In Re: Jeffrey J. Prosser

IN RE: JEFFREY J. PROSSER, Debtor IN RE: INNOVATIVE COMMUNICATION CORPORATION, Debtor STAN SPRINGEL, CHAPTER 11 TRUSTEE OF THE ESTATE OF INNOVATIVE COMMUNICATION CORPORATION, AND JAMES P CARROLL, AS CHAPTER 7 TRUSTEE OF THE ESTATE OF JEFFREY J. PROSSER, Plaintiffs v. JEFFREY J. PROSSER, DAWN PROSSER, JUSTIN PROSSER, MICHAEL PROSSER SYBIL G. PROSSER, MICHELLE LABENNETT, AND LYNDON A. PROSSER, Defendants

Bankruptcy No. 06-30009

Bankruptcy No. 07-30012

Adv. No. 07-3010

Doc. No. 71

Doc. No.79

Doc. No. 704

DISTRICT COURT OF THE VIRGIN ISLANDS

BANKRUPTCY DIVISION

DIVISION OF ST. THOMAS AND ST. JOHN

Dated: February 9, 2011

MEMORANDUM OPINION¹

Before the court are two matters: resolution of the issues tried regarding turnover and resolution, to the extent applicable to the turnover complaint, of a motion to stay proceedings. The First Amended Verified Complaint to Compel Turnover of Property of the Estates and Impose a Constructive Trust and Application For Injunctive Relief, Including Temporary Restraining Order and Preliminary and Permanent Injunctions² ("Amended Complaint"), Adv. Doc. No. 71, was filed by Stan Springel, the Chapter 11 Trustee of the bankruptcy estate of Innovative Communication Corporation (hereinafter "New ICC") and James P. Carroll, the Chapter 7 Trustee of the bankruptcy estate of Jeffrey Prosser.³ The Trustees seek turnover of certain property currently in the possession, custody and/or control of Jeffrey Prosser, Dawn Prosser (Jeffrey Prosser's wife), Michael Prosser⁴ (Jeffrey Prosser's brother), and the "Adult Prosser Children": Sybil Prosser, Michelle LaBennett, Lyndon Adrian Prosser ("Adrian Prosser"), and Justin Prosser (collectively, "Defendants"). Trial in this Adversary Proceeding (hereinafter the "Turnover Trial") was held on November 17-20, 2008, December 8-10, 2008, February 9, 2009, ⁵ March 10, 2009, and March 23-26, 2009, with closing arguments held on July 23, 2009.

This adversary proceeding was consolidated for the purposes of discovery and trial with the Chapter 11 Trustee's fraudulent conveyance adversary action (Adv. No. 08-3004) against the Adult Prosser Children. See Adv. No. 07-3010, Adv. Doc. No. 390.⁶ This Memorandum Opinion does not in any way constitute a finding of whether the Trustees may successfully avoid transfers and recover property through the fraudulent conveyance action pending against the Adult Prosser Children in this court (Adv. No. 08-3004) or in the District Court actions against Dawn Prosser (Case Nos. 3:08-cv-00146 and 3:08-cv-00147). That is, we decide only the turnover action pursuant to §542. While much of the same property is at issue in these various adversary proceedings, in which the respective estates assert different theories for recovery, this court willaddress the Chapter 11 Trustee's fraudulent conveyance complaint against the Adult Prosser Children in a separate memorandum opinion as both the relevant facts and the elements for turnover and fraudulent conveyance differ.⁷ Thus, the rulings here may differ from the rulings in the fraudulent conveyance actions.

For the reasons that follow, we find that the Chapter 11 Trustee has not met his burden to prove that turnover is appropriate. To the extent provided herein, the Chapter 7 Trustee has met his burden of proving the Chapter 7 estate's interest in certain items of property currently in the possession of one or more Defendants such that turnover is appropriate. As to other items, the Chapter 7 Trustee has not met his burden of proof and turnover will be denied.

Background

New ICC is a management and holding company that owned, at the times relevant to this Adversary Proceeding, ⁸ directly or indirectly, 100% of the common stock of various operatingsubsidiaries that provide telephone, newspaper, and other services to the citizens of the USVI and surrounding areas. New ICC is a wholly-owned subsidiary of Emerging Communications, Inc. ("Emerging"or "EmCom"), which, in turn, is directly and indirectly owned by Innovative Communication Company, LLC ("ICC-LLC", collectively, the "Parent Debtors"). Jeffrey Prosser was Chairman of the Board, President, and CEO of New ICC and sole member of its ultimate parent company, ICC-LLC.

