Mazel v. Hopkins et al

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
BARRY A. HOPKINS and
SANDY G. HOPKINS, 	No. 	7-13-11871 TA
Debtors.
EDWARD A. MAZEL,
Chapter 7 Trustee,
Plaintiff,
v. 	Adv. No. 13-1101 T
BARRY A. HOPKINS,
SANDY G. HOPKINS, et al.,
Defendants.
MEMORANDUM OPINION
Before the Court are two motions filed by Plaintiff to strike certain of Defendants’
affirmative defenses.1 As set forth below, the Motions will be granted.
I. 	Background2
Plaintiff’s claims relate to two Qualified Terminable Interest Property (“QTIP”) trusts
created by the Hopkins in December 2010, about four months after they received a letter
demanding payment of a real estate loan Mr. Hopkins guaranteed. 	The Hopkins conveyed or
assigned into the trusts all of their real estate, their stock in the family concrete business, their
interest in a real estate company, and all of their tangible personal property. 	Mr. Hopkins is the
1 Motion to Strike Defendants Hopkins’ Affirmative Defenses, doc. 26 (the “Hopkins Motion”),
and Motion to Strike Defendants Grady’s Affirmative Defenses, doc. 27 (the “Grady Motion”)
(together, the “Motions to Strike”).
2 This is not intended to constitute findings of fact, but an outline of allegations and admissions in
the pleadings. 	All findings are reserved for trial or summary judgment.
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beneficiary of his wife’s QTIP trust, and vice versa. 	Their counsel, David Grady, is the trustee
of both trusts.
In March 2011, the trusts pledged all of their assets to secure loans, the proceeds of which
were apparently used to buy annuities payable to the Hopkins.
In 2011, Charter Bank, FSB brought an action against the Hopkins and others in the First
Judicial District Court, State of New Mexico, captioned Charter Bank v. Ladybug Partners, LLC,
Ray Chavez, Johnny Ray Chavez, and Barry Hopkins, No. D-0101-CV-201100065 (the “State
Court Action”). 	Hopkins and others filed an Answer and Counterclaim in the State Court
Action on April 3, 2011, in which they asserted, inter alia, the affirmative defense of unclean
hands, various affirmative defenses based on alleged improper conduct of the plaintiff and
others, and a counterclaim based on such alleged improper conduct.
On March 31, 2013, Judge Barbara J. Vigil entered an order granting LPP Mortgage Ltd.
(“LPP”)3 summary judgment on the Counterclaim. 	On March 22, 2012, Judge Vigil entered a
final judgment in LPP’s favor against the Hopkins and others in the State Court Action, in the
total amount of $276,897.96.
On May 31, 2013, the Hopkins filed this bankruptcy case and Plaintiff was appointed the
Chapter 7 Trustee. 	Plaintiff brought this adversary proceeding November 21, 2013. 	Because
more than two years had elapsed between the transfers to the trusts and the petition date, the
Plaintiff asserted primarily state law avoidance actions, which have a four-year statute of
limitations. 	The claims were asserted pursuant to 11 U.S.C. § 544(b)(1).4
3 Successor in interest to Charter Bank, FSB.
4 “[T]he trustee may avoid any transfer of an interest of the debtor in property or any obligation
incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured
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LPP filed an unsecured claim for $220,239.57; Grady Law & Mediation LLC filed an
unsecured claim for $59,472.75; and CNH Capital America LLC filed an unsecured claim for
$2,880.42.
Plaintiff contends that the property transfers to the QTIP trusts and the pledge of
collateral to secure the loans to the trusts are avoidable fraudulent or preferential transfers,
designed and carried out to shelter assets after the Hopkins received the demand letter on the
guaranty. 	The Hopkins assert that the transfers were done in connection with legitimate estate
and retirement planning, and are not avoidable.
II. 	Plaintiff’s Claims
The Plaintiff’s amended complaint asserts 46 claims, summarized in the following table:
Count 	Property at Issue 	Claim 	Defendants
1 	5 vehicles 	§ 5425 turnover 	Debtors
2 	Cascade6 Avoid fraudulent transfers;
intent to hinder, delay or
defraud7
Barry Hopkins Trust;
Sandy Hopkins Trust;
Grady; Real Asset;
Durango Asset; Hosten
3 	Loma Hermosa 8 “ 	“
4 	Palisades 	“ 	“
5 	Rio Puerco9 “ 	“
6 	Timeshare 10 “ 	“
7 	Concrete Company11 “ 	“
8 	Ladybug Partners12 “ 	“
claim that is allowable under section 502 of this title or that is not allowable only under section
502(e) of this title.”
