JANET T. NEFF, District Judge.
Defendant Patricia Merkle ("Defendant") appeals a decision of the Bankruptcy Court disallowing in part her asserted "Preferred Interests" in the consolidated debtor and related entities, and her corresponding entitlement to share in distributions under the Debtors' Consolidated Plan of Reorganization. See Jordan River Liquidating Trust v. Jay & P, LLC (In re Jordan River Resources, Inc.), 455 B.R. 657 (Bankr.W.D.Mich.2011). Having reviewed the record and fully considered the parties' briefs, the Court affirms the decision of the Bankruptcy Court.
This appeal stems from an adversary proceeding (Adv. Pro. No. 09-80301, Case No. DL 07-01747) in which the Jordan River Liquidating Trust ("Plaintiff") objected
The Merkles, like many other interested parties, made investments in the Debtors and related entities, which Defendant claims came from the couple's joint funds, thereby entitling her assertions of Preferred Interests. Jay Merkle, who was incarcerated in federal prison for his role in attracting investments in the Debtors, no longer sought payment, but Defendant sought her half of the couple's investments, whether held jointly with her husband, individually, or as a beneficiary under the Merkle Trust (Op. & Or., Dkt. 1-5, [herein "Op."] at 6).
After a trial, the Bankruptcy Court issued a lengthy written opinion, setting forth in detail its findings and conclusions with respect to Defendant's assertions of Preferred Interests, upholding in part Plaintiff's objections to the Preferred Interests. The Bankruptcy Court allowed $106,855.40 in Preferred Interests but disallowed the remaining $353,632.37.
On appeal to this Court from a bankruptcy court's final order or judgment, the bankruptcy court's conclusions of law are reviewed de novo while findings of fact are reviewed under the clear-error standard. B-Line, LLC v. Wingerter (In re Wingerter), 594 F.3d 931, 935-36 (6th Cir.2010). "Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." FED. R. BANKR. P. 8013. "`[A] finding is "clearly erroneous" when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.'" Anderson v. Bessemer
The decision on a motion in limine is an evidentiary ruling reviewed for an abuse of discretion. Gen. Elec. Co. v. Joiner, 522 U.S. 136, 141, 118 S.Ct. 512, 139 L.Ed.2d 508 (1997); Sohail v. Singh (In re Sohail), 438 B.R. 398, 403 (E.D.Va. 2010). "An abuse of discretion occurs where the reviewing court has `a definite and firm conviction that the court below committed a clear error of judgment.'" In re Wingerter, 594 F.3d at 936 (quoting Barlow v. M.J. Waterman & Assocs., Inc. (In re M.J. Waterman & Assocs., Inc.), 227 F.3d 604, 607-08 (6th Cir.2000) (citation, alterations, and internal quotation marks omitted)). "`The question is not how the reviewing court would have ruled, but rather whether a reasonable person could agree with the bankruptcy court's decision; if reasonable persons could differ as to the issue, then there is no abuse of discretion.'" In re Wingerter, 594 F.3d at 936 (quoting Barlow, 227 F.3d at 608).
At issue is whether the Bankruptcy Court erred in finding that Defendant and the Merkle Trust have Allowed Preferred Interests in the consolidated Debtor and related entities as follows:
Allowed
Preferred
Investor Entity Interest
Merkle Trust Superior Petroleum $103,654.60
Merkle Trust Redstone Energy $ 3,200.80
Jay and Ms. Merkle Southwest Energy $ 0.00
Jay and Ms. Merkle Longhorn Energy $ 0.00
Total $106,855.40
Defendant claims that she is entitled to additional Allowed Preferred Interests in the amount of $353,632.37 in the above or related entities. The Bankruptcy Court carefully considered the testimony and documentary evidence presented at trial under the terms of the Plan, and the circumstances of Defendant's investments, as an "insider" (Op. at 4). In a thorough and well-reasoned opinion, the Bankruptcy Court determined that these additional Preferred Interests were not supported by the evidence. This Court finds no basis for reversal.
"An Allowed Preferred Interest as defined in the Plan means a Preferred Interest for which a proof of preferred interest was timely and properly filed with the court by the bar date, or which is listed in the Investor Cash Investment Report (the `Report') and not disputed" (Op. at 6). "The term also includes a previously Disputed Preferred Interest which the court has allowed" (id. (citing Plan at § 1.4)). Since Defendant's asserted Preferred Interests were disputed in the Report, and Plaintiff filed an objection, Defendant had the burden of establishing the validity and nature of her "Preferred Interest" pursuant to the Plan (Op. at 2, 6 (citing Plan at § 4.5(d) and Trl. Tr. at 5-6)).
