Integrated Technology Solutions, Inc.

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
INTEGRATED TECHNOLOGY SOLUTIONS, INC.,
No. 11-08-13832 JA
Debtor.
MEMORANDUM OPINION
This matter is before the Court on the Debtor's Objection to Allowance of the Claim
of Outdoor Creations Unlimited (Claim No. 2) ("Objection to Claim"). The Court held a
final hearing on the Objection to Claim on August 25, 2009 and took the matter under
advisement. Claimant, Outdoor Creations Unlimited ("Outdoor Creations"), was
represented by Jakob & Associates, P.C. The Debtor, Integrated Technology Solutions, Inc.
("ITS"), was represented by William F. Davis & Assoc., P.C. After consideration of the
evidence presented and the arguments of counsel, the Court finds that Outdoor Creations is
entitled to an allowed claim under 11 U.S.C. § 502(b), but that it failed to establish the full
claim amount contained in its proof of claim. Consequently, the Court will sustain, in part,
and overrule, in part, ITS’s Objection to Claim.
BACKGROUND AND PROCEDURAL HISTORY
ITS is a computer consulting and engineering business that provides a range of
computer services to its clients, including the purchase, installation, configuration,
maintenance, and upgrade of computer hardware and software. ITS filed a voluntary
petition under Chapter 11 of the Bankruptcy Code on November 10, 2008. Outdoor
Creations filed a proof of claim in the amount of $198,464.56, based in part upon a pre-
petition default judgment entered in state court determining that ITS was liable for breach of
Case 08-13832-j7 Doc 88 Filed 09/17/09 Entered 09/17/09 12:03:40 Page 1 of 14

-2-
contract, negligent representation, and unfair trade practices. See Claim No. 2, filed January
26, 2009. 1 Post-petition, Outdoor Creations obtained a default judgment for damages
against ITS. See Default Judgment As to Damages on Plaintiff’s Complaint for Breach of
Contract, Negligence, Negligent Misrepresentation, and Unfair Trade Practices Act
(“Damages Judgment”) attached to Claim No. 2. Because the Damages Judgment was
entered against ITS after the filing of ITS’s voluntary petition under Chapter 11 of the
Bankruptcy Code, it violated the automatic stay imposed by 11 U.S.C. § 3622 and is void ab
initio.3
ITS objected to the claim of Outdoor Creations on the following grounds: 1) that the
pre-petition default judgment constituted an avoidable preferential transfer under 11 U.S.C.
§ 547; 2) that the Damages Judgment and consequent transcript of judgment violated the
automatic stay; and 3) that the Damages Judgment constituted an avoidable post-petition
transfer under 11 U.S.C. § 549.4 At a preliminary hearing on the Objection to Claim, the
1 The Court notes that Outdoor Creations did not attach to its proof of claim a copy of the
default judgment on liability, nor did it introduce a copy of the pre-petition default judgment into
evidence at the final hearing. The Objection to Claim acknowledges that a default judgment was
entered pre-petition.
2 That section provides, in relevant part:
. . . a petition filed under . . . this title . . . operates as a stay, applicable to
all entities, of --
(1) the . . . continuation . . . of a judicial . . . proceeding against the
debtor that was . . . commenced before the commencement of the case
under this title . . .
11 U.S.C. § 362(a)(1).
3Ellis v. Consolidated Deisel Elec. Corp., 894 F.2d 371, 372 (10th Cir. 1990)(“It is well
established that any action taken in violation of the stay is void and without effect.”)(citing Kalb v.
Feuerstein, 308 U.S. 433, 438, 60 S.Ct. 343, 346, 84 L.Ed. 379 (1940)).
4 Because the Court finds that the Damages Judgment is void because it violated the
Case 08-13832-j7 Doc 88 Filed 09/17/09 Entered 09/17/09 12:03:40 Page 2 of 14

