Opinion
CASE NO. 19-17075-NVA ADVERSARY NO. 20-00185
2023-09-29
IN RE: STAR DEVELOPMENT GROUP, LLC, Debtor. Hopkins Hospitality Investors, LLC, et al., Plaintiffs, v. Zvi Guttman, Chapter 7 Trustee, Defendant.
Michael Patrick Coyle, The Coyle Law Group LLC, Columbia, MD, for Plaintiffs. Marguerite Lee DeVoll, Jennifer Larkin Kneeland, Watt, Tieder, Hoffar & Fitzgerald, LLP, McLean, VA, for Defendant Zvi Guttman. Harris Eisenstein, Rosenberg Martin Greenberg, LLP, Baltimore, MD, for Defendant PeoplesBank, A Codorus Valley Company. Zvi Guttman, The Law Offices of Zvi Guttman, P.A., Baltimore, MD, Defendant, Pro Se.
Michael Patrick Coyle, The Coyle Law Group LLC, Columbia, MD, for Plaintiffs. Marguerite Lee DeVoll, Jennifer Larkin Kneeland, Watt, Tieder, Hoffar & Fitzgerald, LLP, McLean, VA, for Defendant Zvi Guttman. Harris Eisenstein, Rosenberg Martin Greenberg, LLP, Baltimore, MD, for Defendant PeoplesBank, A Codorus Valley Company. Zvi Guttman, The Law Offices of Zvi Guttman, P.A., Baltimore, MD, Defendant, Pro Se. MEMORANDUM ORDER DENYING THE PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT , GRANTING THE TRUSTEE'S MOTION FOR SUMMARY JUDGMENT AND SUPPLEMENTAL MOTION FOR SUMMARY JUDGMENT, AND ENTERING JUDGMENT AGAINST THE PLAINTIFFS NANCY V. ALQUIST, UNITED STATES BANKRUPTCY JUDGE
Introduction
In this adversary proceeding, Hopkins Hospitality Investors, LLC and Mukesh Majmudar seek a declaratory judgment against the chapter 7 trustee, Zvi Guttman (the "Trustee"), that $1,000,000.00 in the bank account of the debtor, Star Development Group, LLC is not property of the debtor's bankruptcy estate. For the reasons set forth below and as more fully discussed herein, the Court will deny the summary judgment motion filed by Hopkins Hospitality Investors, LLC and Mukesh Majmudar; grant the motion for summary judgment and the supplemental motion for summary judgment filed by the Trustee; and enter judgment against Hopkins Hospitality Investors, LLC and Mukesh Majmudar.
Jurisdiction
The Court has jurisdiction over this proceeding under 28 U.S.C. § 1334. Under 28 U.S.C. § 157(a) and its Local Rule 402, the United States District Court for the District of Maryland has referred the bankruptcy case and this adversary proceeding to this Court. The parties have consented to entry of final orders and/or judgments on all claims. [Adv. Proc. ECF Nos. 1, 10]. This memorandum constitutes the Court's findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure (the "Civil Rules"), made applicable here by Rule 7052 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). To the extent this Court lacks authority to determine all or part of this matter, this memorandum constitutes the Court's report and recommendation.
Citations to papers filed in Star's bankruptcy case are prefaced by "Bankr." Citations to papers filed in this adversary proceeding are prefaced by "Adv. Proc."
Legal Standards
Motions for summary judgment are governed by Civil Rule 56, made applicable to this adversary proceeding by Bankruptcy Rule 7056. "Summary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed 'to secure the just, speedy and inexpensive determination of every action.' " Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting Civil Rule 1). Where a moving party "shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law," the Civil Rules mandate entry of summary judgment. Fed. R. Civ. P. 56(a).
When faced with cross-motions for summary judgment, the court must review each motion separately on its own merits "to determine whether either of the parties deserves judgment as a matter of law." Philip Morris Inc. v. Harshbarger, 122 F.3d 58, 62 n. 4 (1st Cir.1997) (citation and internal punctuation omitted). When considering each individual motion, the court must take care to "resolve all factual disputes and any competing, rational inferences in the light most favorable" to the party opposing that motion.Rossignol v. Voorhaar, 316 F.3d 516, 523 (4th Cir. 2003); see also Fluxo-Cane Overseas Ltd. v. E.D. & F. Man Sugar Inc., 599 F. Supp. 2d 639, 642 (D. Md. 2009).
