Catherine Z Cass

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1
OPINION NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES DIVISION
In re:
CATHERINE Z. CASS
(Christine Zeman as Administrator of the
Estate of Catherine Z. Cass),
Debtor.
Case No. 2:12-bk-16090 RK
Chapter 7
FINDINGS OF FACT AND
CONCLUSIONS OF LAW AFTER TRIAL
ON CONTESTED MATTERS OF: (1)
TRUSTEE’S MOTION FOR ORDER
GRANTING SURCHARGE PURSUANT
TO 11 U.S.C. §506(c); AND
(2) JUDGMENT CREDITORS’ MOTION
TO DISGORGE FEES
Pending before the court in the above-captioned bankruptcy case are the
contested matters of:
1. Trustee’s Motion for Order Granting Surcharge Pursuant to 11 U.S.C.
§506(c), filed on June 1, 2010 as Docket No. 177 as revised and supplemented by the
Trustee’s Motion for Order Granting Surcharge Pursuant to 11 U.S.C. §506(c), filed on
November 13, 2012 as Docket No. 272 and Trustee’s Supplement to Motion for Order
Granting Surcharge Pursuant to 11 U.S.C. §506(c), filed on September 18, 2013 as
Docket No. 331 (collectively, the “Motion to Surcharge”); and
2. Judgment Creditors’ Motion for an Order Compelling the Trustee’s
FILED & ENTERED
MAY 07 2015
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	bakchell
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Attorneys to Disgorge Money Paid to them as Interim Compensation, filed on January 2,
2013 as Docket No. 277 (“Motion to Disgorge”).
These contested matters were tried before the undersigned United States
Bankruptcy Judge on December 19, 2013. D. Edward Hays, of Marshack Hays LLP
(“Marshack Hays”), appeared for Charles W. Daff, Chapter 7 Trustee of the bankruptcy
estate of Catherine Z. Cass (“Trustee”). David B. Dimitruk, of the Law Offices of David B.
Dimitruk, appeared for Judgment Creditors James Wallace, Rebecca Wallace, and Gloria
Suess (“Judgment Creditors”).
Having considered the undisputed facts and evidence set forth in the Joint Pretrial
Order entered by the Court on June 20, 2013 as Docket No. 321, the evidence admitted
at trial and the oral and written arguments of the parties, the court makes the following
findings of fact and conclusions of law in these contested matters pursuant to Rules 7052
and 9014 of the Federal Rules of Bankruptcy Procedure. Any finding of fact that should
be properly characterized as a conclusion of law should be considered as such, and any
conclusion of law that should be properly characterized as a finding of fact should be
considered as such.
I. JURISDICTION
The court has jurisdiction over these contested matters pursuant to 28 U.S.C.
§§1334(b) and 157. These contested matters are core proceedings within the meaning
of 28 U.S.C. §157(b)(2)(A) and (O). The court properly has venue over these matters
pursuant to 28 U.S.C. §§1408 and 1409.
II. FINDINGS OF FACT
1. On April 22, 2004, Catherine Z. Cass (“Debtor” or “Mrs. Cass”) was sued for
nuisance and injunctive relief in the Superior Court of Orange County, California, Case
No. 04CC05117 (the “First Action”) by her neighbors, James Wallace, Rebecca Wallace,
and Gloria Suess (collectively, “Judgment Creditors”). Joint Pretrial Order (“JPTO”),
Undisputed Facts (“UF”) ¶ 1; Declaration of D. Edward Hays in Support of Trial re:
Surcharge, filed on August 26, 2013 as Docket No. 323 (“Hays Trial Decl.”), ¶ 5.
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2. On May 28, 2004, Debtor recorded a Grant Deed with Life Estate (“Grant
Deed”) which deed named her daughter, Christine Zeman (“Zeman” or “Mrs. Zeman”), as
the recipient of a remainder interest in her residence commonly known as 2418 N.
Fairmont Avenue, Santa Ana, California 92706 (the “Property”). The Grant Deed is
sometimes referred to as the “Transfer.” JPTO UF ¶ 2; Joint Compendium (“JC”) Exhibit
(“Ex”) 102; Hays Trial Decl., ¶ 6.1
3. On or about July 8, 2005, Judgment Creditors through their counsel, David
Dimitruk (“Mr. Dimitruk”) filed a second state court action against Debtor and Zeman in
the Superior Court for the State of California, County of Orange, Case No. 05CC08034
(the “Second Action”) seeking judgment, among other determinations and relief, avoiding
the Transfer as fraudulent. JPTO UF ¶ 3; Hays Trial Decl., ¶ 7; Declaration of David B.
Dimitruk in Opposition to the Motion by Trustee for an Order to Surcharge the Judgment
Lien, Docket No. 326 (“Dimitruk Decl.”), ¶ 3.
4. On October 28, 2005, Judgment Creditors obtained a money judgment
against Debtor in the First Action awarding damages in the amount of $320,000
(“Judgment”). JPTO UF ¶ 6; JC, Ex. 3; Dimitruk Decl., ¶ 6.
5. On November 1, 2005, Judgment Creditors recorded an abstract of the
Judgment (“Abstract of Judgment”) with the County Recorder’s Office for the County of
Orange, California. JPTO UF ¶ 7; Dimitruk Decl., ¶ 6; JC, Ex. 4.
6. In the Second Action, filed by Judgment Creditors against Mrs. Cass and
Zeman, Zeman filed a cross-complaint on March 2, 2006. JPTO UF ¶ 8; JC, Ex. 5;
Dimitruk Decl., ¶ 7.
7. The Second Action was scheduled to commence trial in the Superior Court
on January 8, 2007. JPTO UF ¶ 9; Dimitruk Decl., ¶ 8.
8. Judgment Creditors prepared a list of issues for the January 8, 2007 trial in
the Second Action. JPTO UF ¶ 10; JC, Ex. 6; Dimitruk Decl., ¶ 8.
1 All references to “Ex” are to the Exhibits attached to the JC which were admitted into evidence.
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9. Judgment Creditors prepared a trial brief for the January 8, 2007 trial in the
Second Action. JPTO UF ¶ 11; JC, EX. 7; Dimitruk Decl., ¶ 8.
10. On January 5, 2007, prior to trial in the Second Action, Debtor filed a
voluntary petition for relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C. JPTO UF
¶ 12; Trustee’s Request for Judicial Notice in Support of Trustee’s Motion for Order
Granting Surcharge Pursuant to 11 U.S.C. Section 506(c) filed on November 13, 2012 as
Docket No. 273 (“Trustee’s RJN”), ¶ 3, Ex. 3, Court’s docket re: Bankruptcy Case
Number 2:12-bk-16090-RK, Docket No. 1; JC Ex. 8, Petition.
11. Charles W. Daff is the duly appointed and acting Chapter 7 Trustee for the
Bankruptcy Estate of Catherine Z. Cass (“Trustee”). Id.
12. In her bankruptcy petition, Debtor claimed a homestead exemption of
$150,000 in the Property (identified as real property in Orange County, “parcel #003-091-
02 – title owned by daughter”) on Schedule C to the petition, “Property Claimed as
Exempt.” JC Ex. 8, Petition. On this schedule, Debtor also claimed that the value of the
Property was $150,000. Id. On Schedule A to the petition, “Real Property,” Debtor also
indicated that the nature of her interest in the Property was “Life Estate.” Id.
13. On March 12, 2007, Trustee retained D. Edward Hays and Cathrine
Castaldi of the law firm of Rus, Miliband & Smith, APC (“Rus, Miliband & Smith”) to
represent him as general counsel. JPTO UF ¶ 13; Trustee’s RJN, ¶ 3, Ex. 3, Court’s
docket re: Bankruptcy Case Number 2:12-bk-16090-RK, Docket No. 33, Application of
Chapter 7 Trustee to Employ General Counsel (Rus, Miliband & Smith, A Professional
Corporation); Declaration of D. Edward Hays in support of Trustee’s surcharge motion,
filed as Docket No. 272 (“Hays Decl.”), ¶ 3; Declaration of D. Edward Hays in Support of
Trial Re: Surcharge filed on August 26, 2013 as Docket No. 323 (“Hays Trial Decl.”), ¶ 3.
14. On June 22, 2007, the court entered an Order granting Trustee’s
application to employ Rus, Miliband & Smith. JPTO UF ¶ 13; Trustee’s RJN, ¶ 3, Ex. 3;
Docket No. 87, Order Granting Chapter 7 Trustee’s Application to Employ General
Counsel (Rus, Miliband & Smith, A Professional Corporation).
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15. On January 25, 2007, counsel for Judgment Creditors, Mr. Dimitruk, sent a
facsimile transmission to Trustee, Mr. Daff, enclosing a copy of a letter agreement
between Debtor and Zeman. JPTO UF ¶ 14; JC, Ex. 9; Dimitruk Decl., ¶ 1.
16. On January 30, 2007, the Office of the United States Trustee filed a motion
to dismiss Debtor’s case because she failed to complete credit counseling prior to filing
bankruptcy (the “Motion to Dismiss”). JPTO UF ¶ 15; JC, Ex. 11; Trustee’s RJN, ¶ 3, Ex.
3; Docket No. 12; Hays Trial Decl., ¶ 12.
17. The Motion to Dismiss was opposed by Debtor and Trustee. JPTO UF ¶
16; Trustee’s RJN, ¶ 3, Ex. 3; Docket No. 25, Debtor’s Objection to Trustee’s Motion to
Dismiss Case.
18. Judgment Creditors filed a response to the Motion to Dismiss. JPTO UF ¶
17; Trustee’s RJN, ¶ 1, Ex. 1 and ¶ 3, Ex. 3; Docket No. 27, Response to Motion to
Dismiss by Creditors James Wallace, Rebecca Wallace and Gloria Suess, JC Ex. 12.
19. In their response to the Motion to Dismiss, Judgment Creditors requested
alternative relief as follows: “A. The Creditors ask this court to consider denying the
motion because of the abuses by Catherine Cass of the judicial system so that her
property may be sold by the Chapter 7 Trustee; B. Alternatively, the Creditors request
that if the Court dismisses the petition, it issue a bar against Catherine Cass from filing
any further petitions in bankruptcy for the maximum time the court may restrain her
. . .” Docket No. 27 at 2, JC Ex. 12 at 2.
20. On March 7, 2007, the Office of the United States Trustee filed a notice of
withdrawal of its Motion to Dismiss. JPTO UF ¶ 18; Trustee’s RJN, ¶ 3, Ex. 3; Docket
No. 29, Notice of Withdrawal of United States Trustee’s Motion to Dismiss Case Under
11 U.S.C. §109(h)(1) of the Bankruptcy Code.
21. On March 14, 2007, Debtor filed a document entitled “Request for Court’s
Reconsideration of Ruling on March 13, 2007 Regarding Replacement of Trustee
Charles Daff” (“Motion to Reconsider”). JPTO UF ¶ 80; Trustee’s RJN, ¶ 3, Ex. 3; Hays
Trial Decl., ¶ 68(c); Docket No. 32, Request for Court’s Reconsideration of Ruling on
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Mar. 13, 2017 Regarding Replacement of Trustee Charles Daff. On March 29, 2007,
Trustee filed an Opposition to Motion to Reconsider. Docket No. 39, Opposition to
Debtor’s Request for Court’s Reconsideration of Ruling on March 13, 2007 re
Replacement of Trustee Charles Daff; Hays Trial Decl., ¶ 68(d).
22. On March 16, 2007, Mr. Dimitruk spoke to Trustee’s counsel, D. Edward
Hays (“Mr. Hays”), for the first time in this case regarding several matters including the
facts in support of the Second Action which included the fraudulent transfer cause of
action against Zeman, and the Judgment obtained against Debtor in the First Action.
JPTO UF ¶ 81; Dimitruk Decl. ¶ 20; Hays Trial Decl. ¶ 16.
