Opinion
Case No. 18-12991 Adv. No. 19-1013
03-25-2021
In re: SYMPLMED PHARMACEUTICALS, LLC Debtor E. HANLIN BAVELY, TRUSTEE Plaintiff v. ERIK EMERSON Defendant
Chapter 7
MEMORANDUM OPINION ON TRUSTEE'S COMPLAINT FOR TURNOVER OF AMOUNTS DUE FROM DEFENDANT UNDER TWO PROMISSORY NOTES
[This opinion is not intended for publication or citation. The availability of this opinion, in electronic or printed form, is not the result of a direct submission by this Court.]
This Court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E).
Plaintiff and Chapter 7 Trustee E. Hanlin Bavely ("Trustee") commenced this adversary proceeding seeking turnover of amounts due to Debtor Symplmed Pharmaceuticals, LLC ("Debtor") from Defendant Erik Emerson ("Mr. Emerson") under two prepetition promissory notes. A trial was held on March 23, 2021. While the Trustee attended the trial and presented evidence, Mr. Emerson did not attend.
Based upon the testimony and exhibits admitted into evidence, this Court concludes that the Debtor advanced Mr. Emerson a total of $195,000 under the two promissory notes. The promissory notes matured prior to the bankruptcy filing, the amounts advanced have not been repaid by Mr. Emerson, and the amounts due constitute property of the Debtor's bankruptcy estate. Accordingly, judgment is granted to the Trustee under11 U.S.C. § 542(b).
I. FINDINGS OF FACT
Prior to the bankruptcy filing, Mr. Emerson worked as an officer for the Debtor. While so employed, he took out two loans from the Debtor in the principal amounts of $125,000 each pursuant to two promissory notes dated July 15, 2015 and May 2, 2016 [Trustee's Exhibits 1 and 2, Docket Numbers 75 and 76].
The promissory notes contained a "Maturity Date" of July 31, 2019. However, each note included a provision stating: "Notwithstanding any other provision in this Note, the total principal and interest on this Note shall be immediately due and payable upon the effective date of Obligor [Mr. Emerson]'s termination of employment with Symplmed Pharmaceuticals, LLC or one of its subsidiaries." [Id.].
At the March 23, 2021 trial, Stephan Ewald ("Mr. Ewald"), an attorney and member of the Debtor's board of managers since 2013, testified. Mr. Ewald stated that he personally prepared the two promissory notes at issue in this case in the ordinary course of the Debtor's business and that the notes were signed by Mr. Emerson. That Mr. Emerson signed the two promissory notes is further supported by his own admissions in his answer and amended answer [Docket Number 6, ¶ 2 and Docket Number 18, ¶ 2].
Mr. Emerson's unambiguous admissions in his answer and amended answer that he signed the two promissory notes constitute binding judicial admissions. See Ferguson v. Neighborhood Housing Servs. of Cleveland, Inc., 780 F.2d 549, 550-51(6th Cir. 1986) (under federal law, admissions in the pleadings are generally binding on the parties and the court); EEOC v. Pines of Clarkston, 2015 U.S. Dist. LEXIS 55926, at *8-10, 2015 WL 1951945, at *3-4 (E.D. Mich. Apr. 29, 2015).
While Mr. Emerson could borrow a total of $250,000 under both promissory notes, Mr. Ewald testified that the full amount was not advanced by the Debtor to Mr. Emerson. Mr. Ewald reviewed business records including internal memoranda from the Debtor's bookkeeper, Paula Keil, and the Debtor's bank statements from July of 2015 through September of 2016 to determine that Mr. Emerson was advanced a total of $125,000 under the promissory note dated July 15, 2015 and an additional $75,000 under the promissory note dated May 2, 2016 [Trustee's Exhibits 3, 5 and 7-12, Docket Number 74]. Thus, the Debtor advanced a total of $195,000 to Mr. Emerson under the two promissory notes. Mr. Ewald further testified that Mr. Emerson made no payments to the Debtor towards the loans and the principal balance of $195,000 remains payable.
At trial, Mr. Ewald affirmed that Mr. Emerson's employment with the Debtor was terminated in June of 2017 prior to the Debtor's bankruptcy filing. At that time, the Debtor sold all of its assets to an entity known as Marina Biotech, Inc. and Mr. Emerson left employment with the Debtor to begin working exclusively for Marina Biotech.
