Massenburg v. Schlossberg (In re Massenburg)

554 B.R. 769

In re: Tony Arnel MassenburgTony A. Massenburg, Appellant

v.Roger Schlossberg, Appellee.

Civil Action No. TDC-15-3347

United States District Court, D. Maryland.

Signed July 25, 2016

Daniel M. Press, Chung & Press PC, McLean, VA, Eric Hans Kirchman, Kirchman and Kirchman, Rockville, MD, for Appellant.

Frank J. Mastro, Schlossberg & Mastro, Hagerstown, MD, for Appellee.

MEMORANDUM OPINION

THEODORE D. CHUANG, United States District Judge

On November 3, 2015, Appellant Tony A. Massenburg filed a Notice of Appeal of the Order of the United States Bankruptcy Court for the District of Maryland denying his Motion to Require the Chapter 7 Trustee to Turnover the Remaining $30,012.45 of Debtor's NBA Pension Funds (“Motion to Turnover”). The Appeal is fully briefed and ripe for disposition. No hearing is necessary to resolve the issues. See D. Md. Local R. 105.6. For the reasons set forth below, the judgment of the bankruptcy court is AFFIRMED.

BACKGROUND

I. Massenburg's Bankruptcy Proceedings

On September 18, 2012, Massenburg filed a Voluntary Petition under Chapter 11 of the Bankruptcy Code. At the time of filing, Massenburg deposited $126.16 into a debtor-in-possession account (“DIP Account”). When a debtor files for bankruptcy under Chapter 11, the United States Trustee ensures that the debtor closes pre-petition bank accounts and establishes DIP accounts, into which estate funds are deposited. See 7 U.S. Dep't of Justice, United States Trustee Program Policy and Practices Manual § 7-1.2.3 (2011), available at https://www.justice.gov/ust/file/volume_7_banking_and_bonding.pdf/download. Such accounts remain managed by the debtor, referred to as the “debtor in possession,” when no trustee has been appointed to administer the estate. See 11 U.S.C. § 1101(1) (2012). Between September 18, 2012 and February 1, 2013, Massenburg deposited $65,261.07 into the DIP Account. During that time period, Massenburg withdrew $50,684 from the DIP Account to cover living expenses, leaving a balance of $14,703 on January 31, 2013.

The account balance increased considerably on February 1, 2013. Massenburg, a former National Basketball Association (“NBA”) player who holds an NBA record for playing with 12 different teams, see Most Franchises Played For , Basketball-Reference.com, http://www.basketball-reference.com/leaders/most_franchises.html (last visited July 19, 2016), received $550,429.20 from his NBA Players Pension Plan (“Pension Plan”). On February 1, 2013, Massenburg deposited the Pension Plan funds into the DIP Account. Between February 1, 2013 and August 15, 2013, Massenburg deposited $15,309 of non-Pension Plan funds into the DIP Account. During the same time frame, he continued to withdraw funds from DIP Account.

On August 15, 2013, the United States Trustee filed a Motion to Convert the Case from Chapter 11 to Chapter 7. On November 13, 2013, the bankruptcy court issued an Order converting the case, finding that “good cause exists for this case to be converted to a case under Chapter 7 pursuant to 11 U.S.C. § 1112 in the best interests of creditors and the estate.” App. 315.¹ Once appointed, the Chapter 7 Trustee froze the DIP Account.

On November 27, 2013, Massenburg filed an Emergency Motion for Turnover of Property. During bankruptcy proceedings, debtors are permitted to set aside certain property as “exempt” from the claims of creditors. See 11 U.S.C. § 522 ; Sheehan v. Peveich , 574 F.3d 248, 251 (4th Cir.2009). On December 6, 2013, the Bankruptcy Court issued an Order finding that the Pension Plan funds were exempt and directing Trustee Roger Schlossberg (“the Trustee”), to turnover to Massenburg approximately $163,000, consisting of all funds in the DIP Account except for $30,012.45, to be subject to a later order. On December 9, 2013, the Trustee filed a Motion to Reconsider, arguing that the Pension Plan funds were not exempt. On April 1, 2014, the bankruptcy court issued an Order finding that the Pension Plan funds were, in fact, exempt and ordering the turnover of all remaining DIP Account funds except for $30,012.45, which was deemed identifiable as nonexempt, non-Pension Plan funds.

II. Massenburg's Motion to Turnover

On August 24, 2015, Massenburg filed the Motion to Turnover, seeking the $30,012.45 from the DIP Account not ordered to be returned to him. In his Motion, Massenburg argued that he had the right to spend nonexempt funds on his necessary living expenses and that “the fair and equitable result is achieved by taking the amount that the Debtor had spent on necessary expenses prior to the deposit of the pension funds into the DIP Account and using this amount to determine what would be a reasonable amount for the Debtor's expenses after the deposit of the pension funds into the DIP Account.” App. 35.

