Opinion
CASE NO. 98-50956.
October 13, 2010
MEMORANDUM OPINION
The individual Chapter 11 debtor, John W. Backer, also identified in the record as Backer, J. W. Backer, or Dr. Backer, engaged in the practice of veterinary medicine, and in the business of farming and buying, selling, breeding and boarding thoroughbred horses.
The case is before the court on motions of the debtor and Griggs Management Company, a creditor of the debtor, pursuant to 11 U.S.C. § 502(j), requesting that the court reconsider and disallow or reduce the allowed amount of the claim of the Manning Family Trust.
Griggs Management Company holds first and second mortgages on the debtor's 183.5 to 186-acre Woodford county farm as assignee of two claims filed by the original mortgage holder United Bank and Trust Company of Versailles, Kentucky. Versailles is the county seat of Woodford county.
The Manning Family Trust is a trust formed under the laws of New Zealand. It purchased a farm in Woodford county, Kentucky and became involved in buying, selling and breeding thoroughbred horses.
The primary issue raised by the motions of the debtor and Griggs Management seeking reconsideration of the claim of the Manning Family Trust is whether since allowance of the Manning claim, the claim was satisfied, fully or substantially, by fulfillment of the terms of a General Release and Settlement Agreement. This settlement agreement was entered into in September of 2006 between J.P. Morgan Chase Bank, N.A., successor in interest by merger to Bank One, Kentucky, N.A., on the one hand, and the Manning Family Trust, on the other hand.
The Manning Family Trust entered into the General Release and Settlement Agreement on behalf of itself and its current and former trustees, directors, officers, employees, attorneys, and agents, and Ronald C. Manning, individually, and Simon Manning, individually, and in his capacity as beneficiary of the Manning Family Trust. Pursuant to this agreement the parties settled and caused to be dismissed several civil actions pending in the circuit courts of Fayette and Woodford counties, Kentucky, to which they were parties either as plaintiff or defendant.
As enumerated in the General Release and Settlement Agreement, J.P. Morgan Chase Bank, N.A. inherited its status as a litigant in the settled civil actions as successor by merger to Bank One, Kentucky, N.A., which in turn had become a litigant in the actions by reason of its acquisition of and by merger, circa 1991, with First Security National Bank and Trust Company of Lexington, Kentucky to become Bank One, Lexington. The settled actions had been commenced in Kentucky state courts in 1993, 1994, and 2001.
The civil actions settled pursuant to this agreement included (1) a lender liability action by Manning Family Trust against Bank One, Lexington, N. A., filed June 2, 1993, Civil Action No. 93-CI-1774 in the Fayette Circuit Court; (2) a debt collection action by Bank One, Lexington, N.A. against the trustees of the Manning Family Trust, filed December 9, 1993 in the Fayette Circuit Court, Civil Action No. 93-CI-3935; (3) a virtually identical debt collection/foreclosure action by Bank One, Lexington, N.A. against the trustees of the Manning Family Trust filed December 6, 1993 in the Woodford Circuit Court, Civil Action No. 93-CI-00170, and (4) a fraudulent conveyance action by Bank One, Kentucky, N.A. against Ronald Manning and Shona Manning and the trustees of the Manning Family Trust, Civil Action No. 01-CI-00017, filed February 26, 2001 in the Woodford Circuit Court.
The strained relationship between the Bank (initially First Security National Bank and Trust Company), the Manning Family Trust and the debtor, Dr. Backer, dates back two decades to a thoroughbred horse sales transaction that was to occur in 1990.
In March of 1990 Dr. Backer entered into a written listing agreement with Charles White, a partner in Lexington Bloodstock. Inc. (LBI). The agreement authorized LBI to sell a package of thoroughbred horses, consisting of the mare Female Star and three of her offspring, including a 1989 colt by the stallion Sunny's Halo, a 1990 colt by the stallion Alydar, and Female Star's unborn foal by Alydar, a putative 1991 offspring that emerged as a filly. Dr. Backer was offering this bloodstock package, referred to in the record, and apparently in the trade lingo, as a 4-in-1 package, for sale for $1,500,000.00.
In response to LBI's marketing of the package, the Manning Family Trust, through Ronald Clive Manning, made an offer to purchase the mare Female Star and her two Alydar offspring, a 3-in-1 package, for $1,000,000.00. According to the record, Ronald Clive Manning, also referred to in the record as R. C. Manning, had been selected by the other trustees to act for the Trust. He did not wish to purchase the 1989 colt by Sunny's Halo.
Dr. Backer purportedly accepted this offer in May of 1990, and shook hands on the deal, but refused to sign a written agreement prepared by LBI and the Trust, setting out the terms of the sale. Dr. Backer refused to close the transaction because, according to his testimony at trial in the state court civil action initiated by the Trust to force him to honor the agreed upon sale, he did not like the terms of payment.
The Trust, which had made a good faith deposit of $50,000.00 with the selling agent LBI, proposed to pay an additional $600,000.00 at closing and the balance of $350,000.00 in annual installments of $175,000.00 each over a period of two years.
Unable to resolve the impasse, the Trust commenced an action in the Fayette Circuit Court on October 9, 1990, to compel Dr. Backer to conclude the sale, Civil Action No. 90-CI-3506, styled R. C. Manning v. John W. Backer and First Security National Bank Trust Company. First Security National Bank and Trust Company was named a defendant because it was alleged in the complaint that the bank may have an interest in the thoroughbred horses which are "the subject matter of this suit." The complaint sought specific performance of an oral sales agreement conforming to the sales agreement the debtor refused to sign.
