JAMES S. STARZYNSKI, Bankruptcy Judge.
This matter is before the Court on competing Motions for Summary Judgment to determine ownership of funds now on deposit in the Court Registry. This adversary proceeding started with Trustee Gonzales ("Gonzales") filing suit against attorney Saul Ewing, LLP ("Ewing") and John Doe ("Doe") for a turnover of funds on deposit in Saul Ewing, LLP's attorney trust account held on behalf of Douglas Vaughan (the Debtor in this bankruptcy). The suit named Doe as the alleged source of the funds. Trustee Wagner ("Wagner"), Chapter 11 trustee of "The Vaughan Company, Realtors" case, also claiming the funds, sought to intervene, but was then named as a defendant in Trustee Gonzales' First Amended Complaint
The active pleadings are therefore: Gonzales First Amended Complaint (doc. 4)
Before the final pretrial conference Doe filed a Motion for Summary Judgment against Gonzales and Wagner (doc. 41). At the pretrial conference the parties all agreed that this matter could be disposed of through motions for summary judgment. This matter is before the Court on 1) Doe's Motion for Summary Judgment
In adversary proceedings Summary Judgment is governed by Fed.R.Bankr.P. 7056, which incorporates Fed.R.Civ.P. 56, which in turn provides, in relevant part:
Fed.R.Civ.P. 56. Additionally, New Mexico Local Rule 7056-1 regulates the required procedure:
NM LBR 7056-1.
The version of Rule 56 quoted above became effective on December 1, 2010. See Fed.R.Civ.P. 56 (2010 Advisory Committee comments).
Foreword Magazine, Inc. v. OverDrive, Inc., 2011 WL 5169384 at *1-2 (W.D.Mich. 2011). Virtually all other courts agreed. See, e.g.,
Harris v. Beneficial Oklahoma, Inc. (In re Harris), 209 B.R. 990, 995-96 (10th Cir. BAP 1997)(footnotes omitted.) See also United States v. Dibble, 429 F.2d 598, 602 (9th Cir. 1970) (Unauthenticated summary judgment exhibits are inadmissible hearsay.); White v. Wells Fargo Guard Services, 908 F.Supp. 1570, 1579 (M.D.Ala. 1995)(Court may not consider documents not sworn or certified as required by Fed. R.Civ.P. 56.); Canada v. Blain's Helicopters, Inc., 831 F.2d 920, 925 (9th Cir.1987):
See also Mooney v. Monumental Life Ins. Co., 123 F.Supp.2d 1008, 1010 (E.D.La. 2000)(Checks submitted as exhibits were not properly before the court because they were not attached to and authenticated by an affidavit conforming to Rule 56(e)); Investors Credit Corp. v. Batie (In re Batie), 995 F.2d 85, 89 (6th Cir.1993)(Upon a party's objection, documents filed in support of or in opposition to a motion may not be considered by the court unless they have entered "the record as attachments to an appropriate affidavit" and "would be admissible in evidence.")
Foreword Magazine, 2011 WL 5169384 at *2.
The new subdivision (c)(3) "reflects judicial opinions and local rules provisions stating that the court may decide a motion for summary judgment without undertaking an independent search of the record." Fed.R.Civ.P. 56 (2010 Advisory Committee comments).
When filing or responding to a motion for summary judgment the parties must adhere to the federal and local rules to promote efficiency both for the Court and the parties. See Jackson v. Finnegan, Henderson, Farabow, Garrett & Dunner, 101 F.3d 145, 150-151 (D.C.Cir.1996):
The D.C. Circuit had previously pointed out that—
Twist v. Meese, 854 F.2d 1421, 1425 (D.C.Cir.1988), cert. denied, 490 U.S. 1066, 109 S.Ct. 2066, 104 L.Ed.2d 631 (1989).
The United States District Court for the District of New Mexico recently presented a complete overview of the legal standards for deciding Motions for Summary Judgment in the Tenth Circuit:
Bhandari v. VHA Southwest Community Health Corp., 2011 WL 1336525 at * 10-11 (D.N.M.2011) (citing former Rule 56).
The 2010 amendments, except for the obvious changes established by the new materials, were not intended to change summary judgment standards or practice.
There are two sources for facts in this adversary. First, the matters admitted in the answers to the Complaint, cross-claims and counter-claims; and second, the undisputed facts established by the motions for summary judgment. As noted above, claims and admissions by Ewing are not considered.
The following facts were admitted:
1. This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(b), and the administrative order entered March 19, 1992, in the United States District Court for this district referring cases to this Court, in that this action is a core proceeding for turnover pursuant to 11 U.S.C. § 542. Venue is proper.
2. Douglas F. Vaughan filed a voluntary petition under chapter 11 of the Bankruptcy Code on February 22, 2010, and the case was converted to a chapter 7 proceeding on May 20, 2010.
