Bloom v. Reynolds et al

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
THOMAS CLAY WILSON,
Debtor. 	No. 7-07-11361 SA
LINDA BLOOM, Trustee,
Plaintiff,
v. 	Adversary No. 08-1051 S
MICHAEL REYNOLDS, individually,
as TRUSTEE FOR A.K. MEYER GRANDCHILDREN TRUST,
as TRUSTEE FOR MICHAEL REYNOLDS TESTAMENTARY TRUST,
as TRUSTEE FOR M.M. REYNOLDS 67 M.O.M. TRUST,
and RASH, CHAPMAN, SCHREIBER & PORTER, L.L.P.,
Defendants.
MEMORANDUM OPINION ON DEFENDANTS’ MOTIONS TO DISMISS
PURSUANT TO FEDERAL RULES 12(b)(1) and 12(b)(7)
This matter is before the Court on the above-listed
Defendants’ 1) Motion to Dismiss pursuant to Fed.R.Civ.P.
12(b)(1) (doc 15), Plaintiff’s Response (doc 17), Defendants’
Reply (doc 24), Plaintiff’s Surreply (doc 29) with attached
Affidavit of Plaintiff in Opposition to Motion to Dismiss (doc
29-1), and Defendants’ Response to Plaintiff’s Surreply (doc 32),
and 2) Motion to Dismiss pursuant to Fed.R.Civ.P. 12(b)(7) (doc
14), Plaintiff’s Response (doc 18), Defendants’ Reply (doc 22),
Plaintiff’s Surreply (doc 30) and Defendants’ Response to
Plaintiff’s Surreply with attached Affidavit of Thomas D. Walker
(doc 33). 	Defendants also filed a Motion to Dismiss pursuant to
Fed.R.Civ.P. 12(b)(6), which the parties resolved. 	See Order,
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1If the Trustee abandoned the claims, this would be a
jurisdictional bar to this suit. 	See Gardner v. United States
(In re Gardner), 913 F.2d 1515, 1518 (10th Cir. 1990); Brateman
v. Bratemen Bros., Inc. (In re Brateman Bros, Inc.), 135 B.R.
853, 856 (Bankr. N.D. Ind. 1991)(citing In re Xonics, 813 F.2d
127 (7th Cir. 1987)).
2See Ohio Nat’l Life Ins. Co. v. United States, 922 F.2d
320, 325 (6th Cir. 1990) for the definitions of and a discussion
of “factual attacks” versus “facial attacks” on subject matter
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doc 28 (Parties agreeing that the 12(b)(6) motion was to be
denied upon Plaintiff’s filing a Second Amended Complaint, and
stipulating that the remaining two motions to dismiss be
addressed to that Complaint.) 	This is a core proceeding to
determine and recover preferential or fraudulent transfers. 	11
U.S.C. §§ 547, 548 and 550; 28 U.S.C. § 157(b)(2)(F) and (H).
RULE 12(b)(1) MOTION
Federal Rule 12(b)(1) provides, in part:
Every defense to a claim for relief in any pleading
must be asserted in the responsive pleading if one is
required. But a party may assert the following defenses
by motion:
(1) lack of subject-matter jurisdiction;
...
A motion asserting any of these defenses must be made
before pleading if a responsive pleading is allowed.
If a pleading sets out a claim for relief that does not
require a responsive pleading, an opposing party may
assert at trial any defense to that claim. 	No defense
or objection is waived by joining it with one or more
other defenses or objections in a responsive pleading
or in a motion.
Defendants move the Court to dismiss this adversary
proceeding for lack of subject matter jurisdiction, claiming that
the Trustee abandoned the claims 1 . 	This is a “factual attack 2 ”
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jurisdiction.
3There is a limited exception to this rule. 	If the
resolution of the jurisdictional question is “intertwined” with
the merits of the case, the Court would be required to convert
the dismissal motion into a summary judgment motion. 	Holt, 46
F.3d at 1003. 	In this case, the Court finds that the resolution
of the jurisdictional question, i.e., whether the Trustee
abandoned the causes of action, is not intertwined with the
question of whether Defendants received a preferential or
fraudulent transfer. 	Therefore, the Court will not convert the
motion to one for summary judgment.
