DALE L. SOMERS, Bankruptcy Judge.
The Complaint filed in this adversary proceeding by the Chapter 7 Trustee, Steven L. Speth, seeks to recover for the estate a $125,000 cash supersedeas bond (hereafter "Cash Bond") which Debtor Leigh Ann Koksal posted prepetition in Sedgwick County, Kansas, District Court as a condition to stay execution in Kansas of a judgment entered in Ohio against Debtor in favor of Defendant Jamie Lynn Postel. The Court has previously held that as of the date of filing, the estate held a contingent reversionary interest in the Cash Bond
This adversary complaint has followed a somewhat tortured path before this Court, and knowledge of some of those prior proceedings is necessary to understanding the issue before the Court.
On June 16, 2004, a default judgment was entered against Debtor in favor of Postel in Ohio. Facts about this judgment and the relevant Ohio procedure will be discussed below. On January 5, 2007, Postel registered the Ohio judgment in the District Court of Sedgwick County, Kansas. On May 14, 2007, after Debtor moved to vacate the Ohio judgment, Debtor posted the Cash Bond as a condition for the Kansas district court's entering a stay of execution on the registered judgment while the attempts in Ohio to reduce and set aside the judgment were pending.
Debtor filed for bankruptcy relief under Chapter 7 on January 29, 2009. On that date, the $125,000 Cash Bond was in the custody of the Clerk of the Sedgwick County District Court. Although Debtor had been successful in having the amount of the Ohio judgment reduced, $206,000 of the judgment was affirmed. The only avenue for relief from the judgment then available to Debtor in Ohio was discretionary review by the Ohio Supreme Court, which Debtor failed to seek by the March 2, 2009, deadline.
Even though the time for Debtor to file for review of the Ohio Court of Appeal's affirmance of the judgment had expired on March 2, 2009, before the February 3, 2010, ruling, this Court declined to hold that forfeiture of the Cash Bond had occurred because the terms of the Cash Bond indicated that such a ruling was within the jurisdiction of the Kansas district court.
The Trustee filed a Second Amended Complaint on April 20, 2010.
The relevant facts concerning the Ohio litigation are as follows. Postel, a professional artist, sued Debtor, a Kansas resident, on claims of copyright infringement, breach of contract, fraud, and conversion arising out of an ongoing business relationship between the parties concerning collaboration on various art projects. Debtor did not respond to the suit or appear for trial before a magistrate, and on September 24, 2005, a default judgment was granted. Debtor also did not appear for a subsequent trial on damages, and on November 28, 2005, a magistrate recommended entry of a default judgment for $506,000, comprised of $300,000 in statutory damages for copyright infringement, $106,000 in compensatory damages, and $100,000 in punitive damages on the conversion claim. No objections were taken to the magistrate's recommendation, and the trial court adopted the recommendation decision on July 16, 2006.
Debtor retained Ms. Poplar, an Ohio attorney, who on April 4, 2007 (about a month before the Cash Bond was posted in Kansas), filed a motion to vacate the Ohio judgment. Debtor argued that the Ohio court lacked subject matter jurisdiction of the copyright infringement claim, that the Ohio court lack personal jurisdiction over Debtor, and that the default judgment should be set aside pursuant to Ohio Civil Procedure Rule 60(B)(1).
An appeal was taken to the Fifth District Court of Appeals. The issues on appeal were whether the trial court abused its discretion either when it did not vacate the default judgment or when it did not vacate the judgment entry adopting the magistrate's decision regarding damages. In an opinion filed on January 16, 2009, the appellate court agreed that Debtor's motion to set aside the default judgment was not filed within a reasonable time as required by Rule 60(B)(1). Like the lower court, the appellate court did not address Debtor's arguments that she had meritorious defenses but rather based its decision solely upon the timeliness of the Rule 60(B)(1) motion. It also held Debtor's failure to file timely objections to the magistrate's recommendation as to damages and her failure to file an appeal of the trial court's adoption of the magistrate's recommendation precluded her from asserting her arguments on those matters in a Rule 60(B) motion.
