Dougherty v. Sec. Credit Union (In re Dougherty)

IN RE: STEVEN DOUGHERTY, Debtor.

STEVEN DOUGHERTY, Plaintiff, v. SECURITY CREDIT UNION, Defendant.

Case No. 11-33926-dof

Adversary Proceeding Case No. 19-3002-dof

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION - FLINT

June 17, 2019

Chapter 13

Hon. Daniel S. Opperman

OPINION GRANTING DEFENDANT'S MOTION TO DISMISS

Defendant Security Credit Union ("Defendant") filed a Motion to Dismiss and/or for Summary Judgment in Lieu of First Responsive Pleading (the "Motion"), in which Defendant seeks dismissal of, or alternatively summary judgment as to, Plaintiff Steven Dougherty's ("Mr. Dougherty" or the "Debtor") Complaint against Defendant. The Complaint alleges a single count of turnover against Defendant pursuant to 11 U.S.C. § 542(a) relating to funds garnished from the Debtor's wages during the approximately seven months between the latest dismissal and reinstatement of Mr. Dougherty's Chapter 13 bankruptcy case. Defendant argues that the Debtor's wages earned during the gap period between the dismissal and reinstatement of the Debtor's bankruptcy case are not property of the estate, and thus Mr. Dougherty's Complaint for turnover of property of the estate must fail as a matter of law. The Court agrees.

Facts and Procedural History

Mr. Dougherty filed a Chapter 13 bankruptcy on August 19, 2011. During the pendency of Mr. Dougherty's bankruptcy, in relevant part,¹ the case was dismissed on March 28, 2018 for failure to timely complete a case under 11 U.S.C. § 1307(c). The corresponding Notice of Dismissal noted that the automatic stay was lifted accordingly. On August 24, 2018, the Debtor moved to reopen the case so that he could finalize a Permanent Loan Modification Agreement ("Agreement") and complete his Chapter 13 plan. The Chapter 13 Trustee objected, stating that the Debtor's plan was confirmed more than 60 months to the Debtor's Motion. The mortgagee also objected because the Agreement had not been returned to the mortgagee. The parties resolved their differences by a stipulation filed on October 26, 2018 and the case was reopened on October 29, 2018. The purpose of the reopening was to allow the Debtor to finalize his Agreement and complete his plan. None of the pleadings filed with the Court remotely suggested any other relief, especially that sought by the Debtor in this adversary proceeding.

Per the Motion, on April 4, 2018, after the most recent dismissal of the Debtor's bankruptcy case, Defendant issued a writ for periodic garnishment to the Debtor's employer, USF Delta Tooling, LLC (the "Garnishment"). Upon receiving notice that the Debtor's bankruptcy case was reinstated on October 29, 2018, Defendant released the Garnishment. Between the dismissal and the reinstatement of the Debtor's bankruptcy case, Defendant received disbursements from theDebtor's earnings in the aggregate amount of $10,218.02 for wages earned from May 12, 2018 through October 26, 2018.

On January 16, 2019, the Debtor filed the instant Adversary Proceeding against Defendant seeking turnover of the garnished funds pursuant to 11 U.S.C. § 542(a). The Debtor contends that "as a result of the reopening of this case the funds seized by Defendant are the property of the estate." Complaint, para. 10. The Debtor therefore contends that the Debtor is entitled to turnover of the garnished funds pursuant to 11 U.S.C. § 542(a).

Defendant filed the Motion on January 21, 2019, arguing that the Complaint should be dismissed for failure to state a claim upon which relief could be granted pursuant to Rule 12(b)(6), or alternatively, that summary judgment should be entered against the Debtor pursuant to Rule 56. Defendant notes that property of the estate consists of, in relevant part, "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). In the context of a Chapter 13 bankruptcy, in relevant part, property of the estate is expanded to include the earnings of the Debtor after commencement of the case but before the case is dismissed. See 11 U.S.C. § 1306(a)(2). Defendant's argument is simple: because the funds it received from the Garnishment related to the Debtor's earnings after his bankruptcy case was dismissed and before it was reinstated, such funds do not constitute property of the estate. Accordingly, the Debtor's claim for turnover of the garnished funds as property of the estate pursuant to 11 U.S.C. § 542(a) must necessarily fail.

