IN RE GULFPORT PILOTS ASSOCIATION, INC. Case No. 98-52543-EE.
In re: GULFPORT PILOTS ASSOCIATION, INC., Chapter 7, Debtor.
United States Bankruptcy Court, S.D. Mississippi.
April 12, 2010.
Nicholas Van Wiser, Biloxi, MS, Attorney for Gulfport Pilots Association, Inc., Mississippi State Pilots at Gulfport, Inc., Murrell W. Hilton, Jr., Stanley Fournier, Jr., and Thomas Gibson.
Kimberly Lentz, Chapter 7 Trustee, Jeffrey R. Barber, Jackson, MS, Attorney for Chapter 7 Trustee.
John G. McDonnell, Courtney McDonnell Snodgrass, Biloxi, MS, Attorneys for Michael Kopszywa.
FINDINGS OF FACT AND CONCLUSIONS OF LAW ON THE TRUSTEE'S OBJECTION TO CLAIM OF MICHAEL KOPSZYWA
EDWARD ELLINGTON, Bankruptcy Judge
FINDINGS OF FACT
On June 15, 1998, Gulfport Pilots Association, Inc. (Gulfport Pilots) filed a voluntary petition for relief under Chapter 7 of Title 11 of the United States Code.
The Trustee contends that the resolution of this case hinges upon this Court's determination as to whether Kopszywa is entitled to recover from the bankruptcy estate any amount in addition to $215,000, the face amount of his claim. For reasons that will become clear later in this opinion, Mississippi State Pilots at Gulfport, Inc. (Mississippi State Pilots) and Murrell W. Hilton, Jr. (Hilton), Stanley Fournier, Jr. (Fournier), and Thomas Gibson (Gibson), the former owners, directors, officers, and employees of the now defunct Gulfport Pilots and the current owners, directors, officers, and employees of Mississippi State Pilots, have agreed to pay Kopszywa $215,000, but no more than that amount.
As its name suggests, Gulfport Pilots was in the business of navigating vessels in and out of Gulfport Harbor in Gulfport, Mississippi.
On May 22, 1997, the same day that Kopszywa obtained the judgment against Gulfport Pilots, Hilton, Fournier, and Gibson resigned their positions as directors and officers of Gulfport Pilots and formed a new corporation, Mississippi State Pilots, but remained employees of Gulfport Pilots. One week later, they resigned their employment as pilots from Gulfport Pilots and transferred ownership of the only viable pilot boat owned by Gulfport Pilots to Mississippi State Pilots for a sum below its market value. They also transferred all outstanding accounts receivable for piloting work they performed during the prior week when they were employees of both corporations.
On June 26, 1997, Kopszywa sued Mississippi State Pilots, as well as Hilton, Fournier, and Gibson, in the Chancery Court of Harrison County, Mississippi, under Mississippi's Fraudulent Conveyance Act.
At trial, the individual directors admitted that they formed Mississippi State Pilots to avoid liability to Kopszywa. In a judgment rendered on May 20, 2003, the Chancery Court found in favor of the Trustee but awarded only $10,064.50 in damages, the amount the Chancery Court determined that the directors had fraudulently conveyed to Mississippi State Pilots.
On December 7, 2006, the Mississippi Supreme Court reversed the lower court, holding that the new corporation was liable for all of Gulfport Pilot's debts and that the individual directors were personally liable up to the value of the fraudulently transferred accounts receivable. Stanley v. Miss. State Pilots of Gulfport, Inc., 951 So.2d 535 (Miss. 2006). The Supreme Court remanded the case to the Chancery Court for a determination of the amount of personal liability of the individual directors as well as attorneys' fees and punitive damages. According to the post-hearing briefs submitted by the parties, the Chancery Court has not yet considered these matters.