The burden of showing the absence of a genuine issue of material fact rests first with the moving party and requires only that the movant identify the basis for its motion and those portions of the record which it believes demonstrate the absence of a genuine issue of material fact. See Celotex, 477 U.S. at 323, 106 S.Ct. 2548; Fed. R. Civ. P. 56(c)(1). Once that burden has been satisfied, the burden shifts to the non-moving party, who may not rest on mere allegations or denials, but must set forth specific facts showing that there is a genuine issue for trial. See Matsushita v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Fed. R. Civ. P. 56(c)(1). A fact is "material" only if it will affect the outcome of a lawsuit under the applicable law and a dispute is "genuine" only if the evidence is such that a finder of fact reasonably could return a verdict for the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); accord Wai Man Tom v. Hosp. Ventures LLC, 980 F.3d 1027, 1037 (4th Cir. 2020) ("A fact is 'material' if proof of its existence or non-existence would affect disposition of the case under applicable law. An issue of material fact is 'genuine' if the evidence offered is such that a reasonable jury might return a verdict for the non-movant.").
"The facts themselves, and the inferences to be drawn from the underlying facts, must be viewed in the light most favorable to the opposing party." Ramirez v. Amazing Home Contractors, Inc., 114 F. Supp. 3d 306, 308 (D. Md. 2015). When considering a motion for summary judgment, "the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Id. at 249, 106 S.Ct. 2505.
The court may grant summary judgment only if it concludes that the evidence could not permit a reasonable jury to return a favorable verdict. "Therefore, courts must view the evidence in the light most favorable to the nonmoving party and refrain from weighing the evidence or making credibility determinations."Sedar v. Reston Town Ctr. Prop., LLC, 988 F.3d 756, 761 (4th Cir. 2021) (cleaned up).
Civil Rule 56 sets forth certain procedural requirements for summary judgment motions:
(1) Supporting Factual Positions. A party asserting that a fact cannot be or is genuinely disputed must support the assertion by:
(A) citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions,
Fed. R. Civ. P. 56(c). "[T]he plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322, 106 S.Ct. 2548. See also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (where defendant seeks summary judgment "based on the lack of proof of a material fact," court must determine "whether a fair-minded jury could return a verdict for the plaintiff on the evidence presented").interrogatory answers, or other materials; or
(B) showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.
Discussion
I. Relevant Background
Star Development Group, LLC ("Star") is the debtor in this chapter 7 case. Hopkins Hospitality Investors, LLC ("HHI") is the owner of certain real property on which it planned to build a hotel; HHI retained Star to manage the development of the hotel. Mukesh Majmudar ("Mr. Majmudar") is the managing member of both Star and HHI.
In June 2016, Star opened a bank account (the "Account") at PeoplesBank, A Codorus Valley Company ("PeoplesBank") into which HHI and Mr. Majmudar collectively deposited $1,000,000 (the "Funds"). The Account was assigned to PeoplesBank (the "Assignment") to serve as collateral against which PeoplesBank would issue a letter of credit to The Hanover Insurance Company ("Hanover"), which would in turn issue a bond sought by HHI to effect the release of a mechanic's lien on certain real property being developed by HHI and others.
Three years later, in 2019, Star filed for bankruptcy protection. In its initial and amended Statement of Financial Affairs and Schedules, Star identified the Account as its property and stated that it was not holding any property on behalf of another. Consistent with these representations, Mr. Majmudar testified at the Meeting of Creditors that the Account was Star's property, and that Star was not holding any property for another.
In March 2020, the Trustee filed an adversary proceeding in this Court against PeoplesBank in which he sought, inter alia, to avoid Star's pledge of the Account as collateral to PeoplesBank. Three months later, in June 2020, HHI and Mr. Majmudar (together, the "Plaintiffs") filed the instant action, along with proofs of claim in Star's bankruptcy case to assert unsecured claims against Star. At about the same time, Star amended its Statement of Financial Affairs and Schedules to indicate that it was holding the Funds in the Account on behalf of the Plaintiffs and that the Plaintiffs held unsecured claims against Star.
Adversary Proceeding No. 20-00088.
