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Cole v. Strauss

United States District Court, W.D. Missouri, Central Division

January 3, 2017

NANETTE COLE AND BRUCE COLE, Appellants,
v.
BRUCE E. STRAUSS, TRUSTEE, Appellee.

          ORDER

          NANETTE K. LAUGHREY United States District Judge

         This appeal arises out of an adversary proceeding under title 11 of the United States Code.[1] Appellants Bruce Cole and Nanette Cole argue that the Bankruptcy Court should have advised them of their right to have the proceedings heard by an Article III judge; the Bankruptcy Court did not have authority to enter orders concerning the proceeds of the sale of their residence, and requiring them to dismiss a lawsuit they had filed in California; they should not have been held in contempt; and a third party should have been required to file a separate adversary proceeding. Bruce Cole also moves to adopt Nanette Cole's appeal brief. Doc. 15. The motion is granted. The Court affirms.

         I. Statement of Facts

         Bruce Cole was the president and CEO of Mamtek U.S., Inc., and Nanette Cole is his wife. On December 15, 2011, several creditors filed an involuntary petition for relief under Chapter 7 of the Bankruptcy Code against Mamtek. Bruce Strauss was appointed Trustee of the Debtor's bankruptcy estate.

         In May 2012, the Trustee filed an adversary proceeding against the Coles in which he sought, among other things, avoidance of fraudulent and preferential transfers. The Trustee also moved for a temporary restraining order and preliminary injunctive relief, to prevent the Coles from disposing of the proceeds of the sale of their residence in Beverly Hills, California.

         Based upon Bruce Cole's representation that the property would not be sold before June 27, 2012, the Bankruptcy Court denied the Trustee's request for a TRO and set a hearing on the request for a preliminary injunction for June 22, 2012.[2]

         On June 12, 2012, the Trustee filed a renewed motion for TRO because he had been informed by the broker's counsel that the sale of the real property could close as early as June 15.[3] With the Coles' consent, the Bankruptcy Court entered a TRO on June 15. The order provided, in relevant part:

1. All proceeds of the sale of the residence of defendants Bruce and Nanette Cole ... shall be paid to Escrow of the West [a California escrow company] ....
3. The Escrow Agent shall disburse the proceeds of the Residence as follows: ...
(b) to any governmental entities or other taxing authorities in an amount sufficient to satisfy any taxes or fees relating to the Residence or to the sale of the Residence....
4. All proceeds of the sale of the Residence in excess of the amounts set forth in paragraph 3 shall be held by the Escrow Agent pending further order of the United States Bankruptcy Court for the Western District of Missouri.
5. Any attempt by Bruce or Nanette Cole to enter into any agreement or make any instruction that proceeds received hereafter from the sale of the Residence be disbursed to any person or entity other than the Escrow Agent shall be a direct violation of this Order. ….

Bankr. Doc. 55.[4]

         On June 18, 2012, the Bankruptcy Court entered another order, stipulated to by the Trustee and the Coles. It provided, in relevant part, that: (1) the June 15, 2012 order would “remain in force and effect until final judgment is entered in this adversary proceeding;” and (2) Escrow of the West would retain the net proceeds of the sale of the real property “until final judgment is entered in this adversary proceeding, at which time the Court shall enter an order directing the disposition of such proceeds.” Bankr. Doc. 61. After entry of the June 2012 orders, Escrow of the West continued to hold the proceeds of the sale.

         In December 2012, the Bankruptcy Court granted a motion to withdraw filed by the Coles' attorneys, Neal Sader and Bradley McCormack, and the Coles subsequently proceeded pro se in the adversary proceeding

         On August 29, 2013, the Bankruptcy Court granted the Trustee summary judgment on Counts I and III of the adversary complaint, concerning fraudulent and preferential transfers.[5]The Trustee filed a motion in the Bankruptcy Court on October 16, 2013, asking that the June 2012 orders be modified to direct Escrow of the West to transfer the proceeds to the Trustee so the proceeds could be credited against the Trustee's judgment. The Coles filed an objection in the Bankruptcy Court to the Trustee's motion to modify, on the bases that the judgment was not final in view of the counts still pending in the adversary proceeding and that the proceeds should be used to pay their capital gains taxes relating to the sale of the real property.

