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In re Peeples

United States District Court, D. Utah

March 30, 2017

In the Matter of ADAM L. PEEPLES and JENNIFER K. PEEPLES, Debtors.
v.
SCOTT J. McCARDLE, an individual, and SCOTT J. McCARLE, trustee of the JACK AND RUTH McCARDLE TRUST, Defendants/Appellees/Cross-Appellants. ADRIAN J. LEE, an individual, and ANGELA LYNN NOYES LEE, an individual, Plaintiffs/Appellants/Cross-Appellees,

          Paul M. Warner Magistrate Judge.

          MEMORANDUM DECISION AND ORDER AFFIRMING THE BANKRUPTCY COURT'S ORDER AND JUDGMENT

          Jill N. Parrish United States District Court Judge.

         Before the court are an appeal and cross-appeal from two orders of the United States Bankruptcy Court for the District of Utah (the “Bankruptcy Court”): (1) the Order and Judgment Denying Plaintiffs' Motion for Summary Judgment, Granting Defendants' Motion for Summary Judgment, and Denying Defendants' Motion for Attorney's Fees (the “Order”), and (2) the Order Denying Defendants' Motion for Sanctions (the “Sanctions Order”). Appellants Adrian and Angela Lee appeal the Bankruptcy Court's denial of their motion for partial summary judgment and the grant of Appellees' motion for summary judgment. Appellee, Scott McCardle, in his individual capacity and in his capacity as the trustee of the Jack and Ruth McCardle Trust (the “Trust”), cross-appeals the denial of his motion for attorney's fees and the denial of his motion for sanctions. The court has jurisdiction pursuant to 28 U.S.C. § 158(a)(1).

         After considering the record before it, the applicable law, and the parties' arguments in their briefs and at the February 16, 2017 hearing on the matter, the court issues this Memorandum Decision and Order AFFIRMING the Bankruptcy Court in all respects.

         FACTUAL AND PROCEDURAL BACKGROUND

         The Lees have two state court judgments against Adam and Jennifer Peeples, the debtors in the underlying bankruptcy case. As part of their effort to collect on these judgments, the Lees obtained writs of garnishment directed to Mr. McCardle as trustee of the Trust. The writs of garnishment concerned property that the Lees allege belongs to Mr. Peeples as a beneficiary of the Trust. In response to interrogatories on the writs of garnishment, the Trust denied holding any of Mr. Peeples's property, except for a few inconsequential household items. The Trust maintains that Mr. Peeples's beneficial interest in the Trust was terminated prior to the garnishment proceedings.

         The Trust was created when Jack and Ruth McCardle executed a Declaration of Trust on May 11, 1991. Jack and Ruth were the trustees and primary beneficiaries of the Trust. Mr. McCardle was to become the trustee upon the death of both Jack and Ruth. In 1993, Jack and Ruth executed a memorandum amending the Trust to provide that upon their deaths, the Trust would be distributed 1/3 to Mr. McCardle, 1/3 to Patti Ann Peeples, and 1/3 divided equally to Jack and Ruth's grandchildren, one of whom is Mr. Peeples. Jack McCardle died on February 1, 2008. On September 17, 2008, Ruth McCardle executed a memorandum again amending the Trust (the “2008 Memorandum”) to provide that after paying debts, the Trust assets would be divided equally between Mr. McCardle and Patti Ann Peeples, thus eliminating the grandchildren's beneficial interests. Ruth McCardle died in 2009. At that time, Mr. McCardle became trustee and was obliged to distribute the Trust assets according to the terms of the Trust, which he did.

         After the Trust denied holding any of Mr. Peeples's property, Mr. Lee filed an action in the Third Judicial District Court for the State of Utah (the “State Court Lawsuit”) against Mr. McCardle, in both his individual capacity and as trustee of the Trust alleging claims of undue influence, rescission based on mistake, and two counts of breach of fiduciary duty. Mr. Lee sought an order rescinding the 2008 Memorandum and “compensatory damages, ” including “the amount of any overdue distributions that would have otherwise been made to Adam L. Peeples in the absence of the [2008 Memorandum] . . . up to the total amount of [the writs of garnishment, ]” and “punitive damages in the amount of three (3) times the amount of compensatory damages” for breach of fiduciary duty by Mr. McCardle.

         Mr. McCardle filed a motion for summary judgment in the State Court Lawsuit. On March 23, 2014, the state court entered an order granting Mr. McCardle's motion for summary judgment, awarding attorney's fees and costs to Mr. McCardle, and dismissing Mr. Lee's claims. The state court order stated that it did not constitute final judgment and instructed Mr. McCardle to submit a declaration of his attorney's fees and costs. Mr. McCardle submitted a Declaration of Attorney Fees and Costs and Proposed Final Judgment on March 25, 2014, and a Supplemental Declaration of Fees and Costs on April 11, 2014.