At the conclusion of discovery in this proceeding, the parties filed cross-motions for summary judgment and opposing and supporting briefs. [Adv. Proc. ECF Nos. 50, 51, 55, 56, 60]. The Plaintiffs then sought leave to amend their complaint to clarify the legal bases for their contention that the Account is not property of Star's bankruptcy estate, which the Trustee opposed. [Adv. Proc. ECF Nos. 61, 66]. After a hearing, the Court granted the Plaintiffs' motion and accepted the first amended complaint. [Adv. Proc. ECF Nos. 70, 71, 72]. The amended complaint triggered an amended scheduling order allowing additional briefing on the parties' cross-motions for summary judgment, which resulted in a supplemental motion for summary judgment filed by the Trustee and supplemental opposing and supporting briefs by the parties. [Adv. Proc. ECF Nos. 92, 93, 94, 95, 108, 109, 114]. The Court held an evidentiary hearing and took the parties' cross-motions for summary judgment under advisement. [Adv. Proc. ECF No. 115].
II. The Amended Complaint
The amended complaint contains a single claim in which the Plaintiffs seek a declaratory judgment that the Account is not property of Star's bankruptcy estate under any of three legal theories:
(a) The monies were earmarked for PeoplesBank; and/orAmend. Compl. [Adv. Proc. ECF No. 71] at 9.
(b) [Star] only held a legal interest in the monies, but not an equitable interest, because they were held in trust; and/or
(c) The monies were specifically deposited into [Star's] Account for the benefit of PeoplesBank and/or HHI and are therefore not property of the Bankruptcy Estate pursuant to 11 USC § 541(b).
III. Material Facts
As discussed supra, there are three motions for summary judgment in this proceeding: the Trustee's motion for summary judgment, the Plaintiffs' motion for summary judgment, and the Trustee's supplemental motion for summary judgment. [Adv. Proc. ECF Nos. 50, 52, 92]. The following undisputed material facts are pertinent to consideration of all of the motions and are drawn from the complaint, the answer, the parties' motions and briefs on summary judgment and the declarations and exhibits attached thereto, and the record of this adversary proceeding:
• On June 24, 2016, Star executed paperwork to open the Account, including an account agreement, a promissory note in favor of PeoplesBank, a business loan agreement, and an assignment agreement.
• On June 24, 2016, Star assigned the Account to PeoplesBank and represented that it was "the lawful owner of the [Account] free and clear of all loans, liens, encumbrances, and claims except as disclosed to [PeoplesBank] in writing."
• Neither party has provided any documents memorializing any written disclosure to PeoplesBank concerning any exceptions to Star's representation above.
• The only owner identified on the Account is Star.
• On June 29, 2016, HHI deposited $646,684.59 into the Account and Mr. Majmudar deposited $353,315.41 into the Account.
• Neither party has provided any documents memorializing any agreement or conditions concerning the deposits into the Account or their use.
• Following the deposits into the Account and the assignment of the Account, PeoplesBank issued a letter of credit in the amount of $1,000,000 to Hanover, which then issued a bond in the name of HHI.
• On May 24, 2019, Star filed a bankruptcy petition.
• In Part 11 on its Statement of Financial Affairs, Star was asked to "List any property that the debtor holds or controls that another entity owns.
Include any property borrowed from, being stored for, or held in trust. Do not list leased or rented property." Star replied "None."
• In its initial Schedule E, Star listed an unsecured claim held by Mr. Majmudar in the amount of $609,721.43 as a result of "loan to business."
• On June 17, 2019, Star filed an amended Statement of Financial Affairs in which it again replied "None" in Part 11 when asked to "List any property that the debtor holds or controls that another entity owns. Include any property borrowed from, being stored for, or held in trust. Do not list leased or rented property."
• On June 17, 2019, Star filed amended Schedules A/B in which it identified the Account and the funds therein as "cash or cash equivalents owned or controlled by the debtor."
• On July 17, 2019, Mr. Majmudar testified at the meeting of creditors that Star owned the Account and that Star was not holding any assets for another.
• On December 24, 2019, the deadline to file proofs of claim in Star's bankruptcy case expired.
• On March 6, 2020, the Trustee filed an adversary proceeding against PeoplesBank, seeking to avoid the assignment of the Account.
• On June 12, 2020, the Plaintiffs filed the instant adversary proceeding.
• On June 12, 2020, HHI filed a proof of claim in the amount of $5,723,649.39 and identified the basis of its claim as "indemnity agreement." The only attachment to HHI's proof of claim is a document titled "Construction & Development Management Agreement" between HHI and Star.