On October 19, 2015, the bankruptcy court held a hearing on the Motion and denied it based on the conclusion that turnover would be inequitable for two reasons. First, the court reasoned that “the case languished in Chapter 11 from September of 2012, when it was filed, until it was converted in Chapter 7 in November of 2013,” that “[n]o real progress was made toward reorganization,” and that the effect of turnover would be to use the entire Chapter 11 estate on Massenburg's living expenses. Id. at 52–53. Second, the court noted that while Massenburg “could easily have separately accounted for the funds he was spending, he did not do so,” such that any arguably exempt funds within the $30,012.45 lost their exempt status. Id. at 54. Finally, in response to Massenburg's assertion that the court should construe exemption statutes in favor of the debtor, the court noted that it had not interpreted an exemption statute, but had instead “determined where the equities lie.” Id. at 55. Massenburg now appeals the bankruptcy court's ruling.

DISCUSSION

The issue on appeal is whether the bankruptcy court committed error when it denied his Motion to Turnover. The parties disagree on the standard of review that applies to the bankruptcy court's decision and on whether the bankruptcy court correctly denied the Motion. The Court will address each of these disputes in turn. For the reasons that follow, the bankruptcy court's decision is affirmed.

I. Standard of Review

Massenburg asserts that this Court should review legal determinations of the bankruptcy court de novo and factual determinations for clear error. See In re Johnson , 960 F.2d 396, 399 (4th Cir.1992). He contends that the bankruptcy court's ruling was premised on a legal interpretation of the exemption statute when it stated that “the remaining funds lost their exempt status,” App. 54, and that it is thus subject to de novo review. By contrast, the Trustee asserts that the standard of review is abuse of discretion, citing McKinney v. Gannett Co. , 817 F.2d 659, 670 (10th Cir.1987), because the Court is reviewing an application of the bankruptcy court's equitable powers.

While Massenburg correctly states the standard of review for factual and legal determinations, his appeal by its own terms concerns an equitable ruling of the bankruptcy court to deny turnover. The one issue he appeals, turnover, is equitable in nature. See In re Mushroom Transp. Co. , 382 F.3d 325, 337 (3d Cir.2004) ; Walker v. Weese , 286 B.R. 294, 299 (D.Md.2002) (“Commanding turnover is at the very root of the bankruptcy court's equitable powers.”). Unlike when it previously ruled in April 2014 that the Pension Plan funds were exempt pursuant to section 11-504(h) of the Code of Maryland, Courts and Judicial Proceedings, the bankruptcy court did not cite or interpret any statute in ruling on the Motion for Turnover. Rather, Massenburg and the court consistently framed the issues in equitable terms. In his Motion, Massenburg sought turnover of the $30,012.25 because it would be “the fair and equitable result” and asked the court to trace the commingled funds because it would be “an equitable substitute for the impossibility of specific identification.” App. 35. The bankruptcy court also explicitly stated that “as the Debtor has framed the issue I am simply determin[ing] where the equities lie under these circumstances.” Id. at 55. In balancing the equities, the court considered that nothing would remain in the Chapter 11 estate if Massenburg's Motion were granted and that Massenburg commingled the Pension Plan funds without accounting for them. Thus, the court ruled in equity, not based on an exemption statute.

Whether the bankruptcy court appropriately balanced the equities in denying Massenburg's Motion to Turnover is reviewed on appeal for abuse of discretion. See In re Davis , 936 F.2d 771, 775 (4th Cir.1991) ; McKinney , 817 F.3d at 670. The Court finds an abuse of discretion when it has a “definite and firm conviction” that the court below “committed a clear error of judgment.” In re M.J. Waterman & Assocs., Inc. , 227 F.3d 604, 607–08 (6th Cir.2000) (internal quotation marks and citations omitted); In re Uwimana , 284 B.R. 218, 221 (D.Md.2002). “The question is not how the reviewing court would have ruled, but rather whether a reasonable person could agree with the bankruptcy court's decision; if reasonable persons could differ as to the issue, then there is no abuse of discretion.” In re M.J. Waterman & Assocs. , 227 F.3d at 608.

II. The Bankruptcy Court's Turnover Ruling

Massenburg asserts that the bankruptcy court erred because (1) it failed to employ a recognized method of tracing to determine what portions of the commingled funds in the DIP Account were exempt and nonexempt; and (2) it inappropriately concluded that the Debtor's withdrawals for living expenses necessarily consisted of exempt Pension Plan funds because he was entitled to spend nonexempt funds on living expenses. The Court finds no abuse of discretion because the bankruptcy court effectively applied the lowest intermediate balance rule, a tracing method approved by the United States Court of Appeals for the Fourth...