3. Plaintiff is the duly appointed Chapter 7 trustee of the Douglas F. Vaughan chapter 7 estate.
4. On February 22, 2010 (the "VCR Petition Date"), the Vaughan Company, Realtors ("VCR") filed a voluntary petition under chapter 11 of the Bankruptcy Code.
5. Wagner is the duly appointed Chapter 11 Trustee of the VCR bankruptcy estate.
6. Doe is an individual residing and doing business in Bernalillo County, New Mexico.
7. Doe admits he wrote a check to VCR that stated "legal fees" and admits there is a proof of claim filed on his behalf for the $300,000.
8. Wagner asserted the following affirmative defenses: failure to state a claim, lack of standing, plaintiff is not the real party in interest.
9. Doe asserted the following affirmative defenses: failure to state a claim, the funds are not property of the estate, the estate lacks title, the transfer was in good faith without knowledge of the bankruptcy, he lacks capacity, and he was subject to undue influence and duress.
In the discussion that follows, for the proposed facts listed in the three summary judgment motions, each proposed fact is listed in quotation marks. If there are no comments to the fact, this means that the other parties did not dispute it.
Doe listed twelve proposed undisputed material facts. Gonzales' and Wagner's responses differ, so the facts will be analyzed as to each.
1. "Douglas Vaughan ran a Ponzi scheme involving `investors' all over the United States." Gonzales agreed that this was undisputed. Wagner objected to this
2. "Mr. Doe and Mr. Vaughan were long-standing friends." Wagner disputed this fact but also objected as lacking a citation to the record. The Court agrees that without a record citation this fact has not been established. Therefore, Doe fact 2 is disputed as to Wagner. Gonzales failed to respond to Doe fact 2 and would therefore be deemed to admit it if it were properly supported. See NM LBR 7056-1(c). However, as Wagner pointed out, the fact is not supported by a record reference so Gonzales is not deemed to accept fact 2. In summary, fact 2 is disputed.
3. "During the period of May 2009 through February, 2010 Mr. Vaughan borrowed funds from Mr. Doe on a monthly basis in amounts totaling $3,650,000 from Doe in a series of eleven transactions. The amount does not include two checks that were apparently intended to be for legal fees. See Proofs of Claim, Amended XXXX (The Vaughan Company, Realtors) and Amended XXXX (Douglas F. Vaughan)." Wagner disputes fact 3. She argues that the proofs of claim are inadmissable because they were signed by Doe's attorney, not Doe, and the checks attached to the claims are not properly authenticated because they are not certified copies nor have they been authenticated by any other means. Doe, citing Fed. R.Civ.P. 56(c)(2), argues in his reply brief that his undisputed facts are supported by appropriate evidence. (Doc. 54, pp. 5-6). The Court agrees that the checks attached to the claims would be admissible under a hearsay objection as business records. The proof of claim can be considered a summary of the checks. Gonzales failed to respond to Doe fact 3. In summary, the Court finds Doe fact 3 is undisputed.
4. "Mr. Doe paid $200,000 to Saul Ewing, LLC. See Exhibit B to Answer to Amended Complaint and Counterclaims." Wagner objects to this fact because the Exhibit B referred to is a copy of a check that has not been authenticated. Gonzales failed to respond to Doe fact 4 so is deemed to admit it. The Court finds it admissible for the reasons stated in Doe fact 3. In summary, Doe fact 4 is undisputed.
5. "Saul Ewing deposited the $200,000 check into its trust account." Wagner objects because there is no citation to the record. The Court agrees. Furthermore, Doe has not laid a foundation for knowing what account the check was deposited in and the only way he could know this is if someone told him, so it is hearsay. Gonzales did not respond to Doe fact 5, but the Court finds it inadmissable. In summary, Doe fact 5 is disputed.
6. "Saul Ewing earned over thirty thousand dollars in attorney's fees during its representation of Mr. Vaughan, which it removed from the $200,000 it held in trust." Wagner objects because there is no citation to the record. The Court agrees. Furthermore, Doe has not laid a foundation for knowing what Saul Ewing earned and the only way he could know this is if someone told him, so it is hearsay. Gonzales did not respond to Doe fact 6, but the Court finds it inadmissable. In summary, Doe fact 6 is disputed.
7. "Saul Ewing has placed the remaining $162,699.38 into the Court Registry with permission of the Court and makes no claim to the remaining funds." Wagner objects because there is no citation to the record. The Court agrees that it has no duty to search the record for this information, but it appears on the docket so the Court will find it undisputed. Gonzales agreed with fact 7. In summary, the Court finds this fact undisputed.
Doe's facts 9 through 11 pick out certain statements in the Swanda affidavit as undisputed facts. Wagner and Gonzales raise the same objections to those facts.
9. "Mr. Doe is unable to weigh the risks and benefits of the financial decisions and lacks the capacity to enter into contracts. Id. at ¶ 6-7."
10. "Mr. Doe is highly susceptible to undue influence, especially from individuals with whom he has regular contact. Id. at ¶ 8."