• On June 24, 2020, Mr. Majmudar filed a proof of claim in the amount of $353,315.41 and identified the basis of his claim as "money lent." There are no documents attached to Mr. Majmudar's proof of claim.
• On July 8, 2020, Star filed another amended Statement of Financial Affairs in which it replied to Part 11 by identifying HHI and Mr. Majmudar as the owners of "Irrevocable Letter of Credit No. 2500016028 on behalf of Hopkins Hospitality Investors, LLC effective for the benefit of The Hanover Insurance Company" in the amounts of $646,684.59 and $353,315.41, respectively.
• On July 8, 2020, Star amended Schedule E and identified an unsecured claim held by HHI in the amount of $5,723,649.39 and an unsecured claim held by Mr. Majmudar in the amount of $353,315.41. The basis for both of these claims is "cash to secure a letter of credit for development and construction of the Hilton Homewood Suites franchise hotel at 7531 Montpelier Road, Laurel, MD 20723.
• On October 6, 2020, PeoplesBank paid Hanover against the letter of credit.
IV. Analysis
There is no genuine dispute of material facts in this case. The parties agree on the sequence and substance of the events that resulted in the Plaintiffs depositing the Funds into the Account and the pledge of the Account to PeoplesBank as collateral for the issuance of a letter of credit. The facts are amply supported by the record in Star's bankruptcy case and the exhibits attached to the parties' motions for summary judgment. The only issue raised in the parties' motions and briefs is whether, as a matter of law, the Account is property of Star's bankruptcy estate.
A. Property of the Estate
The Bankruptcy Code broadly defines "property of the estate" as "property, wherever located and by whomever held" to include "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a). "The legislative history of this statute is explicit in that: 'The scope of this paragraph is broad. It includes all kinds of property, including tangible or intangible property, causes of action . . . .' " Tignor v. Parkinson, 729 F.2d 977, 980 (4th Cir. 1984) (quoting S. Rep. No. 989, 95th Cong., 2d Sess. 82, and H.R. Rep. No. 595, 95th Cong., 2d Sess. 367), reprinted in 1978 U.S. Code Cong. & Admin. News 5787, 5868, and 5963, 6323). Bankruptcy schedules and forms serve the important purpose of providing notice to parties in interest of inter alia the scope of the debtor's estate. See, e.g., In re USinternetworking, Inc., 310 B.R. 274, 281 (Bankr. D. Md. 2004) ("The purpose of the disclosures in these schedules is to allow parties in interest to rely on them during administration of the case.").
The undisputed material facts show that, until the Plaintiffs commenced this adversary proceeding on June 12, 2020, the Account was consistently characterized and held out as Star's property without any qualification that the Funds in the Account were being held by Star for the benefit of, or in trust for, another or that Star's use of the Funds was restricted in any way. "In line with the broad definition of 'property of the estate,' money held in a bank account in the name of a debtor is presumed to be property of the bankruptcy estate." In re LandAmerica Fin. Grp., Inc., 412 B.R. 800, 809 (Bankr. E.D. Va. 2009); see also Stratton v. Equitable Bank, N.A., 104 B.R. 713, 726 (D. Md. 1989), aff'd, 912 F.2d 464 (4th Cir. 1990) (funds "deposited in accounts owned and controlled by [the debtor] . . . constitute property of the debtor's estate").
The undisputed material facts create a rebuttable presumption that the Account is property of Star's bankruptcy estate. See In re LandAmerica, 412 B.R. at 809-10. Attempting to rebut this presumption, the Plaintiffs offer three legal theories in support of their argument that the Account is not property of Star's bankruptcy estate: (1) that the funds were earmarked for PeoplesBank; (2) that the Funds were held in trust for the benefit of PeoplesBank; and (3) that the assignment of the Account was done solely for the benefit of HHI and is therefore excluded from property of the estate under § 541(b)(1). To prevail on their motion for summary judgment, the Plaintiffs must identify material facts that are undisputed and that "make a showing sufficient to establish the existence of an element essential" to their case. To prevail on his motion for summary judgment, the Trustee must show that the undisputed material facts "could not permit a reasonable jury to return a favorable verdict" for the Plaintiffs.
