Opinion
6:21-bk-04053-GER
12-06-2024
In re D.A.B. Constructors, Inc., Debtor.
Chapter 7
ORDER (1) GRANTING IN PART MOTION TO ALTER, (2) EXTENDING AUTOMATIC STAY AS TO COUNT XV AND (3) GRANTING MOTION TO EXTEND TIME
Grace E. Robson, United States Bankruptcy Judge
THIS MATTER came before the Court on October 2, 2024 at 1:00 p.m. (the "October Hearing") upon Western Surety Company's Motion to Alter and Amend Stay Order, for Clarification and for Amended or Additional Findings (Doc. No. 646) (the "Motion to Alter") filed by Western Surety Company ("Surety") regarding this Court's Order (1) Granting Motion to Enforce Automatic Stay and (2) Directing Western Surety Company to Seek Permission to Amend Complaint and Dismiss Certain Counts (Doc. No. 642) (the "Stay Order"). Arvind Mahendru, as Chapter 7 Trustee ("Trustee") for the estate of D.A.B. Constructors, Inc. ("Debtor"), filed Trustee's Response to the Motion to Alter, to which Surety filed the Reply. Surety also filed Western Surety Company's Motion to Extend Time to Seek Leave to Amend District Court Complaint (Doc. No. 647) (the "Motion to Extend Time").
Response to Western Surety Company's Motion to Alter and Amend Stay Order, for Clarification and for Amended or Additional Findings (Doc. No. 646) (Doc. No. 655) ("Trustee's Response").
Western Surety's Reply to Trustee's Response to Motion for Clarification (Doc. No. 669) (the "Reply").
Having reviewed the Motion to Alter, Trustee's Response and the Reply, together with the Stay Order, and as more fully discussed herein, the Court finds that the Motion to Alter should be granted in part so as to require dismissal with prejudice Counts IV through VII, IX through XII, and XIV, to stay Surety from proceeding on Count XV instead of requiring dismissal thereof, and to require Surety to dismiss Count XVI without prejudice to seeking an adjudication in this Court. Further, the Motion to Extend Time is granted as set forth herein.
BACKGROUND
Debtor operated a construction business. One of its major clients was the Florida Department of Transportation ("FDOT"). Prior to seeking bankruptcy relief, Debtor and Surety entered into that certain General Agreement of Indemnity (the "GAI"), pursuant to which Surety agreed to issue performance and payment bonds on certain construction projects, and Debtor agreed to indemnify Surety for any "loss" sustained by Surety as a result of issuing bonds in favor of Debtor. The GAI was executed by Debora Bachschmidt ("Debora"), as president of Debtor, and William Bachschmidt ("William"), as vice president of Debtor. The GAI specifically acknowledged that Debora and William did not personally guarantee Debtor's obligations under the GAI and did not agree to personally indemnify Surety. At the time the GAI was signed, Debora entered into that certain Creditor Subordination Agreement (the "Subordination Agreement") with Surety in her individual capacity. Pursuant to the Subordination Agreement, any debt owed by Debtor to Debora with respect to certain promissory notes (the "Notes") would be subordinate to any debt or obligations Debtor owed to Surety; however, Debtor was permitted to make scheduled interest payments to Debora due under the Notes (the "Allowed Payments") so long as there was no outstanding or unpaid "Loss" due to Surety.
A copy of the GAI can be found as part of Exhibit A to the Reply.
William passed away in August 2023. See Notice of Death, Mahendru v. Bachschmidt, Ch. 7 Case No. 6:21-bk-04053-GER, Adv. No. 6:23-ap-00061-GER (Bankr. M.D. Fla. Aug. 23, 2023), Doc. No. 10.
Paragraph 22 of the GAI provides "[i]rrespective of any other term or provision in this agreement, no personal guarantee or personal indemnity of any individual is intended or created by or through this agreement."
A copy of the Subordination Agreement can be found as part of Exhibit A to the Reply.
See the Subordination Agreement at Section III, paragraph 1, subparagraphs (a) and (e) for the definition of "Allowed Payments" and "Loss."
In or about July 2021, Surety was made aware that Debtor was unable to meet its obligations on construction projects for which it had issued bonds, and Surety entered into an agreement with Debtor and FDOT that Surety would complete performance of Debtor's contract with FDOT. Sometime in July 2021, Surety filed a financing statement with the Florida Secured Transaction Registry (the "UCC-1") indicating it was secured in all of Debtor's assets. On September 3, 2021 (the "Petition Date"), Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code. Surety filed a proof of claim in this case asserting it was owed an amount "estimated in excess of $75,000,000.00" secured by all Debtor's personal property and the proceeds thereof. Surety is the largest creditor in this case. On February 8, 2022, Trustee filed a complaint against Surety to avoid and recover the UCC-1 and other transfers from Debtor to Surety, as well as to obtain a determination of the extent, validity, and priority of Surety's liens, rights and interests in certain assets of the bankruptcy estate and the proceeds thereof. Prior to an adjudication on the merits, Trustee and Surety entered into an agreement to resolve the claims subject of the Surety Adversary Proceeding (the "Settlement Agreement"). Relevant here, paragraph 3 of the Settlement Agreement provides:
See Reply, Ex. A.
