Court Opinion

ID: 2810123
Source: CourtListenerOpinion
Date Created: 2015-06-19 15:01:33.803883+00
Date Added: 2024-06-11T11:30:15.595948
License: Public Domain

United States Bankruptcy Appellate Panel
                         For the Eighth Circuit
                     ___________________________

                             No. 14-6043
                     ___________________________

                          In re: Michael Robert Wigley

                             lllllllllllllllllllllDebtor

                            ------------------------------

                             Lariat Companies, Inc.

                    lllllllllllllllllllllClaimant - Appellant

                                         v.

                            Michael Robert Wigley

                      lllllllllllllllllllllDebtor - Appellee
                                   ____________

                Appeal from United States Bankruptcy Court
                 for the District of Minnesota - Minneapolis
                                ____________

                           Submitted: April 23, 2015
                             Filed: June 19, 2015
                               ____________

Before FEDERMAN, Chief Judge, NAIL and SHODEEN, Bankruptcy Judges.
                            ____________

NAIL, Bankruptcy Judge.
      Lariat Companies, Inc. ("Lariat") appeals the November 10, 2014 order of the
bankruptcy court capping Lariat's claim against Debtor Michael Robert Wigley
("Debtor") at $445,272.93. We affirm in part, reverse in part, and remand for further
proceedings consistent with this opinion.

                                 BACKGROUND

       In 2008, Lariat, as lessor, and Baja Sol Cantina EP, LLC ("Baja Sol"), as
lessee, entered into a ten-year lease of commercial real property in Hennepin County,
Minnesota. Debtor, who had formed Baja Sol to operate a restaurant on the premises,
personally guaranteed Baja Sol's performance under the lease.

       Baja Sol defaulted under the lease, and Lariat evicted it in July 2010. Lariat
then sued Baja Sol and Debtor to recover damages under the lease and the guaranty,
respectively. On Lariat's motion for summary judgment, the Hennepin County
District Court awarded Lariat $2,224,237.00 in damages, plus pre- and post-judgment
interest and attorney fees. Baja Sol and Debtor appealed, and the Minnesota Court
of Appeals affirmed the district court's judgment.

       Further litigation ensued. In November 2011, Lariat and two other creditors
filed an involuntary chapter 7 petition against Debtor. Pursuant to the parties'
agreement, that case was dismissed in March 2012.

      The day after they filed the involuntary chapter 7 petition against Debtor, the
same three creditors filed a lawsuit against Debtor's wife in Hennepin County District
Court. After the involuntary petition was dismissed, they added Debtor as a co-
defendant. Following a two-day trial, the district court held Debtor and his wife

                                         -2-
jointly and severally liable for various fraudulent transfers totaling $795,098.00 and
awarded Lariat1 that sum plus statutory interest, costs, and disbursements.

       In March 2013, Debtor filed his own lawsuit against Lariat in Hennepin County
District Court. Lariat characterizes that lawsuit as a collateral attack on its judgment
against Baja Sol and Debtor. The district court seemingly agreed: In July 2013, it
concluded Debtor's lawsuit was barred by collateral estoppel and dismissed his
complaint. Debtor appealed. That appeal, stayed by the filing of Debtor's chapter 11
case, is pending.

      In January 2014, Baja Sol filed a chapter 11 petition and commenced an
adversary proceeding to enjoin Lariat from attempting to enforce its judgment against
Debtor. The bankruptcy court denied Baja Sol's request for a preliminary injunction
and, on Lariat's motion, dismissed the adversary proceeding. On the United States
Trustee's motion, Baja Sol's chapter 11 case was dismissed in June 2014.

       In February 2014, Debtor filed his own chapter 11 petition. Lariat filed a proof
of claim for $1,734,539.00. Debtor objected to Lariat's claim on two grounds: (1)
the amount sought based on Debtor's personal guaranty of Baja Sol's performance
under the lease between Lariat and Baja Sol exceeded the amount allowable under 11
U.S.C. § 502(b)(6); and (2) the amount sought based on the various fraudulent
transfers from Debtor to his wife were duplicative of, and subject to the same
limitation as, the amount sought based on Debtor's personal guaranty of Baja Sol's
performance under the lease between Lariat and Baja Sol. Shortly thereafter, Lariat
filed an amended proof of claim for $1,610,787.00.

      The bankruptcy court sustained Debtor's objection and capped Lariat's claim
at $445,272.93. Debtor appealed.

