ERIC L. FRANK, Chief Judge.
In this adversary proceeding, the liquidating agent appointed pursuant to debtor's confirmed chapter 11 plan seeks to recover monies that the debtor advanced to the defendant roughly twenty (20) years before the commencement of this bankruptcy case. As one might expect, the central issue in the litigation is the applicability of the affirmative defense of the statute of limitations.
As explained more fully below, I conclude that the statute of limitations bars the liquidating agent's recovery. Accordingly, judgment will be entered in favor of the defendant and against the liquidating agent.
Debtor John N. Irwin ("the Debtor") filed a voluntary chapter 11 case on May 27, 2010. (Bky No. 10-14407, Doc. # 1). This court confirmed the Debtor's Second Amended Chapter 11 Plan of Reorganization ("the Plan") (id., Doc. # 282) on January 12, 2012. (id., Doc. # 296). The Plan provides for the liquidation of all of the Debtor's non-exempt assets and the appointment of a liquidating agent. (Plan ¶¶ 1.8, 7.1(a)). The liquidating agent is authorized to sell all of the Debtor's non-exempt assets and pursue all avoidance and other causes of action. (Plan ¶ 7.1(a), (b)). Pursuant to the Plan, George L. Miller ("Miller") was appointed as the liquidating agent of the Debtor's estate.
Miller filed an adversary complaint against Defendant Anthony Jannetta ("Jannetta") on May 11, 2012 and an amended complaint ("the Amended Complaint") on July 16, 2012.
At trial, which was held and concluded on October 7, 2013, Jannetta was granted leave to amend his Answer to permit him to raise the statute of limitations as an affirmative defense. After the conclusion of the trial, the parties filed post-trial briefs, the last of which was filed on December 16, 2013. (See Doc. #'s 51, 53).
The Debtor and Jannetta became acquainted when Jannetta leased office space from the Debtor in 1985. (N.T. 17-18). In the ensuing years, the Debtor and Jannetta were involved in several mutual business investments. (Id. 18-19). Jannetta primarily laid the groundwork for the investment opportunities and raised capital. (Id. 18-19, 81-82). The Debtor performed the accounting work for the start-up and operation of the businesses. (Id. 19). In several instances, Jannetta received equity in exchange for finding investors. (Id. 94-95). Jannetta would contribute part of his interest in the company to the Debtor for the accounting and financial work provided by the Debtor. (Id. 83, 95).
Prior to the petition date, the Debtor advanced $126,925.00, $32,095.00 and $3,612.00 to or on behalf of Jannetta (collectively, "the Advances"). (N.T. 39). The total amount of prepetition advances to Jannetta, including "the Companies Loan" (described just below), was approximately $162,632.00. (Id. 39). On Schedule B, the Debtor listed $130,000.00 as the amount of an account receivable due from Jannetta.
The more sizable advance, the $126,925.00, was derived from investments in two (2) companies based in New Jersey — Advacote and Diversified Products ("DPI") (collectively, "the Companies"). (N.T. 21-22). The Debtor and Jannetta were among several other shareholders in the Companies. (Id. 22-23).
From approximately 1989 to 1993, the Debtor advanced money to the Companies on Jannetta's behalf as capital contributions ("the Companies Loan"). (Id. 20, 22). The Debtor kept a ledger ("the Ledger") detailing the money that he advanced to or for Jannetta on the Companies Loan.
The Companies Loan was an oral agreement between the Debtor and Jannetta, the terms of which were never reduced to a written contract. (N.T. 20-21). According to the parties, the Companies Loan did not have a specific due date. However, the Debtor and Jannetta agreed that Jannetta would satisfy the obligation when the Companies became profitable. (N.T. 31).
In 1994, after the Companies' operations were abandoned and the Debtor took a loss on the investment for tax purposes, the parties agreed that the Companies Loan would be repaid when Jannetta's "ship comes in." (Id. 31-32). The Debtor understood that to mean that Jannetta would repay the Companies Loan when he made a profit from other investments. (Id. 32).
The smaller two (2) advances of $32,095.00 and $3,612.00 were not related to the Companies. (Id. 56). The Debtor identified the $32,095.00 advance as "other amounts that were advanced over the years" to Jannetta.
