Reed v. Nathan

558 B.R. 800

Gregory J. Reed et al., Appellants,

v.Kenneth A. Nathan, Appellee.

Case No. 15-cv-14462

United States District Court, E.D. Michigan, Southern Division.

Signed October 6, 2016

As Amended October 11, 2016

Carolyn J. Jackson - Suspended, Law Office of Carolyn J. Jackson, Pontiac, MI, Kurt Thornbladh, Thornbladh Law Group PLLC, Dearborn, MI, Aaron J. Scheinfield, Goldstein Bershad & Fried PC, Southfield, MI, for Appellants.

David M. Findling, Findling Law Firm, Royal Oak, MI, for Appellee.

AMENDED¹ OPINION AND ORDER AFFIRMING BANKRUPTCY COURT'S JANUARY 4, 2016, AMENDED ORDER REQUIRING TURNOVER OF ASSETS

MATTHEW F. LEITMAN, UNITED STATES DISTRICT JUDGE

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.”

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 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.

I

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.)

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 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 Assignment”). 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 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 26.)

• 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

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