11. "Mr. Doe could not understand what he was doing when he gave Saul Ewing money for Mr. Vaughan's legal fees. Id. at 9."
Fancaster, Inc. v. Comcast Corp., 832 F.Supp.2d 380, 401-02, 2011 WL 6426292 at * 13-14 (D.N.J.2011).
The Court finds that Wagner's objections to Doe facts 8 through 11 are well taken. The Swanda affidavit does not set forth sufficient grounds for the Court to evaluate the reliability, admissibility or even relevancy of the expert's opinion. See Fed.R.Evid. 104(a); Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 592-93, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993):
(Footnotes omitted.) Furthermore, the affidavit answers none of the questions the Supreme Court found relevant to admission of expert testimony: 1) "Ordinarily, a key question to be answered in determining whether a theory or technique is scientific knowledge that will assist the trier of fact will be whether it can be (and has been) tested." Id. at 593, 113 S.Ct. 2786; 2) "Another pertinent consideration is whether the theory or technique has been subjected to peer review and publication." Id.; 3) "[T]he court ordinarily should consider the known or potential rate of error." Id. at 594, 113 S.Ct. 2786; and 4) "Finally, `general acceptance' can yet have a bearing on the inquiry. A `reliability assessment does not require, although it does permit, explicit identification of a relevant scientific community and an express determination of a particular degree of acceptance within that community.'" Id. (Citation omitted.) Normally these questions are answered at trial when attempting to qualify an expert witness, and during any voir dire or cross-examination. This, however, is a motion for summary judgment and the burden is on the movant to establish that there is admissible evidence before the Court. Farris v. Intel Corp., 493 F.Supp.2d 1174, 1181 (D.N.M.2007). The Court must do more than simply take the "expert's word for it." Id. at 1182 (Citation omitted.) See also Zamecnik v. Indian Prairie School District # 204, 636 F.3d 874, 881 (7th Cir.2011)(An expert must explain how he used his expertise to generate the conclusions. "Mere conclusions" without describing the inferential process are useless to the court.)
Also in his reply brief (doc. 54), Doe attaches new material as Exhibits E ("Report of Neuropsychological Consultation") and F (a resume of Rex M. Swanda, Ph. D.). Doe argues that Swanda's report was prepared upon his appointment by a judge in the Second Judicial District Court in a family matter under the New Mexico Uniform Probate Code. Doe suggests that if Swanda is a state court expert, he should be so considered here, but provides no legal authority. Furthermore, both Exhibits E and F are hearsay. They are not attached to an affidavit. They are not self-authenticating. They are not certified copies of state court documents. Indeed, neither exhibit even mentions a particular judge, gives a case number, or shows that they were ever even submitted to a court, reviewed by a court, or considered as evidence in any proceeding.
In summary, the Court finds that Doe proposed facts 8 through 11 are subject to a genuine dispute. 12. "To the extent he is able to do so, Mr. Doe has repudiated the transfer of $200,000 of his funds to Saul Ewing. See Affidavit of Doe, Exhibit C to Answer to Amended Complaint and Counterclaim." This affidavit was executed on April 3, 2010. Wagner objects to this fact, arguing that the Doe affidavit was executed less than two months before he was examined by Swanda and Swanda found him to be incapable of understanding his actions when he wrote the checks in February. Therefore, she argues that Doe was not competent to execute the April 3, 2010 affidavit. She also objects because the April 3, 2010 affidavit does not attach copies of documents to which it refers. The Court agrees with Wagner and finds that Doe fact 12 is subject to a genuine dispute.
In his reply brief, Doe attempts to supply citations to the record in support of his purportedly undisputed facts. While minor correction or supplementation in a reply brief for incorrect or missing support in the initial brief is certainly permissible, in this case the wholesale attempt to do in the reply brief what was the required showing in the initial brief is perhaps too little and certainly too late. The purpose of a reply brief is to present legal arguments against matters raised in the response. See Springs Indus., Inc. v. American Motorists Ins. Co., 137 F.R.D. 238, 239-40 (N.D.Tex.1991):
Most of the Gonzales' proposed facts suffer the same problem as Doe's. Facts 1 through 5, 7, 9, 11 and 12 contain no citation to the record. The Court will simply ignore those.
6. "On or about February 3, 2010, VCR wrote a check to Doe for $200,000 in partial repayment of the funds loaned on February 1, 2010 from Doe to VCR (`Vaughan Company, Realtors'). The $200,000 check was noted in VCR's books as a `repayment of principal.' (VCR Trustee's Answer to Amended Complaint and Cross Claims, ¶ 10, docket No. 11)."
Doe responded that he had no knowledge of fact 6 and that "especially with regard to how such a check was reflected in VCR's books." (Doc. 58, p. 2). This response is totally inadequate to controvert the fact. The issue is not whether Doe has this information; the issue is whether Doe has any evidence that contradicts the statement.
