Darnell
Filing
18
OPINION AND ORDER REMANDING matter to Bankruptcy Court for further proceedings and denying Debtor's Motion to Strike 9 . Signed by District Judge Shalina D. Kumar. (TTho)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
IN RE:
DONALD C. DARNELL
Case No. 23-11331
Honorable Shalina D. Kumar
OPINION AND ORDER REMANDING MATTER TO BANKRUPTCY
COURT FOR FURTHER PROCEEDINGS AND DENYING DEBTOR’S
MOTION TO STRIKE (ECF NO. 9)
I.
Introduction
Appellant/Debtor Donald C. Darnell (“Darnell”) appeals from the U.S.
Bankruptcy Court for the Eastern District of Michigan’s order granting the
Chapter 7 Trustee’s objections to Darnell’s claim of exemptions. ECF Nos.
1, 5; see ECF No. 3, PageID.515. Appellee Mark H. Shapiro, Chapter 7
Trustee (“Trustee”) and appellee creditor, the United States of America
(“IRS”) filed briefs, and Darnell filed a reply brief. ECF Nos. 6,7,8.
Based on the briefs and the record, the Court finds the matter
sufficient for determination without a hearing. See E.D. Mich. LR 7.1(f);
Fed. R. Bankr. P. 8012. For the reasons below, the Court remands this
matter to the bankruptcy court for further proceedings to make the factual
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determination of whether the property at issue, the membership interest in
8080 Grand, LLC, is entireties property.
II.
Factual and Procedural Background
Darnell originally filed a voluntary petition under Chapter 11 of the
Bankruptcy Code. ECF No. 5, PageID.533. Unable to confirm a plan under
Chapter 11, Darnell voluntarily stipulated to convert the case to one under
Chapter 7. Id. Darnell claimed an exemption for membership interests in
8080 Grand, LLC (“8080 Grand”), which he asserted were held with his
wife as tenants by the entireties, from the bankruptcy estate under 11
U.S.C. § 522(b)(3)(B), M.C.L. 600.6023a, M.C.L. 450.4504(1), M.C.L.
450.4507, and Michigan common law. Id.
According to Darnell’s statement of the case, the Trustee enumerated
six objections to Darnell’s claimed exemption for membership interests in
8080 Grand: (1) membership interest was not actually entireties property 1;
(2) 11 U.S.C. § 522(b)(3)(B) does not provide an independent basis for
exemption from the bankruptcy estate; (3) M.C.L. 600.6023a only exempts
entireties property that is real property or property expressly listed in M.C.L.
557.151, which LLC membership interests are not; (4) M.C.L. 450.4504(1)
Trustee abandoned this objection but, as discussed further in this
Opinion, now seeks to revive it.
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1
does not protect property from judgment creditors in bankruptcy; (5) M.C.L.
450.4507 does not exempt membership interests from process; and (6)
Michigan common law, namely Sanford v. Bertram, 169 N.W. 880 (1918),
which holds that entireties property is protected from all but joint creditors,
only applies to real property. Id. at PageID.534-36.
The Trustee agrees that Darnell’s statement of the case is accurate
but notes three omissions: (1) prior to the conversion of the case from a
Chapter 11 proceeding to a Chapter 7 proceeding, several creditors
objected to similar exemptions claimed by Darnell, and the bankruptcy
court upheld those objections and denied Darnell’s claimed exemption of
the membership interest in 8080 Grand, see In Re Darnell, No. 22-41803
(Bankr. E.D. Mich.) (ECF No. 142); (2) Darnell ignores the IRS-specific
argument that IRS claims supersede a debtor’s claims of exemption; and
(3) subsequent to the filing of this appeal, in connection with the Trustee’s
attempt to administer Darnell’s interest in 8080 Grand, subpoenaed
documents from Paul Grusche (“Grusche”), the other member of 8080
Grand, included an undated but fully executed version of the 8080 Grand
operating agreement naming only Darnell, and not his wife, as the 50%
member of 8080 Grand. ECF No. 6, PageID.823-24. At the later deposition
of Grusche, he testified that he and Darnell were the only members of 8080
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Grand and that the membership had not changed since its inception. Id. at
842.