The Debtor did not demand payment from Jannetta on the Companies Loan prior to 2010. (Id. 32, 60). In late 2010 (after filing this bankruptcy case), the Debtor told Jannetta in person that Jannetta owed him $130,000.00 on account of the Advances. Jannetta disputed that he was liable for the Advances, but believed that he could negotiate some resolution of the dispute with the Debtor. (Id. 85).
Shortly after their conversation, on October 20, 2010, Jannetta sent the Debtor an electronic communication, inquiring about the amount of the Advances. (Ex. P-3). The subject of the e-mail was "Money owed — Jannetta." (Id.). Jannetta wrote:
Generally speaking, turnover actions, pursuant to 11 U.S.C. § 542, are considered "a remedy available to debtors to obtain what is acknowledged to be property of the bankruptcy estate." In re Asousa P'ship, 264 B.R. 376, 384 (Bankr. E.D.Pa.2001) (citing In re Rosenzweig, 245 B.R. 836, 839-40 (Bankr.N.D.Ill.2000)). The turnover provision of the Bankruptcy Code is designed to facilitate administration of the estate and allow the Debtor to obtain property necessary for survival. In re Charter Co., 913 F.2d 1575, 1579 (11th Cir.1990); In re Chick Smith Ford, Inc., 46 B.R. 515, 518 (Bankr.M.D.Fla.1985).
Two (2) subsections of § 542 are at issue in this proceeding: subsections (a) and (b).
Section 542(a) provides that:
11 U.S.C. § 542(a).
Section 542(a) is limited to property that the trustee may use, sell, or lease under § 363. The elements of a § 542(a) claim are:
In re DBSI, Inc., 468 B.R. 663, 669 (Bankr.D.Del.2011).
Section 542(b) provides that "an entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to ... the trustee." 11 U.S.C. § 542(b). A debt is matured, payable on demand, or payable on order if it is "presently payable," where payment is not subject to any condition precedent. In re Kids World of Am., Inc., 349 B.R. 152, 163 (Bankr.W.D.Ky.2006) (citing In re Gordons Transports, Inc., 51 B.R. 633 (Bankr. W.D.Tenn.1985)); In re Cambridge Capital, LLC, 331 B.R. 47, 57 (Bankr.E.D.N.Y. 2005).
In the Amended Complaint, Miller alleged that Jannetta was in possession of up to $130,000.00 in Advances that was property of the Debtor's estate and subject to turnover pursuant to § 542(a).
The Companies Loan, alleged to be $126,925.00, was made during the period of February 1989 to 1993. The evidence established that the Debtor made most of the advances on the Companies Loan directly to the Companies and only in a few instances to Jannetta himself. According to the Ledger, any funds that Jannetta personally received would have been in 1989. Miller presented no other evidence to demonstrate that Jannetta remained in possession of the funds when the bankruptcy case was commenced in May 2010. As for the $32,095.00 and $3,612.00 advances, other than the amounts, Miller presented no evidence regarding the dates of the advances or that Jannetta was in possession of any of these monies in May 2010.
As the plaintiff, Miller bears the burden of proving all of the elements of his § 542(a) claim, including that Jannetta was in possession of the Advances. Because I find that Miller has failed to meet his burden, I will enter judgment in favor of Jannetta on Miller's § 542(a) turnover claim.
As stated in Part III, the $130,000.00 debt that Miller asserts is mature, payable on demand or on order, as property of the estate is allegedly made up of three (3) sets of advances. If I were to assume that the Companies Loan is $126,925.00,
With only the Debtor's stark assertion that he made advances to or for Jannetta, Miller has not established that Jannetta owed a debt, much less one that was matured and payable to the Debtor's bankruptcy estate. I find that Miller has failed to satisfy his burden under § 542(b).
Miller's claim based on the Companies Loan is an action to recover on a contract. In Pennsylvania,
Determining when an alleged breach of a contract has occurred is dependent, of course, on the terms of the contract. It is necessary, therefore, to scrutinize the contract on which Miller seeks to recover. Unfortunately, on the record presented, the terms of the contract between the Debtor and Jannetta are unclear. If the original agreement provided for repayment of the monies the Debtor advanced to Jannetta only when the Companies became profitable and the Companies never became profitable (and never could become profitable, considering that they went "out of business"), did a repayment obligation ever arise?
