UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
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
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.
By the Court -
David E. Middleton, Esq.
Howell W. Vincent, Esq.
Michael L. Baker, Esq.