Waldridge v. American Hoechst Corp., 24 F.3d 918, 920-21 (7th Cir.1994)(Former Rule 56). See also Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 671 (10th Cir. 1998):
Wagner agrees that Gonzales fact 6 is undisputed as far as it goes, but further states that Wagner claims that that $200,000 check given to Doe represents the same funds Doe gave to Ewing. Her theory of the case is that Ewing held traceable funds.
In summary, the Court finds Gonzales fact 6 undisputed.
8. "Doe paid the legal fees for the Vaughan Retainer, because Debtor was a friend of Doe's; (Ex. 1, Affidavit of Doe, dated March 19, 2010)."
Doe's response agrees that he was a friend, but also states that he has no memory of writing the check. Wagner points to the Doe affidavit that states otherwise.
In summary, based on these responses and also other evidence in the record, the Court finds that Gonzales fact 8 is disputed.
10. "Ewing and Curlett never met Doe, never spoke to Doe or communicated with Doe in any manner whatsoever; (See Attached Ex. 2, Affidavit of Ewing, and the Affidavit of Doe dated April 3, 2010 that is Ex. C to Docket No. 7 in this proceeding)." Doe's response again denies knowledge, so he is deemed to admit that fact 10 is
Doe admits that fact 13 is undisputed.
Wagner agrees that proofs of claim were filed, but she further demonstrates that the details offered in support of the validity and amount of the claim show that most of the credit was extended to VCR, not Douglas Vaughan.
In summary, for what it is worth, the Court finds fact 13 undisputed.
1. "On February 22, 2010 (the `Petition Date'), VCR filed a voluntary petition under Chapter 11 of the Bankruptcy Code. See Wagner's Cross-Claims, ¶ 1. Doe's Answer, ¶ 1."
2. "Wagner is the duly appointed Chapter 11 Trustee of the VCR's bankruptcy estate. See Wagner's Cross-Claims, ¶ 2, Doe's Answer, ¶ 1; see also Certification of Commencement of Case and Appointment of Chapter 11 Trustee (the `Certification'), attached hereto as Exhibit 1, and incorporated herein by this reference."
3. "Doe is an individual residing and doing business in Bernalillo County, New Mexico. See Wagner's Cross-Claims, ¶ 3, Doe's Answer, ¶ 1."
4. "The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334. See Wagner's Cross-Claims, ¶ 5, Doe's Answer, ¶ 1."
5. "Venue is proper in this Court. See Wagner's Cross-Claims, ¶ 6, Doe's Answer, ¶ 1."
6. "According to the books and records of VCR, Doe regularly began investing in VCR's promissory note program as early as 1996, periodically investing in increments ranging from $60,000 to $500,000, usually at a rate of 22%. Doe's notes generally amortized over a period of 24 months. Doe also invested $1,000,000 in September 2009; and VCR issued an interest-only note, bearing interest at 20%, with a maturity date of September 2012. At times, Doe held multiple notes concurrently. See Affidavit of Judith A. Wagner, attached hereto as Exhibit 2 (the `Wagner Affidavit'), ¶ 10."
Doe's response to Wagner proposed fact 6 is:
Doe's Response, doc. 71, p. 3. This response is totally inadequate to controvert the fact. The issue is not whether Doe has this information; the issue is whether Doe has any evidence that contradicts this statement. The Court finds that Wagner fact 6 is undisputed. See also discussion, supra, regarding Gonzales proposed fact 6.
7. "Doe invested at least $6,170,000 in VCR's note program from early 1996 to February 2010. During the same period, Doe received payouts in excess of $4,500,000.00. VCR books and records reflect payments to Doe in the four-year period prior to the Petition Date totaling $2,586,048.76. Wagner Affidavit, ¶ 10."
Doe's response to fact 7 was the same as to fact 6, i.e., lack of knowledge. Therefore, fact 7 is undisputed.
8. "On August 20, 2010, Doe filed his Amended Proof of Claim, No. XXXXX, in the amount of $5,605,000.00. See Claims Register in VCR case, No. 10-10759."
10. "The $300,000 check was written from Doe's Bank of America account no. xxxxx5388 (`Doe's BOA Account'), on check no. 1107. See ¶ 13, Doe's Cross-Claims, and Exhibit B, thereto."
11. "The $300,000 was deposited into VCR's operating account at Charter Bank, account no. xxxx7516 (`VCR's Operating Account') and commingled with all of VCR's monies. Wagner Affidavit, ¶¶ 6, 9, 10."
Doe's response to fact 11 was the same as to facts 6 and 7, i.e., lack of knowledge. Therefore, fact 11 is undisputed.
12. "VCR recorded the $300,000 check from Doe as a `loan' in VCR's books. Wagner Affidavit, ¶ 10."
Doe's response to fact 12 was the same as to facts 6, 7 and 11, i.e., lack of knowledge. Therefore, fact 12 is undisputed.
13. "On or about February 3, 2010, VCR wrote Check No. 107608 to Doe for $200,000. The $200,000 check was noted in VCR's books as a `repayment of principal.' See Wagner Affidavit, ¶ 10."
