UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
COVINGTON DIVISION
IN RE:
MICHAEL HADDIX
DEBTOR CASE NO. 86-00867
UNITED STATES OF AMERICA PLAINTIFF
VS. ADV. NO.
90-0139
MICHAEL E. HADDIX and
RHONDA HADDIX, PATTY DAVIS,
and AUNDIS DAVIS DEFENDANTS
MEMORANDUM OPINION
This matter is before the Court on
Motion of each of the parties for Summary Judgment. The parties have
memorialized Stipulations and represented to the Court that the facts
stipulated are sufficient for the Court to make its ruling. The parties have
submitted this matter to the Court for decision based on the Stipulations, the
Motions for Summary Judgment, depositions and other matters of record in this
case. This Court has jurisdiction of this matter pursuant to 28 U.S.C. 1334(b);
it is a core
proceeding pursuant to 28 U.S.C. 157(b)(2)(K).
The relevant facts as stipulated in
this matter are as follows:
On June 20, 1985, defendant/debtor
Michael Haddix received $92,230.00 from the Farmers
Home Administration ("FmHA"). At the
inception of the loan, he executed a note and mortgage. The interest on the
note secured by the mortgage was 5 1/2% per annum. Pursuant to Agreement 8 of
the mortgage, he initially obtained insurance on the property, upon which a
mobile home was located, which named the FmHA as loss
payee. This insurance was allowed to lapse for failure to pay premiums. Written
notice of the lapse and of the requirement to maintain insurance was sent to
Michael Haddix, with no notification having been sent
since December 1986. On December 9, 1986, Michael Haddix
filed his bankruptcy petition.
Michael Haddix
married Rhonda Haddix, the daughter of Patty and J.L.
Davis. Rhonda thereby obtained a dower interest in the mortgaged property
subject to the interest of the United States. Michael and Rhonda Haddix obtained insurance which did not name the FmHA as loss payee, from the Gallatin County Assessment,
Fire, Wind and Lighting (sic) Insurance Company ("insurance company")
on January 19, 1988. Funds for the purchase of this insurance were provided by
Patty Davis.
The mobile home located on the
mortgaged property was destroyed by fire in May 1988. On May 3, 1988, the
insurance company issued a check for $10,000.00 for the contents of the mobile
home, and on May 9, 1988, a check for $20,000.00 for damage to the mobile home.
The FmHA had appraised the mobile home on December
27, 1984, for $15,000.00. The check for $25,000.00 (sic) was endorsed by Rhonda
Haddix, Michael Haddix, and
Patty Davis. The total proceeds were used to purchase a tract of land located
on Johnson Road (KY #455) in Gallatin County in the name of Patty Davis. A new
mobile home has been located on the purchased property, and Michael and Rhonda Haddix reside there.
On July 7, 1989, Michael Haddix was granted a discharge in bankruptcy. In January
1990 he discussed the possibility of keeping his farm mortgaged to the FmHA with Betty Burgess, the FmHA
County Supervisor. In these discussions Michael Haddix
was advised that he should sell the farm and pay the proceeds to the FmHA, and that he was not eligible for servicing relief as
provided by FmHA regulations because of the alleged
conversion of the insurance proceeds.
On March 5, 1990, J.L. Davis
telephoned Betty Burgess and informed her that he wished to purchase the farm.
The FmHA having appraised the farm at $60,000.00,
without any value for the destroyed mobile home, agreed that it would release
its mortgage on the farm for $60,000.00. On March 12, 1990, that sum was paid
to the FmHA by J.L. Davis and the mortgage was
released. Under FmHA regulations the County
Supervisor may release a mortgage on real estate in exchange for the value of
the equity interest of FmHA based upon the FmHA-appraised value of the real estate.
Under FmHA
regulations, once an alleged conversion case has been referred to the state
office, the County Supervisor no longer has authority to compromise or settle
such claims without approval from the state office, and the County Supervisor
may settle a conversion claim only upon full restitution to the FmHA.
The record in this case indicates
further that the United States filed an objection to Michael Haddix's discharge on April 10, 1989. The complaint was
dismissed as untimely for not having been filed within sixty days of the first
meeting of creditors which occurred on September 9, 1986. The United States
filed a Motion to Reconsider. On May 3, 1989, the Court entered an Order dismissing
the adversary proceedings, "without prejudice to the right of Plaintiff to
refile a complaint to revoke the discharge once the
order of discharge has been entered in the debtors' bankruptcy case no.
86-00867." The United States filed the Complaint in this matter on June 5,
1990.
In its Motion for Summary Judgment,
the plaintiff United States seeks revocation of the discharge of Michael Haddix, judgment on a conversion claim against Michael and
Rhonda Haddix, and against assets traceable to such
conversion in the hands of Patty Davis. The United States further seeks to
avoid transfer of the converted proceeds as a transfer in defraud of creditors
and without consideration. The relief sought by the United States is founded in
the debtor's alleged failure to uphold his obligation to insure the subject
property for the benefit of the United States.
The United States contends that it
has a valid claim against the insurance proceeds under the rule enunciated in A.H.
Thompson Co. v. Security Ins., 67 S.W.2d 493 (Ky. 1933). Therein the court
stated, "It is a settled rule that, where a mortgagor or lienor is charged with the duty of taking out insurance for
the benefit of the lienholder, the latter is entitled
to an equitable lien on the proceeds of the insurance policy, although it, in
terms , is payable to the mortgagor or lienor." At 496. The defendants have made no convincing argument that
such equitable lien does not attach, this Court finds that such lien arose, and
this Court's task, then, is to determine whether the bankruptcy in some manner
defeats the equitable lien.