Although it was alleged in Paragraph 6 of the complaint that the Trust is "ready and willing to pay the defendant John W. Backer the balance of the purchase price as "provided in the purchase agreement at such times as the defendant John W. Backer directs," that assurance apparently did not appease Dr, Backer's concern about the proposed delay in payment of $350,000.00 of the purchase price.
The complaint in that case asked for an order restraining Dr. Backer from removing "the horse," apparently meaning the mare Female Star, out of the jurisdiction of the court.
The complaint was amended to substitute the Manning Family Trust in lieu of R. C. Manning, as plaintiff, and also to add as a defendant Lexington Bloodstock, Inc., which would be owed a commission on the sale of the 3-in-1 bloodstock package. The amended complaint reiterated the Trust's request for specific performance of the unsigned sales agreement, as constituting the oral agreement of the parties.
By an agreed order entered December 12, 1990, First Security National Bank and Trust Company was dismissed as a defendant in this action. That came about because during November of 1990, the month after commencement of the action of the Manning Family Trust against Dr. Backer to compel him to conclude the sale of the 3-in-1 package, Dr. Backer had obtained a loan or loans from Central Kentucky Agricultural Credit Association (Ag Credit), perhaps with the assistance of First Security, the proceeds of which were used to satisfy his indebtedness to First Security, predecessor in interest of Bank One and JP Morgan Chase Bank. The indebtedness of Dr. Backer to First Security which was satisfied by this transaction is alleged to have been unsecured indebtedness in excess of $680,000.00.
To secure the indebtedness to Ag Credit, Dr. Backer granted Ag Credit a security interest in his thoroughbred horses, including the mare Female Star and her Deputy Minister filly. The loan agreement with Ag Credit precluded Dr. Backer from selling his equine collateral securing the indebtedness without the approval of Ag Credit.
Dr. Backer's unwillingness thereafter to sign the 3-in-1 package sales agreement with the Manning Family Trust may have been due to the Ag Credit restriction on the sale of equine collateral securing its loans or due to the fact Dr. Backer's financial situation may have been somewhat relieved by the loan or loans from Ag Credit.
Apparently this switch in loan obligations from First Security to Ag Credit, that resulted in First Security being dismissed as a defendant in the specific performance action, remained unknown to Manning Family Trust and Lexington Bloodstock, Inc. when the Trust's specific performance action was tried in the Fayette Circuit Court without the intervention of a jury some two years later. This fact is mentioned here because it appears to be a substantial basis for the subsequently filed lender liability action of the Manning Family Trust against Bank One, one of the actions ultimately settled by the 2006 General Release and Settlement Agreement between JP Morgan Chase Bank and Manning Family Trust. See the complaint in Civil Action No. 93-CI-1774. Exhibit A to the General Release and Settlement Agreement.
The initial trial in the Manning Family Trust's specific performance action against Dr. Backer was held March 18-19, 1992, in Fayette Circuit Court, Civil Action No. 1990-CI-3506.
In an Opinion and Order entered July 14, 1992, the trial judge found there was clear and convincing evidence Dr. Backer had entered into an oral agreement to sell the 3-in-1 bloodstock package to Manning Family Trust essentially on the terms set out in the unsigned written agreement. The court awarded Manning Family Trust damages in the amount of $73,459.15 plus specific performance and costs. However, in the two-year interim between the commencement of that case and the trial, the debtor had sold the 1990 Alydar colt for $500,000.00 and Calumet Farm was claiming an interest in the 1991 Alydar offspring, a filly.
Undeterred, the trial court ordered Dr. Backer to deliver to the Trust the mare Female Star in foal to the stallion Halo and her 1992 weanling by the stallion Deputy Minister.
Dr. Backer appealed from this judgment. He posted the required supersedeas bond in the amount of $550,000.00. The bond was provided by Cumberland Surety Insurance Company, Inc., which subsequently became enmeshed in litigation over its liability on this bond.
By an unpublished opinion rendered July 14, 1995, the Kentucky Court of Appeals upheld the finding of the trial court that the debtor had orally agreed to sell the 3-in-1 bloodstock package consisting of Female Star and her two Alydar offspring to Manning Family Trust for $1,000,000.00. However, the appellate court nevertheless reversed the judgment, finding that the trial court's mandated delivery to Manning Family Trust of a cobbled 3-in-1 bloodstock package, other than the one the parties agreed upon, was inconsistent with the law of specific performance. The appellate court remanded the case to the trial court with directions to enter a judgment assessing only monetary damages for breach of the oral contract.
Following a non-jury, evidentiary trial held November 29-30, 1995, the trial court on February 27, 1996 entered a judgment for damages against the debtor and in favor of the Manning Family Trust in the amount of $1,483,294.00. This is the judgment on which the claim of the Manning Family Trust is based.
Immediately after entry of this judgment, Manning Family Trust, by counsel, caused notices of its claim to a judgment lien on property of the debtor to be filed in the offices of the County Court Clerks of Fayette, Woodford, and Bourbon counties, Kentucky.
In March of 1996 there was other activity with respect to this judgment.
