Edwards Family Partnership v. Johnson ( 2022 )

Case: 20-61011 Document: 00516298048 Page: 1 Date Filed: 04/27/2022
United States Court of Appeals
for the Fifth Circuit
United States Court of Appeals
Fifth Circuit
FILED
April 27, 2022
No. 20-61011 Lyle W. Cayce
Clerk
In the Matter of: Community Home Financial Services
Corporation,
Debtor,
_____________________________
Edwards Family Partnership, L.P.; Beher Holdings
Trust,
Appellants—Cross-Appellees,
versus
Kristina M. Johnson, Trustee for Community Home
Financial Services Corporation,
Appellee—Cross-Appellant.
Appeal from the United States District Court
for the Southern District of Mississippi
USDC No. 3:18-CV-154
USDC No. 3:18-CV-155
USDC No. 3:18-CV-156
USDC No. 3:18-CV-157
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No. 20-61011
Before Dennis, Higginson, and Costa, Circuit Judges.
Stephen A. Higginson, Circuit Judge:
This is a second review appeal and cross-appeal from consolidated
matters in the Bankruptcy Court for the Southern District of Mississippi.
The dispute centers around a business relationship between companies
owned by Dr. Charles C. Edwards and William D. Dickson. Appellants are
the Edwards Family Partnership (“EFP”) and Beher Holdings Trust
(“BHT”), two companies owned by Edwards and collectively referred to as
the “Edwards entities.” Appellee/Cross-Appellant is Trustee Kristina M.
Johnson, who presently manages Dickson’s former company, Community
Home Financial Services Corporation (“CHFS”). The parties each raise
four issues on appeal relating to the business relationship between EFP,
BHT, and CHFS. We AFFIRM the district court’s decision in part,
REVERSE in part, and REMAND.
I.
A.
i.
The lengthy relationship between Edwards, an orthopedic surgeon
from Maryland, and Dickson, a business owner from Jackson, Mississippi,
began sixteen years ago. Both Edwards and Dickson owned and operated
multiple family businesses. The two men were introduced by a broker hired
by Dickson to find a replacement lender for CHFS. CHFS is a mortgage
servicing entity, managed by Dickson, that purchased discounted mortgage
loan portfolios from third parties and serviced those loans, as well as servicing
loans from several affiliated companies.
In July 2006, Edwards and Dickson met for the first time. Edwards’s
daughter then traveled to Jackson, Mississippi, where CHFS was
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headquartered, to survey the company’s business operations. Although
Edwards’s daughter had no expertise in the realm of mortgage servicing, she
reported favorably to her father about CHFS. Sometime thereafter, Edwards
and Dickson commenced their first business deal, a credit facility of $10
million to fund the purchase of home improvement loans.
To conserve financial resources and to expedite the arrangements, an
employee of CHFS, who happened to be a disbarred attorney, drafted the
loan documents, using as forms the documents prepared by CHFS’s prior
lender, cutting and pasting different names and addresses where appropriate.
Meanwhile, Edwards relied on his daughter, who is not an accountant, to
review CHFS’s financial reports, to calculate the principal balance and
interest due on the promissory notes each month, and to determine “eligible
receivables” based on a “Borrowing Base Certificate.”
Although the financial entanglements of Edwards and Dickson
contained many elements, the present dispute centers around two business
transactions: (1) the initial home improvement loans from Edwards to CHFS
and (2) a subsequent arrangement of seven mortgage portfolios of subprime
loans (the “Mortgage Portfolios”) purchased as “joint ventures” between
Edwards and CHFS. In total, Edwards’s proofs of claim with respect to his
financial arrangements with Dickson and CHFS amount to roughly $30
million.
ii.
The first deal between Edwards and CHFS, which began in 2006,
pertained to “Home Improvement Line” loans (otherwise known as the
“home improvement loans” or the “Home Improvement Line”). Edwards
agreed to loan $10 million to CHFS through his company Rainbow Group.
CHFS used the funds from Rainbow Group/Edwards to purchase consumer
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mortgages taken out by individuals seeking to improve their homes.1 CHFS
then serviced the purchased mortgages and sent Rainbow Group the interest
it owed.2 Nearly 2,000 home improvement loans were handled through this
arrangement, with roughly $600,000 to $700,000 flowing through the deal
each month.
CHFS established a custodial agreement with Harold B. McCarley,
Jr., PLLC, a Mississippi law firm, designating attorney Harold McCarley, Jr.,
as the custodian of the original loan documents and assignments for Rainbow
Group’s benefit. McCarley testified in the bankruptcy trial that he holds
these documents and releases them only upon receipt of a written request
signed by CHFS and Rainbow Group (or other entity identified by Edwards).
The Home Improvement Loan Agreement gives Rainbow Group the
authority to assign its rights and duties as Lender, pursuant to Paragraph 9.6
of the agreement, which reads:
9.6 ASSIGNMENT BY LENDER. LENDER MAY AT ANY
TIME (A) DIVIDE AND REISSUE (WITHOUT
SUBSTANTIVE CHANGES OTHER THAN RESULTING
FROM SUCH DIVISION) THE NOTE, AND/OR (B)
SELL, ASSIGN, GRANT PARTICIPATION IN,
DELEGATE OR OTHERWISE TRANSFER TO ANY
OTHER PERSON (AN “ASSIGNEE”) ALL OR PART OF
RIGHTS AND DUTIES OF LENDER UNDER THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS.