B. Have the Plaintiffs Shown that the Funds Were Earmarked?
The Trustee argues that the earmarking doctrine may only be applied as a defense to a preference action brought under § 547 of the Bankruptcy Code. Although the Court is not aware of any authority explicitly limiting the earmarking doctrine as the Trustee alleges, the Court is also not aware of any case law in which the earmarking doctrine was used oth er than as a defense to a preference action. Because judicially created exceptions to statutory rules must be narrowly construed and the Plaintiffs have not supplied any authority that supports their use of the earmarking doctrine as an affirmative theory in support of a declaratory judgment action, the Court has concerns about the way in which the Plaintiffs are attempting to use the earmarking doctrine here. For the purpose of this analysis, the Court assumes arguendo that the earmarking doctrine may be applied affirmatively by a plaintiff in an adversary proceeding, but takes no position on whether such use is permissible or authorized.
Under the Plaintiffs' first theory, the Account is not property of Star's bankruptcy estate because it was earmarked for PeoplesBank. The earmarking doctrine "is a judicially created exception to the statutory power of the bankruptcy trustee under § 547 to avoid or set aside an otherwise preferential transfer of assets." In re ESA Env't Specialists, Inc., 709 F.3d 388, 394 (4th Cir. 2013); see also In re Bohlen Enters., Ltd., 859 F.2d 561, 565 (8th Cir. 1988) ("The earmarking doctrine is entirely a court-made interpretation of the statutory requirement that a voidable preference must involve a 'transfer of an interest of the debtor in property'."). The doctrine
applies whether the proceeds of the loan are transferred directly by the lender to the creditor or are paid to the debtor with the understanding that they will be paid to the creditor in satisfaction of the creditor's claim, so long as the proceeds are clearly 'earmarked' and are, in fact, paid in accordance with that understanding.5 Collier on Bankruptcy ¶ 547.03 (16th 2023). The Fourth Circuit has admonished that, "[a]s a judicially created exception to a statutory rule, the earmarking defense must be narrowly construed." In re ESA, 709 F.3d at 395 n.5 (citing cases); see also 5 Collier on Bankruptcy ¶ 547.03 (16th 2023) ("Because the earmarking defense is a judicially created exception to the preference section, it has been narrowly construed.").
The earmarking doctrine is comprised of three elements:
(1) the existence of an agreement between the new lender and the debtor that the new funds will be used to pay a specified antecedent debt,In re Bohlen Enters., 859 F.2d at 566 (emphasis added). There must be a showing "that the new lender and the debtor agreed to use loaned funds to pay a specific antecedent debt, the terms of that agreement were actually performed and the debt was paid with the new funds , and the transaction does not diminish the debtor's estate." In re Panzarino, 469 B.R. 286, 289-90 (Bankr. N.D. Ill. 2012) (emphasis added). To prevail on summary judgment, the Plaintiffs bear the burden of identifying undisputed material facts that support each of these elements.
(2) performance of that agreement according to its terms, and
(3) the transaction viewed as a whole (including the transfer in of the new funds and the transfer out to the old creditor) does not result in any diminution of the estate.
Here, the Plaintiffs have failed to meet their burden as to the first and second elements of the earmarking doctrine. The first element requires the existence of an agreement between the Plaintiffs and Star pursuant to which the Funds would be used for the sole purpose of satisfying Star's antecedent debt to PeoplesBank. The Plaintiffs have not identified or produced any such agreement. While the evidence supports the Plaintiffs' contention that the Account was created for the purpose of obtaining the letter of credit, none of the evidence shows that there was any agreement between the Plaintiffs and Star concerning, restricting, or limiting Star's use of the Funds to that purpose. None of the documents executed by Star in creating the Account contain evidence of any limitation or restriction on Star's use of the Funds in the Account. See, e.g., In re AmeriServe Food Distrib., Inc., 315 B.R. 24, 30 (Bankr. D. Del. 2004) ("None of these documents indicate an agreement between AmeriServe and its lenders that the loan was made on the condition that the loan, or even a portion of the loan, would be paid over specifically to Transmed for outstanding and unpaid debt (invoices)."). To the contrary - the documents Star executed to open the Account represented that Star owned the Account free of any encumbrances.