5 Unless otherwise noted, all citations are to 11 U.S.C.
6 The Hopkins’ residence.
7 § 56-10-18(A)(1) N.M.S.A. 1978.
8 A shop and adjoining land, presumably for Debtors’ concrete business.
9 Vacant land in Rio Puerco estates.
10 Timeshare at Eagle Wing Suites at Angel Fire.
11 Barry Hopkins Concrete.
12 Hopkins’ membership interest in Ladybug Partners, LLC, a company that owned one or more
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9 	Personal Property13 “ 	“
10 	Cascade 	Avoid fraudulent transfers;
insolvent; debts beyond ability
to pay14
“
11 	Loma Hermosa 	“ 	“
12 	Palisades 	“ 	“
13 	Rio Puerco 	“ 	“
14 	Timeshare 	“ 	“
15 	Concrete Company 	“ 	“
16 	Ladybug Partners 	“ 	“
17 	Personal Property 	“ 	“
18 	Cascade 	Avoid fraudulent transfers;
insolvent; no reasonably
equivalent value15
“
19 	Loma Hermosa 	“ 	“
20 	Palisades 	“ 	“
21 	Rio Puerco 	“ 	“
22 	Timeshare 	“ 	“
23 	Concrete Company 	“ 	“
24 	Ladybug Partners 	“ 	“
25 	Personal Property 	“ 	“
26 	Cascade 	Avoid preferential transfers to
insider16
“
27 	Loma Hermosa 	“ 	“
28 	Palisades 	“ 	“
29 	Rio Puerco 	“ 	“
30 	Timeshare 	“ 	“
31 	Concrete Company 	“ 	“
32 	Ladybug Partners 	“ 	“
33 	Personal Property 	“ 	“
34 	Cascade 	Avoid fraudulent transfers; 	“
lots in the Oshara Village development in Santa Fe, New Mexico.
13 All of Hopkins’ tangible personal property, including without limitation, all of their clothing;
household goods; furniture; furnishings and rugs; bric-a-brac; tools; equipment; appliances;
electronics; jewelry; art work; collections (specifically including all numismatic and philatelic
collections); gold and silver coins and other precious metals; books; photographs; antiques; family
heirlooms; silverware; china; linens; hobby paraphernalia; any animals and/or pets; motor
vehicles; together with any insurance or insurance proceeds payable with respect to any of such
property.
14 § 56-10-18(A)(2) N.M.S.A. 1978.
15 § 56-10-19(A) N.M.S.A. 1978.
16 § 56-10-19(B) N.M.S.A. 1978
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transfer within 10 years to
self-settled trust with intent to
hinder, delay, or defraud
creditors17
35 	Loma Hermosa 	“ 	“
36 	Palisades 	“ 	“
37 	Rio Puerco 	“ 	“
38 	Timeshare 	“ 	“
39 	Concrete Company 	“ 	“
40 	Ladybug Partners 	“ 	“
41 	Personal Property 	“ 	“
42 	Money damages 	Civil conspiracy 	All defendants
43 	Money damages 	Breach of Fiduciary Duty 	Grady and law firm
44 	Unspecified 	Undiscovered Fraudulent
transfers
All defendants
45 	Money damages 	Legal malpractice 	Grady and law firm
46 	Money damages 	Unfair Trade Practices18 Grady and law firm
III. 	Defendants’ Answer and Affirmative Defenses
The Hopkins answered the complaint, admitting or denying each of the complaint’s 283
numbered paragraphs. 	They also asserted ten affirmative defenses, including unclean hands
and 	that 	Plaintiff’s 	claims 	are 	barred 	because 	of 	the 	bad 	acts 	of 	Plaintiff’s
predecessors-in-interest (the “Prior Bad Acts” defense).
David 	Grady, 	Grady 	Law 	& 	Mediation 	LLC, 	the 	two 	QTIP 	trusts, 	Real 	Asset
Management LLC; Durango Asset Management LLC; and Hosten ar Livranta Och Sparbolag,
A.B. LC (together, the “Grady Defendants”) answered the complaint, admitting or denying each
numbered allegation. 	Like the Hopkins, the Grady Defendants also asserted the affirmative
defenses of, inter alia, unclean hands and Prior Bad Acts.