23. In the March 16, 2007 conversation, Mr. Hays asserted that only Trustee
had the standing and the right to prosecute the state court action. Id. Mr. Hays also said
that Trustee was considering the removal of the Second Action to the Bankruptcy Court.
Id.
24. On March 20, 2007, Debtor filed a request for voluntary dismissal of her
bankruptcy case. JPTO UF ¶ 19; Trustee’s RJN, ¶ 3, Ex. 3; Docket No. 45, Opposition
to Debtor’s Request for Voluntary Dismissal (the motion was “lodged” by Debtor but
never filed and therefore does not appear on the docket; Docket No. 45 is Trustee’s
opposition to the motion and contains an explanation of the situation at 1 n. 1).
25. On April 2, 2007, Mr. Hays sent an e-mail message to Mr. Dimitruk. JPTO
UF ¶ 82; JC Ex. 14; Hays Trial Decl., ¶ 18. The email message stated:
Today, I received an electronic notice that you filed the
attached adversary complaint [8:07-ap-1099-RK which
included a claim for relief to deny the Debtor’s discharge
pursuant to 11 U.S.C. §727]. The second claim for relief
requests that the Court determine that your clients have a lien
or interest in the Cass property superior to any interests held
by the Debtor and/or her daughter. The second claim for
relief does not request that the Court make any determination
with regard to the relative rights between your clients and the
estate. Please reply to confirm that your clients will neither
assert any right nor seek entry of any judgment or order that
purports to bind the estate as the Trustee is not a named-
party to this action.
As you know from our prior discussions, the Trustee contends
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that the estate’s rights in the Property, the claims to avoid and
recover the alleged fraudulent transfer made by Debtor and
any rights arising from the lis pendens recorded by your
clients are superior to that of creditors, including your clients.
Thanks.
Emphasis in original.
26. On April 10, 2007, Trustee filed an opposition to Debtor’s Voluntary
Request for Dismissal. JPTO UF ¶ 20; Trustee’s RJN, ¶ 3, Ex. 3, Docket No. 45,
Opposition to Debtor’s Request for Voluntary Dismissal, JC Ex. 17.
27. On April 10, 2007, Judgment Creditors filed a response to Debtor’s request
for voluntary dismissal. JPTO UF ¶ 21 (the JPTO mistakenly says the response was filed
on April 12, 2007); Trustee’s RJN, ¶ 3, Ex. 3, Docket No. 46, Memorandum of Points and
Authorities in Response to the Motion by Catherine Cass to Dismiss Her Petition, JC Ex.
18.
28. In their response to Debtor’s request for voluntary dismissal, Judgment
Creditors stated that the court should “deny the motion and require the Debtor to require
that the property be re-transferred to the Debtor.” Judgment Creditors alternatively
requested that “if the Court is inclined to grant the Motion, to first require as a condition of
dismissal that the property be re-transferred to the Debtor by recording of an
unconditional transfer of title to the property to the Debtor and in any event, issue an
injunction against the Debtor from re-filing any further bankruptcy petitions either
permanently, for a five-year period, or at least the 180 days, or such other period as the
Court considers to be appropriate.” JPTO UF ¶ 21; JC Ex. 18 at 1:27-2:4.
29. On April 5, 2007, Trustee substituted into the Second Action as the real
party-in-interest and removed that case to the United States Bankruptcy Court for the
Central District of California, which action was assigned Adversary Case No. 8:07-ap-
1099-RK (the “Fraudulent Transfer Adversary Proceeding”). JPTO UF ¶ 22; Trustee’s
RJN, ¶ 3, Ex. 3, Docket No. 44, Notice of Removal of State Court Action to Federal
Bankruptcy Court (Orange County Superior Court Case No. 05CC08034); Hays Trial
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Decl., ¶ 19.
30. On April 17, 2007, Debtor filed a Notice of and: 1. Objection to and Motion
to Disallow Pleadings of D.E. Hays; 2. Objection to and Motion to Disallow Pleading of D.
Dimitruk; 3. Reaffirmation of Debtor’s Voluntary Dismissal Request; 4. Denial of
Fraudulent Transfer; 5. Recapitulation; 6. Request for Sanctions. Docket No. 48; Hays
Trial Decl. ¶ 68(e).
31. On April 24, 2007, Trustee filed the Declaration of D. Edward Hays
Requesting Entry of Order Denying Debtor’s Request for Court’s Reconsideration of
Ruling on March 13, 2007 re Replacement of Trustee Charles W. Daff. Docket No. 49;
Hays Trial Decl. ¶ 68(f).
32. On April 26, 2007, the court entered the Order Denying Debtor’s Request
for Court’s Reconsideration of Ruling on March 13, 2007 re Replacement of Trustee
Charles W. Daff. Docket No. 50; Hays Trial Decl. ¶ 68(g).
33. On April 26, 2007, Debtor filed the Objection to D. Edward Hays’s Request
that the Court to Deny Debtor’s Request for Reconsideration of Retaining Trustee Daff.
Docket No. 52; Hays Trial Decl. ¶ 68(h).
34. On May 8, 2007, Trustee filed a document in this court entitled, “Request
for Judicial Notice re Documents Filed in Orange County Superior Court Case No.
05CC08034.” Docket No. 54; JPTO UF ¶ 23; JC Ex. 19; Dimitruk Decl. ¶ 26.
35. Attached to the May 7, 2007 Request for Judicial Notice was a copy of the
state court complaint filed in the Second Action. Docket No. 54, RJN, Ex. 1. Also
attached to the May 7, 2007 Request for Judicial Notice was a copy of Christine Zeman’s
First Amended Cross-Complaint filed in the Second Action. Docket No. 54, RJN, Ex. 7.
36. On May 10, 2007, Mr. Dimitruk sent Mr. Hays an email message discussing
his thoughts on a stipulation to avoid, recover, and preserve Debtor’s transfer of the
property to Zeman for the benefit of the Estate (the “May 10, 2007 Email”). In this email,
Mr. Dimitruk asked for Mr. Hays’s thoughts on the “homestead” and “Mrs. Cass’s claim to
a life estate.” Hays Trial Decl., ¶ 20; JC Ex. 92 at 02353.
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37. The May 10, 2007 email message is part of an email chain in which Mr.
Dimitruk and Mr. Hays discussed how best to avoid the transfer to Zeman and ensure
that Debtor did not receive a homestead exemption in the Property upon avoidance and
recovery. Id.
38. On May 11, 2007, Trustee filed an objection to Debtor’s claimed $150,000
homestead exemption. JPTO UF ¶ 39; JC Ex. 23; Hays Trial Decl. ¶ 21; Trustee’s RJN ¶
3, Ex. 3; Docket No. 61, Trustee’s Objections to Debtor’s Claimed Exemptions.
39. On May 23, 2007, the court entered an Order to Show Cause as to why the
bankruptcy case should not be dismissed based on Debtor’s failure to obtain credit
counseling prior to bankruptcy (“OSC re Dismissal”). JPTO UF ¶ 24 (the JPTO
incorrectly states that the order was entered on May 24, 2007); Trustee’s RJN ¶ 3, Ex. 3,
Docket No. 70, Order to Show Cause Why This Case Should Not Be Dismissed for
Debtor’s Failure to Obtain Budget and Credit Counseling During the 180-Day Period
Preceding the Petition Date or Submit Certification Establishing Exigent Circumstances;
Hays Trial Decl., ¶ 22.
40. On June 20, 2007, Trustee, Judgment Creditors and Zeman, through their
respective counsel, entered into the Stipulation for Entry of Judgment Avoiding and
Recovering Transfer of Real Property (the “Stipulation”). JPTO UF ¶ 26; JC Ex. 42;
Trustee’s RJN ¶ 2, Ex. 2, Stipulation for Entry of Judgment Avoiding and Recovering
Transfer of Real Property and Order Thereon, filed on May 28, 2008 in Adversary Case
No. 8:07-ap-01099-RK; Hays Trial Decl., ¶¶ 24 and 25.
41. On July 3, 2007, the court deferred ruling on Debtor’s request for voluntary
dismissal and its OSC re Dismissal. JPTO UF ¶ 27; Trustee’s RJN, Ex. 3 at 3, Court’s
docket re: Bankruptcy Case Number 2:12-bk-16090-RK, entries between Docket Nos. 84
and 88. In the interim, the court entered an Order re Suspension of Proceedings pending
resolution of Debtor’s state court appeal of the Judgment entered against her and in favor
of Judgment Creditors. JPTO UF ¶ 27; Trustee’s RJN, Ex. 3 at 3, Court’s docket re:
Bankruptcy Case Number 2:12-bk-16090-RK; Docket No. 88, Order re Suspension of All
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Proceedings. The dismissal hearings were continued from time to time pending
resolution of the appeal. Id.; see Docket entries on November 27, 2007, February 26,
2008, April 8, 2008, May 27, 2008, and July 8, 2008.
42. On July 13, 2007, Trustee filed the Notice of Motion (1) for Leave to File
Motion to Abandon Appellate Claims to Debtor; and (2) to Abandon Appellate Claims to
Debtor. Hays Trial Decl., ¶ 68(k); Docket No. 93, Notice of Trustee’s Motion (1) for Leave
to File Motion to Abandon Appellate Claims to Debtor; and (2) to Abandon Appellate
Claims to Debtor.
43. On July 18, 2007, Trustee filed the Motion (1) for Leave to File Motion to
Abandon Appellate Claims to Debtor; and (2) to Abandon Appellate Claims to Debtor;
Memorandum of Points and Authorities; Declaration of Charles W. Daff. Hays Trial Decl.,
¶ 68(l); Docket No. 94, Trustee’s Motion (1) for Leave to File Motion to Abandon
Appellate Claims to Debtor; and (2) to Abandon Appellate Claims to Debtor.
44. On July 19, 2007, Trustee filed the Opposition to Debtor’s Objection to
Court’s Orders: (1) the Law Firm of Rus, Miliband & Smith Can Be Counsel for Trustee
Charles Daff (2) Disallowing Debtor’s Counterclaim in Adversary Case No. 0099 RK and
(3) Disallowing Debtor’s Counterclaim in Adversary Case 0094 RK Request for
Reconsideration and Request for Leave of Court to File Opposition. Hays Trial Decl., ¶
68(m); Docket No. 98, Opposition to Debtor’s Objection to Court’s Orders: (1) the Law
Firm of Rus, Miliband & Smith Can be Counsel for Trustee Charles Daff (2) Disallowing
Debtor’s Counterclaim in Adversary Case No. 0099 RK and (3) Disallowing Debtor’s
Counterclaim in Adversary Case 0094 RK Request for Reconsideration and Request for
Leave of Court to File Opposition.
45. On August 15, 2007, the court entered the Order Granting Trustee’s Motion
(1) For Leave To File Motion To Abandon Appellate Claims to Debtor; and (2) To
Abandon Appellate Claims to Debtor. Hays Trial Decl., ¶ 68(n); Docket No. 108, Order
Granting Trustee’s Motion (1) For Leave To File Motion To Abandon Appellate Claims to
Debtor; and (2) To Abandon Appellate Claims to Debtor.
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46. On November 20, 2007, Trustee filed the Status Report re Appeal and
Request for Continuance of Review Hearing for 90 Days. Hays Trial Decl., ¶ 68(o);
Docket No. 112, Status Report re Appeal and Request for Continuance of Review
Hearing for 90 Days.
47. On May 29, 2008, after the Judgment was affirmed by the California Court
of Appeal, the court entered a Judgment (the “Avoidance Judgment”) pursuant to the
Stipulation in the Fraudulent Transfer Adversary Proceeding. Judgment Creditors
executed the Stipulation along with Trustee and Zeman. JPTO UF ¶¶ 27 and 28; JC Ex.
42 and 43; Hays Trial Decl., ¶ 25.
48. Debtor appealed entry of the Avoidance Judgment. JPTO UF ¶ 29; Hays
Trial Decl., ¶ 26.