TO THE EXTENT INDICATED IN ANY DOCUMENT,
INSTRUMENT OR AGREEMENT SO SELLING,
1
The nature of the mortgages in question is the origin for the name “Home
Improvement Line.”
2
More specific details regarding the financial terms of the initial Home
Improvement Line agreement between Rainbow Group and CHFS can be found in the
bankruptcy court opinion.
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ASSIGNING, GRANTING PARTICIPATION IN, OR
OTHERWISE TRANSFERRING TO AN ASSIGNEE
SUCH RIGHTS AND/OR DUTIES, (I) THE ASSIGNEE
SHALL ACQUIRE ALL THE LENDER’S RIGHTS
UNDER THE AGREEMENT AND THE OTHER LOAN
DOCUMENTS AND (II) THE ASSIGNEE SHALL BE
DEEMED TO BE THE “LENDER” UNDER THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS
WITH THE AUTHORITY TO EXERCISE SUCH RIGHTS
IN THE CAPACITY OF LENDER.
Edwards exercised this authority twice on behalf of Rainbow Group.
In 2007, Edwards assigned Rainbow Group’s rights and duties to Beher
Holdings Limited (“BHL”).3 Then in 2010, Edwards re-assigned and split
rights to the Home Improvement Line loans between the present appellants:
EFP and BHT. In each instance, when Edwards exercised his reassignment
powers, the business relationship between Edwards and CHFS remained
fundamentally unchanged. Several years after the initial 2006 loan
agreement, Edwards and CHFS entered into amended loan agreements with
respect to the Home Improvement Line. The amended agreements resulted
in a $4 million commercial note and line of credit between CHFS and EFP,
as well as a $12 million commercial note and line of credit between CHFS
and BHT. The parties do not dispute that by the time CHFS declared
bankruptcy in 2012, it owed the Edwards entities $17.8 million on these
notes.
3
Beher Holdings Limited is a British Virgin Islands company, acquired by Dr.
Edwards for the purpose of the assignment orchestrated between BHL and the Rainbow
Group.
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iii.
In 2008, Edwards began to pursue a second type of investment with
Dickson and CHFS. Because of the nationwide financial crisis at the time,
Dickson believed that CHFS could purchase subprime loan portfolios at a
favorable price. Accordingly, Dickson approached Edwards about providing
roughly $9 million through various entities to CHFS to purchase seven
mortgage portfolios (the “Mortgage Portfolios”) of subprime loans. The
Edwards entities maintain that Edwards did not intend for these transactions
to be considered loans but rather “joint ventures” between the Edwards
entities and CHFS.
Edwards (acting on behalf of EFP and BHT) finalized agreements
with CHFS to purchase the Mortgage Portfolios between January 2008 and
March 2011. The parties to Mortgage Portfolios #1-6 are CHFS and
Appellant EFP. The parties to Mortgage Portfolio #7 are CHFS and
Appellant BHT. Only three of the Mortgage Portfolio transactions between
the Edwards entities and CHFS are documented in writing (Mortgage
Portfolios #1, 2, and 7).
The parties do not dispute that the Edwards entities funded the
purchase of the Mortgage Portfolios. Although the purchases of the seven
portfolios were funded directly by entities purportedly controlled by Edwards
(not necessarily EFP/BHT), all portfolio purchase agreements were between
CHFS and the portfolio seller. Moreover, for Portfolios #1-6, the portfolio
sellers assigned the loans to CHFS. The original notes and assignments
comprising the consumer loans in Portfolios #1-6 are in EFP’s possession as
“collateral.”
The agreement between CHFS and BHT regarding Portfolio #7
“contains terms that are materially different” from the agreements for
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Mortgage Portfolios #1-6.4 The parties to the agreement decided the original
notes and assignments in Portfolio #7 would not be held by CHFS, Dickson,
Edwards, or BHT, but rather by a third party. Currently, these custodial
documents for Portfolio #7 are missing.5
It is undisputed that when CHFS declared bankruptcy, the investment
in the portfolios that had not yet been recouped by the Edwards entities was
$11,780,451.
B.
i.
In 2010, the business relationship between Edwards and Dickson
started to deteriorate. The deterioration culminated in a lawsuit filed in
February 2012 by CHFS and Dickson against Edwards in Mississippi state
court. On April 11, 2012, Edwards and EFP/BHT removed the original state
court lawsuit to the United States District Court for the Southern District of
Mississippi. Shortly thereafter, EFP/BHT filed an emergency motion for
immediate appointment of a receiver for CHFS. Just as the district court was
4
Unlike the other agreements, Portfolio #7’s agreement required CHFS to pay all
of its due diligence expenses, and CHFS received a reduced monthly servicing fee of only
$15 per month. Under the terms of this agreement, CHFS was not entitled to receive any
distribution of its 25 percent share of the net proceeds until BHT recovered its entire cash
contribution. In addition, the agreement states that “benefits and obligations of the
Purchase Agreement have been assigned from CHFS to [BHT]. [BHT] will be the
beneficial owner of the loans, subject to the terms of this Joint Venture.”