17 § 548(e).
18 § 57-12-1 N.M.S.A. 1978.
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IV. 	The Motions to Strike
With the Motions to Strike, Plaintiff asks the Court to strike defendants’ unclean hands
and Prior Bad Acts defenses. 	The grounds for the Motions are that the final judgment entered
in the State Court Action adjudicated both defenses and foreclosed relitigation of the defenses.
V. 	Standard for Motions to Strike
Rule 12(f) Fed. R. Civ. P., applicable to this proceeding under Rule 7012(b) Fed. R.
Bankr. P., provides: “The court may strike from a pleading an insufficient defense or any
redundant, immaterial, impertinent, or scandalous matter.”
To grant a Rule 12(f) motion, “The Court must be convinced that there are no questions
of fact, that any questions of law are clear and not in dispute, and that under no set of
circumstances could the defenses succeed.” 	Lane v. Page, 272 F.R.D. 581, 587 (D.N.M. 2011).
See also Anchor Hocking Corp. v. Jacksonville Elec. Auth., 419 F. Supp. 992, 1000 (M.D. Fla.
1976) (citations omitted) (“The standard that must be met is undisputed: only if a defense is
insufficient as a matter of law will it be stricken. A defense is insufficient as a matter of law if,
on the face of the pleadings, it is patently frivolous, or if it is clearly invalid as a matter of law.”).
If this high burden is met, it is appropriate to strike affirmative defenses to prevent litigation of
frivolous matters.
One commentator has explained that federal courts generally disfavor Rule 12(f)
motions:
Both because striking a portion of a pleading is a drastic remedy and because it
often is sought by the movant simply as a dilatory or harassing tactic, numerous
judicial decisions make it clear that motions under Rule 12(f) are viewed with
disfavor by the federal courts and are infrequently granted. 	Thus, in order to
succeed on a Rule 12(f) motion to strike surplus matter from an answer, the
federal courts have established a standard under which it must be shown that the
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allegations being challenged are so unrelated to the plaintiff’s claims as to be
unworthy of any consideration as a defense and that their presence in the pleading
throughout the proceeding will be prejudicial to the moving party.
Wright & Miller, Federal Practice and Procedure: Civil 3d §1380, n. 11 and accompanying text
(footnotes omitted). 	This standard is accepted in New Mexico. 	See Lane, 272 F.R.D. at 587
(citing Wright & Miller and compiling cases).
The Plaintiff’s use of Rule 12(f) in this context, i.e. seeking to strike affirmative defenses,
is proper procedurally. 	See Kaiser Aluminum & Chem. Sales, Inc. v. Avondale Shipyards, Inc.,
677 F.2d 1045, 1057-58 (5th Cir. 1982) (holding that a Rule 12(f) motion to dismiss a defense is
proper when the defense is insufficient as a matter of law). 	See generally Wright & Miller,
Federal Practice and Procedure Civil 3d, § 1380, n. 1 and accompanying text (a motion to strike
is the primary procedure for objecting to an insufficient defense).
As with a Rule 12(b)(6) motion, when a Rule 12(f) motion is being considered the Court
does not weigh evidence. 	Instead, it must assume that the facts set forth in the pleading sought
to be stricken are true and correct. See Fairbanks Capital Corp. v. Jenkins, 225 F. Supp. 2d 910,
914 (N.D. Ill. 2002) (stating that in considering a motion to strike the Court must take
defendants' allegations as true).
VI. 	Consideration of Matters Outside the Pleadings
In addition to the legal argument presented in the Motions, the Plaintiff attached three
documents (the “State Court Documents”) from the State Court Action. 	These documents are
an answer and counterclaim filed by the Hopkins and others, an order granting the plaintiff’s
motion for summary judgment on the defendants’ counterclaim, and a transcript of a final
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judgment entered in the plaintiff’s favor in the State Court Action. 	Defendants did not object to
Plaintiff’s use of the State Court Documents to support the Motions to Strike.
Normally matters outside the pleadings are not considered on a Rule 12(f) motion.