Doe's response to fact 13 was the same as to facts 6, 7, 11 and 12, i.e., lack of knowledge. Therefore, fact 13 is undisputed.
14. "On February 5, 2010, Check No. 107608 was negotiated, and the $200,000 was withdrawn from VCR's Operating Account. Wagner Affidavit, ¶ 10."
15. "On February 5, 2010, Check No 107608 was deposited into Doe's BOA Account. See Exhibit C to Wagner Affidavit."
16. "The $200,000 transferred from VCR to Doe on February 5, 2010 (the `Transfer') was within 90 days of the VCR Petition Date. See Exhibit 1 hereto (Certification); see also Wagner Affidavit, ¶ 10 and Exhibit B, C, and D to Wagner Affidavit."
17. "The Transfer was made while VCR was insolvent. Wagner Affidavit, ¶ 11."
18. "The Transfer was made by VCR on account of one or more antecedent debts owed to Doe (individually and collectively, the `Antecedent Debts'). Wagner Affidavit, ¶ 12."
Doe disputes fact 18. The response states:
(Doc. 71, p. 4). "Exhibit B" is a partial transcript of the Douglas F. Vaughn Section 341 Meeting of Creditors on June 30, 2010. Portions of that transcript are as follows:
The Court has reviewed Exhibit B and cannot find that anything in the transcript that contradicts Wagner's assertion that the $200,000 transfer was on account of an antecedent debt owed to Doe. Even if the transcript showed that "Mr. Vaughan has admitted that he exchanged checks with Mr. Doe in order to procure a check that he could send to Saul Ewing for legal fees" that transcript does not dispute Wagner's facts 9 through 16 which the Court has found undisputed. All of the transactions boil down to a simple fact that Doe wrote a check to VCR for $300,000 and VCR subsequently paid $200,000 to Doe in the preference period. To the extent Vaughan's 341 testimony is at variance, the documents are clear and his testimony does not raise a material fact question in the Court's mind. If there were other transactions with no net effect in the meantime, which seems to be Mr. Doe's point, that is simply not relevant. Or, perhaps Doe is asserting a subsequent new value defense
19. "The Transfer allowed Doe to receive more than he would have received had this bankruptcy case at all times been a case under Chapter 7 of the Bankruptcy Code, the Transfer had not been made, and Doe had received payment of the Antecedent Debt to the extent provided under the Bankruptcy Code. Affidavit of Linda Bloom ¶ 17 (the `Bloom Affidavit'), attached hereto as Exhibit 3 and incorporated herein by this reference."
Doe disputes fact 19. The response states:
(Doc. 71, pp. 4-5). The first sentence of the response does not cite to the record and therefore does not create a fact question. And the sentence actually contradicts the record. Wagner facts 9, 10 and 11 show that Doe wrote a check on his Bank of America account payable to VCR on February 1, 2010 in the amount of $300,000 that was deposited in VCR's operating account. Then, Wagner facts 13, 14 and 15 show that on February 3, 2010 VCR wrote a check to Doe for $200,000 which was negotiated on February 5, 2010 by deposit in Doe's Bank of America account. So, in fact the exchanges were not contemporaneous and they were in fact not for the same amount.
The second sentence, discussing Mr. Ewing's wishes or instructions, is irrelevant to whether Doe received more than he would have received in a chapter 7 liquidation. The third sentence, about VCR's failure to make payments on notes has no support in the record
The statement that "Mr. Doe did not actually receive any value from the debtor that he would not have received had the transfer not been made" is puzzling on its face. If the transfer had not been made of course he would not have received the $200,000 on February 5, 2010. If a transfer is not made, by definition a recipient receives nothing. But here, there was a transfer made by VCR—the $200,000 check—which he received and deposited. In summary, the Court finds Fact 19 undisputed.
Most of Doe's proposed facts were not established as undisputed. The ones that were are as follows:
1. Douglas Vaughan ran a Ponzi scheme involving `investors' all over the United States.
4. Mr. Doe paid $200,000 to Saul Ewing, LLC.
7. Saul Ewing has placed the remaining $162,699.38 into the Court Registry with permission of the Court and makes no claim to the remaining funds.
From these undisputed facts, Doe must show that there is no genuine issue of material fact that the funds on deposit with Ewing are in a constructive trust. This is not possible with the current facts.