The oral Companies Loan contract potentially can be construed in one (1) of two (2) ways — either as a(1) contract that required Jannetta to perform his repayment obligation when he was "able to pay" or (2) "continuing contract." As explained below, I find it to be the former.
The construction of the Companies Loan contract that I adopt, is that, in 1994, after the Companies ceased operating, (thereby eliminating any possibility that their profits would trigger Jannetta's repayment obligation), the parties modified
For an oral, "when able to pay contract," such as the one involved here, the pertinent question is when does the statute of limitations begin to run? Courts have answered this question in two ways: (1) the date of the loan (based on the theory that the obligation is payable on demand and therefore, is a "present debt"); or (2) upon the passage of a reasonable period of time from the date of the loan. See id.; see also When Statute of Limitations Begins to Run Against Action Based on Unwritten Promise to Pay Money Where There Is No Condition or Definite Time for Repayment, 14 A.L.R.4th 1385 (West 2011).
As the court observed in In re Pagnotti, 269 B.R. 326 (Bankr.M.D.Pa.2001), there are no Pennsylvania appellate decisions precisely on point on this question. In Pagnotti, the bankruptcy court exercised its obligation to predict how the Pennsylvania Supreme Court would rule on the issue, see, e.g., Klein v. Weidner, 729 F.3d 280, 283 (3d Cir.2013) (citing cases), and held that the statute of limitations begins to run on the date the loan was extended. Pagnotti, 269 B.R. at 334.
Pagnotti is well-reasoned, but I need not decide whether I will follow its holding. Under either the "date of the loan" or the "reasonable period of time" approach, the limitations period expired before the commencement of this bankruptcy case.
Using the "date of the loan" approach, the latest possible date for the commencement of the limitations period was some time in 1993, when the last advance was made, or 1994, when the contract was modified. Under this analysis, the claim obviously was time-barred when the bankruptcy case was filed in 2010. Even if the proper legal standard is that the limitations period did not commence until a reasonable period of time after the date of the loan (again, either 1993 or 1994), I conclude that a twelve (12) or thirteen (13) year time period was not reasonable given the nature of the Debtor's business relationship with Jannetta. Without determining precisely when the limitations period commenced, the clock certainly began to run prior to 2006, a date more than four (4) years before the commencement of the bankruptcy case and 12-13 years after the date of the loan.
In his post-trial brief, Miller asserts that the analysis above misses the mark entirely. He contends that the contract between the Debtor and Jannetta should be construed as a "continuing contract," which requires an entirely different method of determining whether the statute of limitations has run. Based on this premise, he contends that the limitations period has not expired. Respectfully, I disagree.
A continuing contract is "an agreement which does not fix any certain time for payment or for the termination of the services." Thorpe v. Schoenbrun, 202 Pa.Super. 375, 195 A.2d 870, 872 (1963). It arises when the parties' agreement calls for one party to provide services to another for an indefinite duration. See In re Koonce's Estate, 105 Pa.Super. 539, 161 A. 578, 579 (1932). "The test of continuity
For a continuing contract, the statute of limitation does not begin to run until breach occurs or the termination of the contractual relationship between the parties. Cole v. Lawrence, 701 A.2d 987, 989 (Pa.Super.1997) (citing Thorpe, 195 A.2d at 872). More specifically, if a continuing contract is one which does not fix a time certain for payment and for termination of services, the statute of limitations begins to run upon termination of the contract. Thorpe, 195 A.2d at 872.
Miller asserts that the Debtor loaned money to Jannetta on a continuing basis and the Debtor expected that Jannetta would repay him the obligation as just one part of a single continuing contract between them that continues to this very day. In support of this notion, he cites the fact that the Debtor still prepares Jannetta's income tax returns. Therefore, according to Miller, the continuing contract has never terminated, the limitations period has never commenced and the Companies Loan is a valid and existing obligation due and payable to the Debtor's estate.
I am unpersuaded by Miller's characterization of the Debtor-Jannetta contractual relationship.