The Trustee, Mississippi State Pilots, and the individual directors engaged in settlement discussions in the aftermath of the Supreme Court's decision. According to the parties, however, a hurdle to their efforts to reach an amicable settlement of the fraudulent conveyance action is Kopszywa's contention that his claim against the estate far exceeds $215,000. As noted previously, Mississippi State Pilots and the individual directors have agreed to pay Kopszywa the full amount of the face value of his claim, the only pre-petition claim filed against the estate, and to pay the Trustee's attorney's fees and certain statutory fees. Kopszywa opposes the Trustee's efforts to settle, characterizing the offer by the individual directors as "grossly inadequate" and a thinly veiled effort to avoid payment of punitive damages and attorney's fees. The Trustee supports the settlement offer because of his belief that any judgment rendered by the Chancery Court in excess of $215,000 would belong to Gulfport Pilots or to the individual directors as its former shareholders under § 726(a)(6), and not to Kopszywa.
In his Objection to Claim, the Trustee contends that because Kopszywa filed his claim in the face amount of $215,000 based upon a pre-petition judgment, he is entitled only to that amount or, alternatively, to that amount plus an additional amount permitted by law up to the date Gulfport Pilots filed its petition for relief on June 15, 1998. The Trustee protests any attempt by Kopszywa to use the judgment resulting from his personal injury action to bootstrap any future award of punitive damages and attorney's fees that may result from the Supreme Court's reversal of the Chancery Court judgment rendered in the fraudulent conveyance action. In his brief, the Trustee faults Kopszywa for failing to distinguish between the Circuit Court judgment (based on his personal injury action) and the Chancery Court action (based on the Trustee's fraudulent conveyance action).
As to the issue of post-judgment, pre-petition interest,
As to the issue of post-petition interest,
Kopszywa insists in his Response to the Objection to Claim that his proof of claim includes both interest and maintenance but admits that it does not include attorney's fees or expenses. In his brief, he contends that maintenance awarded in the judgment in the amount of $105 per week continued to accrue post-petition because of the finding of fraud by the Supreme Court. He also points out that the Supreme Court indicated in its decision that Gulfport Pilots, Mississippi State Pilots, and their individual directors may be liable for attorney's fees and punitive damages. Apparently, Kopszywa believes he should be the beneficiary of any such award, rather than the bankruptcy estate, but he does not cite any legal authority in support of his contention.
As to the issue of post-judgment, pre-petition interest, Kopszywa suggested at the hearing on this matter that this Court should impose an eight per cent interest rate or perhaps a federal post-judgment interest rate of 6.01%, the percentage in effect when the state court judgment was rendered. In his brief, he urges this Court to impose a legal rate of six per cent and cites as authority § 39 of the Mississippi Code of 1942 and a federal district court case
As to the issue of post-petition interest, Kopszywa acknowledges that § 502(b) prohibits payment of post-petition interest to unsecured creditors on their allowed claims. However, Kopszywa insists that an exception under § 726(a)(5)
Kopszywa calculates his claim to include $215,000, plus maintenance awarded in the amount of $105 per week totaling $65,520 through March 2009, plus post-judgment, pre-petition interest as well as post-petition interest.
CONCLUSIONS OF LAW
This Court has jurisdiction of the subject matter and of the parties to this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(B).
Sections 501 and 502 govern the filing and allowance of creditor claims. Pursuant to § 502(a), a proof of claim filed by a creditor under § 501 is deemed allowed unless a party in interest (often the trustee) objects to the claim. Section 502(b) provides that once an objection is made, the Court, after notice and a hearing "shall allow such claim in such amount" as of the date of the filing of the petition except to the extent the claim falls within one of the nine exceptions listed in § 502(b)(1)-(9). The present dispute concerns § 502(b)(1), which disallows a claim if "such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured."