The defendants have asserted that
the lien is void pursuant to 11 U.S.C. 545 and that the insurance proceeds are
exempt pursuant to KRS 427.110. Section 545 pertains to statutory liens. An
equitable lien is not a statutory lien as defined in 11 U.S.C. 101(49) and
therefore is not void pursuant to 545. KRS 427.110 does provide an exemption
for insurance proceeds such as in the case at bar. The language of that statute
provides, however, that such proceeds are "exempt from execution or other
process to subject such money to the payment of any debt or liability of a
policyholder." The court in In re
Dixon, 885 F.2d 327 (6th Cir. 1989), having been called upon to interpret
the Ohio homestead exemption statute, has held that where an exemption statute
provided for property to be held exempt from "execution, garnishment,
attachment, or sale to satisfy a judgment", the state had limited the
circumstances under which the exemption was impaired. Applying this reasoning
to the case at bar requires that the insurance proceeds be subject to pending
execution or other process in order to find that the lien of the United States
impairs an interest of the debtor in exempt property.
As concerns the debtor's avoidance
of liens, under Kentucky law a debtor may only avoid the fixing of a lien on
property the state defines as exempt if such lien is a judicial lien or a
non-possessory, non-purchase money security interest in various items of
personal property. The equitable lien is obviously not the latter. As for a
judicial lien, 101(32) defines it as a "lien obtained by judgment, levy,
sequestration, or other legal or equitable process or proceeding." This
Court does not believe that an equitable lien fits within this definition. The
equitable lien arose because "equity regards as done that which ought to
have been done", and not as the result of any legal or equitable process
or proceeding. In any event, the defendants have done nothing to establish that
the equitable lien is of a type that is avoidable by the debtor, and this Court
concludes that it is not. The insurance in question was secured by Haddix post-petition with proceeds of a post-petition loan
from his mother-in-law, Patty Davis.
The defendants have proffered
several other arguments at various stages of this proceeding, including res judicata, waiver and estoppel,
accord and satisfaction, and the Statute of Frauds. The contention that the
doctrine of res judicata is applicable herein is
based on the fact that the complaint of the United States in adversary case no.
89-0078 was dismissed in this Court as to attempts to determine the dischargeability of a debt under 11 U.S.C. 523(c) and 727(a). However, this Court's Order
of May 3, 1989, clearly states that the dismissal was without prejudice to the
right of the United States to bring an action for revocation of discharge under
727(d)(e). The United States is not seeking to relitigate the same complaint as that previously dismissed
by this Court, and the matter is therefore not res judicata.
Accord and satisfaction is argued on
the basis of the purchase by J.L. Davis of the real estate which was the
subject of the FmHA mortgage. It has been stipulated
that the FmHA agreed to release its mortgage in
return for the payment of $60,000.00, the appraised value of the real estate.
Betty Burgess, the FmHA county supervisor, testified
by deposition that the subject property had been appraised on April 12, 1989,
at $60,000.00, which included the land and buildings. (Burgess depo., p.14) The subject mobile
home had been destroyed by fire almost a year before this appraisal was
conducted, and it has been further stipulated that this appraisal did not
include any value placed on the destroyed mobile home. Although J.L. Davis has
testified that he assumed that his payment of the $60,000.00 would
"satisfy all the problems" (Davis depo., p.17), he also knew
that the FmHA had arrived at the $60,000.00 figure as
the fair market value of the farm. (Davis depo.,
pp. 11-12). On the date of his purchase, the farm did not include the
mobile home. There is therefore nothing in these depositions or elsewhere in
the record of this case to suggest that at the time J.L. Davis bought the farm,
the United States intended, or that any of its agents represented, that the
purchase price included satisfaction of its claim to the insurance proceeds for
the burned mobile home.
Elements of the preceding arguments
are employed in pursuit of the defendants' contention that the United States'
complaint is barred by the doctrine of waiver and estoppel.
Having disposed of the res judicata and accord and
satisfaction arguments in favor of the United States, this Court does not find
it necessary to address this argument. In addition, this Court sees no
application of the Statute of Frauds, KRS 371.010, to this proceeding.
As concerns the United States'
prayer for revocation of the debtor's discharge pursuant to 11 U.S.C. 727(d)(e), this Court is of the opinion that the plaintiff has
not demonstrated that the debtor's actions were such as to justify such a harsh
remedy. 11 U.S.C. 727(d)(1) and (2) require proof of
fraudulent intent, which must be proved by clear and convincing evidence. Keck
v. Wacker, 413 F.Supp. 1377, 1383 (E.D.Ky. 1976). 11 U.S.C.727(d)(3)
does not apply in this case.
In conclusion, this Court finds that
the United States has carried forward its burden of demonstrating that there is
no genuine issue as to any material fact concerning its equitable lien on the
fire insurance proceeds. The defendants have not responded with specific facts
showing that there is a genuine issue for trial, as
required by FRCP 56, nor have they met the initial burden imposed by their own
Motions for Summary Judgment. There being no just cause for delay, it is the
opinion of this Court that the United States is entitled to judgment as a
matter of law for the fire insurance proceeds resulting from the destruction of
the mobile home to be applied against Haddixs
indebtedness. It is further the opinion of this Court that the Motions for Summary
Judgment of the defendants Michael and Rhonda Haddix,
and Patty Davis should be overruled. Finally, the United States not having
demonstrated any liability on the part of defendant Aundis
Davis in this matter, he should be dismissed as a party defendant.
Dated:
By the Court -
___________________________________
Judge
Copies to:
David E. Middleton, Esq.
Howell W. Vincent, Esq.
Michael L. Baker, Esq.
mhaddix.opi