Stephen Thomas Yelverton

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
STEPHEN THOMAS YELVERTON,
Debtor.
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Case No. 09-00414
(Chapter 11)
MEMORANDUM DECISION AND ORDER ADDRESSING MOTION OF
STEPHEN THOMAS YELVERTON TO RECONSIDER ORDER DENYING
DEBTOR’S OBJECTION TO CLAIM OF SEDGHI INVESTMENT PROPERTIES, LLP
This addresses the motion of the debtor, Stephen Thomas
Yelverton, to reconsider this court’s January 22, 2010, order
denying Yelverton’s objection to the claim of Sedghi Investment
Properties, LLP. 	For the reasons set forth below, I will
conditionally grant the motion in part.
I
On May 14, 2009, the debtor commenced the above-captioned
case under chapter 11 of the Bankruptcy Code. 	On August 20,
2009, Sedghi Investment timely filed a proof of claim in the
case, claiming $63,846.56 in damages stemming from the breach of
a lease on which Yelverton was a guarantor (Claim No. 23). 	On
October 8, 2009, Yelverton filed an objection to the proof of
claim, arguing that he was not liable for the amount because
The document below is hereby signed.
Signed: April 09, 2010.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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Sedghi Investment (1) unlawfully evicted him and (2) failed to
mitigate its damages by securing a new tenant to assume the lease
or rent the property (Dkt. No 113). 	Sedghi Investment timely
filed in response to the debtor’s objection. 	At an evidentiary
hearing on the objection on January 21, 2010, I overruled
Yelverton’s objection and the next day entered an order
memorializing that decision.
On January 31, 2010, Yelverton filed this motion under Fed.
R. Bankr. Proc. 3008 to reconsider my order denying his
objection. 	Yelverton argues that my decision overruling his
objection was in error for two reasons: (1) under Ostrow v.
Smulkin, 249 A.2d 520, 521-22 (D.C. 1969), once a landlord
retakes possession of property by legal process, the obligation
of a tenant to pay future rent ceases and (2) the claim should
have been disallowed as a fraudulent transfer under
§ 548(a)(1)(B).
II
Under Fed. R. Bankr. Proc. 3008, “A party in interest may
move for reconsideration of an order allowing or disallowing a
claim against the estate.” 	Moreover, under § 502(j) of the
Bankruptcy Code, the court may reconsider the order allowing or
disallowing a claim “for cause,” and “the reconsidered claim may
be allowed or disallowed according to the equities of the case.”
In Yelverton’s motion to reconsider, he first argues that
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the court should disallow Sedghi Investment’s claim to the extent
it violates the rule set forth in Ostrow v. Smulkin, 249 A.2d 520
(D.C. 1969). 	In Ostrow, the D.C. Court of Appeals held that
“[i]f the landlord retakes possession by legal process or by
accepting a voluntary surrender of possession by the tenant, the
obligation of the tenant to pay future rent ceases.” 	Id. at 521.
Based on Ostrow, Yelverton contends that any amount claimed for
rent beyond the date Sedghi Investment received a judgment for
possession should be disallowed.
A.
In its response to the motion to reconsider, Sedghi
Investment argues that Yelverton’s Ostrow argument should fail
for two reasons. 	First, Sedghi Investment contends that because
Yelverton failed to raise this argument in either his written
objection or at the hearing on the matter, he has waived it.
Were this a motion to reconsider under either Rule 9023 or 9024,
Sedghi Investment’s point would be well taken. 	Because, however,
this is a motion under 11 U.S.C. § 502(j) and Rule 3008, the
court may reconsider “for cause” and may disallow the claim
“according to the equities of the case.” 	Generally, courts
conclude that Fed. R. Civ. P. 59 or 60 (depending on when the
motion is filed) supply the standards of cause, or that some form
of the excusable neglect test supplies the cause standard). 	See
In re Wyatt, 368 B.R. 99, 104 (Bankr. D.N.H. 2007).
