Robert Underhill, et al v. Huntington National Bank

Filing

OPINION: we REVERSE the judgment of the BAP and REMAND for proceedings consistent with this opinion, decision not for publication. Gilbert S. Merritt, Circuit Judge; Deborah L. Cook, AUTHORING Circuit Judge and Bernice Bouie Donald, Circuit Judge, DISSENTING.

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NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 14a0712n.06
Case No. 13-4195

FILED
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
In re: ROBERT D. UNDERHILL; BETH
UNDERHILL,
Debtors.

ROBERT D. UNDERHILL; BETH
UNDERHILL,
Appellants,
v.
HUNTINGTON NATIONAL BANK,
Appellee.

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Sep 10, 2014
DEBORAH S. HUNT, Clerk

ON
APPEAL
FROM
THE
BANKRUPTCY
APPELLATE
PANEL FOR THE SIXTH CIRCUIT

BEFORE: MERRITT, COOK, and DONALD, Circuit Judges.
COOK, Circuit Judge. Robert and Beth Underhill filed for Chapter 7 bankruptcy, listing
their 100% ownership interest in Golf Chic Boutique, LLC as an asset. After the bankruptcy
court granted the Underhills a discharge and closed the case, Golf Chic successfully sued a
competitor for tortious interference, garnering a settlement payment to Beth. Alleging that the
settlement proceeds constituted property of the bankruptcy estate, creditor Huntington National
Bank moved the bankruptcy court to reopen the Underhills’ bankruptcy to recoup those funds for
the estate’s creditors. The court granted the motion, the Bankruptcy Appellate Panel (BAP)

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affirmed, and the Underhills appeal. Because Golf Chic’s cause of action became a property
interest after the Underhills filed for bankruptcy, it cannot qualify as bankruptcy property, and
we therefore reverse.
I.
The Underhills filed their personal bankruptcy petition on January 6, 2010, representing
that neither they nor Golf Chic had any assets in the nature of unliquidated claims. Three months
after the bankruptcy court closed its case, a major supplier canceled its contract with Golf Chic,
leading to Golf Chic’s demise. The Underhills discovered that a competitor, Ladies Pro Shop
(“Ladies Pro”), had complained to the supplier about Golf Chic’s prices since 2009, culminating
with emails in April and September 2010 requesting that the supplier sever ties with Golf Chic.
Golf Chic then sued various defendants associated with Ladies Pro for tortious-interferencewith-contract and disparagement. The parties settled, with Golf Chic agreeing to dismiss the
case in exchange for $80,000. The defendants sent a check to Golf Chic’s lawyers, who then
forwarded a portion of the proceeds to Beth Underhill.
Upon learning of the settlement, Huntington moved the bankruptcy court to reopen the
Underhills’ bankruptcy to allow the trustee to administer the proceeds to creditors.
Acknowledging that the proceeds belonged to the estate only if the cause of action constituted a
property interest before the Underhills filed for bankruptcy, and pointing to the Underhills’
complaint against Ladies Pro, Huntington asserted that the cause of action “arose in 2009” prior
to the bankruptcy petition. The Underhills countered that no cause of action existed until Ladies
Pro’s threats caused Golf Chic’s supplier to cancel their contract in September 2010.

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Despite the fact that the harm occurred post-petition, the bankruptcy court concluded that
the cause of action was “sufficiently rooted in the [Underhills’] pre-bankruptcy past” because the
record “ma[d]e clear that events relating or giving rise to the Claim occurred as early as April of
2009.” (App. Vol. IV at 934.) The court relied on deposition testimony—taken in connection
with the underlying lawsuit—that prior to the filing of the petition Ladies Pro “was complaining”
to the supplier about Golf Chic’s discounted selling. (Id. at 933.) Specifically, a Ladies Pro
representative testified that she “may have talked to” the supplier in 2009 after learning about
Golf Chic’s pricing from various mutual customers, including one who acted as a “mole” by
forwarding Golf Chic’s email advertisements. (Id.; App. Vol. I at 213−14.) And Beth Underhill
testified that she learned about Ladies Pro’s complaints in April 2009. (App. Vol. III at 725.)
The Underhills appealed to the BAP, which affirmed the bankruptcy court’s judgment
because the record reflected that “the events giving rise to Golf Chic[]’s claim for tortious
interference began in 2009.” (App. Vol. V at 1065.) In doing so, the BAP also rejected the
Underhills’ new argument that the trustee abandoned the cause of action by failing to administer
it before the close of the case. (Id.) This appeal followed.
II.
The Underhills contend that the cause of action cannot qualify as bankruptcy property
because Ladies Pro caused Golf Chic no pre-petition injury.1 “We review a bankruptcy court’s
. . . conclusions of law de novo.” In re Zingale, 693 F.3d 704, 707 (6th Cir. 2012).

