SuVicMon Development, Inc. v. Charles Morrison, Sr.SuVicMon Development, Inc. v. Charles Morrison, Sr.
Before GRANT, TJOFLAT, and ED CARNES, Circuit Judges.
In this bankruptcy appeal, the plaintiffs seek to proceed with a suit for fraudulent transfer against the debtor despite his having received a discharge. The plaintiffs have a state-court judgment against the
I.
The plaintiffs in this case are three corporations that first sued the debtor, Charles M. Morrison, Sr., in Alabama state court in 2006. Their complaint raised claims for common-law fraud and violations of the Alabama Securities Act. In 2012, the plaintiffs amended the complaint to add claims for fraudulent transfer under the Alabama Uniform Fraudulent Transfer Act (AUFTA) against Morrison and his sons, Charles M. Morrison, Jr., and Bradley P. Morrison, alleging that Morrison had given money and real estate to his sons in an effort to defraud his creditors. In particular, they alleged that Morrison was seeking to divest himself of assets from which the plaintiffs could recover on their securities-fraud claims.
Morrison filed for bankruptcy under Chapter 7 in August 2018. The bankruptcy court lifted the automatic stay to allow the plaintiffs’ state-court case against Morrison to proceed, but stayed execution of any judgment. In November 2018, the plaintiffs also initiated an adversary proceeding against Morrison within the bankruptcy case, seeking a ruling that their claims in the state-court case would not be dischargeable. The bankruptcy court entered Morrison‘s discharge order the next month, with the adversary proceeding still pending.
In July 2019, the state-court case went to trial. The state trial court entered judgment on the jury‘s verdict against Morrison on the common-law fraud and Alabama Securities Act claims, for an aggregate sum across the three plaintiffs of $1,185,176. However, the court granted judgment as a matter of law dismissing the fraudulent transfer claim as to Morrison and Charles, and the jury found in favor of the defendants on the fraudulent transfer claim as to Morrison and Bradley. The plaintiffs appealed the judgments denying liability on the fraudulent transfer claims to the Alabama Supreme Court.
In November 2019, the bankruptcy court granted summary judgment to the plaintiffs in the adversary proceeding, finding that the state-court judgment that the plaintiffs obtained on their securities-fraud claims was excepted from discharge under
The bankruptcy court ruled in December 2019, however, that the discharge injunction barred the plaintiffs from proceeding against Morrison in the state courts on the fraudulent transfer claims. The court held that the In re Jet Florida doctrine was inapplicable to the case because Morrison would be burdened with the expense of defending the state-court suit if it were allowed to proceed with him as a party. Hence, the court denied the plaintiffs’ motion with respect to Morrison, while indicating that they were free to proceed with the state-court appeal as to Morrison‘s sons.
The plaintiffs appealed this ruling to the District Court, which affirmed the bankruptcy court‘s decision. The District Court agreed that In re Jet Florida did not apply to the case for the same reason given by the bankruptcy court, and added as a further reason for this conclusion that proceeding against Morrison was not a prerequisite for the plaintiffs to be able to recover from his sons. The plaintiffs now appeal from the District Court‘s decision to this Court.
II.
When this Court reviews the decision of a district court engaged in appellate review of a bankruptcy court decision, we independently examine the bankruptcy court‘s factual and legal determinations using the same standards of review applicable in the district court. United Mine Works Combined Benefit Fund v. Toffel (In re Walter Energy, Inc.), 911 F.3d 1121, 1135 (11th Cir. 2018). Generally speaking, this means that we review the bankruptcy court‘s factual findings for clear error and that we exercise de novo review of legal conclusions whether by the bankruptcy court or the district court. Id.; see also Club Assocs. v. Consol. Cap. Realty Invs. (In re Club Assocs.), 951 F.2d 1223, 1228 (11th Cir. 1992). In addition, as explained further in section III.B.2 below, the bankruptcy court‘s decision whether to permit suit against a discharged debtor under In re Jet Florida is to be reviewed for abuse of discretion.
III.
The plaintiffs make two arguments for why they should be allowed to proceed against Morrison on the fraudulent transfer claims: first that the fraudulent transfer suit is an action to collect a non-dischargeable debt and is thus not subject to the discharge injunction, and second that proceeding nominally against Morrison is permitted under In re Jet Florida. We reject both of these arguments and therefore affirm the District Court‘s decision affirming the bankruptcy court.
A.
We begin with the plaintiffs’ first argument. According to
The plaintiffs’ argument is incorrect. The reason is that a fraudulent transfer action is “not a mere ‘collection action,‘” but “rather a claim that requires an independent adjudication of liability based on statutorily-defined elements.” C & M Inv. Grp., Ltd. v. Campbell, 448 F. App‘x 902, 905 (11th Cir. 2011).2 Under the AUFTA, a creditor has a fraudulent transfer claim against a debtor for actual fraud whenever “the debtor made the transfer with actual intent to hinder, delay, or defraud any creditor of the debtor.”