The Trustee and the IRS believe the factual determination of whether
the membership interest in 8080 Grand is or is not entireties property
should precede this Court’s review of the bankruptcy court’s legal
determination that the 8080 Grand membership interest is not exempt as
entireties property. The Court agrees and remands the matter to the
bankruptcy court for that factual determination.
III.
Analysis
After Grusche produced and testified about the operating agreement
revealing only Grusche and Darnell as members of 8080 Grand, the
Trustee moved for relief pursuant to Federal Rule of Bankruptcy Procedure
9024 and Federal Rule of Civil Procedure 60(b). ECF No. 400. The Trustee
specifically requested an evidentiary hearing to elicit testimony from
Darnell’s wife as to her direct knowledge of any interest she may have in
8080 Grand and from Grusche regarding his deposition testimony about
the 8080 Grand membership interests and operating agreement.
The bankruptcy court expressed concern that it lacked jurisdiction to
entertain this motion because of the pending appeal before this Court. See
In Re Darnell, No. 22-41803 (Bankr. E.D. Mich.) (ECF No. 145). The
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Trustee directed the bankruptcy court’s attention to Federal Rule of
Bankruptcy Procedure 8008, which provides four options for a bankruptcy
court that has been asked to consider a motion after an appeal has been
filed. Id. In response to the bankruptcy court’s questions about Rule 8008,
the Trustee identified three of the Rule’s options: (1) defer a ruling on the
motion until after the appeal is resolved; (2) deny the motion; or (3) indicate
it would grant the motion if the case were remanded to it. Under these
circumstances, which the bankruptcy court described as “complicated,”
“confusing,” and “difficult overall,” it first indicated it would defer ruling on
the Trustee’s motion but then reconsidered and denied the motion without
prejudice, stating “we’ll wait to see what the district court decides and then
we’ll go from there.” Id.
Notably, both the Trustee and the bankruptcy court failed to address
a fourth option for a bankruptcy court lacking jurisdiction after the filing of
an appeal: the bankruptcy court may state that the motion raises a
substantial issue. Fed. R. Bankr. P. 8008(a)(3). If a bankruptcy court states
that a motion filed before it raises a substantial issue, the district court may
remand the case to the bankruptcy court for further proceedings while
retaining jurisdiction. Fed. R. Bankr. P. 8008(c).
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The bankruptcy court’s obvious struggle over how to address a
factual issue, which was raised after its legal ruling and would require an
evidentiary hearing to resolve, suggests that the Trustee’s motion indeed
raises a substantial issue. Because resolving that factual issue may moot
the legal issues before this Court on appeal, the Court finds that remanding
this matter to the bankruptcy court for a factual determination on whether
Darnell’s 8080 Grand membership interest is entireties property serves the
interest of judicial economy.2
IV.
Conclusion
For these reasons, the Court REMANDS this matter to the
bankruptcy court for further proceedings consistent with this opinion. The
Court shall retain jurisdiction pending the bankruptcy court’s decision on
the Trustee’s motion for relief. The parties must promptly notify the Court
when the bankruptcy court has decided the motion on remand.
Darnell moves to strike the portions of the Appellees’ briefs addressing
the need for further factual determination, arguing that the allegations
therein are false and immaterial, and should be stricken from the record
because they raise issues not raised in the lower court. ECF No. 9. As
discussed, this matter was raised before the bankruptcy court and this
Court has reviewed the audio recording of that hearing. The Court finds the
issue raised by the Trustee and the IRS to be material and whether it is
false is the crux of the factual determination the bankruptcy court must
make on remand. The Court finds no basis to strike any portion of the
Appellees’ briefs and thus DENIES Darnell’s motion to strike.
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2
IT IS SO ORDERED.
s/ Shalina D. Kumar
SHALINA D. KUMAR
United States District Judge
Dated: September 30, 2024
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