In re Ennis

Citations: 178 B.R. 177; 1995 Bankr. LEXIS 190; 1995 WL 79980Docket: Bankruptcy No. 94-60780 KMS

Court: United States Bankruptcy Court, W.D. Missouri; January 6, 1995; Us Bankruptcy; United States Bankruptcy Court

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The court granted Morris Friedell's motion to terminate the automatic stay and denied the debtors' motions for an advance of funds and confirmation of their Chapter 13 plan. The hearing took place on December 19, 1994, where various matters were addressed, including the confirmation of the debtors’ plan, the relief from stay motion by Friedell, the Chapter 13 Trustee's potential dismissal of the case, and the debtors' request to use funds tied to Friedell's security interest. The court reviewed evidence and arguments presented by both parties; however, only Michael Ennis provided testimony, which was objected to as hearsay and irrelevant, while Carolyn Ennis did not testify.

The core issue involved Friedell's claimed perfected security interest in $107,488.33 from the probate estate of Carolyn Ennis's deceased mother, Rose Kubby. The court concluded that the automatic stay should be lifted, affecting both the debtors' objection to Friedell's claim and their request for inheritance advances. The court found no competent evidence to support the debtors' claims of incompetence regarding the stipulation made in their divorce case or the validity of a quitclaim deed submitted by Friedell. Consequently, the court ordered the debtors to file an amended plan within 15 days, affirming that the quitclaim deed did not cancel the stipulation regarding the division of proceeds from the sale of the marital home.

In August 1987, Carolyn Friedell sold a house but failed to pay her ex-husband, Morris Friedell, his share of the net proceeds as stipulated. On November 19, 1991, Carolyn and Michael Ennis filed for Chapter 7 bankruptcy in Seattle, failing to list Morris as a creditor, leading to a discharge on June 24, 1992. Subsequently, on December 21, 1992, Morris secured a California state court judgment against Carolyn for $73,575, accruing interest at 10% per annum, which totaled $125,641.91 by August 31, 1994, the date of their Chapter 13 filing. Despite being aware of the proceedings and having the opportunity to defend herself, Carolyn did not appear at trial. An attempt to appeal the judgment was dismissed by the California appellate court.

On July 26, 1993, Morris registered the California judgment in Polk County, Iowa, where Carolyn was due to receive a final distribution of $107,488.33 from her deceased mother's estate. Morris garnished this estate on January 5, 1994, with the debt amounting to approximately $120,850 by that time. Carolyn's motion to quash the garnishment, claiming lack of proper notice, was denied on May 17, 1994. Following an application by Morris to condemn funds, Carolyn attempted to reopen her Chapter 7 case in Washington on June 22, 1994, to discharge her debt to Morris, but this motion was denied on July 22, 1994, with the judge ruling that the debt was not discharged.

Carolyn then filed a motion in Iowa, citing newly discovered evidence suggesting the debt was discharged, referencing two cases. However, the Iowa District Court denied this motion on August 25, 1994. On August 31, 1994, Carolyn and Michael filed for Chapter 13 bankruptcy in Missouri, proceeding pro se after briefly retaining legal counsel. Notably, they had representation in previous proceedings, including the Washington bankruptcy, Iowa probate, and California litigation.

Creditor Morris Friedell filed a motion for relief from the stay on September 30, 1994, with two responses submitted on behalf of the debtors: one by attorney Norman Rouse and another pro se by the debtors. An initial, non-evidentiary hearing was scheduled for November 8, 1994, and subsequently continued to November 22, 1994, where debtor Carolyn Friedell Ennis requested further postponement. The Court then set a final evidentiary hearing for December 19, 1994.

During the November 22 hearing, Friedell's counsel argued for lifting the stay, asserting that Friedell held a secured claim exceeding the $107,488.33 in the probate estate, rendering the debtors without equity in those funds and unable to demonstrate their necessity for Chapter 13 reorganization. Friedell also indicated that if no lien was found on the funds, the alternative motion to dismiss should be granted due to the debtors' disqualification from Chapter 13 status based on 11 U.S.C. § 109(e), as Friedell's claim alone exceeded the $100,000 limit for unsecured debts.

The debtors sought to challenge the validity of a 1981 stipulation, claiming it was executed while Carolyn Ennis was disabled or potentially forged. However, these issues were not raised in the formal responses submitted by Rouse or the debtors. Instead, defenses centered on a prior discharge in a Washington bankruptcy, asserting exemptions for the inheritance, and claiming Friedell would not suffer harm from the stay since he intended to give the inheritance funds to the children. 

Testimony was limited; Carolyn Ennis did not testify, and Michael Ennis's statement regarding past events was excluded as hearsay. The debtors failed to provide evidence regarding equity in the funds or other relevant issues necessary for maintaining the stay.

The court concluded that Morris Friedell had a non-contingent, liquidated claim of $125,641.91 from a California judgment, with a perfected lien under Iowa law on the $107,488.33 from Carolyn Ennis's inheritance, categorizing him as an undersecured creditor.

Mr. Friedell is recognized as an undersecured creditor with no equity in the property, shifting the burden of proof to the debtors. The debtors failed to provide admissible evidence for adequate protection of the creditor's lien or necessity for reorganization, leading to the termination of the stay under 11 U.S.C. §§ 362(d)(2) and 362(d)(1) due to lack of equity and evidence. Additionally, even if Friedell's lien were invalid, the case would still be dismissed for jurisdictional reasons, as his non-contingent, liquidated, unsecured claim of $125,641.91 exceeds the Chapter 13 debt limit of $100,000 under 11 U.S.C. § 109(e).