The distinctness of a fraudulent transfer action is shown most clearly by the availability of damages specific to that action. While the remedy for fraudulent transfer may be avoidance of the transfer or execution directly on the transferred asset, see
The plaintiffs’ reasoning, accordingly, fails to distinguish between the different potential debts involved in this
A fraudulent transfer action differs in this respect from execution on a judgment. Modes of execution and associated proceedings, such as writs of execution, attachment, judgment liens, and garnishment, do not constitute a new claim against the debtor or give rise to a new debt distinct from the judgment being executed. The reason for this, however, is that execution and associated proceedings are unlike ordinary causes of action against the debtor; they mostly are not causes of action at all. Because execution proceedings are ancillary to the prior judgment, cf. 30 Am. Jur. 2d Executions and Enforcement of Judgments § 468 (2017), they do not require any allegation of wrongdoing but are instead based simply on an executable judgment and the identification of property appropriately subject to execution. Modes of execution are generally in rem, in the sense that they “confer a property interest on the judgment creditor that satisfies the judgment,” Irwin v. O‘Bryan, 791 F. App‘x 588, 593 (6th Cir. 2019). Garnishment, by which a creditor may obtain property of the debtor or money due to the debtor from a third party, has been described as quasi in rem, see U.S. Rubber Co. v. Poage, 297 F.2d 670, 673 (5th Cir. 1962)6: it typically both gives the creditor a lien on the property, see 30 Am. Jur. 2d Executions and Enforcement of Judgments § 539 (2017), and constitutes an
A fraudulent transfer action is not an execution proceeding, and thus is not a ‘collection action’ in any sense helpful to the plaintiffs’ argument. Fraudulent transfer is a cause of action which can be brought against the debtor in personam. See Parker v. Handy (In re Handy), 624 F.3d 19, 21-22 (1st Cir. 2010) (finding action to be in personam). Unlike execution proceedings, a fraudulent transfer action need not be based on a judgment at all, only an underlying claim by a creditor, but does require proof of wrongful or any rate legally disapproved conduct by the debtor (namely, actual or constructive fraud). A fraudulent transfer action does not necessarily confer a property interest on the creditor; rather, any in rem effect of the action is a matter of the remedy chosen by the court. While some remedies available under the AUFTA directly grant the creditor an interest in property, see
The plaintiffs’ first argument, then, is unsuccessful: a fraudulent transfer action does not function as an execution proceeding, and the fact that the underlying claim is non-dischargeable does not compel the conclusion that the fraudulent transfer claim is non-dischargeable.
B.
The plaintiffs’ second argument is that they should be allowed to proceed nominally against Morrison in order to seek recovery from his sons, the transferees, under the doctrine of In re Jet Florida. Below we review the In re Jet Florida case and its requirements, consider the appropriate standard of review, and then explain why the plaintiffs’ argument does not succeed.
1.
In In re Jet Florida, this Court ruled that the holder of a discharged claim, there a defamation claimant, could proceed nominally against the debtor for the purpose of recovering from the debtor‘s insurer. 883 F.2d 970.7 The Court began its analysis with
personal liability of the debtor,” noting that “the statutory language, on its face, does not preclude the determination of the debtor‘s
Moreover, the Court observed that the underlying policy of the bankruptcy discharge framework is to give debtors a “fresh start in economic life.” Id. at 972, 975. Prior case law indicated that this aim would not be frustrated by permitting the debtor to be sued nominally as a means of recovering from a third party because “the [d]ebtor and his property are not subject to any risk.” Id. at 974 (alteration adopted) (quoting Wimmer v. Mann (In re Mann), 58 B.R. 953, 956 (Bankr. W.D. Va. 1986)). Conversely, as the Court remarked, the discharge injunction is not intended to allow an insurer to “escape its obligations based simply on the financial misfortunes of the insured,” as would happen if the plaintiff‘s suit were not permitted to proceed. Id. at 975-76. The Court noted that “the insurer is not considered to be ‘prejudiced’ under section 524 when the permanent injunction is modified to permit a pending action to continue ..., because the insurer‘s obligation remains commensurate with the underlying insurance contract.” Id. at 975.
The Court expressed its “concern[]” that permitting such suit “would frustrate the fresh-start policy embodied in the Code in one way—by requiring the bankrupt to spend sums in defending this lawsuit.” Id. at 976. It explained, however, that “the practical and economic realities” in the case would “compel the insurance company to defend the underlying action,” because the insurer would be liable if the debtor were to default on the suit. Id. (emphasis omitted). Indeed, “the relationship between the parties in this action . . . virtually requires that Air Florida will be represented in the defamation action with no cost to it.” Id. The Court was therefore satisfied that the possibility of any resulting expense to the debtor was “so remote that the fresh-start policy is simply not defeated.” Id. The Court thus allowed the plaintiff‘s suit, concluding that “pursuant to section 524(e), a plaintiff may proceed against the debtor simply in order to establish liability as a prerequisite to recover from another, an insurer, who may be liable.” Id.
