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In re Consolidated Estate of Dougherty, Inc.

United States District Court, D. Oregon

January 25, 2018

In re Consolidated Estate of Dougherty, Inc., WDL Properties, LLC, Douglas D. Dougherty, and Katherina M. Dougherty, Debtor.
Barton Land & Livestock, LLC, dba Baker Group Enterprises, an Oregon limited liability company; George Barton, an individual; Lee Ann Literal, an individual; Elk Canyon Enterprises, LLC, an Oregon limited liability company; Charles Vernon Walker, an individual; Robbins Farm Equipment, Inc., an Oregon corporation; and ASNW, Inc., dba Agri-Service Northwest, a Washington corporation, Defendants. Jeanne E. Huffman, chapter 7 trustee, Plaintiff, Adversary Proceeding No. 15-3153-dwh



         On the bankruptcy court's recommendation, on December 31, 2015, the district court entered judgment in this bankruptcy adversary proceeding by default against the defendants, including Lee Ann Literal. She has now moved to vacate the default judgment against her [20]. I held an evidentiary hearing on the motion to vacate, at which she testified.

         Because Literal has articulated a meritorious defense to the claims in this action- I recommend that the district court GRANT her motion and vacate the default judgment against her.

         Below, I describe the parties' contentions and evidence, propose findings of fact and conclusions of law, recommend that the motion be granted, and describe the procedure for the district court's consideration of this document.

         I. Contentions and evidence

         A. The complaint

         Jeanne Huffman serves as the trustee of the consolidated bankruptcy estate of Dougherty, Inc., and several other entities. On September 11, 2015, the trustee filed the complaint initiating this action.[1]

         The trustee asserts that Literal is the partner and significant other of defendant George Barton, they reside together, Barton has not had a bank account in over 25 years, she holds funds of Barton and Barton Land & Livestock in her personal bank accounts, and, based on those allegations, funds transferred to Barton Land & Livestock addressed in the complaint are held or were used for her benefit.[2] The complaint refers to Barton, Barton Land & Livestock, and Literal collectively as "Barton" or the "Barton Defendants."[3]

         The complaint contains ten claims for relief. In the first claim for relief, the trustee seeks to avoid (or set aside) and recover from the Barton Defendants, including Literal, certain unauthorized transfers of property of the consolidated bankruptcy estate, as permitted by 11 U.S.C. §§ 549 and 550.[4] The trustee seeks to recover two assets of at least $97, 515 and $23, 500 each, for a total of $121, 015, as well as other unidentified assets. The transfers of those assets are collectively referred to in the complaint as the "Barton Postpetition Transfers"[5] and herein as the "$121, 015."

         In the seventh claim, the trustee seeks declaratory judgment that the defendants have no right, title, or interest in the assets alleged to be estate property and that any transfers of those assets are void.[6]

         In the eighth claim, the trustee seeks turnover of the assets alleged to be estate property or a money judgment for the value of that property, [7]

         In the ninth claim, the trustee seeks a declaration that Literal holds in resulting trust the $121, 015 and other proceeds of assets described in the complaint that were transferred to Barton and deposited in bank accounts of or otherwise held in her name, [8] she holds substantially all assets in which Barton has an interest, and she enjoys the benefit of the assets, including the farm where he resides with her, the farming equipment, vehicles, trailers, and other personal property used by him, and the bank and investment accounts in her name where he deposits his funds, including Social Security checks and other payments described in the complaint, [9] To the extent that the court determines that she is not independently and severally liable to the estate under any of the other claims for relief, the trustee requests that "under the doctrine of resulting trust, " any judgment against Barton to recover estate assets "should also be entered against and attach to" her assets.[10]

         B. Service of the complaint and summons; other mailings to Literal

         The trustee's lawyer certified that the summons and complaint were mailed separately to both Literal and Barton by first-class U.S. mail (as permitted by Federal Rule of Bankruptcy Procedure 7004(b)), on September 16, 2015, [11] and the mailings were addressed to them at 149 Smith Hollow, Dayton, Washington 99328.

         In addition to the summons and complaint, four other documents in this action were mailed by the Bankruptcy Noticing Center (the bankruptcy court's mailing agent) separately to both Literal and Barton at the Smith Hollow address: the bankruptcy court's order that the action would be dismissed unless the trustee lodged a proposed default order and judgment, mailed on October 29, 2015, [12] the trustee's motion to settle the action against another defendant, mailed on November 14, 2015, [13] the order of default against Literal, Barton, and others, mailed on January 1, 2016, [14] and the district court's judgment against them and others, mailed on January 27, 2016.[15]

         C. The default motion, order, and judgment

         At a hearing on October 27, 2015, the bankruptcy judge stated that, in order to avoid any question of the bankruptcy court's jurisdiction or constitutional authority to enter a default judgment in this action, the bankruptcy court would transmit to the district court a proposed judgment with the bankruptcy judge's recommendation.

