AMENDED OPINION and ORDER Affirming Bankruptcy Court's January 4, 2016, Amended Order Requiring Turnover of Assets. Signed by District Judge Matthew F. Leitman. (HMon)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
GREGORY J. REED et al.,
Case No. 15-cv-14462
Hon. Matthew F. Leitman
KENNETH A. NATHAN
AMENDED1 OPINION AND ORDER AFFIRMING BANKRUPTCY
COURT’S JANUARY 4, 2016, AMENDED ORDER REQUIRING
TURNOVER OF ASSETS
In 1996, Debtor-Appellant Gregory Reed (“Reed”) and two other individuals
established Appellant Keeper of the Word Foundation (“KWF”) to purchase and
preserve documents of historical significance.
While Reed’s intentions were
laudable, his operation of KWF’s finances was not.
For many years, Reed
comingled his personal assets with those of KWF in order to shield his assets from
his many creditors, used assets that supposedly belonged to KWF for his own
purposes, and treated KWF as his personal “piggy bank.”
This Amended Opinion makes no substantive changes to the Court’s original
Opinion and Order. The only changes from the original version are (1) the
addition of the full and correct citation to an article by Professor Ralph Brubaker
(on pages 14, 23, and 33 below) and (2) the elimination of a pronoun and
redundant parenthetical (on page 14 below).
In 2014, Reed filed for personal bankruptcy under Chapter 7 of the
Bankruptcy Code (the “Bankruptcy Proceeding”).
The Bankruptcy Court
appointed Appellee Kenneth Nathan (the “Trustee”) as the Trustee of Reed’s
bankruptcy estate (the “Estate”). During the course of the Bankruptcy Proceeding,
the Trustee filed a motion seeking an order that required KWF to turn over assets
that it claimed to own (the “Turnover Motion”). The Trustee alleged that the assets
in question were, in fact, assets of the Estate. The Bankruptcy Court held several
days of hearings on the Turnover Motion, concluded that nearly all of the assets in
dispute did belong to the Estate, and entered a final order that required KWF to
turn over the bulk of these assets to the Trustee (the “Final Turnover Order”).2
In this appeal, Reed and KWF urge the Court to vacate the Final Turnover
Order. They argue that (1) the Bankruptcy Court lacked jurisdiction to enter the
Final Turnover Order; (2) the Bankruptcy Court erred by adjudicating the turnover
proceedings in the context of a contested motion rather than in an adversary
proceeding; and (3) the Bankruptcy Court deprived KWF of its Seventh
Amendment right to a jury trial. The Court disagrees.
The Bankruptcy Court entered both a written opinion and a separate final order
on December 17, 2015. (See Bankruptcy Proceeding Dkt. ## 344, 345.) The final
order was amended to correct a clerical error on January 4, 2016. (See id. at Dkt.
#362.) The Court will refer to these three documents collectively as the “Final
The Bankruptcy Court did precisely what it had to do in order to properly
administer the Estate. And it did what bankruptcy commissioners, referees, and
judges have been doing with Supreme Court approval for well over seventy-five
years. The Bankruptcy Court did not exceed its statutory jurisdiction, violate
Article III of, or the Seventh Amendment to, the United States Constitution, or
cause KWF any cognizable prejudice. Accordingly, for the reasons explained in
detail below, the Court AFFIRMS the Final Turnover Order.
Reed is a licensed attorney who lives in Detroit, Michigan. (Final Turnover
Order, Bankruptcy Proceeding Dkt. #344 at 2, citing 11/2/2015 Hearing Tr.,
Bankruptcy Proceeding Dkt. #296 at 21-22, 52.) “In the early 1990’s,  Reed
became interested in purchasing documents and writings which he believed to have
historical significance.” (Id. at 3.)
In 1996, Reed and two other individuals
incorporated KWF as a non-profit organization in order “to collect and preserve
records, relics, and other things of historical interest” such as “papers, memoirs,
and memorabilia.” (KWF Articles of Incorporation, Bankruptcy Proceeding Dkt.
#167 at Ex. 2.) “Since at least 2012, Reed has had sole control over the financial
affairs of KWF.” (Final Turnover Order, Bankruptcy Proceeding Dkt. #344 at 27,
citing 10/7/2015 Hearing Tr., Bankruptcy Proceeding Dkt. #257 at 118-120 and
KWF Trial Exhibit 1, Bankruptcy Proceeding Dkt. ## 195-1 – 195-7.)
On August 28, 2014, Reed filed the Bankruptcy Proceeding.3 (See
Bankruptcy Proceeding, Dkt. #1.) On February 27, 2015, the Trustee initiated a
related adversary proceeding in the Bankruptcy Court against KWF and five other
Defendants (the “Adversary Proceeding”).4 (See Adversary Proceeding, Dkt. #1.)
The Trustee’s First Amended Complaint in the Adversary Proceeding alleged that
Reed fraudulently conveyed certain real and personal property to KWF “for the
purpose of defrauding Reed’s creditors.” (First. Am. Compl., Adversary
Proceeding Dkt. #50 at 2.)
The Trustee sought “a judgment avoiding and
recovering the property transferred [to KWF] in the Fraudulent Transfers, or the
value thereof, from [KWF] for the benefit of the  Estate.” (Id. at 19-20.)
KWF filed a motion to dismiss the First Amended Complaint on March 30,
2015. (See Adversary Proceeding Dkt. #21.) It also demanded a jury trial on the
claims raised in the First Amended Complaint. (See Adversary Proceeding Dkt.
#25.) Finally, KWF filed a motion to withdraw the reference to the Bankruptcy
Court and requested that the claims in the First Amended Complaint be adjudicated
in district court. (See Adversary Proceeding Dkt. #65.)
The Bankruptcy Proceeding was assigned Bankruptcy Court case number 1453838.
The related Adversary Proceeding was assigned Bankruptcy Court case number
15-04192. Adversary proceedings are described in more detail in section VII(A)
During the initial phases of the Adversary Proceeding, the Trustee came to
believe that many of the assets that were the subject of the fraudulent transfer
claim actually belonged to Reed. The Trustee then changed his approach. Instead
of seeking to obtain the assets through the fraudulent conveyance claim in the
Adversary Proceeding, the Trustee attempted to acquire the assets by filing the
Turnover Motion in the underlying Bankruptcy Proceeding.5 In the Turnover
Motion, the Trustee sought an order to compel KWF to surrender “[a]ny and all [of
its] assets” (hereinafter, the “Turnover Assets”). (See Bankruptcy Proceeding Dkt.
#149 at 1-2.) The Trustee filed the Turnover Motion under 11 U.S.C. § 542(a)
(“Section 542(a)”), a statute that requires an entity “in possession, custody, or
control” of property belonging to a bankruptcy estate to “deliver” that property to
the estate’s trustee “unless such property is of inconsequential value or benefit to
the estate.” 11 U.S.C. § 542(a). KWF filed a response to the Turnover Motion on
July 6, 2015. (See Bankruptcy Proceeding Dkt. #167.)
The Bankruptcy Court held an initial hearing on the Turnover Motion on
July 21, 2015. The court heard legal arguments from counsel at that hearing but
did not take testimony. “At the conclusion of the hearing, the [Bankruptcy] Court
issued a preliminary ruling that there were already pleadings in the record from
On May 5, 2015, the Bankruptcy Court stayed the Adversary Proceeding. (See
Adversary Proceeding Dkt. #69.) The Adversary Proceeding remains stayed as of
this date of this Opinion and Order.
which the [c]ourt could conclude” that some of the property in question belonged
to the Estate. (Final Turnover Order, Bankruptcy Proceeding Dkt. #344 at 14.)
The Bankruptcy Court then scheduled an evidentiary hearing to determine
“whether any of the assets held by KWF, or allegedly held by KWF [i.e., the
Turnover Assets], were property of the  [E]state.” (Id.) The parties took vastly
different positions on that issue. KWF acknowledged that Reed had once owned
some of the Turnover Assets, but it insisted that it lawfully acquired those assets in
2004 when Reed assigned all of his property to KWF (the “Purported
KWF further argued that the Turnover Assets should not be
deemed part of the Estate because it (KWF) had a truly separate existence from
Reed. The Trustee countered that that the Turnover Assets belonged to the Estate
because Reed had extensively comingled his assets and personal financial affairs
with those of KWF.
The Bankruptcy Court conducted the evidentiary hearing over three days in
the Fall of 2015. During this hearing, the Bankruptcy Court allowed the Trustee
and KWF to examine witnesses, introduce evidence, and present legal argument.
At the conclusion of the evidentiary hearing, the Bankruptcy Court allowed each
party to file a post-hearing brief.