Under Ohio law there is no automatic right to appeal a civil case from the court of appeals to the supreme court. Pursuant to the Ohio Constitution, the Ohio Supreme
The parties focus their evidence and arguments on the value of the estate's interest in the Cash Bond on the date of filing. This probably occurred because of the importance in this case of the Court's February 3, 2010, ruling that the estate had a contingent reversionary interest in the Cash Bond on that date. However, since that ruling, the Sedgwick County District Court held that Koksal's interest in the Cash Bond was forfeited, and authorized the Clerk of the District Court to transfer the Cash Bond and accrued interest to Postel's attorney's trust account. Thereafter, the Trustee amended the Complaint to seek recovery pursuant to § 549 of the estate's interest in the Cash Bond, since that interest was transferred postpetition. Thus the issue before the Court is the value of the estate's interest which was transferred, not the value of the estate's interest on the date of filing.
The Trustee contends that the value of the estate's interest is 40% of the Cash Bond. Postel argues that the estate's interest had no value. The Court agrees with Postel.
The Trustee's position is based on the theory that the value of the estate's interest in the Cash Bond is equal to Debtor's chances of having won her appeal to the Ohio Supreme Court. Based upon evidence presented by Debtor's Ohio counsel, he argues that when the bankruptcy case was filed, Debtor still had the right to seek review of the judgment by the Ohio Supreme Court and there was a substantial likelihood of reversal based upon meritorious defenses.
Postel's position that the estate's interest has no value is supported by the testimony and report of attorney Mark J. Lazzo, who was qualified as an expert. He offered two rationales in support of his position that the estate's interest in the Cash Bond was valueless on the date of filing. First, he opined that the estate's interest vanished 32 days after the bankruptcy filing when the deadline for seeking review of the judgment by the Ohio Supreme Court passed without action by the Debtor. Second, he opined that, assuming the estate's interest in the Cash Bond was not divested, the estate's interest in the Cash Bond had no value on the date of filing because a hypothetical buyer of the estate's interest, knowing the hurdles to reversal of the judgment, would not have paid the estate any sum for the remote chance of recovering the Cash Bond.
Both the Trustee's valuation method and Postel's alternative valuation method are based upon examination of the likelihood, determined as of the date of filing, that the judgment would have been reversed if Debtor had pursued her remedies before the Ohio Supreme Court. The Court finds the Trustee's position that the estate's interest should be valued at 40% of the Cash Bond amount is not supported by the facts of the case. Although the Trustee has identified some interesting legal issues underlying the judgment, such as the propriety of awarding punitive damages when they were not pled and the reliability of the evidence presented during the hearing on damages, these issues would not have been reached unless the Ohio Supreme Court both accepted discretionary review and found an abuse of discretion in denying the Rule 60(B) relief based upon timeliness. The Court finds that these hurdles to review of the judgment on the merits were essentially insurmountable, making Debtor's chances of obtaining release of the Cash Bond if she had moved for review by the Ohio Supreme Court essentially nonexistent.
Postel's expert frames the analysis as what a hypothetical purchaser of the estate's interest would have paid the Trustee for the chance of recovering the Cash Bond if the Ohio judgment were set aside. He opines that such a person would not have paid anything (would not have purchased the interest) because in order to obtain release of the Cash Bond, a purchaser would have been required to promptly retain Ohio counsel to file a pleading requesting the Ohio Supreme Court to exercise its discretionary jurisdiction, to convince that court that the case involved a case of public or great general interest, and, after prevailing on that motion, then also to prevail on the merits of an appeal asserting that the lower courts had abused their discretion in denying the Rule 60(B) motion. The Court agrees that the cost of pursuing review and the very remote likelihood of prevailing on two separate matters before the Ohio Supreme Court are such that a reasonable person would not elect to purchase the estate's interest.
The Trustee challenges this position by questioning the appropriateness of the hypothetical purchaser analysis and by contending that Postel's expert undervalues the chances of reversal of the judgment by failing to consider the allegedly meritorious defenses to the judgment. As to the first objection, the Trustee argues that this asset is of the type that the Trustee would retain and "work himself." However, assuming this were true, the Court finds the hypothetical purchaser analysis useful and relevant because the Trustee's decision to attempt to recover value from the asset would involve evaluation of the same considerations used in the hypothetical purchaser analysis. As to the second objection, the Court finds Postel's analysis supported by the evidence, since the procedural posture of the Ohio case made it highly unlikely that the merits of the defenses would ever be reached.