5
Patrick Frascogna, a Mississippi attorney whose law office was in the same
building as the CHFS headquarters, was supposed to keep the notes and assignments for
Portfolio #7 in his custody. However, Frascogna either released the loan documents to
Dickson or never received them. Dickson claims that the documents are in a Panamanian
warehouse but has not divulged the location of the warehouse.
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about to conclude its trial in the matter of the receivership, 6 CHFS
voluntarily filed a Chapter 11 petition for relief, which stayed all proceedings
against CHFS in the receivership action.
Amid the bankruptcy proceedings (sometime in 2013), Dickson
absconded to Costa Rica to establish “rogue” operations of the CHFS
business outside of the United States. The parties do not dispute that
Dickson stole nearly $10 million from CHFS bank accounts while in South
America. Dickson also shipped various pieces of office equipment, several
computer servers, and many of CHFS’s loan records to Costa Rica.
Ultimately, Dickson was returned to the United States in federal custody,
arrested for bank fraud, and indicted on April 9, 2014.
In 2012, EFP/BHT filed a Motion to Appoint Chapter 11 Trustee for
CHFS based on the alleged misconduct of CHFS and Dickson.7 Then in
December 2013, the bankruptcy court entered an Order Granting United
States Trustee’s Emergency Motion for Order for the Appointment of a
Chapter 11 Trustee. Over the objection of the Edwards entities,8 the
bankruptcy court appointed Appellee Kristina Johnson (“Johnson” or
6
The Edwards entities allege that after hearing testimony in the receivership
matter, the district court judge “indicated that a receivership would likely be imposed.”
7
A bankruptcy trustee is entrusted with specific, legally binding responsibilities,
which are “extensive.” Commodity Futures Trading Comm‘n v. Weintraub, 471 U.S. 343,
352 (1985). “A trustee shall . . . investigate the acts, conduct, assets, liabilities, and financial
condition of the debtor, the operation of the debtor’s business and the desirability of the
continuance of such business.” 11 U.S.C. § 1106(a)(3). The trustee, as well as the trustee’s
attorneys, “are held to high fiduciary standards of conduct.” Matter of Evangeline Ref. Co.,
890 F.2d 1312, 1323 (5th Cir. 1989).
8
The Edwards entities objected to Johnson’s appointment as Chapter 11 trustee
on the grounds that Johnson’s law firm was representing the accounting firm retained by
CHFS as an expert witness in the bankruptcy case. The bankruptcy court found Johnson
had no conflict.
8
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“Trustee”) as the Chapter 11 trustee for CHFS on January 21, 2014.
Johnson subsequently hired the law firm at which she is a partner, to
represent her9 in the matter. Once the order granting the emergency motion
for the appointment of a Chapter 11 trustee – in this case Johnson – was
entered, Dickson no longer had any decision-making authority for CHFS.
See 11 U.S.C. § 704, § 1106. Nevertheless, Dickson’s illicit activities with
respect to CHFS continued until he was taken into federal custody.
ii.
In September 2014, Edwards was contacted by a business associate of
Dickson’s in Costa Rica, Mike James Meehan (“Meehan”). Edwards and
Meehan began to communicate sporadically over email regarding the affairs
of CHFS in Costa Rica. Edwards and Meehan’s correspondence lasted for
roughly five months.
Emails between Edwards and Meehan reveal that Edwards sent
Meehan wire transfers in exchange for information about CHFS’s South
American operations on multiple occasions. 10 Sometime during the email
correspondence period, Meehan emailed Edwards a link to a Dropbox folder
that contained data on CHFS pulled from a CHFS computer. After Edwards
informed Meehan that he was unable to access the Dropbox folder, Meehan
mailed Edwards two compact discs (“CDs”) with the information in
question. Edwards testified at trial “that he believed the CDs to be duplicates
of each other,” with no relevant or new information.
9
The district court order opined on the troubling incentives associated with the
arrangement between Johnson and her law firm in this case. Thus far, more than thirty
lawyers have billed the estate for work on this matter, amounting to over $5 million in legal
fees for which the estate is now responsible.
10
Specifically, Edwards testified at trial that he wired Meehan money “out of just
appreciation.”
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In addition to corresponding over email, Edwards traveled to Costa
Rica to meet with Meehan in person in December 2014. After this visit,
Edwards, once again, reached out to Meehan over email seeking information
from the hard drives of computers in the CHFS Costa Rica office, as well as
information about assets seized by the Costa Rican government from
Dickson. Edwards claims that the only information he received from Meehan
were “some computer records of the Home Improvement Loans and the
other EFP/BHT portfolios that Meehan copied onto CDs.”
Meehan did not attempt to contact Johnson until February 2015
(roughly five months after contacting Edwards). Before Meehan reached out
to Johnson, she was unaware of the location of CHFS’s computers, books,
and records in Costa Rica and had no knowledge of the financial affairs of
CHFS in South America. Johnson alleges that, because of Edwards’s
communications with Meehan, Edwards had extensive knowledge of various
matters related to CHFS’s business affairs for several months,11 while she
remained in the dark as to the same information.