Defendant argues that the Bankruptcy Court erred in denying her "motion in limine," in which she asserted that only the Original Objection of Plaintiff was timely filed under the Plan, and further, that her asserted Preferred Interests to which Plaintiff did not specifically object, totaling $164,264.73, must be automatically deemed "allowed" under the Plan. This Court finds no error.
Defendant asserts that the Plan set a deadline of April 1, 2009 for objections to Proofs of Preferred Interest, and although the Plan permits Plaintiff to unilaterally
Plaintiff argues that the Bankruptcy Court did not abuse its discretion in denying what amounted to a tardy motion for summary judgment, disguised as a motion in limine, particularly when Defendant suffered no prejudice because she had full notice of the basis of Plaintiff's objections and conducted full discovery based on that notice.
The gist of Defendant's "motion in limine" was that no evidence should be permitted with respect to any Preferred Interest to which Plaintiff had not expressly and timely objected (Def. Br. at 10-11). Thus, since only the Original Objection was timely, Plaintiff could introduce only evidence related to the objections therein. Or, if the Bankruptcy Court permitted the Amended Objection, no evidence should be admitted with respect to the matters raised in the Original Objection, because Plaintiff failed to incorporate the Original Objection in the Amended Objection, and it therefore superseded, rather than supplemented, the Original Objection. Moreover, no evidence should be admitted with respect to the $164,264.73 jointly-filed Preferred Interests because there was no challenge to these in either Plaintiff's Original or Amended Objection.
Having reviewed the April 27, 2011 transcript
In denying the motion in limine, the Bankruptcy Court stated that regardless of the nature of the motion, the procedural rules for amendments to the pleadings were applicable to the adversary proceeding, and amendment was contemplated, although the matter of timeliness was left open.
Given the Bankruptcy Court's considerations and reasoning, this Court finds no abuse of discretion in denial of the motion in limine. Defendant's procedural arguments do not justify relief in light of the varied and opposing concerns raised below.
Defendant additionally argues that the Bankruptcy Court erred in allowing Plaintiff "to contradict the admissions in [Plaintiff's accountant] Rhonda Karney's testimony and its discovery responses which it did not supplement or correct before trial" (Def. Br. at 27). Plaintiff responds that it fully complied with all discovery obligations, and even assuming arguendo that it did not, Defendant failed to raise the issue of discovery violations before the trial court, and therefore the issue is not properly considered on appeal. See Dubuc v. Michigan Bd. of Law Examiners, 342 F.3d 610, 619-20 (6th Cir.2003). This court is not persuaded that Defendant properly and timely raised this issue below is questionable. In any event, Defendant's argument is without merit.
Defendant seeks relief from the Bankruptcy Court's substantive decision on the grounds that Plaintiff failed to supplement its discovery responses, which failure allegedly misled Defendant in her trial preparations. This argument is similar to the motion-in-limine argument and ignores the nature and timing of the proceedings below. Determining which of Defendant's asserted Preferred Interests should be allowed was difficult because of the insider nature of the financial dealings by Defendant's husband, and the proofs were complicated by his criminal proceedings, including the seizure of records and his incarceration. Although no fault is placed on Defendant, her financial interests are nevertheless derivative of her husband's transactions, and the burden of proof rests ultimately on her.
The Bankruptcy Court properly considered the merits of Defendant's asserted Preferred Interests on the basis of the relevant evidence, and Defendant's arguments for reversal on narrow procedural grounds must be rejected. This is particularly so under the circumstances of this case, given Jay Merkle's personal direction of the investments and the financial transactions, and the ubiquitous transfers amongst the related entities.
Defendant argues that the Bankruptcy Court erred in its determinations with respect to her Preferred Interests by failing to give her credit for (1) $33,000 that the Merkles invested in Redstone Energy; (2) $20,000 invested directly into Longhorn Energy Corporation; (3) a $600,000 investment ultimately booked in the name of Superior Petroleum; and (4) a $144,264.73 investment ultimately booked in the name of Southwest Energy Resources. Defendant's arguments are unpersuasive.
As Plaintiff notes, the Bankruptcy Court's findings were based on the books and records before it and were fully supported by the testimony and other evidence. The Bankruptcy Court properly considered the standards of proof and the evidence in making its findings of fact:
(Op. at 9-10 (footnote omitted)). Defendant has failed to show any clear error in the Bankruptcy Court's findings of fact. For the reasons that follow, Defendant's challenges on appeal are without merit.