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on subject matter jurisdiction because it goes beyond allegations
of the complaint and challenges the facts upon which subject
matter jurisdiction depends. 	Therefore, the Court does not
presume the truthfulness of the complaint’s factual allegations;
rather, the Court must resolve the disputed jurisdictional facts
through use of affidavits, other documents, or even limited
evidentiary hearings. 	Holt v. United States, 46 F.3d 1000, 1003
(10th Cir. 1995). 	“In such instances, a court’s reference to
evidence outside the pleadings does not convert the motion to a
Rule 56 motion. 3” 	Id.
The Court finds that resolution of this factual dispute is
straightforward. 	Abandonment is governed by 11 U.S.C. § 554
which provides:
(a) After notice and a hearing, the trustee may abandon
any property of the estate that is burdensome to the
estate or that is of inconsequential value and benefit
to the estate.
(b) On request of a party in interest and after notice
and a hearing, the court may order the trustee to
abandon any property of the estate that is burdensome
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to the estate or that is of inconsequential value and
benefit to the estate.
(c) Unless the court orders otherwise, any property
scheduled under section 521(1) of this title not
otherwise administered at the time of the closing of a
case is abandoned to the debtor and administered for
purposes of section 350 of this title.
(d) Unless the court orders otherwise, property of the
estate that is not abandoned under this section and
that is not administered in the case remains property
of the estate.
Section 554 is implemented by Bankruptcy Rule 6007, which
states:
Unless otherwise directed by the court, the trustee or
debtor in possession shall give notice of a proposed
abandonment or disposition of property to the United
States trustee, all creditors, indenture trustees, and
committees elected pursuant to § 705 or appointed
pursuant to § 1102 of the Code. 	A party in interest
may file and serve an objection within 15 days of the
mailing of the notice, or within the time fixed by the
court. 	If a timely objection is made, the court shall
set a hearing on notice to the United States trustee
and to other entities as the court may direct.
In short, the Trustee can abandon burdensome or
inconsequential assets “after notice and a hearing” or a party in
interest can request such abandonment “after notice and a
hearing,” see 11 U.S.C. § 554(a), (b) and Bankruptcy Rule 6007;
or, assets can be abandoned through a failure to administer
scheduled assets upon case closing. 	11 U.S.C. § 554(c). 	In this
case, Defendants argue that the Trustee abandoned the causes of
action against them under 554(a). 	Abandonment under this section
must be intentional and unequivocal and the general rule of
irrevocability applies strictly. 	Woods v. Kenan, 173 F.3d 770,
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778 (10th Cir.), cert. denied, 528 U.S. 878 (1999). 	See also
Pace v. Battley (In re Pace), 146 B.R. 562, 566 (9th Cir. B.A.P.
1992)(“Abandonment requires affirmative action by the trustee or
some other evidence of the intent to abandon the asset.”)
The Trustee did file a Notice of Proposed Abandonment of
Property in the bankruptcy case. 	See Doc 100. 	It states, in
part, “... the Trustee ... intends to abandon the claims made by
the Debtor in the case pending as Thomas Clay Wilson vs. Cypress
Estates and Patricia Owens, Adversary No. 07-1088.” 	Defendants
allege that because the funds they were paid by the Debtor were
the proceeds of a real estate contract involved in the named
adversary proceeding, abandonment of Debtor’s claims constituted
an abandonment of the Trustee’s causes of action against them.
The Court disagrees. 	First, the Trustee is seeking to recover
moneys paid over during the days prior to the bankruptcy filing.
If these moneys were already received by the Debtor (or somehow
controlled by the Debtor and he caused the payments to be made),
the Court does not see how they are still involved in the
adversary proceeding except perhaps as an unsecured claim against
the Debtor. 	Even if the Debtor obtained the funds through fraud
or borrowing, their payment to Defendants could still be a
preference or fraudulent transfer. 	See Edmondson v. Aladdin
Synergetics, Inc. (In re Tinnell Traffic Services, Inc.), 43 B.R.
277, 279 (Bankr. D. Tenn. 1984)(Fraudulently obtained funds);
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Boyer v. Baker & Schultz (In re Smith), 966 F.2d 1527, 1533 (7th
Cir. 1992)(Borrowed funds).