49. On August 5, 2008, Judgment Creditors filed a brief detailing their position
regarding dismissal of the bankruptcy case in which they stated:
This memorandum is divided into two principal
sections, which turn on whether this Court dismisses Mrs.
Cass’s bankruptcy petition or not. . . .
JPTO UF ¶ 25; JC Ex. 44, Positions by James Wallace, Rebecca Wallace, and Gloria
Suess; Declaration of David B. Dimitruk in Support Thereof at 1:27-2:1.
On March 20, 2007, Catherine Cass filed a motion to
dismiss her own bankruptcy petition and, because of this
Court’s June 28, 2007 Order (see paragraph 3 below), no
ruling has been made on her motion. The Creditors’ primary
position on April 10, 2007, when they filed their response to
the motion, was that the court should deny the request
because Christine Zeman had not yet agreed to retransfer the
residence in which Mrs. Cass resides to Mrs. Cass. . . .
Id. at 2:7-11.
The Creditors now favor a dismissal upon certain
conditions and for the following reasons. . . .
Id. at 2:18.
The Creditors will benefit from a dismissal because a
dismissal will avoid the numerous delays and predictable
litigation expenses that they have sustained by virtue of the
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various positions that Mrs. Cass has taken in this court. A
dismissal will entitle them to obtain an order from the state
court to sell the residence so that the judgment may be
satisfied. Denying the motion to dismiss subjects the Creditors
to further delays and expenses that are not likely to be
sustained by the streamlined procedures available in the state
court proceeding for the sale of property. The Creditors will be
prejudiced, however, if the court does not also issue an
injunction and order the trustee to restore title to the
Residence to Mrs. Cass as conditions of the dismissal. . . .
Id. at 8:19-27.
Should the court dismiss this bankruptcy action, the
court should also issue a permanent injunction against Mrs.
Cass from filing any further bankruptcy actions. . . . . If the
court is unwilling to permanently enjoin Mrs. Cass from filing
any bankruptcy petition it should then issue a five-year
injunction because the six-month injunction under 11 U.S.C.
section 109 is insufficient to prevent Mrs. Cass from causing
further delay
. . . .
Id. at 9:3-8.
For a dismissal of the bankruptcy petition to become
effective, the court must also (1) require the trustee to execute
such documents as may be necessary to restore actual title to
the Residence in the name of Catherine Cass (i.e., it may also
be necessary to cause a certified copy of the Separate
Judgment to be recorded in the Orange County Recorder’s
Office in order to effectuate such a transfer), and (2) remand
the second lawsuit to the Orange County Superior Court,
which the trustee removed to this court. . .
Id. at 9:12-17.
In the event that this Court does not dismiss the
bankruptcy case, the Creditors contend that certain
determinations must follow the retention of the case as
illustrated below. These determinations are dependent on the
outcome of the pending appeal before the Bankruptcy
Appellate Panel and, therefore, these determinations must
also await the ruling from the Bankruptcy Appellate Panel. . . .
Essentially, this Court should (1) vacate its June 28,
2007 Order, which stays all other proceedings in the case, (2)
set a time for the filing of proof of claims, (3) require the
recordation of the Stipulated Judgment in the Orange County
Recorder’s Office, (4) require the trustee to sell the residence,
and (5) set the pending cases for trial so that a final
distribution of the sale proceeds may be made.
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Id. at 10:3-12; JPTO UF ¶ 25; JC Ex. 44 (the brief was filed in response to “Debtor’s
Motion to Reinstate Court’s Motion to Dismiss Bankruptcy and Motion to Reinstate
Court’s Motion to Dismiss; also Motion for Discharge as a viable Alternative”); see
Trustee’s RJN, ¶ 3, Ex. 3; Docket No. 102, Notice of Motion to Reinstate Court’s Motion
to Dismiss Bankruptcy and Motion to Reinstate Court’s Motion to Dismiss, also Motion for
Discharge as a Viable Alternative; Docket No. 129, Positions by James Wallace,
Rebecca Wallace, and Gloria Suess; Dimitruk Decl., ¶ 35.
50. On August 26, 2008, the court denied Debtor’s request for voluntary
dismissal and vacated the OSC re Dismissal. JPTO UF ¶ 30 (the JPTO stated that
orders on the dismissal motion and OSC were entered on September 2, 2008 but no
such orders appear on the docket); Trustee’s RJN, Ex. 3, Court’s docket re: Bankruptcy
Case Number 2:12-bk-16090-RK, entries between Docket Nos. 133 and 134.
51. On September 2, 2008, the court entered Orders denying Debtor’s request
for voluntary dismissal and vacating the OSC re Dismissal. JPTO UF ¶ 30; Hays Trial
Decl., ¶ 27.
52. On September 18, 2008, Trustee filed the Opposition to Debtor’s Motion for
Second Reconsideration as Per the Order of the Bankruptcy Appellate Panel. Docket
No. 135, Trustee’s Opposition to Debtor’s Motion for Second Reconsideration as per the
Order of the Bankruptcy Appellate Panel; Hays Trial Decl., ¶ 68(p).
53. In February 2009, Debtor passed away, and Zeman became the
administrator for Debtor’s probate estate. JPTO UF ¶ 31; see also Trustee’s RJN, Ex. 3,
Court’s docket re: Bankruptcy Case Number 2:12-bk-16090-RK, Docket No. 153, Notice
of Lodging Certified Copies of Order for Probate and Letters of Administration for the
Estate of Catherine Z. Cass, and Docket No. 154, Order for Substitution of Debtor
Catherine Z. Cass by Christine Zeman, Administrator of the Estate of Catherine Z. Cass;
Hays Trial Decl., ¶ 28.
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54. On May 8, 2009, Trustee substituted Marshack Hays as his general
counsel. JPTO UF ¶ 32; Trustee’s RJN, Ex. 3, Court’s docket re: Bankruptcy Case
Number 2:12-bk-16090-RK, Docket No. 137, Substitution of Attorney; Hays Trial Decl., ¶
30.
55. On June 11, 2009, Debtor’s appeal of the Avoidance Judgment was
dismissed by the Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”) as a result of
Debtor’s death and the failure of a personal representative for Debtor subsequently to
appear in and prosecute the appeal. JPTO UF ¶ 33.
56. On January 27, 2010, Trustee through his attorneys at Marshack Hays filed
an adversary proceeding against Judgment Creditors seeking declaratory relief. JPTO
UF ¶ 34; JC Ex. 48; Trustee’s RJN, Ex. 3, Court’s docket re: Bankruptcy Case Number
2:12-bk-16090-RK, Docket No. 156, Complaint for (1) Declaratory Relief Re: Validity,
Priority and Extent of Alleged Judgment Lien; and (2) Avoidance, Recovery and
Preservation of Unauthorized Post-Petition Transfer.
57. On March 3, 2010, Judgment Creditors filed an answer to the complaint
filed by Trustee. JPTO UF ¶ 35; JC Ex. 52; Hays Trial Decl., ¶ 36.
58. On March 3, 2010, Judgment Creditors filed a counterclaim against
Trustee. JPTO UF ¶ 36; JC Ex. 53; Hays Trial Decl., ¶ 37.
59. On April 26, 2010, Trustee filed an answer to the counterclaim by Judgment
Creditors. JPTO UF ¶ 37; JC Ex. 56.
60. On May 24, 2010, Judgment Creditors filed a first amended counterclaim.
JPTO UF ¶ 38; JC Ex. 62.
61. On January 27, 2010, Trustee filed a supplemental brief in support of the
objection to the homestead exemption. JPTO UF ¶ 40; JC Ex. 47; Trustee’s RJN, Ex. 3,
Court’s docket re: Bankruptcy Case Number 2:12-bk-16090-RK, Docket No. 155, Notice
of Hearing and Trustee’s Supplemental Objections to Debtor’s Claimed Homestead
Exemption; Hays Trial Decl., ¶ 32.
62. On February 16, 2010, Trustee filed a reply to Debtor’s opposition to the
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homestead objection. JPTO UF ¶ 41; JC Ex. 49; Trustee’s RJN, Ex. 3, Court’s docket re:
Bankruptcy Case Number 2:12-bk-16090-RK, Docket No. 158, Reply to Opposition to
Trustee’s Objections to Debtor’s Claimed Homestead Exemption; Hays Trial Decl., ¶ 34.
63. On March 2, 2010, Trustee filed another supplemental brief in support of
the objection. JPTO UF ¶ 42; JC Ex. 50; Trustee’s RJN, Ex. 3, Court’s docket re:
Bankruptcy Case Number 2:12-bk-16090-RK, Docket No. 161, Trustee’s Supplemental
Brief Re: Objections to Debtor’s Claimed Homestead Exemption; Hays Trial Decl., ¶ 35.
64. On March 12, 2010, Judgment Creditors filed a brief with respect to
Debtor’s claimed homestead exemption. JPTO UF ¶ 43; JC Ex. 54; Trustee’s RJN, Ex.
3, Court’s docket re: Bankruptcy Case Number 2:12-bk-16090-RK, Docket No. 164,
Objections to the Claim of Exemption; Hays Trial Decl., ¶ 38.
65. On May 6, 2010, the court entered an Order regarding Debtor’s claim of
exemption (the “Exemption Order”). JPTO UF ¶ 44; JC Ex. 57; Trustee’s RJN, Ex. 3,
Court’s docket re: Bankruptcy Case Number 2:12-bk-16090-RK, Docket No. 170, Order
Re: Trustee’s Objections to Debtor’s Claimed Homestead Exemption.
66. In its Exemption Order, the court determined that Debtor’s heirs were not
entitled to exempt any portion of the proceeds of sale of the Property. JPTO UF ¶ 44; JC
Ex. 57; Trustee’s RJN, Ex. 3, Court’s docket re: Bankruptcy Case Number 2:12-bk-
16090-RK, Docket No. 170, Order Re: Trustee’s Objections to Debtor’s Claimed
Homestead Exemption; Hays Trial Decl. ¶ 49.
67. Trustee procured an all cash “as-is” offer to purchase the Property for
$200,000. JPTO UF ¶ 45; Hays Trial Decl., ¶ 40.
68. Upon recovery by Trustee of Debtor’s residence, it was in substantial
disrepair. Trustee cleaned the Property and prepared it for listing. Hays Trial Decl., ¶ 39.
69. Trustee employed a broker to solicit overbidders. JPTO UF ¶ 46; Hays
Trial Decl., ¶ 68(a) and (b).
70. On March 30, 2010, Trustee filed a motion to approve the sale of the
Property (the “Sale Motion”). JPTO UF ¶ 47; JC Ex. 55; Hays Trial Decl., ¶ 41.
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71. In the Sale Motion, Trustee sought to sell the Property for the benefit of the
bankruptcy estate. JPTO UF ¶ 48; see also, Dimitruk Decl., ¶ 36.
72. Judgment Creditors filed objections to the Sale Motion. JPTO UF ¶ 49; JC
Ex. 59; RJN Ex. 3, Court’s docket re: Bankruptcy Case Number 2:12-bk-16090-RK,
Docket No. 169, Objections by the Judgment Creditors to the Trustee’s Motion for
Authorization to Sell Property and to Sell Property as Requested by the Trustee; Hays
Trial Decl., ¶ 42.
73. Prior to the hearing on the Sale Motion, Trustee received and accepted an
overbid of $280,000. Hays Trial Decl., ¶ 43.
74. At the hearing on the Sale Motion, there were five cash bidders. JPTO UF
¶ 50; Hays Trial Decl., ¶ 44.
75. After conducting an auction in open court, the sales price was increased to
$321,000. JPTO UF ¶ 51; Hays Trial Decl., ¶ 45.
76. This amount exceeded Judgment Creditors’ opinion as to the value of the
Property and they withdrew their objection to Trustee’s proposed sale. JPTO UF ¶ 52;
Hays Trial Decl., ¶ 46.
