Gordon v. Oyinade Shenbanjo A.K.A Matthew Shenbanjo (In re Taylor)

In re: TAWAKALIT TAYLOR, Debtor.

NEIL C. GORDON, as Chapter 7 Trustee for the estate of Tawakalit Taylor, Plaintiff, v. OYINADE SHENBANJO a.k.a MATTHEW SHENBANJO, Defendant.

CASE NO. 16-69706-PMB

ADVERSARY PROCEEDING NO. 18-5280

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF GEORGIA ATLANTA DIVISION

March 1, 2019

IT IS ORDERED as set forth below:

CHAPTER 7

ORDER DENYING PLAINTIFF'S MOTION FOR DEFAULT JUDGMENT, SETTING ASIDE DEFAULT, AND PERMITTING PLAINTIFF TO REPLEAD

This matter is before the Court on the Motion for Default Judgment filed by the Plaintiff-Chapter 7 Trustee (the "Trustee") on January 10, 2019 (Docket No. 6)(the "Motion"). In the Motion, the Trustee seeks entry of a default judgment against Defendant Oyinade Shenbanjo a.k.a. Matthew Shenbanjo (the "Defendant") pursuant to Rule 55 of the Federal Rules of Civil Procedure as incorporated herein through Rule 7055 of the Federal Rules of Bankruptcy Procedure.¹

The Debtor named above (the "Debtor") filed this bankruptcy case under Chapter 7 of Title 11, United States Code, on November 1, 2016. Thereafter, the Trustee² commenced this Adversary Proceeding by filing a four-count Complaint against the Defendant on November 1, 2018 (the "Complaint"). The Complaint relates to the certain loan obligations incurred by the Debtor for the education of the Defendant (the "Incurred Obligations")(Complaint ¶ 23); in particular, certain Federal Direct Parent PLUS Loans³ (the "Parent PLUS Loans").

The Defendant is the Debtor's son and an insider as defined in 11 U.S.C. § 101(31)(A)(i). The Defendant was a student at Harvard University ("Harvard") from August 2, 2011 through his graduation. According to the Complaint, the Defendant's tuition was funded mostly through the Parent PLUS Loans applied for and "signed by the Debtor and paid to Harvard while she was insolvent." See Complaint ¶ 18. Proceeds from the Parent PLUS Loans (the "Parent PLUS Loan Proceeds") were allegedly either paid to Harvard (Complaint ¶ 18) or credited to theDefendant's student account at Harvard for payment of his college tuition (Complaint ¶ 22). The Incurred Obligations based on Parent PLUS Loans are asserted to total $75,401.00 (Complaint ¶ 23). The Trustee further alleges that the Debtor received less than reasonably equivalent value in exchange for the Incurred Obligations,⁴ and that he has made written demand for their reimbursement from the Defendant (Complaint ¶¶ 24, 25).⁵ The Trustee notes that the Debtor did not schedule the Incurred Obligations in her Chapter 7 case (Complaint ¶ 30). The Debtor has filed three (3) prior bankruptcy cases, which the Trustee alleges were caused by the Debtor's incurrence of the Incurred Obligations. See Complaint ¶¶ 12-14, and 34.⁶

In the Complaint, the Trustee seeks a variety of relief. In Count I, the Trustee seeks to avoid the Incurred Obligations as fraudulently incurred obligations "pursuant to 11 U.S.C. Sections 548(a)(1)(B)(ii)(I) and (III)."⁷ Count II is styled as an alternative basis of relief, presumably to Count I. In Count II, the Trustee seeks to avoid the "Transfers" under 11 U.S.C.§ 548(a)(1)(B). It is not clear from the way that term is defined in the Complaint precisely what the Trustee means by the term "Transfers". Based on the way it is defined in Paragraph 23 of the Complaint,⁸ it might be reasonable to assume that the Trustee means payments on the Incurred Obligations that were made by the Debtor. However, the definition refers to Exhibit "A" to the Complaint for further detail, and Exhibit "A" only outlines the various advances of the proceeds of the Incurred Obligations; it does not appear to identify any payments on those obligations. Consequently, it might be reasonable to assume instead that when the Trustee says "Transfers", he means the Parent PLUS Loan Proceeds (since that is what is identified on Exhibit "A").⁹ Whatever it is that the "Transfers" are supposed to be, that is what the Trustee seeks to avoid in Count II. In Count III, the Trustee seeks a finding that the Defendant is liable for the amount of the Incurred Obligations and the value of the avoided "Transfers" under 11 U.S.C. § 550(a)(1). Finally, in Count IV, the Trustee seeks to preserve the avoided "Transfers" for the benefit of this bankruptcy estate under 11 U.S.C. § 551.