In response, Johnson filed the PPC Amended Complaint against
Edwards and the Edwards entities alleging violations of the automatic stay
under 11 U.S.C. §§ 105(a), 362(a), (k). In the Amended Complaint, Trustee
Johnson estimated that the estate was forced to incur additional servicing
costs of more than $10,000, which could have been avoided if Edwards had
notified Johnson of his communications with Meehan or turned over the
information he possessed. Additionally, Johnson alleged that Edwards’s
11
According to Johnson, as referenced in the bankruptcy court opinion, Edwards
“had knowledge of approximately 2,000 loans, at least two bank accounts in CHFS’s name
(one with Banco de Costa Rica and the other with Banco Panameño), over $1.5 million in
loans purchased in Costa Rica with funds stolen from the estate, and the names of two
CHFS affiliates (Pirrana SA and Mary Madison Foundation)[.]”
10
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actions with respect to Meehan cost her an opportunity to obtain CHFS
assets that were either seized or frozen by the Costa Rican government,
thereby incurring greater legal fees and expenses to retrieve the repossessed
assets. At the time of the bankruptcy trial, Johnson estimated the estate had
“incurred legal fees and expenses attributable to Edwards’s conduct in
excess of $61,458.2535” and would continue to incur additional expenses.
The bankruptcy court consolidated the PPC Amended Complaint with the
other related proceedings in an order on February 15, 2017.
iii.
From October 30, 2017, through November 2, 2017, and on
November 27, 2017, the bankruptcy court conducted a consolidated trial
consisting of three adversary proceedings and five related contested matters.
Judge Olack issued a far-reaching opinion in February 2018. With respect to
the issues presently before this court on appeal, the bankruptcy court
concluded:
A. Mortgage Portfolios
1) The Loans to CHFS to purchase Mortgage Portfolios #3-6
were barred by the statute of frauds and, therefore, were
unenforceable against the estate.
2) The Edwards entities were entitled (in 2018) to $788,611 for
their secured claim on the loans for Mortgage Portfolio #1-2.
3) Johnson was not required to return collections from
Mortgage Portfolio #7 to the Edwards entities.
B. Home Improvement Line Loans
1) Trustee Johnson was entitled to a judgment that the 2010
Assignment is void.
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C. Tracing
1) EFP/BHT were not entitled to a judgment declaring that
they have a security interest in any of the stolen funds
recovered or intercepted by the Trustee.
D. Post-Petition Adversary Conduct
1) Trustee Johnson was entitled to a judgment against Edwards
and EFP/BHT, jointly and severally, for the conversion of the
original CD.
2) Trustee Johnson was entitled to damages against Edwards
and EFP/BHT, jointly and severally, for violations of the
automatic stay.
iv.
On October 2, 2020, the district court issued a memorandum opinion
and judgment affirming in part, reversing in part, and rendering in part the
bankruptcy court’s opinion. With respect to the issues presently on appeal,
the district court concluded:
A. Mortgage Portfolios
1) The bankruptcy court’s rulings on the mortgage portfolios
were within the standard of review and affirmed.
B. Home Improvement Line Loans
1) Trustee Johnson’s challenge to Dr. Edwards’s internal 2010
Assignment was reversed and rendered.
C. Post-Petition Adversary Conduct
1) The Trustee’s conversion claim was reversed and rendered.
2) The bankruptcy court’s findings under § 362(k) were
vacated and remanded. The district court held that “[i]f it is
determined [on remand] that fees should be awarded, the court
should clearly explain how it arrived at the level of
compensation awarded.”
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II.
A district court reviewing the final judgement of a bankruptcy court
uses the clearly erroneous standard of review for questions of fact and a de
novo standard of review for conclusions of law. In re Gerhardt, 348 F.3d 89,
91 (5th Cir. 2003). When we review the decision of a district court, sitting in
its bankruptcy appellate capacity, we apply the same standards of review. In
re SI Restructuring, Inc., 542 F.3d 131, 134 (5th Cir. 2008). See also Barron &
Newburger, P.C. v. Tex. Skyline, Ltd. (In re Woerner), 783 F.3d 266, 270 (5th
Cir. 2015) (en banc). We also apply these standards when reviewing a
bankruptcy court’s final judgements directly. In re ASARCO, L.L.C., 702
F.3d 250, 257 (5th Cir. 2012).
III.
A.
The Edwards entities first ask this court to overturn the bankruptcy
court’s conclusion that the entities’ right to repayment for the funding of
Mortgage Portfolios #3-6 is barred by the statute of frauds. The Edwards
entities argue the “statute of frauds does not apply to agreements already
fully performed by one party; or to agreements capable of being fully
performed within 15 months, even if performance is not expected.”
Mississippi law provides that “[a]n action shall not be brought . . .
upon any agreement which is not to be performed within the space of fifteen
months from the making thereof” unless the agreement is “in writing, and
signed by the party to be charged therewith or signed by some person by him
or her thereunto lawfully authorized in writing.” Miss. Code Ann.
§ 15-3-1. The Mississippi Supreme Court and our court have both previously
struck down loan agreements with durations that fell beyond the fifteen-
month period. See, e.g., Fireman's Fund Ins. Co. v. Williams, 154 So. 545, 547
(Miss. 1934) Williams v. Evans, 547 So. 2d 54, 56 (Miss. 1989); Stahlman v.
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Nat'l Lead Co., 318 F.2d 388, 395 (5th Cir. 1963). However, the Mississippi
Supreme Court has also considered the indefinite duration of an agreement
to be a determinative factor in removing the agreement from the statute of
frauds consideration. See, e.g., Beane v. Bowden, 399 So. 2d 1358, 1361 (Miss.