-3-
Court determined that the only remaining issue to be determined at a final hearing was ITS's
damages; consequently the Court set a final hearing on damages on August 25, 2009. At the
final hearing, ITS continued to argue that any findings issued by the state court in the
default judgment as to liability constituted an avoidable preferential transfer, and that such
judgment is not binding on the Bankruptcy Court under collateral estoppel principles since
ITS did not participate in the state court action.
For purposes of adjudicating the Objection to Claim, the Court overruled ITS’s
objection that the pre-petition default judgment constituted an avoidable preferential transfer
under 11 U.S.C. § 547, without prejudice to ITS filing an adversary proceeding. An action
to avoid a preferential transfer under 11 U.S.C. § 547 must be brought by adversary
proceeding. See Rule 7001(1), Fed.R.Bankr.P. The Court observed that in any event it does
not appear that a prepetition adjudication of a claim by default constitutes a transfer within
the meaning of 11 U.S.C. § 547(b).
The Court overruled ITS’s objection that the default judgment on liability is not
binding on the Bankruptcy Court. The pre-petition default judgment determining liability
constitutes an adjudication by a state court that binds the Bankruptcy Court under principles
of res judicata and full faith and credit.5
automatic stay, the Court need not address ITS’s argument that the post-petition entry of the
Damages Judgment and issuance of a transcript of judgment constitute voidable post-petition
transfers under 11 U.S.C. § 549.
5See, e.g.,Tague & Beem, P.C. v. Tague ( In re Tague), 137 B.R. 495, 502 (Bankr. D.Colo.
1991)(“Res judicata enables the bankruptcy court to give full faith and credit to a prior state court
judgment in assessing whether a ‘claim’ or ‘debt’ exists in a bankruptcy case.”) (citing generally
Bolling v. City & County of Denver 790 F.2d 67, 68 (10 th Cir. 1986)). Because federal courts are
bound under 27 U.S.C. § 1738 to give full faith and credit to a state court judgment, only lack of
Case 08-13832-j7 Doc 88 Filed 09/17/09 Entered 09/17/09 12:03:40 Page 3 of 14

-4-
FACTS
In August of 2006, Outdoor Creations hired ITS to provide it with a networked
computer system. The purpose of the computer system was to network three related
business entities: Lawnscapers Grounds Management; Outdoor Creations; and
Enchantment Mower and Saw. These three separate business entities share the same
management structure, and are owned by the same individual. ITS and Outdoor Creations
expected that the computer system and network would be installed and operational by
December of 2006. ITS also provided and installed a telephone system for Outdoor
Creations. Neither the computer system nor the telephone system that ITS installed worked
satisfactorily. Wendy Crismore, manager for Outdoor Creations, testified that the system
ITS installed would crash and the network go down on a daily basis. As a result, inventory,
cost control and accounting functions that were supposed to be automated under the new
computer system had to be performed manually.
Outdoor Creations terminated its relationship with ITS and hired another computer
consultant, Dimitri’s IT Inc., to fix the system and make the network functional. The
telephone system ITS installed was also unsatisfactory. Outdoor Creations hired The
Telephone Man, Inc. to replace the telephone system.
Ron Reust, Jay McAdams, Arthur Reust, Peggy Carnes, Danelle Marianito
performed manual inventory and accounting functions for the three related companies that
would not have been needed if the new computer system ITS installed had worked
jurisdiction or fraud can serve as grounds to nullify a state court judgment. 	Browning v. Navarro,
887 F.2d 553, 563 (5 th Cir. 1989), rehearing denied 894 F.2d 99 (5 th Cir. 1990).
Case 08-13832-j7 Doc 88 Filed 09/17/09 Entered 09/17/09 12:03:40 Page 4 of 14

-5-
properly. Further, if the new system had worked properly, Ms. Marianito and Mr.
McAdams would not have had a role in the company; Arthur Reust would likely have had a
minor role assisting with inventory accounting; Ms. Carnes would have continued to work
in accounting and inventory, but would not have had to manually input data relating to
sales histories, inventory accounts, costs and controls; and Ron Reust would have worked
in a different capacity.
ITS billed Outdoor Creations a total of $30,087.32 from August 2006 through
January of 2007 for the services and goods it provided to Outdoor Creations. See Exhibit
C. Of this amount, Outdoor Creations paid ITS $23,125.21. Id.
Dimitri’s IT Inc. fixed the faulty system ITS had installed, and made the network
functional. For this work, Dimitri’s IT Inc. billed Outdoor Creations $35,967.31, including
$280.00 for work described as “go over left over equipment/software purchased by ITS”
performed more than six months after the bulk of the services Dimitri’s IT Inc. rendered to
fix the system. Dimitri’s IT Inc. also billed ITS $2,030.00 for work that constituted
litigation services.6 See Exhibits E-1 through E-7.
Outdoor Creations introduced 2006 and 2007 employee earnings statements for Ron
Reust, Jay McAdams, Arthur Reust, Peggy Carnes, and Danelle Marianito, see Exhibits A-
6See Exhibit E-7 which includes the following time entries:
6/24/2008 	Help create deposition questions for ITS 	8.0 	$560.00
6/4/2008 	Present deposition questions and come up with existing
questions. Clarify and explain technical issues to Dustyn
and Wendy
11.0 	$770.00
November-
08
Summarize ITS issues and prepare for hearing 	10.0 	$700.00
Case 08-13832-j7 Doc 88 Filed 09/17/09 Entered 09/17/09 12:03:40 Page 5 of 14