On March 22, 1996 the judgment was assigned to Shona P. Manning, wife of Ronald Clive Manning. Ms. Manning, also a trustee of the Manning Family Trust, is the mother of Simon Manning, the sole beneficiary of the Trust. The judgment was assigned to Mrs. Manning purportedly in satisfaction of an indebtedness of $750,000.00 plus interest owed to her by the Trust.
Then on or about March 23, 1996, Dr. Backer and the Manning Family Trust entered into a Forbearance Agreement, not to be confused with the General Release and Settlement Agreement entered into ten years later in 2006 between JP Morgan Chase Bank and Manning Family Trust.
The Forbearance Agreement was as follows:
Fayette Circuit Court
Civil Branch
Third Division
No. 90-CI-3506
FORBEARANCE AGREEMENT Backer Agrees as Follows
1. Manning shall be entitled to receive and have all of the funds on deposit in the hands of Clyde L. Stapleton, Master Commissioner of the Fayette Circuit Court, in Civil Action No. 90-CI-3506, and Civil Action No. 93-CI-1774 (which is consolidated with Civil Action No. 93-CI-3935) to the exclusion and claim of Backer.
[Comment: In conformity with this provision, after deduction of the Master Commissioner's fee, the Manning Family Trust received $168,582.02 to be credited as a payment on the February 27, 1996, judgment in the amount of $1,483,294.00]
2. Manning shall be entitled to proceed against the $550,000.00 supersedeas bond and the surety on said bond (Cumberland Surety Insurance Company, Inc.) in order to satisfy its judgment.
[Comment: This was the supersedeas bond posted by the debtor, Dr. Backer, in connection with his appeal from the earlier July 14, 1992, judgment of the trial court awarding monetary damages in the amount of $73,459.15 plus costs, plus an aberrant form of specific performance that resulted in the judgment being reversed.
[Litigation ensued in state court as to whether the coverage provided by the $550,000.00 supersedeas bond posted by the debtor in connection with the appeal from this earlier July 14, 1992, judgment, also provided coverage for the February 27, 1996 judgment for damages in the amount $1,483,294.00 awarded by the trial court to Manning Family Trust, from which judgment Dr. Backer agreed not to appeal. The trial court denied the request of Cumberland Surety Insurance Company, Inc. to intervene in the action to protest its further liability on the bond and to protest an order of the trial court requiring the surety to provide a bond in an increased amount to cover the $1,283,294.00 judgment and costs awarded to Manning at the end of the second trial. These rulings of the trial court were reversed by the Kentucky Court of Appeals. See 2002 WL 31388769 (6th Cir. Oct. 22, 2002).]
3. The 1995 Female Star/Mureyve filly foal, shall be sold privately for an amount and upon such terms as Manning and Backer may agree, with the proceeds (free of Ag Credit's claim) of that sale to be divided sixty-six and two-thirds (66 2/3) to Manning and thirty-three and one-third (33 1/3) to Backer. There is presently being negotiated a private sale which if not successful, the parties agree that this yearling will then be sold either privately or publicly under such terms and conditions as the parties may agree. In the event the parties are unable to agree with regard to any of the terms or conditions of the sale of the yearling, then Eaton Sales Company shall be employed by the parties to arbitrate the dispute. In the event Backer shall insure the Female Star/Mureyev filly foal then he may insure it for his interests and upon loss any insurance proceeds shall be paid to Backer. In the event, Manning shall insure the Female Star/Nureyev filly foal he may insure only his interests and upon loss the insurance proceeds shall be his.
[Comment: The Manning Family Trust was paid $93,602.29 from the proceeds of sale of this filly at the 1996 Keeneland Yearling Sale.]
4. Backer will not file for relief under the United States Bankruptcy Code for at least 90 days following the transfer of the last item of property to Manning pursuant to this agreement.
5. Backer waives for the benefit of Manning any claim or privilege or confidentiality which may be raised by himself, Bank One, Ag Credit, Stoll, Keenon and Park, or Brown, Todd and Heyburn, with respect to Manning or his counsel's examination of any records, files, documents or papers or testimony in connection with Mannings pending actions against Bank One, Stoll, Keenon and Park and any other future litigation against Ag Credit. Backer further agrees to provide a written release and authorization to permit such examination by Manning.
6. Backer agrees he will not file an appeal of the judgment issued by the Fayette Circuit Court, Third Division, on February 27, 1996.
[Comment: As per this agreement there was no appeal from this second, monetary judgment in the amount of $1,483,294.00. No supersedeas bond was required or posted. The issue of whether the $550,000.00 bond posted in connection with the appeal from the earlier judgment in some manner guaranteed payment of the follow on judgment entered July 14, 1992, became the subject of separate litigation within the confines of Civil Action No. 90-CI-003506, Manning Family Trust's specific performance action in the Fayette Circuit Court.]
Manning Agrees As Follows
7. Except for the property and/or assets hereinabove described which Backer shall immediately make available to Manning, Manning agrees to forbear any other collection efforts against Backer.
[Comment: The Bankruptcy Court in Adversary Proceeding No. 98-5047 in Dr. Backer's Chapter 11 bankruptcy case held this provision read in conjunction with paragraph 10 of the Forbearance Agreement, in which both parties agreed the Forbearance Agreement was not a settlement, did not preclude resumption of collection activity by Manning Family Trust. This ruling was appealed to the U. S. District Court and to the Sixth Circuit Court of Appeals, both of which sustained this interpretation of the agreement. See 2002 WL 31388769 (6th Cir. Ky. Oct. 22, 2002).]