Doc. No. 1.
Proof of Claim 90 (the "Proof of Claim").
Mahendru v. W. Sur. Co., Ch. 7 Case No. 6:21-bk-04053-GER, Adv. No. 6:22-ap-00023-GER (Bankr. M.D. Fla. filed Feb. 8, 2022) (the "Surety Adversary Proceeding").
Motion to Approve Settlement Pursuant to Federal Rule of Bankruptcy Procedure 9019, Ex. A (Doc. No. 367).
The Trustee represents and warrants that he will not oppose or interfere with any claims or causes of actions asserted by the Surety against William and/or Deborah [sic] Bachschmidt or any other indemnitor, based upon any common law indemnity claim, breach of fiduciary duty under the subordination agreement(s) or [the GAI], breach of the subordination agreement(s), breach of the [GAI], breach of guaranty or breach of contract. The Trustee acknowledges and agrees that the preceding causes of action are not property of the Estate. Notwithstanding the preceding sentence, the Trustee may pursue any and all causes of action the estate may hold against the Bachschmidts or any other indemnitor.
The Court approved the Settlement Agreement, directed the parties to comply with its terms, and retained jurisdiction to enforce its terms as well as resolve any disputes pertaining to the Settlement Agreement. After entering into the Settlement Agreement, Surety commenced an action against Debora, William, Foster Bachshmidt ("Foster") and Truist Bank ("Truist") in the United States District Court for the Northern District of Florida (the "District Court") by filing a complaint (as amended, the "District Court Complaint"). Trustee communicated to Surety that Surety was violating the automatic stay. The parties disagreed on whether the automatic stay applied, and ultimately Trustee filed his Motion to Enforce Automatic Stay. Trustee argued Surety's claims seek identical recovery sought in Trustee's complaints filed against Debora, William and Foster. After Debora moved to stay the proceedings in District Court, the District Court entered an order staying the District Court Action pending this Court's resolution of the Motion to Enforce. The Court continued the hearing to consider the Motion to Enforce by agreement of the parties to permit the parties to mediate a global resolution of the matters. Once the Court was notified that the parties' efforts could not progress any further, the Court held a hearing (the "April Hearing") on the Motion to Enforce and Western Surety Company's Response to Trustee's Motion to Enforce Automatic Stay The parties argued their positions, and the Court issued its oral ruling finding that Surety's claims were either (i) direct claims that can be pursued; (ii) claims derivative of harms to Debtor that belong to Trustee and therefore cannot be pursued ("Infringing Claims"); or (iii) claims that would impact Trustee's administration of the estate that should be stayed ("Enjoined Claims"). Thereafter, the Court entered the Stay Order.
Order Granting Motion to Approve Settlement Pursuant to Federal Rule of Bankruptcy Procedure 9019 (Doc. No. 384).
Debora, William and Foster are collectively referred to herein as the "Bachschmidts."
Amended Complaint, W. Sur. Co. v. Bachschmidt, No. 1:23-cv-00112-MW-MJF (N.D. Fla. Aug. 7, 2023), Doc. No. 33.
Doc. No. 587 (the "Motion to Enforce").
Trustee commenced litigation against Debora and William in this Court. See Complaint, Mahendru v. Bachschmidt, Ch. 7 Case No. 6:21-bk-04053-GER, Adv. No. 6:23-ap-00061-GER (Bankr. M.D. Fla. June 22, 2023), Doc. No. 1. Trustee later filed the Verified Second Amended Complaint. Verified Second Amended Complaint, Mahendru v. Bachschmidt, Ch. 7 Case No. 6:21-bk-04053-GER, Adv. No. 6:23-ap-00061-GER (Bankr. M.D. Fla. Aug. 5, 2024), Doc. No. 61 (the "Debora and William Complaint").
Trustee commenced litigation against Foster and Umeris Aerospace, LLC. See Complaint, Mahendru v. Bachschmidt, Ch. 7 Case No. 6:21-bk-04053-GER, Adv. No. 6:23-ap-00083-GER (Bankr. M.D. Fla. July 27, 2023), Doc. No. 1. Trustee later filed the Amended Complaint. See Amended Complaint, Mahendru v. Bachschmidt, Ch. 7 Case No. 6:21-bk-04053-GER, Adv. No. 6:23-ap-00083-GER (Bankr. M.D. Fla. Mar. 1, 2024), Doc. No. 55 (the "Foster Complaint").