On December 17, 2015, the Bankruptcy Court entered the Final Turnover
Order and held that the Turnover Assets were part of the Estate. (See Final
Turnover Order, Bankruptcy Proceeding Dkt. ## 344, 345.) In its decision, the
Bankruptcy Court addressed KWF’s claims that it owned the Turnover Assets by
virtue of the Purported Assignment and its claimed separate existence from Reed.
The court determined that notwithstanding the Purported Assignment and KWF’s
formal legal status as an independent entity, the Turnover Assets were properly
considered part of the Estate because Reed had comprehensively comingled his
financial affairs with those of KWF and had maintained control of assets that
supposedly belonged to KWF. (See Final Turnover Order, Bankruptcy Proceeding
Dkt. #344 at 31-32.) The court highlighted many examples of Reed comingling his
financial affairs with those of KWF, maintaining control over KWF’s purported
assets, or both:
While KWF claimed to own a personal residence on Burns Street in Detroit
where Reed lived (the “Burns Property”), title to the Burns Property was
always in Reed’s name. (See Final Turnover Order, Bankruptcy Proceeding
Dkt. #344 at 24.) Moreover, Reed granted a mortgage on the Burns Property
as security for a loan to him personally and deducted from his personal tax
obligations the property taxes paid on that property. (See id.)
In August 2013, Reed sold books belonging to KWF to Glen Horowitz
Bookseller, Inc. for $15,000, and Reed had that money deposited into a
KWF checking account. (See id.) Reed then used those funds “to pay [his]
personal expenses.” (Id.)
“[P]ayments for the sale of [other] books by KWF were deposited into a
KWF bank account and then used to pay [Reed’s] personal expenses.” (Id. at
In March 2014, “Reed sold a letter from Martin Luther King to Rosa Parks”
for $65,000. (Id. at 25-26.) Reed “testified that the letter came from the
inventory of the [KWF],” but bank statements established that the funds
from the sale of the letter “were used to pay Mr. Reed’s personal expenses,
specifically his mortgage, his car payment, his utility bills, and his credit
card bills.” (Id. at 26; internal quotation marks omitted.)
Reed had his Social Security income deposited into KWF bank accounts and
then used those accounts “to pay all, or most of, his personal expenses,
including the mortgage on the Burns Property, utilities, credit cards, and
[his] Lexus car payment.” (Id. at 27-28.)
In 2014, Reed settled a civil lawsuit to which KWF was not a party, had
settlement funds owed to him “deposited in a KWF bank account,” and he
then used those funds “either to benefit himself or to pay [his] preferred
creditors.” (Id. at 30.)
Reed “has always maintained [personal] control of the memorabilia he has
collected [in KWF’s name] over the years, and has used it to generate
revenue for himself, not for the benefit of KWF.” (Id. at 25; emphasis
Reed hid from the Trustee assets that KWF was required to produce for
inspection. (See id.)
“Reed’s control of the finances of KWF made it possible for Reed to use
KWF’s bank accounts as his own.” (Id. at 31.)
Finally, Reed caused KWF to execute a promissory note as security for a
$110,000 loan even though the borrowed funds were “used for some other
purpose than to benefit KWF.” (Id. at 28-29.)
From this evidence, the Bankruptcy Court determined that Reed “used KWF as his
personal piggy bank” and had “comingled his financial affairs with those of KWF
to the point where [he] treat[ed] all of KWF’s assets as his own.” (Id. at 31-32.)
The court therefore held that the Turnover Assets were properly deemed property
of the Estate. (See id. at 32.)
The Bankruptcy Court entered the Final Turnover Order on December 17,
2015. (See Bankruptcy Proceeding at Dkt. ## 344, 345.) KWF timely filed its
appeal of the Final Turnover Order in this Court on December 28, 2015. (See ECF
A federal district court has jurisdiction to hear appeals – and an aggrieved
litigant may appeal as of right – from “final judgments, orders, and decrees” of a
bankruptcy court. 28 U.S.C. § 158(a)(1). The Court reviews the Bankruptcy
Court’s legal conclusions de novo and its findings of fact for clear error. See In re
Dilworth, 560 F.3d 562, 563 (6th Cir. 2009). “On an appeal the district court or
bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy judge’s
judgment, order, or decree or remand with instructions for further proceedings.”
Fed. R. Bankr. P. 8013.
“The only way to fully comprehend federal bankruptcy jurisdiction –
including the current assignment of adjudicatory authority to non-Article III
bankruptcy judges – is to understand the history of federal bankruptcy
jurisdiction.” Ralph Brubaker, A ‘Summary’ Statutory and Constitutional Theory of
Bankruptcy Judges’ Core Jurisdiction After Stern v. Marshall, 86 Amer. Bankr.
L.J. 121, 122 (2012).6 That history is an important guidepost in assessing the
limits of bankruptcy court jurisdiction because the Supreme Court has “offered no
comprehensive rule for application across all cases.” In re Renewable Energy Dev.
Corp., 792 F.3d 1274, 1279-80 (10th Cir. 2015).
Consulting the parameters of bankruptcy court jurisdiction that prevailed
under the Bankruptcy Act of 1898 (the “1898 Act”) is especially helpful in
delineating the limits of modern bankruptcy court jurisdiction. Justices of the
Throughout this Opinion and Order, the Court cites the work of noted bankruptcy
scholar Ralph Brubaker (“Professor Brubaker”), the Carl L. Vacketta Professor of
Law at the University of Illinois College of Law. The Supreme Court has cited
Professor Brubaker’s bankruptcy scholarship with approval on more than one
occasion. See, e.g., Wellness Intern. Network, Ltd. v. Sharif, __ U.S. __, 135 S.Ct.
1932, 1942 (2015) (quoting Ralph Brubaker, The Constitutionality of Litigant
Consent to Non-Article III Bankruptcy Adjudications, 32 Bankr. L. Letter No. 12,
at 1, 6 (Dec. 2012)); Executive Benefits Ins. Agency v. Arkison, 573 U.S. __, 134
S.Ct. 2165, 2170 (2014) (citing Brubaker, 86 Am. Bankr. L.J. at 124, 128). The
Court wishes to thank Professor Brubaker for the informative amicus brief that he
submitted in this action at the Court’s request. (See ECF #34.)
Supreme Court and leading bankruptcy scholars have recently drawn upon those
parameters as they have wrestled with the extent to which Article III of the United
States Constitution limits modern bankruptcy court jurisdiction. See, e.g., Wellness
Intern. Network, Ltd. v. Sharif, __ U.S. __, 135 S.Ct. 1932, 1952-54 (2015)
(Roberts, C.J. dissenting7); id. at 1967-68 (Thomas, J., dissenting); Brubaker, 86
Amer. Bankr. L. J. at 122. And they have suggested that Article III does not limit
a modern bankruptcy court’s jurisdiction to enter a final order in a matter that
would have fallen within the historical summary jurisdiction of bankruptcy courts.
See Sharif, 135 S.Ct. at 1952-54 (Roberts, C.J., dissenting); Brubaker, 86 Amer.
Bankr. L. J. at 122.
The practice under the 1898 Act also sheds important light on the statutory
jurisdiction of modern bankruptcy courts to enter final orders. The Supreme Court
“will not read the Bankruptcy Code to erode past bankruptcy practice absent a
clear indication that Congress intended such a departure.” Hamilton v. Lanning,
This Opinion and Order draws extensively upon the Chief Justice’s Opinion
Sharif. Importantly, while that Opinion is designated as a dissenting Opinion, the
majority in Sharif neither addressed nor disagreed with the portions of the Chief
Justice’s Opinion discussed above. More specifically, this Opinion and Order
draws heavily upon Section IA of the Chief Justice’s Opinion in Sharif. In that
Section, the Chief Justice opined that Article III of the United States Constitution
did not prohibit a bankruptcy judge from entering a final order on the claim at issue
in that case. See Sharif, 135 S.Ct. at 1950-1955 (Roberts, C.J. dissenting). The
majority expressly declined to address that issue. See id. at 1942 n.7. Instead, the
majority addressed only whether the parties could validly consent to have a
bankruptcy court adjudicate the claim. See id. at 1942-48.
560 U.S. 505, 517 (2010), and as explained below, Congress gave no “clear
indication” in the Code that it intended to subtract from the historical jurisdiction
bankruptcy courts have long enjoyed. On the contrary, Congress’ objective is to
“giv[e] bankruptcy courts as much core jurisdiction as is constitutionally
permissible.” Brubaker, 86 Am. Bankr. L.J. at 124, 128.
To be sure, under current Supreme Court precedent, questions of modern
bankruptcy court jurisdiction generally – and the specific jurisdictional questions
currently before this Court – cannot be answered solely by looking to past practice.