The Trustee filed a certificate of service showing service of the Complaint and a summons upon the Defendant on November 5, 2018. (See Docket No. 3). Since the Defendant had not answered or otherwise responded to the Complaint, the Trustee filed a Request for Clerk's Entry of Default on December 14, 2018 (Docket No. 5). The Clerk entered a default against the Defendant on December 17, 2018 (the "Default"). On January 28, 2019, the Defendant filed a pleading entitled Answer: Defendant's Motion for Relief from JudgmentPursuant to Rule 60(b)(1) (Docket No. 7)(the "Answer"). In the Answer, the Defendant denies substantially all the allegations in the Complaint, denies the Trustee is entitled to relief against him, and seeks to "set aside the judgment entered against him on December 17, 2018" (presumably the Default) under Rule 60 of the Federal Rules of Civil Procedure. In the Answer, he also asserts that when he first saw the Complaint, he mistakenly believed the matter related solely to the Debtor and sent it to her lawyer. Because the Court finds that the Complaint does not state a claim to relief that is plausible on its face so as to permit the Court to grant the Motion, the Court has not considered the substance of the Answer in connection with its analysis of the Motion.

Standard of Review

The entry of a default judgment under Fed.R.Bankr.P. 7055 is discretionary, and a defendant's default does not mean there is a basis for entry of a judgment. Rather, a "sufficient basis in the pleadings" must be shown and only the "well-pled allegations of fact" can support a default judgment since a default "does not admit conclusions of law." In re Bohanon, 2017 WL 2634980, *1 (Bankr. N.D. Ga. June 19, 2017), quoting Nishimatsu Constr. Co. v. Houston Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975); see also Cotton v. Massachusetts Mut. Life Ins. Co., 402 F.3d 1267, 1278 (11th Cir. 2005). As explained by the United States Supreme Court, a complaint must set forth "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

Discussion

As outlined below, the Complaint does not contain sufficient grounds for granting the relief requested on the legal theories asserted.

Count I

The Trustee has not named the correct defendant to avoid the Incurred Obligations. To avoid the Incurred Obligations created by the Parent PLUS Loans, the Trustee would need to name the obligee on the Parent PLUS Loans; presumably the United States Department of Education or some subsequent transferee of the Parent PLUS Loans. Here, the only named Defendant is the student whose tuition was paid by the Parent PLUS Loan Proceeds. Because the proper party is not named, judgment cannot be entered avoiding the Incurred Obligations.

Count II

As noted above, the Trustee does not clearly identify the "Transfers" he seeks to avoid. Based on the way they are defined, they could be either (i) payments made by the Debtor on the Incurred Obligations, or (ii) the Parent PLUS Loan Proceeds themselves. If the Trustee means the former, so long as the Incurred Obligations have not themselves been avoided, payments on those obligations were payments on an outstanding obligation of the Debtor, would thus be for reasonably equivalent value (the reduction of the debt of the Debtor),¹⁰ and would therefore not be avoidable as fraudulent transfers. In addition, the Trustee has not identified any payments made by the Debtor on the Parent PLUS Loans, and such failure also prevents the Court from granting judgment in his favor if "Transfers" means such payments.

To the extent that "Transfers" instead means the Parent PLUS Loan Proceeds, a reading that is consistent with the way the Trustee defined that same term in the Motion,¹¹ the allegations in the Complaint (and the structure of the Parent PLUS Loan program itself)¹² clearly demonstrate that the Debtor did not have an interest in the PLUS Loan Proceeds as required under 11 U.S.C. § 548(a)(1). As discussed in Eisenberg v. Pennsylvania State Univ. (In re Lewis), 574 B.R. 536, 538-540 (Bankr. E.D. Pa. 2017), the structure of the Parent PLUS Loan Program as set forth in applicable federal law and associated regulations¹³ prevents the loan proceeds from passing unrestricted through the hands of a parent borrower or being used to pay her debts. See also Novak v. University of Miami (In re Demitrus), 586 B.R. 88, 91-95 (Bankr. D. Conn. 2018) (following Lewis and noting consensus forming that PLUS loans may not be avoided as fraudulent transfers where debtor never exercised dominion over proceeds); Roumeliotis v. Johnson & Wales Univ. (In re DeMauro), 586 B.R. 379, 385-388 (Bankr. D. Conn. 2018).

Here, the Incurred Obligations and resulting Parent PLUS Loan Proceeds were created only after the loan applications were approved for the specific purpose of paying designatededucational expenses. The Trustee specifically alleges in the Complaint that the Parent PLUS Loan Proceeds were disbursed to Harvard through the Defendant's student account. There is no allegation that the Debtor ever possessed or held these funds before they were paid to Harvard. Rather, the Parent PLUS Loan Proceeds obtained by the Debtor were used for the only purposes for which they legally could have been used—to pay for tuition and other qualifying educational expenses incurred by the Defendant while attending Harvard.

In sum, the allegations in Count II do not adequately plead that the Parent PLUS Loan Proceeds were property of the Debtor, that they were in her possession or control, or that they were available to satisfy her debts. The...