The effect of imposing a constructive trust in a bankruptcy case is to remove the trust property from the state and award it to the creditor/beneficiaries at the expense of the other creditors. "The party seeking imposition of a constructive trust bears the burden of establishing the trust requirements." Hill v. Kinzler (In re Foster), 275 F.3d 924, 926 (10th Cir.2001)(citing In re Seneca Oil, 906 F.2d 1445, 1449 (10th Cir.1990)). Under established Tenth Circuit law, before undertaking the determination of whether assets are subject to a constructive trust, the Court must consider whether imposition of a constructive trust would be equitable. Hill v. Kinzler, 275 F.3d at 927. To do this, the Court must weigh the claims of the other creditors before employing any equitable fictions. Id. at 928. One factor is whether other similarly situated creditors would be harmed. Id. See also Kalish v. The Landing (In re The Landing), 160 B.R. 820, 824 (Bankr.E.D.Mo.1993):
Even assuming that Doe would be successful in proving that Mr. Vaughan exerted undue influence over him and tricked him, through duress or otherwise, to write checks to VCR and Ewing, he would have a tort claim, maybe a contract claim, maybe a claim for breach of duty of some relationship, or maybe even some right to equitable relief. Wagner's affidavit, doc. 65-2, p. 8, estimates VCR claims, the vast majority of which are "Ponzi scheme" claims, as between $60 million and $75 million. Each of these creditors can allege they were defrauded also. On the current record, there is no valid reason to elevate Doe's claim above others similarly situated.
Therefore, the Court finds that Doe has not shown that there is no genuine issue of material fact concerning his ownership or entitlement to the funds on deposit. Doe's Motion for Summary Judgment must be denied.
Most of Gonzales' proposed facts were not established as undisputed. The ones that were are:
10. Ewing and Curlett never met Doe, never spoke to Doe or communicated with Doe in any manner whatsoever.
13. Doe filed an Amended Proof of Claim in this bankruptcy case for money that Doe loaned to the Debtor in the amount of $5,905,000 (POC No. 258-2).
From these undisputed facts, Gonzales must show that there is no genuine issue of material fact that, 1) as to Doe, a) it would not be equitable for him to assert a constructive trust over the $162,000 because he is no differently situated than other creditors, and b) the funds were under such dominion and control of Vaughan that they can be ruled to be in the estate as a matter of law; and 2) as to Wagner, a) that she lacks standing to pursue her claim against Doe in this bankruptcy case, and b) the funds are not property of the VCR estate.
As to Doe, Gonzales has established that the law is that a creditor generally cannot elevate his claim over others if they are similarly situated. Consequently, on the current record Mr. Doe's motion for summary judgment is being denied. Of course, this current ruling does not preclude him from rearguing the position at trial or presenting additional evidence that would demonstrate that he is not, in fact, similarly situated. Gonzales' second argument that the funds were under Vaughan's dominion and control is simply not yet supported by the record. The record fails to show what control Vaughan had over the funds and what was to become of the funds in the event Ewing did not apply them all to attorney fees. There is no evidence of either Vaughan's or Ewing's understanding regarding the funds or the circumstances under which they were deposited. And, as far as the Court can determine there is no easy answer "as a matter of law" what becomes of unapplied trust funds supplied by a third party. There is not enough to grant any relief, so the Gonzales Motion as to Doe will be denied.
As to Wagner, the Court finds that Wagner does have standing to assert a claim to the funds. This does not suggest that the Court anticipates she will prevail on her claim, but she does have sufficient standing to argue it. Wagner's claim essentially must be either that the Ewing funds are in a constructive trust for the VCR estate, or that somehow Ewing is a recipient of a transfer and should also be liable with Doe. As noted above, to prove a constructive trust she would need to establish that the equities allowed the VCR estate to prevail over the Vaughan unsecured creditors, which was not addressed in the motion by anyone, and she would have to trace the funds from VCR, through Doe, and into Ewing. The simple fact that VCR wrote a check to Doe and he subsequently wrote a check to Ewing does not satisfy the tracing requirement. Wagner has alleged that the same funds passed from VCR through to Ewing but has not established it at this point. To the extent that Gonzales is arguing lack of jurisdiction, the Court finds it has jurisdiction in the Vaughan bankruptcy to adjudicate the Wagner cross-claim against Doe. See Fed. R.Civ.P. 13(g) (authorizing cross-claims against a co-party if the claim relates to any property that is the subject matter of the original action). Additionally, the Court has independent subject matter jurisdiction over both the parties and the subject matter.
Wagner established that the following facts were undisputed:
1. On February 22, 2010 (the `Petition Date'), VCR filed a voluntary petition under Chapter 11 of the Bankruptcy Code.
2. Wagner is the duly appointed Chapter 11 Trustee of the VCR's bankruptcy estate.
3. Doe is an individual residing and doing business in Bernalillo County, New Mexico.
4. The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334
5. Venue is proper in this Court.
6. According to the books and records of VCR, Doe regularly began investing in VCR's promissory note program as early as 1996, periodically investing in increments ranging from $60,000 to $500,000, usually at a rate of 22%. Doe's notes generally amortized over a period of 24 months. Doe also invested $1,000,000 in September 2009; and VCR issued an interest-only note for the $1,000,000, bearing interest at 20%, with a maturity date of September 2012. At times, Doe held multiple notes concurrently.
7. Doe invested at least $6,170,000 in VCR's note program from early 1996 to February 2010. During the same period, Doe received payouts in excess of $4,500,000.00. VCR books and records reflect payments to Doe in the four-year period prior to the Petition Date totaling $2,586,048.76.