1

The Underhills argue for the first time on appeal that the bankruptcy court lacked
jurisdiction because Huntington filed its reopening motion too late. But no deadlines apply to
motions to administer assets. See 11 U.S.C. § 350(b). Though the Underhills characterize
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Pre-petition causes of action belong to the bankruptcy estate and post-petition actions
belong to the debtor. Specifically, the debtor’s filing of a bankruptcy petition commences a
voluntary bankruptcy case, 11 U.S.C. § 301, creating a bankruptcy estate consisting of “legal or
equitable interests of the debtor in property as of the commencement of the case,”
id. § 541(a)(1). State substantive law determines the “nature and extent” of causes of action,
see Tyler v. DH Capital Mgmt., Inc., 736 F.3d 455, 461 (6th Cir. 2013), but federal bankruptcy
law dictates when that property interest becomes property of the estate for purposes of § 541,
see In re Terwilliger’s Catering Plus, Inc., 911 F.2d 1168, 1172 (6th Cir. 1990).
The Underhills’ contention finds considerable support in Tyler. That case explained that
most courts apply Segal v. Rochelle, 382 U.S. 375 (1966)—which defined pre-petition assets
under a previous version of the Code as those “sufficiently rooted in the pre-bankruptcy past” of
the debtor—to the current version of the Code. Tyler, 736 F.3d at 461−62 (collecting cases).
And we recognized that “[p]re-petition conduct or facts alone will not ‘root’ a claim in the past;
there must be a pre-petition violation.” Id. at 462. That is, a cause of action qualifies as
bankruptcy estate property only if the claimant suffered a pre-petition injury. See id.; In re
Witko, 374 F.3d 1040, 1044 (11th Cir. 2004) (concluding that legal-malpractice claim belonged
to the debtor because he “did not suffer any harm from the alleged legal malpractice prior to or
contemporaneous with filing his bankruptcy petition”); Cook v. Baca, 512 F. App’x 810, 820
Huntington’s motion as seeking revocation, which typically must occur within a year of the
discharge, see 11 U.S.C. § 727(e)(2), Huntington moved only to administer the settlement
proceeds from the tort suit. (See App. Vol. I at 91−97.)
The Underhills also assert that the trustee abandoned any interest in the Golf Chic/Ladies
Pro litigation by not administering it before the close of the case. Yet, because the Underhills
failed to include these claims in their schedule of assets, the trustee could not abandon them. See
11 U.S.C. § 554(c); In re Fossey, 119 B.R. 268, 272 (D. Utah 1990).
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(10th Cir. 2013) (“Though . . . the alleged conspiracies involved property that was the subject of
dispute between the parties prior to the bankruptcy filing, the alleged constitutional injuries did
not exist prior to the filing.”); In re Pettibone Corp., 90 B.R. 918, 932 (Bankr. N.D. Ill. 1988)
(“[I]f a tort claimant whose employer had purchased a defective product pre-petition is exposed
only post-petition to that product and sustains bodily injury only after filing of the
manufacturer’s bankruptcy, the claimant’s bankruptcy claim arises post-petition.”).
Here, the record lacks evidence of a pre-petition violation or injury.

Though the

bankruptcy court pointed to evidence that Ladies Pro monitored Golf Chic’s prices and
complained to the supplier pre-petition, tortious-interference-with-contract requires more: a
“wrongdoer’s intentional procurement of [a] contract’s breach.” Fred Siegel Co. v. Arter &
Hadden, 707 N.E.2d 853, 858 (Ohio 1999). Ladies Pro first interfered with Golf Chic’s supply
source in its April 2010 cease-sales demand—after the bankruptcy petition. (App. Vol. II at
378.)2 Meanwhile, Ladies Pro’s pre-petition complaints did not constitute “disparagement,”
because that tort targets false statements. See A & B-Abell Elevator Co. v. Columbus/Cent. Ohio
Bldg. & Constr. Trades Counsel, Nos. 92AP-1540 & 92AP-1541, 1993 WL 387179, at *14
(Ohio Ct. App. Sept. 30, 1993); Restatement (Second) of Torts § 623A; O.R.C. § 4165.02(A)(10)
and (12). Nothing in the record intimates that Ladies Pro made any pre-petition false statements
against Golf Chic.
2

