Edwards Family Partnership v. Johnson
32f4th472
| 5th Cir. | 2022Background
- CHFS (a mortgage servicer run by Dickson) borrowed from Dr. Charles Edwards’ entities (Rainbow Group, later EFP and BHT) via a $10M Home Improvement Line (HIL) and later funded seven subprime “Mortgage Portfolios.” CHFS later filed Chapter 11.
- Rainbow Group assigned its HIL rights twice (to BHL in 2007, then split to EFP/BHT in 2010); original loan documents were held under a custodial agreement by a Mississippi law firm.
- Mortgages in Portfolios #3–6 had long terms; Portfolios #1–2 and #7 had disputed characterization (loan vs. joint venture) and valuation; Portfolio #7’s original documents are missing.
- Dickson stole funds and removed CHFS records to Costa Rica; Trustee Kristina Johnson was appointed and sued Edwards/entities for various claims including stay violations, conversion, and challenges to assignments and security interests.
- Bankruptcy court ruled against Edwards on statute-of-frauds for Portfolios #3–6, adopted Trustee valuation for #1–2 (reduced secured claim), voided the 2010 assignment on fairness grounds, found conversion and stay violations; district court affirmed some rulings, reversed others, and remanded valuation and stay-damage issues.
- On appeal the Fifth Circuit: affirmed statute-of-frauds holding; remanded valuation of #1–2 and the Portfolio #7 claim amount to the bankruptcy court; affirmed that the 2010 assignment is valid and that Edwards’ entities hold a perfected security interest in the HIL loans; affirmed failure to trace commingled stolen funds; reversed the conversion finding and vacated contempt-based sanctions for automatic-stay violations (remanding fee/damages issues).
Issues
| Issue | Plaintiff's Argument (Trustee Johnson) | Defendant's Argument (Edwards entities) | Held |
|---|---|---|---|
| 1. Statute of Frauds for Mortgage Portfolios #3–6 | Agreements were enforceable despite oral terms; statute of frauds inapplicable because agreements were susceptible to performance within 15 months or fully performed | Statute of frauds bars recovery because loan repayment depended on long-term underlying loans (over 5 years) | Affirmed: statute of frauds bars claims for Portfolios #3–6 (not performable within 15 months) |
| 2. Valuation and characterization of Mortgage Portfolios #1–2 | Trustee: portfolios are loans; Trustee’s expert valuation ($788,611) correct | Edwards: portfolios treated as loans entitling them to larger secured claim (~$1.7M); bankruptcy court improperly adopted Trustee’s expert assumptions | Remanded: bankruptcy court must re-evaluate and explain valuation/characterization of #1–2 |
| 3. Mortgage Portfolio #7 claim and missing documents | Trustee: collections rightfully retained by estate; assignment terms disfavor Edwards | Edwards: Portfolio #7 was a joint venture and claim disallowance lacked analysis; amount owed must be recalculated | Remanded: summary disallowance lacked analysis—issue returned to bankruptcy court for reevaluation |
| 4. Validity / perfection of 2010 HIL Assignment; tracing stolen funds; post-petition conduct (conversion / §362) | Trustee: has standing and can challenge 2010 Assignment; assignment voidable; Edwards violated automatic stay and converted estate property (CDs) and caused costs; recovered/commingled funds belong to estate | Edwards: 2010 Assignment valid; custodial possession under UCC continuous-perfection preserved Edwards’ perfected interest; Trustee cannot trace commingled stolen funds to retain security; CDs were provided by a third party (Meehan), not estate property | Mixed: Trustee has standing but failed to show error—district court was correct to find 2010 Assignment valid and Edwards’ entities have a perfected security interest; bankruptcy court was right that Edwards failed to trace commingled recovered funds (affirmed); reversed conversion finding re: CDs and vacated contempt/§105 sanctions for stay violation (remanded damages/fees issues) |
Key Cases Cited
- Anderson v. City of Bessemer City, 470 U.S. 564 (U.S. 1985) (deference to trial-court factual findings).
- In re Gerhardt, 348 F.3d 89 (5th Cir. 2003) (standards of review for bankruptcy appeals).
- In re SI Restructuring, Inc., 542 F.3d 131 (5th Cir. 2008) (appellate review standards for district court sitting in bankruptcy appellate capacity).
- In re ASARCO, L.L.C., 702 F.3d 250 (5th Cir. 2012) (application of review standards to bankruptcy judgments).
- Matter of Trendsetter HR L.L.C., 949 F.3d 905 (5th Cir. 2020) (affirming factual findings that are plausible in light of the record).
- Beane v. Bowden, 399 So. 2d 1358 (Miss. 1981) (Mississippi law on indefinite-duration contracts and statute of frauds).
- Stahlman v. Nat'l Lead Co., 318 F.2d 388 (5th Cir. 1963) (statute of frauds precedent).
- In re Stembridge, 394 F.3d 383 (5th Cir. 2004) (valuation is mixed question of law and fact).
- Matter of Clark Pipe & Supply Co., Inc., 893 F.2d 693 (5th Cir. 1990) (bankruptcy judges resolve valuation case-by-case).
- Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343 (U.S. 1985) (scope of trustee duties and control of debtor records).
- United States v. Durham, 86 F.3d 70 (5th Cir. 1996) (equitable tracing principles and discretion in applying equitable remedies).