1981) (“[T]he oral contract was of an indefinite duration and susceptible of
performance within 15 months, thus removing it from the statute of
frauds.”). See also Morgan v. Jackson Ready-Mix Concrete, 157 So. 2d 772, 779
(Miss. 1963) (“The possibility of performance within fifteen months takes
the contract out of the operation of the statute [of frauds].”).
Accordingly, the salient question is whether the agreement between
the Edwards entities and CHFS pertaining to the repayment of Mortgage
Portfolios #3-6 had an indefinite duration for repayment and was susceptible
of performance within fifteen months.12 To answer this question, the
bankruptcy court looked to the terms of the underlying subprime loans that
comprise the larger Mortgage Portfolios. The bankruptcy court reasoned
that “[b]ecause the loans that comprise Portfolios #3-#6 are all for terms
longer than five (5) years, . . . the loans to CHFS to purchase Portfolios #3-#6
could not be performed within the space of fifteen (15) months and,
therefore, are unenforceable against the estate.”
We will affirm the bankruptcy court’s findings if its “‘account of the
evidence is plausible in light of the record,’ even if we ‘would have weighed
the evidence differently.’” Matter of Trendsetter HR L.L.C., 949 F.3d 905,
910 (5th Cir. 2020) (quoting Anderson v. City of Bessemer City, 470 U.S. 564,
574 (1985)). The bankruptcy court’s determination that CHFS could not
repay the Edwards entities until it had collected on the underlying loans in
12
The record belies any cursory suggestion that the Edwards entities fully
performed under Mortgage Portfolios #3-6, inasmuch as the Edwards entities had
continuing service and fee obligations.
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the Portfolios—which would take more than five years, based on the terms
of the loan agreements—is “plausible in light of the record.” Id. We agree
that the agreement between the Edwards entities and CHFS was not
performable within a fifteen-month period. As such, we affirm the district
and bankruptcy courts’ conclusion that the Edwards entities’ right to
repayment for their funding of Mortgage Portfolios #3-6 was barred by the
statute of frauds
B.
The Edwards entities further contend that while the bankruptcy court
correctly identified the unrecouped, combined value of Mortgage Portfolios
#1-2 and rightly deemed that amount to be a secured loan to CHFS of
$1,778,804, the bankruptcy court “reached [an] unreasonable result by
arbitrarily adopting a valuation model put forward by the Trustee through her
expert” for the two portfolios. The Edwards entities argue that the
bankruptcy court itself found the underlying notes at issue were owned by
the estate and, as such, that “[t]he valuation model that the bankruptcy court
accepted was based on assumptions that the bankruptcy court’s findings had
expressly rejected.”
This court has previously held that “[v]aluation is a mixed question of
law and fact, the factual premises being subject to review on a clearly
erroneous standard, and the legal conclusion being subject to de novo
review.” In re Stembridge, 394 F.3d 383, 385 (5th Cir. 2004) (citation
omitted). As we have observed, the Bankruptcy Code “leaves valuation
questions to judges” to resolve “on a case-by-case basis.” Matter of Clark
Pipe & Supply Co., Inc., 893 F.2d 693, 697 (5th Cir. 1990).
Here, the bankruptcy court opinion does not elaborate on the
reasoning behind its valuation method. The bankruptcy court simply adopted
valuations for Mortgage Portfolio #1-2 proposed by the Trustee’s expert,
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accountant Jeffrey N. Aucoin that is $788,611.13 In one prior case, we
concluded that a bankruptcy court’s proposed valuation was unreviewable
because the bankruptcy court had not given specific reasons for its choice of
valuation method. See Matter of Missionary Baptist Found. of Am., Inc., 796
F.2d 752, 760-61 (5th Cir. 1986). Although they did not provide an alternative
valuation, the Edwards entities did point out a problem underlying the
bankruptcy court’s valuation: The bankruptcy court found that Mortgage
Portfolios #1 and #2 were loans to CHFS, but then assumed they were joint
ventures for purposes of the valuation. This classification leads to a big
difference in the money that EFP is owed. Our court’s analysis of the issue
indicates that if the portfolio agreements are loans, EFP is entitled to the
entire loan payment from CHFS (which is the secured interest of
$1,728,804); if they are joint ventures, EFP is only entitled to the money from
the mortgage collection.
Upon review, we conclude this uncertainty is sufficient to merit
further consideration by the bankruptcy court, in order for the court to
determine how much money EFP is owed for Mortgage Portfolios #1 and #2
and to explain why the court’s valuation of these portfolios is correct.
Accordingly, we remand solely this issue of the valuations of Mortgage
Portfolios #1-2 to the bankruptcy court.
13
We note that factual findings made by the bankruptcy court that are drawn from
assessments of witness credibility are granted additional deference because “only the trial
judge can be aware of the variations in demeanor and tone of voice that bear so heavily on
the listener’s understanding of and belief in what is said.” In re Renaissance Hosp. Grand
Prairie Inc., 713 F.3d 285, 293 (5th Cir. 2013) (quoting Anderson v. Bessemer City, N.C., 470
U.S. 564, 575 (1985)).
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C.