8. Manning agrees to make available directly and through his counsel for the purpose of inspection and copying all of his case files, discovery files, and research files, relative to Manning's actions against Bank One and Stoll, Keenon and Park.
9. Manning agrees that if he and Backer are unable to agree on the sale of the yearling as hereinabove described then that disagreement shall be arbitrated by Eaton Sales Company.
Both Parties Agree
10. This is not a settlement agreement but is a Forbearance Agreement given Backer's present financial condition and the prospect of obtaining further recovery against Backer on the Judgment held by Manning.
In Witness Whereof the parties hereto and hereunto set their hand, this the ___ day of March, 1996.
S/John W. Backer D V M S/Ronald C. Manning And as Trustee, of the Manning Family Trust
John R, (sic) Backer Ronald C. Manning, Individually
[Comment: Information in the record indicates this Forbearance Agreement was executed by the parties on or about March 22 or 23, 1996. It may be worth noting that Shona P. Manning, the assignee of the February 27, 1996 judgment, did not sign the Forbearance Agreement. She did sign an undated document authorizing her husband, Ronald Clive. Manning, to act in her behalf in dealing with assets of the Trust. See Exhibit 15 in Adversary Proceeding No. 98-5047.]
Following execution of this Forbearance Agreement, counsel for the Manning Family Trust caused to be filed notices of release of the writs they previously had caused to be filed as a preliminary step to pursuing collection of the Trust's $1,483,294.00 judgment, thus withdrawing from this initial step in the collection process.
Thereafter, there appears to have been a pause in collection activity, perhaps because the parties were awaiting the outcome of litigation they had initiated against each other in 1993. This litigation, which is discussed below, was resolved by the General Release and Settlement Agreement entered into by the parties three years later in 2006.
On June 2, 1993, Manning Family Trust and Ronald C. Manning, as Trustee and Individually, filed a lender liability action against Bank One, Lexington, N.A. in Fayette Circuit Court, Civil Action No, 93-CI-1774. The complaint in that action enumerates alleged misconduct on the part of officers of First Security National Bank and Trust Company, predecessor in interest of Bank One, Lexington, N.A. See Exhibit A to the General Release and Settlement Agreement.
The pleadings indicate the Mannings believed that: (1) after having granted the Manning Family Trust a $450,000.00 loan to purchase the 3-in-1 bloodstock package from Dr. Backer, First Security obtained a security interest in the thoroughbred horses which were the subject of the sale, and perhaps other equine assets of Dr. Backer, to secure a $680,000.00 antecedent, unsecured debt owed to the bank by Dr. Backer; (2) the bank may have assisted Dr. Backer in obtaining a loan from Central Kentucky Agricultural Credit Association (Ag Credit), secured by the same collateral, the proceeds of which loan were used to pay Dr. Backer's indebtedness to First Security, and (3) these transactions frustrated the Manning Family Trust's plans to purchase the mare Female Star and her two Alydar offspring.
The complaint also alleges First Security misinformed the Mannings with respect to another loan commitment which the Trust had planned to use to purchase other thoroughbred horses at the 1991 horse sales.
The complaint includes other counts alleging Breach of Contract, Wrongful Interference, Conspiracy and Civil Conspiracy, Misrepresentation and Fraud, and Willful and Wanton Conduct.
Six months later, on December 9, 1993, Bank One, Lexington, N.A. filed in Fayette Circuit Court a debt collection action against the trustees of the Manning Family Trust alleging the Trust was in default on several loans owed to the bank by the Trust. See Exhbit B to the General Release and Settlement Agreement.
One loan was evidenced by a $712,500.00 note dated August 15, 1990, which matured August 15, 1991. This note was secured by a mortgage on the Woodford county horse farm purchased by the Trust. This indebtedness was also secured by security interest in 560,157 shares of Enercell Corporation common stock.
On December 11, 1990, the Trust and R.C. Manning delivered to First Security a promissory draw note for the principal for $600,000.00 which matured December 11, 1991. To secure payment of this note and any renewals or extensions of this note and the note dated August 15, 1990, the mortgage on the Manning farm was replaced by an updated mortgage that secured not only the indebtedness on the farm and also other outstanding indebtedness of the Trust to the bank as well. Also, Bank One acquired a security interest in all horses of the Trust of any breed and interests of any kind in equine collateral as additional security for the outstanding indebtedness to the bank. The indebtedness to Bank One was also secured by a security interest in a life insurance policy on R. C. Manning and the proceeds thereof.
The complaint of Bank One alleged the Manning trustees and the Trust were in default in payment of the original and renewal promissory notes associated with this indebtedness.
The complaint included the United States as a defendant because the IRS had filed notice of a tax lien for unpaid taxes against the Manning farm.
The record indicates that on October 27, 1999, the Fayette Circuit Court in Civil Action No. 93-CI-1774 granted Bank One's motion for summary judgment on all counts of the multi-count lender liability complaint of the Manning Family Trust against Bank One, the complaint pursuant to which the Trust had sought actual and punitive damages for Bank One's alleged interference with the Trust's purchase of the 3-in-1 bloodstock package from Dr. Backer. And, on that date the court in Adversary Proceeding No. 93-CI-3935 entered a judgment in favor of Bank One against the Manning Family Trust in an amount in excess of $1.6 million on several loans in default owed to by Manning Family Trust to Bank One. See Exhibits B and G to the General Release and Settlement Agreement.