8. On August 20, 2010, Doe filed his Amended Proof of Claim, No. XXXXX, in the amount of $5,605,000.00.
9. On or about February 1, 2010, Doe wrote a check to VCR in the amount of $300,000.
10. The $300,000 check was written from Doe's Bank of America account no. xxxxx5388 (`Doe's BOA Account'), by check no. 1107.
11. The $300,000 was deposited into VCR's operating account at Charter Bank, account no. xxxx7516 (`VCR's Operating Account') and commingled with all of VCR's monies.
12. VCR recorded the $300,000 check from Doe as a `loan' in VCR's books.
13. On or about February 3, 2010, VCR wrote Check No. 107608 to Doe for $200,000. The $200,000 check was noted in VCR's books as a `repayment of principal.'
15. On February 5, 2010, Check No 107608 was deposited into Doe's BOA Account.
16. The $200,000 transferred from VCR to Doe on February 5, 2010 (the
17. The Transfer was made while VCR was insolvent.
18. The Transfer was made by VCR on account of one or more antecedent debts owed to Doe (individually and collectively, the "Antecedent Debts").
19. The Transfer allowed Doe to receive more than he would have received had this bankruptcy case at all times been a case under Chapter 7 of the Bankruptcy Code, the Transfer had not been made, and Doe had received payment of the Antecedent Debt to the extent provided under the Bankruptcy Code.
In this adversary proceeding Wagner seeks to avoid a preferential transfer under Bankruptcy Code section 547. The United States Supreme Court discussed the policies underlying that section in Union Bank v. Wolas (In re ZZZZ Best Co., Inc.), 502 U.S. 151, 112 S.Ct. 527, 116 L.Ed.2d 514 (1991).
Id. at 160-61, 112 S.Ct. 527.
Before addressing the merits of Wagner's preference claim, the Court will examine Doe's affirmative defenses to determine if any of them preclude proof of any required element
As to "the funds are not property of the estate", we are dealing with a claim that a payment by VCR to Doe before VCR's bankruptcy was a preference. It is undisputed that Doe wrote a check to VCR for $300,000. There were no restrictions imposed on that $300,000 and VCR was free to do with it as it chose. The Tenth Circuit follows the "dominion and control" test. Bailey v. Big Sky Motors, Ltd. (In re Ogden), 314 F.3d 1190, 1202 (10th Cir.2002). "Dominion" over money is the right to put the money to one's own purpose. Id. (Citation omitted). There is really no argument that the $300,000 did not become property of VCR. It was deposited in its general account and co-mingled. Several days later VCR wrote a check to Doe for $200,000. He deposited it.
Begier v. Internal Revenue Service, 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990). If VCR had not written the check for $200,000 to Doe it would have been part of the estate. The payment was from property of the debtor. To the extent Doe may be arguing that VCR never had an interest in the $300,000, that argument is also not well taken. Under Ogden, a debtor obtains rights even if the property is obtained by fraud, Ogden, 314 F.3d at 1198, or borrowed. Id. at 1199. And, a repayment of a fraudulent debt to the victim is made with the debtor's funds and can be a preference. Id. at 1201 n. 7.
As to "the estate lacks title [to the $162,000]", this affirmative defense is more properly directed to the Gonzales claim. It is meaningless in this context.
As to "the transfer was in good faith without knowledge of the bankruptcy", it is unclear which "transfer" Doe refers. First, there was his transfer of $300,000 to VCR. Second, VCR transferred $200,000 back to Doe. Finally, and irrelevant to Wagner's claim for a preference, Doe transferred $200,000 to Ewing or to Ewing as agent for Vaughan. The lack of clarity is irrelevant, however, because all three transfers were before there was a bankruptcy about which knowledge could be had. Furthermore, the good faith
Clark v. Balcor Real Estate Finance, Inc. (In re Meridith Hoffman Partners), 12 F.3d 1549, 1557 (10th Cir.), cert. denied, 512 U.S. 1206, 114 S.Ct. 2677, 129 L.Ed.2d 812 (1994). See also Meoli v. Huntington Nat'l Bank (In re Teleservices Group, Inc.), 444 B.R. 767, 807 (Bankr.W.D.Mich. 2011):
(Footnote omitted.) And see Ogden, 314 F.3d at 1201 (It is generally the effect of the transaction, rather than the debtor or creditor's intent, that is controlling.); Gill v. Winn (In re Perma Pacific Properties), 983 F.2d 964, 968 (1992)(Neither the debtor's nor the creditor's intent or state of mind is dispositive of whether or not a transfer is a preference.) (Citation omitted.)
As to Doe's defense that he lacks capacity, and he was subject to undue influence and duress, any exception to preference liability depends on the nature of the transfer, not the identity of the creditor. Meridith Hoffman, 12 F.3d at 1555. Doe's mental status is also not really pertinent because the focus is the effect on the other creditors of a transfer by VCR to Doe.