Order Granting in Part Defendant's Motion to Stay, W. Sur. Co. v. Bachschmidt, No. 1:23-cv-00112-MW-MJF (N.D. Fla. Sept. 28, 2023), Doc. No. 56.
The April Hearing was conducted on April 18, 2024.
Doc. No. 628 ("Surety's Response to Motion to Enforce").
Counts I, II and III are not at issue as part of the Motion to Alter, so the Court will not discuss them herein.
LEGAL STANDARD
Surety seeks "clarification, amendment or additional findings" pursuant to Federal Rules of Civil Procedure 52, 59 and 60 which are made applicable to these proceedings by Federal Rules of Bankruptcy Procedure 7052, 9023 and 9024.
Hereinafter referred to as "Rule" or "Rules." The Federal
Hereinafter referred to as "Bankruptcy Rule" or "Bankruptcy Rules."
Reconsideration of, or Relief from, Stay Order
In seeking reconsideration or relief from the Stay Order, Surety has the burden to prove the Stay Order includes "(1) manifest error of fact; (2) manifest error of law; or (3) newly discovered evidence." "A motion for reconsideration is not a vehicle to re-argue issues resolved by the court's decision . . . ." Relief under Rule 60 will be granted upon a showing of "mistake, inadvertence, surprise, or excusable neglect" or for "any other reason that justifies relief." "[A] party seeking relief bears a heavy burden of demonstrating 'a justification so compelling that [a court is] required to vacate its order.'"
Kupersmith v. McCutcheon (In re McCutcheon), 629 B.R. 311, 315-16 (Bankr. M.D. Ga. 2021) (citing Arthur v. King, 500 F.3d 1335, 1343 (11th Cir. 2007)).
Daughtrey v. Rivera (In re Daughtrey), 896 F.3d 1255, 1280 (11th Cir. 2018) (quoting In re Invs. Fla. Aggressive Growth Fund, Ltd., 168 B.R. 760, 768 (Bankr. N.D. Fla. 1994)).
Fed.R.Civ.P. 60(b)(6); accord In re McCutcheon, 629 B.R. at 317; Perez v. Future Motion, Inc., No. 6:22-cv-586-RBD-RMN, 2023 WL 3995465, at *1 (M.D. Fla. May 19, 2023), report and recommendation adopted, No. 6:22-cv-586-RBD-RMN, 2023 WL 5346544 (M.D. Fla. Aug. 21, 2023); Auto-Owners Ins. Co. v. Ralph Gage Contracting, Inc., 748 Fed.Appx. 967, 968-69 (11th Cir. 2018).
Auto-Owners Ins. Co., 748 Fed.Appx. at 969 (quoting Cano v. Baker, 435 F.3d 1337, 1342 (11th Cir. 2006)).
Clarification of Stay Order
There is no Federal Rule of Civil Procedure that specifically governs motions for clarification. "The case law establishes, however, that the 'general purpose of a motion for clarification is to explain or clarify something ambiguous or vague, not to alter or amend.'"Although a motion for clarification may not open the door to "re-litigat[ing] a matter that the court has considered and decided," courts "have encouraged parties to request clarification when they are uncertain about the scope of a ruling or its application 'in a concrete context or particular factual situation.'"
United States v. Philip Morris USA Inc., No. CV 99-2496 (PLF), 2023 WL 4057501, at *4 (D.D.C. June 19, 2023) (quoting United States v. Philip Morris USA Inc., 793 F.Supp.2d 164, 168 (D.D.C. 2011)).
Id. (alteration in original) (quoting Sai v. Transp. Sec. Admin., No. CV 14-403 (RDM), 2015 WL 13889866, at *3 (D.D.C. Aug. 19, 2015)).
Id. (first quoting Philip Morris USA, 793 F.Supp.2d at 168-69; then citing United States v. Volvo Powertrain Corp., 758 F.3d 330, 344 (D.C. Cir. 2014); and then citing Barnes v. District of Columbia, 289 F.R.D. 1, 12-13 (D.D.C. 2012)).
Request for Additional Findings
"Federal Rule of Civil Procedure 52 vests the Court with discretion to amend findings that were made after a bench trial or to make additional findings of fact." "The purpose of [Rule 52] is to allow the court to correct plain errors of law or fact, or, in limited situations, to allow the parties to present newly discovered evidence." Rule 52 does "not . . . allow the relitigation of old issues, a rehearing on the merits, or the presentation of new theories of the case."