Defendant argues that the Bankruptcy Court's sole basis for excluding her asserted Redstone Energy Corp. Preferred Interest of $16,500 (her one-half interest) was because corresponding subscription agreements for the documented three checks were not introduced into evidence. Defendant contends this was an error of law because the Plan imposes no requirement for any particular documentation, such as subscription agreements.
The Bankruptcy Court stated at the outset of its findings that "[t]he parties agree that there must be a signed subscription agreement in order for the court to allow a Preferred Interest" (Op. at 10). The Bankruptcy Court noted that the Merkles' 2004 investment of $10,800 was accompanied by a contemporaneous subscription agreement. Defendant's additional asserted Preferred Interests in Redstone Energy were not supported by the requisite evidence. This Court finds no error.
Likewise, Defendant's asserted Preferred Interest of $10,000 (her one-half interest) in Longhorn Energy Corp. was documented by a check but no subscription agreement. The Bankruptcy Court properly
Defendant argues that she is entitled to additional Preferred Interests of $255,000 (her one-half interest) related to Superior Petroleum Corp. She first contends that the Bankruptcy Court erred in disallowing her a Preferred Interest based on the Merkles' $500,000 loan to Delaware River Resources (DRR). This Court finds no error. The Bankruptcy Court carefully considered the circumstances surrounding this alleged preferred investment and properly concluded that, at most, Defendant proved she received a Preferred Interest in Superior Petroleum "on account of" a non-cash receivable loan to DRR (Op. at 15). The Court noted that Defendant "offered no explanation for how this payable qualifies as `Cash' within the meaning of the Plan" or for that matter how the transaction changed from a loan to a Preferred Interest (id. at 15-16).
The Bankruptcy Court's conclusions are supported by ample evidence, including that the loan was recorded as a debt to Jay Merkle on DRR's books, at an annualized interest rate of 72%, for which he received three $30,000 interest payments; the loan was then transferred to Shelf Exploration (a company that had no investors) and was treated as a liability to Jay on Shelf's books; and then Jay caused the loan to be transferred to Superior Petroleum and at the same time somehow converted it into a preferred investment in the name of the Merkle Trust (Op. at 14). The Bankruptcy Court correctly found no evidence supporting a Preferred Interest with respect to the $500,000 loan.
Defendant argues in the alternative, that if this Court agrees with the Bankruptcy Court that the $500,000 loaned to DRR could not be transformed into a preferred investment, then the Court must recognize that as a Claim, with Defendant being entitled a Claim for one-half of that amount or $250,000.
This Court finds no basis in the record for an alternative award on appeal of $250,000 to Defendant on the basis of an Allowed Claim for her half of the $500,000 loan. Defendant cites no foundational support in the lower record for this alternative relief, nor does the Bankruptcy Court's Opinion include a consideration of this alternative. This Court declines to make an alternative award for an Allowed Claim in the first instance.
Defendant next argues that the Bankruptcy Court erred in giving credit for $100,000 originally loaned to Snake River Resources (SRR). The Bankruptcy Court found that this second component of Defendant's asserted Preferred Interest in Superior Petroleum should be disallowed for the essentially the same reasons that the DRR $500,000 loan was disallowed: this interest originated as a loan to SRR; there was no subscription agreement to evidence an equity investment; and without explanation, the loan was transferred to Superior Petroleum and placed on the books as a preferred investment in favor of the Merkle Trust with a subscription
Defendant finally argues that the Bankruptcy Court erred in failing to give credit for the Merkles' $144,264.73 investment ultimately booked in the name of Southwest Energy Resources, Inc., which would have entitled Defendant to a Preferred Interest of $72,132.37. This Court finds no error.
The Bankruptcy Court noted the convoluted shuffling of the investments at issue: "The transaction began as a loan derived from money invested at least in part by an unrelated entity, was re-labeled as a preferred investment almost a year after money changed hands, and remains unsubstantiated by the presence of a check, Cash, or even Ms. Merkle's direct knowledge" (Op. at 19). Defendant's reliance on Jay Merkle's explanation of the course of the investments, and a presumption that the transformation on the Southwest Energy books to a preferred investment was legitimate, is insufficient to overcome the deficiencies in the proofs cited by the Bankruptcy Court.
The Bankruptcy Court properly concluded that the asserted Preferred Interests should be disallowed. As an insider, Defendant's proofs of Preferred Interests warranted closer scrutiny, and Defendant failed to meet her burden of proof with respect to the disallowed Preferred Interests. The Bankruptcy Court's decision is affirmed.
An Order consistent with this Opinion will be entered.