We interpret In re Jet Florida as imposing two requirements that must be satisfied before a plaintiff may proceed nominally against a discharged debtor in order to recover from a third party. First, the debtor‘s status as a defendant in the case must be a genuine prerequisite to the plaintiff‘s recovering from the third party: it must be the case that the plaintiff could not meet the legal conditions for such recovery without suing the debtor. Second, it must be sufficiently certain that maintaining suit against the debtor will not place any economic burden on the debtor, such that the debtor‘s fresh start will not be interfered with.
2.
Because this case is the first one in which this Court has reviewed a decision arising under the In re Jet Florida doctrine, we have not previously had occasion to decide the proper standard of review for such cases. We hold that a bankruptcy court‘s decision whether to permit
There are a number of grounds for this conclusion. First, a plaintiff requesting leave to maintain suit against the debtor in a nominal capacity is seeking what is at least effectively a modification of the discharge injunction. In re Jet Florida referred to the court‘s action in granting leave as an action by which the discharge injunction “is modified.” 883 F.2d at 975. Other courts have largely agreed that the discharge injunction can be modified, and they have considered requests for permission to proceed against the debtor to recover from a third party under the heading of such modification. Buke, LLC v. Eastburg (In re Eastburg), 447 B.R. 624, 633 (B.A.P. 10th Cir. 2011); In re Shondel, 950 F.2d 1301, 1307-09 (7th Cir. 1991); In re Hendrix, 986 F.2d 195, 198 (7th Cir. 1993). A decision as to whether to modify an injunction is always reviewed for abuse of discretion. Epic Metals Corp. v. Souliere, 181 F.3d 1280, 1281, 1283 (11th Cir. 1999); see Horne v. Flores, 557 U.S. 433, 447 (2009).8 Moreover, as the Supreme Court has recently explained in the discharge context, there is a “longstanding interpretive principle” that “[w]hen a statutory term is obviously transplanted from another legal source, it brings the old soil with it.” Taggart v. Lorenzen, 139 S. Ct. 1795, 1801 (2019) (internal quotation marks omitted) (quoting Hall v. Hall, 138 S. Ct. 1118, 1128 (2018)). In Taggart, the Court noted that the statutes pertaining to the discharge injunction “bring with them the ‘old soil’ that has long governed how courts enforce injunctions” and held that they accordingly incorporate traditional equity standards for determining civil contempt. Id. at 1801-02. Likewise, in this case, the same interpretive principle would
suggest that a decision which has the effect of modifying the discharge injunction should be subject to abuse of discretion review, as has customarily been the case with decisions regarding injunctions. In addition, a decision to permit suit against the debtor under In re Jet Florida is functionally analogous to a decision to grant relief from the automatic stay, which is also reviewed for abuse of discretion. In re Eastburg, 447 B.R. at 630-31; see Barclays-American/Business Credit, Inc. v. Radio WBHP, Inc. (In re Dixie Broad., Inc.), 871 F.2d 1023, 1026 (11th Cir. 1989) (standard of review for relief from stay).
Second, the bankruptcy court‘s determination as to whether it is sufficiently certain that the maintenance of suit will not place an economic burden on the debtor rests largely on questions of fact and involves the kind of case-specific inquiry that often calls for trial-court discretion. That an issue requires consideration of “multifarious” and “narrow” facts, Pierce v. Underwood, 487 U.S. 552, 561-62 (1988), or demands that “many disparate factors . . .
The court may need to consider such factors as the kind of third party from which the plaintiff wishes to recover (whether an insurer or some other party) and the financial condition of the debtor, as well as potential economic burdens other than the cost of obtaining defense counsel, such as court costs and the possibility that needing to stand trial might cause a debtor to lose his or her employment. The last-mentioned considerations were negligible or irrelevant in the case of the large corporate debtor in In re Jet Florida, but may bear compelling importance in the case of a bankrupt individual.
Finally, “exceptions to the general rule of discharge . . . are to be strictly construed in favor of the debtor.” United States v. Mitchell (In re Mitchell), 633 F.3d 1319, 1327 (11th Cir. 2011); Kawaauhau v. Geiger, 523 U.S. 57, 62 (1998) (“[E]xceptions to discharge ‘should be confined to those plainly expressed.‘“). This principle would surely apply with even greater force where the exception, as here, is implied rather than being an express exemption in the statute. Hence, the bankruptcy court should have the discretion to deny permission to proceed against the debtor where matters might not be entirely clear but the court has reason to doubt that the debtor will be fully protected against burdens arising from the plaintiff‘s suit.
