The opinion of the court was delivered by: Debtor Judge Thomas M. Rose
Bky. No. 03-33161 Adv. Proc. No. 04-3092
ENTRY AND ORDER AFFIRMING BANKRUPTCY COURT'S DECISION
The matters now before the Court are appeals taken from a Decision entered by United States Bankruptcy Judge William A. Clark on January 20, 2006 (the "Order"). The Order (doc. #124) was issued in an adversary proceeding (Adv. Proc. #04-3092) brought by Ruth A. Slone as Trustee for James A. Fisher ("Fisher"), the debtor in the underlying bankruptcy action. The Adversary Proceeding was brought against Fisher and Rhonda Brennan ("Brennan") (collectively the "Defendants").
The Order grants judgment to the Defendants on multiple cash transfers between them and judgment to the Trustee on the transfer of an inventory from Fisher to Brennan. Both the Trustee and the Defendants now appeal the Order.
Appeals from the final judgments and orders of bankruptcy courts are governed by 28 U.S.C. §158 and Bankruptcy Rules ("BR") 8001 et seq. In this case, both the Trustee and the Defendants have elected, pursuant to the preceding authority, to have their appeals heard by this Court. This Court, therefore, has jurisdiction to adjudicate the appeals.
The two appeals were initially filed under different case numbers in this Court. They have since been consolidated into one case under the above caption. (Doc. #14.)
There are two threshold issues that must be addressed before analyzing the appeals. The threshold issues will be addressed seriatim.
First, the Defendants/Appellants have moved to strike Appellee's Reply Brief or to file a response to the sur-reply portion of that brief. (Doc. #23.) Federal Rule of Bankruptcy Procedure 8009 specifically permits an Appellant to file a brief, an Appellee to file a response and the Appellant to file a reply thereto. Neither local rules nor the Federal Rules of Bankruptcy Procedure permit the filing of a sur-reply without leave of court. If the Appellee has filed a cross appeal, as is the case here, the Appellee's response to the Appellant's Brief is to contain Appellee's cross appeal arguments. Appellant may then file a response and the Appellee may file a reply to Appellant's response to the issues presented on cross appeal.
In this case, the Appellants filed their initial Brief on the issues that they raise on appeal. This was followed by the filing of Appellee's Brief which includes a response to Appellant's initial brief and argument on the issues that Appellee raises on cross appeal. The Appellants then filed a reply to their brief and a response to the issues raised by the Appellee on appeal. At this point, the Appellants' issues were fully briefed. Appellants had filed a brief, Appellee a response and Appellants a reply.
The Appellee then filed a Reply Brief that includes a reply to Appellants' response to the issues raised by Appellee on appeal. At this point, Appellee's issues were fully briefed. However, the Appellee's Reply brief also again addresses Appellants' issues on appeal which is essentially a sur-reply on those issues. Further, this sur-reply was filed without leave of court.
The Appellee now admits that she filed a reply brief without leave of court. She also argues that she was able to do so without leave of court because the Appellants added two new arguments in their reply.
Because Appellee filed a reply brief without leave of court, the portion of Appellee's Reply Brief that addresses Appellants' issues on appeal is struck and will not be considered. Also, arguments made for the first time in a reply brief are not to be considered on appeal. Wright v. Holbrook, 794 F.2d 1152, 1156 (6th Cir. 1986). Therefore, new issues raised by the Appellants in their reply will not be considered unless they otherwise would have been considered by the Court as part of its analysis.
Appellee's sur-reply will not be considered. To that extent, Appellants' motion to strike (doc. #23) is GRANTED. Finally, in her response to Appellant's motion to strike, the Appellee argues that the Appellants have raised arguments on appeal that the trial court did not hear. To the extent this argument is made in the briefs that have not been struck, it will be considered. Otherwise, it will not be considered to have been properly raised.
B. The Use of Deposition Testimony
The second threshold issue raised by the Parties is the use of deposition testimony. The Appellants argue that the trial court incorrectly relied upon deposition testimony in reaching its decision because Fisher's deposition transcript was not offered as evidence. The Appellee responds that this issue was raised in post trial briefing, was rejected by the trial court and should be overturned only if the trial court abused its discretion.