Aerotek, Inc. v. Thompson, No. 6:13-cv-1277-Orl-22KRS, 2015 WL 13707102, at *1 (M.D. Fla. July 27, 2015) (alteration in original) (quoting Hannover Ins. Co. v. Dolly Trans Freight, Inc., No. 6:05-CV-576-ORL-19DA, 2007 WL 170788, at *2 (M.D. Fla. Jan. 18, 2007)).
Id. (quoting Hannover Ins., 2007 WL 170788, at *2).
DISCUSSION
Surety seeks relief from the Stay Order arguing this Court: (1) rewrote the Settlement Agreement; (2) impermissibly prevents Surety from proceeding on direct claims; and (3) does not have exclusive jurisdiction to determine whether funds received by Debtor are property of Debtor's bankruptcy estate. Other than clarification as to whether Counts IV, V, VI and VII were to be dismissed with or without prejudice, Surety failed to point to any ambiguity or vagueness in the Stay Order that required clarification. Surety likewise failed to demonstrate new or additional facts that would alter the Court's ruling. Surety simply disagrees with the rulings contained in the Stay Order and seeks reconsideration thereof.
Bankruptcy Jurisdiction
Surety argues that the bankruptcy court does not have exclusive jurisdiction to determine whether funds transferred by Debtor to or for the benefit of the Bachschmidts is property of Debtor's bankruptcy estate. Surety is wrong.
District Courts have original and exclusive jurisdiction over bankruptcy cases, and the particular district court in which a case is commenced or is pending has exclusive jurisdiction over property of the debtor and property of the bankruptcy estate. Each district court may provide that any or all bankruptcy cases and proceedings be referred to the bankruptcy judges for the district, who in turn may hear, determine, and enter orders and judgments in all bankruptcy cases and all core proceedings arising under the Bankruptcy Code or arising in a bankruptcy case as referred to bankruptcy judges by the district court. The United States District Court for the Middle District of Florida has entered a standing order referring all bankruptcy cases and proceedings "arising in" or "related to" a bankruptcy case to bankruptcy judges for this district. As a result of this standing order of reference, this Court has jurisdiction over Debtor's bankruptcy case, Debtor's property, property of the estate, and causes of action "arising under," "arising in" or "related to" cases under title 11.
28 U.S.C. § 1334(a), (e)(1). District Courts have non-exclusive jurisdiction over civil proceedings "arising under," "arising in" or "related to" bankruptcy cases. 28 U.S.C. § 1334(b).
28 U.S.C. § 157(a), (b).
The "Order of Reference" in effect as of the filing of this case was entered February 22, 2012. In re Standing Order of Reference of Cases Arising Under Title 11, United States Code, No. 6:12-mc-26-ORL-22 (M.D. Fla. Feb. 22, 2012), (the "2012 Order of Reference"); see also Ritter v. Sharrer (In re Health Support Network, Inc.), No. 8:16-CV-3296-T-36, 2017 WL 2495213, at *2 (M.D. Fla. Apr. 6, 2017) (citing the 2012 Order of Reference). The Order of Reference was recently amended and superseded by the Order of Reference of Cases Arising Under Title 11, United States Code, and Designating Bankruptcy Judges to Conduct Jury Trials and Act as Settlement Judges, In re Administrative Orders of the Chief Judge, No. 3:21-mc-1-TJC (M.D. Fla. Oct. 29, 2024).
The Bankruptcy Court Has Exclusive Jurisdiction to Determine Whether Specific Property is Property of Debtor's Bankruptcy Estate
It is well established that the bankruptcy court has exclusive jurisdiction to determine whether property is property of the estate. In fact, "[t]here is nothing more core to the bankruptcy process than the determination of what is, and what is not, included in the bankruptcy estate."
In re Sticky Holsters, Inc., No. 2:23-BK-00962-FMD, 2024 WL 3359368, at *6 (Bankr. M.D. Fla. July 10, 2024) (first quoting In re Marathe, 459 B.R. 850, 854 (Bankr. M.D. Fla. 2011); then citing Manges v. Atlas (In re Duval Cnty. Ranch Co.), 167 B.R. 848, 849 (Bankr.S.D.Tex. 1994); and then citing Brown v. Fox Broad. Co. (In re Cox), 433 B.R. 911, 920 (Bankr. N.D.Ga. 2010)), reconsideration denied, No. 2:23-BK-00962-FMD, 2024 WL 3758396 (Bankr. M.D. Fla. Aug. 8, 2024).