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Nevertheless, although Rules 59 and 60 set forth standards under
which cause can be established, they cannot be the exclusive
grounds. 	As explained in In re Willoughby, 324 B.R. 66, 73-74
(Bankr. S.D. Ind. 2005):
After reviewing the significant body of case law
devoted to the appropriate standard for cause under §
502(j), the Court must conclude that the issue has
become needlessly complicated. 	Bankruptcy courts have
substantial discretion in deciding what constitutes
“cause” for reconsidering a claim pursuant to section
502(j). 	See, e.g., [Colley v. National Bank of Texas
(In re Colley), 814 F.2d 1008, 1010 (5th Cir. 1987)]
(“As the Advisory Committee Note to Bankruptcy Rule
3008 evidences, the bankruptcy court's discretion in
deciding whether to reconsider a claim is virtually
plenary, as the court may decline to reconsider without
a hearing or notice to the parties involved. 	If
reconsideration is granted, the court may readjust the
claim in any fashion ‘according to the equities of the
case.’ ”). Because of this discretion, the Court is not
inclined to adopt a hard and fast rule as to what
constitutes “cause” or to make whatever rule it does
apply dependent on how or when judgment was entered on
the claim. 	Presumably, if Congress wanted a specific
standard to apply, it would have articulated one.
Furthermore, § 502(j) and Rule 3008 are unnecessary if
Rule 9023 and 9024 were intended to apply mechanically
to motions to reconsider claims.
In the Court's opinion, it should instead consider
the totality of the circumstances to determine whether
cause exists under § 502(j) and whether equity requires
the claim to be allowed, disallowed, or otherwise
adjusted. 	Rules 59 and 60 certainly provide
significant guidance as to what may constitute cause
under § 502(j), but they should not, in the Court's
opinion, be applied as rigidly as some cases would
suggest. In examining the totality of the
circumstances, the Court may also consider any relevant
factor to determine whether equity warrants
reconsideration of the claim, including the reason for,
and effect of, any delay in seeking reconsideration of
the claim; the detrimental or beneficial effect of
reconsideration on other parties; whether any party has
altered its position in reliance on the Court's
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previous judgment or confirmation order, the effect of
reconsideration on administration of the case or like
cases; and the movant's good faith.
Accord, In re Wyatt, 368 B.R. at 104-05 (Bankr. D.N.H. 2007)
("The bottom line is that the Court has broad discretion to
determine whether cause exists.”).
Were Yelverton the only other party in interest in this
case, the equities would clearly weigh in favor of denying his
motion on the basis of waiver. 	Because the extent to which
Sedghi Investment’s claim is allowed impacts other unsecured
creditors in the case, though, the equities of the case favor
allowing Yelverton to raise this new grounds for disallowance,
notwithstanding Sedghi Investment’s well-taken waiver argument.
Sedghi Investment should not reap a windfall recovery at the
expense of other unsecured creditors merely because of
Yelverton’s failure timely to raise what might otherwise be a
meritorious argument.
Although the equities of the case favor allowing Yelverton
to raise Ostrow as a new grounds for objection, they do not favor
Sedghi Investment having had to incur the expenses resulting from
Yelverton’s failure to raise this new argument in his initial
objection. 	If Yelverton continues to prosecute his Ostrow
argument, Sedghi Investment will have been subjected to preparing
for and attending two hearings instead of only one. 	Accordingly,
if Yelverton proceeds with seeking disallowance based on Ostrow,
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Sedghi Investment is entitled to recover, as an administrative
claim, any expenses it incurred as a result of Yelverton’s
failure to raise his Ostrow argument in his original objection.
See Thorpe v. Thorpe, 364 F.2d 692, 694 (D.C. Cir. 1966) (party
relieved from adverse judgment may be required to pay court costs
and attorney’s fees incurred because of the default giving rise
to the judgment). 	Although Thorpe was decided under Fed. R. Civ.
