARDS HOMES BUILDING COMPANY, LLC, Debtor.Kevin Adell, Appellant,

v.John Richards Homes Building Company, LLC; and Honigman Miller Schwartz and Cohn, Appellees.

Bankruptcy Case No. 02–54689.

Civil Case No. 12–cv–10506.

United States District Court,

E.D. Michigan,

Southern Division.

July 16, 2012.

David J. Nowaczewski, Ralph E. McDowell, Bodman PLC, Detroit, MI, Fred T. Magaziner, Dechert LLP, Philadelphia, PA, G. Eric Brunstad, Jr., Dechert LLP, Hartford, CT, for Appellant.

Arthur Thomas O'Reilly, Norman C. Ankers, Honigman, Miller, Detroit, MI, for Appellees.

ORDER AFFIRMING IN PART AND REVERSING IN PART THE BANKRUPTCY COURT'S ORDER

STEPHEN J. MURPHY, III, District Judge.

This appeal from the United States Bankruptcy Court for the Eastern District of Michigan (“Michigan Bankruptcy Court”) comes at the closing stages of a complex legal battle that began when Kevin Adell filed an involuntary Chapter 11 bankruptcy petition against John Richard Homes Building Co., LLC (“JRH”) in 2002. At issue is whether the Michigan Bankruptcy Court abused its discretion in entering a $4.65 million judgment against Adell for (1) the attorney fees and costs JRH has incurred in attempting to enforce a $6.1 million judgment entered against Adell by the Michigan Bankruptcy Court in 2003; and (2) punitive damages for Adell's conduct after the entry of judgment. The Court heard oral argument on the appeal on June 6, 2012. For the reasons that follow, the Court will AFFIRM the award of attorney fees and costs, and REVERSE the award of additional punitive damages.

BACKGROUND

I. Procedural Overview¹

Adell filed an involuntary petition for Chapter 11 reorganization against JRH in 2002. See generally11 U.S.C. § 303. The Michigan Bankruptcy Court dismissed the petition in 2003, and, in light of the damage caused to JRH's business and reputation as a result of the petition, it entered a judgment of $6.1 million in compensatory damages, punitive damages, and attorney fees against Adell and two related firms with whom he had conspired, Adell Broadcasting Co. (“ABC”) and STN.com. See id. § 303(1). This Court and the Sixth Circuit affirmed the award, and the Supreme Court denied certiorari. See In re John Richards Homes Building Company, LLC, 291 B.R. 727 (Bankr.E.D.Mich.2003) [hereinafter JRH I ], aff'd,312 B.R. 849 (E.D.Mich.2004), aff'd,439 F.3d 248 (6th Cir.2006), cert. denied,549 U.S. 818, 127 S.Ct. 85, 166 L.Ed.2d 31 (2006).

Not long after the Michigan Bankruptcy Court entered its ruling, Adell filed for Chapter 11 reorganization in the United States Bankruptcy Court for the Middle District of Florida (“Florida Bankruptcy Court”). Adell liquidated many of his assets to purchase a mansion in Florida. The Florida and Michigan Bankruptcy Courts disagreed as to the validity of Adell's claim to Florida's unlimited “homestead” exemption from judgment creditors on the mansion. Compare In re John Richards Homes Building Co., LLC, 298 B.R. 591 (Bankr.E.D.Mich.2003) [hereinafter JRH II] with In re Adell, 321 B.R. 562 (Bankr.M.D.Fla.2005) [hereinafter Adell I ].

The Florida Bankruptcy Court eventually dismissed Adell's petition because Adell was not entitled to a discharge of indebtedness. In re Adell, 332 B.R. 844 (Bankr.M.D.Fla.2005) [hereinafter Adell II ]. JRH sought sanctions against Adell in Florida Bankruptcy Court, but the bankruptcy judge there refused to award them, a ruling the district court and the Eleventh Circuit upheld on appeal. In re Adell, No. 07–cv–361, 2008 WL 746833 (M.D.Fla. Mar. 18, 2008) [hereinafter Adell III ] (finding bankruptcy court's decision denying sanctions was not abuse of discretion), aff'd,296 Fed.Appx. 837 (11th Cir.2008).

After the Sixth Circuit affirmed the original, $6.1 million judgment against Adell, he paid that judgment in full on behalf of himself, ABC, and STN.com. Afterwards, JMH, along with lead counsel Honigman Miller Schwartz & Cohn (“HMSC”), returned to the Michigan Bankruptcy Court and moved for additional attorney fees and costs for incurred during post-judgment litigation. These activities included efforts to execute on Adell's real and personal property in various forums, garnishment litigation in the Michigan Bankruptcy Court, and the Florida bankruptcy litigation. The bankruptcy court denied the request, but this Court reversed and remanded. In re John Richards Homes Bldg. Co., LLC, No. 02–54689, 2006 WL 3228523 (Bankr.E.D.Mich. Sept. 21, 2006) [hereinafter JRH III], rev'd and remanded,405 B.R. 192 (E.D.Mich.2009). Likewise, the bankruptcy court denied a motion for additional punitive damages filed by JRH based on Adell's post-judgment conduct, which this Court also reversed and remanded. In re John Richards Homes Bldg. Co., LLC, No. 02–54689, 2006 WL 3230009 (E.D.Mich.Bankr.Sept. 21, 2006) [hereinafter JRH IV ], rev'd and remanded,404 B.R. 220 (E.D.Mich.2009).