Fannie Mae v. CCH John Eagan II Homes, L.P. (In re CCH John Eagan II Homes, L.P.), Ch. 11 Case No. 15-31082-EPK, Adv. No. 16-01183-EPK, 2016 WL 6088134, at *5 (Bankr. S.D. Fla. Oct. 17, 2016) (citing Hamm v. McIntyre (In re McIntyre), Ch. 7 Case No. 10-30570-WRS, Adv. No. 11-3097-WRS, 2013 Bankr. LEXIS 1689, at *13-14, *25 (Bankr. M.D. Ala. Mar. 8, 2013)).
Property of the Estate
A bankruptcy estate is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." "Congress intended a broad range of property to be included in the estate." "[I]t includes all property in which a debtor has any interest."
United States v. Whiting Pools, Inc., 462 U.S. 198, 204, 103 S.Ct. 2309, 2313, 76 L.Ed.2d 515 (1983).
In re Chambers, 451 B.R. 621, 622 (Bankr. N.D.Ga. 2011) (first citing 11 U.S.C. § 541(a)(1); and then citing Whiting Pools, 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515).
Surety argues its claims are direct claims because funds deposited into and transferred out of Debtor's bank account are "trust funds" that belong to Surety and are not property of the estate. Debtor's legal and equitable interests in funds in its bank accounts are included in "property of the estate" under 11 U.S.C. § 541(a). The extent of Debtor's interest in the transferred funds is a question of state law. Under Florida law, "[t]he person whose name appears on legal title is presumed to be the owner of the property in question." Therefore, as an initial matter, the transferred funds at issue are presumed to be Debtor's funds.
Surety agreed that its claims pertain to the funds deposited into, and transferred from, Debtor's account(s) with SunTrust Bank n/k/a Truist Bank. Debtor also had account(s) with Capital City Bank.
Woolum v. Adamovich (In re Woolum), 279 B.R. 865, 869 (Bankr. M.D. Fla. 2002) ("The extent and validity of the debtor's interest in property is a question of state law." (quoting Dzikowski v. NASD Regul., Inc. (In re Scanlon), 239 F.3d 1195, 1197 (11th Cir. 2001))); see also Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979) ("Property interests are created and defined by state law.").
Hagopian v. Zimmer, 653 So.2d 474, 475 (Fla. 3d DCA 1995) (citing Cannova v. Carran, 92 So.2d 614, 619 (Fla. 1957)); accord Branch Banking & Tr. Co v. ARK Dev./Oceanview, LLC, 150 So.3d 817, 820 (Fla. 4th DCA 2014) (recognizing that "[f]or garnishment purposes, funds on deposit in a financial institution are presumed to belong to the person or entity named on the account" (quoting Green v. Dep't of Rev. ex rel. Williams, 78 So.3d 555, 557 (Fla. 5th DCA 2011))).
In addition, "[a] general claim that 'applies equally to all creditors' and can be brought by the debtor is the property of the bankruptcy estate of the debtor." "It is the general nature of a claim instead of the general nature of a debt that causes a claim to belong to a bankruptcy estate." Actions to avoid transfers under 11 U.S.C. §§ 544, 547 and 548 are property of the estate. In addition, "[a] claim for breach of fiduciary duty by an officer or director of a corporation that caused generalized harm to the corporation and its shareholders is derivative and property of the estate" and is stayed by the commencement of a bankruptcy case.
Bond Safeguard Ins. Co. v. Wells Fargo Bank, N.A., 502 Fed.Appx. 867, 869 (11th Cir. 2012) (quoting and citing Baillie Lumber Co. v. Thompson (In re Icarus Holding, LLC), 391 F.3d 1315, 1319, 1320 (11th Cir. 2004)).
Id. at 870.
See In re Zwirn, 362 B.R. 536, 539-40 (Bankr. S.D. Fla. 2007).
Se. Toyota Distribs., LLC v. PCH Commc'ns, LLC (In re PCH Commc'ns, LLC), Ch. 7 Case No. 16-17186-BKC-LMI, Adv. No. 16-1472-BKC-LMI, 2017 WL 3638196, at *2 (Bankr. S.D. Fla. Mar. 1, 2017) (citing Off. Comm. of Unsecured Creditors of BankUnited Fin. Corp. v. Fed. Deposit Ins. Corp. (In re Bank United Fin. Corp.), 442 B.R. 49 (Bankr. S.D. Fla. 2010)); accord Nisselson v. Marjerry Realty Corp. (In re Port Morris Tile & Marble LP), 645 B.R. 500, 515 (Bankr. S.D.N.Y. 2022) ("A creditor's claim against a third party is not particular simply because the trustee cannot bring the exact claim as the creditor," and the "proper analysis . . . involves a comparison between the harms that are [the] subject of the creditors' claim and the harms that are actionable via the trustee's claims.").