-6-
1 thru A–11, employees who performed manual inventory and accounting functions as a
result of the non-functioning computer system. Although Ms. Crismore testified that the
earnings statements cover only that portion of time that the employees performed data entry
and inventory control services necessitated by the faulty computer system, the evidence
does not support that testimony. Ms. Crismore testified that if ITS had performed as
agreed, the computer system would have been functional by December 2006, after which
there would have been no need for manual accounting. She also testified that the computer
system as fixed by Dimitri’s IT Inc. worked properly by May 2007. 7 Accordingly, any
additional employee time for manual inventory and accounting would have been performed
between sometime in December 2006 and the end of May 2007.
Enchantment Mower & Saw, Lawnscapers Grounds Management, and Outdoor
Creations each used AR3 LLC dba Atlas Resources, Inc.(“Atlas”) as a third party payroll
service. Atlas made payroll for those companies, and generated the employee earning
statements admitted in evidence for Peggy Carnes, Danelle Marianito, Jay McAdams,
Arthur Reust and Ron Reust. Those earnings statements are for each of the 2006 and 2007
calendar years. 	They reflect that for those periods Atlas’ client for payroll to Jay
McAdams and Arthur Reust was Outdoor Creations, Atlas’ client for payroll to Ron Reust,
Dannelle Marianito was Lawnscpaers Grounds Management, and Atlas’ client for payroll
to Peggy Carnes was Enchantment Mower & Saw for part of her wages and Lawnscapers
Grounds Management for the remainder of her wages. See Exhibits A-1 through A-11.
7 Outdoor Creations introduced Dmitri IT Inc. invoices indicating that it continued to perform
work to fix ITS’s faulty work through July 2007. See Exhibits E-4, E-5 and E-6.
Case 08-13832-j7 Doc 88 Filed 09/17/09 Entered 09/17/09 12:03:40 Page 6 of 14

-7-
The earnings statements do not reflect wages by pay-period, but simply show the total
amount paid each employee over each one-year period. No evidence was presented that
Outdoor Creations employed or paid any part of the compensation for Peggy Carnes,
Dannelle Marianito or Ron Reust, had any obligation to reimburse Enchantment Mower &
Saw or Lawnscapers Grounds Management for the amounts it paid those employees, or
otherwise suffered any damage as a result of compensation those other entities paid.
Ms. Crismore testified that she spent approximately fifty percent of her time
addressing the computer problems that arose as a result of the faulty services ITS provided
Outdoor Creations. Although Ms. Crismore testified that she is a manager for Outdoor
Creations, the documentary evidence reflecting her salary consists of a Find Report from
the records of Lawnscapers Grounds Management. See Exhibit A - 12. That report reflects
that she received a salary of $75,601.00 for the period from January 2006 through
December 2007. No evidence was presented that Outdoor Creations paid any part of
Wendy Crismore’s compensation, had any obligation to reimburse Lawnscapers Grounds
Management for any amounts it paid to Ms. Crismore, or otherwise suffered any damages
as a result of any compensation Lawnscapers Grounds Management paid to Ms. Crismore.
Outdoor Creations paid $3,197.70 for the telephones and The Telephone Man, Inc.’s
telephone installation services. Outdoor Creations was unable to realize any value from the
telephones ITS provided.
DISCUSSION
Allowance of claims is governed by 11 U.S.C. § 502. Pursuant to 11 U.S.C. §
Case 08-13832-j7 Doc 88 Filed 09/17/09 Entered 09/17/09 12:03:40 Page 7 of 14