77. On June 1, 2010, the court entered an Order approving Trustee’s sale of
the Property for $321,000. JPTO UF ¶ 53; JC Ex. 63; Trustee’s RJN, Ex. 3, Court’s
docket re: Bankruptcy Case Number 2:12-bk-16090-RK, Docket No. 173, Order
Approving Trustee’s Motion for Authorization to Employ a Broker to Sell Property (1)
Outside the Ordinary Course of Business; (2) Free and Clear of Liens; (3) Subject to
Overbid; (4) For Determination of Good Faith Purchaser Section 363(m); (5) To Pay
Trustee’s Insurance Agency; and (6) To Pay for Property Maintenance; Hays Trial Decl.,
¶ 51.
78. After payment of costs of sale and all known liens, except the abstract of
judgment recorded by Judgment Creditors, the net proceeds of the sale were
$292,730.95. JPTO UF ¶ 54; Dimitruk Decl., ¶ 19; Hays Trial Decl., ¶ 53.
79. Trustee’s attorneys filed separate fee applications seeking allowance of the
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fees and costs incurred from January 2007 through and including May 31, 2010 as
administrative expenses pursuant to 11 U.S.C. §§330 and 331. JPTO UF ¶ 55; JC Exs.
64 (Rus, Miliband & Smith) and 65 (Marshack Hays); Dimitruk Decl., ¶ 27; Hays Trial
Decl., ¶ 54.
80. Judgment Creditors opposed these fee applications. JPTO UF ¶ 56; JC Ex.
68; Hays Trial Decl., ¶¶ 55, 68(q).
81. On March 24, 2011, the court entered an order approving reimbursement of
100 percent of the expenses and 50 percent of the fees requested by Marshack Hays
and Rus, Miliband & Smith, on an interim basis. JPTO UF ¶ 57; JC EX. 74; Trustee’s
RJN, Ex. 3, Court’s docket re: Bankruptcy Case Number 2:12-bk-16090-RK, Docket No.
237, Order on (1) First and Final Fee Application of Rus, Miliband and Smith and (2) First
Interim Fee Application of Marshack Hays, LLP, Former and Current Counsel for Chapter
7 Trustee; Hays Trial Decl., ¶ 56. The fee application order reserved ruling on the
benefit, reasonableness, and necessity of the remaining 50% of the fees until the
litigation between Judgment Creditors and Trustee was resolved. Id.
82. On April 6, 2012, the court conducted a trial of the Fraudulent Transfer
Adversary Proceeding. JPTO UF ¶ 58; Hays Trial Decl., ¶ 57.
83. On August 31, 2012, the court entered its memorandum decision holding
that Judgment Creditors held a lien on the proceeds received by Trustee from the sale of
the Property. JPTO UF ¶ 59; JC Ex. 75; Hays Trial Decl., ¶ 58.
84. Trustee appealed the court’s decision determining that Judgment Creditors’
lien attached to the sales proceeds. JPTO UF ¶ 60; Hays Trial Decl., ¶ 59.
85. On April 11, 2013, the Bankruptcy Appellate Panel affirmed this court’s
August 31, 2012 decision that Judgment Creditors’ lien attached to the sales proceeds.
JPTO UF ¶ 61; JC Ex. 98; Hays Trial Decl., ¶ 60. Trustee has timely appealed the
Bankruptcy Appellate Panel’s decision affirming the court’s decision to the United States
Court of Appeals for the Ninth Circuit, where the matter currently remains pending. Id.
86. Marshack Hays submitted a summary of its time and expense records for
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the Avoidance Action, homestead exemption objection, and sale of Debtor’s residence as
kept in the ordinary course of business. JPTO UF ¶¶ 62, 64, 66; JC Exs. 79, 80, and 81,
respectively; Hays Decl., ¶¶ 9, 10, 11; Declaration of Charles W. Daff in Support of
Trustee’s Motion for Order Granting Surcharge Pursuant to 11 U.S.C. §506(c) filed on
June 15, 2010 as Docket No. 186 (“Daff Decl.”), ¶¶ 8, 9.
87. Rus, Miliband & Smith submitted a summary of its time and expense
records for fees and costs incurred in this case. JPTO UF ¶ 68; JC Ex. 99; Daff Decl., ¶¶
6, 7.
88. On February 19, 2013, Rus, Miliband & Smith and Marshack Hays filed
renewed applications seeking the remaining 50 percent of their fees that were requested
in their first interim fee applications. JPTO UF ¶ 71; JC Ex. 85; Hays Trial Decl., ¶¶ 62,
68(r). The court denied the renewed applications pending final fee applications. Id.
89. At the time Mrs. Cass filed her bankruptcy petition on January 5, 2007, the
amount due to Judgment Creditors under the October 28, 2005 judgment was
$358,048.78. The amount is calculated as follows:
a. $320,000.00 (the judgment debt) x 10% + $32,000.00 annual interest.
b. $32,000.00 annual interest ÷ 365 days per year = $87.67 daily interest.
c. The number of days between October 28, 2005 and January 5, 2007 = 434.
d. $87.67 daily interest x 434 days = $38,048.78.
e. $320,000.00 + $38,048.78 = $358,048.78.
JPTO UF ¶ 73; Dimitruk Decl., ¶ 14.
90. Debtor stated in her Schedule D, filed on January 5, 2007, in conjunction
with her bankruptcy petition, that the value of the residence was $500,000. JPTO UF ¶
74; JC Ex. 100.
91. On July 15, 2010, Trustee filed a “Statement of Property Sold Pursuant to
FRBP 6004(F)(1) and LBR 6004-1(g).” JPTO UF ¶ 75; JC Ex. 71.
92. Debtor stated in her Schedule D, filed on January 5, 2007, in conjunction
with her bankruptcy petition, and in her Schedule A, that the value of the deed of trust
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held by Union Bank was $19,000. JPTO UF ¶ 77; JC Exs., 100, 101; Dimitruk Decl., ¶
17. The amount reported by Trustee as having been paid to Union Bank at the close of
escrow on June 15, 2010 was a total of $18,687.33. JPTO UF ¶ 77; JC Ex. 71; Dimitruk
Decl., ¶ 17.
93. The sum of $9,655.96 was paid as costs in the close of the escrow on June
15, 2010, which represented slightly over 3 percent of the sale price. JPTO UF ¶ 78; JC,
Ex. 71; Dimitruk Dec., ¶ 18.
94. The net proceeds from the sale of the residence were $292,730.95. JPTO
UF ¶ 79; Dimitruk Decl., ¶ 19.
95. In conjunction with this surcharge motion, Judgment Creditors propounded
written interrogatories to Trustee. A copy of the interrogatory responses is included in the
record. JPTO UF ¶ 83; JC, Ex. 97.
96. Interrogatory number 3 posed the following question: “Please describe how
you learned that the abstract of judgment that James Wallace, Rebecca Wallace and
Gloria Suess caused to be recorded was recorded.” Trustee said: “The Trustee does not
recall, but it was in the context of his duties as Chapter 7 Trustee for the bankruptcy
estate for Catherine Cass.” Id.
97. On behalf of Trustee, Marshack Hays incurred $9,407.00 in fees and
$395.55 in costs avoiding and recovering the Transfer. Hays Trial Decl., ¶ 65; JC Ex 79.
98. On behalf of Trustee, Marshack Hays incurred $15,139 in fees and $106.39
in costs in successfully obtaining an order that Trustee did not have to pay Debtor’s
claimed $150,000 homestead exemption out of the proceeds of sale of the Property.
Hays Trial Decl., ¶ 66; JC Ex 80.
99. On behalf of Trustee, Marshack Hays incurred $14,687.00 in fees and
$133.85 in expenses related to selling the Property. Hays Trial Decl., ¶ 67; JC, Ex 81.
100. The total fees and costs described in the three previous paragraphs and
detailed in JC, Exhibits 79-81, is $39,233 in fees and $635.79 in costs.
101. On behalf of Trustee, Rus, Miliband & Smith, incurred $55,700 in fees and
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$4,805.88 in expenses in connection with Trustee’s efforts to avoid the Transfer, which
included opposing Debtor’s numerous attempts to have her case dismissed, negotiating a
resolution of the fraudulent transfer adversary proceeding and a suspension of Debtor’s
bankruptcy case, and objecting to Debtor’s claimed homestead. Trial Declaration of
Cathrine M. Castaldi re: Trustee’s Motion for Order Granting Surcharge Pursuant to 11
U.S.C. §506(c), filed as Docket No. 324 (“Castaldi Decl.”).
102. Rus, Miliband & Smith incurred $1,275.00 in conferring with Trustee and a
real estate broker to establish the value of the Property during various times in the course
of the bankruptcy case. Castaldi Decl., ¶ 7.
103. On behalf of Trustee, Rus, Miliband & Smith, incurred $25,550.00 in
prosecuting the fraudulent transfer claim against Zeman. Ultimately, Rus, Miliband &
Smith was able to circumvent a lengthy trial and dispute with respect to the fraudulent
transfer claim by negotiating a resolution with Zeman and Judgment Creditors. According
to Rus, Miliband & Smith, this required communication with counsel for Zeman and
counsel for Judgment Creditors and resulted in a judgment in favor of the Estate that
allowed for recovery of the Property. Castaldi Decl., ¶ 8; JC, Exs. 43, 64.
104. After entry of the Stipulated Judgment, Debtor appealed entry of the
Stipulated Judgment to the Bankruptcy Appellate Panel. Trustee incurred $16,425.00 in
defending this appeal, which was dismissed upon the death of Mrs. Cass. Castaldi Decl.,
¶ 9.
105. Rus, Miliband & Smith incurred $2,962.50 in recovering possession of the
Property from the County of Orange after Debtor’s death. These activities included
corresponding with the County of Orange, reviewing release forms requested by the
county and obtaining possession of the keys, and access to the home, so that Trustee
could ready the home for sale. Castaldi Decl., ¶ 10.
106. On May 11, 2007, Rus, Miliband & Smith assisted Trustee in objecting to
Debtor’s claimed homestead exemption in the amount of $150,000. Castaldi Decl., ¶ 11;
JC, Ex. 23. Rus, Miliband & Smith incurred $4,575.00 in connection with the objection to
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Debtor’s Homestead Exemption, which objection was ultimately sustained by the court.
Castaldi Decl., ¶ 11.
107. Trustee incurred $4,912.50 in prosecuting the Motion to Abandon the
Estate’s Right to prosecute Mrs. Cass’s appeal of the judgment obtained against her by
Judgment Creditors to its successful conclusion. Castaldi Decl., ¶ 12.
108. In response to Marshack Hays’s Interim Fee Application for the period from
April 21, 2009 through May 31, 2010 and the First and Final Application for Allowance of
Fees and Costs filed by Rus, Miliband & Smith, APC, for the period from March 12, 2007
through April 30, 2010, the Office of the United States Trustee evaluated all of the fees
and costs incurred by Trustee in avoiding and recovering the Transfer. The Office of the
United States Trustee stated:
The U.S. Trustee has reviewed the RMS and MH
compensation applications in detail and submits that the fees
requested are reasonable as required under 11 U.S.C.
§330(a)(3)(A) through §330(a)(3)(F) as follows:
(A) Time spent on particular entries appears reasonable. In
addition to monthly invoices, the applications contain
detailed narrative descriptions of services and costs
broken into numerous different categories. As noted
above, the bulk of item expended related to litigation
necessary for the estate to take title to the Santa Ana
Property and time needed to respond to Debtor’s
numerous motions and objections, many of which appear
to be unfounded.
(B) Expenses appear reasonable and are detailed by
category;
(C) Services appear reasonable and necessary to the
administration of the estate, however, a 20% hold back is
suggested to allow the case to conclude;
(D) Both RMS and MH have reasonable blended hourly rates
of $375 (RMS) and $277 (MH), evidencing that less
complex matters were delegated to employees with lower
hourly rates;
(E) Counsel at RMS and MH have vast experience and
exceptional knowledge and skill in the Orange County, CA
bankruptcy community and were fully capable of handling
the services rendered; and
(F) Fees sought appear customary within the local community.