         On December 28, 2015, the trustee moved for entry of a default order against several defendants, including Literal.[16] On December 31, 2015, the bankruptcy judge signed and entered a proposed judgment and money award, approving it as to form and recommending it to the district court for entry.[17] On January 25, 2016, District Judge Michael Simon signed the judgment in the form proposed by the bankruptcy judge.[18]

         The relief granted by the judgment is set forth in four narrative paragraphs, A through D.[19] Paragraph A requires Literal and others to turn over to the trustee any estate assets in the possession of any of die defendants. Paragraph B awards judgment against all the defendants, jointly and severally, avoiding the "Barton Postpetition Transfers" and recovering $121, 015. (The judgment says that "Barton Postpetition Transfers" is defined in the declaration accompanying the default motion, but in fact that definition appears in the complaint, [20] rather than in the default motion.) Paragraph C declares that "(a) Literal holds substantially all assets in which George E. Barton has an interest, and (b) notwithstanding her independent liability, under the doctrine of resulting trust, any judgment entered against George E. Barton to recover assets of the Estate shall be entered against and attach to the assets of Lee Ann Literal." Paragraph D dismisses without prejudice the remaining claims of the complaint, including the estate's claims for damages for conversion, conspiracy to defraud, and civil RICO.

         D. Literal's motion to vacate

         On December 30, 2016, Literal filed in the bankruptcy court her motion to vacate the default judgment.[21] She seeks to set aside the default judgment based on the following three arguments: the judgment is void under Federal Rule of Civil Procedure (Civil Rule) 60(b)(4),[22] the judgment is based on mistakes of fact or inadequate factual findings, and the judgment should be set aside under the standard established in the Ninth Circuit's 1984 decision in Falk v. Allen.[23]

         E. The Literal declaration

         Accompanying the motion is Literal's supporting declaration, where she makes the contentions summarized in this part I.E.

Literal is employed as a hairdresser and was formerly employed training racehorses. She currently owns retired race horses and also boards horses owned by others on her property. She owns the home and land where she resides and adjacent agricultural land.[24]
Literal has been in a relationship with Barton since approximately 2000. He began living on her property in 2005. He has never had any interest in real property that she owns or in any of her other assets, and he did not contribute to their acquisition.[25]
In August 2015, Barton had four knee surgeries over seven days, with serious complications related to an infection in his knee. Shortly thereafter, he had a series of strokes. He was in and out of the hospital, and he and she had to travel repeatedly for medical treatment between August and December 2015.[26]
In late 2015 and early 2016, Literal assisted Barton with managing the extensive bills associated with his medical care. She did not pay the bills, but she assisted him with organizing and tracking them and working with Medicare and insurance. In that process, she contends that she received advice that she should transfer her agricultural land and homestead property to make it unavailable to her future medical creditors. And in reliance on that advice, she conveyed the property to a young woman with whom she is very close, reserving a life estate for herself. She contends that she did not then know of the judgment.[27]
Literal did not receive the summons and complaint. Her unsecured mailbox is on Smith Hollow Road, a rural road. She contends that she has had mail stolen in the past, and her repeated absence from the property in the time after the complaint was mailed to her may explain why she never received it.[28]
If Literal had received the complaint, she would have retained an attorney to defend her; she had nothing to do with the conduct alleged by the trustee; she did not participate in, or assist with, any transfer of property of the debtors or the trustee; and she did not receive or benefit from the $121, 015 that the trustee alleges that Barton received from the debtors.[29]
Barton has no interest in any of the assets that Liberal owns, including her real property, and their finances are not commingled. She has periodically allowed Barton to deposit his Social Security checks into her bank account when he did not have a bank account. She then wrote checks out of her account to pay his expenses. Other than his use of her bank account as a means of depositing his Social Security checks and paying his expenses, they have not had any commingled or intertwined finances. Other than his deposit of this Social Security checks from 2015 forward, she has not held any assets, money, or property belonging to him.[30]
Literal learned of the judgment in September or October 2016 when she obtained a title report related to property that she owns with her sisters. She began trying to find an attorney then, but was unsuccessful. When she was served with a judgment-debtor-examination order, she was finally able to retain an attorney, Patrick McBurney. He represented her at the examination and then referred her to her current lawyer to seek relief from the judgment, [31]

         F. The Leonard declaration

         In opposition to the motion to vacate, one of the trustee's lawyers, Justin Leonard, filed a declaration, making the following contentions.