Although there were prior filed involuntary bankruptcy cases then pending, on July 31, 2006, Emerging, ICC-LLC, and Jeffrey Prosser each filed voluntary petitions seeking relief under chapter 11 of the Bankruptcy Code, commencing Case Nos. 06-30007, 06-30008⁹, and 06-30009, respectively. Subsequently, Jeffrey Prosser's case was converted to a chapter 7, and John Ellis was appointed as trustee. See Case No. 06-30009, Doc. No. 865. Mr. Ellis later resigned, and James Carroll was appointed and continues to serve as Chapter 7 Trustee. Case No. 06-30009, Doc. No. 948. With the conversion of Jeffrey Prosser's case to chapter 7, all authority to act on behalf of his individual bankruptcy estate transferred to the Chapter 7 Trustee.¹⁰

On July 5, 2007, the Greenlight Entities¹¹ filed an Involuntary Petition against New ICC, commencing Case No. 07-30012. An Order for Relief was entered on September 21, 2007. See Case No. 07-30012, Doc. No. 60. Stan Springel was appointed Trustee in the Chapter 11 cases. Case No. 06-30007, Doc. No. 543; Case No. 06-30008, Doc. No. 523; Case No. 07-30012, Doc. No. 125. Jeffrey Prosser's control of the Parent Debtors was severed when the trustee was appointed in these bankruptcy cases. Thereafter, he was removed from the Board of Directors of New ICC.

Now, through this adversary proceeding, the Trustees jointly seek turnover of the value of certain services and turnover of certain Property¹² that is currently in the possession of one or more of the Defendants on the basis that the funds used to purchase, maintain, and/or insure the Property were provided by New ICC and/or Jeffrey Prosser. See Trustees' Trial Brief Regarding Turnover Adversary Proceeding, Adv. Doc. No. 291, at 9.¹³ The Trustees contend that these payments give rise to both legal and equitable interests in the Property and, accordingly, turnoverpursuant to §542 is appropriate.¹⁴Id. The Defendants argue that the Property was gifted to them by Jeffrey Prosser¹⁵, regardless of whether the source of funds was New ICC. See Dawn Prosser's Trial Brief, Adv. Doc. No. 294, at 12.¹⁶ They assert that, even when New ICC made payments, those payments were income to Jeffrey Prosser and were accounted for as such through an account maintained on the books and records of the company, known by various names: "Due From [Shareholder] Account", "Receivables LLC", "contra equity account" (hereinafter "contra equity account").¹⁷See Jeffrey Prosser's Trial Brief, Adv. Doc. No. 303, at 7; Dawn Prosser's Trial Brief, Adv. Doc. No. 294, at 12. Therefore, for the purpose of determining whether turnover is appropriate, it is significant how New ICC recorded and dealt with these transactions and the assets or services acquired thereby.¹⁸

On February 4, 2010, Jeffrey Prosser filed his Emergency Motion for Stay of Proceedings, Adv. Doc. No. 704, asserting a stay of this adversary proceeding was appropriate on the basis of allegations made in a separate adversary proceeding in which he filed his Motion for Evidentiary Hearing to Determine Whether an Order Should be Entered Imposing Sanctions, Disqualification and/or Referral for Further Disciplinary Proceedings Against Plaintiffs and/or Certain Attorneys, Adv. No. 10-3001, Adv. Doc. No. 29.¹⁹ Both Trustees filed Responses to the Motion for Stay of Proceedings. Adv. Doc. Nos. 708 and 709. At the March 24, 2010 omnibus hearing, the Motion to Stay was carried to the May 7, 2010, omnibus hearing to determine the status and later continued to the June omnibus and included in that agenda, as the evidentiary hearing in Adv. No. 10-3001 would have taken place by that time. Transcript of 05/07/10 hearing, Case No. 07-30012, Doc. No. 1698, at 204. The evidentiary hearing took place on May 24, 2010, as scheduled, but the Motion for Stay of Proceedings was not listed on the June agenda or any agendas since that time. A hearing was held on January 25, 2011, to determine the status of the Motion for Stay, and the court heard argument on the motion at that time. Adv. Doc. No. 727. Although the court has not yet ruled on the allegations in Adv. No. 10-3001, and withoutmaking any findings as to the merits of the allegations therein, the court finds that it was not presented in Adv. No. 10-3001 with any evidence that affects the Turnover Trial. Thus, the Motion to Stay will be denied, and the court will address the merits of the Amended Complaint filed in this Adversary Proceeding.

Subject Matter Jurisdiction²⁰

Dawn Prosser contends that this court lacks subject matter jurisdiction on the basis that ownership is directly disputed in this turnover action. See Dawn Prosser's Trial Brief, Adv. Doc. No. 294, at 3-10. However, even then the court has jurisdiction. The true question is whether it exercises core or non-core jurisdiction.

"An action for turnover is a core proceeding because it is a substantive right created under federal bankruptcy law. However, where title to the property sought to be turned over to the bankruptcy estate is in dispute, such an action can only constitute, at the most, non-core rather than core proceedings, given that such actions are not true turnover actions." See In re DHP Holdings II Corp., Case No. 08-13422, 2010 Bankr. LEXIS 2455, 2010 WL 3218385 (Bankr. D. Del. Aug. 13, 2010), at *21 (quoting 5 Collier on Bankruptcy SI 542.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.)).

In the Third Circuit, there is a two-pronged test to determine whether a proceeding is core or non-core. See In re Valley Media, Inc., 289 B.R. 27, 31 (Bankr. D. Del. 2003). First, a court is directed to consult the language of 28 U.S.C. §157(b), which provides an illustrative list of core proceedings. Id. (citing to Halper v. Halper, 164 F.3d 830, 836 (3d Cir. 1999)...