Desmond v. Keebler (In re Keebler)

658 B.R. 908

IN RE: Lee C. KEEBLER, Debtor.

Michael K. Desmond, not individually,but as Chapter 7 Trustee for the bankruptcy estate of Lee C. Keebler, Plaintiff, v. Lee C. Keebler and Pamela Keebler, Defendants.

Case No. 21bk03589

Adv. No. 22ap00001

United States Bankruptcy Court, N.D. Illinois, Eastern Division

Signed March 29, 2024

Attorneys for Plaintiff: Michael K. Desmond and Justin M. Herzog, Smith, Gambrell & Russell, LLP, Chicago, IL.

Attorney for Defendants: David P. Lloyd, David P. Lloyd, Ltd., La Grange, IL.

MEMORANDUM DECISION¹

TIMOTHY A. BARNES, Judge.

This matter comes on for consideration on the Trustee's Objection to Debtor's Exemption [Dkt. No. 15]² (the "Exemption Objection") brought by Michael K. Desmond (the "Trustee"), in his capacity as trustee for the bankruptcy estate of Lee C. Keebler (the "Debtor") in the underlying bankruptcy case, and the Complaint to Avoid and Recover Fraudulent Transfer and for Other Relief [Adv. Dkt. No. 1] (the "Complaint") filed by the Trustee in the above-captioned adversary proceeding (the "Adversary"). The matter also comes for consideration on the Trustee's Post-Trial Motion to Reopen Proof for Limited Purpose of Allowing Court to Take Judicial Notice [Adv. Dkt. No. 54] (the "Motion to Reopen"), filed by the Trustee in the Adversary after the conclusion of the trial on the Complaint and the Exemption Objection. The Exemption Objection, the Complaint and the Motion to Reopen are all opposed by the Debtor. The Debtor's spouse, Pamela Keebler ("Pamela" and together with the Debtor, the "Defendants"), also opposes the Complaint and the Motion to Reopen.

As described in more detail herein, the Complaint at bar seeks relief in five counts, the first four sounding in avoidance and recovery of the Debtor's prepetition transfer of his homestead from joint tenancy to tenancy by the entirety. In the fifth count, the Trustee seeks authority to sell that homestead under section 363(h) of title 11 of the United States Code, 11 U.S.C. §§ 101, et seq. (the "Bankruptcy Code").

For the reasons more fully set forth below, upon review of the parties' respective filings and after conducting a trial on July 10, 2023 (the "Trial"), to resolve the Exemption Objection and the Complaint, the court finds that the Trustee has carried his burden on the first of the four counts of the Complaint. As the transfer will be avoided, the Trustee's Exemption Objection is now well supported and will be sustained.

At the conclusion of the Trustee's case in chief at the Trial, however, the Defendants orally moved for a judgment on partial findings under Rule 52(c) of the Federal Rules of Civil Procedure (the "Civil Rules" and as to each, "Civil Rule ___"), made applicable to this matter by Bankruptcy Rule 7052, on all counts of the Complaint. After some consideration, that oral motion was denied with respect to the first four counts, but was granted with respect to the fifth count—the Trustee's request to sell Pamela's interest in the Defendants' home. At the Trustee's request, the court delayed entry of judgment in the matter for the Trustee to seek to rectify the deficiency. The Trustee's attempt to rectify the situation was the Motion to Reopen, which will be granted, in part. However, even with the additional evidence in the record, the Trustee's request to sell Pamela's interest in the Defendants' home still fails to satisfy the required elements of section 363(h).

As a result, judgment will be entered in favor of Trustee on the first four counts of the Complaint and the Exemption Objection will be sustained. Judgment will be entered in favor of the Defendants on the fifth count—the Trustee's request to sell Pamela's interest in the Defendants' home.

JURISDICTION

The federal district courts have "original and exclusive jurisdiction" of all cases under the Bankruptcy Code. 28 U.S.C. § 1334(a). The federal district courts also have "original but not exclusive jurisdiction" of all civil proceedings arising under the Bankruptcy Code or arising in or related to cases under the Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may refer these cases to the bankruptcy courts for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).

A bankruptcy court judge to whom a case has been referred has statutory authority to enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Bankruptcy court judges must therefore determine, on motion or sua sponte, whether a proceeding is a core proceeding or is otherwise related to a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(3). As to the former, the bankruptcy court judge may hear and determine such matters. 28 U.S.C. § 157(b)(1). As to the latter, the bankruptcy court judge may hear the matters, but may not decide them without the consent of the parties. 28 U.S.C. §§ 157(b)(1), (c). Absent consent, the bankruptcy court judge must "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 considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c)(1).