But in trying to understand whether a bankruptcy court exceeded its jurisdiction in
entering a particular final order, it makes good sense to begin by determining
whether the challenged order would have fallen with the historical jurisdiction of
bankruptcy courts to enter final orders. So this Court begins with that question as
it wrestles with the ultimate inquiry of whether the Bankruptcy Court lacked
jurisdiction to enter the Final Turnover Order.
“At its most basic level, bankruptcy is ‘an adjudication of interests claimed
in a res,’” and in order to adjudicate those interests, a bankruptcy court must first
determine the parameters of the res. Sharif, 135 S.Ct. at 1952 (Roberts, C.J.
dissenting) (quoting Katchen v. Landy, 382 U.S. 323, 329 (1966)).
“[d]efining what constitutes the estate is the necessary starting point of every
bankruptcy; a court cannot divide up the estate without first knowing what’s in it.”
Id. That is precisely why “[i]dentifying property that constitutes the estate has
long been a central feature of bankruptcy adjudication.” Id. (discussing the
historical authority of English bankruptcy commissioners).
But bankruptcy courts have not had unlimited authority to determine that
property belongs to a bankruptcy estate.
The extent of their power to bring
property within the estate has turned, in large part, on whether the property was in
the actual or constructive possession of the debtor – and thus the bankruptcy court8
– at the time the debtor filed for bankruptcy. Where the debtor did possess the
property, the bankruptcy courts have been permitted to adjudicate all disputes
concerning title to the property – including claims of ownership by third parties –
and to order that the property be surrendered to the estate.
The practice under the 1898 Act illustrates these broad historical powers of
bankruptcy courts. Under that Act, “bankruptcy referees had authority to exercise
‘summary’ jurisdiction over certain claims, while other claims could only be
See, e.g., Ex parte Baldwin, 291 U.S. 610, 615 (1934) (“All property in the
possession of a bankrupt of which he claims the ownership passes, upon the filing
of a petition in bankruptcy, into the custody of the court of bankruptcy”) (emphasis
added); In re Ellis, 674 F.2d 1238, 1251 (9th Cir. 1982) (“Upon filing of [a]
bankruptcy petition,  property [of bankruptcy debtor] passe[s] into the custody of
the bankruptcy court, which then ha[s] jurisdiction to determine controversies
concerning the property”); In Re Higbee Co., 88 F.Supp. 751, 752 (N.D. Ohio
1950) (explaining that a bankruptcy “court has actual or constructive possession
over all property which at the time of the filing of the [bankruptcy] petition was in
the actual or constructive possession of the bankrupt”).
adjudicated in ‘plenary’ proceedings before an Article III district court.” Id. (citing
Executive Benefits Ins. Agency v. Arkison, 573 U.S. __, 134 S.Ct. 2165, 2170
(2014)). A bankruptcy referee’s summary jurisdiction under the 1898 Act included
the “power … to adjudicate, without consent, controversies concerning the title to
property of which [the court] had possession.” Taubel-Scott-Kitzmiller Co. v. Fox,
264 U.S. 426, 432–33 (1924). Stated another way, “if the property were in the
custody of the bankruptcy court or its officer, any controversy raised by an adverse
claimant setting up a title to or lien upon it might be determined on summary
proceedings in the bankruptcy court, and would fall within the jurisdiction of the
referee.” Weidhorn v. Levy, 253 U.S. 268, 271-72 (1920) (emphasis added).
The possession that gave rise to a bankruptcy court’s broad summary
jurisdiction did “not” have “to be actual.” Id. “Constructive possession [was]
sufficient.” Id. And such possession “exist[ed]” in a number of circumstances,
including, where the debtor had “control” over the property at that time. Weidhorn,
253 U.S. at 271-72 (internal citations omitted) (bankruptcy court did not have
actual or constructive possession over property which would have given rise to
summary jurisdiction because debtor did not have “possession or control” over
See also Ralph Brubaker, The Constitutionality of Non-Article III Bankruptcy
Adjudications, With and Without Litigant Consent (Part III), 36 Bankr. L. Letter
No. 1, at 1, 7-8 (Jan. 2016) (noting that the Supreme Court “often phrased the
Under limited circumstances, a bankruptcy court was even deemed to have
constructive possession of – and thus summary jurisdiction over – property held by
a third party. Such constructive possession existed where the debtor’s estate had a
claim to the property and where third party’s “claim [to the property was] colorable
only.” Taubel-Scott-Kitzmiller Co. 264 U.S. at 432-33. Constructive possession
did not exist where the third party in possession raised a “substantial adverse”
claim to the property. In re Wiltse Bros. Corp., 357 F.2d 190, 193 (6th Cir. 1966)
(“General principles establish that where the actual or constructive possession is in
a third person, the Bankruptcy Court only has jurisdiction when it determines that
the property is not held under a substantial adverse claim”).
Importantly, bankruptcy courts retained jurisdiction to determine whether a
third party raised a merely “colorable” claim to property (in which case the
bankruptcy court had constructive possession of the property and summary
jurisdiction to resolve competing claims to it) or a “substantial adverse” claim (in
which case the bankruptcy court lacked constructive possession and could not
summarily decide claims with respect to that property). As the Supreme Court
explained, a bankruptcy court was empowered to “conclude, where it lack[ed]
actual possession, that the physical possession held by some other persons [was] of
determinative inquiry [concerning whether the debtor, and thus the bankruptcy
court, possessed property] in terms of whether the property at issue was “in
possession or control of the court or of the bankrupt….”) (Emphasis added.)
such a nature that the property [was] constructively within the possession of the
court.” Taubel-Scott-Kitzmiller, 264 U.S. at 434. In other words, the Supreme
Court reserved to the bankruptcy court “the power and the duty” to determine
whether a third party’s claim to property was a “substantial adverse” one or a
“merely colorable” one. Cline v. Kaplan, 323 U.S. 97, 99 (1944).
In Harrison v. Chamberlain, 271 U.S. 191, 194-95 (1926), the Supreme
Court provided bankruptcy courts with “the test to be applied in determining
whether an adverse claim is substantial or merely colorable.” Under this test, a
third party’s claim “is to be deemed of a substantial character when the claimant's
contention discloses a contested matter of right, involving some fair doubt and
reasonable room for controversy, in matters either of fact or law; and is not to be
held merely colorable unless the preliminary inquiry shows that it is so
unsubstantial and obviously insufficient, either in fact or law, as to be plainly
without color of merit, and a mere pretense.” Id. (quotation omitted).
In Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215 (1941), the
Supreme Court applied the above-described rules to determine whether a
bankruptcy court had summary jurisdiction to declare that property titled to an
affiliate of the debtor belonged to the debtor’s bankruptcy estate.
involved a debtor named Wilbur Downey (“Downey”). Prior to 1936, Downey
“had engaged in business, unincorporated, and had incurred a debt to the
predecessor of Standard Coated Products Corporation of approximately $104,000.”
Sampsell, 313 U.S. at 215. In June of 1936, Downey formed a corporation,
transferred his personal stock to the corporation, and thereafter conducted business
in the name of the corporation. See id.
In 1938, Downey “was adjudged a
voluntary bankrupt,” and during the bankruptcy proceedings, the assigned
bankruptcy referee ordered Downey and the corporation to show cause “why the
assets of the corporation should not be marshalled for the benefit of the creditors of
the bankrupt estate and administered by the trustee.” Id. at 216. The referee held a
hearing, found that the corporation was a mere “sham and a cloak” designed to
preserve assets for Downey’s family, and entered a final order declaring “that the
property of the corporation was property of the bankrupt estate and that it be
administered for the benefit of creditors.” Id. at 217.
The Supreme Court held that there was “no question but that the jurisdiction
of the bankruptcy court was properly exercised by summary proceedings.” Id. at
218. The court explained that a mere alter ego of the debtor is in no position to
make a “substantial adverse” claim to property that would deprive a bankruptcy
court of constructive possession – and thus summary jurisdiction – over the
property under “the rule of Taubel-Scott-Kitzmiller Co. [supra]”:
The legal existence of the affiliated corporation does not
per se give it standing to insist on a plenary suit.
Mere legal paraphernalia will not suffice to transform
into a substantial adverse claimant a corporation whose
affairs are so closely assimilated to the affairs of the
dominant stockholder that in substance it is little more
than his corporate pocket. Whatever the full reach of that
rule may be, it is clear that a family corporation’s adverse
claim is merely colorable where, as in this case, the
corporation is formed in order to continue the bankrupt’s
business, where the bankrupt remains in control, and
where the effect of the transfer is to hinder, delay, or
defraud his creditors. Hence, Downey’s corporation was
in no position to assert against Downey’s trustee that it
was so separate and insulated from Downey’s other
business affairs as to stand in an independent and adverse
Id. at 218. Sampsell exemplifies the historical authority of bankruptcy courts to
exercise summary jurisdiction over a “claim that the debtor had concealed assets
under the veil of a corporate entity that was” his mere alter ego. Sharif, 135 S.Ct. at
1953 (Roberts, C.J., dissenting) (describing Sampsell).
