Newton v. Fabrication (In re Davis)

584 B.R. 230

IN RE Janice Lynne DAVIS aka Janice Hall, Debtor

John P. Newton, Jr., Trustee, Plaintiff

v.Metal Craft Fabrication and Sales, LLC, Defendant

Case No. 3:16–bk–33409–SHB

Adv. Proc. No. 3:17–ap–3007–SHB

United States Bankruptcy Court, E.D. Tennessee.

Signed February 1, 2018

MAYER & NEWTON, John P. Newton, Jr., Esq., 1111 Northshore Drive, Suite S–570, Knoxville, Tennessee 37919, Attorneys for Plaintiff

QUIST, FITZPATRICK & JARRARD, PLLC, Ryan E. Jarrard, Esq., 2121 First Tennessee Plaza, 800 South Gay Street, Knoxville, Tennessee 37929, Attorneys for Defendant

MEMORANDUM ON CROSS MOTIONS FOR SUMMARY JUDGMENT

SUZANNE H. BAUKNIGHT, UNITED STATES BANKRUPTCY JUDGE

Plaintiff initiated this adversary proceeding on March 31, 2017, by the filing of the Complaint [Doc. 1], asking the Court to avoid a pre-petition transfer from Debtor to Defendant pursuant to 11 U.S.C. § 547 and/or § 548 to be recovered for the benefit of Debtor's bankruptcy estate pursuant to 11 U.S.C. § 551.¹ Presently before the Court are Defendant's Motion for Summary Judgment with supporting documents [Docs. 13, 16, 14] and Plaintiff's Motion for Partial Summary Judgment with supporting documents [Docs. 17, 18, 19]. Plaintiff's motion argues that summary judgment is appropriate solely because the Court should reject Defendant's argument that the prepetition payment from Debtor to Defendant constituted "new value" under § 547(c)(1). The parties each oppose the other's motion. [Docs. 21, 22, 23, 24.]

Because the Court finds that the payment by Debtor to Defendant did not constitute new value under § 547(c)(1), the Court will enter judgment in favor of Plaintiff under § 547(b).

I. Facts

The parties have stipulated and/or the record reflects the following facts. From 2008 through May 5, 2016, Debtor was employed as Defendant's office manager. [Docs. 16 at ¶ 1, 21 at ¶ 1.] Because her responsibilities included managing Defendant's finances, Debtor had access to and was a signatory on Defendant's bank accounts, through which she paid not only Defendant's business expenses, but also, without permission and in violation of her employment, a number of her personal expenses, including her home mortgage, her car, and her credit cards. [Docs. 16 at ¶¶ 2–5, 21 at ¶¶ 2–5.] As a result of her admission that she embezzled $120,000.00 from Defendant, Debtor was fired by Defendant. [Docs. 16 at ¶¶ 7–8; 21 at ¶¶ 7–8.]

Debtor was prosecuted by the State of Tennessee for embezzlement and charged with theft of property over $60,000.00 in violation of Tennessee Code Annotated § 39–14–103, a Class B felony, which subjected Debtor to a potential prison sentence of eight to twelve years. [Docs. 16 at ¶¶ 10–11, 21 at ¶¶ 10–11.] She entered into a plea agreement prior to a trial on the merits, through which the State of Tennessee agreed to allow her to avoid jail time by serving a Community Corrections sentence. [Doc. 14–3, ¶¶ 8–9.² ] Debtor's plea included an agreement that she would repay $120,000.00 in restitution to Defendant. [Docs. 19 at ¶ 3, 22 at ¶ 3.] In connection with her plea, Debtor signed an agreement on September 9, 2016, and tendered a check payable to Defendant for $70,000.00 on that same date. [Docs. 19 at ¶¶ 3–5, 19–2, 22 at ¶¶ 3–5.] The $70,000.00 payment was partially funded by the sale of Debtor's residence. [Docs. 16 at ¶ 21, 21 at ¶ 21.]