According to the Edwards entities, while the bankruptcy court
correctly identified Mortgage Portfolio #7 as a joint venture, the bankruptcy
court’s decision to disallow this claim “should be vacated and remanded for
reasonable reevaluation of the amounts owed to the Edwards Entities for
Mortgage Portfolio 7.” The Edwards entities correctly assert that the
bankruptcy court did not offer any analysis or consideration of this issue
beyond its disallowance of the claim in the concluding section of its opinion.
Due to the absence of any analysis, EFP and BHT ask this court to remand
this issue for “reasonable reevaluation of the amounts owed to the Edwards
entities for Mortgage Portfolio 7.”
“The court to which [a bankruptcy] claim or cause of action is
removed may remand such claim or cause of action on any equitable
ground.” 28 U.S.C. § 1452(b). We have previously recognized that fact and
subject matter determinations, when presented to the court of appeals in the
first instance, are best resolved by the bankruptcy court. See In re Baron, 593
F. App’x 356, 361-62 (5th Cir. 2014) (finding the determination of whether a
creditor’s right to seek relief in a bankruptcy matter may be enjoined by a
district court is “best left to the bankruptcy court on remand” when the issue
was raised before the bankruptcy court, but the court did not address the
issue). See also Matter of T-H New Orleans Ltd. P’ship, 10 F.3d 1099, 1103
(5th Cir. 1993) (same). Given the summary disallowance of this issue, as well
as both parties’ acknowledgement that the issue remains unresolved, we
remand this issue to the bankruptcy court.
IV.
A.
Trustee Johnson argues that the 2010 Assignment of the Home
Improvement Line loans is void and cannot be cured post-petition “for the
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reasons . . . determined by the bankruptcy court.” Johnson argues that she
has standing to challenge the 2010 Assignment of the HIL loans—despite not
being a party to the Assignment—pursuant to statutorily granted authority
under several sections of the federal Bankruptcy Code. While the bankruptcy
court determined that the 2010 Assignment was valid, the bankruptcy court
also concluded that it would be unfair to treat Edwards’s 2010 Assignment
as lawful because of intervening periods of non-compliance with local laws by
the assignee entities. See On these grounds, the bankruptcy court voided the
2010 Assignment. In response, the district court stated that “it was an abuse
of discretion [for the bankruptcy court] to even consider” such arguments
and deemed the 2010 Assignment to be valid.
We examine the question of whether Johnson has standing to
challenge the 2010 Assignment de novo. See Friends of St. Frances Xavier
Cabrini Church v. Fed. Emergency Mgmt. Agency, 658 F.3d 460, 466 (5th Cir.
2011) (“Standing is a question of law reviewed de novo by this court.”). We
recently held in a related dispute that bankruptcy trustees generally have
standing, as a party of interest, to challenge any matters concerning the
bankruptcy estate. See Matter of Cmty. Home Fin. Servs., Inc., 990 F.3d 422,
427 (5th Cir. 2021). In that case, we explained that a bankruptcy trustee “is
distinct from all other bankruptcy parties because the trustee is responsible
for the administration of the bankruptcy estate.” Id. at 426. Accordingly,
the “trustee’s standing comes from the trustee’s duties to administer the
bankruptcy estate, not from any pecuniary interest in the bankruptcy.” Id. at
427. Similarly, in an earlier case, we held that “the bankruptcy trustee is the
real party in interest with respect to claims falling within the bankruptcy
estate.” United States ex rel. Spicer v. Westbrook, 751 F.3d 354, 362 (5th Cir.
2014). Because a challenge to the validity of the 2010 Assignment is directly
linked to the bankruptcy estate, Trustee Johnson has standing to raise
questions about the legitimacy of the Assignment.
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Nevertheless, Johnson offers no substantive legal or factual reason
why this panel should reverse the district court’s conclusion that the 2010
Assignment is valid. On appeal, “the burden is on the appellants to show
error.” Murphy v. St. Paul Fire & Marine Ins. Co., 314 F.2d 30, 31 (5th Cir.
1963). Because Johnson has not met her burden of demonstrating that the
district court erred, we affirm the district court’s conclusion that the 2010
Assignment is valid.
B.
Trustee Johnson also asks this court to overturn the district court’s
determination that the Edwards entities have a perfected security interest in
the HIL loans. In response, the Edwards entities maintain they hold a
perfected security interest in the HIL loans pursuant to the Rainbow Loan
Agreement and the Custodial Agreement, emphasizing “the dispositive
significance under the UCC of the custodian’s continuing possession of the
tangible instruments at issue.”
We look to state law to determine if a security interest is perfected.
Matter of Locklin, 101 F.3d 435, 438 (5th Cir. 1996). Under the Mississippi
U.C.C., a party has a perfected secured interest in a tangible instrument when
another party has taken possession of the instrument “after having
authenticated a record acknowledging that it will hold possession for the
secured party’s benefit.” Miss. Code Ann. § 75-9-313(c)(2). Here, it is
undisputed that Rainbow Group held a perfected security interest in the HIL
loans, pursuant to this statutory provision, based on the Custodial Agreement
and Rainbow Loan Agreement between the McCarley Firm, Rainbow Group,
and CHFS. However, the critical question is whether Appellants EFP and
BHT also possess a perfected security interest in the HIL loans under the
same theory, given that the Custodial Agreement does not name these
entities as beneficiary parties or lenders.
