The Alabama Creditors v. Rodney Dixon Dorand

Summarized by Amir Shachmurove , Brown Rudnick LLP
1 year 11 months ago

Case Type:

Business

Case Status:

Affirmed

Citation:

22-14113 (11th Circuit, Mar 14,2024) Published

Tag(s):

Ruling:

The U.S. Court of Appeals for the Eleventh Circuit (Circuit) affirmed the decision of the United States Bankruptcy Court for the Northern District of Florida (BC) concluding that the individual retirement account of Rodney Dorand (DR), a chapter 7 debtor, held by Morgan Stanley (MS) was estate property, as an Alabama state court decision finding the funds not to be exempt from collection under state law in an action by creditors seeking to collect on a default judgment had not extinguished his interest prepetition, MS not having completed the transfer before DR's bankruptcy filing.

Procedural context:

In the face of an action by creditors seeking the funds in his MS-managed retirement account so as to satisfy an outstanding default judgment, the DR, his state trial and appellate losses final, filed for chapter 7 relief in the BC. Upon filing, the DR classified his funds as property of the estate. In retort, the relevant creditors pointed out that the Circuit Court of Tallapoosa County, Alabama (State Court), where they had sued the DR prepetition, had denied any claim for exemption of those funds from collection under state law, an issue that the DR could not relitigate in the BC. Arguments now joined, the parties agreed that the BC could and would determine the exemption issue based on their evidence filed by the parties, which included testimony from MS' corporate representative. asserting that the DR still owned the retirement account when he filed for bankruptcy. After a hearing and extensive briefing, the BC determined that the retirement account was the DR's exempt property, that the Alabama judgment against garnishee MS “does not affect the [retirement account’s] exempt status," and that MS did not obtain any right to setoff as it had yet to pay the state court judgment (at which point it could exercise this prerogative). The Circuit first granted the parties' joint petition for direct appeal under 28 U.S.C. § 158(d)(2)(A)(iii) and later provided MS with leave to file a brief as amicus curiae and to participate in oral argument.

Facts:

Prepetition, DR had accumulated a string of losses. Creditors had sued the DR in the State Court for damages arising from a failed condominium development. When the DR failed to appear at trial, the State Court naturally entered a default judgment in favor of the creditors for $1.6 million. Thereafter, these same creditors began collection proceedings in, presumably, this same State Court, seeking, among other assets, the funds in an individual retirement account that the DR had established at MS. After considering their request, the state court issued a writ of garnishment to MS. After a series of motions, the State Court entered an amended judgment "against Morgan Stanley" in the amount of $856,622.39. Ultimately, after the DR exhausted his avenues for relief, the amended judgment became non-appealable in February 2021. Now timing became crucial. Consistent with the State Court's order, MS now proceeded to liquidate the assets in the DR's retirement account to $800,539.46 in cash and requested payment instructions. However, whether or not in response to threats by the DR's counsel (as alleged by creditors' own), by April 2021, MS had never wired the funds to the clerk, and the funds thus still sat in the DR's retirement account.

Judge(s):

William H. Pryor Jr.; Jill A. Pryor; and Stanley Marcus

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