Plaintiff also cites Battley v. Pace (In re Pace), 132 B.R.
644, 646 (Bankr. D. Ak. 1991), aff’d, 146 B.R. 562 (9th Cir.
B.A.P. 1992) for the proposition that the abandonment statute
does not permit abandonment of “inextricably intertwined” assets.
This Court agrees. 	Specific notice of any proposed abandonment
is required, even of those “inextricably intertwined.” 	Id. at
647. 	The Trustee’s Notice of Proposed Abandonment in this case
specifies that Debtor’s claims against Cypress and Patricia Owens
will be abandoned; it does not specify that preference claims or
fraudulent transfer claims against the unrelated Defendants in
this adversary proceeding were to be abandoned also.
The Court will enter an Order denying the Motion to Dismiss
under Federal Rule 12(b)(1).
RULE 12(b)(7) MOTION
Federal Rule 12(b)(7) provides, in part:
Every defense to a claim for relief in any pleading
must be asserted in the responsive pleading if one is
required. But a party may assert the following defenses
by motion:
...
(7) failure to join a party under Rule 19.
A motion asserting any of these defenses must be made
before pleading if a responsive pleading is allowed.
If a pleading sets out a claim for relief that does not
require a responsive pleading, an opposing party may
assert at trial any defense to that claim. 	No defense
or objection is waived by joining it with one or more
other defenses or objections in a responsive pleading
or in a motion.
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Rule 19, in turn, states in part:
(a) Persons Required to Be Joined if Feasible.
(1) Required Party. 	A person who is subject to
service of process and whose joinder will not
deprive the court of subject-matter jurisdiction
must be joined as a party if:
(A) in that person's absence, the court
cannot accord complete relief among existing
parties; or
(B) that person claims an interest relating to the
subject of the action and is so situated that
disposing of the action in the person's absence
may:
(i) as a practical matter impair or impede
the person's ability to protect the interest;
or
(ii) leave an existing party subject to a
substantial risk of incurring double,
multiple, or otherwise inconsistent
obligations because of the interest.
(2) Joinder by Court Order. 	If a person has not been
joined as required, the court must order that the
person be made a party. 	A person who refuses to join
as a plaintiff may be made either a defendant or, in a
proper case, an involuntary plaintiff.
(3) Venue. If a joined party objects to venue and
the joinder would make venue improper, the court
must dismiss that party.
(b) When Joinder Is Not Feasible. 	If a person who is
required to be joined if feasible cannot be joined, the
court must determine whether, in equity and good
conscience, the action should proceed among the
existing parties or should be dismissed. 	The factors
for the court to consider include:
(1) the extent to which a judgment rendered in the
person's absence might prejudice that person or
the existing parties;
(2) the extent to which any prejudice could be
lessened or avoided by:
(A) protective provisions in the judgment;
(B) shaping the relief; or
(C) other measures;
(3) whether a judgment rendered in the person's absence
would be adequate; and
(4) whether the plaintiff would have an adequate remedy
if the action were dismissed for nonjoinder.
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The Tenth Circuit Court of Appeals set out a two step
process to determine whether a suit must be dismissed for
nonjoinder.
Determining whether an absent party is indispensable
requires a two-part analysis. 	The court must first
determine under Rule 19(a) whether the party is
necessary to the suit and must therefore be joined if
joinder is feasible. 	If the absent party is necessary
but cannot be joined, the court must then determine
under Rule 19(b) whether the party is indispensable.
If so, the suit must be dismissed.
Rishell v. Jane Phillips Episcopal Memorial Medical Center, 94
F.3d 1407, 1411 (10 th Cir. 1996), cert. denied, 520 U.S. 1166
(1997). 	(Citations omitted.)
Defendants move the Court to dismiss this adversary
proceeding, claiming that Cypress Estates, L.P. and/or Patricia
Owens, individually and as general partner of Cypress Estates
(together “Cypress”) are required parties without which the Court
cannot accord complete relief among the existing parties or which
claim an interest relating to the subject of this action and are
so situated that disposing of the action in Cypress’ absence may
leave Defendants subject to a substantial risk of incurring
double, multiple or inconsistent obligations.