Although the decision dismissing the complaint of Manning Family Trust against Bank One subsequently was reversed on December 22, 2000 in a "Not to be published" opinion of the Kentucky Court of Appeals, certainly the granting of Bank One's motion for summary judgment meant delay and dimmed the possibility of recovery from the bank for the bank's alleged misconduct with respect to the sale of the 3-in-1 package by Dr. Backer to Manning Family Trust. This Kentucky Court of Appeals decision recounts the conduct of the bank in greater detail. See Kentucky Court of Appeals No. 1999-CA-000654-MR.
On or about December 29, 1997, counsel for Shona Manning, assignee of the Manning $1,483,294.00 February 27, 1996 judgment against Dr. Backer, had resumed collection activity on the judgment.
Then, shortly thereafter, in a "Not to be published opinion" rendered January 16, 1998, by the Kentucky Court of Appeals, in a consolidated appeal of three rulings of the trial court against Cumberland Surety Insurance Company, Inc., the appellate court reversed three rulings of the trial court. The primary issue was whether the bond Cumberland had provided in connection with Dr. Backer's appeal from the initial judgment of the trial court in Civil Action No. 90-CI 3506 ordering specific performance of a 3-in-1 bloodstock sales agreement, other than the bloodstock package the parties had agreed upon, which judgment was reversed, nevertheless left Cumberland obligated to provide a bond in an increased amount to cover the larger amount of monetary damages assessed in the subsequent judgment entered by the court.
The appellate court ruled that as a result of the reversal of the initial (July 14, 1992) judgment, the surety was completely relieved of any obligation to satisfy that earlier or the subsequent (February 27, 1996) judgment entered in the case.
These state court rulings relieving Bank One and Cumberland Surety of an obligation to pay the Manning Judgment against the debtor, left the debtor, Dr. Backer, seemingly as the only person or entity liable for the $1,483,294.00 judgment in favor of the Manning Family Trust. The renewed collection activity by the Mannings against Dr. Backer resulted in him seeking bankruptcy relief.
Dr. Backer filed his petition for relief under Chapter 11 of the Bankruptcy Code in this court April 15, 1998.
Two days later, on April 17, 1998, upon application of Dr. Backer, by counsel, Civil Action No. 90-CI-3506 was removed from the Fayette Circuit Court to the United States District Court and referred to the Bankruptcy Court for the Eastern District of Kentucky. This civil action is now designated Adversary Proceeding 98-5015. This is the civil action in which the state court awarded Manning Family Trust the $1,483,294.00 judgment against Dr. Backer. It is also the civil action referred to in the heading of the Forbearance Agreement.
The filing by Dr. Backer of his Chapter 11 petition on April 15, 1998 invoked the statutory automatic stay against further collection activity against Dr. Backer.
By agreement of the parties the stay was modified for the limited purpose of permitting the so-called "Cumberland portion" of the removed case to proceed. This included the motion of Manning Family Trust pending in the Kentucky Supreme Court seeking discretionary review of the January 16, 1998 decision of the Kentucky Court of Appeals relieving Cumberland Surety Insurance Company of any liability on the supersedeas bond it had written for the debtor. Discretionary review was denied.
Otherwise, Dr. Backer was and remained protected from collection activity by the automatic stay, which took effect on April 15, 1998, when he filed his Chapter 11 petition for bankruptcy relief.
Nevertheless, the debtor, by counsel, on July 13, 1998, filed in this court Adversary Proceeding No, 98-5047 styled J. W. Backer, Debtor v. Manning Family Trust; Ronald C. Manning and Shona P. Manning.
The complaint sought a declaratory judgment that: (1) the Forbearance Agreement the parties had entered into on March 27, 1996, precluded the Manning Family Trust from any further collection action on the February 27, 1996, $1,483,294.00 judgment obtained by Manning Family Trust against the debtor in Civil Action No. 90-CI-3506 in the Fayette Circuit Court; (2) an execution order issued on the December 29, 1997, on the February 27, 1996 judgment is void or voidable, and (3) the Notice of Judgment Lien filed by defendants in the Woodford County Clerk's Office within 90 days of the debtor's bankruptcy is void or voidable under Kentucky law.
At the conclusion of a hearing on February 2, 1999, on cross motions of the debtor, Dr. Backer, and Manning Family Trust for summary judgment, each party being represented by counsel, the court speaking from the bench orally overruled the plaintiff debtor's motion for summary judgment and sustained the motion of the defendant Manning Family Trust for summary judgment, finding that the Forbearance Agreement was just that and not a Settlement Agreement.
An order in conformity with this ruling was entered by the court on February 18, 1999. This determination of the rights of the parties under the Forbearance Agreement was appealed by the debtor to the U.S. District Court and subsequently by the debtor to the Sixth Circuit Court of Appeals. Both of those courts agreed the document was merely a Forbearance Agreement, not a Settlement. See 2002 WL 31388769 (6th Cir. Ky.) (Oct. 22, 2002).