The Federal Rules of Bankruptcy Procedure
This Court in Pursue Energy described the burden-shifting process that § 502 and Rule 3001 mandate during a proof of claim dispute when a creditor files an objection to a proof of claim that comports with the requirements of Rule 3001. In re Pursue Energy Corp., 379 B.R. 100, 105-06 (Bankr. S.D. Miss. 2006), aff'd, No. 3:06CV405, 2007 WL 2900483 (S.D. Miss. Sept. 28, 2007). Under the procedural framework provided by the Bankruptcy Rules, which must be construed under Rule 1001 "to secure the just, speedyand inexpensive determination" of disputed claims, the claimant will prevail unless the party who objects to the proof of claim produces evidence that is at least equal in probative force to that offered by the proof of claim. If the party who objects produces this rebuttal evidence, then the burden of going forward with the evidence shifts back to the claimant who bears the ultimate burden of persuasion to establish the validity and amount of his claim by a preponderance of the evidence. Fidelity Holding Co., 837 F.2d at 698. As this Court noted in Pursue Energy, the effect of Rule 3001(f) is to analogize the filing of a proof of claim to the filing of a verified complaint in a civil action and, similarly, the filing of an objection to the filing of an answer. Pursue Energy, 379 B.R. at 105 (quoting Simmons v. Savell (In re Simmons), 765 F.2d 547, 552 (5th Cir. 1985)).
At issue in this contested matter is the proper amount of Kopszywa's claim. Kopszywa filed his proof of claim in accordance with § 501(a) and Rule 3001 in the face amount of "$215,000+" based upon an attached state court judgment. Thus, Kopszywa's claim in the amount of $215,000 is entitled to prima facie validity. The Trustee offered no evidence to rebut this component of Kopszywa's claim and, indeed, the Trustee in his brief "confesses" the claim as filed. What the Trustee does dispute are the pre-petition and post-petition amounts of post-judgment interest on the principal amount of $215,000 as well as the post-petition amounts of post-judgment maintenance.
Kopszywa insists in his Response to Objection to Claim that he is entitled to maintenance in the amount of $105 per week from April 25, 1997, until satisfaction of the judgment, which he calculates from April 25, 1997, through March, 2009, to total $65,520. He further contends that he is entitled to pre-petition and post-petition interest, although he does not specify the amounts in any of his pleadings. Also, as noted previously, Kopszywa did not attach to his proof of claim an itemized statement of these amounts, separate and apart from the state court judgment. He posits that the state court judgment itself suffices as an itemization.
Kopszywa's position carries weight with regard to the issue of maintenance, given that the amount is easily calculable from the face of the judgment. The judgment is silent, however, as to an interest rate and thus is an improper substitute for what Rule 3001 requires. For that reason, the interest amounts that he demands do not enjoy any evidentiary benefit. Consequently, Kopszywa retains the burden of proving by a preponderance of the evidence this component of his claim. Requiring Kopszywa to meet the initial burden of proving his claim for interest is only fair. As the Trustee pointed out in his brief, Kopszywa's failure to comply with Rule 3001 placed the Trustee in the awkward position of filing an objection
With these burdens of proof in mind, the Court will address separately the three components of Kopszywa's claim that are in dispute: (1) post-judgment, pre-petition interest; (2) post-petition interest under § 726(a)(5); and (3) post-petition maintenance.
A. Post-judgment, Pre-petition Interest
At common law, there was no interest on judgments. Kaiser Aluminum & Chem. Corp. v. Bonjorno, 494 U.S. 827, 840 (1990). Post-judgment interest is solely a creature of statute and is available, if at all, only as provided by law. In Mississippi, the statute that provides for post-judgment interest states:
Miss. Code Ann. § 75-17-7. Therefore, Mississippi law leaves to the discretion of the trial judge the rate of interest to be applied to judgments, as well as the date such interest begins to accrue (so long as the date is no earlier than the date of the filing of the complaint). To clarify the intent of the Mississippi Legislature in adopting this approach to post-judgment interest, the Court has found instructive a brief historical analysis of Miss. Code Ann. § 75-17-7.