      1
          The other two creditors had settled their claims.

                                           -3-
                             STANDARD OF REVIEW

      The relevant facts are not in dispute. We review the bankruptcy court's
conclusions of law de novo. Pierce v. Collection Assocs., Inc. (In re Pierce), 779
F.3d 814, 817 (8th Cir. 2015).

                                    DISCUSSION

      If a party in interest objects to a claim,

            the court, after notice and a hearing, shall determine the
            amount of such claim . . . as of the date of the filing of the
            petition, and shall allow such claim in such amount, except
            to the extent that–

            ...

            (6) if such claim is the claim of a lessor for damages
            resulting from the termination of a lease of real property,
            such claim exceeds–

                   (A) the rent reserved by such lease, without
                   acceleration, for the greater of one year, or 15
                   percent, not to exceed three years, of the remaining
                   term of such lease, following the earlier of–

                          (i) the date of the filing of the petition; and

                          (ii) the date on which such lessor repossessed,
                          or the lessee surrendered, the leased property;
                          plus

                   (B) any unpaid rent due under such lease, without
                   acceleration, on the earlier of such dates[.]

                                          -4-
11 U.S.C. § 502(b) (emphasis added). Section 502(b)(6)'s cap on a landlord's
damages is "designed to compensate the landlord for his loss while not permitting a
claim so large (based on a long-term lease) as to prevent other general unsecured
creditors from recovering a dividend from the estate." S. Rep. No. 95-989, at 63
(1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5849.

        The Ninth Circuit Court of Appeals has suggested a "simple test" for
determining whether damages result from rejection of a lease:2 "Assuming all other
conditions remain constant, would the landlord have the same claim against the tenant
if the tenant were to assume the lease rather than rejecting it?" Saddleback Valley
Community Church v. El Toro Materials Co. (In re El Toro Materials Co.), 504 F.3d
978, 981 (9th Cir. 2007). We suggest an equally simple test for cases involving, not
a post-petition rejection of a lease, but a pre-petition termination of a lease:
Assuming all other conditions remain constant, would the landlord have the same
claim against the tenant if the lease had not been terminated?

       In this case, Lariat's claim comprises four elements: (1) $172,243.11 for
unpaid rent, common area maintenance, and late fees through the eviction date, as
found by the Hennepin County District Court, and $54,844.00 for interest thereon to
February 10, 2014, the date on which Debtor filed his chapter 11 petition; (2)
$308,805.00 for fifteen months of post-eviction rent per § 502(b)(6)(A) and
$70,306.00 for interest thereon to February 10, 2014; (3) $185,829.00 for attorney
fees, costs, and disbursements, including interest thereon to February 10, 2014; and
(4) $801,415.22 for Debtor's liability for the various fraudulent transfers to his wife
and $17,346.00 for post-petition interest thereon to February 10, 2014.

      2
       With certain exceptions, "[a] trustee, subject to the court's approval, may
assume or reject any executory contract or unexpired lease of the debtor." 11 U.S.C.
§ 365(a).

                                         -5-
       With respect to the first element of Lariat's claim, Debtor objected to that
portion of the $172,243.11 that represented late charges and an "eviction fee," which
totaled $32,394.40, and further objected to the entire $54,844.00 of interest.3 In
sustaining Debtor's objection to these sums, the bankruptcy court concluded "the
interest, late charges and eviction fees relating to the repossession date are claims for
damages resulting from termination of the lease" and were thus subject to §
502(b)(6)'s cap. We respectfully disagree.

       The parties agree the lease was terminated in July 2010, when Lariat evicted
Baja Sol from the premises. Would Lariat have the same claim against Baja Sol (and
through his guaranty, Debtor) for the unpaid rent, common area maintenance, late
fees, and interest thereon if the lease had not been terminated? Yes.

       Lariat is seeking unpaid rent, common area maintenance, and late fees only
through the eviction date. Because these items accrued prior to termination of the
lease, they cannot be said to have resulted from termination of the lease.4 In re MDC
Systems, Inc., 488 B.R. 74, 96-97 (Bankr. E.D. Pa. 2013); In re Dronebarger, Bankr.
No. 10-10889-HCM, 2011 WL 350479, at *17 (Bankr. W.D. Tex. Jan. 31, 2011).
The pre- and post-judgment interest thereon is derivative of the amounts awarded for
unpaid rent, common area maintenance, and late fees. Because those amounts did not
result from termination of the lease, the interest thereon cannot be said to have
resulted from termination of the lease, either. Dronebarger, 2011 WL 350479, at

      3
          Debtor agrees Lariat would be allowed the unpaid rent under § 502(b)(6)(B).
      4
        In its description of the items comprising this element of its claim, Lariat does
not specifically refer to the eviction fee (amounting to $322.00) about which Debtor
complained. While its name might suggest otherwise, the record indicates this fee
accrued in June 2010, prior to termination of the lease. Consequently, it cannot be
said to have resulted from termination of the lease, either.