The court also ruled against the debtors' challenge to the validity of a 1981 stipulation, citing collateral estoppel. The court affirmed that the relevant issues had been previously adjudicated in California, where Carolyn Friedell Ennis had notice of the original suit but did not appear. The California judgment is final, and the necessary elements for collateral estoppel were met: the issues were identical, the prior adjudication was a judgment on the merits, the parties were the same, and Ennis had a full and fair opportunity to litigate. The validity of the stipulation was confirmed by subsequent rulings in Washington and Iowa courts, further solidifying the court's decision against relitigating these matters.

The California judgment has been reviewed by multiple courts, including the California appellate court, which dismissed an appeal, and a Washington bankruptcy court that denied a motion to reopen the case to include the Friedell debt, ruling that this debt was not discharged. An Iowa District Court also ruled against Carolyn Ennis on attempts to challenge the foreign judgment registration and to quash garnishment. Ennis has had ample opportunity to litigate the issue and has pursued challenges in California, Washington, Iowa, and Missouri. The Washington bankruptcy court's denial of the motion to reopen is now final, with the judge affirming that the debt to Mr. Friedell remains undischargeable.

The cases cited by the debtors, In re Beezley and In re Miller, are not applicable here as they involved no-asset Chapter 7 cases where the debts would have been dischargeable regardless. If the Washington bankruptcy court had reopened the case, Friedell could have objected to the debt's discharge under 11 U.S.C. 523(a)(4) or (a)(6). There is no evidence that the Washington Chapter 7 case was a no-asset case or that it had no bar date.

Debtors have fully explored options to contest the lien on funds held by an Iowa probate executor. Ennis claims incompetency regarding her ability to represent herself and alleges that she was incompetent when she signed a stipulation in 1981. However, principles of collateral estoppel suggest that the court need not address this claim, though it chooses to do so. There was no admissible evidence presented regarding Ennis's alleged incompetency or disability at the time of the stipulation or during the current proceedings. Ennis did not testify, nor did she secure her doctor’s testimony. Observations from the court indicate that Ennis appears competent, despite displaying anger and emotional distress during the hearings. She demonstrated awareness and engagement during the proceedings, suggesting a competent understanding of the case.

The court acknowledges the intelligence and competence of the debtor, noting that she has demonstrated a higher level of skill than a typical pro se debtor, with no signs of incompetence observed during hearings. The court rules on the debtor's motion for an advance of funds, concluding that it cannot grant the motion until the creditor's motion to lift the automatic stay is resolved. The court confirms that creditor Morris Friedell holds a secured claim of $125,641.91 and a valid lien on $107,488.33 held by probate executor Paul Ahlers. As the creditor is undersecured, allowing debtors to access these funds would compromise his security, leading to the denial of the advance funds motion. The court references previous rulings affirming that financial inability and a lack of bankruptcy knowledge do not warrant court-appointed counsel for debtors. Additionally, the court denies confirmation of the debtors’ plan due to the ruling on the automatic stay and instructs the debtors to file an amended plan within 15 days after the December 19, 1994 hearing, failing which the Chapter 13 Trustee's motion to dismiss will be granted. In conclusion, the court grants the motion to lift the stay and denies the motion for an advance of cash collateral.

Morris Friedell's motion to terminate the automatic stay is granted, allowing him to enforce his secured claim of $125,641.91 against funds held by probate executor Paul Ahlers at Norwest Bank. The court found that the claim is secured by a valid, perfected lien on these funds. If the motion had been denied based on an unsecured claim of $125,690.12, it would have led to an alternative motion to dismiss under 11 U.S.C. 109(e) due to the debtors having unsecured debt exceeding $100,000, making them ineligible for Chapter 13 relief. The court also denied the debtors' request to advance funds for legal expenses and found no substantial evidence supporting claims of Carolyn Ennis's incompetency or disability, concluding she appeared competent. The court recalculated Friedell's claim, adjusting it from $132,820 to $125,641.91, excluding compounded interest. Debtors' objection to Friedell's claim and their adversary action against executor Ahlers are scheduled for trial on January 9, 1995, with prior rulings applicable to those proceedings. Debtors must file an amended plan within 15 days following the termination of the automatic stay.

The preliminary hearing on November 22 was held via telephone, focusing solely on legal arguments without evidence presentation. Attorneys Carlson and O'Neal, representing Morris Friedell and executor Paul Ahlers, along with debtor Carolyn Ennis, participated from Springfield, while the judge, debtor Michael Ennis, and Chapter 13 Trustee Richard Fink were present in Kansas City. Attorney Tichenor appeared by phone from Iowa. The court scheduled a final evidentiary hearing for December 19 in Kansas City, requiring in-person attendance. Carolyn Ennis objected to the Kansas City location shortly before the hearing and requested to appear by phone, which had been previously denied due to ineffective telephonic communication and the necessity for witness presence. Reasons for the Kansas City venue included Michael Ennis's residence and job proximity, travel distances for Carolyn Ennis, and the Friedell attorneys' refusal to waive the statutory 30-day period for the final hearing. 

The Bankruptcy Reform Act of 1994 increased unsecured debt limits to $250,000 for cases filed post-October 22, 1994. The issue of appointing counsel for debtors was highlighted, with the court clarifying that it cannot appoint attorneys in bankruptcy cases. Carolyn Ennis had previously requested counsel appointment, citing difficulties in finding representation; however, her claims focused more on the case's complexity than on funding. Legal precedents were referenced to support the court's position, indicating that the in forma pauperis statute does not apply to bankruptcy, and that bankruptcy courts are not classified under that statute. The court noted that if an amended Chapter 13 plan was not filed within the specified 15-day period, dismissal could occur, although it acknowledged a potential filing of an amended plan titled "K*A*N*G*A*R*0*0 PAPERS (INCLUDES PLAN)" on January 5, 1995, pending further review.