592 B.R. 38
Bankr. W.D. Pa.2018Background
- Debtor Somerset Regional Water Resources, LLC (an S-corporation) incurred large 2015 operating losses that, when carried back, generated federal tax refunds claimed on amended 2013–2015 returns filed in 2016. After IRS offsets, a $1,124,538.31 refund check issued to "Larry L. & Connie J Mostoller" remained in dispute.
- Debtor (through its sole member Larry Mostoller) negotiated post‑petition DIP financing with Somerset Trust Company (STC); the parties (Debtor, Mostoller, STC) consented to a Final DIP Order that included ¶6 assigning to STC “any rights or interest in the 2015 Federal tax refund due to him individually, but attributable to the operating losses of the Debtor.”
- STC advanced DIP funds after entry of the Final DIP Order; the estate later converted to Chapter 7 and the refund check was delivered to the court pursuant to a turnover order. STC negotiated part of the check under a compromise; $536,894 remained contested and held by STC.
- Central dispute: whether ¶6’s language covers only a refund from a 2015 tax return (i.e., taxes paid/refunded in 2015) or encompasses all refund proceeds attributable to the Debtor’s 2015 losses (including carry‑back refunds for 2013–2014 amended returns received in 2016).
- The court found ¶6 ambiguous (patently and latently), permitted extrinsic evidence, credited testimony/emails showing the parties used “2015 refund” to mean the entire refund generated by 2015 losses, and ruled STC was entitled to the remaining proceeds; the respondents’ motions in limine and for release were denied as to the remainder.
Issues
| Issue | STC's Argument | Respondents' Argument | Held |
|---|---|---|---|
| Whether ¶6 of Final DIP Order is ambiguous | ¶6 is at least latently ambiguous; phrase "attributable to the operating losses of the Debtor" modifies "2015 Federal tax refund" to include refunds generated by 2015 losses (including carrybacks) | ¶6 is unambiguous: it pledges only the refund from a 2015 tax return (not prior‑year amended returns) — parol evidence barred | Court: ¶6 is ambiguous (patent and latent); extrinsic evidence may be considered and supports STC's construction (STC prevails) |
| Whether extrinsic evidence (emails, affidavits) may be considered | Permissible because latent ambiguity exists; circumstances surrounding formation and parties’ usage are proper aids | Parol evidence rule bars extrinsic evidence; affidavits drafted by counsel are inadmissible | Court: admitted extrinsic evidence; denied motion in limine; affidavits drafted by counsel were admissible and credible |
| Whether counsel‑drafted affidavits are inadmissible | Affidavits drafted by counsel are common and admissible absent evidence of fabrication | Argued affidavits should be excluded because drafted by STC counsel | Court: rejected exclusion; found practice acceptable and testimony credible |
| Jurisdiction / Stern challenge & spouses’ TBE claim to refund | Court has core jurisdiction to interpret/enforce its orders; respondents consented to the DIP Order and participated in proceedings; refund proceeds pledged to STC | Respondents argued refund was tenancy‑by‑the‑entireties and non‑core so bankruptcy court could not enter final judgment under Stern v. Marshall | Court: Stern challenge rejected; proceeding core and/or parties consented; no TBE interest shown for Mrs. Mostoller — STC entitled to remainder |
Key Cases Cited
- Travelers Indemnity Co. v. Bailey, 557 U.S. 137 (court has power to interpret and enforce its prior orders)
- McDowell v. Philadelphia Hous. Auth., 423 F.3d 233 (consent decrees interpreted under contract principles; ambiguity is a question of law)
- United States v. New Jersey, 194 F.3d 426 (circumstances surrounding formation and technical meanings are relevant interpretive aids)
- Fox v. U.S. Dep't of Hous. & Urban Dev., 680 F.2d 315 (consent decree interpretation and use of extrinsic evidence when ambiguous)
- Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604 (extrinsic evidence allowed only where writing ambiguous)
- Bohler‑Uddeholm Am., Inc. v. Ellwood Grp., Inc., 247 F.3d 79 (latent ambiguity doctrine; need a contractual hook to admit extrinsic evidence)
- ITT Continental Baking Co. v. United States, 420 U.S. 223 (consent decrees construed as contracts; permissible aids include surrounding circumstances)
- Emor, Inc. v. Cyprus Mines Corp., 467 F.2d 770 (party bound where it knew or had reason to know other party's interpretation)