Preferred Ready-Mix LLC v. Berleth (In re Preferred Ready-Mix LLC)

647 B.R. 158

IN RE: PREFERRED READY-MIX LLC, Debtor.

Preferred Ready-Mix LLC, Plaintiff,

v.Robert Berleth and Berleth and Associates, Defendants.

CASE NO: 21-33369

ADVERSARY NO. 22-3040

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed November 9, 2022

Paul James Hammer, Barron and Newburger, Bellaire, TX, Stephen Wayne Sather, Barron Newburger, P.C., Austin, TX, for Defendants.

Joyce Williams Lindauer, Joyce W. Lindauer Attorney, PLLC, Dallas, TX, for Plaintiff.

MEMORANDUM OPINION

Jeffrey Norman, United States Bankruptcy Judge

Trial was held on November 8, 2022. For the reasons so stated the Complaint for Turnover and Related Relief is granted in part and denied in part.

PROCEDURAL BACKGROUND

The debtor, Preferred Ready Mix LLC, the plaintiff herein ("Ready-Mix") brought suit against Robert Berleth, ("Berleth") a State Court receiver in this adversary under four counts, Turnover, Stay Violation, Conversion and Disallowance of Claim. Prior to the filing of this adversary proceeding the debtor was the owner/operator of concrete mixing trucks. The debtor is a limited liability corporation, which is fifty percent owned by Robert Foran ("Foran"). Berleth and Associates has been dismissed from this proceeding.¹

Foran had financial difficulty, and after a Texas state court suit styled Roesle v. Foran et al. , 19-DVC-267154, in Fort Bend County, 400^th Judicial District Court, entered default judgment² against Foran and Nolan Star Trucking, LLC, Berleth was appointed as receiver. The order appointing receiver was first entered, as to Foran and Nolan Star Trucking on June 4, 2021,³ and then on September 30, 2022, by an ex parte order supplement receivership⁴ also against Preferred Ready-Mix, LLC.⁵ Pursuant to the ex parte order, Berleth seized, in part, the assets of Ready-Mix on or about October 1, 2021.

On October 14, 2021, the debtor filed a Chapter 11 case.⁶ By October 21, 2022, Berleth had actual notice of the bankruptcy filing.⁷ At this juncture, given proper notice by the debtor of the filing and demand for possession of the seized assets by counsel, the Court would have expected an orderly progression in this case. That is seized assets would have been turned over to the debtor, and Berleth would have filed a claim for administrative expenses.⁸ This did not occur.

Ready-Mix, unfortunately, had very serious issues with its choice of counsel. Counsel who filed the case for Ready-Mix was unresponsive, disappeared, and ordered to disgorge her retainer. Ultimately, the Court was forced to issue an arrest warrant as her unresponsiveness accrued. She was arrested and has filed personal bankruptcy to avoid the Court's disgorgement order entered in this case against her.

This, unfortunately, led to a delay in turnover for which Berleth is not responsible.⁹ However, the debtor did make demand on November 10, 2022¹⁰ and Berleth should be held liable for any delay thereafter.

By two letters, one dated November 10, 2021, and one dated November 29, 2021, counsel for the debtor requested return of trucks, equipment, tools and various other items. Berleth did not comply with the November 10, 2021 demand. He thereafter caused further delay resulting in a partial turnover of trucks on November 20, 2022, which was followed up with an additional turnover on December 6, 2022. This adversary proceeding was thereafter filed on March 7, 2022.

FACTUAL FINDINGS AND CONCLUSIONS OF LAW

Berleth on October 1, 2021, seized six Peterbilt Mixer Trucks, a 2003 Ford Model F250, compressor and tools on the Ford Truck, office supplies and office records from the debtor. While demand for turnover was not made immediately after the filing of the Chapter 11 of the debtor due to issues of counsel, demand was properly made by the debtor's new counsel for return of these items on November 10, 2021. Thereafter, emails¹¹ indicate the response of Berleth¹² to the debtor and vindicate the debtor's complaints against him.¹³ Most of these responses are serious impediments to immediate turnover and are patently impermissible. Berleth had no authority to condition turnover. He intentionally and improperly used the leverage of his possession of the debtor's major assets and made demands for payment against the debtor in order to thwart immediate turnover. This is impermissible. Additionally, he [or his agents] collected estate assets from the debtor in the form of a $2,500.00 payment without Court authority. This type of behavior cannot be condoned and must be remedied by this Court.

