Wernes v. Kroesen (In re Kroesen)

In re: DEBORAH SUE KROESEN,

NANCE WERNES, Plaintiff, v. DEBORAH SUE KROESEN, Defendant.

DEBORAH SUE KROESEN, Plaintiff, v. NANCE WERNES, Defendant.

Case No. 18-42624-can13

Adv. Case. No. 19-04003

Adv. Case. No. 19-04022

UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF MISSOURI

May 1, 2020

Not Designated for Publication

MEMORANDUM OPINION

Introduction

These related matters come before the court on Creditor Nance Wernes' Complaint to Determine the Dischargeability of a Debt pursuant to 11 U.S.C. §§ 523(a)(2)(A)-(B) against the chapter 13 Debtor Deborah Kroesen¹ and Debtor Deborah Kroesen's Complaint for Damages and Injunctive Relief for violations of the automatic stay against Ms. Wernes.²

In short, this matter involves a house rehab gone awry among two people who had been friends. Ms. Wernes, who had invested in a home Ms. Kroesen proposed to rehab and sell, alleges that Ms. Kroesen defrauded her in connection with a promissory note entered between them onJune 20, 2018. Unfortunately, the project was never completed, the house was foreclosed upon by the first lienholder, and Ms. Wernes lost her investment. Ms. Kroesen denies any allegation of misrepresentation or false pretense in connection with the rehab project.

After Ms. Kroesen filed bankruptcy as a result of the failed rehab project, Ms. Kroesen filed a complaint against Ms. Wernes alleges that Ms. Wernes violated Ms. Kroesen's automatic stay by menacing Ms. Kroesen, warranting an award for damages, injunctive relief, and attorney fees. Ms. Wernes denies that she either menaced Ms. Kroesen or violated the automatic stay.

With the agreement of the parties, the court consolidated both adversary proceedings for purposes of discovery and trial. The court held a three-and-a-half-hour trial on both matters on February 25, 2020 and allowed the parties forty-five minutes each to present their closing arguments on March 3, 2020. The debtor, Deborah Kroesen, appeared by counsel Jennifer Benedict; the creditor, Nance Wernes, appeared pro se. At the end of closing arguments, the court took the nondischargeability issue under advisement, ruled in favor of Ms. Wernes on the violation of the stay issue, and reserved the right to submit its findings of fact and conclusions of law. The following constitutes the court's findings of fact and conclusions of law as required by Fed. R. Bankr. P. 7052 on both adversary proceedings.

PROCEDURAL HISTORY

Before delving into the court's findings of fact and conclusions of law, the court recounts the lengthy procedural history of this chapter 13 case and the two related adversary proceedings.

The chapter 13 case

• On October 4, 2018, Ms. Kroesen filed a chapter 13 petition. She scheduled Ms. Wernes on Schedule D as a secured creditor owed $90,000 against property described as "210 NW Donovan Road, Lee's Summit, MO 64063" (the "Donovan Property") with the notation,"Jackson County Home purchased to be 'flipped' valued at $150,000." The Schedule I stated that Ms. Kroesen had been employed as a paralegal at the Jennifer Benedict Law Office for six years. Her chapter 13 plan proposed a monthly payment of $200/month with a 5% dividend to unsecured creditors and proposed that the Donovan Property be surrendered to Nance Wernes.

• After the chapter 13 trustee raised numerous confirmation issues, and after the filing of several amended plans, the court confirmed Ms. Kroesen's final amended plan paying $330/month for a base of 36 months was confirmed. Ms. Wernes did not object to confirmation of any of proposed plans.

• In the meantime, Crossroads Management Group, the holder of the first lien against the Donovan Property, filed a motion for relief from stay, alleging the validity of its first lien pursuant to a loan dated July 21, 2017 in the original principal amount of $143,000 incurred by Sisters' Property Solutions, LLC, a single-member LLC owned by Ms. Kroesen. Crossroads alleged a current payoff due of $154,606.40, in excess of the value of the Donovan Property scheduled by Ms. Kroesen in her Schedule A/B. The certificate of service does not reflect whether Crossroads notified Ms. Wernes as the second lienholder. No one objected and the court entered an order lifting the stay.

• Also in the meantime, Ms. Wernes timely filed her proof of claim, Claim No. 10-1. Her pro se claim was filed as a secured claim in the amount of $40,000 and unsecured in the amount of $110,422, for a total claim of $150,422. She listed the value of the Donovan Property as worth $200,000. She also requested priority treatment of $2,850 for deposits under 11 U.S.C. § 507(a)(7) and of $8,000 for taxes and penalties owed to governmental units under 11 U.S.C. § 507(a)(8). Her claim was supported by a copy of a PromissoryNote dated June 20, 2018 in the principal amount of $135,191.34 payable by August 14, 2018 in one installment of $134,191.34³ plus interest payments of $4,828.26/month accruing at an interest rate of 48% beginning on June 14, 2018 (six days before the date on the Note). The Promissory Note stated that it was secured by a subordinate lien against the Donovan Property.