A long line of post-Sampsell circuit-level decisions confirm this historical
power of bankruptcy courts. See In re Cyberco Holdings, Inc., 431 B.R. 404, 41718 (Bankr. W.D. Mich. 2010) (collecting cases). The decision of the United States
Court of Appeals for the Second Circuit in Soviero v. Franklin National Bank of
Long Island, 328 F.2d 446 (2d Cir. 1964), is the most significant of these
decisions. Soviero involved the bankruptcy of a corporate debtor. The bankruptcy
trustee “sought an adjudication [from a bankruptcy referee] that assets of thirteen
separate corporations … in fact belonged to the bankrupt” on the ground that these
affiliated entities were mere alter egos of the debtor. Id. at 446-47. A bank that
held a lien against property titled to the affiliates disputed the alter ego allegations
and also argued “that the [r]eferee in bankruptcy lacked jurisdiction to summarily
adjudicate title to property adversely held without the instigation of a plenary suit.”
Id. The referee overruled the objection, held a hearing on the alter ego issue, ruled
that the affiliated entities were in fact alter egos of the debtor and that their assets
should be treated as property of the estate, and entered a final order requiring the
affiliates to turn their assets over the trustee. See id. The bank appealed.
The Second Circuit held that the bankruptcy referee did not exceed its
summary jurisdiction. The court first identified the governing rules established by
the Supreme Court precedent discussed above: (1) that a bankruptcy court or
referee “has the power to adjudicate summarily rights and claims to property which
is in the actual or constructive possession of the court,” id. at 447 (quoting Cline,
323 U.S. at 98), and (2) that a bankruptcy court or referee “is deemed to have
constructive possession where at the time of the filing of the petition in bankruptcy
the property in question is held by one whose adverse claim lacks substance and is
at best only colorable.” Id. The Second Circuit described its task as to “determine
whether the adverse claims of corporate separateness presented such a fair doubt or
a reasonable controversy as to render the [r]eferee’s order piercing the corporate
entities unjustified.” Id. The Second Circuit concluded that the evidence before the
referee amply established that the affiliates were mere alter egos of the debtor; that
the affiliates’ claims to the property were therefore “without color of merit, and a
mere pretense;” and that “the [r]eferee’s use of a summary proceeding was thus
entirely proper.” Id. (emphasis added).
After deciding the jurisdictional issue, the Second Circuit then addressed
whether the referee properly ordered the affiliates to turn over assets titled in their
names. The court affirmed the turnover order and explained:
Although we hold that the [r]eferee properly decided the
preliminary jurisdictional issue, the question of the
propriety of the issuance of the turnover order remains. A
turnover order is a judicial innovation by which the court
(of bankruptcy) seeks efficiently and expeditiously to
accomplish ends prescribed by the statute. We cannot
agree with the Bank's contention that the corporate veils
may be pierced only where the [r]eferee finds that the
subsidiary corporations were organized to defraud or
hinder creditors. In Stone v. Eacho, 127 F.2d 284 (4th
Cir.), cert. denied 317 U.S. 635, 63 S.Ct. 54, 87 L.ed. 512
(1942), where the facts closely resembled those of the
instant case, the court affirmed the issuance of the
turnover order, ignoring the corporate entity of a
subsidiary corporation, for only then could all the
creditors receive that equality of treatment which it is the
purpose of the bankruptcy act to afford. A similar
conclusion is fully warranted here.
Id. at 448-49 (quotations and citations omitted) (emphasis added).
Soviero “provides in a comprehensive opinion a textbook example of what
had become a well established practice under the former  Act of courts in
bankruptcy permitting the involuntary seizure of another entity's assets through the
issuance of a turnover order so long as the bankruptcy trustee could establish that
the targeted entity was merely the alter ego or instrumentality of the bankrupt
debtor.” Cyberco Holdings, 431 B.R. at 420.
The Bankruptcy Court’s entry of the Final Turnover Order was fully
consistent with the historical exercise of summary bankruptcy jurisdiction
described above. Under those historical standards, the Bankruptcy Court had
summary jurisdiction to adjudicate title to the Turnover Assets and to require their
surrender to the Trustee because it had constructive possession over the assets. It
had constructive possession for two reasons.
First, the Bankruptcy Court had constructive possession over the Turnover
Assets because KWF’s claim to the assets was entirely baseless and, thus, merely
“colorable.” See Taubel-Scott-Kitzmiller Co., supra (bankruptcy court has
constructive possession where claim of third party holding property is only
“colorable”). Indeed, in this Court, KWF makes no real effort to substantiate its
claim to title of the Turnover Assets. As described above, the Bankruptcy Court
ruled that KWF had no claim to those assets because (1) Reed had so completely
comingled his financial affairs with KWF that KWF’s assets were properly part of
the Estate and (2) Reed always maintained control over the assets. KWF does not
present any substantive attack on, or make any real attempt to show error in, the
Bankruptcy Court’s analysis of these issues in its appeal.10 KWF’s silence in this
regard speaks volumes – and leaves no doubt but that its claim to title of the assets
created neither “fair doubt” nor “reasonable room for controversy” and was so
“obviously insufficient … as to be plainly without color of merit.” Harrison, 271
U.S. at 193-95.
Moreover, this Court has reviewed the evidence in the record and concurs
with the Bankruptcy Court’s conclusion that there is no support for KWF’s claim
to title of the Turnover Assets. The Bankruptcy Court’s comprehensive survey of
the evidence, as described in detail in Section II above (and as set forth in the Final
Turnover Order at pp. 21-32), conclusively establishes that, in the apt words of the
Bankruptcy Court, Reed used KWF as his “personal piggy bank.” (Final Turnover
Order, Bankruptcy Proceeding Dkt. #344 at 31.) Given Reed’s conduct, KWF’s
claim to the Turnover Assets is merely colorable and is not a substantial adverse
claim. Accordingly, notwithstanding KWF’s claim to the assets, the Bankruptcy
Instead, KWF focuses almost exclusively on jurisdictional and procedural
attacks on the Final Turnover Order. (See KWF Br. on Appeal, ECF #5.) KWF
does make the point that that it is recognized as a “separate nonprofit corporation”
and a “separate legal person, represented by separate counsel” (id. at 7, ECF #5 at
14, Pg. ID 2850), but that point says nothing about whether Reed comingled his
personal financial affairs with KWF’s financial affairs or whether he maintained
control over the Turnover Assets. KWF’s brief on appeal also includes a single
paragraph captioned “Keeper of the Word Foundation Has Established Title to its
Property,” (id. at 14, ECF #5 at 21, Pg. ID 2857), but the argument there is
undeveloped and does not respond to the Bankruptcy Court’s analysis on these
Court retained constructive possession over them and would have had summary
jurisdiction (under the historical standards outlined above) to compel their
surrender to the Trustee. See Soviero, supra.
Second, the Bankruptcy Court found that Reed always retained full control
over the Turnover Assets – including, of course, when he filed for bankruptcy –
and Reed’s control gave the Bankruptcy Court constructive possession of those
assets. See Weidhorn, 253 U.S. at 272; Ralph Brubaker, The Constitutionality of
Non-Article III Bankruptcy Adjudications, With and Without Litigant Consent
(Part III), 36 Bankr. L. Letter No. 1, at 1, 9-10 (Jan. 2016). Such constructive
possession would have supported the exercise of summary jurisdiction over claims
to the Turnover Assets and would have authorized summary entry of an order
compelling their return to the Estate.
Simply put, there is no doubt but that under the historical standards
discussed above, the Bankruptcy Court would have had summary jurisdiction to
enter the Final Turnover Order. It is against that background that the Court now
considers whether the Bankruptcy Court had statutory and constitutional
jurisdiction to adjudicate the Turnover Motion. (The Bankruptcy Court did not
examine or expressly rule upon these jurisdictional questions, but the findings
made by that court enable this Court to conduct the appropriate analysis.)
The Court turns first to the question of whether the Bankruptcy Court
exceeded its statutory jurisdiction when it entered the Final Turnover Order. The
Court begins with that question because if answered in the affirmative, it would
permit the Court to avoid the constitutional question. See, e.g., United States v.