On remand, this Court instructed the Michigan Bankruptcy Court to reach the merits of JMH's requests for costs, attorney fees, and an additional award of punitive damages. After an evidentiary hearing, the Michigan Bankruptcy Court entered an award of $1.85 million in attorney fees, and $2.8 million in punitive damages. JRH V, 461 B.R. at 4. Adell now appeals this additional $4.65 million in damages.

II. Adell's Asset Sale and Florida Relocation

Analysis of the issues presented in this motion requires a narrower focus on the history of the post-judgment proceedings. The Michigan Bankruptcy Court entered its initial, $6.1 million judgment against Adell on April 25, 2003. JRH I, 291 B.R. at 729. Adell's response was swift. He liquidated many of his Michigan assets, fled to Florida on May 5, 2003, and purchased a $2.8 million home there in Naples on May 8. JRH II, 298 B.R. at 593;Adell I, 321 B.R. at 564–65. JRH scrambled to respond. It filed a motion for post-judgment relief on May 21, 2003, requesting that the Court order Adell to sell the home he purchased and turn over the proceeds in satisfaction of the judgment. Adell defended JRH's request on the grounds that the Florida Constitution's “homestead” exemption prohibited such a sale.²SeeFla. Const. art. X, § 4(a)(1) (exempting “a homestead” from any “forced sale under process of any court” and from any “lien” resulting from a “judgment, decree or execution”).

The bankruptcy judge ruled against Adell. The judge found that 11 U.S.C. § 303(1) preempted the “homestead” exemption. See JRH II, 298 B.R. at 602–07. He also concluded, as a matter of Florida law, that Adell's “homestead” claim was invalid because he had not established Florida residency. Id. at 607–09. The bankruptcy judge ordered Adell to sell his home within sixty days of the September 17, 2003 entry date of JRH II, and remit the proceeds in partial satisfaction of the judgment. The Michigan Bankruptcy Court also appointed a receiver on October 3, 2003, after Adell showed recalcitrance in cooperating with JRH II's directives. This Court granted a stay of proceedings to execute on the judgment on November 10, 2003, contingent on Adell posting a supersedeas bond of $2.8 million.

III. Adell's Bankruptcy Filing in Florida

On November 14, 2003—the day before the deadline for compliance with the order of September 17 was set to expire—Adell filed for Chapter 11 reorganization in Florida Bankruptcy Court. See Notice of Bankruptcy, In re John Richards Homes Bldg. Co., L.L.C., No. 02–54689, ECF No. 543 (Bankr.E.D.Mich. Nov. 18, 2003). With that filing, Adell became entitled to the protections of the automatic stay, which stops judicial proceedings against the individual and halts all efforts by creditors to execute on judgments. See11 U.S.C. § 362. JRH moved to dismiss the Chapter 11 petition, but the Florida Bankruptcy Court denied the motion.³Adell II, 332 B.R. at 846.

While the appeal of the initial motion to dismiss to the District Court for the Middle District of Florida was pending, the Florida Bankruptcy Court's January 31, 2005 ruling in Adell I expressed disagreement with the Michigan Bankruptcy Court's conclusion in JRH II in 2003 on the applicability of the “homestead” exemption. By the time the ruling issued, Adell had resided in Florida for 180 days prior to filing the chapter 11 petition, registered to vote in Florida, registered an automobile in Florida, obtained Florida licenses for fishing and driving, opened several Florida bank accounts, started a new business venture in Florida, and formed a Florida not-for-profit company. The Florida Bankruptcy Court concluded that these actions were sufficient to establish “bona fide residence” in Florida, and rejected JRH's overtures regarding the applicability of the “homestead” exemption. Adell I, 321 B.R. at 571.

This ruling became moot when the district court reversed the Florida Bankruptcy Court's denial of the motion to dismiss Adell's Chapter 11 petition on May 11, 2005. Adell attempted to convert his case into a Chapter 7 liquidation, but the Bankruptcy Court granted JRH's motion to dismiss the petition entirely on October 4, 2005. Id. at 846–49. The bankruptcy judge found that there was “no doubt that [Adell] converted nonexempt assets into exempt assets ... that the transfer took place within one year before the date of the filing of the petition; and, based on the circumstances and events surrounding the sudden move to Florida, the transfer was made to hinder, delay, or defraud a creditor, JRH.” Id. at 849. This statement was not just rhetoric. It was a reference to 11 U.S.C. § 727(a)(2)(A), which prevents the bankruptcy court from granting a discharge to one who has “transferred, removed ... or concealed ... property of the debtor, within one year before the date of the filing of the petition.”

JRH sought sanctions in the Florida Bankruptcy Court against Adell. The bankruptcy judge denied the request, finding that “Adell attempted to pursue a legitimate goal within the utmost of his ability and, therefore, to impose a...