-8-
502(a), a creditor’s proof of claim filed in accordance with 11 U.S.C. § 501 is deemed
allowed unless a party objects. 11 U.S.C. § 502(a).8 Once an objection is made, the Court
determines the amount of the creditor’s claim as of the date of the petition. 11 U.S.C. §
502(b).9 Although a proof of claim filed in accordance with Rule 3001, Fed.R.Bankr.P.
constitutes prima facie evidence of the validity and the amount of the claim10 , once the
objecting party provides sufficient probative evidence in support of its objection, “the
creditor [claimant] has the ultimate burden of persuasion as to the validity and amount of
the claim.”11 In this case, Outdoor Creations attached a copy of the post-petition Damages
Judgment to its proof of claim. ITS objected to the claim by asserting that the Damages
Judgment, entered post-petition in violation of the automatic stay, is void. Even though the
8 That section provides:
A claim or interest, proof of which is filed under section 501 of this title, is deemed
allowed, unless a party in interest, including a creditor of a general partner in a
partnership that is a debtor in a case under chapter 7 of this title, objects.
11 U.S.C. § 502(a).
9 That section provides, in relevant part:
Except as provided in subsections (e)(2), (f), (g), (h), and (i) of this section, if such
objection to a claim is made, the court, after notice and a hearing, shall determine
the amount of such claim in lawful currency of the United States as of the date of
the filing of the petition, and shall allow such claim in such amount, except to the
extent that--
(1) such claim is unenforceable against the debtor
and property of the debtor, under any agreement or applicable law
for a reason other than because such claim is contingent or
unmatured[.]
11 U.S.C. § 502(b)(1).
10See Rule 3001(f), Fed.R.Bankr.P. (“A proof of claim executed and filed in accordance
with these rules shall constitute prima facie evidence of the validity and amount of the claim.”).
11Wilson v. Broadband Wireless Int’l Corp. (In re Broadband Wireless Int’l Corp.), 295
B.R. 140, 145 (10th Cir. BAP 2003)(citing Agricredit Corp. v. Harrison (In re Harrison), 987 F.2d
677, 680 (10th Cir. 1993)).
Case 08-13832-j7 Doc 88 Filed 09/17/09 Entered 09/17/09 12:03:40 Page 8 of 14

-9-
validity of the claim (i.e., ITS’s liability) has been established, Outdoor Creations bears the
burden of proving the amount of its claim (i.e., the amount of damages suffered as a result
of ITS’s unsatisfactory computer services).
Damages Calculation:
Outdoor Creations’ state court action was premised upon breach of contract,
wrongful misrepresentation and violation of the New Mexico Unfair Trade Practices Act,
but it did not specify the cause of action upon which it based its claim for damages at the
final hearing on the Objection to Claim. “Whether recovery is premised on tort or contract
theories, the objective of the damage award is the same: full compensation for the injured
party.” Hubbard v. Albuquerque Truck Center, Ltd., 125 N.M. 153, 158, 958 P.2d 111,
116 (Ct. App. 1998). In this case, to calculate Outdoor Creations’ allowed claim, the Court
will apply general principles for determining damages based on breach of contract.12
“In an action for breach of contract the party who fails to perform the agreement is
justly responsible for all damages flowing naturally from the breach.” Camino Real Mobile
Home Park P’ship v. Wolfe, 119 N.M. 436, 443, 891 P.2d 1190, 1197 (1995) (citing
Schaeffer v. Kelton, 95 N.M. 182, 187, 619 P.2d 1226, 1231 (1980)). Damages sustained
by the non-breaching party to a contract are
based on his expectation interest as measured by
(a) 	the loss in the value to him of the other party’s performance caused by
12 Although Outdoor Creations did not introduce in evidence the contract between
Outdoor Creations and ITS, the testimony focused on damages Outdoor Creations suffered
as a result of ITS not having installed the computer system as agreed. Further, from the
evidence presented, the Court cannot determine what duty on the part of ITS, if any, arose
in tort. Outdoor Creations made no argument in support of a claim of violation of the New
Mexico Unfair Trade Practices Act.
Case 08-13832-j7 Doc 88 Filed 09/17/09 Entered 09/17/09 12:03:40 Page 9 of 14