When ruling on a motion to dismiss for failure to join a
party, the Court accepts the allegations in the complaint as
true. 	Davis Companies v. Emerald Casino, Inc., 268 F.3d 477, 479
n.2 (7 th Cir. 2001). 	And, the Court can go beyond the pleadings
and look to extrinsic evidence. 	Id. at 480 n.4. 	The party
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moving for dismissal has the burden of persuasion. 	Rishell, 94
F.3d at 1411; 7 Wright, Miller and Kane, Fed. Prac. & Proc. Civ.
3d § 1609 n.5.
The first step is to answer the question of whether
“complete relief” can be accorded among the existing parties.
Fed.R.Civ.P. 19(a)(1)(A). 	“[T]he term ‘complete relief’ refers
only to ‘relief between the persons already parties, and not as
between a party and the absent person whose joinder is sought.”
Davis Companies, 268 F.3d at 484 (quoting Perrian v. O’Grady, 958
F.2d 192, 196 (7 th Cir. 1992)); Arkwright-Boston Manufacturers
Mutual Ins. Co. v. City of New York, 762 F.2d 205, 209 (2 nd Cir.
1985). 	In this case, the Trustee seeks only a return of money
preferentially or fraudulently transferred to the Defendants.
Complete relief is available without Cypress.
The second step is to consider whether Cypress’ ability to
protect its interest will be impaired. 	Fed.R.Civ.P. 19
(a)(1)(B)(i). 	Cypress is not liable to the Trustee for the
transfers. 	Cypress could not sue Defendants for these bankruptcy
causes of action. 	Compare Hartford Underwriters Ins. Co. v.
Union Planters Bank, N.A., 530 U.S. 1, 6 (2000) (“The trustee”
means “only the trustee” in Bankruptcy Code § 506(c).). 	Cypress
is not liable to Defendants if the Trustee prevails. 	Cypress has
no interest in this case. 	Cypress’ ability to bring its own
lawsuit to protect any claim it believes it has will not be
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impaired by this lawsuit. 	This lawsuit would not collaterally
estop Cypress in that lawsuit. 	The Court concludes that if this
lawsuit continues without Cypress it will not impair or impede
Cypress.
The final step in the analysis is to consider whether the
existing parties will be subjected to a substantial risk of
multiple or inconsistent obligations unless Cypress is joined.
Fed.R.Civ.P. 19 (a)(1)(B)(ii). 	Defendants argue in the Motion
(doc. 14, ¶ 8) that Cypress may claim that the funds they
received in payment of their judgment were held in trust or
constructive trust for the benefit of Cypress. 	They then claim
that this makes them subject to multiple and inconsistent claims
with respect to the alleged transfers. 	In their reply they argue
that Cypress claims a right to the same funds the Trustee seeks
to recover. 	(Doc 22, ¶ 3.)
The Court finds that Defendants have failed to meet their
burden of persuasion on this point. 	First, what Defendants are
worried about is inconsistent adjudications, not inconsistent
obligations. 	See Delgado v. Plaza Las Americas, Inc., 139 F.3d
1, 3 (1 st Cir. 1998):
“Inconsistent obligations” are not, however, the same
as inconsistent adjudications or results. 	See Micheel
v. Haralson, 586 F.Supp. 169, 171 (E.D.Pa.1983); see
also 4 James Wm. Moore et al., Moore's Federal Practice
¶ 19.03 (3d ed.1997). 	Inconsistent obligations occur
when a party is unable to comply with one court's order
without breaching another court's order concerning the
same incident. 	See 4 Moore's at ¶ 19.03. 	Inconsistent
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adjudications or results, by contrast, occur when a
defendant successfully defends a claim in one forum,
yet loses on another claim arising from the same
incident in another forum. 	See National Union Fire
Ins. Co. of Pittsburgh v. Massachusetts Mun. Wholesale
Elec. Co., 117 F.R.D. 321, 322 (D. Mass.1987) citing
Bedel v. Thompson, 103 F.R.D. 78, 81 (S.D. Ohio 1984));
see also Boone v. General Motors Acceptance Corp., 682
F.2d 552, 554 (5th Cir. 1982)(the threat of
inconsistent obligations, not multiple litigations,
informs Fed.R.Civ.P. 19(a) considerations); Field v.