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While counsel fees are substantial, they spanned over a three
year period and appeared necessary to prevail in litigation
regarding title to the Santa Ana Property. Substantial time
also was expended to respond to the Debtor’s repeated
efforts to obviate applicant’s efforts. . . .
Trustee’s independent review failed to discover any services
or costs which are not compensable.
Trustee’s RJN, Ex. 4, Docket No. 273, Comment of United States Trustee to Applications
Seeking Allowance of Fees and Costs by Counsel for Chapter 7 Trustee; JC Ex. 69.
109. On April 8, 2011, the court entered an order approving payment on an
interim basis by Trustee of $30,269 in fees and $1,440.53 in costs to Marshack Hays and
$55,856.25 in fees and $4,805.88 in costs to Rus, Miliband & Smith (the “Fee Award”).
The Fee Award represented 50 percent of the Firms’ fees incurred between October 1,
2008 and May 31, 2010 and 100 percent of the Firms’ costs during that time period. The
Fee Award was without prejudice to the Firms later applying to be paid the balance of the
fees and costs requested. Trustee’s RJN, ¶ 3, Ex. 3, Court’s docket re: Bankruptcy Case
Number 2:12-bk-16090-RK, Docket No. 246, Order Re Applications for Allowance of
Fees and Costs Filed by Marshack Hays and Rus, Miliband, & Smith, APC.
110. Judgment Creditors’ counsel, Mr. Dimitruk, acknowledged during his
deposition that his clients benefited from Trustee’s efforts in this case, but also stated that
the same result could have been accomplished in the state court action at far less cost.
Mr. Dimitruk testified at his deposition as follows:
Q: Do you on behalf of your clients take the position that the
stipulation that avoided and recovered the transfer from the
debtor to Ms. Zeman benefited your clients in any way?
A: Yes.
Q: And in what way did that stipulation provide benefit to your
clients?
A: It achieved, in a summary fashion, a part of what they were
attempting to achieve in the state court action that they filed
against both of them, which was the setting aside of the
transfer as a fraudulent transfer. The result is something that
my clients started in a lawsuit that they filed in a state court
action.
JC Ex. 95, Deposition of David Dimitruk, 36:20-37:8.
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Q: Okay. Do you believe that any of the actions taken by the
trustee that resulted in the exemption order benefited your
clients in any way?
A: Yes.
Q: And how did your clients benefit?
A: It spared them what I consider to be the meager cost of
accomplishing the same thing that they could have
accomplished in the state court action.
JC Ex. 95, Deposition of David Dimitruk, 37:20-25-38:3.
Q: In this case, the trustee actually effectuated a sale of the
property, correct?
A: Yes, sir.
Q: Do you believe that any of the actions taken by the trustee
in effectuating a sale of property benefited or potentially
benefited -- will benefit your clients in any way?
A: As to all of the above questions, yes.
Q: Okay. And can you describe what you believe to be
benefit?
A: In a similar way that I responded to the question about the
setting aside of the sale, the conversion, transformation of the
property into cash is something that my clients were
attempting to do in the state court action, and could have
done at a far less cost.
Id., 38:3-18.
111. As discussed herein, the court finds that the preponderance of the evidence
shows that as a result of the efforts of Trustee’s counsel, Marshack Hays and Rus,
Miliband & Smith, Judgment Creditors have benefited in the following ways:
a. Debtor’s transfer of title to her residence to her daughter, Mrs.
Zeman, was avoided, recovered, and preserved by Trustee for the benefit
of creditors, including Judgment Creditors;
b. Through Trustee’s avoidance of the transfer, Debtor lost her claimed
$150,000 homestead exemption, which would have had priority over the
judgment lien of Judgment Creditors; and
c. Debtor’s residence was sold for $321,000 through a sale in this
bankruptcy case.
See Hays Trial Decl., ¶ 63; see also, Daff v. Wallace (In re Cass), 2013 WL
1459272 (9th Cir. BAP 2013), slip op. at *12, citing, Hitt v. Glass (In re Glass), 164
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B.R. 759, 762 (9th Cir. BAP 1994) and 11 U.S.C. §522(g).
112. Based on these facts and numbers, Judgment Creditors netted
approximately an additional $50,000 over what they would have received in enforcing
their rights outside of bankruptcy, that is, specifically, if they had obtained an order from
the state court setting aside the fraudulent transfer from Debtor to her daughter, which the
court assumes that they would have, the recovery would have been subject to Debtor’s
homestead exemption. As discussed herein, by avoiding the transfer which removed the
homestead exemption and conducting an asset sale in this case through the efforts of
Trustee’s counsel in this case, this meant an additional $150,000 in equity from the sale
of Debtor’s residence to pay Judgment Creditors, which they would not have been entitled
to outside of bankruptcy, and after deducting litigation costs in the approximate amount of
$100,000 claimed by Trustee’s counsel for their efforts in Trustee’s surcharge motion, this
leaves roughly an additional $50,000 to benefit Judgment Creditors on their judgment
lien.
III. CONCLUSIONS OF LAW
1. The Motion to Surcharge requires the court to decide whether certain fees
and costs incurred by Trustee to the law firms of Marshack Hays and Rus, Miliband &
Smith (1) were reasonable, necessary, and benefited Judgment Creditors, or (2) were
consented to by Judgment Creditors such that the court should surcharge Judgment
Creditors’ lien to reimburse the Estate for such fees and costs. Compton Impressions Ltd
v. Queen City Bank, N.A. (In re Compton Impressions, Ltd.) 217 F.3d 1256, 1260 (9th
Cir. 2000); Central Bank of Montana v. Cascade Hydraulics & Utility Service, Inc. (In re
Cascade Hydraulics & Utility Service, Inc.), 815 F.2d 546, 548 (9th Cir. 1987); see also,
Debbie Reynolds Hotel & Casino, Inc. v. Calstar Corporation, Inc. (In re Debbie Reynolds
Hotel & Casino, Inc.), 255 F.3d 1061, 1068 (9th Cir. 2001) (the bankruptcy trustee is
entitled to a surcharge to the extent that the costs incurred were (1) reasonable and
necessary and benefited the secured creditor, or (2) consented to by the secured
creditor). The fees and costs Trustee seeks to recover were incurred in successfully
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avoiding and recovering Debtor’s transfer of her residence to her daughter, Zeman,
objecting to Debtor’s claimed homestead exemption, and improving, marketing, and
selling the Property realizing value for Judgment Creditors on their lien.
2. Trustee does not seek to surcharge Judgment Creditors’ lien for any fees or
costs incurred in litigating against Judgment Creditors with regard to the validity, priority,
or extent of their lien.
3. The Motion to Disgorge filed by Judgment Creditors requests that the Court
enter an order disgorging the interim fees and costs previously awarded to Marshack
Hays in the amount of $30,269 in fees and $1,440.53 in costs and the fees and costs
previously awarded to Rus, Miliband & Smith, in the amount of $55,856.25 in fees and
$4,805.88 in costs (the “Fee Award”).
4. Pursuant to 11 U.S.C. §506(c), a bankruptcy trustee may recover the
reasonable and necessary administrative expenses incurred in the preservation and
disposal of property subject to an allowed secured claim. See, 11 U.S.C. §506(c); see
also, Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000); In
re McLean Wine Co., Inc., 463 B.R. 838, 854-855 (Bankr. E.D. Mich. 2011). In the Ninth
Circuit, the trustee is entitled to a surcharge to the extent that the costs incurred were (1)
reasonable and necessary and that they benefited the secured creditor, or (2) consented
to by the secured creditor. In re Compton Impressions, Ltd., 217 F.3d at 1260; In re
Cascade Hydraulics & Utility Service, Inc., 815 F.2d at 548. “Section 506(c) is the
statutory basis for preventing a windfall to a secured creditor.” In re McLean Wine Co.,
Inc., 463 B.R. at 855 (citation omitted).
A. Lack of Consent by Judgment Creditors
5. Trustee contends that Judgment Creditors’ consent to Trustee’s efforts
provides a basis to surcharge the lien and that Judgment Creditors’ consent can be
inferred from their conduct. Judgment Creditors contend that they did not consent to
Trustee’s efforts. As will be discussed below, the court determines that Judgment
Creditors did not consent to Trustee’s actions.
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6. Because Trustee does not argue that Judgment Creditors expressly
consented, the primary issue is the parties’ disagreement as to whether there was
implied consent, which is defined specifically for the purposes of 11 U.S.C. §506(c).
7. The payment of administrative expenses from the proceeds of secured
collateral is allowed when those expenses are incurred primarily for the benefit of the
secured creditor or when the secured creditor caused or consented to the expense. In re
Cascade Hydraulics & Utility Service, Inc., 815 F.2d at 548. Consent may be found to
have been impliedly given if the creditor “has caused the additional expense.” Id. at 549
(citation omitted). On the other hand, it is improper to imply consent to the recovery of
expenses under Section 506(c) from (i) the mere acquiescence by a secured creditor with
respect to an attempt to reorganize under Chapter 11 or with the respect to the liquidation
of its collateral in a case, (ii) the creditor’s mere failure to object to a proposed liquidation,
or (iii) the creditor’s mere failure to move to lift the automatic stay or take similar action.
In re Compton Impressions, Ltd., 217 F.3d at 1261-1262 (mere cooperation or consent to
specific expenses does not establish consent to other expenses).
8. The court finds that consent of Judgment Creditors to Trustee’s litigation
efforts cannot be inferred from their conduct. Trustee argues that on January 29, 2007,
Judgment Creditors’ counsel, Mr. Dimitruk, sent Trustee a memorandum impliedly
consenting to Trustee seeking turnover of the residence from Debtor. That memorandum
stated: “In case you decide to make a demand on Christine Zeman to convey title back
pursuant to the agreement, her address is . . .” JC, Ex.10 at 00114, January 29, 2007
memorandum from Mr. Dimitruk to Trustee. The memorandum then went on to offer
advice for the 11 U.S.C. §341(a) meeting. Id.
9. Implied consent is generally limited to instances in which the creditor
caused the additional expense. In re Cascade Hydraulics & Utility Service, Inc., 815 F.2d
at 549. Here, all Mr. Dimitruk’s memorandum did was provide Trustee with Zeman’s
address and some advice for the 11 U.S.C. §341(a) meeting of creditors. Neither of
these pieces of information caused Trustee to incur the expenses sought by the
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surcharge motion. While Trustee argues that the overall tone of the memorandum
expressed Judgment Creditors’ “desire to cooperate” with Trustee to avoid and recover
the transfer of the residence, “[m]ere cooperation with the debtor does not make the
secured creditor liable for all expenses of administration.” In re Compton Impressions,
Ltd., 217 F.3d at 1261, citing, In re Cascade Hydraulics & Utility Service, Inc., 815 F.2d at
548.
10. Trustee also argues that consent can be implied because Judgment
Creditors’ counsel, Mr. Dimitruk, did not reply to an email from Trustee which claimed that
the estate’s rights in Debtor’s residence were superior to Judgment Creditors. On April 2,
2007, Mr. Dimitruk filed an adversary action against Debtor that included a request that
the court determine that Judgment Creditors had a lien on the residence superior to any
interest held by Debtor. Shortly thereafter, Trustee’s counsel, Mr. Hays, emailed Mr.
Dimitruk and requested that he “reply to confirm that [his] clients will neither assert any
right nor seek entry of any judgment or order that purports to bind the estate as Trustee is
not a named-party to this action.” Mr. Hays further asserted to Mr. Dimitruk that “the
estate’s rights in the residence, the claim to avoid and recover the alleged fraudulent
transfer . . . and any right arising from the lis pendens . . . are superior to that of creditors,
including your clients.” JPTO UF ¶ 82; JC Ex. 92 at 02332; Hays Trial Decl. ¶ 18.
Trustee argues that Mr. Dimitruk implied his approval of Mr. Hays’s statements when he
did not reply to the email to rebut any of the statements.