The absence of any evidence that there was an agreement between the Plaintiffs and Star precludes application of the earmarking doctrine. See, e.g., In re Kumar Bavishi & Assocs., 906 F.2d 942, 944 (3d Cir. 1990) ("Similarly, we are not persuaded that the funds borrowed by Salween were earmarked for payment to appellee. The record does not reflect the existence of an agreement between Salween and the debtor that the funds be used to pay a specified antecedent debt as required by [In re Bohlen Enters.]."). Mr. Majmudar's affidavit in opposition to the Trustee's motion for summary judgment does not create a material fact dispute as to this element. While Mr. Majmudar states that Star "had no discretion" in the use of the Funds and that Star "was only permitted to use these [Funds] to satisfy its obligations . . . to PeoplesBank," these statements do not create an agreement between the Plaintiffs and Star concerning, restricting, or limiting Star's use of the Funds. Majmudar Aff. [Adv. Proc. ECF No. 52-1]. At best, Mr. Majmudar's affidavit explains his intentions, but that is not a sufficient basis on which the Court can find that an agreement existed, particularly given the absence of any other evidence. Accordingly, the Court finds that the Plaintiffs have failed to establish the first element of the earmarking doctrine.
The second element of the earmarking doctrine requires that the "the terms of that agreement were actually performed and the debt was paid with the new funds." In re Panzarino, 469 B.R. at 290. The transaction must result in the satisfaction of the antecedent debt, so that the original creditor is replaced by the new lender. "Without the satisfaction of an antecedent debt of the debtor by the new creditor, the concept of earmarking cannot apply: there is no debt by which one creditor is substituted for another." In re ESA, 709 F.3d at 396. See also In re Flanagan, 503 F.3d 171, 184 (2d Cir. 2007) (earmarking doctrine "applies whenever a third party provides funds to the debtor for the express purpose of enabling the debtor to pay a specified creditor, that is substituting a new creditor for an old creditor"); In re Heitkamp, 137 F.3d 1087, 1089 (8th Cir. 1998) (finding earmarking applies where "a new creditor merely steps into the shoes of an old creditor"); In re Interior Wood Prod. Co., 986 F.2d 228, 231 (8th Cir. 1993) ("The earmarking doctrine is typically applicable when a third party makes a loan to a debtor specifically to enable the debtor to satisfy the debt of a designated creditor. In other words, a new creditor is substituted for an old creditor."); In re Montgomery, 983 F.2d 1389, 1395 (6th Cir. 1993) ("If all that occurs in a transfer is the substitution of one creditor for another, no preference is created because the debtor has not transferred property of his estate; he still owes the same sum to a creditor, only the identity of the creditor has changed."); Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351, 1356 (5th Cir. 1986) (same).
As stated supra, there is no evidence of any agreement or terms concerning the use of the Funds. Even assuming arguendo that the Court could infer the existence of a non-written agreement or understanding between the Plaintiffs and Star based on the documents (between Star and PeoplesBank) and the correspondence (between Mr. Majmudar and PeoplesBank) that facilitated the creation of the Account, the Plaintiffs have not provided any evidence to show that such an agreement was performed - specifically, that Star's antecedent debt to PeoplesBank was extinguished and the Plaintiffs replaced PeoplesBank as creditors of Star. Seven years after the Account was created, Star's obligation to PeoplesBank remains unsatisfied, as evidenced by the fact that the Funds remain in the Account and by the proof of claim filed by PeoplesBank in Star's bankruptcy case. The transaction did not result in the substitution of an old creditor (PeoplesBank) by a new creditor (Plaintiffs). See In re ESA, 709 F.3d at 396. Accordingly, the Court concludes that the Plaintiffs have failed to establish the second element of the earmarking doctrine.
The third element of the earmarking doctrine requires that the transaction does not diminish the debtor's bankruptcy estate. Because all three elements of the doctrine are required, and because the record amply demonstrates the absence of any evidence that satisfies the first or second elements of the earmarking doctrine, the Court need not consider whether the third element has been satisfied here. And because the Plaintiffs have failed to make a "showing sufficient to establish the existence of an element essential to [their] case," Civil Rule 56 "mandates the entry of summary judgment" against them on this legal theory. Celotex, 477 U.S. at 322, 106 S.Ct. 2548.
C. Have the Plaintiffs Shown That the Funds Were Held in Trust?
The Plaintiffs next attempt to rebut the presumption that the Account is property of Star's bankruptcy estate by arguing that the Funds were being held in trust for PeoplesBank. "Trusts arise by either clear and deliberate language or operation of law." From the Heart Church Ministries, Inc. v. Afr. Methodist Episcopal Zion Church, 370 Md. 152, 182, 803 A.2d 548 (2002). "The existence of a trust must be established by clear and convincing evidence." In re FirstPay, Inc., 773 F.3d 583, 590 (4th Cir. 2014).