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Mississippi law states that “[i]f a secured party assigns a perfected
security interest . . . , a filing . . . is not required to continue the perfected
status of the security interest against creditors of and transferees from the
original debtor.” Miss. Code Ann. § 75-9-310(c); see also id. cmt. 4
(“Subsection (c) . . . . provides that no filing is necessary in connection with
an assignment by a secured party to an assignee in order to maintain
perfection as against creditors of and transferees from the original debtor.”).
The statute confirms that Edwards did not have to amend or re-perfect the
Custodial Agreement or security interest upon its assignment from Rainbow
Group to the Edwards entities. As such, the Edwards entities would hold a
perfected security interest in the HIL loans under a continuous possession
theory.
Nevertheless, the bankruptcy court determined that the analysis could
not end there because the parties had “varied by agreement” the continuous-
perfection provision of § 75-9-310(c), affirmatively requiring Edwards to re-
perfect his security interest every time he assigned the note to a new entity
under the terms of the Custodial Agreement. See Miss. Code Ann.
§ 75-1-302 (“Except as otherwise provided . . . , the effect of provisions of
the Uniform Commercial Code may be varied by agreement.”). The
bankruptcy court based this conclusion on Section 5.7 of the Custodial
Agreement.14
“Generally, courts look to the ‘four corners’ of the contract to
ascertain its meaning.” Harrison Cty. Com. Lot, LLC v. H. Gordon Myrick,
Inc., 107 So. 3d 943, 959 (Miss. 2013). However, “separate agreements
executed contemporaneously by the same parties, for the same purposes, and
14
Section 5.7 of the Custodial Agreement states: “No party hereto shall sell,
pledge, assign or otherwise transfer this Agreement without the prior written consent of
the other parties hereto.”
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as part of the same transaction, are to be construed together.” Sullivan v.
Mounger, 882 So. 2d 129, 135 (Miss. 2004). Accordingly, we must review the
Custodial Agreement and the Rainbow Loan Agreement for the HIL loans in
conjunction with one another. Section 5.7 of the Custodial Agreement
mandates that parties to the agreement may not “transfer this Agreement
without the prior written consent of the other parties” Section 9.6 of the
Rainbow Loan Agreement states that the original lender may at any time
assign or transfer the rights and duties of lender to another party and that
party would be “DEEMED TO BE THE ‘LENDER’ UNDER THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS WITH THE
AUTHORITY TO EXERCISE SUCH RIGHTS IN THE CAPACITY OF
THE LENDER.” The agreement does not require the lender to seek
approval or sign-off or to even notify the other parties prior to re-assignment.
Read in conjunction with one another, these contract provisions
support the district court’s determination that “everyone would have to
agree in writing before they could change the custodian of the mortgages. The
lender can change at any time. The custodian can’t.” This reading of the
contractual provisions is further supported by the trial testimony of Harold
McCarley, Jr., the custodian of the loan documents. McCarley stated that
“he understood he was the bailee of the Home Improvement Loans for the
‘lender’ under the Custodial Agreement and that at some point, the ‘lender’
changed from Rainbow Group, Ltd. to Beher Limited.” McCarley also
testified that he “took instruction from Edwards as to the identity of the
lender.” For these reasons, we affirm the district court’s conclusion that the
Edwards entities have a perfected security interest in the Home
Improvement Line notes.
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V.
The Edwards entities argue that the bankruptcy court erred in
concluding that, because the Edwards entities could not trace the assets
stolen by Dickson to the funds recovered by the Trustee, EFP and BHT do
not hold a security interest in those funds. The Edwards entities also contend
that they should maintain their security interest in the stolen funds, despite
those funds having been co-mingled, based on the application of “equitable
principles” under the terms of the Mississippi U.C.C.
The district court opinion did not reach the tracing issue, so we review
the bankruptcy court’s decision on this matter directly. Under Mississippi’s
governing rules for security interests in commingled goods, when goods
become commingled—that is, when identity of the collateral has become
lost—the security interest no longer exists in the commingled goods. See
Miss. Code Ann. § 75-9-336(b) (“A security interest does not exist in
commingled goods…”). Since the original goods can no longer be identified,
the rules pertaining to security interests in those goods (including particularly
transfer or creation of a security interest in those original goods) are
inapplicable, even though the goods still exist in some form. See id. cmt. 3
(“[T]he security interest in the specific original collateral alone is lost once
the collateral becomes commingled goods, and no security interest in the
original collateral can be created thereafter…”). However, a security
interest remains attached to “[p]roceeds that are commingled with other
property . . . to the extent that the secured party identifies the proceeds by a
method of tracing, including application of equitable principles, that is
permitted under law.” Id. § 75-9-315(b)(2).
Pursuant to the express language of Mississippi’s statute, the burden
lies with the secured party—the Edwards entities—to identify the proceeds
in question “by a method of tracing.” However, EFP and BHT do not
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provide this court with “a method of tracing” to identify the proceeds in
question. Instead, they ask this court to apply “equitable principles” to
retain their secured interest in the comingled funds. Yet, the Edwards
entities offer no explanation or pertinent caselaw on how the application of
equitable principles might serve as a method of tracing the funds, other than
simply to state that such principles would mandate the security interest
remain intact.