11. The court finds that any failure of Mr. Dimitruk as Judgment Creditors’
counsel to reply to the email message of Trustee’s counsel, Mr. Hays, cannot be
construed as implied consent because it did not cause Trustee’s pursuit of the avoidance
and recovery of the transfer of Debtor’s residence. On the contrary, Mr. Hays’s email
message stated that Trustee alone had the right to pursue the claims to avoid and
recover the alleged fraudulent transfer and that his right to pursue the claims was
superior to that of Judgment Creditors. The email message of Mr. Hays, Trustee’s
counsel, actually seems to indicate that Trustee intended to pursue the avoidance and
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recovery claims whether Judgment Creditors consented or not. The court is thus not
persuaded that any failure of Mr. Dimitruk to reply to Mr. Hays’s email message caused
Trustee to incur additional expense in pursuing the avoidance and recovery action, and
therefore cannot be the basis for inferring consent.
12. Trustee also argues that consent can be implied based on Judgment
Creditors’ participation in the execution of the June 19, 2007 stipulation that avoided and
recovered the transfer. Trustee argues that because the Stipulation is silent with regard
to the alleged lien, by signing the Stipulation, Judgment Creditors impliedly, if not
expressly, acknowledged that Debtor transferred the beneficial and legal interest in the
residence and that the transfer was then being avoided and recovered.
13. It is not clear to the court how Judgment Creditors’ acknowledgement that
Debtor transferred the beneficial legal interest in the residence and that the transfer was
then being avoided and recovered caused Trustee to incur expenses in his pursuit of the
avoidance and recovery action. It seems that Judgment Creditors’ participation in the
Stipulation would have enabled Trustee to minimize expenses by cutting short any
possible litigation in the avoidance and recovery action.
14. Trustee also argues that Judgment Creditors impliedly consented based on
Mr. Dimitruk’s discussion of litigation strategy with Trustee’s counsel. Trustee described
a series of May 2007 emails between himself and Mr. Dimitruk discussing strategy
regarding “how best to avoid the transfer to Zeman and ensure that Debtor did not
receive her homestead exemption.” Hays Trial Decl. ¶ 20. Trustee went on to state that
“In my opinion, in these emails Mr. Dimitruk indicated his implied consent to the Trustee
taking action to ensure that the transfer was avoided and Debtor not paid her
homestead.” Id.
15. After reviewing the emails described by Trustee, it is difficult for the court to
see how Trustee could infer consent from Mr. Dimitruk’s comments in the email
message. The only discussion of the homestead exemption was Mr. Dimitruk’s question:
“what thoughts have you given to the legal effects of a transfer to either Mr. Daff or Mrs.
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Cass upon (1) the homestead, (2) Mrs. Cass’s claim to a life estate, and (3) Mrs. Cass’s
rights to object to the proposal?” JC Exhibit 92 at 2353. This question or comment is not
sufficient to imply consent, especially when this comment is found in the same email
message as the following statement: “Acceptance of the offer [referring to the settlement
offer that would eventually produce the June 19, 2007, stipulation], as presently framed,
is better than rejection of it by a counter-offer that is not accepted by Zeman and the
possibility of protracted and expensive litigation should Zeman stand firm on her offer to
transfer to her mother.” Id.
16. Trustee also states that on February 20, 2007, Judgment Creditors filed a
response to the United States Trustee’s Motion to Dismiss Debtor’s case in which
Judgment Creditors requested alternative relief. In this response, Judgment Creditors
asserted: “A. The Creditors ask this court to consider denying the motion because of the
abuses by Catherine Cass of the judicial system so that her property may be sold by the
Chapter 7 Trustee; B. Alternatively, the Creditors request that if the court dismisses the
petition, it issue a bar against Catherine Cass from filing any further petitions in
bankruptcy for the maximum time the court restrain her. . .” Docket No. 27 at 2:4-6.
Furthermore, on March 20, 2007, Debtor filed a request for voluntary dismissal of her
bankruptcy case. JPTO ¶ 19. On April 10, 2007, Judgment Creditors filed a response to
Debtor’s request for voluntary dismissal in which they stated that the court should “deny
the motion and require the Debtor to require that the property be re-transferred to the
Debtor.” Judgment Creditors alternatively requested that “if the Court is inclined to grant
the Motion, to first require as a condition of dismissal that the property be re-transferred
to the Debtor by recording of an unconditional transfer of title to the property to the
Debtor and in any event, issue an injunction against the Debtor from re-filing any further
bankruptcy petitions either permanently, for a five-year period, or at least the 180 days, or
such other period as the Court considers to be appropriate.” JPTO UF ¶ 21; JC Ex. 18 at
8:14-20.
17. Judgment Creditors’ opposition to Debtor’s dismissal between February and
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June of 2007 is consistent with Judgment Creditors’ cooperation with Trustee, which
appears to have been based on the hope that Trustee would be able to quickly and
inexpensively resolve the avoidance and recovery of the Transfer through stipulation or
some other means of settlement. On June 20, 2007, Trustee, Judgment Creditors and
Zeman, through their respective counsel, entered into a Stipulation for Entry of Judgment
Avoiding and Recovering Transfer of Real Property. JPTO UF ¶ 26; JC Ex. 42. On May
29, 2008, the court entered the Avoidance Judgment pursuant to the June 20, 2007
Stipulation in the Fraudulent Transfer Adversary Proceeding. JC Ex. 43. Debtor
appealed entry of the Avoidance Judgment. JPTO UF ¶ 29. Hays Trial Decl., ¶ 26.
18. On August 5, 2008, Judgment Creditors filed Positions by James Wallace,
Rebecca Wallace and Gloria Suess (Docket No. 129), which set forth Judgment
Creditors’ position regarding dismissal of Debtor’s bankruptcy case. JC Ex. 44. In that
pleading, Judgment Creditors stated:
The Creditors will benefit from a dismissal because a
dismissal will avoid the numerous delays and predictable
litigation expenses that they have sustained by virtue of the
various positions that Mrs. Cass has taken in this court. A
dismissal will entitle them to obtain an order from the state
court to sell the residence so that the judgment may be
satisfied. Denying the motion to dismiss subjects the Creditors
to further delays and expenses that are not likely to be
sustained by the streamlined procedures available in the state
court proceeding for the sale of property. The Creditors will be
prejudiced, however, if the court does not also issue an
injunction and order the trustee to restore title to the
Residence to Mrs. Cass as conditions of the dismissal. . .
Id. at 8:19-27 (emphasis added). After Debtor appealed entry of the Avoidance
Judgment, it became evident that the Avoidance Litigation was going to be more time
consuming and expensive than Judgment Creditors had anticipated. By August 2008,
Judgment Creditors moved from opposition to the dismissal of Debtor’s bankruptcy case
to supporting dismissal because it had become clear that Debtor’s position with respect
to the Avoidance Judgment was going to make the Avoidance Litigation more protracted
and expensive than if Debtor had been content with settlement. Judgment Creditors’
August 5, 2008, pleading makes clear that by that time Judgment Creditors believed that
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they would be better served if Debtor’s bankruptcy case were dismissed so that
Judgment Creditors could pursue more “streamlined procedures available in the state
court proceeding for the sale of property.” Id.
19. The court finds that Trustee has not shown by a preponderance of the
evidence that Judgment Creditors expressly or impliedly consented to the additional
expenses incurred by Trustee. While Judgment Creditors may have initially cooperated
with Trustee regarding the Avoidance Litigation in bankruptcy court, mere cooperation is
not enough to imply consent for the recovery of all of Trustee’s expenses. In re Compton
Impressions, Ltd., 217 F.3d at 1261. It appears to the court that Judgment Creditors
initially believed that the Avoidance Litigation could be quickly and inexpensively resolved
by Trustee through a stipulation or other settlement. Furthermore, Trustee was the only
party who had standing to pursue the Avoidance Action in bankruptcy, so Judgment
Creditors had little choice but to acquiesce to Trustee’s actions. Finally, once it became
clear to Judgment Creditors that Debtor’s position regarding the Avoidance Action was
going to lead to time consuming and expensive litigation in bankruptcy court, Judgment
Creditors supported dismissal of Debtor’s bankruptcy case so that they could pursue
more “streamlined procedures available in state court.”
20. In the absence of consent by the holder of a secured claim, the facts of a
case may justify charging the holder of a secured claim with certain expenses if a clear
benefit to the secured creditor can be demonstrated. In re Compton Impressions, Ltd.,
217 F.3d at 1262. Here, as discussed below, the actions taken by Trustee benefited
Judgment Creditors, and the court determines that Trustee’s Motion to Surcharge
Judgment Creditors’ lien should therefore be granted.
B. Fees for Services Reasonable, Necessary, and Beneficial to Judgment
Creditors
21. Trustee contends that Judgment Creditors benefited from the fees and
costs incurred by his attorneys. Trustee specifically contends that his attorneys’ efforts:
(1) recovered Debtor’s residence from Debtor’s daughter, which made it available to sell
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to pay Judgment Creditors’ lien; (2) prevented Debtor from receiving any of the sale
proceeds on account of her $150,000 homestead exemption, making more of the
proceeds available to satisfy Judgment Creditors’ lien; and (3) and improved and
marketed the residence, realizing market value for the Property.
22. Judgment Creditors contend that the burden to show that a bankruptcy
trustee’s attorneys’ fees conferred a benefit on a secured creditor is higher than the
burden for other types of surcharge motions, such as those seeking reimbursement of
money actually paid by a trustee. Judgment Creditors contend that the burden is so high
that it is virtually impossible to meet and that Trustee fails to meet the burden.
23. As discussed above, 11 U.S.C. §506(c) allows “the trustee [to] recover from
property securing an allowed claim the reasonable, necessary costs and expenses of
preserving, or disposing of, such property to the extent of any benefit to the holder of
such claim.” Under this provision, Trustee must demonstrate that the expenses were (1)
reasonable, (2) necessary, and (3) beneficial to Judgment Creditors in order to recover.
11 U.S.C. §506(c). As a threshold matter, in order for Section 506(c) to apply, the
relevant expenses sought by Trustee must be “necessary” to preserve or dispose of the
secured creditor’s property. In re Compton Impressions, Ltd., 217 F.3d at 1260-1261. To
satisfy the benefit test of §506(c), Trustee must establish in quantifiable terms that it
expended funds directly to protect and preserve the collateral. In re Cascade Hydraulics
& Utility Service, Inc., 815 F.2d at 548. The amount of Judgment Creditors’ benefit limits
Trustee’s recovery of expenses. In re Compton Impressions, Ltd., 217 F.3d at 1261
(citation omitted). “Section 506(c) is not intended as a substitute for the recovery of
administrative expenses normally the responsibility of the debtor’s estate.” In re Cascade
Hydraulics & Utility Service, Inc., 815 F.2d at 548.
24. Viewing Debtor’s actions in this bankruptcy case retrospectively, it is
evident that she intended her actions to delay, hinder and/or defraud her creditors,
including Judgment Creditors. After Debtor was sued by Judgment Creditors in state
court, she transferred the remainder interest in the Property to her daughter. Judgment
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Creditors obtained a money judgment against debtor in state court, and commenced a
second action in state court against Debtor and her daughter to avoid the transfer as a
fraudulent transfer. Shortly before the trial in the second action in state court for
fraudulent transfer, Debtor commenced this bankruptcy case by filing her voluntary
Chapter 7 bankruptcy petition. The bankruptcy filing gave Debtor temporary relief
because the Chapter 7 Trustee started administration of the bankruptcy estate on behalf
of creditors, including the Property, in which Debtor had claimed a life estate. Debtor
opposed Trustee’s efforts to administer the estate for creditors, including filing requests
for replacement of Trustee (ECF 18), for voluntary dismissal (ECF 73), for disallowance
of pleadings filed by counsel for Trustee and Judgment Creditors (ECF 90), for
reconsideration of orders denying voluntary dismissal and replacement of Trustee (ECF
32 and 89), and objections to employment of counsel for Trustee (ECF 90). The United
States Trustee had moved for dismissal of the case for Debtor’s failure to obtain credit
counseling before filing her bankruptcy petition, but later withdrew that motion (ECF 12
and 29). The court on its own motion issued an order to show cause why the bankruptcy
case should not be dismissed for Debtor’s failure to obtain prepetition credit counseling,
which was supported by Debtor, but opposed by Trustee, Judgment Creditors and the
United States Trustee (ECF 70). The court did not dismiss the bankruptcy case because,
as argued by the United States Trustee, citing In re Mendez, 367 B.R. 109, 118 (9th Cir.