         At some point, the Coles hired Gary Mobley, a California attorney, to assist them in having capital gains taxes paid to the IRS and the California Franchise Tax Board out of the proceeds of the sale of the real property. Mobley did not enter an appearance on behalf of the Coles in the adversary proceeding. But he sent a letter on November 13, 2013 to Escrow of the West, stating that he “represent[ed]” the Coles with respect to the sale proceeds and demanding that payment be made from the proceeds to the IRS and the California Franchise Tax Board, based on the Bankruptcy Court's June 2012 orders. Bankr. Doc. 267, Exhibit A. Through December 17, 2013, Mobley and Escrow of the West's attorney, Daniel Krishel, exchanged numerous letters and emails regarding the Coles' demand for the payment and Escrow of the West's position that such a transfer was unauthorized. Bankr. Doc. 267, Exhibits B-E. The Coles also filed a supplemental brief in the Bankruptcy Court in opposition to the Trustee's motion to modify, but did not disclose the exchanges Mobley was having with Escrow of the West's attorney. Bankr. Doc. 231.

         On December 20, 2013, the Bankruptcy Court denied the Trustee's motion to transfer the proceeds, holding that transfer was premature in view of the other pending claims in the adversary proceeding. Bankr. Doc. 239. The Bankruptcy Court added that if circumstances changed, it would consider a motion to modify its orders regarding the proceeds. The Bankruptcy Court also expressly acknowledged the argument the Coles had made in response to the Trustee's motion, i.e., “that taxes related to the sale of the Property are due and owing, and are to be disbursed by the Escrow Agent from the Funds, ” and ordered:

[The Coles'] assertion in response to the Trustee's motion does not substitute for a motion requesting release of a portion of the Funds. The Court agrees with the Trustee's position that, if the Defendants claim that the Funds should be used to pay their capital gain tax liability, they must submit a formal request to the Court for consideration, asserting all the factual and legal bases for that claim, to which the Trustee will have the opportunity to respond. The Court will then decide the matter, holding a hearing, if necessary.

Bankr. Doc. 239, p. 4 (emphasis added).

         Krishel sent an email to Mobley on January 6, 2014 about the Bankruptcy Court's order, and stating that the Coles would “need to make a motion to have specific funds released and to whom they are to be released.” Bankr. Doc. 267, Ex. F. Mobley responded on January 7, 2014:

The bankruptcy court decision does nothing to change my clients' position, which I believe I have clearly articulated to you. Specifically, your client is holding approximately $900, 000 of my clients' money in an escrow account, the bankruptcy court has ordered Escrow of the West to use these funds to pay to the IRS and Franchise Tax Board (“FTB”) to pay the capital gains taxes incurred in the sale of the residence, and my clients have specifically requested that your client do so. Under these circumstances, your client has no right to refuse this request or, at a minimum, interplead these funds into a California court.

Id., Ex. G. Mobley also said Escrow of the West had “been stalling” him pending the Bankruptcy Court's decision regarding the disbursement motion and that the Bankruptcy Court had ordered Escrow of the West to pay the capital gains taxes. Id. Mobley threatened to sue Escrow of the West if it did not pay the taxes.

         On February 10, 2014, Mobley filed a lawsuit on behalf of the Coles in the Superior Court of California, Orange County, against the Trustee, Escrow of the West, the State of California, and the United States of America concerning the proceeds of the sale of the real property. The first count sought a declaration that Escrow of the West should disburse $175, 000 of the funds to the Coles as a homestead exemption, and remaining funds to the United States and the State of California to satisfy the taxes. The second count alleged Escrow of the West had breached a fiduciary duty when it did not comply with the Coles' demands to pay over the funds as the Coles had requested. Bankr. Doc. 267, Exhibit H.

         The Trustee filed an emergency motion on February 25, 2014 in the adversary proceeding before the Bankruptcy Court, to halt the California litigation and asking for modification of the Bankruptcy Court's prior orders and an expedited hearing. The Coles filed a response in the Bankruptcy Court the following day, representing that there was “no emergency or imminent threat of funds being disbursed.” Bankr. Doc. 248, p. 2. The Coles filed another response in the Bankruptcy Court on March 4, 2014, arguing that the Bankruptcy Court did not have jurisdiction over the funds held by Escrow of the West, and that they had merely brought the California lawsuit to force Escrow of the West to comply with the Bankruptcy Court's orders. Bankr. Doc. 259, pp. 2 and 10.