Elkins, 300 F.3d 638, 647 (6th Cir. 2002) (“Courts should avoid unnecessary
constitutional questions”). And the Supreme Court recently began with a statutory
inquiry when facing a similar challenge to a bankruptcy court’s jurisdiction. See
Stern v. Marshall 564 U.S. 462, 475-79 (2011). For the reasons explained below,
the Bankruptcy Court did not exceed its statutory jurisdiction here when it entered
the Final Turnover Order.
The Bankruptcy Code recognizes two types of proceedings – “core” and
“noncore” – and the distinction between the proceedings “is fundamental to a
bankruptcy court’s jurisdiction.” In re Bavelis, 773 F.3d 148, 156 (6th Cir. 2014).
A “core” proceeding is “one that either invokes a substantive right created by
federal bankruptcy law or one which could not exist outside of the bankruptcy.” Id.
“Noncore proceedings, in contrast, are those causes of action that (1) are not
identified as a core proceeding under 28 U.S.C. § 157(b)(2), (2) existed prior to the
filing of the bankruptcy case, (3) would continue to exist independent of the
provisions of Title 11 of the United States Code, and (4) are not significantly
affected as a result of the filing of the bankruptcy case.” Id.
As the United States Court of Appeals for the Sixth Circuit has explained,
the core/noncore classification governs the extent of a bankruptcy court’s statutory
jurisdiction to enter final orders:
Congress has granted bankruptcy judges differing
authority depending on whether the claim is “core” or
“noncore.” 28 U.S.C. § 157. In core proceedings, a
bankruptcy judge “may enter appropriate orders and
judgments” subject to appellate review by the district
court. Id. § 157(b)(1). In noncore proceedings, on the
other hand, the bankruptcy judge “shall submit proposed
findings of fact and conclusions of law to the district
court, and any final order or judgment shall be entered by
the district judge after ... reviewing de novo” the
objections of either party. Id. § 157(c)(1).
Id. Here, then, the Bankruptcy Court had statutory jurisdiction to enter the Final
Turnover Order if and only if the turnover proceedings were “core.” They were.
There were, in effect, two components to the turnover proceedings before
the Bankruptcy Court. The first component consisted of the court determining
“whether” the Turnover Assets were “in, fact, part of” the Estate. (Final Turnover
Order, Bankruptcy Proceeding Dkt. #344 at 1.) The second component was the
order requiring surrender of the Turnover Assets to the Trustee. (See id. at 32-33.)
Both fell with the court’s core jurisdiction.
To begin, there is no doubt that a bankruptcy court has core jurisdiction to
determine what constitutes property of the estate. Indeed, “[i]t is well established
that proceedings to determine what constitutes property of the bankruptcy estate
under section 541(a) of the Bankruptcy Code are core proceedings.” In re AGR
Premier Consulting, Inc., 550 Fed. App’x 115, 122 (3d Cir. 2014).11 Moreover,
there is strong historical support for treating proceedings to determine what
constitutes estate property as core under the Bankruptcy Code. As noted above,
“[i]dentifying property that constitutes the estate has long been a central feature of
bankruptcy adjudication,” Sharif, 135 S.Ct. at 1952 (Roberts, C.J., dissenting), and
Congress intended the term “core” to include proceedings “that fell within the
scope of the historical bankruptcy court's power.” Arkison, 134 S.Ct. at 2172,
See also In re Reliance Grp. Holdings, Inc., 273 B.R. 374, 395 (Bankr. E.D. Pa.
2002) (“a determination of what is property of the estate … is precisely the type of
proceeding over which the bankruptcy court has exclusive [core] jurisdiction.”)
(quoting All American Laundry Service v. Ascher, 128 B.R. 639, 643 (Bankr.
N.D.Ill. 1991)); In re Pali Holdings, Inc., 488 B.R 841, 848-49 (Bankr. S.D.N.Y.
2013) (determination of whether property is part of a bankruptcy estate remains a
“core” proceeding after Stern decision). The determination of property that
belongs to the estate is a core function “even though such a determination may rest
upon interpretation of state law.” In re Reliance Grp. Holdings, 273 B.R. at 395;
see also In re Touch America Holdings, Inc., 401 B.R. 107, 117 (Bankr. D. Del.
2009) (“A proceeding to determine whether certain property rights are ‘property of
the estate’ under Bankruptcy Code § 541 is a core proceeding, even if the
determination rests upon interpretation of state law”) (quoting Reliance Grp.
Holdings, 273 B.R. at 394-95); In re Grubb & Ellis Co., 523 B.R. 423, 440 (Bankr.
S.D.N.Y. 2014) (same).
Thus, the Bankruptcy Court performed a core function when it analyzed whether
the Turnover Assets belonged to the Estate and ruled that they did.
The entry of the Final Turnover Order requiring surrender of the Turnover
Assets was likewise a core proceeding. A federal statute provides examples of
such proceedings, and that statute identifies “orders to turn over property of the
estate” as core proceedings. 28 U.S.C. § 157(b)(2)(E). The Final Turnover Order
was just such an order: it required KWF to turn over property that belonged to the
Estate. The Final Turnover Order thus fit comfortably within the class of core
proceedings identified in 28 U.S.C. 157(b)(2)(E). See, e.g., In re Glenn, 359 B.R.
200, 204 (Bankr. N.D. Ill. 2006) (“Requests for turnover orders are core
proceedings within the jurisdiction of the bankruptcy courts”).
KWF counters that the turnover proceedings were not core because it (KWF)
disputed title to the Turnover Assets. It is easy to see why KWF makes this
argument. There is ample authority for the proposition that a bankruptcy trustee’s
request for “turnover of assets whose title is in dispute … can only constitute, at
the most, noncore rather than core proceedings … [under] 28 U.S.C. §
157(b)(2)(E).” In re Allegheny Health Educ. and Research Foundation, 233 B.R.
671, 677 (Bankr. W.D. Pa. 1999). As one federal court has explained, where an
“ownership dispute must be resolved before any relief can be ordered, the
proceeding is a non-core replevin action under state law rather than a [core]
turnover proceeding.” In re General Media, 335 B.R. 66, 76 (Bankr. S.D.N.Y
2005). This rule appears to rest on the notion that where there is a dispute over
title, the assets in question cannot properly be treated as “property of the estate”
under 28 U.S.C. § 157(b)(2)(E).
But not every “dispute” over title converts what would otherwise be a core
turnover proceeding into a noncore one. Only a legitimate or bona fide dispute
over title does so. See Acolyte Elec. Corp. v. City of New York, 69 B.R. 155, 173
(Bankr. E.D.N.Y. 1986) (explaining that a turnover action “does not constitute a
core proceeding under § 157(b)(2)(E)” when there is “a bona fide dispute” or a
“legitimate dispute” as to debtor’s right to the property). A dispute that is not
legitimate does not create sufficient doubt as to whether the assets in question are
“property of the estate” so as to remove a turnover action from § 157(b)(2)(E).
The analysis is much like that described above under the 1898 Act. Just as a
merely “colorable” claim to title by a third party did not deprive a bankruptcy court
of constructive possession of, and summary jurisdiction over, property involved in
a turnover action under that Act, see above at section III(B), a wholly insubstantial
claim of title by a third party today does not divest a bankruptcy court of its core
turnover jurisdiction.12 As one court has explained, “bankruptcy courts under the
Allowing a third party to strip a bankruptcy court of its core turnover jurisdiction
by asserting an entirely baseless claim to title would substantially interfere with the
efficient administration of bankruptcy estates.
1898 Act could exercise summary jurisdiction over turnover claims when the
defenses to such claims were not ‘real and substantial,’ [and] they can do the
equivalent of that now.” In Re Pali Holdings, Inc., 488 B.R 841, 854 and n. 43 &
45 (Bankr. S.D.N.Y 2013). Simply put, “the principles applicable to determine
jurisdiction over turnover actions under the 1898 [Act] remain ‘perfectly
appropriate to distinguish between a ‘core’ turnover proceeding and a ‘non-core’
[one],” In Re Prosser, 2013 WL 996367, at *4 (Bankr. D.V.I 2013) (quoting Beard
v. Braunstein, 914 F.2d 434, 444 (3d Cir. 1990)),13 and under those “principles,”
the entry of the Turnover Order must be deemed a core proceeding because KWF’s
claim to the Turnover Assets was and is entirely baseless.
Article III, Section 1 of the Constitution provides that “[t]he judicial power
of the United States, shall be vested in one Supreme Court, and in such inferior
Courts as the Congress may from time to time ordain and establish.” U.S. Const.
art. III, § 1. Congress has created more than 100 Article III courts, including 94
District Courts and 13 Courts of Appeals. See Sharif, 135 S.Ct. at 1938. Judges on
While Congress eliminated the summary/plenary line in the Bankruptcy Reform
Act of 1978, see In re Aurora Cord and Cable Co. Inc., 2 B.R. 342, 344 (Bankr.
