Manchester v. Funderburgh (In re Funderburgh)

Summarized by William Wallo , Bakke Norman, S.C.
11 years 1 week ago

Citation:

Manchester v. Funderburgh (In re Funderburgh), 2015 WL 412774 (10th Cir. BAP February 2, 2015)

Tag(s):

Ruling:

The BAP affirmed the bankruptcy court's denial of the debtor's discharge and avoidance of fraudulent transfers, ruling that the bankruptcy trustee was not precluded from asserting the claims by the dismissal "with prejudice" of a duplicate adversary proceeding.

Procedural context:

Trustee sought to avoid and recover fraudulent transfers and deny the debtors' discharge. The adversary complaint was erroneously filed twice. The trustee then dismissed one of the cases "with prejudice," and the debtors are argued that pursuit of the claims was barred by the doctrine of res judicata (or claim preclusion). The bankruptcy court rejected the argument and set aside the original order. After an adverse judgment on the merits, the debtors appealed, again asserting the preclusive effect of the original dismissal order, as well as arguing that the bankruptcy court improperly considered transfers of corporate property when denying their discharge. The BAP rejected these arguments and affirmed.

Facts:

The debtors owned cleaning and maintenance businesses. After the loss of a significant contract effectively put them out of business, the debtors and their companies were sued in several different actions. They filed chapter 7 and the trustee filed an adversary proceeding to avoid fraudulent transfers and deny their discharge. Due to apparent technical difficulties with the bankruptcy court's electronic filing system, the same complaint was inadvertently filed twice (and received two separate case numbers). When notified of this fact, the trustee's office filed a dismissal of one of the cases; the dismissal provided that the trustee was dismissing that case "with prejudice since it was filed in duplicate." The debtor then moved to dismiss the second case, arguing that the trustee's dismissal precluded further litigation of the claims. The trustee requested that the bankruptcy court set aside the original dismissal on equitable grounds. The bankruptcy court dis so, finding that it was clear the dismissal was intended solely to get rid of the duplicate case, not dismiss the claims themselves. The court then denied the motion to dismiss. The debtors appealed, but the appeal was dismissed as interlocutory. On the merits, the bankruptcy court found that transfers of a Corvette and some real property were fraudulent and therefore avoidable. The court also found that their conduct justified denial of their discharge. The court then authorized an interim distribution to creditors. The debtors appealed. On appeal, the BAP found that the trustee's motion to set aside the dismissal was in the nature of a Rule 60 motion for relief from a judgment or order. While a voluntary dismissal with prejudice may operate as a final adjudication on the merits (and thus be entitled to preclusive effect), a dismissal with prejudice can be set aside or modified under Rule 60. Noting the equitable nature of the doctrine of res judicata, the court observed that when considering whether to deny litigants "two" days in court, it is important "not to deprive [them] of one." The trustee's initial dismissal did not lead to piecemeal litigation and the debtors were not prejudiced in any way since it was clear on the face of the pleadings that the trustee never intended to terminate or abandon the claims against them, but simply wished to dismiss the duplicate petition. In addition, sufficient evidence existed to support the bankruptcy court's conclusion that the debtors were not entitled to a discharge, and the debtors did not have standing to object to the interim distribution. Affirmed.

Judge(s):

Michael, Romero, and Jacobvitz

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