These rulings with respect to the nature and affect of the Forbearance Agreement did not free Manning Family Trust from the force and effect of the automatic stay, which precluded resumption of collection activity.
By an Agreed Order entered in this Chapter 11 case on August 1, 2003 it was agreed that the Manning claim against the debtor, Dr. Backer, belonged to the Manning Family Trust and that the amount of the claim, including interest calculated to the date of bankruptcy was $1,573,248.75. This order acknowledged that Bank One holds a deficiency judgment against Manning Family Trust for the amount of $747,083.54, plus attorney fees and costs and interest for which Bank One also holds a non-wage garnishment on any dividend payable to Manning Family Trust on its claim against Dr. Backer. The order does not memorialize the process or events in state court proceedings by which the judgment claim of Bank One in an amount in excess of $1.6 million against the Manning Family Trust was reduced to a deficiency balance of $747,083.54 plus attorney fees and costs and interest.
It seems appropriate to reiterate, the primary issue before the court raised by the motions of the debtor, Dr. Backer, and the creditor, Griggs Management Company, is whether, subsequent to recognizing that the Manning claim against Dr. Backer belongs to the Manning Family Trust and allowance of this claim of the Manning Family Trust in the amount of $1,573,248.75 by an agreed order entered August 1, 2003, in this Chapter 11 case (see Doc. Nos. 244 and 249), the claim has been satisfied completely or substantially by fulfillment of the terms of the 2006 General Release and Settlement Agreement between the Manning Family Trust and JP Morgan Chase Bank.
However, before dealing with the effect of that General Release and Settlement Agreement on the claim of the Manning Family Trust, the court must first address the assertion of present counsel for the Manning Family Trust that the motions of the debtor and Griggs Management Company seeking reconsideration of the allowance of the claim of the Manning Family Trust are time barred, precluded by the fact a prior objection to the Manning claim was litigated and denied by the court in Adversary Proceeding No. 98-5047. Whether this is so depends on the nature and characterization of that Adversary Proceeding, styled J. W. Backer v. Manning Family Trust, Ronald C. Manning and Shona P. Manning.
Present counsel has a personal stake in this initial determination. The February 27, 1996 judgment on which the claim of the Manning Family Trust is based was assigned to present counsel as security for payment of his fee for representation of the Trust.
Section 502(j) of the Bankruptcy Code, 11 U.S.C. § 502(j), authorizes the court to reconsider for cause a claim that has been allowed or disallowed and to allow or disallow the claim according to the equities of the case. Rule 3008 of the Federal Rules of Bankruptcy Procedure, which permits a party in interest to move for reconsideration of an order allowing or disallowing a claim against a bankruptcy estate, derives from Code § 502(j).
The time frames within which a party may seek reconsideration of an order allowing or disallowing a claim in a bankruptcy case, or appeal from such an order, are subject to the time limitations set out in Rules 59 and 60 of the Federal Rules of Civil Procedure, which are made applicable to cases under the Bankruptcy Code by Rules 9023 and 9024 of the Federal Rules of Bankruptcy Procedure.
In this instance, the claim of the Manning Family Trust is based of a state court judgement for the amount of $1,463,294.00, plus interest at the rate fixed by Kentucky law of 12 per cent per annum until paid. This judgment of the state court was entered February 27, 1996, more than two years before the debtor filed for bankruptcy relief on April 15, 1998.
In paragraph 6 of the March 22, 1996 Forbearance Agreement entered into by the debtor, Dr. Backer, and the Manning Family Trust, Dr. Backer agreed not to appeal from that judgment.
The order of this court entered February 18, 1999, in Adversary Proceeding No. 98-5047 (Doc. No. 41) reserved a ruling on allowance of the claim because of the uncertainty at that time as to whether the claim was owned by the Trust or Shona P. Manning.
Mrs. Manning re-assigned the judgment to the Trust on January 17, 2003, ostensibly because she had received no payments on the judgment, or perhaps because Bank One, Kentucky, N.A. had commenced in the Woodford Circuit Court on February 26, 2001 Civil Action No. 01-CI-00047 contesting the validity of the assignment. Apparently, the payments made to the Trust pursuant to paragraphs 1 and 3 of the Forbearance Agreement were not passed along to Mrs. Manning as assignee of the judgment against Dr. Backer.
An agreed order entered by the court on August 1, 2003 recognized Manning Family Trust as owner of the judgment claim against Dr. Backer. The order allowed the claim as an unsecured claim in the amount of $1,573,248.75, which included accrued interest calculated to the date of bankruptcy. See Doc. Nos. 244 and 249 in the debtor's bankruptcy case No. 98-50956.
The complaint of the debtor in Adversary Proceeding No. 98-5047 asked this court to halt collection activity by counsel representing Shona Manning, who was then the assignee of the Manning judgement, against Dr. Backer, on the ground such activity was precluded by the terms of the pre-bankruptcy Forbearance Agreement executed by the parties.
The complaint did not challenge the validity or amount of the Manning judgment. It sought cessation of collection activity on the judgment, including the avoidance under state law, made applicable by provisions of the Bankruptcy Code, of liens obtained on the eve of bankruptcy, enforcement of which liens was stayed by the intervention of bankruptcy.
At that point in time both the lender liability action of Manning Family Trust against First Security National Bank and Trust Company, predecessor of JP Morgan Chase Bank, for damages, and the litigation concerning the liability of Cumberland Surety Insurance Company for payment of the judgment of Manning Family Trust against Dr. Backer, were unresolved.