We have previously explained that “adherence to
specific equitable principles, including rules concerning tracing analysis are
‘subject to the equitable discretion of the court.’” United States v. Durham,
86 F.3d 70, 72 (5th Cir. 1996) (quoting In re Intermountain Porta Storage,
Inc., 74 B.R. 1011, 1016 (D.C. Colo. 1987)). However, “when performing a
judicial function by interpreting a state statute—which limits his discretion
and is not merely a standardless grant of authority—a judge acts to implement
state policy rather than create policy.” Boston v. Lafayette Cty., Miss., 743 F.
Supp. 462, 470 (N.D. Miss. 1990). Creating new policy about the application
of equitable principles in this matter is not the appropriate role of this court.
For this reason, we affirm the bankruptcy court’s holding that the Edwards
entities failed to meet their burden of tracing the recovered funds.
VI.
A.
Trustee Johnson challenges the district court’s decision to vacate and
remand the bankruptcy court’s ruling that Edwards’s post-petition conduct
was violative of federal law. Specifically, Johnson argues that the bankruptcy
court was correct in determining that Edwards’s attempts to acquire
information about Dickson and CHFS’s operations in South America, after
the bankruptcy proceedings began, amounted to a violation of the automatic
stay imposed pursuant to 11 U.S.C. § 362(a)(3). Accordingly, Trustee
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Johnson urges this court to reinstate the award of damages granted by the
bankruptcy court pursuant to 11 U.S.C. §§ 362(k) and 105(a). In response,
EFP and BHT contend the bankruptcy court applied erroneous standards
when considering Johnson’s claims and, moreover, that the court’s damages
award was based on speculation or conjecture.
A bankruptcy petition automatically stays numerous proceedings
against the debtor and the estate. See 11 U.S.C. § 362(a). “[A]n individual
injured by any willful violation of a stay provided by this section shall recover
actual damages, including costs and attorneys’ fees, and, in appropriate
circumstances, may recover punitive damages.” Id. § 362(k)(1). Though we
have previously held that both debtors and creditors have prudential standing
to sue under § 362(k), we have expressly declined to consider the question of
whether bankruptcy trustees have prudential standing to assert an automatic-
stay violation claim. See St. Paul Fire & Marine Ins. Co. v. Labuzan, 579 F.3d
533, 543, 545 (5th Cir. 2009).
As the district court explained, the bankruptcy court “sidestepped the
question of the Johnson’s standing under § 362(k) to pursue damages for an
automatic stay violation,” instead determining that it “could sanction Dr.
Edwards under its contempt power.” See 11 U.S.C. § 105(a). Although the
bankruptcy court cited its § 105 contempt power as the source of its authority
to make this ruling, it analyzed the issue under § 362(k). To establish civil
contempt under § 105, however, Edwards’s conduct must have been shown,
“by clear and convincing evidence,” to be in violation of “a definite and
specific order of the court requiring him to perform or refrain from
performing a particular act or acts with knowledge of the court’s order.”
Piggly Wiggly, 177 F.3d at 382. Here, there is no finding by “clear and
convincing evidence” that Edwards’s post-petition conduct met this
threshold. Accordingly, we affirm only the district court’s decision to vacate
the bankruptcy court’s ruling on this matter.
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B.
Trustee Johnson further suggests that Edwards’s failure to provide to
the bankruptcy court, as well as Johnson’s, the information and/or physical
materials he acquired as a result of his independent inquiries “constituted
a . . . disruption of the bankruptcy process” that amounted to an improper
conversion of estate property. Under Mississippi law, “[c]onversion
requires the intent to exercise dominion or control over goods inconsistent
with the true owner’s rights and is a result of conduct intended to affect
property.” Greenlee v. Mitchell, 607 So. 2d 97, 111 (Miss. 1992). Conversion
is deemed to have occurred once an individual has taken possession of an item
from its owner. Walker v. Brown, 501 So. 2d 358, 361 (Miss. 1987). “It is
elementary that ownership is an essential element of conversion.” Cmty.
Bank, Ellisville, Mississippi v. Courtney, 884 So. 2d 767, 772 (Miss. 2004).
The district court determined that the bankruptcy court had
committed a “clear error” in determining that Edwards’s receipt of the CDs
constituted a conversion of estate property. The district court reasoned that
because the CDs did not come from CHFS or the Trustee, but rather from
Meehan, a non-party in this matter who willfully provided the discs to
Edwards, the physical CDs themselves were not the tangible property of the
estate.15 We agree. Because Edwards could not have converted estate
property if the property in question did not belong to the estate, we affirm the
district court’s reversal of the bankruptcy court on this issue.
15
Trustee Johnson also alleges that an action for conversion is appropriate in this
case due to Edwards’s possession of intangible information that was stored on the CDs he
received from Meehan. However, Mississippi law is clear that this type of intangible
property cannot constitute the basis for a conversion claim. See Holbert v. Wal-Mart Assocs.,
2011 WL 3652202, at *3–4 (S.D. Miss. Aug. 18, 2011); Directv, Inc. v. Hubbard, 2005 WL
1994489, at *4 (N.D. Miss. Aug. 17, 2005).
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VII.
For the foregoing reasons, we AFFIRM the district court’s decision
in part, REVERSE in part, and REMAND the case for reconsideration of
the issue of the collections of Mortgage Portfolio #7.
26