Since 1848, the Mississippi Legislature has authorized its state courts to award post-judgment interest:
1848 Hutchinson's Miss. Code, ch. 54, art. 2, § 38. Then, in 1857, the Legislature mandated that judgments rendered in state courts bear the legal rate of interest of six per cent:
1857 Miss. Code, ch. 50, arts. 1, 3.
Thereafter, for well over one hundred years, the post-judgment interest rate of six per cent remained unchanged despite several codifications that rearranged and displaced prior versions of the statute, with the Legislature enacting only minor changes to its provisions in the years between 1857 and 1975. In 1871, for example, the Legislature changed the word "act" to "chapter." 1871 Miss. Code, ch. 51, § 2281. In 1880, the Legislature deleted the reference to the interest rate on bonds and simplified the language regarding recovery of a greater rate of interest than ten per cent from "such excess shall be forfeited, on the plea of the party to be charged therewith" to "all interest shall be forfeited." 1880 Miss. Code § 1141. In 1892, the Legislature changed the language of the progenitor statutes (§ 1141, § 2281), although it made no change to the specific percentage rate of six per cent or to its mandatory terms:
1892 Miss. General Statute Laws § 2350. Throughout the Legislature's successive codifications of Mississippi law, the language of the post-judgment interest rate statute remained the same or similar from 1857 to 1975.
Then, in 1975, the Legislature increased the interest rate on judgments from six per cent to eight per cent. That legislation, amending Miss. Code Ann. § 75-17-7, is the direct ancestor of the current version of the statute at issue here:
1975 Miss. Laws, ch. 336, § 1. The interest rate on judgments remained at eight per cent until 1989, when the Legislature amended § 75-17-7 to its current version.
As amended, Miss. Code Ann. § 75-17-7 deletes the reference to a specific percentage rate and instead requires the judge hearing the complaint to set the interest rate and the method of its calculation:
1989 Miss. Laws, ch. 311, § 5 (codified at Miss. Code Ann. § 75-17-7); see Estate of Baxter v. Shaw Assocs., Inc., 797 So.2d 396, 407 (Miss. Ct. App. 2001). With these changes, the Legislature returned Miss. Code Ann. § 75-17-7 to its pre-1857 language when, as previously noted, the Legislature granted courts the discretion to award post-judgment interest and to determine the percentage rate of interest.
The above historical analysis demonstrates that the Legislature in 1989 intended to change the method for establishing the post-judgment interest rate. The purpose for this change is unknown in the absence of any written legislative history but the advantage in granting a judge the power to set the rate of interest is clear: it relieves the legislature of the burden of amending the statute each time there is a fluctuation in the market interest rates.
The judgment at issue here awarded Kopszywa "judicial interest from April 25, 1997 until paid" without specifying a percentage rate. This Court cannot amend the judgment by supplying its own rate of interest, as Kopszywa urges this Court to do by proposing different rates, ranging from six per cent to eight per cent. They may all be reasonable rates but the salient fact is that the applicable statute does not authorize this Court—only the court that rendered the judgment—to make that determination, which in this case was the Circuit Court of Harrison County. This Court does not reach this conclusion without pause. As pointed out by Kopszywa, Miss. Code Ann. § 75-17-7 uses the term "shall," which the Mississippi Supreme Court has interpreted as meaning that an award of post-judgment interest is "mandatory." See Miss. Dep't of Human Servs. v. McNeel, 10 So.3d 444 (Miss. 2009); Miss. Dep't of Mental Health v. Hall, 936 So.2d 917 (Miss. 2006). Indeed, the Supreme Court has gone so far as to describe post-judgment interest as a statutory right. McNeel, 10 So. 3d at 460; Hall, 936 So. 2d at 929-30. On the other hand, Kopszywa has not presented this Court with any case authority that supports his view that this Court may alter the state court judgment to include a percentage rate. Notably, the Supreme Court itself did not feel compelled by the statute to calculate the amount of interest due when confronted with the issue in McNeel and Hall but remanded both cases to the lower tribunal with directions to do so in conformance with the statute. McNeel, 10 So. 3d at 460; Hall, 936 So. 2d at 929-30. Here, of course, this Court is not similarly empowered.
This Court recognizes that the purpose of post-judgment interest is to compensate the "wronged" plaintiff for the loss of the use of the money awarded by a final judgment. See Affiliated Capital Corp. v. City of Houston, 793 F.2d 706, 710 (5th Cir. 1986). Indeed, an interest award is often a substantial percentage of a plaintiff's ultimate compensation. Here, for example, Kopszywa's claim would more than double under the weight of post-judgment interest.