BAP 2007), Debtor was using her failure to obtain credit counseling to seek dismissal not
in good faith. To protect creditors and the integrity of the bankruptcy system, Debtor was
not allowed to voluntarily dismiss her bankruptcy case by claiming that her bankruptcy
filing was improper due to her own failure to obtain credit counseling. Trustee
abandoned the estate’s rights to Debtor’s state court appellate claims against Judgment
Creditors, and Debtor was allowed to prosecute her appeal through the state appellate
system (ECF 180). Meanwhile, Trustee substituted into the second state court suit to
prosecute the claim to avoid the fraudulent transfer of the Property, removed that suit to
this court, negotiated avoidance of the transfer of the Property with Debtor’s daughter,
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and defended Debtor’s appeal of the judgment avoiding the transfer. Hays Trial Decl. ¶¶
19-25. After obtaining the avoidance judgment, Trustee marketed and sold the Property
to benefit the estate and creditors and obtained a good price through an asset sale with
overbidding. Hays Trial Decl. ¶¶ 39-45. Because the court did not dismiss the bankruptcy
case in the interest of the estate and creditors, Trustee provided necessary and beneficial
services to the estate and creditors in opposing Debtor’s litigious efforts to frustrate
creditors and administration of the estate described above. Because the case was not
dismissed, Trustee was needed to administer the estate on behalf of creditors, and this
included opposing Debtor’s efforts to frustrate creditors and estate administration. Such
efforts were needed from the commencement of the case in 2007 and remained
necessary after Debtor’s death in 2009 because of the continuing efforts of Debtor’s
daughter, as probate representative, to assert rights adverse to creditors and the estate,
including the assertion of Debtor’s homestead exemption to the Property.
a. Avoidance Action
25. Trustee incurred $9,407.00 in fees and $395.55 in costs in avoiding and
recovering the Transfer through services provided by Marshack Hays. Trustee incurred
$25,550.00 in prosecuting the avoidance action against Zeman while Trustee was
represented by Rus, Miliband & Smith. Ultimately, Rus, Miliband & Smith was able to
circumvent a trial of the fraudulent transfer claim by reaching a consensual resolution
with Zeman and Judgment Creditors. Castaldi Trial Decl. ¶ 8. This required extensive
communication with counsel for Zeman and counsel for Judgment Creditors and resulted
in a judgment in favor of the Estate that allowed for recovery of the Property. Trustee
also incurred $16,425.00 in defending against Debtor’s appeal of the Stipulated
Judgment from the Avoidance Action. Castaldi Trial Decl. ¶ 9.
i. Necessity and Benefit of Fees Incurred in Avoidance Action
26. Trustee’s efforts and expenses incurred in avoiding, recovering, and
preserving the Transfer were necessary and beneficial to Judgment Creditors because,
so long as the bankruptcy case remained open, Judgment Creditors could not have
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prosecuted avoidance and recovery of the Transfer, and only Trustee had standing to do
so. See 11 U.S.C. §550; see also, City National Bank v. Chabot (In re Chabot), 100 B.R.
18, 23 (Bankr. C.D. Cal. 1989) (Chapter 7 Trustee has exclusive right to avoid and
recover fraudulent transfers made by a debtor); see also Estate of Spirtos v. One San
Bernardino County S.C. Case Numbered SPR 02211, 443 F.3d 1172, 1176 (9th Cir.
2006).
27. Although Judgment Creditors may have initially cooperated with Trustee
regarding the Avoidance Litigation in bankruptcy court, once it was clear, around August
2008, that Debtor’s position with respect to the Avoidance Judgment was going to make
the Avoidance Litigation more protracted and expensive than Judgment Creditors had
anticipated, Judgment Creditors began to support dismissal of Debtor’s bankruptcy case
so that they could pursue recovery of the residence in state court. Judgment Creditors
argued that “[d]enying the motion to dismiss subjects the Creditors to further delays and
expenses that are not likely to be sustained by the streamlined procedures available in
the state court proceeding for the sale of property.” JC Ex. 44 at 8:21-24, Position filed
by James Wallace, Rebecca Wallace, and Gloria Suess (Docket No. 129). The court
finds that Judgment Creditors benefited by the actions taken by Trustee because
Judgment Creditors could not have prosecuted the avoidance and recovery of the
residence so long as the bankruptcy case remained open.
28. Judgment Creditors argue throughout their Proposed Findings of Fact and
Conclusions of Law that “at no time did the Trustee assert that he intended to confer any
benefit on the Judgment Creditors” through Trustee’s actions. Judgment Creditors’
Proposed Findings of Fact and Conclusions of Law at 7:13-15, 15:13-14, 18:16-19. The
court is not aware of any intent requirement in 11 U.S.C. 506(c). Judgment Creditors
appear to read In re Cascade Hydraulics as requiring some type of intent to benefit,
stating that “Trustee had no intentions of directly benefit the collateral within the meaning
of In re Cascade Hydraulics.” Id. at 38:1-2. Without a quotation or pin cite to specific
case law, the court is unable to follow the thrust of Judgment Creditors’ argument. As
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discussed elsewhere in these findings, the court determines Trustee and his attorneys’
actions did benefit Judgment Creditors. Although Trustee unsuccessfully sought a
judicial declaration that Judgment Creditors were not secured creditors, Trustee never
disputed that Judgment Creditors were proper creditors (Trustee took the position that
Judgment Creditors were unsecured on grounds that they did not perfect their judgment
lien on the Property, which position was rejected by this court and the Bankruptcy
Appellate Panel, Daff v. Wallace (In re Cass), 476 B.R. 602 (Bankr. C.D. Cal. 2012), aff’d,
2013 WL 1459272 (9th Cir. BAP 2013)), and even if Trustee were successful, these
creditors would have benefited from Trustee’s actions regarding the homestead
exemption and Avoidance Litigation as unsecured creditors.
ii. Reasonableness of Fees Incurred in the Avoidance Action
29. Debtor filed numerous pleadings of questionable legal merit in her
bankruptcy case and repeatedly opposed Trustee’s efforts to recover, preserve and
administer the residence, which required Trustee’s response and increased the expenses
incurred. See, e.g., Debtor’s “Request for Court’s Reconsideration of Ruling . . .
Regarding Replacement of Trustee Charles Daff,” Trustee’s response, Debtor’s request
for voluntary dismissal, Trustee’s response, Debtor’s “Notice of and 1. Objection to
Motion to Disallow Pleadings of D.E. Hays, etc.,” Debtor’s Objection to D. Edward Hays’s
Request that the Court to Deny Debtor’s Request for Reconsideration of Retaining
Trustee Daff,” Debtor’s appeal of the judgment avoidance of transfer or the residence.
JPTO UF ¶¶ 80, 19, 29; Trustee’s RJN, Ex. 3, Court’s docket re: bankruptcy case number
2:12-bk-16090-RK, Docket Nos. 32, 45, 46; Declaration of D. Edward Hays in Support of
Trial re: Surcharge filed on August 26, 2013 as Docket No. 323 (“Hays Trial Decl.”), ¶¶
26, 68(c)(d) and (e). Given Debtor’s litigious tactics, the court finds that Trustee’s efforts
and the expenses incurred in the avoidance action were reasonable.
30. In addition, in response to Marshack Hays’s Interim Fee Application for the
period from April 21, 2009 through May 31, 2010, the Office of the United States Trustee
evaluated and found reasonable all of the fees and costs incurred by Trustee’s counsel,
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Marshack Hays and Rus, Miliband & Smith, in avoiding and recovering the Transfer. The
U.S. Trustee’s Office stated:
The U.S. Trustee has reviewed the RMS and MH
compensation applications in detail and submits that the fees
requested are reasonable as required under 11 U.S.C.
§330(a)(3)(A) through §330(a)(3)(F) as follows:
(A) Time spent on particular entries appears reasonable. .
. . As noted above, the bulk of item expended related to
litigation necessary for the estate to take title to the
Santa Ana Property and time needed to respond to
Debtor’s numerous motions and objections, many of
which appear to be unfounded.
(B) Expenses appear reasonable and are detailed by
category;
(C) Services appear reasonable and necessary . . . ;
(D) Both RMS and MH have reasonable blended hourly
rates . . . ;
While counsel fees are substantial, they spanned over a three
year period and appeared necessary to prevail in litigation
regarding title to the Santa Ana Property. Substantial time
also was expended to respond to the Debtor’s repeated
efforts to obviate applicant’s efforts. . . .
Trustee’s independent review failed to discover any services
or costs which are not compensable.
JC 69 at 4:6-5:14.
31. The court finds that Trustee took reasonable steps to substitute into
Judgment Creditors’ state court action, remove it to the this bankruptcy court, prosecute
it, respond to Debtor’s defenses, and ultimately recover Debtor’s residence for the Estate
and creditors.
32. Trustee’s actions were necessary and reasonable to preserve the residence
and liquidate it for the benefit of creditors, including Judgment Creditors.
b. Debtor’s Claimed Homestead Exemption
33. In Debtor’s Schedules A and C to her bankruptcy petition, she claimed a life
estate interest in the residence and a homestead exemption in the amount of $150,000.
JPTO UF ¶ 39; JC Ex. 8; Hays Decl., ¶ 6; Trustee’s RJN, Ex. 3, Court’s docket re:
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bankruptcy case number 2:12-bk-16090-RK, Docket No. 61. Apparently, she claimed a
higher homestead exemption in the amount of $150,000 as a person 65 years of age or
older pursuant to California Code of Civil Procedure §704.730(a)(3)(2007). Trustee’s
counsel filed an objection and several supplemental briefs objecting to Debtor’s claimed
homestead exemption and arguing that no portion of the exemption should be paid from
the proceeds generated from the sale of the Property. The court held that Trustee did not
sell anything owned by Debtor on the petition date in which Debtor could claim an
exemption. Instead, Trustee avoided and recovered the remainder interest transferred by
Debtor to Zeman pursuant to the Grant Deed with Life Estate. The remainder interest
recovered by Trustee subsequently became fee simple title upon Debtor’s death. Docket
No. 170. Trustee incurred $15,139 in fees and $106.39 for out of pocket expenses in
opposing Debtor’s $150,000 claimed homestead exemption. Hays Trial Decl., ¶ 66.
Trustee incurred an additional $4,575.00 in connection with the objection to Debtor’s
Homestead Exemption for fees for services provided by Rus, Miliband & Smith. Castaldi
Trial Declaration ¶ 11.
34. Trustee’s actions were necessary to preserve the amount of $150,000
claimed by Debtor as her homestead exemption for the Estate and benefited Judgment
Creditors. Under California law, the allowed homestead would have had priority to
payment over Judgment Creditors’ involuntary judgment lien upon sale of homesteaded
property. California Code of Civil Procedure §§704.720 et seq. and 704.810. As
previously stated, through Trustee’s avoidance of the transfer approved by court order in
May 2008, Debtor lost her claimed $150,000 homestead exemption, which would have
had priority over the judgment lien of Judgment Creditors. Daff v. Wallace (In re Cass),
2013 WL 1459272, slip op. at *12, citing, In re Glass, 164 B.R. at 762 and 11 U.S.C.
§522(g). By avoiding the Transfer and obtaining an order denying payment of the
claimed $150,000 homestead amount, Trustee effectively added this amount of money
available for payment on Judgment Creditors’ lien, which was not available to them
outside of bankruptcy. Id. Accordingly, the court finds that Trustee’s efforts in avoiding
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the Transfer and objecting to the homestead exemption were necessary to payment of
Judgment Creditors’ lien and necessarily beneficial to them.