The trial court "relied heavily on the written evidence in issuing the findings of fact in this case." (Order 4.) Specifically, the trial court relied upon written evidence "in the form of financial summaries provided by the parties, e-mail and memoranda documentation between Fisher and his new employer Globe Products, Inc. . " as providing "the only reliable evidence regarding the intent of the parties at the time of the transaction." (Id.) Further, the trial court determined that deposition testimony was properly utilized at trial (Order 5.)
The Federal Rules of Evidence provide that any deposition may be used by a party for impeachment of the deponent or for any other purpose permitted by the Federal Rules of Evidence. Fed.R.Civ.P. 32(a)(1). The Appellants argue that deposition testimony that is used only for impeachment is not substantive evidence. However, this is true only if the deponent does not testify at the trial and is not, therefore, subject to cross examination. See 8A Charles Alan Wright, Arthur R. Miller and Richard L. Marcus, Federal Practice and Procedure § 2144 (2d ed. 1994) (an example of where another purpose is permitted by the Fed.R.Evid. is Rule 801(d)(1) which makes a prior statement of a witness admissible if the declarant testifies and is subject to cross examination). In this case, Fisher, the deponent, testified at trial and was subject to cross examination. Therefore, the portion of Fisher's deposition testimony that was used for impeachment is admissible as substantive evidence.
Deposition testimony was used for impeachment of the deponent and was, therefore, admissible as evidence. Further, there is no indication that the trial court used deposition testimony other than the deposition testimony introduced at the trial for impeachment of the deponent. Finally, to the extent that the Parties rely upon deposition testimony that was not permitted to be introduced at trial, it will be disregarded.
The undisputed facts as set forth in the Record On Appeal, which has been supplemented by the Trustee, are as follows:
A. Fisher and Fisher Data Products
Fisher is an engineer who formed Fisher Data Products ("FDP") in August of 1994. FDP manufactured test equipment for commercial grade motors.
FDP is an Ohio "Subchapter S" corporation and Fisher was the sole shareholder. Fisher was also the sole shareholder of JF Properties, LLC, which owned the real estate where FDP was located.
Both FDP and Fisher were in financial trouble by 1999. FDP had borrowed money from several financial institutions including National City Bank ("NCB"), County Corporation and the National Center for Industrial Competitiveness Capital Fund ("NCIC"). Fisher guaranteed most of the loans made to FDP. In addition, Fisher personally borrowed substantial sums of money from NCB and from his parents.
FDP began defaulting on its loans in 2000 and 2001. Among the loans in default was a loan from NCB to FDP. NCB instituted a lawsuit on the loan in 2002 and took a judgment against Fisher and FDP in November of that year. NCB was secured by FDP's accounts receivables, FDP's inventory and equipment and by the commercial building owned by JF Properties. FDP was dissolved shortly thereafter.
In early 2003, Fisher began working for Globe Products, Inc. ("Globe"). On April 16, 2003, Fisher filed for personal bankruptcy.
Fisher and Brennan met in 1998 when Brennan was employed by FDP in sales and marketing. In 2000, Fisher and Brennan became romantically involved and in November of 2001, Fisher moved into Brennan's home.
In May of 2002, Brennan purchased a new home on Schantz Avenue in Oakwood. From that time forward, the two cohabitated at the Schantz Avenue location.
Brennan's responsibilities at FDP increased until July of 2002 when she took a voluntary layoff. She was then unemployed until January of 2003 when she began working for Globe on a contract basis.
As cohabitants, Fisher and Brennan shared financial responsibilities. They each describe a living arrangement in which they shared financial responsibilities for the household including payment of the monthly mortgage, utilities and general living expenses. Both Fisher and Brennan had children and indicate that they shared the expense of raising those children.
Fisher and Brennan had a number of financial transactions between themselves while they were cohabitating and prior to Fisher's bankruptcy. These transactions can be divided into two groups: those that occurred prior to April 15, 2002 and those that occurred between April 16, 2002, and April 16, 2003. The April 15, 2002 date is significant because it is one year before Fisher filed for bankruptcy.