"If a cause of action belongs to the estate, then the trustee 'is the only party with standing to prosecute [it].'" Because certain causes of action brought by Surety emanate from transfers of funds that are presumptively Debtor's property and harmed all creditors generally, the Court concluded in the Stay Order that Surety's claims violate the automatic stay. Actions taken in violation of the automatic stay are void.
Bond Safeguard Ins., 502 Fed.Appx. at 869 (alteration in original) (quoting Parker v. Wendy's Int'l, Inc., 365 F.3d 1268, 1272 (11th Cir. 2004)).
United States v. White, 466 F.3d 1241, 1244 (11th Cir. 2006) ("It is the law of this Circuit that '[a]ctions taken in violation of the automatic stay are void and without effect.'" (alteration in original) (quoting Borg-Warner Acceptance Corp. v. Hall, 685 F.2d 1306, 1308 (11th Cir. 1982))).
With the foregoing background and legal principles in mind, the Court discusses each of the claims at issue.
a. Counts IV through VII
Surety represented in filings and on the record that it would voluntarily dismiss Counts IV through VII of the District Court Complaint, but it has backtracked its representations in the Motion to Alter. Counts IV through VII seek to avoid and recover funds transferred from Debtor's Truist bank accounts to Debora, William and/or Foster. As noted above, a fraudulent transfer action is a claim against the debtor that is stayed upon the commencement of a bankruptcy case. Furthermore, only Trustee has standing to pursue such causes of action.
See Western Surety Company's Response to Trustee's Motion to Enforce Automatic Stay at 1 (Doc. No. 628) ("Although Western Surety disputes that the Trustee is correct in its assertion that Counts IV-VII and Count VIII violate the automatic stay and that Western seeks recovery of property of the estate, it has agreed to amicably resolve this dispute by abating and/or dismissing the offending counts so that both Western Surety and the Trustee may continue with their litigation against the Bachschmidts in both the District Court and this Bankruptcy."); Western Surety Company's Supplemental Response to Trustee's Notice of Filing at 3 (Doc. No. 630) ("Western, in fact, has agreed to dismiss the Infringing Counts.").
See In re Saunders, 101 B.R. 303, 305 (Bankr. N.D. Fla. 1989) ("While a fraudulent transfer action may be an action against a third party, it is also an action 'to recover a claim against the debtor.' Absent a claim against the debtor, there is no independent basis for the action against the transferee."); see also In re Zwirn, 362 B.R. at 539 ("Nonetheless, these courts hold that any state court lawsuit to recover a fraudulent conveyance violates the automatic stay under § 362(a)(1) as an action 'to recover a claim against the debtor.'" (first citing In re Saunders, 101 B.R. 303; and then citing Fed. Deposit Ins. Corp. v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125 (2d Cir. 1992))).
See In re Zwirn, 362 B.R. at 539 ("[A]ll courts appear to agree that commencing a bankruptcy case stays any state court fraudulent conveyance actions by a creditor . . . ." (citing NBD Bank, N.A. v. Fletcher (In re Fletcher), 176 B.R. 445, 452 (Bankr. W.D. Mich. 1995))).
Surety has not met its burden for the Court to reconsider the Stay Order. As such, because Surety now refuses to voluntarily dismiss Counts IV through VII, the Court directs Surety to dismiss Counts IV through VII as void for violating the automatic stay. To the extent it was not clear, the Surety is directed to dismiss Counts IV through VII with prejudice.
b. Count VIII - Breach of Fiduciary Duty Under the GAI
Count VIII alleges that Debora, William and Foster breached their fiduciary duty under the GAI by causing Debtor to transfer "trust funds" to pay for personal expenses. While the Settlement Agreement provides that Trustee will not oppose or interfere with Surety's claims based on breach of fiduciary duty under the GAI, the allegations contained in Count VIII are based on harm to Debtor that generally effected all creditors. Surety also argues it can pursue this claim based on the Settlement Agreement, regardless of whether it has a superior interest in the transferred funds. The Court disagrees and finds that because Debtor is the presumptive owner of any funds transferred from its bank accounts, the claim is property of the bankruptcy estate that only Trustee can pursue.
As noted hereinabove, the GAI was signed by Debora and William in their respective capacities as president and vice-president of Debtor. Foster did not sign the GAI. See supra note 5 (quoting the GAI, which provides that "no personal guarantee or personal indemnity of any individual is intended or created by or through this agreement").
Surety agreed to remove allegations relating to breach of fiduciary duty based on the zone of insolvency. See Western Surety Company's Response to Trustee's Motion to Enforce Automatic Stay at 1, 5-6 (Doc. No. 628). Therefore, the Court does not address whether such allegations violate the automatic stay.