If one person pays money to another, it depends upon the manifested intention of the parties whether a trust or a debt is created. Where the language of the parties does not clearly show their intention, all the circumstances must be considered in order to determine whether a trust or a debt was intended.Levin v. Sec. Fin. Ins. Corp., 246 Md. 712, 718, 230 A.2d 93 (1967).
The undisputed material facts show that, until the instant adversary proceeding was filed, Star repeatedly disclaimed holding property for another. [Bankr. ECF Nos. 1, 11]. In the documents completed to open the Account, Star represented that it was "the lawful owner of the [Account] free and clear of all loans, liens, encumbrances, and claims except as disclosed to [PeoplesBank] in writing." Ex. 17 to Motion of Hopkins Hospitality Investors and Mukesh Majmudar for Summary Judgment [Adv. Proc. ECF No. 52-17] at 9. The Plaintiffs have not identified or produced any writing in which Star made any such disclosure to PeoplesBank. Further, in both its initial and amended Statement of Financial Affairs, Star denied having any property that it "held in trust." [Bankr. ECF Nos. 1, 11]. In sworn testimony at the meeting of creditors, Mr. Majmudar testified that Star was not holding any property for another. Ex. 8 to Defendant, Zvi Guttman, Chapter 7 Trustee's Motion for Summary Judgment [Adv. Proc. ECF No. 51-9] at 29:1-8. The proofs of claim filed by the Plaintiffs (after the bar date) identify the bases of their claims as "money lent" (Mr. Majmudar) or "indemnity agreement" (HHI). Star also categorized the Funds on its balance sheet and tax returns as loans. Exs. 3, 4 to Defendant, Zvi Guttman, Chapter 7 Trustee's Motion for Summary Judgment [Adv. Proc. ECF Nos. 51-4, 51-5].
After this adversary proceeding was filed, Star amended its Statement of Financial Affairs to claim that it held property for the Plaintiffs - although the property is not identified as either the Account or the Funds, but instead is described as "Irrevocable Letter of Credit No. 2500016028 on behalf of Hopkins Hospitality Investors, LLC effective for the benefit of The Hanover Insurance Company" valued in the amount of $353,315.41 for Mr. Majmudar and $646,684.59 for HHI. [Bankr. ECF No. 36]. This is inconsistent with the Plaintiffs' argument in their brief supporting their motion for summary judgment that "there is significant undisputed evidence that PeoplesBank and the Plaintiffs intended to create a trust for the benefit of PeoplesBank with the [Funds]." Reply of Hopkins Hospitality Investors and Mukesh Majmudar in Support of Their Motion for Summary Judgment [Adv. Proc. ECF No. 60] at 10 (emphasis added).
There is no evidence memorializing an intention to create a trust here, whether for the benefit of the Plaintiffs or PeoplesBank. Accordingly, the Court must consider "all the circumstances . . . to determine whether a trust or a debt was intended." Levin, 246 Md. at 718, 230 A.2d 93. The belated attempt by the Plaintiffs and Star (acting through Mr. Majmudar) to re-characterize the Account and the Funds as being held in trust is not supported by any of the evidence. In order to find that a trust was created here, the Court would have to ignore Star's initial and first amended Statement of Financial Affairs, filed under penalty of perjury; Mr. Majmudar's testimony at the meeting of creditors, provided under oath; the proofs of claim filed by the Plaintiffs; and Star's balance sheet and tax returns. Even then, the only document which identifies any property held by Star in trust for another is the second amended Statement of Financial Affairs - but that document states that Star holds a letter of credit, not the Account or the Funds , in trust for the Plaintiffs. The Plaintiffs have failed to show any undisputed material facts that support the creation of a trust in this case.
D. Are the Funds Held Solely for the Benefit of HHI?
The Plaintiffs' final argument relies on a provision of the Bankruptcy Code that excludes from property of the estate "any power that the debtor may exercise solely for the benefit of an entity other than the debtor." 11 U.S.C. § 541(b)(1). Relying on a decision by the Court of Appeals for the Eleventh Circuit, the Plaintiffs argue that the Funds in the Account were held for the benefit of HHI. T & B Scottdale Contractors, Inc. v. U.S., 866 F.2d 1372, 1376 (11th Cir. 1989) (opining that the legislative history of § 541 shows that "funds in the debtor's possession held for a third-party do not become property of the bankruptcy estate").