The first business relationship between the Debtor and Jannetta's was as a lessor and lessee, when Jannetta leased office space from the Debtor in the mid to late 1980's. Over the next decade, the parties became involved in several separate and unrelated business investments. Only scant details of these investments were presented, but from the testimony, the last business investment was roughly around 2002. None of these business deals appear to involve any written agreement between the Debtor and Jannetta. More significantly, nothing in the record suggests that the other investments were a direct outgrowth of or bore any direct relationship to the Companies Loan. Rather, I infer from the sparse testimony, that the Debtor and Jannetta entered into a series of independent, joint investment ventures, each one standing alone, as those distinct opportunities presented themselves. There was no evidence that these transactions were integrated in any way.
To avoid this outcome, Miller posits that the continuing contract remained extant even after the last investment in 2002 because the Debtor employed Jannetta's accounting and tax services more than a decade later. I disagree. The accountant/client relationship between the Debtor and Jannetta differs materially from the loan/investment relationship that existed between them previously.
The record is undeveloped regarding the accountant/client relationship between the Debtor and Jannetta. I know neither how long the Debtor served as Jannetta's accountant nor the scope of the services provided; I know only that he has prepared Jannetta's tax returns after the Debtor's case was filed. Nor is there anything in the record suggesting that the parties viewed the two (2) relationships (loan/investment and accountant/client) as related in any way. As a factual matter, Miller has not met his burden of proof.
On this record, it would be an unprecedented expansion of the continuing contract doctrine to hold that the parties' contractual relationship continued for more than twenty (20) years based on what appear to be no more than ad hoc, unrelated business relationships. In short, the business investments were separate transactions and agreements, distinguishable from the accounting services that the Debtor later provided to Jannetta.
For these reasons, I conclude that the "continuing contract" theory is flawed and does not bar the application of the statute of limitations to Miller's claim.
Miller has one (1) final bow in his quiver. He asserts that limitations period has not expired under the "acknowledgment doctrine."
Pennsylvania law has long recognized the acknowledgment doctrine, which provides that a statute of limitations may be tolled or its bar removed by a promise to pay the debt. Makozy v. Makozy, 874 A.2d 1160 (Pa.Super.Ct.2005). For instance, payment on a debt is an affirmative acknowledgment of the debt. United States v. Hemmons, 774 F.Supp. 346, 351 (E.D.Pa.1991) ("Under Pennsylvania law... a loan payment serves as an acknowledgment of the total outstanding debt, the statute of limitations re-commences running with each payment."); Huntingdon Fin. Corp. v. Newtown Artesian Water Co., 442 Pa.Super. 406, 659 A.2d 1052, 1053 (1995) ("There can be no more clear and unequivocal acknowledgment of debt than actual payment").
In the absence of payment, the obligor's communication of his or her acknowledgment of the debt can serve to reboot the limitations period:
Newtown Artesian Water Co., 659 A.2d at 1054 (quoting Maniatakis' Estate, 258 Pa. 11, 101 A. 920, 921 (1917)) (emphasis added).
Pennsylvania courts have insisted that an acknowledgment be unequivocal and unqualified. Hazlett v. Stillwagen, 23 Pa.Super. 114, 1903 WL 3164, at *2-3 (1903) ("the acknowledgment must be unaccompanied by any conditions or qualifications inconsistent with an absolute promise to pay generally or on demand"). A hope or desire to pay in the future is not indicative of a promise to pay and will not toll the statute of limitations. Fix's Estate, 140 Pa.Super. 60, 63, 12 A.2d 826 (1940). Even an apparently unqualified statement in isolation may be rebutted by statements that refute an intention to pay the obligation on demand. Hazlett, 1903 WL 3164, at *3. Pennsylvania case law also strictly applies the requirement that the acknowledged debt be clearly identified. See Raab v. Lander, 427 Fed.Appx. 182, 187 (3d Cir.2011) (non-precedential) (referring to "strict requirements" for acknowledgment doctrine to apply under Pennsylvania law).
For several reasons, I conclude that the October 20, 2010 e-mail is not an acknowledgment of the Companies Loan debt.
First, the October 20, 2010 e-mail does not clearly define the obligation to which Jannetta refers. The October 20, 2010 e-mail's subject was: "Money owed — Jannetta." In the body of the e-mail, Jannetta referred to a conversation he had with the Debtor "about ... leaving the office," and stated that he thought the amount owed was around $70,000.00. (Ex. P-3). Jannetta in no way referred to the Companies Loan which the Debtor made on his behalf for the Companies.