On February 29, 2016, Holly Hayman, another of the trustee's lawyers, mailed to both Literal and Barton at the Smith Hollow address an affidavit and summary of judgment by Leonard in support of the trustee's filing in Columbia County, Washington, Superior Court.[32]
On March 8, 2016, Literal signed and acknowledged a deed conveying title to her residence real property to Kellie Glorfield in consideration of "love and affection."[33] The deed was recorded on May 24, 2016.[34]
On June 16, 2016, lawyer Robert McMillen filed an answer on behalf of Literal, Barton, and others to a complaint filed in Polk County, Oregon, Circuit Court by AgCo Finance, LLC.[35] Between June and August 2016, Leonard had several conversations with McMillen regarding this bankruptcy adversary proceeding and the judgment.[36] On August 5, 2016, Leonard wrote to McMillen regarding the trustee's intent to enforce the judgment.[37]

         G. Evidentiary hearing

         On January 23, 2017, this action was assigned to me on the retirement of the prior bankruptcy judge. On January 26, 2017, 1 entered an order scheduling an evidentiary hearing on the motion.[38] Among other things, that order required the parties to exchange exhibits before the evidentiary hearing, required any objections to authenticity of documents be made at the beginning of the hearing to dispense with authenticating witnesses, and ordered that, absent a timely authenticity objection, all exhibits would be deemed admitted. No authenticity objections were raised, and I admitted into evidence without objection each exhibit listed in the parties' exhibit lists.[39]

         An audio recording of the evidentiary hearing is available on the bankruptcy court's docket of this action.[40] Literal was the sole live witness.

         1. Commingling of Barton's funds and other property with Literal's

         Literal testified that "at one point in time [Barton] gave me some money that he owed me." Barton ordered groceries, some horse and pet food, and parts for her vehicles, and she doesn't know how he paid for those items. He did have access to her bank account and often made deposits (including of his Social Security payments) and withdrawals. She denied receiving any of the $121, 015 that Barton allegedly received, and none of her real or personal property had been bought using funds that she received from him.

         2. Service of summons and complaint by mailing to Literal

         Literal denied having received any of the seven mailings to the Smith Hollow address in connection with this action: the summons and complaint, which the trustee's lawyers mailed to Barton and her on September 16, 2015, the four other documents in this action that BNC mailed to Barton and her from October 29, 2015, through January 27, 2016, and the two Superior Court documents that Ms. Hayman mailed to Literal on February 29, 2016.

         3. Literal's time away from home in the fall of 2015

         During the fall of 2015, Literal was regularly away from her and Barton's home in Dayton, Washington, not only working at her job in Dayton and caring for her horses after work, but also attending to several serious medical issues faced by Barton that fall. Barton injured his knee in August, requiring four surgeries, after which he suffered a serious infection and a stroke, he was diagnosed with a hole in his heart, and he underwent physical and speech therapy and heart-repair surgery. His medical treatment occurred primarily away from Dayton, including at Walla Walla and Spokane, Washington, and she was regularly traveling and staying with him while he was away from home. He was release to home care in early September. But her job and horse-care responsibilities kept her away from home until 9:30 p.m., so she was unable to provide Barton's home care, and he moved in with his 95-year-old mother. In addition to her other responsibilities, Literal regularly traveled to Barton's mother's home to and help with his care.

         4. When Literal first learned of complaint

         Literal recalled meeting with McMillen and Barton once, in August 2016, to discuss the AgCo litigation. She thought that McMillen was representing only Barton, and not also her.

         Literal claimed to have first learned of the judgment in September 2016, when she received title report for her property in Columbia County, Washington, showing the lien of the judgment as a foreign judgment dated February 29, 2016, and entered on March 8, 2016. Hearing Exhibit A is a copy of the title report. It is dated September 8, 2016, and it bears several handwritten notations on the page describing the lien of the judgment. Those notations include Leonard's name and telephone number.

         Literal said that she first saw the complaint when she received a copy from Patrick McBurney, a lawyer whom she hired to advise her about the judgment. She said that it arrived in a yellow envelope and was "big" (the complaint itself is in fact 84 pages long); she didn't recall having previously received by mail a document of that size. She later discussed the complaint with Barton, who by then had had several strokes, and he told her that she "shouldn't be involved in it" and that he didn't recall receiving as much as $120, 000.

         5. Other mailings to Literal's home

         Literal denied receiving by mail any of the mailings in or related to this action, other than when mailed to her by her lawyers.

         In 2016, Literal learned of mailings to her from the county tax assessor and an insurance company, which she claims not to have received.

         II. Proposed finding of fact

         I do not find credible Literal's assertion that she did not receive the summons and complaint. Although I perceived no reason to doubt her sincerity, her story is simply not plausible.

         A. Literal was served with and received the ...

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