KAREN K. SPECIE, Bankruptcy Judge.
The Chapter 7 Trustee and the largest unsecured creditor, Thomas and Adele Daake (the "Daakes") are fighting over which of them can pursue and collect on claims against third parties. The Daakes, who have been trying to collect a $5-$6 million claim against the Debtor for years, recently filed a state court law suit against third parties (one, a former insider of the Debtor) and want to keep the proceeds of any recovery for themselves. The Trustee wants to bring any recovery into the bankruptcy estate for distribution to all unsecured creditors. The defendants in the suit filed by the Daakes just want everyone to go away.
The primary legal issue boils down to whether certain claims and causes of action the Daakes filed, or that may be filed, in state court constitute property of the bankruptcy estate. A second issue is whether the Trustee has standing to pursue the state court claims or whether, as the Daakes assert, the Trustee no longer has standing because she did not take action to pursue any fraudulent transfer claims within the two years set forth in Section 546(a). Finally, the Court must decide whether to order the Daakes to give the Trustee any information they have about any pending actions that relate to this bankruptcy case.
The Court finds that any claims asserted in state court that belonged to the Debtor prepetition are Section 541 property of the bankruptcy estate that the Chapter 7
The Debtor, CD Jones & Company, Inc., is a Florida corporation formed in 1989. At some point in 2003 the Daakes entered into a business transaction with the Debtor; the Daakes contracted for the Debtor to perform certain construction for them in Escambia County, Florida. A dispute arose between the Debtor and the Daakes, and in 2004 the Daakes sued the Debtor for breach of contract, violation of certain building codes, and fraud. After costly and protracted litigation, including a jury trial, in July of 2009 the Daakes won a jury verdict against the Debtor in excess of five (5) million dollars, including $100,000.00 in punitive damages. Not surprisingly, the Debtor filed its Chapter 7 petition on July 30, 2009, after the jury verdict but before a Final Judgment was signed by the trial court.
The Daakes sought and were granted stay relief in order to obtain a final judgment and liquidate their claims against the Debtor for attorneys' fees and costs.
The Debtor's original founders, principals and co-owners were Dennis and Cynthia Jones. Sometime in 2006, during the heat of the litigation between the Daakes and the Debtor, Dennis and Cynthia Jones transferred their ownership interests in the Debtor to their son, Chris Jones, and a business associate, William Clay. Later, in April of 2007, the Debtor completed a transaction with William Clay and Chris Jones that resulted in Mr. Clay becoming the Debtor's sole remaining shareholder. At about the same time, the Debtor was sued by another creditor, Alcan Investments, LLC, for breach of contract, fraud, conspiracy to commit fraud, concealment, violations of the Interstate Land Sales Full Disclosure Act, and recovery of fraudulent transfers.
Sherry Chancellor was appointed Trustee of the Debtor's estate on July 31, 2009. The Trustee has not filed any adversary proceedings against the Debtor or others. On May 11, 2011, the Trustee filed an application to employ the Daakes' current counsel, then with another firm, to pursue and recover assets and avoidable transfers on behalf of the estate, but after a creditor objected the Trustee withdrew the application two days prior to the expiration of the Section 546(a) limitations period. The Daakes' counsel then filed emergency motions to either compel the Trustee to bring such avoidance actions or alternatively grant the Daakes permission to bring the actions. The Trustee objected to the motion
In June of 2012, after the expiration of the time provided under Section 546(a), but without notice to or consent by the Trustee, the Daakes filed a new law suit in state court against two people: one of the former owners of the Debtor, Dennis Jones, as Trustee, and April White, who is or was engaged to the Jones' son, Chris Jones. It is the claims and causes of action in this new law suit (the "Jones' Trust suit") that are at the heart of this dispute.
In the Jones' Trust suit, the Daakes allege that while Dennis and Cynthia Jones still owned their shares in the Debtor they 1) formed and caused the Debtor to pay for the formation of two trusts for which Dennis Jones became Trustee: The Dennis Jones Grantor Trust and the Cynthia Jones Grantor Trust (the "Jones' Trusts"); and 2) caused the Debtor to transfer to the Jones' Trusts and a third party, April White, certain valuable land and other assets.
To date, the Daakes are the only parties who have been willing (and able) to expend the time, money and effort to pursue claims thus far in this case.
Upon discovering that the Daakes had filed the Jones' Trust suit, the Chapter 7 Trustee filed a Motion to Compel Disclosure, seeking an order compelling the Daakes and their counsel to "make a full and complete disclosure, under penalty of perjury regarding any knowledge they may have of any pending litigation that involves the Debtor in this matter in any way shape or form."
The Daakes rely primarily on the Illinois bankruptcy case of Klingman v. Levinson, 158 B.R. 109 (N.D.Ill.1993) in support of their assertion that the Jones' Trust suit is essentially a fraudulent transfer claim that the Trustee could have brought under 11 U.S.C. §§ 544 and 548. They also cite Klingman for their position that because the deadline provided by 11 U.S.C. § 546 has passed, the Trustee's exclusive right to pursue fraudulent transfer claims has expired and the Daakes may now step in to pursue such claims for their own benefit.