-10-
its failure or deficiency, plus
(b) 	any other loss, including incidental or consequential loss, caused by
the breach, less
(c) 	any cost or other loss that he has avoided by not having to perform.
Restatement (Second) of Contracts § 347(a) (1981).13
Outdoor Creations paid Dimitri’s IT Inc. a total of $35,967.31. Of this amount,
$2,030.00 is more properly characterized as “litigation services.” Outdoor Creations
presented no evidence that its contract with ITS provided for recovery of litigation costs.
The evidence is unclear whether $280.00 charged well after Dimitri’s IT Inc. completed all
or substantially all of the work to fix the ITS installed system was for work to correct what
ITS had done. These amounts are not properly included in the allowed claim. The Court
finds that $33,657.31 of the $35,967.31 that Outdoor Creations paid Dimitri’s IT Inc. is
attributable to services Dimitri’s IT Inc. performed to fix the computer system installed by
ITS.
To calculate Outdoor Creations’ damages resulting from its payment to Dimitri’s IT
13See also Restatement (Second) Contracts § 347 comment a. (1981) (explaining that
“[c]ontract damages are ordinarily based on the injured party’s expectation interest and are
intended to give him the benefit of his bargain by awarding him a sum of money that will, to the
extent possible, put him in as good a position as he would have been in had the contract been
performed.”) New Mexico has generally adopted the principles set forth in Restatement (Second).
See, e.g., Torrance County Mental Health Program, Inc. v. New Mexico Health and Environment
Dept. 113 N.M. 593, 601-602, 830 P.2d 145, 153-154 (1992)(relying on Restatement (Second) of
Contracts §347(a) & (c) (1981) for the general rule that damages for breach of contract are
measured by “the loss in value of the performance promised by the breaching party, less any cost
or other loss that the nonbreaching party has avoided by not having to perform.” and relying on
Reestatement (Second) of Contracts § 347(b) and comment c for the proposition that the non-
breaching party may also be entitled to recover consequential damages in certain circumstances).
See also, Servants of Paraclete, Inc. v. Great American Ins. Co. 866 F.Supp. 1560, 1578 (D.N.M.
1994)(stating that “New Mexico contract law on damages is generally in accord with basic
Restatement principles.”) (citing Restatement (Second) of Contracts §§ 347, 351, 352
(1981)).
.
Case 08-13832-j7 Doc 88 Filed 09/17/09 Entered 09/17/09 12:03:40 Page 10 of 14

-11-
Inc., the amount it paid to Dimitri’s IT Inc. must be reduced by the unpaid balance of
$6,962.11 that Outdoor Creations would have paid ITS had ITS performed as agreed. That
amount represents a cost Outdoor Creations avoided by not having to pay ITS the entire
contract price. Based on the foregoing, the Court concludes that the amount of Outdoor
Creations’ damages claim attributable to the services performed by Dimitri’s IT Inc.’s to
fix the ITS installed computer system is $26,695.20.
Outdoor Creations also seeks consequential damages for wages it paid to employees
to perform manual inventory and accounting services it would not have otherwise incurred
had the system installed by ITS functioned properly, and wages to Ms. Crismore for the
time she spent dealing with ITS’s faulty work. Based on Ms. Crismore’s testimony that
Outdoor Creations and ITS anticipated that the system would be functional by December of
2006, and that it in fact did function satisfactorily in May of 2007 after Dimitri’s IT Inc.
fixed the system, any additional wages for manual inventory and accounting services or to
deal with faulty work by ITS would have been incurred between December of 2006 and
May of 2007. Outdoor Creations is entitled to consequential damages attributable to wages
it paid for manual inventory and accounting services or to deal with faulty work by ITS
incurred during that period.
The earnings statements offered in support of Outdoor Creations’ claim for
consequential damages reflect that Outdoor Creation paid Arthur Reust and Jay McAdams.
It appears from the Atlas earnings statements that Enchantment Mower & Saw and/or
Lawnscapers Grounds Management, not Outdoor Creations, paid Peggy Carnes, Danelle
Marianito, and Ron Reust. The Find Report for Ms. Crismore shows that her salary was
Case 08-13832-j7 Doc 88 Filed 09/17/09 Entered 09/17/09 12:03:40 Page 11 of 14