On August 6, 2018, the Debtor filed its bankruptcy petition under chapter 7 of the Bankruptcy Code. Subsequently, the Trustee filed the complaint that commenced this adversary proceeding to collect amounts due from Mr. Emerson under the two promissory notes on behalf of the bankruptcy estate.
II. LEGAL ANALYSIS
The Trustee asserts that Bankruptcy Code Section 542(b) authorizes this Court to order Mr. Emerson to turn over to the bankruptcy estate amounts due under the two prepetition promissory notes. Section 542(b) states:
Use of the terms "Bankruptcy Code Section," "Section," or "§" are references to provisions of Title 11 of the United States Code. --------
Except as provided in subsection (c) or (d) of this section, an entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to, or on the order of, the trustee, except to the extent that such debt may be offset under section 553 of this title against a claim against the debtor.11 U.S.C. § 542(b). Utilizing Section 542(b), a trustee may compel an entity to turn over a debt: 1) that is property of the debtor's bankruptcy estate; and 2) that has matured, is payable on demand, or is payable on order. 11 U.S.C. § 542(b); Wayne Servs. Legacy, Inc. v. Donlen Trust (In re Toys "R" Us, Inc.), 615 B.R. 96, 103 (Bankr. E.D. Va. 2020); Porter-Hayden Co. v. First State Mgmt. Group, Inc. (In re Porter-Hayden Co.), 304 B.R. 725, 731-32 (Bankr. D. Md. 2004).
In the case at hand, the Trustee has met these two requirements for turnover. First, the Trustee established that Mr. Emerson's obligation to pay the Debtor arose pursuant to two promissory notes entered prior to the Debtor's bankruptcy filing. Consequently, the amounts owed on the prepetition contractual obligations constitute property of the estate under Bankruptcy Code Section 541(a).
Next, the Trustee must demonstrate that the debts have "matured." In this context, "matured" refers to debts that are presently payable, as opposed to those that are contingent and become payable only upon the occurrence of a future act or event. Porter-Hayden, 304 B.R. at 732; Kids World of Amer., Inc. v. State of Georgia (In re Kids World of Amer., Inc.), 349 B.R. 152, 163 (Bankr. W.D. Ky. 2006). See also 5 Lawrence P. King, Collier on Bankruptcy ¶ 542.04 (Alan R. Resnick & Henry J. Sommers, eds., 16th ed. 2020). A Section 542(b) turnover action is appropriately focused on the collection rather than the creation, recognition, or liquidation of a debt. Porter-Hayden Co., 304 B.R. at 732. See also 5 Collier on Bankruptcy ¶ 542.04.
At trial, the Trustee established that Mr. Emerson's obligation to pay the amounts due under the promissory notes "matured" prior to the Debtor's bankruptcy filing. In June of 2017, the Debtor sold all of its assets to Marina Biotech, Inc. and Mr. Emerson left his employment with the Debtor to work exclusively for Marina Biotech after the sale. This event terminated Mr. Emerson's employment with the Debtor and, under the express terms of the promissory notes, the principal balance became immediately due and payable.
Mr. Emerson failed to appear for the March 23, 2021 trial to present evidence or arguments on his own behalf. Accordingly, this Court concludes that the Trustee's undisputed evidence establishes both elements of claim for turnover under Section 542(b).
Finally, this Court determines the amounts due under the promissory notes and subject to turnover. Mr. Ewald's testimony and the business records admitted into evidence establish that the Debtor advanced Mr. Emerson a total of $195,000 under the two promissory notes. Mr. Ewald further confirmed at trial that Mr. Emerson has not repaid any portion of the balance owed to the Debtor. Accordingly, the principal balance of $195,000 is subject to turnover from Mr. Emerson to the Trustee on behalf of the Debtor's bankruptcy estate.
III. CONCLUSION
Based on the evidence presented at trial, this Court grants judgment to the Trustee pursuant to 11 U.S.C. § 542(b). Defendant Erik Emerson is ordered to turn over to the Trustee $195,000 plus interest calculated at the contract rate of interest provided in the July 15, 2015 and May 2, 2016 promissory notes. Interest is to begin accruing from the date Mr. Emerson's employment with the Debtor was terminated in June of 2017. A separate judgment entry will be entered in accordance with these findings of fact and conclusions of law.
SO ORDERED.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/_________
Beth A. Buchanan
United States Bankruptcy Judge Dated: March 25, 2021 Distribution List:
E. Hanlin Bavely, Esq.
Erik Emerson
61397 Skeen Trail Drive
Bend, OR 97702