         The Peeples filed their bankruptcy petition on April 17, 2014. Five days later, Mr. Lee filed a notice of bankruptcy stay in the State Court Lawsuit and informed Mr. McCardle's counsel that he believed the State Court Lawsuit was automatically stayed under 11 U.S.C. § 362(a)(1). On May 7, 2014, Mr. McCardle filed an objection to Mr. Lee's notice of stay. Mr. Lee responded to Mr. McCardle's objection that same day, but the state court nevertheless lifted the stay. On May 29, 2014, the state court entered final judgment in favor of Mr. McCardle and an award of attorney's fees and costs against Mr. Lee (the “State Court Judgment”). The State Court Judgment confirmed the earlier order granting Mr. McCardle's motion summary judgment, dismissed Mr. Lee's claims with prejudice, and entered attorney's fees and costs to Mr. McCardle in the principal judgment amount of $41, 889.00 and “all further attorney [sic] fees and costs incurred by [Mr. McCardle] in collecting the Principal Judgment Amount.”

         On May 22, 2014, the Lees commenced an adversary proceeding in the Bankruptcy Court seeking a declaratory judgment that the State Court Judgment was void ab initio, as well as damages and sanctions against Mr. McCardle and his attorneys for violating the stay. The Lees argued that when the Peeples filed their bankruptcy petition, the State Court Lawsuit was automatically stayed under 11 U.S.C. § 362(a)(1). The Lees thereafter filed a motion for partial summary judgment on their claim for declaratory relief. Mr. McCardle filed a cross-motion for summary judgment seeking dismissal of the adversary proceeding on the basis that the State Court Lawsuit was not subject to the automatic stay provision of §362(a)(1). Mr. McCardle also filed a motion for sanctions under Fed.R.Bankr.P. 9011 and a motion for attorney's fees, arguing that he was entitled to fees based on (1) the bad faith exception to the American Rule; (2) the Utah Uniform Trust Code; and (3) the State Court Judgment.

         On July 14, 2016, the Bankruptcy Court denied the Lees' motion for partial summary judgment, granted Mr. McCardle's motion for summary judgment, and denied Mr. McCardle's motion for attorney's fees. The Bankruptcy Court separately denied Mr. McCardle's motion for sanctions. The Lees filed a notice of appeal on July 18, 2016. Mr. McCardle filed his notice of cross-appeal on August 1, 2016.

         STANDARD OF REVIEW

         When reviewing the summary judgment ruling of a bankruptcy court, the district court reviews the case de novo, applying the same legal standard used by the bankruptcy court, namely Fed.R.Civ.P. 56(c). In re Stat-Tech Int'l Corp., 47 F.3d 1054, 1057 (10th Cir.1995). Under Fed.R.Civ.P. 56(c), “[s]ummary judgment is appropriate where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.” Id. Additionally, the court “may affirm the [bankruptcy] court for any reason supported by the record.” In re Myers, 362 F.3d 667, 674 n.7 (10th Cir. 2004).

         In reviewing a bankruptcy court's denial of a motion for attorney's fees, the court reviews the bankruptcy court's decision “for an abuse of discretion, but any statutory interpretation or other legal analysis underlying the [bankruptcy] court's decision concerning attorney's fees is reviewed de novo.” In re Taylor, 478 B.R. 419, 423 (B.A.P. 10th Cir. 2012), aff'd, 737 F.3d 670 (10th Cir. 2013). Further, any factual findings of the bankruptcy court are reviewed for clear error. In re Hodes, 402 F.3d 1005, 1008 (10th Cir. 2005).

         DISCUSSION

         I. If An Action Is Dependent On (Or Based Upon) A Claim Against The Debtor, The Action Falls Within The Scope Of Section 362(A)(1).

         The Lees seek a declaration that the State Court Lawsuit was subject to the automatic Stay defined by the Bankruptcy Code, 11 U.S.C. § 362(a)(1). Specifically, Mr. Lee argues that the State Court Lawsuit was an “action . . . to recover a claim against the debtor” and should have been stayed upon the Peeples's bankruptcy filing. The Bankruptcy Court held that the State Court Lawsuit did not fall within the scope of Section 362(a)(1) as an action to recover a claim against the debtor. The Lees argue that the Bankruptcy Court erred by (1) failing to properly interpret the ...


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