         The Bankruptcy Court held a hearing by telephone on the emergency motion on March 5, 2014.[6] The Bankruptcy Court found that the Coles' filing of the California lawsuit was “a clear violation of the Barton Doctrine[7], ” Bankr. Doc. 265, pg. 9, and that the Coles had “clearly violated this Court's order and are actively trying to circumvent it in at least several respects, ” id., p. 34. The Bankruptcy Court also cited both the November 13 letter from Mobley, as well as the California lawsuit, as evidence of the Coles' attempts to circumvent and violate its order. Id., p. 35. The Bankruptcy Court further found that by filing the California lawsuit, the Coles were seeking in California “an interpretation of my order. The appropriate place for an interpretation of this Court's order is this Court. I also note that they're essentially asking the California court to interpret my order, incredibly, without even having advised the California court of the existence of my order.” Id., p. 36. Describing the Coles' conduct as “disingenuous at least and deceitful at most, ” the Bankruptcy Court noted that while litigating the Trustee's motion to transfer the proceeds, the Coles never advised the Bankruptcy Court that they were actively seeking to have the proceeds paid to the taxing authorities. Id. The Bankruptcy Court granted the Trustee's emergency motion and ordered Escrow of the West to transfer the funds to the Tennessee bank account of the Estate of Mamtek U.S. by 5 p.m. the same day, which Escrow of the West did. The Bankruptcy Court further ordered the Trustee “not [to] dispose of or transfer any of the Funds until all claims in the above-captioned adversary proceeding are finally determined and unappealable.” Bankr. Doc. 262.

         On March 11, 2014, Escrow of the West filed a motion to dismiss in the California lawsuit, attaching copies of the Bankruptcy Court's March 5, 2014 hearing transcript and order on the emergency motion. Bankr. Doc. 267, Exhibit I. The Coles filed suggestions in opposition in the California lawsuit, arguing that the Bankruptcy Court had ordered Escrow of the West to pay their taxes. Bankr. Doc. 267, Exhibit J. The Hon. Derek W. Hunt held a hearing on the motion on April 22, 2014. Judge Hunt denied Escrow of the West's motion to dismiss, but stayed the case. Although Mobley argued that the Bankruptcy Court's June 2012 orders' reference to the “taxes” should be read expansively and the Coles were therefore entitled to immediate payment of the capital gains taxes from the sale proceeds, Judge Hunt disagreed. He opined that the order was merely referring to property taxes, but that in any event, it was up to the Bankruptcy Court to interpret and enforce its own order. Judge Hunt found the Coles had “misinform[ed] [him] about the background [of the bankruptcy proceedings].” Bankr. Doc. 267, Exhibit M, p. 9. He concluded that the “money [was] within the bankruptcy court's jurisdiction” and it was not “sensible [of the Coles] to think [they] could go forward and adjudicate against Escrow of the West, which has transferred, or in some fashion put that money-by virtue of a bankruptcy court order-in the hands of” the Trustee. Id., pp. 11-12. Judge Hunt also noted that the Bankruptcy Court had invited the Coles to file a motion in the Bankruptcy Court if they felt the funds should be used to pay the capital gains taxes, but the Coles had not taken the Bankruptcy Court up on the invitation. Judge Hunt stated that he was “not going to step on Judge Dow's feet.” Id., p. 13-15.

         The Coles did not file a motion in the Bankruptcy Court concerning payment of taxes. They continued to litigate the California case and it was reassigned from Judge Hunt to the Hon. Randall Sherman on August 9, 2014. On December 5, 2014, Judge Sherman held a hearing, vacated the stay previously entered by Judge Hunt, and set a case management conference for January 23, 2015 with a trial to follow.