Jannetta testified that he and the Debtor spoke about the $130,000.00 obligation shortly before Jannetta sent the October 20, 2010 e-mail. This testimony may give rise to an inference that Jannetta was talking about the Advances in his October 20, 2010 e-mail. See Hazlett, 23 Pa.Super. at 117-18 (circumstantial evidence may establish particular debt with sufficient certainty). However, other facts cloud that inference. In the e-mail, Jannetta stated that the amount was "somewhere around" $70,000.00. This amount does not coincide with the $126,925.00 Companies Loan, nor does it appear to correspond to any other particular obligation that was alleged to be owed to the Debtor. The Debtor's trial testimony established that he believed that Jannetta owed him for various other debts, inter alia, office services, unpaid rent, and other amounts advanced over the years. (N.T. 38-40). According to the Debtor, these debts were allegedly owed by either
In these circumstances, the obligation to which Jannetta referred in the October 20, 2010 e-mail is not sufficiently clear or distinct to permit invocation of the acknowledgment doctrine. See McPhilomy, 19 A.2d at 145 ("identification by mere inference of the [factfinder] from other collateral matters is not sufficient" (quoting Rosencrance v. Johnson, 191 Pa. 520, 43 A. 360, 361 (1899))).
Second, Jannetta's statement in the October 20, 2010 e-mail was conditional:
Finally, Jannetta testified he did not believe he owed any money at the time the Debtor demanded repayment on the Advances and thought that he could negotiate a more reasonable number with the Debtor at a later time. Jannetta's testimony is consistent with a finding that the October 20, 2010 e-mail was not an unconditional admission of liability or promise to pay.
For the reasons set forth above, I find that the statute of limitations has expired on Miller's claim against Jannetta.
After confirmation of a chapter 11 plan, the exercise of subject matter jurisdiction under § 1334(b) is limited to matters that "affect an integral aspect of the bankruptcy process," i.e., to matters that have a "close nexus to the bankruptcy plan or proceeding." In re Seven Fields Dev. Corp., 505 F.3d 237, 258 (3d Cir. 2007) (quoting In re Resorts Int'l, Inc., 372 F.3d 154, 167 (3d Cir.2004)). Specifically, the matter must affect "the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement." Resorts, 372 F.3d at 168-69. The requisite close nexus can exist in various types of controversies. See In re Transcontinental Refrigerated Lines, Inc., 494 B.R. 816, 821 (Bankr.M.D.Pa.2013) (giving examples). In the context of an adversary proceeding to collect a pre-petition claim of the bankruptcy estate that is filed post-confirmation, the mere fact the outcome of the proceeding may result in additional assets to distribute to creditors, by itself, does not create a close nexus to the plan or the bankruptcy case. E.g., In re Insilco Technologies, Inc., 330 B.R. 512, 524 (Bankr.D.Del. 2005) (citing Resorts, 372 F.3d at 170). Rather, for a sufficiently close nexus to exist, the plan must describe the action over which the court had pre-confirmation jurisdiction and expressly provide for the retention of bankruptcy court jurisdiction to liquidate the claim. E.g., In re BWI Liquidating Corp., 437 B.R. 160, 165 (Bankr.D.Del.2010).
Based on my review of the bankruptcy schedules (Schedule B-16) (Bky. No. 10-14407, Doc. #3), Article 6.1(b), 6.1(c), 9.1 and 11.1 of the Second Amended Disclosure Statement (Bky. No. 10-14407, Doc. #283), and Article 7.1(a), 7.1(b), 7.1(d) and 11.1 of the Plan, I conclude that a the standards stated above are satisfied, a close nexus exists between this adversary proceeding and the Plan and therefore, that this court has subject matter jurisdiction over the proceeding.
While Miller does not make this precise argument, from the facts, it may be fair to conclude that the Companies Loan, by itself, was a continuing contract. But, even if it were (as opposed to a "when able to pay" contract, as I have found), the contract terminated in 1994 when the Companies ceased operating and no further advances were made by the Debtor on Jannetta's behalf for the Companies, and the limitations period commenced at that time.