The Debtor filed a response to the Motion on January 29, 2019. Despite claiming that there are genuine issues of material fact that would preclude summary judgment, the Debtor fails to raiseany factual issues. Rather, the Debtor contends that he "could reasonably argue" that the reinstatement of the bankruptcy case pursuant to 11 U.S.C. § 350(b) simultaneously reinstated the applicability of 11 U.S.C. § 1327(c), which vests all property of the estate in the Debtor upon confirmation of a plan, free and clear of any interest or claim of any creditor provided for in the plan. See 11 U.S.C. § 1327(b) and (c). The Debtor contends that if 11 U.S.C. § 1327(c) was applicable to the garnished funds, the Debtor would be entitled to turnover of such funds. These are clearly issues of law, not fact. Moreover, despite positing that the effect of a reinstatement of a Chapter 13 bankruptcy case is not a clearly resolved area of law, the Debtor failed to cite any authority supporting his response to the Motion.²

The Court held a hearing on the Motion on March 6, 2019, after which the Court ordered both parties to submit supplemental briefs. Accordingly, Plaintiff filed a supplemental brief on March 29, 2019; Defendant filed a responsive brief on April 12, 2019; and Plaintiff filed a reply brief on May 3, 2019. The Court has carefully reviewed the parties' respective briefs, and, in light of the previous hearing on this matter, concludes that additional oral argument is unnecessary for the Court to render an Opinion.

Law

A. Jurisdiction

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334, as well as L.R. 83.50. This is a core proceeding under 28 U.S.C. § 157(b)(2)(E), as the "words 'to turnover property of the estate' in 28 U.S.C. § 157(b)(2)(E) are terms of art in the bankruptcy context meantto include proceedings brought pursuant to 11 U.S.C. § 542." Dayton Title Agency, Inc. v. Pa. Indemnity Ins. Co. (In re Dayton Title Agency), 264 B.R. 880, 883 (Bankr. S.D. Ohio 2000) (citation omitted). Therefore, all matters before the Court today fall within this Court's jurisdiction as they emanate from Title 11 of the United States Code.

B. Motion to Dismiss Standard

Under Federal Rule of Civil Procedure 12(b)(6), made applicable in this adversary proceeding by Federal Rule of Bankruptcy Procedure 7012(b), a party may assert by motion the "failure to state a claim upon which relief can be granted." The United States Supreme Court has held that in order to survive a Rule 12(b)(6) motion to dismiss, the complaint must allege "enough facts to state a claim that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). In so doing, the Supreme Court renounced the previously "'accepted rule that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Id. at 561-62 (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). As explained by the Supreme Court in Twombly, while "Federal Rule of Civil Procedure 8(a)(2) requires only a short and plain statement of the claim showing that the pleader is entitled to relief, in order to give the defendant fair notice of what the claim is and the grounds upon which it rests," this "requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do[.] . . . Factual allegations must be enough to raise a right to relief above the speculative level," assuming that all of the complaint's allegations are true. Id. at 555 (internal quotations and citations omitted). In Ashcroft v. Iqbal, 556 U.S. 662, 684 (2009), the Supreme Court confirmed that the Twombly standard applies in all federal civil actions and not just in antitrust disputes as was the case inTwombly. The Supreme Court also emphasized that the assumption that all of the allegations are true does not apply to legal conclusions: "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. at 678 (citing Twombly, 550 U.S. at 555). Moreover, the Supreme Court noted that "where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged—but it has not 'show[n]'—'that the pleader is entitled to relief.'" Id. at 679 (quoting Fed. R. Civ. P. 8(a)(2)).

In sum, the plausibility standard first set forth by Twombly does not require "'detailed factual allegations'" or a showing of probability. Id. at 678 (quoting Fed. R. Civ. P. 8(a)(2)). However, "'the complaint must contain either direct or inferential allegations respecting all material elements to sustain a recovery under some viable legal theory. '" Digeronimo Aggregates, LLC v. Zemla, 763 F.3d 506, 509 (6th Cir. 2014) (quoting Handy-Clay v. City of Memphis, 695 F.3d 531, 538 (6th Cir. 2012)). When deciding a Rule 12(b)(6) motion to dismiss, the Court "must 'construe the complaint in the light most favorable to the plaintiff, accept its allegations as true, and draw all reasonable inferences in favor of the plaintiff.'" Wesley v. Campbell, 779 F.3d 421, 428 (6th Cir. 2015) (quoting Directv, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007)). The defendant has the burden of showing that the plaintiff failed to state a plausible claim for relief. Id.

C. Reinstatement of the Case

"In bankruptcy, case closing is a concept distinct from case...