Proc. 60(b), which allows the court to impose “just terms” in
vacating a judgment, and this case was decided under § 502(j)
instead, § 502(j) permits the court to grant allowance or
disallowance on reconsideration according to the equities of the
case, and conditioning reconsideration on payment of attorney’s
fees incurred by reason of Yelverton’s default in raising Ostrow
in his original objection to Sedghi Investment’s claim fits
within the “equities of the case.”
B.
Sedghi Investment next contends, based on Ostrow itself and
in accordance with the summary of the case above, that although
Yelverton is not liable for future rent, he is liable for damages
as a result of the breach of the lease. 	To the extent the lease
provides for such damages, Sedghi Investment is correct: Ostrow
provides that “depending on the circumstances and contractual
provisions of the lease, the tenant may be liable for damages
even after the landlord has retaken possession, but this
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liability is for damages for breach of contract and not for
rent.” 	Id. 	Although Sedhi points to no such provision in the
lease, it would be inappropriate to dispose of the issue on a
motion to reconsider. 	Instead, I think fairness requires that
the court give Sedghi Investment the opportunity to properly
respond to Yelverton’s new grounds for objection and to have a
hearing before the court.
III
In addition to the Ostrow argument, Yelverton also asks the
court to reconsider based on § 548(a)(1)(B). 	Section
548(a)(1)(B) allows the trustee to recover from a transferee for
the benefit of the estate any property transferred by the debtor
in the two years before bankruptcy where the debtor received less
than reasonably equivalent value and, as Yelverton contends here,
the result of the transfer was to leave the debtor with
unreasonably small capital. 	Yelverton argues that all rent
incurred after September 2008, the time when he no longer lived
in the leased premises, is avoidable under this provision because
he was not receiving reasonably equivalent value in exchange for
the obligation to pay rent. 	Yelverton, however, misconstrues
this provision.
The relevant time to evaluate the transfer for purposes of
§ 548 is the time Yelverton agreed to serve as a guarantor for
the lease. 	Yelverton does not contend that at this point he did
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not receive reasonably equivalent value in exchange for his
guarantee. 	Indeed, solely by virtue of his guarantee was
Yelverton was able to live in the leased premises. 	Because
Yelverton has not set forth a plausible argument under
§ 548(a)(1)(B), his motion to reconsider on this basis is
appropriately denied.
IV
For these reasons, it is
ORDERED that:
1. Yelverton’s Motion for Reconsideration (Dkt. No.
220) is denied with respect to the reconsideration based on
§ 548(a)(1)(B).
2. 	The motion is conditionally granted with respect to
reconsideration based on Ostrow, but within 7 days after the
entry of this order, Yelverton may withdraw his objection if
he wishes to avoid being held liable pursuant to the
condition imposed by paragraph 5 below for granting
reconsideration.
3. 	Sedghi Investment shall have the opportunity to
file, within 21 days of the entry of this order, a response
to Yelverton’s objection to its proof of claim based on
Ostrow and Yelverton shall have 7 days from the filing of
Sedghi Investment’s response to file a reply.
4. 	On May 19, 2010, at 2:00 PM the court shall hold a
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hearing on the objection and that by May 12, 2010, the
parties shall provide to one another a list of witnesses and
exhibits for the hearing.
5. 	Unless Yelverton timely withdraws his motion for
reconsideration based on Ostrow, then within 21 days from
the hearing on the objection to Sedghi Investment’s proof of
claim, Sedghi Investment may submit a bill of costs
detailing its expenses incurred as a result of Yelverton’s
failure to raise his Ostrow argument in his initial
objection. 	Within 14 days after Sedghi Investment submits
its bill of cost, Yelverton may object to the costs to be
awarded as an administrative expense.
[Signed and dated above.]
Copies to: Debtor; Richard Rogers, attorney for Sedghi Investment
Properties, LLP; Office of the United States Trustee.
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