N.D. Ill. 1980), the Bankruptcy Amendments and Federal Judgeship Act of 1984
made that distinction relevant again by using the term “core” to track the historical
jurisdiction of bankruptcy courts to enter final orders. See Arkison, 134 S.Ct. at
2171 n. 7.
these Article III courts have “life tenure and pay that cannot be diminished.” Id.
“[T]hese protections help to ensure the integrity and independence of the
Judiciary,” and for that reason the Supreme Court has long held “‘that, in general,
Congress may not withdraw from’ the Article III courts ‘any matter which, from its
nature, is the subject of a suit at the common law, or in equity, or in admiralty.’”
Id. (quoting Stern, 564 U.S. at 484.)
Congress has also created bankruptcy courts “to assist Article III courts in
their work.” Id. Judges on bankruptcy courts perform work that is essential to the
effective functioning of the federal judicial system, but they “do not enjoy the
protections of Article III.” Id. Congress’ efforts to assign powers to bankruptcy
courts in a manner consistent with Article III “have not always been successful.”
Id. at 1939. Indeed, the Supreme Court has twice “held that Congress violated
Article III by authorizing bankruptcy judges to decide certain claims for which
litigants are constitutionally entitled to an Article III adjudication.” Id.
The Supreme Court’s precedents in this area distinguish between claims
involving “private rights” and those involving “public rights.” See Waldman v.
Stone, 698 F.3d 910, 918 (6th Cir. 2012). “Private rights” have been “historically
described as ‘the liability of one individual to another under the law as defined,’”
and the adjudication of these rights “is part of the judicial Power reserved to
Article III courts under the Constitution.” Id. (quoting Stern, 564 U.S. at 489). The
Supreme Court has not offered a single, all-encompassing definition of “public
rights,” but it has “limit[ed]” such rights to claims that “derive from a federal
regulatory scheme, or in which resolution of the claim by an expert government
agency is deemed essential to a limited regulatory objective within the agency’s
authority.” Stern, 564 U.S. at 490. “[W]hat makes a right ‘public’ rather than
private is that the right is integrally related to particular federal government
action.” Id. Claims involving the adjudication of public rights “may be removed
from the jurisdiction of Article III courts” and assigned to bankruptcy courts.
Arkison, 134 S.Ct. at 2171; Waldman, 698 F.3d at 918.
The Supreme Court has not definitively ruled on whether the “public rights”
exception to Article III applies when a bankruptcy court performs a function that
lies at the very heart of historical bankruptcy jurisdiction. But the Court has
“initimat[ed]” that the exception does apply in these circumstances. Waldman, 698
F.3d at 920. For instance, in Northern Pipeline Const. Co. v. Marathon Pipe Line
Co., 458 U.S. 50 (1982), a plurality of the Supreme Court suggested that matters
invoking “‘the core of the federal bankruptcy power’ … ‘may well be’ a matter of
public right.” Id. (quoting Northern Pipeline, 458 U.S. at 71-72.) Likewise, in
Arkison, the Supreme Court continued to recognize the constitutional significance
of the distinction between the adjudication of matters at the “core” of the
bankruptcy power and the adjudication of “state-created private rights.” Arkison,
134 S.Ct. at 2171 (quoting Northern Pipeline, 458 U.S. at 71-72.)
And there is strong reason to believe that a bankruptcy court may adjudicate
a claim lying at the heart of historical bankruptcy jurisdiction even if the claim
does not fit neatly into the “public rights” rubric. As Chief Justice Roberts has
explained, the Supreme Court’s “precedents” have “recognized” a historicallybased “exception to the requirements of Article III for certain bankruptcy
When the Framers gathers to draft the Constitution,
English statutes had long empowered nonjudicial
bankruptcy ‘commissioners’ to collect a debtor’s
property, resolve claims by creditors, order the
distribution of assets in the estate, and ultimately
discharge the debts. This historical practice, combined
with Congress’s constitutional authority to enact
bankruptcy laws, confirms that Congress may assign to
non-Article courts adjudications involving ‘the
restructuring of debtor-creditor relations, which is at the
core of the federal bankruptcy power.’
Sharif, 135 S.Ct. at 1951 (Roberts, C.J. dissenting) (internal citation omitted)
(quoting Northern Pipeline, 458 U.S. at 71). This exception exists separate and
apart from the public rights exception. See id. (distinguishing between the two
Professor Brubaker’s influential scholarship echoes the Chief Justice’s view
that the Supreme Court’s most recent Article III precedents permit a bankruptcy
court to adjudicate a claim within the core of historical bankruptcy jurisdiction.
Professor Brubaker explains that the Supreme Court “has simply confirmed the
constitutional significance of the longstanding, fundamental, historical distinction
between ‘summary’ matters of estate and case administration, appropriate for final
adjudication by a non-Article III arbiter …[and] ‘plenary’ suits by the bankruptcy
estate’s representative to recover money or property from an ‘adverse claimant,’ in
which individual litigants have a constitutional right to final judgment from an
Article III judge.” Brubaker, 36 Bankr. L. Letter at 1, 1-2.14
All of this convinces this Court that Article III “poses no barrier” to a
bankruptcy court’s “resolution” of a “claim” that fits comfortably within the
historically-recognized heart of bankruptcy jurisdiction. Sharif, 135 S.Ct. at 1952
(Roberts, C.J., dissenting).
A bankruptcy court may adjudicate such a claim
because it falls within either the public rights exception to Article III or the
independent exception to Article III for proceedings within the heart of
longstanding bankruptcy jurisdiction.
The Chief Justice’s Opinion in Sharif confirms that the Bankruptcy Court
did not violate Article III by entering the Turnover Order because the entry of that
order was fully consistent with the historical exercise of core bankruptcy
This article is attached as “Exhibit F” to Professor Brubaker’s amicus brief in
this action. (See ECF #34 at 97-112, Pg. ID 3278-93.)
jurisdiction. The facts of Sharif are much like those here, and the Chief Justice’s
analysis of the Article III issue presented there fits this case like a glove.
In Sharif, a creditor alleged that the debtor “had concealed about $5 million
of assets by claiming that they were owned by a trust” for which he served as the
trustee. Id. at 1952. The creditor sought a declaratory judgment “that the trust was
in fact [the debtor’s] alter ego and that its assets should accordingly be part of his
bankruptcy estate.” Id. The bankruptcy court entered “a final judgment (based on
default) to [the creditor], declaring that the trust assets were part of the [debtor’s]
estate because he had treated them as his own property.” Id. On appeal, the
creditor argued that Article III prevented the bankruptcy court from entering the
judgment. The Chief Justice disagreed.
The Chief Justice carefully reviewed the historical bankruptcy practice
described in detail in parts III(A)-(C) above and concluded that identifying
property of a debtor’s estate is and always has been “peculiarly a bankruptcy
power.” Id. at 1952. He added that a bankruptcy court’s power to gather assets in
the debtor’s actual or constructive possession “stem[med] not from any
independent source of law but from the bankruptcy itself.” Id. (citing Stern, 564
U.S. at 499-500). And the Chief Justice stressed that under the 1898 Act the
Supreme Court repeatedly allowed bankruptcy courts, in the exercise of their
summary jurisdiction, to bring property in the debtor’s possession into the estate,
“at least where [as in this case] no third party asserted a ‘substantial adverse’
claim.” Id. at 1953.
The Chief Justice also drew heavily upon Sampsell, supra, highlighting that
“[j]ust as the bankruptcy referee in that case had authority to decide whether assets
allegedly concealed behind the corporate veil belonged to the bankruptcy estate,
the Bankruptcy Court here had authority to decide whether the assets concealed in
the trust belonged to Sharif’s estate.” Id.
To underscore this point, the Chief Justice contrasted the bankruptcy court’s
gathering of assets from a debtor’s alter ego with a bankruptcy court’s adjudication
of a fraudulent conveyance claim:
Sharif contends that Wellness's alter ego claim is more
like an allegation of a fraudulent conveyance, which this
Court has implied must be adjudicated by an Article III
court. See Granfinanciera, S.A. v. Nordberg, 492 U.S. 33,
56, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989); Arkison, 573
U.S., at –––– – ––––, 134 S.Ct., at 2172–2173. Although
both actions aim to remedy a debtor's deception, they
differ in a critical respect. A fraudulent conveyance claim
seeks assets in the hands of a third party, while an alter
ego claim targets only the debtor's “second self.”
Webster's New International Dictionary 76 (2d ed. 1954).
That distinction is significant given bankruptcy's historic
domain over property within the actual or constructive
“possession [of] the bankrupt at the time of the filing of
the petition.” Thompson v. Magnolia Petroleum Co., 309
U.S. 478, 481, 60 S.Ct. 628, 84 L.Ed. 876 (1940).