Huntington contends that the Underhills forfeited this argument because they failed to
“link[] the termination of the supplier relationship to the right to file the [tort] action” in the
bankruptcy court. Not so. Their counsel argued during the hearing that the debtors “never had
any claim at any point the bankruptcy was open and . . . the damage to Golf Chic . . . is the
September 30th termination [of the contract]. Before that Golf Chic never had a claim that they
could allege . . . .” (App. Vol. IV at 967.) Regardless, their brief to the bankruptcy court
stressed that their legal claims against Ladies Pro arose post-petition. (App. Vol. VI at 1076–
77.)
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In search of a pre-petition violation, Huntington redirects our attention to Golf Chic’s
underlying complaint against Ladies Pro, which alleged business interference beginning “[i]n or
about 2009” and continuing “[f]rom 2009 forward.” (App. Vol. I at 114–15.) Yet, because this
matter proceeded to an evidentiary hearing, these vague allegations no longer suffice. The
parties had the opportunity to document Ladies Pro’s alleged misconduct, and the pre-petition
price complaints identified by the parties fall well short of intentional procurement of breach-ofcontract.
Still, Huntington contends that Segal supports treating the claims against Ladies Pro as
pre-petition property. That case held that a debtor’s loss-carryback tax refund claim belonged to
the estate even though the debtor could not claim it until the end of the year (post-petition). See
382 U.S. at 380. But the Court explained that the “two key elements pointing toward realization
of a refund existed at the time these bankruptcy petitions were filed: taxes had been paid on net
income within the past three years, and the year of bankruptcy at that point exhibited a net
operating loss.” Id.; see also Witko, 374 F.3d at 1043 (noting that in Segal “the predicates for
receiving the refunds . . . occurred pre-petition”). No similar pre-petition predicates established
Golf Chic’s tort claims here. The business interference occurred post-petition.
Offering a final counter-argument, Huntington cites lower-court cases for the proposition
that the “the accrual date does not control whether a cause of action constitutes property of the
estate.” None of these cases, however, concerned a cause of action unsupported by a pre-petition
legal injury. See, e.g., In re Parker, 368 B.R. 86, 2007 WL 1376081, at *7−8 (6th Cir. BAP
2007) (table) (legal malpractice claim, where the allegedly deficient representation resulted in a
pre-petition judgment against the claimant); In re Richards, 249 B.R. 859, 861 (Bankr. E.D.
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Mich. 2000) (medical-malpractice claim where “both the onset of the debtor’s disease and a
greater portion of its progress occurred before he filed his [bankruptcy] petition”).
III.
We REVERSE the judgment of the BAP and REMAND for proceedings consistent with
this opinion.

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BERNICE BOUIE DONALD, Circuit Judge, dissenting. The Underhills possess a
100% ownership interest in Golf Chic Boutique, LLC, which they listed as an asset when they
filed a bankruptcy petition in January of 2010. They were discharged from bankruptcy in May
of 2010, and their bankruptcy case was closed the following month. In October of 2010, Golf
Chic sued The Ladies Pro Shop, Inc., a competitor, in Ohio state court, asserting claims of
tortious interference with business relationships and ultimately achieving a settlement of
$80,000.00. The conduct that gave rise to the tortious interference claims culminated in the
termination of Golf Chic’s contract with its primary supplier in September of 2010. It is
undisputed, however, that some of the conduct occurred in 2009. Also undisputed is Beth
Underhill’s testimony that she became aware of this conduct in April of 2009.