Subsequent state appellate court decisions eliminated the possibility of recovery from the surety and required further litigation to determine the possibility of recovery in the Trust's lender liability action against Bank One. Because these state court judicial decisions shrank in one instance and eliminated in the other instance the possibility of recovery by the Trust from these two deep pockets, it is not particularly surprising that the Mannings, by counsel, had chosen to resume collection efforts against Dr. Backer. The Forbearance Agreement did not specify the length of the period of delay in pursuing collection activity against Dr. Backer. These collection efforts terminated when Dr. Backer filed his petition for relief under Chapter 11 of the Bankruptcy Code.
At a hearing before this court on July 23, 2003, attorney John David Dyche, appearing for Bank One, suggested that if Manning Family Trust had received forgiveness of $750,000.00 of indebtedness in exchange for assignment of the judgment against Dr. Backer to Shona P. Manning, "then the Trust is precluded from certain damages in its case against Bank One because they have received a value that is for the same damages. . . ." He proffered: "What has happened is after Bank One got its judgment against the Manning Family Trust or was close to getting their judgment, the Trust slipped off and tried to assign this judgment to Shawna (sic) Manning. . . . There was no consideration. There was no anything for it. So, when Bank One sued on that fraudulent conveyance the Trust then sees that it has got a problem over in the Fayette Circuit Court because if they are going to sustain this fiction of the Shawna (sic) Manning assignment being valid, they are going to have to acknowledge the forgiveness of several hundred thousand dollars of debt from Shawna (sic) Manning. And, if they acknowledge that, then these are the same damages. They stem from . . ."
Presumably, attorney Dyche was referring to two state court actions Bank One had initiated against the Manning Family Trust, a collection action, No. 93-CI-3539, filed December 9, 1993, by Bank One in the Fayette Circuit Court, alleging the Trust was in default on several outstanding loans, and a fraudulent conveyance action No. 01-CI-00047, filed February 26, 2001 in the Woodford Circuit Court, challenging the validity of the March 23, 1996 assignment to Shona P. Manning of the $1,483,294.00 February 27, 1996 Judgment the Trust had obtained against the debtor, Dr. Backer.
In the Fayette Circuit Court action, Bank One on October 27, 1999, obtained a judgment against the Manning Family Trust for an amount in excess of $1.6 million, plus interest. Bank One had caused a non-wage garnishment issued on that judgment to be levied on the judgment claim of Manning Family Trust against Dr. Backer in his bankruptcy case, to sequester for Bank One any dividend Manning Family Trust might receive on its judgment claim against Dr. Backer.
Present counsel for the Mannings contends the limited objection of Bank One to his motion for entry of a proposed order designating Manning Family Trust as owner of the February 27, 1996 judgment in the amount of $1,483,294.00 against Dr. Backer and fixing the allowed amount of the Manning claim, including interest to the date of bankruptcy, as $1,573,284.75 was an objection to the claim, that the objection was denied, and that the order entered with respect to this limited objection to the motion for entry of the proposed order precludes entertainment by this court of the pending motions of the debtor and Griggs Management seeking reconsideration of the order allowing the claim. See Doc. Nos. 244, 245, 246, 248, 249, 250 in the debtor's bankruptcy case. The limited objection of Bank One was not to the validity or amount of the Manning claim. Rather the objection expresses a number of other concerns, as for example the effect of the proposed order on Bank One's action in the Woodford Circuit Court to set aside as fraudulent the Trust's assignment to Shona Manning of the judgment on which the claim is based. The final agreed order entered by the court on August 1, 2003, did not change the allowed amount of the claim proposed in the motion of counsel for Manning Family Trust. The order was amended to include provisions preserving the interests of attorneys asserting lien rights on the claim.
The limited objection to a motion proposing entry of an order concerning ownership of the judgment on which the Manning claims are based was not an objection to the allowance or to the amount of the Manning claim against Dr. Backer, for which reason the court refuses to construe the objection to the motion as an objection to the Manning claim. Paragraph 23 of Bank One's Limited Motion states: "There does not appear to be any dispute, however, as to MFT currently being the owner of the State Court Judgment or the amount of the judgment or that MFT is currently the owner of the Manning Proof of claims."
Present counsel for the Mannings and the Trust contends Adversary Proceeding No. 98-5047 filed by Dr. Backer seeking a determination that the Forbearance Agreement between him and Manning Family Trust precluded renewal of collection activity against him on the judgment, should be interpreted as an objection to allowance of the claim of the Manning Family Trust. As previously noted the debtor agreed in the Forbearance Agreement not to appeal the judgment on which the Manning claim is based. He did not appeal from the judgment and he agreed to entry of the August 1, 2003 order fixing the amount of the Manning claim.
The language of the complaint seeking postponement of collection activity on the judgment does not question the validity or amount of the claim. It seems obvious from the terms of the Forbearance Agreement that the debtor and his attorneys and the Mannings and their attorneys all had expectation that some payment on the claim would be obtained from First Security National Bank and Trust Company or Cumberland Surety Insurance Company, or both, and ultimately that expectation may have been justified, depending on how the settlement benefits tendered by J.P. Morgan Chase Bank are applied.