         On January 20, 2015, Escrow of the West filed a motion in the Bankruptcy Court asking for findings that Escrow of the West had complied with the Bankruptcy Court's orders and that the Coles were in contempt. Bankr. Doc. 267. Mobley and the Coles filed separate suggestions in opposition. Docs. 274 and 274. The Bankruptcy Court held a hearing on Escrow of the West's motion on March 11, 2015. Mobley was present in person and Nanette Cole participated by telephone. After hearing argument, Judge Dow made oral findings of fact and conclusions of law under Bankruptcy Rules 7052 and 9014(c). Judge Dow found that Escrow of the West had complied in all material respects with the Bankruptcy Court's orders and that “as of February 6, 2014, the Coles and their counsel [Mobley] were in contempt of this Court's order of 12/20 by filing the proceeding in the State of California requesting precisely the determination that this Court told the Coles in my order of 12/20 they could only get here.” Bankr. Doc. 283, p. 35. Judge Dow ordered the Coles to dismiss the California case and stated that they would be fined $100 per day until they had done so. Id., pp. 35-36. Judge Dow also ordered Escrow of the West's attorney to prepare a written order incorporating his oral ruling. Id., p. 46. Although Judge Dow had not in his oral ruling indicated whether the California lawsuit should be dismissed with or without prejudice, the written order he subsequently entered provided that it should be dismissed with prejudice. Bankr. Doc. 281.

         The Coles filed a motion to dismiss with prejudice in the California case on March 13, 2015 and the case was dismissed with prejudice the same day.[8] Nothing in the record reflects that the Coles were directed to pay or paid the $100 daily fine after they dismissed the case.[9]

         On February 17, 2016, the Trustee filed a motion in the Bankruptcy Court adversary proceeding to dismiss the remaining counts. The Coles filed a “Response, ” stating they did not object to dismissal of the counts “as the only relief specified in the motion, ” but that they did object if the Trustee wanted relief beyond what was specified, stating that the Trustee should be required to file a separate motion. Bankr. Doc. 303. The Bankruptcy Court granted the Trustee's motion to dismiss on March 11, 2014, ordering:

Trustee's Motion to Dismiss Adversary Proceeding Counts II, IV, V, VI, VII, VIII And IX Only Of The First Amended Complaint filed by Bruce E. Strauss, Trustee is Granted. The Court has reviewed the responses filed by both defendants. Neither states any basis for refusal of the requested relief which benefits the defendants and which they essentially say they do not oppose. While concerns are expressed about so-called “other relief” no relief other than dismissal of the remaining counts of the amended complaint is sought. None of the litany of other complaints (many of which have been previously raised and rejected) is even remotely relevant to the relief requested by plaintiff in the motion.

Bankr. Doc. 304.

         The Coles filed motions in the Bankruptcy Court under Bankruptcy Rule 9023 to alter or amend, and to clarify. Bankr. Docs. 306 and 307.[10] They asked the Bankruptcy Court to clarify the process by which they could seek an order directing the Trustee to use certain funds in his possession to pay their taxes, and to order that before the Trustee disbursed the funds, the Trustee must file a motion seeking authorization to do so. Id. The Trustee responded that the issue of clarity of the process for obtaining an order on payment of taxes had already been litigated, the process was so clear that the Coles and their attorney had in fact been sanctioned for violating it, and the Western District had upheld the sanction in the attorney's appeal. The Trustee added that no order was necessary with respect to his obligations to file any motion regarding disbursement, inasmuch as the Bankruptcy Code and Rules already governed such activities. Bankr. Doc. 309.

         On May 4, 2016, the Bankruptcy Court denied the Coles' motions. Bankr. Doc. 312. The Bankruptcy Court held that the grounds for the Coles' motion were unclear. It noted that although the Coles asked for clarification about the process for determining the appropriate disposition of the proceeds held by the Trustee of the sale of their residence, and complained that the Bankruptcy Court had overlooked a similar request for clarification in their response to the motion to dismiss, the issue was irrelevant to the Trustee's motion to dismiss the remaining counts. The Bankruptcy Court further noted it had already made “abundantly clear” what the Coles must do if they wanted a determination regarding payment of taxes from the sale of the proceeds. Id., p. 2. Finally, the Bankruptcy Court noted that Rule 9023 is addressed to mistakes of law or fact, but the Coles had not suggested that anything in the order on the motion to dismiss reflected a mistake of law or fact. The Bankruptcy Court concluded:

[The Coles] have been told repeatedly that they must file a motion setting forth the arguments and authorities that support their request and serve it on the Trustee. There is no need for any “clarification”. Despite that repeated advice, the [Coles] have failed to do so. ...

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