In his reply brief, Doe for the first time claims that the payment he received was not on account of an antecedent debt and also that the exchange was contemporaneous. Neither argument is valid. First, while his proofs of claim shows that he was an antecedent "creditor," as does his Material Fact 3, he argues that the $200,000 he cashed on February 5, 2010 was not "on account" of those debts. He does not suggest, however, what the $200,000 was "on account of" if not a debt; surely he is not claiming that VCR gifted him $200,000. He only argues that it was a contemporaneous exchange. What was contemporaneous, however, was his receipt from VCR of $200,000 and his payment the same day of $200,000 to Ewing as agent for Vaughan. This is not contemporaneous because there are different entities. These defenses are not well taken.
Finally, the final issue is whether Wagner has stated a claim.
Eckles v. Pan American Marketing (In re Balducci Oil Co.), 33 B.R. 843, 845 (Bankr. D.Colo.1983). There are actually six elements, the five numbered elements plus proof that the transfer was of property of the estate. Wagner has established all elements:
--------------------------------------------------------------Element Proof -------------------------------------------------------------- Property of the debtor. Wagner fact 13—the funds came from VCR's checking account. -------------------------------------------------------------- 1) to or for the benefit of Wagner facts 13-15. Doe. -------------------------------------------------------------- 2) on account of antecedent Wagner fact 18; Doe fact 3; debt. Doe's two proofs of claim; discussion on page 54. -------------------------------------------------------------- 3) made when debtor was Wagner fact 17. insolvent. -------------------------------------------------------------- 4) made within 90 days of Wagner fact 16. filing. -------------------------------------------------------------- 5) enables Doe to receive Doe fact 19. more than in liquidation ("Chapter 7 test"). --------------------------------------------------------------
Therefore, Wagner is entitled to a judgment on her cross-claim against Doe, and a separate judgment will enter awarding her $200,000 plus pre-judgment interest from the filing of the cross-claim and post-judgment interest from the date of entry of the judgment.
For the reasons set forth above, the Court finds that Doe's Motion for Summary Judgment against both Wagner and Gonzales (doc. 41) is not well taken and will be denied. The Court also finds that Gonzales' Motion for Summary Judgment against both Doe and Wagner (doc. 47) is not well taken and will be denied. The Court also finds that Wagner's Motion for Summary Judgment against Doe is well taken and a Judgment in conformity with this Opinion will be entered separately.
Count 1 repeats some of the common allegations and demands that "the transfer of funds should be set aside as the products of undue influence and duress and the remaining funds should be transferred back to Doe."
Count 2 adds little new material, but several legal conclusions: e.g., ownership of the funds in Ewing's trust account were never transferred to Mr. Vaughan; Wagner and Gonzales are not entitled to the unearned attorney fees; and Mr. Doe is entitled to a return of all unearned fees.
Neither of the Counts suggest in legal terms what the actual causes of action would be. What they are attempting to do, however, is to impose a constructive trust on property that would otherwise be property of either the Vaughan or VCR estate.
The Committee's assurances that the new version of the rule is not intended to change the respective burdens of the summary judgment process is not inconsistent with the observation of the District Court in Foreword Magazine that the revisions have effected a sea change in summary judgment procedure. 2011 WL 5169384 at * 1-2. It remains to be seen whether the "new Coke" version of the rule serves as well as the earlier version of the rule with its bright-line rules for submitting evidence. Id.
(Emphasis added.) Hundreds of cases agree. See, e.g., Garland v. Advanced Medical Fund, L.P. II, 86 F.Supp.2d 1195, 1198-99 (N.D.Ga. 2000):
(The Garland Court summarily denied the nonconforming motions. 86 F.Supp.2d at 1199).
11 U.S.C. § 547(c)(4). After Doe received the payment from VCR the only new value he gave was to Vaughan, by sending funds to Vaughan's attorney on behalf of Vaughan.
Doe fact 2 attempts to authenticate Doe's bank records and demonstrate that the purpose of a specific check was intended to be a retainer with Ewing through an affidavit executed by Doe's attorney's legal assistant. Doc. 71, exhibit A, is the affidavit of Philippa F. Schwendimann that states that as part of her duties for the law firm, she sent a request for documents to the Bank of America and that they responded by producing affidavit exhibits A and B. She does not, as part of her affidavit, state that the affidavit is based on her personal knowledge. And, it appears that it is not. All she can testify to is the fact that she sent "x" and received "y". It does not prove that "y" is true. Putting hearsay into an affidavit does not make it admissible for a summary judgment.
Similarly, fact 3 is supported by Schwendimann's affidavit and is based on hearsay.
Fact 4 is supported by a citation to Vaughan's 341 meeting testimony where he states that Ewing instructed him to do certain things. The content of what was told to Vaughan is hearsay for the truth of what Ewing asserted, and inadmissible even though it was repeated at a 341 meeting.