The Eleventh Circuit's citation to the legislative history of § 541 is from a section that pertains to discussion of sub-section (d), not sub-section (b)(1). In re Frankum, 453 B.R. 352, 363 n.13 (Bankr. E.D. Ark. 2011). Moreover, "legislative history is not law." Hunley v. Instagram, LLC, 73 F.4th 1060, 1072 (9th Cir. 2023) ("If we look to legislative history at all, we will only recur to it as an aid to understanding an ambiguous text.").
The facts in T & B Scottdale Contractors are distinguishable from those in the instant case. In T & B Scottdale Contractors, the debtor (a sub-contractor) and the general contractor had a joint bank account governed by a written agreement that explicitly restricted the use of funds deposited into that account by the general contractor to paying materialmen. Id. at 1373. The district court held that funds in the account belonged to the debtor's bankruptcy estate, but the Eleventh Circuit reversed. Id. at 1376. The determinative factor in the appellate court's decision to reverse the district court was evidence of a written agreement that expressly conditioned the use of the funds in the joint account. Id. Here, there is no evidence of any agreement - written or otherwise - restricting Star's use of the Funds. Accordingly, T & B Scottdale Contractors does not support the Plaintiffs' contention that § 541(b)(1) can be applied here.
The prevailing analysis of § 541(b)(1) occurs in the context of trust relationships. See, e.g., In re Cybermech, Inc., 13 F.3d 818, 820 (4th Cir. 1994) (§ 541(b)(1) states "that property of the debtor does not include assets being held by the debtor in trust for another"); In re Marrama, 316 B.R. 418, 423 (B.A.P. 1st Cir. 2004); In re Unicom Computer Corp., 13 F.3d 321, 324 (9th Cir. 1994); In re Intrenet, Inc., 273 B.R. 153, 157 (Bankr. S.D. Ohio 2002); In re Veatch, 232 B.R. 346, 351 (Bankr. E.D. Va. 1999); In re Dally, 202 B.R. 724, 727 (Bankr. N.D. Ill. 1996); In re Carriage House, Inc., 146 B.R. 352, 355 (D. Vt. 1992). This Court has already analyzed, and rejected, the Plaintiffs' trust argument. The Plaintiffs do not offer anything new in their argument under § 541(b)(1) to change that result.
E. The Motions for Summary Judgment
To prevail on a motion for summary judgment, the moving party must show that (1) none of the material facts are disputed and (2) the undisputed material facts entitle that party to judgment as a matter of law. If the moving party is also the party which will bear the burden of proving its case at trial, and "fails to make a showing sufficient to establish the existence of an element essential to that party's case," Civil Rule 56(c) "mandates the entry of summary judgment" against that party. Celotex, 477 U.S. at 322, 106 S.Ct. 2548.
Here, while both parties seek summary judgment, it is the Plaintiffs who ultimately bear the burden of proving the elements essential to their case at trial. As discussed in detail supra, the Plaintiffs have failed to establish (1) the first and second elements of the earmarking doctrine; (2) that the Funds were being held in the Account in trust for PeoplesBank; or (3) that Star held the power to assign the Account exclusively for the benefit of HHI under § 541(b)(1). Accordingly, the Court finds that the Plaintiffs "fail[ed] to make a showing sufficient to establish the existence of an element essential to that [their] case." Celotex, 477 U.S. at 322, 106 S.Ct. 2548. As a result, Civil Rule 56(c) "mandates the entry of summary judgment" against the Plaintiffs. Id.
Where, as here, the defendant (the Trustee) seeks summary judgment "based on the lack of proof of a material fact," the court must determine "whether a fair-minded jury could return a verdict for the plaintiff on the evidence presented." Anderson, 477 U.S. at 252, 106 S.Ct. 2505. For the same reasons that summary judgment must independently be entered against the Plaintiffs under Civil Rule 56(c), the Court finds that a fair-minded jury could not return a verdict for the Plaintiffs here. Accordingly, the Trustee is entitled to summary judgment as a matter of law.
Conclusion
In light of the foregoing, it is, by the United States Bankruptcy Court for the District of Maryland,
ORDERED, that the Plaintiffs' motion for summary judgment is DENIED; and it is further,
ORDERED, that the Trustee's motion for summary judgment and supplemental motion for summary judgment are both GRANTED; and it is further,
ORDERED, that judgment is entered against the Plaintiffs.
SO ORDERED