See Hantz v. Belyew, 194 Fed.Appx. 897 (11th Cir. 2006) (finding that plaintiffs had no standing to pursue claim for injuries suffered by the debtor where allegations refer to misbehavior detrimental to all shareholders, not just plaintiffs).
Therefore, as the Court previously ruled, Surety may seek permission to amend Count VIII so long as the allegations it asserts are not based on general harms to Debtor, duties arising while in the "zone of insolvency" or transfers of Debtor's funds which are presumptively property of the estate. If Surety cannot fashion such a claim, then it must dismiss Count VIII with prejudice.
Counsel conceded at the October Hearing that allegations regarding duties arising while in the "zone of insolvency" were not appropriate to include in its Complaint.
c. Counts IX, X, XI, XII and XIV - Aiding and Abetting by Truist
Counts IX, X, XI, XII and XIV assert claims against Truist for aiding and abetting the alleged breach of fiduciary duty, conversion, and embezzlement stemming from the transfer of Debtor's funds to or for the personal benefit of the Bachschmidts. Surety alleges Truist worked in concert with Debora and William to breach fiduciary duties owed to Surety by allowing funds received from Bonded Contracts and deposited into Debtor's Truist bank account(s) to be diverted and used for payments to Truist and others not designated as beneficiaries under the Bonded Contracts. The referenced claims derive from harm "visited directly upon [Debtor] that [Debtor] could have pursued itself under applicable law." "Claims based on the depletion of corporate assets . . . are generalized in nature" and may only be prosecuted by the trustee. Further, despite Surety repeatedly asserting the funds deposited into and transferred out of Debtor's Truist bank account(s) are "trust funds" that belong to Surety, this Court has made no such determination. Until such a determination is made, the funds deposited into and transferred out of Debtor's Truist bank account(s) are presumptively property of the estate.
In re First Leads & Mktg., Inc., No. 22-10245-PMB, 2023 WL 4163478, at *4 (Bankr. N.D.Ga. June 23, 2023) (citing Mennen v. Onkyo Corp., 248 Fed.Appx. 112, 113 (11th Cir. 2007)).
Id.
Id. (quoting In re Black Elk Energy Offshore Operations, LLC, No. 15-34287, 2016 WL 4055044, at *3 (Bankr.S.D.Tex. July 26, 2016)).
Because the transferred funds are presumptively property of the estate and the harm is a general one based on depletion of Debtor's assets, Surety's Counts IX, X, XI, XII and XIV are claims which belong to the bankruptcy estate and must be dismissed with prejudice.
d. Count XIII - Avoidance and Attachment
In Count XIII, Surety seeks to avoid the entry of a final consent judgment entered against Debora and William in favor of Truist (the "Consent Judgment"); then, as a remedy, it seeks to attach the funds paid by Debtor from its Truist bank account towards satisfaction of the Consent Judgment. While the cause of action is not exclusive to Trustee, the remedy sought is Surety's back door attempt to get around Trustee's exclusive power to recover estate property. Trustee has sued Debora and William to avoid and recover the same funds that were paid by Debtor to Truist from Debtor's Truist bank account. Surety's attachment of said funds would violate the automatic stay as it would directly interfere with Trustee's administration of the estate's cause(s) of action to recover those funds. As such, the Court ruled that Surety could request avoidance of the Consent Judgment but could not proceed in District Court to attach the funds paid from Debtor's Truist bank account. Surety has failed to demonstrate why the Court's ruling should be reconsidered.
See supra note 17.
e. Count XV - Request for Preliminary Injunction
Surety requests the District Court issue a preliminary injunction against Debora and William that would preclude Debora and William from making payments towards satisfaction of the Consent Judgment, determine priorities regarding assets, and require Debora to provide an accounting, among other requested relief. The Stay Order directed Surety to dismiss Count XV. Surety's request is premised solely on allegations that funds from Debtor's Truist bank account(s) were used to pay Debora and William's personal expenses. Once again, Surety alleges the transferred funds are "trust funds" even though the funds are presumptively Debtor's as they were transferred from Debtor's Truist bank account. Additionally, the relief sought in Count XV overlaps with relief Trustee seeks in this Court and this Court has exclusive jurisdiction to determine whether the funds at issue are property of the estate. Moreover, Count XV is based on a general harm and granting the relief sought in Count XV could conceivably affect the administration of Debtor's estate. However, the Court reconsiders paragraph 9 of the Stay Order; instead of requiring dismissal, Surety is stayed from proceeding on Count XV.