Debtor filed her Chapter 7 bankruptcy case on November 16, 2016, and received a discharge on March 1, 2017. [Docs. 19 at ¶ 1, 19–1, 19–5 at ¶ 4.a.] Seven days after discharge was entered, Defendant filed Metal Craft Fabrication and Sales, LLC v. Janice L. Davis , Adv. Proc. No. 3 :17–ap–03004–SHB, seeking a determination that it did not receive notice of Debtor's bankruptcy case and that the debt owed as a result of her embezzlement was not dischargeable under 11 U.S.C. § 523(a). Defendant's adversary proceeding against Debtor resulted in the April 19, 2017 entry of an Agreed Judgment Determining Dischargeability of Debt by which Defendant was granted a nondischargeable judgment against Debtor in the amount of $120,000.00, which includes the $70,000.00 that Plaintiff seeks to avoid in this adversary proceeding. [Docs. 16 at ¶ 9, 21 at ¶ 9.]

II. Summary Judgment Standard

Pursuant to the Federal Rules of Civil Procedure, "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law[,]" utilizing the following procedures:

(1) Supporting Factual Positions. A party asserting that a fact cannot be or is genuinely disputed must support the assertion by:

(A) citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials; or

(B) showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.

(2) Objection That a Fact Is Not Supported by Admissible Evidence. A party may object that the material cited to support or dispute a fact cannot be presented in a form that would be admissible in evidence.

(3) Materials Not Cited. The court need consider only the cited materials, but it may consider other materials in the record.

(4) Affidavits or Declarations. An affidavit or declaration used to support or oppose a motion must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant or declarant is competent to testify on the matters stated.

Fed. R. Civ. P. 56(c) (applicable in adversary proceedings through Rule 7056 of the Federal Rules of Bankruptcy Procedure ). The Court does not weigh the evidence to determine the truth of the matter asserted when deciding a motion for summary judgment but simply determines whether a genuine issue for trial exists. See Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Id.

Each movant bears the burden of proving that summary judgment is appropriate by establishing that there is no genuine dispute concerning any material fact, such that any defense alleged is factually unsupported. See Celotex Corp. v. Catrett , 477 U.S. 317, 323–24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the initial burden of proof is met, the non-moving party must prove that there is a genuine dispute of material fact for trial but may not rely solely on allegations or denials contained in the pleadings. See Nye v. CSX Transp., Inc. , 437 F.3d 556, 563 (6th Cir. 2006) (holding that reliance upon a "mere scintilla of evidence in support of the nonmoving party will not be sufficient"); see also Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp. , 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The facts and all resulting inferences are viewed in a light most favorable to the non-moving party, and the Court must decide whether "the evidence presents a sufficient disagreement to require submission to a [fact-finder] or whether it is so one-sided that one party must prevail as a matter of law." Anderson , 477 U.S. at 243, 106 S.Ct. 2505. Nevertheless, when "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no ‘genuine issue for trial.’ " Matsushita , 475 U.S. at 587, 106 S.Ct. 1348 (citations omitted).

III. Analysis

Plaintiff's cause of action arises under 11 U.S.C. § 547(b), which allows a Chapter 7 trustee to avoid a preferential transfer made by a debtor to a creditor if the transfer was made within ninety days before the petition date and was made for the benefit of the creditor on account of an antecedent debt while the debtor was insolvent, thus enabling the creditor to receive more than it would have received in a Chapter 7 liquidation case. Subsection (c) provides a number of statutory defenses including the following, as asserted by Defendant:

(c) The trustee may not avoid under this section a transfer—

(1) to the extent that such transfer was

(A) intended by the debtor and the creditor to and for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and

(B) in fact a substantially contemporaneous exchange[.]

11 U.S.C. § 547(c). A trustee who alleges a preferential transfer bears the burden of proving each element, and the party asserting a § 547(c) statutory defense bears the burden of proving each element. The elements of both the claim and defense must be satisfied by a preponderance of the evidence. See 11 U.S.C. § 547(g).

Particularly important to the instant case, the Bankruptcy Code expressly provides:

"[N]ew value" means money or money's worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation[.]

11 U.S.C. § 547(a)(2).

Based on the record before it, the Court finds that Plaintiff has proved—and Defendant has offered nothing adequate to refute—that the requirements of § 547(b) have been satisfied. That is, the undisputed facts establish that Debtor paid $70,000.00 to Defendant within the ninety-day period before Debtor filed for bankruptcy; Debtor was insolvent at the time she made the transfer; the payment was on account of an antecedent debt; and the transfer put Defendant in a better position than it would have been in Debtor's Chapter 7 bankruptcy case had it not received the $70,000.00. Defendant argues that § 547(c)(1) applies. Specifically, Defendant asserts...