Through a fraudulent conveyance, a dishonest debtor
relinquishes possession of assets before filing for
bankruptcy. Reclaiming those assets for the estate
requires depriving third parties of property within their
otherwise lawful possession and control, an action that
“quintessentially” required a suit at common law.
Granfinanciera, 492 U.S., at 56, 109 S.Ct. 2782. By
contrast, a debtor's possession of property provided “an
adequate basis” for a bankruptcy referee to adjudicate a
dispute over title in a summary proceeding. Thompson,
309 U.S., at 482, 60 S.Ct. 628; see Mueller, 184 U.S., at
15–16, 22 S.Ct. 269 (distinguishing claim to property in
possession of debtor's agent from fraudulent conveyance
claim in determining that bankruptcy referee could
exercise summary jurisdiction).
In sum, unlike the fraudulent conveyance claim in
Granfinanciera, Wellness's alter ego claim alleges that
assets within Sharif's actual or constructive possession
belong to his estate. And unlike the breach of contract
and tort claims at issue in Northern Pipeline and Stern,
Wellness's claim stems not from any independent source
of law but “from the bankruptcy itself.” Stern, 564 U.S.,
at ––––, 131 S.Ct., at 2618. Provided that no third party
asserted a substantial adverse claim to the trust assets,
Wellness's claim therefore falls within the narrow
historical exception that permits a non-Article III
adjudicator in certain bankruptcy proceedings.
Id. at 1953-54.
The Chief Justice’s analysis applies with full force here. As in Sharif, the
Bankruptcy Court here exercised its longstanding historical authority – which,
again, exists independent of state law – to identify property in the debtor’s
(Reed’s) constructive possession and to bring that property into the Estate. The
Bankruptcy Court properly exercised this power because neither KWF nor any
other party asserted a “substantial adverse” claim to the Turnover Assets. Like the
Chief Justice, this Court “do[es] not read the [Supreme] Court’s precedents to
require the bankruptcy courts to abandon this power, which they have exercised for
[at least one] centur[y].” Waldman, 698 F.3d at 920-21. Article III did not prevent
the Bankruptcy Court from entering the Final Turnover Order.
Even if the Bankruptcy Court lacked statutory and constitutional authority to
enter the Final Turnover Order, the Court would still not grant KWF relief on
appeal. Instead, the Court would exercise its authority to treat the Final Turnover
Order as “proposed findings of fact and conclusions of law” with respect to the
issues raised in the Turnover Motion. See 28 U.S.C. § 157(c)(1) (allowing
“bankruptcy judge [t]o hear a proceeding that is not a core proceeding” and to
“submit proposed findings of fact and conclusions to law to district court”); see
also Arkison, 134 S.Ct. 2175 (holding that “even if … Bankruptcy Court’s entry of
judgment was invalid” and was not designated as proposed findings of fact and
conclusions of law, “the District Court’s de novo review and entry of its own valid
final judgment cured any error”).
Here, the Court has conducted such a de novo review of the Final Turnover
Order and the parties’ respective arguments with respect to the Turnover Assets. It
concludes that, for all of the reasons persuasively explained by the Bankruptcy
Court in the Final Turnover Order, (1) the record evidence conclusively establishes
that KWF has no viable claim to ownership of the Turnover Assets, (2) the assets
belong to the Estate, and (3) the assets must be turned over to the Trustee.
Accordingly, in the alternative to its conclusion that the Bankruptcy Court had
jurisdiction to enter the Final Turnover Order, the Court treats the Final Turnover
Order as proposed findings of fact and conclusions of law and adopts the same as
the final judgment of this Court in favor of the Trustee.
KWF argues that the Bankruptcy Court made an additional and independent
error when it adjudicated the dispute over title to the Turnover Assets in the
context of a contested motion under Section 542(a) rather than in an adversary
proceeding. KWF has failed to persuade the Court that the Bankruptcy Court erred
in this regard. And even if the court did so err, the error was harmless.
“Disputes litigated in the bankruptcy court are divided into adversary
proceedings and contested matters.” In re Indian Palms Associates, Ltd., 61 F.3d
197, 204 n.11 (5th Cir. 1995). Contested matters are “generally initiated by motion
and do not require a responsive pleading (unless the bankruptcy court directs that
an answer be served).” Id.
On the other hand, adversary proceedings “are
governed by more formal rules of procedure than contested matters and must be
instituted by the filing of a complaint. Pursuant to Chapter VII of the Bankruptcy
Rules, many of the Federal Rules of Civil Procedure are applicable and these
proceedings are thus conducted much like ordinary civil litigation.” Id.
“Bankruptcy Rule 7001 identifies matters that constitute adversary
proceedings governed by the rules of Part VII of the Bankruptcy Rules.” In re MF
Global Inc., 531 B.R. 424, 431 (Bankr. S.D.N.Y. 2015).
That rule’s list of
adversary proceedings includes “a proceeding to recover money or property, other
than a proceeding to compel the debtor to deliver property to the trustee, or a
proceeding under § 554(b) or § 725 of the Code.” Fed. R. Bankr. P. 7001(1)
(emphasis added). Under this rule, then, an action to recover money or property
from a third party must be brought as an adversary proceeding; an action to recover
money or property from the debtor may be brought as a contested matter.
KWF argues that Rule 7001 required the Bankruptcy Court to adjudicate the
dispute over title to the Turnover Assets in an adversary proceeding because the
Trustee sought to recover property not from the debtor (Reed), but, instead, from a
third party (KWF). In support of this argument, KWF cites several cases in which
courts have held that a request for the turnover of property must be litigated by
adversary proceeding (and not in a contested motion) where there is a dispute over
ownership of the property between the debtor and a third party. See, e.g., In re Ace
Industries, 65 B.R. 199 (Bankr. W.D. Mich. 1986) (requiring debtor to file
adversary proceeding where ownership of property was in dispute); In re Riding,
44 B.R. 846 (Bankr. D. Utah 1984) (same).
But there is a real question as to whether Rule 7001 or the cases cited by
KWF apply here. As explained in detail above, the evidence overwhelmingly
establishes that Reed had so commingled his own affairs with KWF that there was
no distinction between the two. Thus, even though the Turnover Motion was
nominally directed at KWF, it could reasonably be seen as “a proceeding to
compel the debtor to deliver property to the trustee,” which need not take the form
of an adversary proceeding. Fed. R. Bankr. P. 7001(1) (emphasis added).
Likewise, the cases cited by Reed are distinguishable because they involved
legitimate or bona fide disputes over title, and, as described above, there was no
such dispute here.
Finally, KWF argues that it was entitled to an adversary proceeding because
the Trustee was seeking to recover under a fraudulent conveyance theory. (See
KWF Br. on Appeal at 12-13, ECF #5 at 19-20, Pg. ID 2855-56, citing advisory
committee notes to Bankruptcy Code.)
But the Trustee did not advance a
fraudulent conveyance theory in the Turnover Motion. While the Trustee did
assert a fraudulent conveyance claim in the related Adversary Proceeding, the
Turnover Motion did not include a fraudulent conveyance theory.
Bankruptcy Court explained, in the Turnover Motion, “the Trustee [did not seek]
recovery from KWF as the recipient of a fraudulent transfer. Instead, the Trustee
argu[ed] that Reed’s failure to segregate his personal affairs from those of KWF
[was] grounds for treating property held by KWF as property of Reed’s bankruptcy
estate.” (Final Turnover Order, Bankruptcy Proceeding Dkt. #344 at 30-31.) Thus,
because the Trustee did not proceed on a fraudulent conveyance theory in the
Turnover Motion, KWF was not entitled to have the claims raised in that motion
adjudicated in an adversary proceeding.
For all of these reasons, KWF has not persuaded the Court that the
Bankruptcy Court erred when it adjudicated the Turnover Motion in the underlying
Bankruptcy Proceeding instead of in the related Adversary Proceeding.
Even if the Bankruptcy Court erred when it adjudicated the dispute over title
to the Turnover Assets by way of a contested motion rather than in an adversary
proceeding, KWF still would not be entitled to relief. It is well-established that the
erroneous failure to conduct an adversary proceeding is subject to harmless error
review, and any error here was harmless.
The Sixth Circuit’s decision in In re Cannonsburg Environmental
Associates, Ltd., 72 F.3d 1260 (6th Cir. 1996), is instructive. In Cannonsburg, the
Sixth Circuit held that even though the “Federal Rules of Bankruptcy Procedure
clearly mandate[d]” that “an adversary proceeding should have been filed,” the
error was not a basis for relief because it was “harmless.” Id. at 1264. The Sixth
Circuit declined to grant relief because the appellant could not “demonstrate that it
ha[d] been prejudiced by the [t]rustee’s failure to file an adversary proceeding.” Id.
