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Osadon v. C& N Renovation, Inc.

Court of Appeals of Texas, Fifth District, Dallas

May 9, 2018


          On Appeal from the 44th Judicial District Court Dallas County, Texas, Trial Court Cause No. DC-15-14200

          Before Justices Lang-Miers, Myers, and Boatright.



         This appeal arises from a debtor's transfer of funds to avoid garnishment by its judgment creditor. We must decide two principal questions: (i) whether the federal bankruptcy court retains subject-matter jurisdiction over the creditor's claims to the exclusion of the district court's exercise of jurisdiction over such claims in the proceeding below, and (ii) whether the district court erred in rendering summary judgment in the creditor's favor. We answer both of these questions in the negative, and we therefore affirm.

         I. Background

         C&N Renovation, Inc., the appellee, obtained an arbitration award against All Nation Renovation, Inc. (ANR), an appellant, in the amount of $94, 110.04. C&N filed suit against ANR in September 2012 to confirm the award. On March 12, 2013, the district court rendered judgment awarding C&N $115, 090.54, which consisted of the arbitration award plus $20, 980.50 in attorney's fees and other expenses incurred in the arbitration.

         Six days before the court rendered judgment, on March 6, ANR deposited a check in the amount of $232, 721.59 into its bank account. Appellants contend that ANR was paid this sum for its completion of a construction project in Arizona. On March 8, ANR transferred $232, 500 to KLT Renovation, Inc., an appellant. Six days later, on March 14, KLT transferred $120, 000 to Mimon Osadon, also an appellant. Both ANR and KLT are owned solely by Osadon. On the advice of his banker, Osadon conducted the foregoing transfers to prevent C&N from garnishing the funds so that he could instead pay debts that ANR owed to subcontractors who had worked on its construction project.

         Approximately two years later, in February 2015, ANR filed a Chapter 7 bankruptcy. See generally 11 U.S.C. §§ 701-84. ANR's bankruptcy filing disclosed (i) personal property assets of $100 (on Schedule B), (ii) C&N as a creditor holding unsecured non-priority claims (on Schedule F), and (iii) a March 13, 2013 transfer of an undisclosed amount to Osadon "to repay debts of company" (on the statement of financial affairs). The bankruptcy court closed the ANR bankruptcy in July 2015 without any discharge of ANR's debts or any action taken by the bankruptcy trustee to recover the March 2013 transfers. Appellants represent that the trustee requested and reviewed two years' worth of ANR's bank statements but elected to close the case without taking further action. C&N was the only creditor listed in ANR's bankruptcy filing.

         C&N filed the underlying suit in November 2015, alleging claims against appellants for fraudulent transfer, civil conspiracy, and attorney's fees. It sought damages of at least $100, 000. Appellants moved to dismiss C&N's claims for lack of subject matter jurisdiction, [1] urging that the bankruptcy court retained exclusive jurisdiction over the transfers that C&N sought to recover. Following a hearing, the district court denied appellants' motion.

         C&N filed a traditional motion for summary judgment. The district court granted C&N's motion and awarded it $115, 090.54 against each of appellants, jointly and severally. This sum represented the amount awarded in the judgment rendered on March 12, 2013. The court declined to render summary judgment on C&N's attorney's fees claim, instead setting this claim for trial. Following a one-day bench trial, the court on January 31, 2017, rendered judgment incorporating its prior summary-judgment ruling and also awarding C&N $59, 769.80 for attorney's fees as well as additional fees if the case was appealed. The court thereafter made findings of fact and conclusions of law with respect to its attorney's fees award. This appeal followed.

         II. Analysis

         Appellants raise eight issues that we categorize into three topics: jurisdiction, summary judgment, and damages. We will consider each topic in turn.

         A. Jurisdiction

         ANR's bankruptcy estate consisted of its "legal or equitable interests" in property as of the commencement of its bankruptcy case. 11 U.S.C. § 541(a)(1). In their first issue, appellants contend that the estate included ANR's interest in the funds that it had transferred to KLT, and that KLT had transferred to Osadon, relying on In re MortgageAmerica Corp., 714 F.2d 1266 (5th Cir. 1983). The Fifth Circuit in that case addressed the issue of whether the automatic stay applied to the fraudulent transfer claims of a creditor while the bankruptcy was pending. The court concluded that a debtor in bankruptcy should be considered under section 541(a)(1) of the Bankruptcy Code as continuing to have a "legal or equitable interest[ ]" in property fraudulently transferred by the debtor and the automatic stay applied. Id. at 1275. While the transferee may have colorable title to the property, the equitable interest remains in the debtor so that creditors may attach or execute judgment upon it as though the debtor had never transferred it. Id. A suit to pursue the debtor's property is usually brought by the bankruptcy trustee for the benefit of all creditors equally. Id. at 1272. Based on MortgageAmerica, appellants urge that the claims remain "property of the estate" although the bankruptcy was closed and the trustee was discharged. In appellants' view, this interest remains subject to the bankruptcy court's exclusive jurisdiction, and the district court in the proceeding below thus erred in denying appellants' motion to dismiss.

         We disagree with appellants. To understand appellants' argument, we must consider the statutory provisions applicable to the abandonment of property of a bankruptcy estate and the closure of a bankruptcy case. After a hearing, the bankruptcy trustee may abandon any property that is of inconsequential value and benefit to the estate, and the court may order such an abandonment on the request of a party in interest. 11 U.S.C. § 554(a)-(b). The Bankruptcy Code requires the closure of a case once the estate has been "fully administered" and the bankruptcy court has discharged the trustee. Id. § 350(a). Upon such closure, "any property scheduled under section 521(a)(1)" of the code and "not otherwise administered" is "abandoned to the debtor and administered for purposes of section 350." Id. § 554(c). However, property that has neither been abandoned nor administered remains in the estate. Id. § 554(d). Appellants contend that ANR's interest in the foregoing transfers was neither "scheduled" nor "administered, " and thus it remains in the estate following the closure of the bankruptcy case. They also fault C&N for not itself seeking abandonment of ANR's interest in the bankruptcy court or seeking to compel the trustee to prosecute the claim.

         C&N responds that MortgageAmerica is distinguishable and does not apply to this case. It notes that in MortgageAmerica the creditor was attempting to pursue its fraudulent transfer claims while the bankruptcy was still pending and that the issue was whether the claims were part of the estate and subject to the automatic stay. Under C&N's view, the trustee alone had standing to avoid ANR's transfer, and this standing reverted to C&N upon the closure of the bankruptcy case and the expiration of the two-year statute of limitations applicable to the trustee. E.g., In re Integrated Agri, Inc., 313 B.R. 419, 427-28 (Bankr. C.D. Ill. 2004). C&N alternatively urges that the transfers were "scheduled" and that the estate's claim to the funds was therefore abandoned when the bankruptcy was ...

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