                                          -6-
*17. Lariat's claim for the various components of this element of its claim is thus not
subject to § 502(b)(6)'s cap.

       With respect to the second element of Lariat's claim, Debtor agreed with
Lariat's calculation that $308,805.00 was allowable for "future rents" under §
502(b)(6)(A), but objected to the $70,306.00 of interest thereon. In sustaining
Debtor's objection, the bankruptcy court concluded "[t]he interest charge constitutes
damages resulting from the termination of the lease[.]" We agree.

     Would Lariat have the same claim against Baja Sol (and through his guaranty,
Debtor) for interest on the future rents if the lease had not been terminated? No.

       If the lease had not been terminated, Lariat would not have a claim for future
rents, and without a claim for future rents, Lariat would not have a claim for interest
thereon. Lariat's claim for interest on its future rents thus resulted from termination
of the lease and is subject to § 502(b)(6)(A)'s cap.

       With respect to the third element of Lariat's claim, Debtor objected to any
allowance for attorney fees, costs, and disbursements. In sustaining Debtor's
objection, the bankruptcy court concluded "these claims are not outside the scope of
[§] 502(b)(6) as not arising from a lease termination." We respectfully disagree, at
least to the extent of the attorney fees, costs, and disbursements the district court
awarded Lariat in the state court action to recover damages under the lease and
guaranty.

      Would Lariat have the same claim against Baja Sol (and through his guaranty,
Debtor) for those attorney fees, costs, and disbursements if the lease had not been
terminated? Yes.

                                         -7-
        Because the damages comprising the first element of Lariat's claim (unpaid
rent, common area maintenance, and late fees) accrued prior to termination of the
lease and thus cannot be said to have resulted from termination of the lease, the
related attorney fees, costs, and disbursements–and the pre-petition interest
thereon–likewise cannot be said to have resulted from termination of the lease.
Kupfer v. Salma (In re Kupfer), 526 B.R. 812, 820-21 (N.D. Cal. 2014); In re Rock
& Republic Enters., Inc., Bankr. No. 10-11728, 2011 WL 2471000, at *25 (Bankr.
S.D.N.Y. June 20, 2011); MDC Systems, 488 B.R. at 96-97; Dronebarger, 2011 WL
350479, at *17. Lariat's claim for these attorney fees, costs, and disbursements–and
the pre-petition interest thereon–is thus not subject to § 502(b)(6)'s cap.

       As for the balance of the attorney fees, costs, and disbursements that comprise
this element of Lariat's claim, Debtor's objection was not limited to § 502(b)(6).
Specifically, Debtor also argued Lariat had not identified any basis on which Debtor
could be held liable for Lariat's attorney fees, costs, and disbursements, other than
those the district court awarded Lariat in the state court action to recover damages
under the lease and guaranty. Because it concluded all the requested attorney fees,
costs, and disbursements were subject to § 502(b)(6)'s cap, the bankruptcy court did
not reach this question. On remand, the bankruptcy court will therefore need to first
determine whether Lariat is entitled, under the lease or otherwise, to the balance of
the attorney fees, costs, and disbursements comprising this element of Lariat's claim
and then determine whether Lariat would have the same claim against Baja Sol (and
through his guaranty, Debtor) for these attorney fees, costs, and disbursements if the
lease had not been terminated.

       With respect to the fourth and final element of Lariat's claim, Debtor objected
to any allowance for Debtor's liability for the various fraudulent transfers to his wife.
In sustaining Debtor's objection, the bankruptcy court concluded the state court
judgment based on the fraudulent transfers was duplicative of the earlier state court
judgment awarding Lariat damages for Baja Sol's breach of the lease. We agree.

                                          -8-
       The Uniform Fraudulent Transfer Act, as adopted by the Minnesota legislature,
MINN. STAT. §§ 513.41-513.51, does not create a "new" claim.5 "The Minnesota
Uniform Fraudulent Transfer Act is not substantive in nature, but instead merely
confers an alternate remedy for protecting preexisting creditor rights. The creditor
rights a party seeks to enforce must exist under independent law, such as contract
law." Deford v. Soo Line R. Co., 867 F.2d 1080, 1087 (8th Cir. 1989) (citation
therein) (emphasis added).