Trustee seeks a temporary injunction or attachment under section 726.108 of the Florida Statutes, a preliminary injunction and asset freeze under Rule 65, as well as the imposition of a constructive trust and equitable liens on property owned by Debora, William and Foster that Trustee asserts is traceable to alleged avoidable transfers from Debtor's bank accounts that were used for the personal benefit of these defendants. See supra notes 17-18 (regarding the Debora and William Complaint and the Foster Complaint).
f. Count XVI - Declaratory Relief as to Parties' Rights Under the GAI
Count XVI seeks a declaration: (1) regarding Surety's, Debora's and William's rights and obligations under the GAI, including access to Debtor's books and records, right to payments, and proceeds from Bonded Contracts; (2) that funds paid by the FDOT and other governmental entities to Debtor are "trust funds"; and (3) determining Surety's right to have proceeds held in trust for its benefit. While Surety frames the claim as against Debora and William, the GAI was not signed by Debora or William in their individual capacity, and the allegations supporting personal liability are derivative of the depletion of Debtor's funds, i.e., a general harm to all of Debtor's creditors, not a direct harm to Surety. As pled, Count XVI impermissibly requests that the District Court determine whether certain funds are property of the estate; however, as discussed herein, this Court has exclusive jurisdiction to make this determination. Further, even if the District Court had concurrent jurisdiction, this Court would stay Surety from pursuing the relief as such determination would undoubtedly affect the administration of Debtor's estate. The Court finds there is no basis to reconsider the Stay Order and Count XVI must be dismissed without prejudice to seeking an adjudication in this Court as to Surety's rights under the GAI.
11 U.S.C. § 105(a); Aimco CLO 10 Ltd. v. Revlon, Inc. (In re Revlon, Inc.), Ch. 11 Case No. 22-10760 (DSJ), Adv. No. 22-01167 (DSJ), 2023 WL 2229352, at *16 (Bankr. S.D.N.Y. Feb. 24, 2023) ("What Plaintiffs are not entitled to do is to usurp the trustee's exclusive role, augmented by the UCC where appropriate, to seek to recover and protect the estate's property, to avoid impermissible pre-bankruptcy transactions, and to administer the estate including by appropriately settling disputes that affect the estate's rights. These are core estate functions.").
Impact of Settlement Agreement
Finally, Surety argues the Court rewrote the Settlement Agreement and wants this Court to explain "its reasoning for granting what amounts to a bar order without any consideration or analysis of the traditional factors that [courts] usually consider in granting such extraordinary relief." However, the Court did not rewrite the agreement or issue a bar order. The Settlement Agreement allows Surety to pursue direct claims against any non-debtor that is an indemnitor or party to a contract with Surety. The Settlement Agreement does not assign or authorize Surety to pursue estate causes of action. Moreover, the Settlement Agreement did not make any determination on whether funds held in Debtor's bank accounts were "trust funds" belonging to Surety. As discussed herein, Surety was pursuing estate causes of action in violation of the automatic stay or otherwise impeding Trustee's administration of the estate. The enforcement of the automatic stay as to causes of action that are property of the estate and the imposition of a temporary injunction on claims that belong to a creditor but have a conceivable effect on the bankruptcy estate are not tantamount to a bar order. A "bar order" is a permanent injunction or release of claims.
See SE Prop. Holdings, LLC v. Seaside Eng'g & Surveying, Inc. (In re Seaside Eng'g & Surveying, Inc.), 780 F.3d 1070, 1077 (11th Cir. 2015) (recognizing that bar orders are "releases/injunctions"), abrogated by Harrington v. Purdue Pharma L. P., 144 S.Ct. 2071, 219 L.Ed.2d 721 (2024).
Based on the foregoing, it is
ORDERED
1. The Motion to Alter (Doc. No. 646) is GRANTED IN PART as set forth herein.
2. The Motion to Extend Time (Doc. No. 647) is GRANTED. Surety shall file an amended complaint consistent with the Stay Order, as modified by this Order, within 14 days of the entry of this Order.
3. Surety shall dismiss, with prejudice, Counts IV through VII, IX through XII and XIV of the District Court Complaint. While directed to dismiss the referenced counts with prejudice, Surety retains the ability to assert that proceeds recovered by Trustee are trust funds in which Surety has a superior interest. Surety must bring any and all such claims in this Court.
4. Paragraph 9 of the Stay Order is reconsidered, such that Surety is stayed from proceeding on Count XV.
5. Surety shall dismiss Count XVI without prejudice to seeking an adjudication in this Court as to Surety's rights under the GAI.
6. Surety shall comply with the Stay Order, as modified herein, within 14 days of the entry of this Order.
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Attorney David S. Jennis is directed to serve a copy of this Order on interested parties who are not CM/ECF users and file a proof of service within 3 days of entry of the Order.