The Court holds that if estimation of the likelihood of release of the Cash Bond based upon the status of the Ohio judgment as of the date of filing is the correct valuation method under the circumstances of this case, the estate's contingent reversionary interest had no value on the date of filing.
The alternative method of valuation urged by Postel is that, even if the estate's contingent interest had value on the date of filing, such value was extinguished upon expiration of the appeal deadline, so that no value exists for turnover to the Trustee. It is undisputed that approximately 32 days after Debtor filed for relief under Chapter 7, the time to seek review by the Ohio Supreme Court expired without Debtor or anyone on her behalf seeking review, thereby, as found by the Shawnee County District Court, satisfying the conditions for forfeiture of the Cash Bond to Postel, the holder of the judgment. If this theory of valuation controls, the estate's interest has no value.
Because the Court concludes that the estate's interest in the Cash Bond has no value under either of the suggested methods of valuation, it is not necessary for the Court to chose between the two alternative methods. However, the Court pauses to address this question because it may arise in the future and because it has concluded that only the second method is correct.
Neither of the parties has provided authority helpful to the Court when addressing the legal question of which of the two valuation methods is correct. Postel's expert simply states, "I am unaware of any bankruptcy law which prevents the value of an asset of the estate from dissipating (or disappearing) with the lapse of time post-filing, where the time lapse is not stayed by the bankruptcy." The Celotex
The Court's research has found no cases addressing the value of a Chapter 7 estate's interest in a cash supersedeas bond posted by the debtor before filing a bankruptcy petition where the debtor's appeal
For example, in Potter,
In Ruetz,
The estimation of value based solely upon the circumstances as they existed on the date of filing is based upon the inclusion of the contingent reversionary interest as property of the estate as of the date of filing. This is a logical position consistent with § 541(a)(1), which provides that the "commencement of a case ... creates an estate ... comprised of ... all legal or equitable interests of the debtor in property as of the commencement of the case." But this basis for determination of value fails to consider § 541(a)(6), which includes in the estate the "[p]roceeds, product, offspring, rents, or profits of or from property of the estate." Where an estate includes a contingent asset, the postpetition increase in value of the asset because of the happening of the contingency constitutes proceeds, product, or profits of the estate property.
The Court therefore holds that § 541(a)(6) applies to valuing the estate's interest in the forfeited Cash Bond. On the date of filing, the Chapter 7 estate included a contingent reversionary interest in the Cash Bond posted prepetition by the Debtor as a condition for a stay of execution on the Ohio judgment. The Ohio judgment became final while the bankruptcy case was open, and the court in which the Cash Bond was posted ruled that the Cash Bond was forfeited to the judgment creditor. Not only is the estate's contingent reversionary interest in the Cash Bond as of the date of filing property of the estate, but the estate also includes postpetition increases or decreases in the value as a result of the happening of the contingent event. Under § 549, the Trustee may recover only the value of the estate's interest in the Cash Bond which was transferred postpetition. In this case, that transfer occurred when the Cash Bond was forfeited in early March 2010, one and a half months after the case was filed. It is the value after forfeiture, not the value on the date of filing, which determines the Trustee's right to recover the transfer under § 549.
For the foregoing reasons, the Court concludes that the estate's contingent reversionary interest in the $125,000 Cash Bond which the Trustee seeks to recover under § 549 from Postel has no value. Both § 541(a)(1) and (a)(6) are applicable to the valuation since the contingency, which as of the date of filing could have increased or decreased the value of the estate's interest in the Cash Bond, had occurred when the estate's interest was transferred. The happening of that contingency, the forfeiture of Debtor's interest in the Cash Bond, deprived the estate of any interest in the Cash Bond. Alternatively, if the estate's contingent interest in the Cash Bond should be valued as of the date of filing based upon circumstances then existing, the estate's interest was nevertheless zero, as there was essentially
The Trustee's Complaint for turnover of the estate's interest in the Cash Bond is denied, as the estate's interest is valueless. Defendant Postel is entitled to the Cash Bond, plus any accrued interest thereon.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure, which makes Rule 52(a) of the Federal Rules of Civil Procedure applicable to this proceeding. A judgment based upon this ruling will be entered on a separate document as required by Federal Rule of Bankruptcy Procedure 7058, which makes Federal Rule of Civil Procedure 58 applicable to this proceeding.