35. Judgment Creditors argue in their trial brief that they did not benefit from
Trustee’s services related to the homestead exemption because Judgment Creditors
“could have achieved the same result for less of a cost to them.” Trial Brief by James
and Rebecca Wallace and Gloria Suess, Docket No. 327 at 15:19-20. Judgment
Creditors then go on to explain why Debtor’s death in February 2009 caused any claimed
homestead exemption to lapse under California law. Id. at 15:20-16:15. As a result,
Judgment Creditors “could have avoided the homestead claim for far less a cost that the
Trustee’s attorneys charged to get the same result through a much more circuitous way”
and on that basis asked the court to disallow the “entire claim associated with the
homestead services…” Id. at 16:17-20.
36. The court is not persuaded by Judgment Creditors’ arguments. Although
Judgment Creditors are correct that Debtor’s death prevented the application of a
homestead exemption as to Judgment Creditors, Judgment Creditors do not account for
the significant period of time between January 5, 2007 when Debtor filed bankruptcy and
claimed a homestead exemption, and Debtor’s death in February 2009. After Debtor filed
her bankruptcy petition, Judgment Creditors worked with Trustee to object to the claimed
homestead exemption, and Trustee filed an objection on May 11, 2007. That objection
continued to be litigated even after Debtor’s death, and her daughter and probate
representative, Zeman, filed an opposition to the objection on February 9, 2010. Docket
No. 160. On May 6, 2010, the court entered an order determining that the disputed claim
of exemption was rendered moot by Debtor’s death and that no portion of the proceeds of
sale shall constitute proceeds of the sale of the Debtor’s interest in her life estate. Docket
No. 170. The court is not persuaded by Judgment Creditors’ unsupported assertion that
they “would have faced little, if any obstacles, [sic] to enforcing the abstract of judgment
in a sheriff’s sale…” Trial Brief by James and Rebecca Wallace and Gloria Suess, Docket
No. 327 at 16:15-16. As has been obvious throughout this case, Debtor and her
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successor-in-interest, her daughter as probate representative, were both tenacious and
unrelenting litigants, and litigating with such adversaries will generally require some
expense, if not significant expense.
37. Debtor’s death could not have been foreseen at the outset of the litigation
over the homestead exemption in the bankruptcy case, and so, at the very least, Trustee
is justified in claiming legal fees expended for his attorneys objecting to Debtor’s claimed
homestead exemption prior to her death in February 2009. Trustee is entitled to the
whole amount of attorneys’ fees incurred in litigating the homestead exemption because
Debtor’s probate representative, Zeman, continued to assert the exemption even after
Debtor’s death, which required some form of litigation expense to oppose in order to
protect the interests of the Estate and creditors. Despite Judgment Creditors’ belief that
they could have handled this task more cheaply, there is insufficient evidence to support
such an assertion, and the court determines that Trustee’s incurrence of attorneys’ fees
in objecting to the homestead exemption was reasonable, necessary and benefited
Judgment Creditors.
38. Accordingly, the court determines that the legal fees of $15,139 and costs
of $4,682.39 incurred by Trustee for services of his counsel for litigation with Debtor and
her probate representative over the validity of the claimed homestead exemption are
reasonable.
c. Sale of Property
39. Trustee incurred $14,687.00 in fees and $133.85 in expenses related to
selling the residence with respect to the efforts of Marshack Hays. Hays Trial Decl. ¶ 67.
Prior to Marshack Hays’s representation of Trustee, Trustee incurred $2,962.50 in fees in
recovering possession of the Property from the County of Orange after Debtor’s death.
Castaldi Trial Decl. ¶ 10.
40. When Trustee recovered the residence, it was in substantial disrepair, and
he incurred costs to clean, maintain and safeguard the residence for sale. Hays Trial
Decl. ¶ 39. Trustee procured an all cash “as-is” offer to purchase the residence for
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$200,000. JPTO UF ¶ 45; Hays Trial Decl. ¶ 40. Trustee then employed a broker who
solicited multiple overbidders. JPTO UF ¶ 46; Hays Trial Decl. ¶ 68(a) and (b). An
overbid of $280,000 was received by Trustee and accepted prior to the sale hearing.
Hays Trial Decl. ¶ 43. At the sale hearing, five overbidders with cash appeared. JPTO
UF ¶ 50; Hays Trial Decl. ¶ 44. After bidding, the sale price was increased to $321,000.
JPTO UF ¶ 51; Hays Trial Decl. ¶ 45. This amount exceeded Judgment Creditors’
opinion as to the value of Debtor’s residence. JPTO UF ¶ 52; Hays Trial Decl. ¶ 46.
Trustee’s counsel, Marshack Hays and Rus, Miliband & Smith, performed all of the legal
work in connection with selling Debtor’s residence in this bankruptcy case.
41. It was necessary to sell the residence to obtain proceeds to pay creditors,
including the Judgment Creditors’ lien, while Debtor’s case was in the bankruptcy court.
Trustee’s efforts resulted in Trustee receiving the highest and best price for the
residence, which benefited Judgment Creditors by providing the most possible proceeds
for payment of their lien. The court finds that the legal fees and expenses incurred by
Trustee of less than $15,000, less than 5 percent of the sale price, were reasonable.
42. Thus, Judgment Creditors benefited from Trustee’s litigation efforts in
avoiding the transfer of Debtor’s residence, objecting to Debtor’s homestead exemption,
and selling the residence. As noted previously, Judgment Creditors’ counsel
acknowledged that his clients benefited from Trustee’s efforts during his deposition as
Mr. Dimitruk testified at his deposition as follows:
Q: Do you on behalf of your clients take the position that
the stipulation that avoided and recovered the transfer from
the debtor to Ms. Zeman benefited your clients in any way?
A: Yes.
Q: And in what way did that stipulation provide benefit to
your clients?
A: It achieved, in a summary fashion, a part of what they
were attempting to achieve in the state court action that they
filed against both of them, which was the setting aside of the
transfer as a fraudulent transfer. The result is something that
my clients started in a lawsuit that they filed in a state court
action.
JPTO UF ¶ 25; JC Ex. 95 at 36:20 – 37:8.
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Q: Okay. Do you believe that any of the actions taken by
the trustee that resulted in the exemption order benefited your
clients in any way?
A: Yes.
Q: And how did your clients benefit?
A: It spared them what I consider to be the meager cost of
accomplishing the same thing that they could have
accomplished in the state court action.
JC Ex. 95 at 37:20 – 38:2.
Q: In this case, the trustee actually effectuated a sale of
the property, correct?
A: Yes, sir.
Q: Do you believe that any of the actions taken by the
trustee in effectuating a sale of property benefited or
potentially benefited -- will benefit your clients in any way?
A: As to all of the above questions, yes.
Q: Okay. And can you describe what you believe to be
benefit?
A: In a similar way that I responded to the question about
the setting aside of the sale, the conversion, transformation of
the property into cash is something that my clients were
attempting to do in the state court action, and could have
done at a far less cost.
Id. at 38:3 – 38:18.
43. Thus, the court finds that the fees and costs incurred by Trustee regarding
the sale of the Property were beneficial to payment of Judgment Creditors’ lien.
C. No Judicial Estoppel
44. Judgment Creditors argued that regardless of the reasonableness,
necessity, or benefit of Trustee’s efforts, Trustee should be judicially estopped from
seeking to surcharge their judgment lien because Trustee previously argued that they did
not have such a lien. Judgment Creditors contended that Trustee could not surcharge
their judgment lien for his litigation expenses unless he acknowledged the validity of their
lien. As previously noted, Trustee had taken the litigating position that Judgment
Creditors did not have a valid lien on the Property, but that in the event the court
determined that the lien was in fact valid, the lien was subject to surcharge under 11
U.S.C. §506(c). As previously noted, this court determined that Judgment Creditors held
a valid judgment lien against the Property. Subsequently, Trustee filed his Motion to
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Surcharge.
45. Judicial estoppel applies “where a party assumes a certain position in a
legal proceeding, and succeeds in maintaining that position” and provides that “he may
not thereafter, simply because his interests have changed, assume a contrary position,
especially if it be to the prejudice of the party who has acquiesced in the position formerly
taken by him.” New Hampshire v. Maine, 532 U.S. 742, 751 (2001). This principle of
judicial estoppel, “generally prevents a party from prevailing in one phase of a case on an
argument and then relying on a contradictory argument to prevail in another phase.” Id.
(citation omitted).
46. Several factors are considered in determining whether to apply judicial
estoppel in a particular case: (1) whether the party’s position is “clearly inconsistent” with
its earlier position; (2) whether the party has succeeded in persuading a court to accept
that party’s earlier position; (3) whether the party seeking to assert an inconsistent
position would derive an unfair advantage or impose an unfair detriment on the opposing
party if not estopped. New Hampshire v. Maine, 532 U.S. at 750; accord, Ah Quin v.
County of Kauai Department of Transportation, 733 F.3d 267, 270-271 (9th Cir. 2013).
47. Judicial estoppel does not apply in the present case because Trustee did
not succeed in persuading the court to accept Trustee’s position that Judgment Creditors’
lien was invalid. Indeed, Trustee’s argument that the lien was invalid failed as the court
held, now affirmed by the BAP, that the lien was valid. JPTO UF ¶ 59; JC Ex. 75; Hays
Trial Decl., ¶ 58.
48. In addition, Judgment Creditors do not meet the other two required
elements of judicial estoppel. First, Trustee has not taken inconsistent positions. He has
consistently argued that if the court determined that the lien was valid then the lien should
be surcharged. Second, Trustee will not derive an unfair advantage from a surcharge of
the lien. Surcharge will fairly reimburse Trustee for, as explained above, reasonable and
necessary expenses incurred for the benefit of Judgment Creditors with respect to their
judgment lien.
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D. Disgorgement
49. By his surcharge motion, Trustee seeks to surcharge Judgment Debtors’
lien for $39,868.79 in fees and costs for services of its counsel, Marshack Hays, and
$60,505.88 in fees and costs for services of its former counsel, Rus, Miliband & Smith,
which the court should grant as set forth herein.
50. By their disgorgement motion, Judgment Creditors seek an order disgorging
the fees and costs previously paid to Marshack Hays in the sum of $31,709.53 and Rus,
Miliband & Smith in the sum of $60,622.13.
51. Because Judgment Creditors’ lien will be surcharged in an amount in
excess of the interim fee awards previously made, the court determines that that
Trustee’s counsel, Marshack Hays and Rus, Miliband & Smith, may retain the interim
fees and costs previously awarded and paid to them because Judgment Creditors’
Motion to Disgorge should be denied as discussed herein.
IV. CONCLUSION
For the foregoing reasons, the court determines that it should grant Trustee’s
Motion to Surcharge because Trustee has shown by a preponderance of the evidence
that the fees and costs incurred for services of his counsel directly benefited Judgment
Creditors with respect to their judgment lien and therefore, directs Trustee to lodge an
order surcharging Judgment Creditors’ lien for Trustee’s fees and costs incurred for
services of his counsel that directly benefited Judgment Creditors with respect to their
judgment lien in the following amounts: $39,233 for reimbursement of fees and $635.79
for reimbursement of costs incurred by Trustee and owed to the Estate’s counsel,
Marshack Hays LLP, and $55,700 for reimbursement of fees and $4,805.88 for
reimbursement of costs incurred by Trustee and owed to the Estate’s former counsel,
Rus, Miliband & Smith, APC. Also, for the foregoing reasons, the court should deny
Judgment Creditors’ Motion to Disgorge the fees and costs previously paid to Judgment
Creditors.
Trustee is ordered to lodge proposed final judgments or orders consistent with
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these findings of fact and conclusions of law within 14 days of entry of these findings of
fact and conclusions of law.
IT IS SO ORDERED.
###
Date: May 7, 2015
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