Krauss v. Keibler-Thompson Corp., 72 F.R.D. 615, 617 (D. Del. 1976); Wright & Miller Federal
Practice and Procedure: Civil 3d § 1380 (“Matter outside the pleadings normally not considered
on a Rule 12(f) motion”). 	Courts have made exceptions to this general rule, however,
especially where, as here, the outside matters have not been objected to and are undisputed. 	See
Wilkinson v. Feild, 108 F. Supp. 541, 545 (W.D. Ark. 1952) (court considered a deposition
because both parties referred to it in their Rule 12(f) briefs); Post v. Textron, Inc., 531 F. Supp.
45, 47 (W.D. Mich. 1981) (court considered matters outside of the pleadings since both parties
submitted them); Diamond Scientific Co. v. Ambico, Inc., 848 F.2d 1220, 1226-27 (Fed. Cir.
1988) (affirmed district court’s consideration of matters outside the pleadings because, inter alia,
they presented uncontested factual matters). 	See also 2A J. Moore, Moore’s Federal Practice,
¶12.21[3], at 2438 (1975) (practice of reviewing only pleadings is ‘regrettable’).
In this case, no dispute was raised as to the authenticity of the State Court Documents,
nor did any Defendant object to the Court considering them. 	Defendants even referred to the
State Court Action and the summary judgment entered therein in their answers. 19 In the
particular circumstances of this case, the Court finds that it is fair and reasonable to consider the
State Court Documents.
19 Hopkins answer, ¶ 296; Grady answer, ¶ 9 of the affirmative defenses.
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VII. 	The Debtors’ Defenses
In response to the Hopkins Motion the Debtors denied that preclusive principles bar their
defenses and also argued that the defenses “set forth and establish the basis of Defendants
Hopkins actions, which are relevant to the present case.” 	Response to the Hopkins Motion,
filed April 7, 2014, doc. 28, p. 3.
The Debtors’ response is insufficient for several reasons. 	First, since admittedly the
only purpose of the defenses is to “establish the basis of the Defendants’ actions,” inserting the
text in affirmative defenses in improper. 	Instead, the Debtors should have inserted the language
into one of the 287 paragraphs of the answer.
Second, the defenses, viewed as such rather than as an explanatory narrative, are not
relevant. 	Plaintiff brought most of his claims under state law, pursuant to § 544(b)(1). 	To
proceed under this section, Plaintiff must show, inter alia, that there was at least one unsecured,
pre-petition creditor with a valid claim against the Debtors. 	See, e.g., In re 9281 Shore Road
Owners Corp., 187 B.R. 837, 852 (E.D.N.Y. 1995); Bakst v. Probst (In re Amelung), 436 B.R.
806, 809 (Bankr. D.S.C. 2010); Dicello v. Jenkins (In re Int’l Loan Network, Inc.), 160 B.R. 1,
18, n. 30 (Bankr. D.D.C. 1993). 	If there is no so-called “golden creditor” against whom the
transfer is voidable under applicable law, then the trustee cannot bring an action under §
544(b)(1). 	In re Equip. Acquisition Res., Inc., 742 F.3d 743, 746 (7th Cir. 2014) (stating that the
trustee stands in the shoes of an actual unsecured creditor, and if the actual creditor could not
succeed for any reason, e.g. statute of limitation, estoppel, res judicata, then the trustee is
similarly barred); Bumgardner v. Simms (In re Simco Mech.), 151 B.R. 978, 983 (Bankr. S.D.
Fla. 1993); Weibolt Stores Inc. v. Shottenstein, 94 B.R. 488, 506 (N.D. Ill. 1988).
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The questioned defenses would be relevant if LLP’s claim were the only general
unsecured claim in this case. 	It is not; there are at least two other unsecured creditors. 	CNH
Capital America LLC filed an unsecured claim for $2,880, and Grady Law & Mediation LLC
filed an unsecured claim for $59,472. 	The Debtors have never alleged, in their answer or their
response to the Hopkins Motion, that no “golden creditor” exists. 	Because that is not an issue,
defenses attacking the validity of LPP’s claim are wholly irrelevant to the proceeding.
Furthermore, preclusion principles prevent the Debtors from raising the defenses.
Claim preclusion bars litigation of claims that were or could have been advanced in an earlier
proceeding. 	Strickland v. City of Albuquerque, 130 F.3d 1408, 1411 (10th Cir. 1997) (citing State
ex rel Martinez v Kerr-McGee Corp., 898 P.2d 1256, 1259 (N.M. Ct. App. 1995)).