The appropriate standard of review is consequently abuse of discretion. A trial court “abuses its discretion if it applies an incorrect legal standard, follows improper procedures in making the determination, or makes findings of fact that are clearly erroneous.” Cordoba v. DIRECTV, LLC, 942 F.3d 1259, 1267 (11th Cir. 2019). A trial court may also abuse its discretion by “commit[ting] a clear error in judgment.” United States v. Brown, 415 F.3d 1257, 1266 (11th Cir. 2005). Notably, “[i]n making these assessments,” we review the trial court‘s “purely legal determinations de novo.” Vega v. T-Mobile USA, Inc., 564 F.3d 1256, 1265 (11th Cir. 2009). The issue posed by the first In re Jet Florida requirement, i.e., whether maintaining suit against the debtor is a prerequisite to recovering from the third party, is a pure question of law. Thus, as part of the abuse of discretion review, the bankruptcy court‘s resolution of this issue is to be reviewed de novo. However, the determination of whether it is sufficiently certain that the proposed litigation will not impose an economic burden on the debtor is committed to the bankruptcy court‘s sound discretion.
3.
We now proceed to explain that, in the case at bar, the bankruptcy court did not abuse its discretion in denying the plaintiffs’ request for permission to maintain suit against Morrison under In re Jet Florida. The plaintiffs did not satisfy the prerequisite requirement and thus were not eligible for such permission as a matter of law. Furthermore, the bankruptcy court properly exercised its discretion in determining that the proposed litigation could impose economic burdens on Morrison and hence did not meet the second In re Jet Florida requirement.
With regard to the first requirement, Morrison‘s presence as a defendant in the plaintiffs’ state-court lawsuit was not a prerequisite for the plaintiffs to recover from Morrison‘s sons. Under the AUFTA, a fraudulent transfer plaintiff can bring suit against the transferee directly. See
The plaintiffs argue that naming Morrison as a defendant would make his deposition testimony admissible in evidence as party admissions and that this would be useful if the fraudulent transfer claims were to be retried and Morrison were to be unavailable as a witness at trial. If Morrison were to be unavailable, however, it appears that the relevant statements could still be admitted as statements against interest. See Ala. R. Evid. 804(b)(3). More importantly, these evidentiary matters pertain only to how easy or difficult it would be for the plaintiffs to prove their case in the contemplated litigation; they are irrelevant to the question at hand, which is whether proceeding against Morrison is a legal condition for recovery. See also In re Czuba, 146 B.R. 225, 230 (Bankr. D. Minn. 1992) (determining that the debtor was not a necessary party even though the debtor‘s testimony might be needed to prove or disprove the plaintiff‘s allegations and the debtor‘s actions were the basis for the plaintiff‘s claims).9
b.
With regard to the second In re Jet Florida requirement that the debtor be protected from economic burdens, the bankruptcy court found that allowing the plaintiffs to maintain suit against Morrison would impose an economic burden on him and frustrate the fresh start offered by his discharge. While the court did not frame its decision as a discretionary one, it is evident that even if it had taken itself as having discretion on this issue, it would not have exercised its discretion to say that it was sufficiently certain that the lawsuit would not place an economic burden on Morrison. We thus proceed to review the court‘s determination for abuse of discretion.
No insurer is involved in this case, and the bankruptcy court determined that Morrison would bear the expense of defending himself in the fraudulent transfer action. The plaintiffs have argued that Morrison would be free to default on the suit and that his sons would provide for his defense. The bankruptcy court, however, found the argument that Morrison could rely on his sons for his defense to be “speculative at best,” noting that Morrison had failed to file a brief in the plaintiffs’ related adversary proceeding concerning the dischargeability of the securities-fraud judgment “at least in part[] because he did not have the resources to pay bankruptcy counsel to prepare the same.” And while insurers generally have ample resources to facilitate the defense of suits in
Accordingly, there are sufficient grounds from which to determine that it is not sufficiently certain that the proposed litigation would not impose an economic burden on Morrison. Instead, there is reason to think that the litigation could interfere with the fresh start to which he is entitled. Consequently, the bankruptcy court was within its discretion in determining that the plaintiffs’ suit did not come within the In re Jet Florida doctrine in this regard.
For this reason, as well as the independent reason that the plaintiffs did not meet the prerequisite requirement, the bankruptcy court did not abuse its discretion in denying permission to proceed against Morrison as a means of recovering from his sons.
IV.
We conclude that the bankruptcy court did not err in rejecting the plaintiffs’ request to proceed against Morrison under either of the theories that they have advanced. Its decision was properly upheld by the District Court.
AFFIRMED.