In addition to the foregoing considerations, a bankruptcy court judge must also have constitutional authority to hear and determine a matter. Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Constitutional authority exists when a matter originates under the Bankruptcy Code or, in noncore matters, where the matter is either one that falls within the public rights exception, id., or where the parties have consented, either expressly or impliedly, to the bankruptcy court judge hearing and determining the matter. See, e.g., Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665, 669, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015) (parties may consent to a bankruptcy court's jurisdiction); Richer v. Morehead, 798 F.3d 487, 490 (7th Cir. 2015) (noting that "implied consent is good enough").

There are three matters that are before the court for determination—the Exemption Objection, the Complaint and the Motion to Reopen. The court must find that it has jurisdiction and authority to determine all of the matters independently.

An objection to a debtor's claim of exemption in a bankruptcy case is listed as a core matter. 28 U.S.C. § 157(b)(2)(B). "The court also has constitutional authority to determine the exemption because, even though the exemption may derive from state law, '[t]he right to exempt property from the bankruptcy estate is established by an express provision of the Bankruptcy Code (section 522) and is central to the public bankruptcy scheme.' " In re West, 507 B.R. 252, 254-55 (Bankr. N.D. Ill. 2014) (Barnes, J.) (quoting In re Carlew, 469 B.R. 666, 673 (Bankr. S.D. Tex. 2012) aff'd sub nom. W. v. Carlew, Case No. CIV.A. H-12-0913, 2012 WL 3002197 (S.D. Tex. July 23, 2012)).

Avoidance and recovery of a fraudulent transfer are available under alternate theories under 735 ILCS 5/12-112 (made applicable by section 544 of the Bankruptcy Code) or sections 548(a)(1)(A) or (a)(1)(B) of the Bankruptcy Code and are a core matter under 28 U.S.C. § 157(b)(2)(F) in which this court has constitutional authority to enter final orders. KHI Liquidation Trust v. Wisenbaker Builder Services, Inc. (In re Kimball Hill, Inc.), 480 B.R. 894, 906-08 (Bankr. N.D. Ill. 2012) (Barnes, J.) (analyzing history of fraudulent transfer claims and finding that they "have bankruptcy law as their source").

Under section 363(h), a trustee may sell a co-debtor's interest in real property in which the estate also holds an interest. As such an action is a core proceeding, 28 U.S.C. §§ 157(b)(2)(N) and (O), and stems from the Bankruptcy Code, a bankruptcy court judge has authority to enter final orders. Doyaga v. Markisich (In re Markisich), 655 B.R. 670, 674 (Bankr. E.D.N.Y. 2023).

A motion to reopen the evidentiary record after the close of trial to allow the court to take judicial notice under Fed. R. Evid. 201(c), made applicable to the Adversary by Fed. R. Bankr. P. 9017, relates to the substantive claims upon which the trial was held (which, per the above, the court has jurisdiction, statutory authority and constitutional authority to hear and determine), is a matter of administration and is a core proceeding. 28 U.S.C. § 157(b)(2)(A). Further, a bankruptcy court judge has inherent authority of the management of trials of which they have constitutional authority to hear and determine. Rybolt v. Carrington Mortgage Services, LLC (In re Rybolt), 550 B.R. 422, 424 (Bankr. N.D. Ind. 2016) (citing Luce v. U.S., 469 U.S. 38, 41 n.4, 105 S.Ct. 460, 83 L.Ed.2d 443 (1984)).

More importantly, no party has contested the jurisdiction or authority of this court in entering final orders in these matters. Accordingly, the court has the jurisdiction, statutory authority and constitutional authority to hear and determine the Exemption Objection, the Complaint and the Motion to Reopen.

BACKGROUND

In many ways, this case is a relatively straightforward one. The Trustee brought an avoidance and recovery action and an objection to exemptions predicated on the success of that action. After a one-day trial, the Trustee prevailed—but not entirely. In other ways, this is a cautionary tale about communicating with the court a party's intentions and how not to proceed to trial with unvoiced presumptions forming the basis of the approach.

The matter before the court centers around the Debtor's homestead, namely 7800 McVicker Avenue, Burbank, IL 60459 (the "Property"). On March 19, 2021 (the "Petition Date"), when the...