Berleth's failure to act to turn over assets, together with his demands, effectively held the major assets of the debtor hostage. Berleth in his testimony indicated that he had followed the rules in this bankruptcy case. The Court strongly disagrees. The Court finds that Berleth attempted to use his position as a state court appointed receiver to thwart the provisions of 11 U.S.C. §§ 542 and 543.

Berleth provided an accounting to this Court in the underlying bankruptcy case on February 18, 2022.¹⁴ The accounting is generous in Berleth's view of the facts but confirms the turnovers on November 20, 2021, and December 6, 2021.

The Court has applied the preponderance of the evidence standard to all claims of the plaintiff, except as noted and placed the burden of proof on the plaintiff.

TURNOVER

Turnover is available to a trustee or debtor-in-possession. Section 542 of the Bankruptcy Code generally requires a noncustodial entity who has possession, custody, or control of property of the estate that the trustee may use, sell, or lease under Section 363 or may exempt under Section 522 to deliver to the trustee and account for the property or the value of such property. Section 543 generally requires a custodian with knowledge of the commencement of the case to deliver to the trustee and account for such property of the estate and the proceeds of such property. The provisions of Section 542(a) of the Bankruptcy Code, governing the turnover of tangible property, are intended to be self-executing.

The debtor/plaintiff has by clear and convincing evidence met its burden as to the six Peterbilt Mixer Trucks, the 2003 Ford Model F250 and the compressor. The Court can find that as to this property prior to turnover (1) the property was in the possession, custody or control of another entity; (2) the property could be used in accordance with the provisions of Section 363; and (3) the property had more than inconsequential value to the debtor's estate. However, as to the remainder of the property claimed by the debtor to be subject to turnover, the evidence is less substantial [as later described] and fails to meet a burden of clear and convincing evidence or even a lesser evidentiary standard of a preponderance of the evidence.

Turnover of the six Peterbilt Mixer Trucks, the 2003 Ford Model F250 and the compressor has already occurred. The debtor seeks damages as a result of Berleth's actions, including attorney fees and costs. The court finds it may sanction a party for violation of sections 542 or 543 of the Bankruptcy Code. The debtor did not call a witness for attorney's fees, so no attorney fees are awarded, but the Court grants damages of $500.00 per day, for each of the six Peterbilt Trucks and the Ford Truck, for each of the ten days the vehicles were not turned over. Therefore, there is a total damage award of $35,000.00 for the plaintiff and against Berleth.

AUTOMATIC STAY

A debtor may recover damages for violation of the automatic stay in the context of a third party's exercising of control over property of the estate subject to a turnover proceeding or demand pursuant to Section 362(a)(3) of the bankruptcy code. The burden of proof on damages is on the plaintiff, and damages must be proven with reasonable certainty.¹⁵ Here, the plaintiff seeks remedies for violation of 11 U.S.C. § 362, including any remedies under 11 U.S.C. 362(k). Berleth argues that since the plaintiff is not an individual, it does not have standing to seek damages under 11 U.S.C. § 362(k).¹⁶ The Court does not find that persuasive, as the Fifth Circuit has noted that a corporate debtor fell within the definition of an individual.¹⁷ Berleth admits, however, that the Court does have the authority to find contempt for the failure to abide by a court order.

Here, the Court finds Berleth's actions were with actual knowledge of the bankruptcy filing and intentional, with the intent to deprive the debtor of his assets. Additionally, his actions were not in good faith and in contravention of the provisions of the automatic stay. Furthermore, the Court finds that Berleth did more than just passive retention of estate property, as demand was made.¹⁸ Consequences for violations of the automatic stay can be severe. Parties that willfully violate the automatic stay may be liable to debtors for actual damages, including costs, attorneys’ fees, and, in appropriate circumstances, punitive damages.¹⁹ Here, actual damages would be duplicative of the damage award from violation of sections 543 and 542 of the Bankruptcy Code. However, to the extent the prior award of damages is inappropriate, it is awarded here as actual damages on the same calculation noted above.²⁰ Additionally, given the finding of bad faith and intentional actions by Berleth, the Court awards punitive damages of $10,000.00. Accordingly, total damages for violation of the automatic stay are awarded in the amount of $45,000.00 for the plaintiff against Berleth.

CONVERSION

The Court finds that the plaintiff has failed in its burden of proof of conversion. There are four elements to a conversion claim: (1) Plaintiff owned, had legal possession of, or was entitled to possession of the property; (2) Defendant assumed and exercised dominion and control over the property in an unlawful and unauthorized manner, to the exclusion of and inconsistent with plaintiff's rights; (3) Plaintiff made a demand for the property; (4) Defendant refused to return the property.²¹ The...