The complaint the Daakes filed in the Jones' Trust suit does not allege any Fraudulent Transfer statute(s) as a basis for relief, nor does it allege "badges of fraud" or the most common elements of claims for actual or constructive fraudulent transfers. Instead, in the Jones' Trust suit the Daakes seek imposition of an equitable lien on or equitable title to all assets transferred by the Debtor to the Jones' Trusts and April White under theories of unjust enrichment and resulting trust.
The Daakes brought the Jones' Trust suit on their own behalf, as creditors of the Debtor, and also on behalf of the Debtor.
101 B.R. at 304 (referring to In re MortgageAmerica Corp., 714 F.2d 1266 (5th Cir. 1983)).
In a case involving facts similar to those here, In re Xenerga, Inc., 449 B.R. 594 (Bankr.M.D.Fla.2011), the Chapter 7 trustee sought approval to settle state-court claims asserted by the debtor's customers against insiders of the debtor. The trustee argued that the claims were "alter ego" claims belonging to all creditors generally and thus belonged to the bankruptcy estate.
Id. at 599.
By filing the Jones' Trust suit, the Daakes, in a roundabout way, are going after the former owners of the Debtor by seeking equitable remedies against assets transferred to and held in the trusts of the former owners. The Florida Supreme Court has stated that a plaintiff, when asserting an alter ego claim, must show that a corporation was "organized ... in some fashion that the corporate property was converted or the corporate assets depleted for the personal benefit of the individual stockholders, or ... in general, that property belonging to the corporation can be traced into the hands of the stockholders."
The Trustee seeks a ruling that the claims asserted in the Jones' Trust suit constitute property of the bankruptcy estate that only she has standing to pursue, although the Trustee made no attempt to pursue the claims until the Jones' Trust suit was filed by the Daakes. The defendants named in the Jones' Trust suit support the Trustee's position; apparently because they do not wish to be pursued by the Daakes and their lawyer any longer. The Daakes assert that the defendants' goal appears to be to escape liability under any theory. Realizing that if their claims could have been brought by the Debtor the Trustee is the only party with standing to pursue them, the Daakes now claim that the Jones' Trust suit is actually one seeking to set aside fraudulent transfers under Florida Statute 726, and is not property of the estate.
If the claims and causes of action in the Jones' Trust suit are, in reality, fraudulent transfer claims that would have been
All parties cite In re Saunders, 101 B.R. 303 (Bankr.N.D.Fla.1989) in support of their respective arguments. The Jones' Trust defendants cite Saunders in support of the Trustee's position that an action assertable by the Debtor is property of the estate that only she has standing to pursue, and the Daakes cite Saunders in support of their argument that a state law fraudulent transfer action is not property of the estate because it is not an action assertable by the Debtor. In Saunders, a creditor sued four other entities under Florida's (then) Fraudulent Transfer statute (F.S. § 56.29). The issue before the Court in Saunders was whether the creditor's fraudulent transfer action was stayed under 11 U.S.C. § 362(a)(3).
In a case dealing squarely with the issue, the Bankruptcy Court for the Southern District of Florida has ruled that state court fraudulent transfer claims constitute property of the estate. In re Zwirn, 362 B.R. 536 (Bankr.S.D.Fla.2007). In Zwirn, a judgment creditor filed a fraudulent transfer claim against third parties in state court seeking to recover property that the Debtor had fraudulently conveyed pre-petition.
In re Zwirn, 362 B.R. at 539 (citations omitted).
Zwirn and Saunders reached different conclusions as to whether state law fraudulent transfer claims are Section 541 property of the estate, but the result in both cases is the same: the trustee has the right to pursue state law fraudulent transfer claims by virtue of the operation of Section 544.
The issue in Moore was whether the trustee had the ability to sell fraudulent transfer causes of action to estate creditors. The Moore court found that Section 541(a)(1) is not the only provision under which property may become property of the estate; although that section brings in most of the estate's assets, the trustee's avoidance powers under Section 544 allow the trustee to enlarge the property of the estate after the commencement of the case.
In re Moore, 608 F.3d at 260.
In ruling that the trustee could sell a creditor's fraudulent transfer claim under Section 363(b) of the Code as property of
This Court agrees that creditors' fraudulent transfer claims belong to the Trustee under the strong-arm powers of Section 544 and are property of the estate once the case is filed. As the Moore court concluded:
Without question, the Daakes hold a claim "that is allowable under section 502" and the property that the Daakes are going after in the Jones' Trust suit was "an interest of the debtor in property" within the meaning of Section 544(b)(1), which reads:
11 U.S.C. § 544(b)(1).
If the claims asserted in the Jones' Trust suit are, in fact, fraudulent transfer claims, then such claims are, or became, property of the estate and, as this Court stated in Saunders,
101 B.R. at 306.
The bankruptcy court in Zwirn, finding that both the fraudulently transferred property and the fraudulent transfer action were property of the estate, addressed the policy concerns of conferring "blank check" standing on creditors to pursue their own avoidance actions:
In re Zwirn, 362 B.R. at 540-41. The court in In re Pearlman, quoting Zwirn, shared these concerns and stated: "Allowing individual creditors to pursue their own causes of action under state [or federal] law `would interfere with this estate and with the equitable distribution scheme dependent upon it ... Any other result would produce near anarchy where the only discernible organizing principle would be first-come-first-served.'" In re Pearlman, 472 B.R. at 122.