• The chapter 13 trustee objected to the claim.⁴ The trustee objected to the priority treatment of a portion of the claim; alleged that the trustee was unable to administer the claim as filed due to the conflicting information regarding the claim type and claim amount; and requested that the claim be allowed as a secured claim in the amount of $150,422. Ms. Wernes did not respond to either objection and the court entered an order sustaining the trustee's objection. Ms. Wernes likewise did not object to the trustee's Notice Allowing/Disallowing claim showing her claim was to be treated as secured on a surrendered property to be paid a 0% dividend from the confirmed plan.

The adversary complaints

• On January 5, 2019, Ms. Wernes timely filed her complaint of nondischargeability against Ms. Kroesen, Adv. No. 19-4003. The court entered a pretrial order setting a pretrial conference for February 26, 2019 and a trial setting of March 19, 2019.

• On February 26, 2019, the court held the first of many status conferences in the nondischargeability case. The plaintiff, Ms. Wernes, was represented by attorney Ryan Shernaman and Ms. Kroesen was (and remains) represented by attorney Jennifer Benedict. At this date, neither party had begun discovery and both represented that they did not need a scheduling order, so the court cancelled the trial date and set another status conferencefor May 21, 2019, stating that the parties should be prepared to discuss a trial date at that conference.

• In the interim, on April 9, 2019, Ms. Kroesen filed her complaint for injunctive relief and damages against Ms. Wernes, Adv. No. 19-4022, alleging Ms. Wernes had violated the automatic stay. The court entered a pretrial order setting a status conference of June 3, 2019 (later corrected to June 4) and a trial date of June 25, 2019.

• On May 21, 2019, the court held a second status conference on the nondischargeability complaint. The parties stated they had both completed written discovery. Mr. Shernaman, representing Ms. Wernes, stated he intended to take Ms. Kroesen's deposition and that a half day would be sufficient to try the case. Ms. Benedict said she would need an hour. The court set a discovery cutoff of July 1, 2019, a final pretrial conference for July 2, 2019, and a trial for July 29, 2019. Although the court raised the fact that the other adversary with the same parties was also pending, Mr. Shernaman stated Ms. Wernes had not retained him to defend her in the stay violation adversary.

• On June 4, 2019, the court held its first of many status conferences regarding the stay violation complaint. Ms. Wernes did not participate. Before the conference, Ms. Benedict had filed a motion for default judgment against Ms. Wernes, but the court denied the motion for failure of proper service, cancelled the June 25, 2019 trial date, and set a deadline for Ms. Benedict to request an alias summons and to re-serve the complaint. The court also noted that under Rule 55, the court would likely need a hearing to determine damages, assuming Ms. Wernes was properly served. After Ms. Benedict timely requested the alias summons, the court then entered an amended pretrial order setting a pretrial conference for July 2, 2019 (at the same time as the final pretrial conference in thedischargeability adversary complaint) and a trial date of July 30, 2019 (the day after the trial in the other adversary was scheduled).

• Before the July 29 trial could occur in the dischargeability adversary proceeding, however, Ms. Wernes' counsel, Mr. Shernaman, filed a motion to withdraw. The court set the motion for hearing on the July 2, 2019 final pretrial conference.

• On July 2, 2019, the court held conferences in both cases. Ms. Wernes appeared pro se and stated she did not object to Mr. Shernaman's motion to withdraw but requested time to find another attorney. The court agreed to give her more time and cancelled the July 29 trial setting and set another status conference for July 30, 2019 when the trial in the stay violation proceeding had been set. The court warned Ms. Wernes that the discovery cutoff had expired on July 1, and that if she could not find another lawyer, she would have to proceed without one and that the court would set another trial date. In the stay violation adversary, although Ms. Benedict had served Ms. Wernes properly, the answer date had not yet expired but hearing no opposition to the trial date, the court kept the July 30 trial date. Ms. Wernes through new counsel, Nicky McNeil, filed an answer the next day.

• Neither the July 30, 2019 trial in the stay violation adversary nor the July 30 status conference in the dischargeability occurred on July 30, however. Shortly before the trial setting, Ms. Kroesen's counsel Jennifer Benedict requested a continuance for the purpose of conducting additional discovery and noting that Ms.

...