-12-
booked to Lawnscapers Grounds Management, not to Outdoor Creations. Outdoor
Creations, as claimant, has the ultimate burden of proof. Based on the evidence presented,
the Court cannot find that Outdoor Creations paid any part of the compensation paid to
Peggy Carnes, Wendy Crismore, Danelle Marianito, or Ron Reust for extra works
necessitated by ITS’s faulty services. Because Outdoor Creations, not Lawnscapers
Grounds Management or Enchantment Mower & Saw, is the claimant, none of the wages
paid by Lawnscapers Grounds Management or Enchantment Mower & Saw are
appropriately included in Outdoor Creations’ damages claim unless Outdoor Creations
suffered economic loss as a result of payments by those other entities.
There was no evidence presented to the Court of an obligation on the part of Outdoor
Creations to reimburse Lawnscapers Grounds Management or Enchantment Mower & Saw
for the additional costs those entities incurred as a result of ITS’s breaches of contract. Nor
was any evidence presented that Outdoor Creations suffered any other loss or economic
harm as a result of the additional compensation paid by Lawnscapers Grounds
Management and Enchantment Mower & Saw. Based on the foregoing, the Court will not
allow as damages the amounts Lawnscapers Grounds Management and/or Enchantment
Mower & Saw apparently paid to Peggy Carnes, Wendy Crismore, Danelle Marianito, and
Ron Reust. The Court will allow pro-rated wages for Arthur Reust and Jay McAdams (the
two employees compensated by Outdoor Creations) for the period from January 1, 2006,
when the computer system ITS installed should have been functional, through the end May
of 2007 when the system actually was functional.14
14 Pro-rated wages for Aurthur Reust for that period are $4,219.50:
Case 08-13832-j7 Doc 88 Filed 09/17/09 Entered 09/17/09 12:03:40 Page 12 of 14

-13-
Finally, Outdoor Creations seeks to recover as part of its damages the amount it paid
to The Telephone Man, Inc. Ms. Crismore testified that the telephone system that ITS
installed was outdated, and that Outdoor Creations was billed by and paid the Telephone
Man, Inc. $3,197.70 to replace the telephone system. She further testified that Outdoor
Creations was not able to realize anything from the old telephone equipment. The Court,
therefore, finds that the $3,197.70 that Outdoor Creations incurred to replace the telephone
system should be included in Outdoor Creations’ allowed claim.
In sum, the evidence before the Court establishes that Outdoor Creations is entitled
to an allowed claim comprised of the following:
Payment to The Telephone Man, Inc.: 	$ 3,197.70
Payment to Dimitri’s IT, Inc. 	33,657.31
Pro-rated wages for manual accounting and inventory 	7,560.45
inventory services performed by employees of
Outdoor Creations
Less
Unpaid balance of ITS’s invoice: 	$6,962.11
TOTAL: 	$37,453.35
The findings of fact and conclusions of law contained in this Memorandum Opinion
are entered in accordance with Federal Rules of Bankruptcy Procedure 7052 and 9014.
$10,126.80 (total wages plus payroll taxes for 2007) ÷ 12 months = $843.90 	X 5 months
= $4,219.50.
Pro-rated wages for Jay McAdams for that period are $3,340.95:
$8,018.30 (total wages plus payroll taxes for 2007) ÷ 12 months = $668.19 X 5 months =
$3,340.95.
Case 08-13832-j7 Doc 88 Filed 09/17/09 Entered 09/17/09 12:03:40 Page 13 of 14

-14-
The Court will enter a separate order consistent with this Memorandum Opinion.
______________________________________
ROBERT H. JACOBVITZ
United States Bankruptcy Judge
Date entered on docket: 	September 17, 2009
COPY TO:
William F. Davis
William F. Davis & Assoc., P.C.
Attorney for Debtor
6709 Academy NE, Suite A
Albuquerque, NM 87109
Steven M Jakob
Jakob & Associates, P.C.
Attorney for Outdoor Creations Unlimited
P.O. Box 93700
Albuquerque, NM 87199-3700
Case 08-13832-j7 Doc 88 Filed 09/17/09 Entered 09/17/09 12:03:40 Page 14 of 14