The Trustee's Motion for Determination of Cause of Action an Asset of the Estate
The Daakes assert that the Trustee no longer has standing to pursue the Jones' Trust suit because she did not do so within two years of her appointment, relying on the Illinois case of Klingman v. Levinson, 158 B.R. 109 (N.D.Ill.1993). The Daakes' reliance on Klingman is misplaced. Section 546(a)(1) provides that the exclusive time within which a trustee may file an action under, inter alia, Sections 544 and 548 is not later than 2 years after the entry of the order for relief. 11 U.S.C. § 546(a). If the Jones' Trust suit is determined to be a fraudulent transfer claim, as the Daakes allege, then under Klingman the Trustee's exclusive right to bring the action expired in 2011, but that does not mean that the Trustee has lost standing. It simply means that a creditor, here the Daakes, also has standing to pursue the action.
The Section 546 time limitation is not a jurisdictional bar to the Trustee asserting fraudulent conveyance claims; rather it is an affirmative defense available to the fraudulent transfer defendants to be raised in the state court in the event that the Trustee seeks to proceed. See In re Zwirn, 362 B.R. at 541.
Of course, Klingman and Section 546(a) only apply if the Jones' Trust suit asserts state law fraudulent transfer claims. Klingman involved a claim that was, without question, based on state fraudulent transfer law. Here, it is not yet clear what types of claims and causes of action are pending or may be brought against the Jones' Trust defendants. For that reason alone, Klingman is distinguishable. If the claims and causes of action in the Jones' Trust suit are not fraudulent transfer claims, but rather are claims that belonged to the Debtor pre-petition, then the Section 546(a) limitation does not apply. Rather, the Trustee would be pursuing Section 541(a)(1) property of the estate pursuant to Section 704(a)(1), which she is mandated to do. "Generally speaking, a pre-petition cause of action is the property of the Chapter 7 bankruptcy estate, and only the trustee in bankruptcy has standing to pursue it." In Larkin, 468 B.R. 431 (Bankr.S.D.Fla.2012) (quoting Parker v. Wendy's Int'l, Inc., 365 F.3d 1268, 1272 (11th Cir.2004)).
The Trustee has standing to appear in the Jones' Trust suit and to pursue any claims that belonged to the Debtor as of the date of the bankruptcy petition. If the state court determines that the claims in the Jones' Trust suit are fraudulent transfer claims, then the Trustee may not have standing to pursue such claims due to the expiration of the limitation period of Section 546(a), but that is an issue to be determined in state court.
The Daakes assert that "the Chapter 7 Trustee chose not to pursue any avoidance actions or seek recovery of any assets of CD Jones in the hands of third parties," and that therefore such actions or claims are "deemed abandoned" under Section 554 and may be pursued by the Daakes.
One of the purposes of the Chapter 7 Trustee is to "objectively evaluate the entire estate and to bring only those actions which are viable, cost effective and will benefit the estate."
Simply because the Daakes believe in their cause does not mean that pursuing the Jones' Trust suit is in the best interests of this estate. Whatever has transpired during this case, the result is that the Trustee has developed a mistrust of counsel for the Daakes, and possibly the
In her Motion to Compel Disclosure, the Trustee requests "that the Daakes and their counsel provide a verified statement to the Trustee and this Court regarding any pending actions that relate to the above referenced bankruptcy estate." In their response to the Trustee's motion to compel, the Daakes do not deny having any such information; they merely state that they are "not aware of any legal basis that [the trustee] would have for requiring that the information sought be turned over to her."
Based on the facts in this case and the history between the parties, the Trustee's Motion to Compel Disclosure
It is ultimately up to the Escambia County Circuit Court to decide whether the causes of action the Daakes are asserting in the Jones' Trust suit are fraudulent transfer claims that belonged to creditors or whether they are causes of action that belonged to the Debtor. Regardless, the claims and causes of action asserted in the Jones' Trust suit constitute property of the bankruptcy estate and any recovery from them shall inure to the benefit of all creditors. If there are other pending actions that relate to this bankruptcy estate of which the Daakes have knowledge, then once that information is provided to the Trustee she can decide whether to pursue those actions.
This case has been pending since 2009. If the Trustee elects to pursue the Jones' Trust suit, then she will need to decide fairly quickly whether to retain the Daakes' counsel, or separate counsel, to represent her. If the Trustee decides not to pursue the Jones' Trust suit, then the Daakes are entitled to have her either abandon any interest in the claims asserted in that suit or authorize them to pursue the suit for the benefit of this estate.
The Court will enter separate orders consistent with this opinion.
DONE and ORDERED.