        Lariat's argument to the contrary and the cases offered in support of its
argument are not persuasive. For example, it is true the Seventh Circuit Court of
Appeals has said–in a case involving 11 U.S.C. § 523(a)(2)(A) (which excepts from
discharge, inter alia, a debt for money, property or services obtained by a debtor's
actual fraud)–a debtor's "actual fraud would give rise to a new debt, nondischargeable
because created by fraud[.]" McClellan v. Cantrell, 217 F.3d 890, 895 (7th Cir.
2000). However, the court went on to say such a debt "would be a new debt only to
the extent of the value of the security that he conveyed, for that would be the only debt
created by the fraud itself." Id. (emphasis added). That is not the situation presented
in this case: Nothing in the record suggests Debtor transferred any property in which
Lariat held a security interest.

       It is also true the Ohio Court of Appeals has said–in a case involving Ohio
law–"courts have allowed creditors to recover compensatory damages in fraudulent
transfer cases where a judgment has already been rendered against a debtor and has
not been paid." D.A.N. Joint Venture III, L.P. v. Med-XS Solutions, Inc., No. 2011-L-

      5
      Effective August 1, 2015, this act will be known as the Uniform Voidable
Transactions Act, and many of its provisions will be amended. 2015 Minn. Sess.
Laws Serv. Ch. 17 (S.F. 1816) (West).

                                          -9-
056, 2012 WL 764236, at *8 (Ohio App. Mar. 12, 2012) (citations therein).6
However, the court also said:

             Regarding duplicative damages, the fact that a plaintiff has
             separate and independent causes of action in contract and
             in tort does not permit him to recover more than the
             amount of damage actually suffered as a consequence of
             the injury resulting from the wrongful breach of his
             contract. A plaintiff must allege and prove the existence of
             additional damages attributable to the defendant to be
             awarded damages on each of the separate claims.

Id. at *7 (citation and internal quotation marks omitted) (emphasis added). Nothing
in the record suggests Lariat alleged, much less proved, the existence of additional
damages attributable to Debtor.

       Lastly, in citing JCA Partnership v. Wenzel Plumbing & Heating, Inc., 978
F.2d 1056 (8th Cir. 1992), in support of the proposition that a fraudulent transfer is
a separate wrong, Lariat reads far too much into that decision. In considering whether
the doctrine of election of remedies barred a breach of contract claim, the court only
held:

             The doctrine of election of remedies precludes double
             redress for a single wrong, but the previous fraudulent
             conveyance action and this breach of contract claim
             address separate wrongs. The alleged "wrong" in the
             fraudulent conveyance action was the sheriff's sale of the
             property to the mortgagee and the mortgagee's subsequent
             transfer to [a third party] for less than its reasonable
             equivalent value. The damages sought were alleged to be

      6
       D.A.N. Joint Venture III also involved a fraudulent transfer of a secured
creditor's collateral. Id. at *1.

                                        -10-
             the difference between the fair market value of the property
             and the amount that [the mortgagee] and later [the third
             party] paid for the property. In contrast, [the vendor's]
             "wrong" in this breach of contract action arose from its
             failure to deliver possession to [the vendee] after he cured
             his default. Although [the vendor] could not deliver
             possession because the mortgagee had possession, that was
             due to [the vendor's] default and not legally due to [the
             vendee's] default. Furthermore, [the vendor] was not even
             a party to the fraudulent conveyance action. Applying
             “concepts of fairness,” the two actions appear to address
             separate wrongs and separate parties. Therefore, the
             breach of contract claim against [the vendor] is not barred
             by the doctrine of election of remedies.

Id. at 1061 (emphasis added). This is a far cry from saying a fraudulent transfer
creates a new claim.7

       One final item merits mention. Both parties agree there is a discrepancy
between the amount of the claim allowed by the bankruptcy court and the difference
between the amount of Lariat's amended proof of claim and the amounts the
bankruptcy court disallowed. Lariat says the difference is $3,379.67; Debtor seems
to say the difference is $3,380.78. On remand, the bankruptcy court will need to
either explain the discrepancy or determine whether Lariat or Debtor is correct and
adjust the amount of Lariat's allowed claim accordingly.

      7
        Lariat cites JCA Partnership and another case, Sherman v. Third Nat'l Bank
(In re Sherman), 67 F.3d 1348 (8th Cir. 1995), in support of the proposition that the
Eighth Circuit Court of Appeals has shown a "distinct reluctance" to hold that
fraudulent transfer judgments duplicate any underlying liability. We do not read
either of these cases to support this proposition.

                                        -11-
                                 CONCLUSION

      For the foregoing reasons, we affirm in part, reverse in part, and remand for
further proceedings consistent with this opinion.

                                       -12-