Volkswagenwerk AG, 626 F.2d 293, 301 (3d Cir. 1980)
(similar). 	Unlike a risk of inconsistent obligations,
a risk that a defendant who has successfully defended
against a party may be found liable to another party in
a subsequent action arising from the same incident-
i.e., a risk of inconsistent adjudications or results-
does not necessitate joinder of all of the parties into
one action pursuant to Fed.R.Civ.P. 19(a). 	See Field,
626 F.2d at 301. 	Moreover, where two suits arising
from the same incident involve different causes of
action, defendants are not faced with the potential for
double liability because separate suits have different
consequences and different measures of damages. 	See In
re Torcise, 116 F.3d 860, 866 (11th Cir. 1997).
So, Defendants’ concern is being found liable both in
Bankruptcy Court and in some possible state court action. 	They
have not, however, identified any specific “inconsistent
obligations” such that they could not comply with both court’s
orders. 	Moreover, there needs to be a “substantial risk” of
inconsistent obligations, not a speculative risk. 	Rushton v.
Standard Indus., Inc. (In re C.W. Mining Co.), 2009 WL 1884437 at
*3 (Bankr. D. Utah 2009).
Defendants aver they received the money without knowledge of
Cypress’ claim. 	See Motion ¶ 3(a)-(b) (doc 14). 	Their
preexisting judgment indicates value was paid. 	See Restatement
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4Restatement (First) of Restitution § 173 (1937)
incorporates the Restatement (First) of Trusts §§ 298-309
concerning what constitutes value.
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(First) of Trusts § 304(2)(a) 4 (“If the trustee transfers trust
property in consideration of the extinguishment in whole or in
part of a pre-existing debt or other obligation, the transfer is
for value if (a) the trust property transferred is a negotiable
instrument or money.”) Defendants would therefore be bona fide
purchasers for value. 	See Restatement (First) of Restitution §
172 (1937) & cmt. a:
This principle is most frequently applied to the
situation where a person holds property subject to a
constructive trust and transfers it to a person who
pays value without notice of the facts which gave rise
to the constructive trust; in which case the
constructive trust is cut off. 	This situation arises,
for example, where a person obtains property by fraud
and transfers the property to a person who pays value
without notice of the fraud.
Being bona fide purchasers for value, Defendants took the funds
free of any constructive trust or equitable lien in favor of
Cypress. 	See Id. § 168(1) (“Where a person holding property in
which another has a beneficial interest transfers title to the
property in violation of his duty to the other, the transferee
holds the property subject to the interest of the other, unless
he is a bona fide purchaser.”) See also Int’l State Bank v. Bray,
87 N.M. 350, 352, 533 P.2d 583, 585 (1975)(“There is no real
dispute here that the equitable rights of a defrauded beneficiary
... may be cut off by a conveyance to a bona fide purchaser who
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takes for value without notice of the breach of trust.”); Turley
v. Mahan & Rowsey, Inc. (In re Mahan & Rowsey, Inc.), 817 F.2d
682, 684 (10 th Cir. 1987)(“Generally, when assets of a trust are
improperly transferred by the trustee, the beneficiary may trace
those assets and recover them from anyone but a bona fide
purchaser for value.”); Williams v. Aloisi (In re Aloisi), 271
B.R. 676, 686 (M.D. Fla. 2002)(“If a person acquires title to
property by giving value without notice of another’s constructive
trust or equitable lien, then the person is a bona fide purchaser
who acquires title without being subject to the constructive
trust or equitable lien.”) Therefore, the Court finds that any
risk is only speculative. 	7 Wright, Miller and Kane, Fed. Prac.
& Proc. Civ. 3d § 1604 text accompanying note 44 (“The key is
whether the possibility of being subject to multiple obligations
is real; an unsubstantiated or speculative risk will not satisfy
the Rule 19(a) criteria.”)
The Court will enter an Order denying the Motion to Dismiss
under Federal Rule 12(b)(7).
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	August 21, 2009
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Copies to:
George M Moore
Moore, Berkson & Gandarilla, P.C.
Attorney for Plaintiff
PO Box 7459
Albuquerque, NM 87194
Thomas D Walker
Attorney for Defendants
500 Marquette Ave NW Ste 650
Albuquerque, NM 87102-5309
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