See also In re Service Merchandise Co., Inc., 256 B.R. 755, 766 (Bankr. M.D.
Tenn. 2000) (“[U]nless the party is able to demonstrate prejudice by the failure to
file an adversary proceeding, a court will find the error constitutes harmless
Here, KWF has failed to demonstrate that it suffered any meaningful
prejudice from the Bankruptcy Court’s decision to proceed by motion rather than
in an adversary proceeding. The Bankruptcy Court provided KWF with many
procedural protections like those that KWF would have enjoyed if the court had
conducted an adversary proceeding:
The Bankruptcy Court allowed KWF three weeks to respond to the Turnover
Motion, which included an additional week to respond that KWF requested
by stipulation. (See Bankruptcy Proceeding Dkt. #157.)
The Bankruptcy Court held a hearing on the Turnover Motion on July 21,
2016, at which it heard legal argument from KWF. (See Bankruptcy
Proceeding Dkt. #210.)
After the July 21st hearing, the Bankruptcy Court concluded that it needed
additional briefing and hearing on the issues related to whether assets that
supposedly belonged to KWF were, “in fact, assets of [Reed’s] bankruptcy
estate.” (Final Turnover Order, Dkt. #344 at 1.) It then provided KWF
nearly three months to prepare for an evidentiary hearing on that issue.
The Bankruptcy Court held a substantial evidentiary hearing over three days
during which KWF was free to (and did) present evidence and examine
Finally, the Bankruptcy Court allowed KWF to file a supplemental brief
following the conclusion of the evidentiary hearing. (See Bankruptcy
Proceeding Dkt. #320.)
Given all of these procedural protections that the Bankruptcy Court provided
KWF in this case, KWF did not suffer any prejudice as a result of the Bankruptcy
Court’s decision to proceed by way of contested motion in the Bankruptcy
KWF’s primary claim of prejudice is that the Bankruptcy Court’s decision to
proceed by motion rather than in an adversary proceeding purportedly allowed
both that court and the Trustee to change the theory of the case during the course
of the litigation. More specifically, KWF complains that while the Turnover
Motion was premised upon the theory that the Turnover Assets belonged to the
Estate, the Bankruptcy Court and the Trustee improperly and without appropriate
notice injected a fraudulent conveyance theory of recovery into the proceedings,
thereby “shift[ing] the grounds for [the Bankruptcy Court’s] inquiry.” (KWF Supp.
Br. at 8, ECF #25 at 13, Pg. ID 3136.) KWF insists that this theory-change-on-thefly (so to speak) could not have occurred in an adversary proceeding because the
disputed issues in such a proceeding are formally framed by pleadings that must
comply with, and may only be amended in accordance with, the Federal Rules of
KWF is correct that during adjudication of the Turnover Motion, the
Bankruptcy Court did introduce the possibility that it would inquire into whether
the Turnover Assets had been fraudulently transferred to KWF. (See Bankruptcy
Court July 22, 2015, Order, Bankruptcy Proceeding Dkt. #186 at 3.) But the
Bankruptcy Court later decided that the proceedings would not involve any claim
of fraudulent conveyance.
As the Bankruptcy Court explained in the Final
Turnover Order, the evidentiary hearing focused on whether the Turnover Assets
belong to the Estate, not on whether those assets had been fraudulently transferred
to KWF. (See Final Turnover Order, Bankruptcy Proceeding Dkt. #344 at 26-32.)
More importantly, the Final Turnover Order did not grant relief to the Trustee on a
fraudulent conveyance theory. Instead, the Bankruptcy Court ordered KWF to
surrender the Turnover Assets based upon “Reed’s failure to segregate his personal
affairs from those of KWF.” (Id. at 30-31.) Thus, even though the Bankruptcy
Court temporarily considered a fraudulent conveyance theory during the contested
motion proceedings, that consideration did not end up causing KWF any real harm.
Accordingly, KWF has failed to show that it suffered meaningful prejudice when
the Bankruptcy Court adjudicated the dispute over the Turnover Assets in the
context of a contested motion rather than through an adversary proceeding.
Finally, KWF argues that the Bankruptcy Court’s entry of the Final
Turnover Order violated its (KWF’s) Seventh Amendment right to a jury trial. The
As Professor Brubaker has explained, the Supreme Court “fully equat[es]
bankruptcy litigants’ Seventh Amendment right to a jury trial in federal bankruptcy
proceedings with their right to a final judgment from an Article III judge.”
Brubaker, Am. Bankr. L.J. at 150-51. Professor Brubaker rests this conclusion
primarily upon the Supreme Court’s decisions in Granfinanciera, S.A. v. Nordberg,
492 U.S. 33 (1989) and Stern, supra. See Brubaker, Am. Bankr. L.J. at 150-51. In
Granfinanciera, the Supreme Court explained that “if Congress may assign the
adjudication of a statutory cause of action to a non-Article III tribunal, then the
Seventh Amendment poses no independent bar to the adjudication of that action by
a nonjury factfinder.” Granfinanciera, 492 U.S. at 52-54.
And in Stern, the
Supreme Court “relied directly (and without qualification) upon Seventh
Amendment jury trial decisions (in Granfinanciera, Katchen [supra], and
Langenkamp v. Culp [498 U.S. 42 (1990)]) as if they were binding precedent for
purposes of the Article III decision … systematically describing, paraphrasing, or
recasting language, analysis, conclusions, and holdings from those decisions in
Article III terms.” Brubaker, 86 Am. Bankr. L.J. at 151. From Granfinanciera and
Stern, Professor Brubaker concludes that a bankruptcy litigant who has no “right to
a final judgment from an Article III judge” has no Seventh Amendment right to a
jury trial. Id. This Court agrees.
KWF insists that it did have a right to a jury trial because (1) Granfinanciera
held that a defendant has a Seventh Amendment right to a jury trial on a fraudulent
conveyance claim and (2) the Trustee here sought recovery of the assets on a
fraudulent conveyance theory. But as noted above, the Turnover Motion did not
include, and the Final Turnover Order did not rest upon, a fraudulent conveyance
theory. Moreover, as Chief Justice Roberts explained in the passage from Sharif
quoted above, (1) there are important differences between an action by a trustee
seeking assets on a comingling theory and one seeking assets on a fraudulent
conveyance theory and (2) given those differences, a comingling claim is not
subject to the same constitutional constraints as a fraudulent conveyance claim. See
Sharif, 135 S.Ct. at 1953-54 (Roberts, C.J., dissenting).
In sum, because KWF had no right to a final judgment from an Article III
judge, it likewise had no right to a jury trial.
In the alternative, KWF is not entitled to relief because there is no Seventh
Amendment right to a jury trial in turnover proceedings under Section 542(a)
where, as here, there is no legitimate dispute over title.15
The decision of the United States Court of Appeals for the First Circuit in
Braunstein v. McCabe, 571 F.3d 108 (1st Cir. 2009), is particularly instructive in
this regard. In Braunstein, the First Circuit carefully surveyed the history and
nature of turnover proceedings and the turnover remedy and concluded that they do
not fall within the Seventh Amendment jury trial guarantee. The First Circuit
explained that a turnover action “invokes the court's most basic equitable powers to
gather and manage property of the estate” and therefore does not require a jury
trial. Id. at 122. Moreover, the Braunstein court correctly concluded that the
“enactment of [Section 542(a)] “did not alter the essentially equitable nature of
those powers to collect the assets of the estate.” Id. at 121. And because that
power is equitable, it does not require a trial by jury. See id. This Court concurs
with the First Circuit and believes that the reasoning set forth in Braunstein
underscores that the Seventh Amendment right to trial by jury does not attach to a
turnover proceeding, like the one in this appeal, in which there is no bona fide
dispute as to ownership of the assets in question.
This conclusion is a separate and wholly independent basis for denying KWF
relief from the Court’s holding in section VIII(A) above.
For the reasons stated above, IT IS HEREBY ORDERED that the Final
Turnover Order is AFFIRMED. In the alternative, the Court treats the Final
Turnover Order as Proposed Findings of Fact and Conclusions of Law, ADOPTS
the Final Turnover Order as its own Findings of Fact and Conclusions of Law, and
GRANTS the Turnover Motion.
IT IS SO ORDERED.
s/Matthew F. Leitman
MATTHEW F. LEITMAN
UNITED STATES DISTRICT JUDGE
Dated: October 11, 2016
I hereby certify that a copy of the foregoing document was served upon the
parties and/or counsel of record on October 11, 2016, by electronic means and/or
s/Holly A. Monda
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