The complaint in Adversary Proceeding 98-5047 sought a determination of the deterrent effect of the Forbearance Agreement on the renewed collection activity on the judgment on which the Manning claim is based. The complaint did not question the allowance of or amount of the Manning claim. This adversary proceeding should not be interpreted as precluding a Rule 60(b)(5) determination of whether the judgment on which the claim is based has been satisfied or released. The judgment on which the Manning claim is based was entered in litigation in the Fayette Circuit Court well before the debtor sought bankruptcy relief and the judgment itself has not been contested in these subsequent bankruptcy proceedings, because the debtor honored his agreement not to appeal the judgment.
Dr. Backer, the debtor, is not a party to the to the 2006 General Release and Settlement Agreement between J P Morgan Chase Bank, N.A. and Manning Family Trust. He is not named as a defendant in Civil Action No. 93-CI-1774, Fayette Circuit Court, styled Manning Family Trust v. Bank One, N.A.
Dr. Backer was the principal defendant in Civil Action No. 90-CI-3506, styled Manning Family Trust v. J. W. Backer and First Security National Bank and Trust Company, an action filed three years earlier in Fayette Circuit. That was the action to force Dr. Backer to abide by the terms of the oral agreement to sell the 3-in-1 bloodstock package to Manning Family Trust. First Security National Bank and Trust Company was named a defendant in that action based on the supposition the Bank had an interest in the thoroughbred horses that were the subject of the sale. The alleged involvement of First Security in loan arrangements with Ag Credit to pay the indebtedness of Dr. Backer to First Security was undisclosed and First Security was dismissed as a defendant in that action because the indebtedness of Dr. Backer to the bank had been satisfied.
From a cursory examination of the complaint of Manning Family Trust against Dr. Backer and First Security National Bank and Trust Company in the 1990 Civil Action No. 90-CI-3506, in the Fayette Circuit Court, the action to force Dr. Backer to abide by the terms of the oral agreement to sell the 3-in-1 bloodstock package to Manning Family Trust, and the complaint of Manning Family Trust, et al. against J. P. Morgan Chase Bank in the 1993 Civil Action No. 93-CI-1774 in the Fayette Circuit Court, it might appear these two civil actions are unrelated.
However, based on the entire record of the earlier 1990 civil action, the amendments to the complaint, the Opinions and Orders of the trial judge, the Answer, Counterclaim and Cross-claim of the defendant, Central Kentucky Agricultural Credit Association, and the unpublished opinion of the Kentucky Court of Appeals, 93-CA-2580-MR (July 14, 1995), the nexus of facts on which these 1990 and 1993 civil actions are based becomes apparent.
Numerous documents in Civil Action 90-CI-3506 establish an indisputable relationship between the facts for which damages were assessed against Dr. Backer and those for which Manning Family Trust sought to recover damages from J.P. Morgan Chase in Civil Action No. 93-CI-1774.
The 1993 action of Manning Family Trust against Bank One, N.A. 93-CI-1774 is grounded on the alleged conduct of officers of the predecessor bank, First Security that aborted the sale of the 3-in-1 package to Manning Family Trust.
It is clear from the allegations in the 1993 civil action against Bank One, now J. P. Morgan Chase, N.A., if true, that officers of the predecessor bank, First Security may have orchestrated the conduct of the debtor that resulted in his declining to abide by the terms of the 3-in-1 bloodstock sale to Manning Family Trust. The damage claims of the Manning Family Trust in Civil Action 93-CI-1774 in the Fayette Circuit Court are predicated on the alleged misconduct of officers in not honoring loan commitments that frustrated plans of the Manning Family Trust to purchase thoroughbred bloodstock during the years 1990-1991.
Dr. Backer was not a party to the September ___ 2006 General Release and Settlement Agreement between J.P. Morgan Chase Bank and Manning Family Trust, which allocates a payment by check in the amount of $500,000.00 with respect to the settlement of the Honeagle Farm, (the "Settlement Account"). Counsel for the Mannings in his response to the motions for reconsideration of the August 1, 2003 order allowing the Manning claim indicates this payment was for settlement of the Mannings' claim for wrongful foreclosure on the farm, a tort claim. However, the Judgment and Order signed by Fayette Circuit Judge Paisley and entered in Civil Actions Nos. 93-CI-1774 and 93-CI-3935 on October 27, 1999, adjudges Bank One to have a valid and enforceable mortgage on the farm. See Exhibit G to the settlement agreement. Naturally, the court is perplexed by the apparent inconsistency between this court order and the Mannings' alleged tort of wrongful foreclosure.
The court will schedule a hearing on the allocation of the consideration, money and forgiveness of debt, provided for in the settlement agreement.
The court is satisfied the forgiveness of the indebtedness on the farm owned by the Manning Family Trust plus the $500,000.00 payment to the Trust as computed by counsel for J. P. Morgan Chase Bank is sufficient to satisfy the judgment of Manning Family Trust against Dr. Backer, if the transfer of these benefits to the Trust are applied in that manner. But a further hearing may be necessary to clarify the assertion that this transfer of wealth was for settlement of a claim of the Manning Family Trust against a predecessor in interest of J. P. Morgan Chase for wrongful foreclosure, a claim that is not discernable from the record before the court.
The affixing of this Court's electronic seal below is proof this document has been signed by the Judge and electronically entered by the Clerk in the official record of this case.