The record indicates a total of eighty-seven transfers. Eight of those transfers occurred between December 7, 2000, and April 15, 2002. Of these eight, three were from Fisher to Brennan and five were from Brennan to Fisher. These transfers were all $1,000 or more and were in increments of $1,000. The transfers from Brennan to Fisher totaled $15,000 and those from Fisher to Brennan totaled the same.
Seventy-nine of the transfers occurred between April 16, 2002 and April 16, 2003, the year prior to Fisher's bankruptcy filing. Of these seventy-nine transfers, sixteen were from Fisher to Brennan and sixty-three were from Brennan to Fisher. The transfers range in amount from $20 to $11,000. The total amount transferred from Fisher to Brennan was $33,233.11 and the total amount transferred from Brennan to Fisher was $34,600.98.
C. Inventory Transaction Between FDP and Brennan
As of November 2002, FDP was no longer a viable business entity but did have assets in the form of inventory, outstanding orders and patents. The inventory was designed to be used with certain patents which were ultimately sold to Globe.
In December 2002, Fisher began negotiations with Globe, one of FDP's competitors. The negotiations were initially for Globe's purchase of FDP. The negotiations evolved into discussions of Fisher's future employment with Globe and Globe's purchase of parts to complete some of FDP's backlog of orders.
As a result of these discussions, Globe asked Fisher to approach NCB with the idea that NCB would assign the inventory to Globe and Globe would purchase the inventory on an as-needed basis. However, NCB had no interest in this arrangement because it had no place to store the inventory. Further, Globe decided that it did not want to purchase the inventory in its entirety.
In January of 2003, Fisher began working for Globe on a contract basis. Shortly after Globe employed Fisher, Brennan sent a letter to NCB offering to purchase for $3,800 FDP's inventory, certain shelving units and a conveyor. The inventory had been appraised by NCB at $3,000. Mr. Loffer, who was a special asset administrator for NCB, responded to Brennan that, although NCB held a security interest in the inventory, FDP still owned the inventory and any offer to purchase the inventory needed to be made to FDP.
Thus, on January 30, 2003, when both Fisher and Brennan were employed by Globe, Brennan sent a letter to Fisher offering to purchase the inventory, certain shelving units and a conveyor from FDP for $3,850. Fisher accepted the offer and Brennan purchased the inventory, certain shelving units and a conveyor for $3,850 by check dated February 3, 2003.
Globe then purchased a portion of the inventory from Brennan for $10,326.11 on February 7, 2003. Globe continued to purchase the inventory on an as needed basis. The amount paid by Globe to Brennan totaled $99,128.65 through October 2004. Brennan used the profits from the sale of the inventory for supplemental income, jewelry, vacations, and other typical personal expenses. She also expended a significant amount of money to make what she termed "gifts" to former FDP employees.
Fisher filed his petition for bankruptcy on April 16, 2003. Subsequently, the Trustee brought an adversary proceeding against Fisher and Brennan.
The Trustee's Complaint alleges that Brennan received fraudulent and preferential transfers in the form of money and property from Fisher in the time preceding his bankruptcy filing. The Trustee requests that the monetary transfers be set aside, that the property be returned to the estate, and, if appropriate, that the Trustee be granted a judgment in the amount of the proceeds of the sale of the property. The Trustee also requested costs, attorney's fees and punitive damages.
The Defendants denied all of the allegations in the Trustee's Complaint and the matter was tried to the Bankruptcy Court on October 12 and 14, 2005. Following post-trial briefing and the Trustee's motion seeking leave to respond to issues raised in Brennan's Reply brief regarding the use of depositions in the decision, the Bankruptcy Court granted judgment to the Defendants on the multiple cash transfers between them and granted judgment to the Trustee on the transfer of the inventory to Brennan.
The bulk of the trial testimony came from Fisher and Brennan whom the court found to be "completely lacking in credibility." The Bankruptcy Court found Fisher and Brennan's testimony to be, at times, "beyond reason," in conflict with each other and in conflict with their own earlier depositions. Given Fisher and Brennan's lack of credibility, the Bankruptcy Court "relied heavily on the written evidence in issuing the findings of fact . ." Written evidence in the form of financial summaries provided by the parties, e-mail and memoranda documentation between Fisher and ...