Yet the

Underhills failed to list any contingent or unliquidated claims on the part of Golf Chic in their
bankruptcy schedules.
Although it concedes that 11 U.S.C. § 541 designates pre-petition causes of action the
property of the bankruptcy estate, the majority does not hold that the Underhills’ nondisclosure
justifies reopening their bankruptcy case. My colleagues rather conclude that “the record lacks
evidence of a pre-petition violation or injury” as would bring Golf Chic’s tortious interference
claims within § 541’s sweep. Ante at 4. According to the majority, the earliest that such an
injury could have occurred was in April of 2010—post-petition—when Ladies Pro demanded
that Golf Chic’s primary supplier sever its ties with the company. Id. at 6.
As we recently recognized in Tyler v. DH Capital Management, Incorporated, however,
“‘[E]very conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and
derivative, is within the reach of § 541.’” 736 F.3d 455, 461 (6th Cir. 2013) (quoting Azbill v.
Kendrick (In re Azbill), No. 06-8074, 2008 Bankr. LEXIS 527, at *19-20 (B.A.P. 6th Cir. Mar.
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11, 2008)). A claim, therefore, need only be “sufficiently rooted in the pre-bankruptcy past” to
comprise part of the debtor’s bankruptcy estate. Segal v. Rochelle, 382 U.S. 375, 380 (1966).
Here, there is no question that some of the conduct on which Golf Chic’s tortious interference
claims were based occurred pre-petition and that Beth Underhill became aware of the conduct
before she and her husband filed their bankruptcy petition. Golf Chic’s claims against Ladies
Pro thus appear to have been “sufficiently rooted in the pre-bankruptcy past” to make them
assets of the Underhills’ bankruptcy estate. In failing to list the claims as contingent interests in
their bankruptcy schedules, the Underhills thus deprived Huntington National Bank and other
creditors of the shares of the settlement proceeds to which they were entitled under § 541.
True enough, we stated in Tyler that “pre-petition conduct or facts alone will not ‘root’ a
claim in the [pre-bankruptcy] past[.]” 736 F.3d at 462. Instead, we concluded, “there must be a
pre-petition violation” to satisfy the “sufficiently rooted” test. Ibid. But we also acknowledged
that courts have diverged over how to apply this test to causes of action as distinct from other
assets. “Some courts,” we explained, “have applied the test expansively, including contingent
and unripe claims as property of the state.” Ibid. “Others,” we recognized, “have treated the test
as equivalent to the determination of when the cause of action accrues under the substantive
law.” Ibid. Rather than weigh in on one side or the other, we decided that “we need not answer
whether a cause of action, one or more of whose elements have not been satisfied at the time of
the petition, may become pre-petition property.” Id. at 463.
Thus, it is of little consequence that, under Ohio law, tortious interference claims are not
actionable until damages have been sustained. See Fred Siegel Co., L.P.A. v. Arter & Hadden,
707 N.E.2d 853, 858 (Ohio 1999); PNH v. Alfa Laval Flow, Inc., 940 N.E.2d 577, 587-88 (Ohio
Ct. App. 2010). Not only does federal law, rather than state law, determine when a property
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interest becomes part of the bankruptcy estate, see ante at 4 (citing In re Terwilliger’s Catering
Plus, Inc., 911 F.2d 1168, 1172 (6th Cir. 1990)); Tyler expressly left open the possibility that
unaccrued claims could be “sufficiently rooted in [a debtor’s] pre-bankruptcy past” to comprise
part of the bankruptcy estate. Segal, 382 U.S. at 380. The majority’s reliance on the fact that
Golf Chic’s tortious interference claims were not yet actionable when the Underhills filed their
bankruptcy petition in 2010 is therefore misplaced; the claims were partially based on conduct of
which Beth Underhill was aware in 2009.

Similarly, the majority mistakenly dismisses

Huntington’s argument to this effect as supported by “lower-court cases” that did not “concern[ ]
a cause of action unsupported by a pre-petition legal injury.” Ante at 7. But it is not merely
lower courts that have recognized that a claim’s accrual date does not control the question of
whether it comprises part of the bankruptcy estate; our own court also supported this notion in
Tyler.
The Underhills listed their 100% ownership interest in Golf Chic as an asset when they
filed for bankruptcy. They did not list claims that Golf Chic filed months later as contingent
interests despite being aware of some of the conduct on which the claims were based. The
majority rejects the Bankruptcy Court and the Bankruptcy Appellate Panel’s conclusion that the
claims were part of the Underhills’ bankruptcy estate and, in so doing, divests Huntington of its
rightful share of the settlement proceeds in which the claims resulted.
respectfully dissent.

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I must, therefore,