It is a basic principle of statutory construction, however, that a court must give effect to the plain language of a statute. McLaurin v. Noble Drilling (U.S.) Inc., 529 F.3d 285, 288 (5th Cir. 2008). The method chosen by the Legislature for calculating post-judgment interest rates in Mississippi clearly grants the power to the trial judge, who in this case did not set a percentage in the judgment and who apparently was not asked or reminded by Kopszywa to do so.
B. Post-petition Interest Under § 726(a)(5)
As stated previously, the issue before this Court is the amount of Kopszywa's claim. Whether his unsecured claim should include post-petition interest under the distribution scheme set forth in §726(a)(5) depends on the existence of surplus funds in the estate after payment in full of the principal amount of all allowed claims. Because the distribution process governed by § 726 is the last step in the liquidation of a Chapter 7 case and does not begin until all property has been converted to cash, Kopszywa's claim for post-petition interest is premature. Here, there has been no actual recovery by the Trustee of any of the amounts awarded to the estate in the fraudulent conveyance action, or of any future amounts for punitive damages and attorney's fees. Indeed, the Trustee in his brief expresses skepticism that the Chancery Court will award the estate any punitive damages whatsoever. That the income tax returns of Gulfport Pilots and Mississippi State Pilots reflect substantial gross profits in the years before and after the filing by Gulfport Pilots of its bankruptcy petition does not automatically translate into a finding of surplus funds for purposes of § 726(a), as urged by Kopszywa.
In the event, however, that the estate should become flush with surplus funds at some point in the future as a result of the fraudulent conveyance action, this Court notes that § 726(a)(5) would entitle Kopszywa to compensation for the delay in payment of his claim caused by the filing of the bankruptcy case. Moreover, because his claim for payment of post-petition interest would be separate and distinct from his claim based on the state court judgment, the federal judgment rate under 28 U.S.C. § 1961 would apply. See In re El Paso Refinery, L.P., 244 B.R. 613, 619-621 (Bankr. W.D. Tex. 2000). Specifically, Kopszywa would be entitled to post-petition interest on his claim at the federal judgment rate of 5.43%, which was the rate in effect on June 15, 1998, the date of the filing of the petition.
C. Medical Bills and Maintenance
The judgment provided for the payment of medical bills outstanding as of March 25, 1997. The evidence presented at the hearing showed that the amount of medical bills in the judgment was $15,000, and the parties do not dispute this amount. The face amount on the proof of claim was "$215,000+," an amount that is consistent with $15,000 in medical bills. The Court finds that Kopszywa has met his burden of proof and, accordingly, his claim in the amount of $15,000 in medical bills should be allowed.
Additionally, the judgment provided for maintenance from April 25, 1997, at a rate of $105 per week, until the judgment is satisfied. Kopszywa cites no legal authority in his brief why this pre-petition debt should not be discharged under § 727(b). Accordingly, the Court finds that Kopszywa's claim for maintenance should be allowed from April 25, 1997, until the date of the filing of the bankruptcy petition, on June 15, 1998, which is a total of 59 weeks and 3 days. At $105 per week, or $15 per day, the amount of the allowed claim for maintenance computes to $6,240.
The Court finds that the Objection to Claim filed by the Trustee and the Objection to Proof of Claim and Joinder in Trustee's Objection filed by Gulfport Pilots, Mississippi State Pilots, Hilton, Fournier, and Gibson should be sustained to the extent that they challenge Kopszywa's claim for post-judgment, pre-petition interest, which is hereby disallowed. Kopszywa's claims for medical bills and maintenance are allowed in the amounts set forth above, and to the extent that the Objection to Claim and Joinder challenge those amounts, they should be overruled.
In conclusion, the Court finds that the total amount of Kopszywa's allowed claim should be $221,240, calculated as follows:
A separate judgment consistent with this opinion will be entered in accordance with Rule 9021.
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