“Federal courts give the same preclusive effect to state court judgments that those
judgments would be given in the state court from which they emerged.” 	Strickland, 130 F.3d at
1411 (citing Kremer v. Chem. Constr. Corp., 456 U.S. 461, 466 (1982)). 	Under New Mexico law,
claim preclusion requires four elements: “(1) the same party or parties in privity; (2) the identity of
capacity or character of persons for or against whom the claim is made; (3) the same subject
matter; and (4) the same cause of action in both suits.” 	Strickland, 130 F.3d at 1411, citing Myers
v. Olson, 676 P.2d 822, 824 (N.M. 1984).
Here, LPP has filed an unsecured claim for $220,239, see Claim 1 in claims register, based
on the final judgment entered in the State Court Action. 	Res judicata prevents the Debtors from
collaterally attacking the judgment in this adversary proceeding. 	See Harwell v. Hill (In re
Harwell), 2011 WL 1135382, at **4-5 (D. Colo. 2011) (affirming bankruptcy court’s decision to
overrule debtor’s claim objection because the issue had previously been decided pre-petition
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litigation between the debtor and creditor); In re Crosby, 261 B.R. 470, 477 (Bankr. D. Kan. 2001)
(overruling debtor’s objection to creditor’s claim because the claim was based on a pre-petition
state court judgment). 	See generally Montana v. U.S., 440 U.S. 147 (1979) (“A fundamental
precept of common-law adjudication, embodied in the related doctrines of collateral estoppel and
res judicata, is that a ‘right, question or fact distinctly put in issue and directly determined by a
court of competent jurisdiction ... cannot be disputed in a subsequent suit between the same parties
or their privies ...”). 	The Debtors, having been parties to the State Court Action, cannot
challenge the resulting judgment in this adversary proceeding.
VIII. 	The Grady Defendants’ Defenses.
Plaintiff also asks the Court to strike the unclean hands and Prior Bad Acts defenses of
the Grady Defendants. 	The Grady Defendants disagree, arguing that the defenses do not attack
the Debtor’s liability to LPP, but instead were asserted
in response to the Trustee claims that are predicated on their alleged belief, actual
intent, and notice. . . . . 	Paragraphs 7, 9-22, and 25-27 of the affirmative
defenses elaborate on the alleged factual underpinnings of the Grady Defendants’
good faith in the transaction now in dispute, including the absence of any “actual
intent” to hinder, delay or defraud creditors, the absence of “reasonable cause to
believe” the Hopkins Defendants were insolvent, and the absence of timely notice
that the Hopkins Defendants were actually subject to debt collection.
The affirmative defenses do not challenge the underlying debts per se—but do,
instead, 	challenge 	the 	Trustee’s 	allegations 	about 	the 	Grady 	Defendants’
knowledge of and expectations about the debt.
Response to the Grady Motion, filed April 8, 2014, doc. 29, pp. 4-5.
The Grady Defendants certainly are entitled to argue, and have argued in their answer
and elsewhere, that Plaintiff’s claims fail because of the state of mind of the Debtors and/or the
Grady Defendants. 	At the pleading stage simple denials are sufficient, but “elaboration” of a
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defendant’s position is permitted. 	What is improper is to couch a lengthy “elaboration” as an
affirmative defense when it is not a defense. 	The facts alleged by the Grady Defendants in their
unclean hands and Prior Bad Acts defenses may (or may not) be relevant at trial, but do not
belong in the Grady Defendants’ affirmative defenses.
Furthermore, the defenses are not relevant, for the reasons outlined above.
IX. 	Conclusion
The Motions to Strike are well taken and will be granted, with the understanding that, to
the extent relevant at a trial on the merits, the Court will hear testimony relating to the
Defendants’ belief, intent, state of mind, and/or notice.
A separate order will be entered.
____________________________________
Hon. David T. Thuma
United States Bankruptcy Judge
Entered: 	May 29, 2014.
Copies to:
Anthony Spratley
1001 5 th St. NW
Albuquerque, NM 87102
Clinton Marrs
4811 Hardware Dr. NE, Suite A-4
Albuquerque, NM 87109
Paul Kienzle, III
Jordan DeHaan
P.O. Box 587
Albuquerque, NM 87103
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