Stan Springel, Chapter 11 Tr. of the Bankr. Estate of Innovative Commc'n Corp. v. Prosser (In re Prosser)

In re: JEFFREY J. PROSSER, Debtor.

STAN SPRINGEL, CHAPTER 11 TRUSTEE OF THE BANKRUPTCY ESTATE OFINNOVATIVE COMMUNICATION CORPORATION AND JAMES P. CARROLL,CHAPTER 7 TRUSTEE OF THE BANKRUPTCY ESTATE OF JEFFREY J. PROSSER, Plaintiffs/Appellees, v. JEFFREY J. PROSSER, Defendant/Appellant.

Bankruptcy No. 2006-30009

Civil Action No. 3:2013-0087

c/w Civil Action No. 3:2013-0010

c/w Civil Action No. 3:2013-0056

c/w Civil Action No. 3:2013-0057

DISTRICT COURT OF THE VIRGIN ISLANDS DIVISION OF ST. THOMAS AND ST. JOHN

June 19, 2018

Chapter 7

Attorneys:

Norman A. Abood, Esq.,

Toledo, OH

Robert F. Craig, Esq.,

Omaha, NE

Lawrence H. Schoenbach, Esq.,

New York, NY

For Appellant

Yann Geron, Esq.,

New York, NY

Samuel H. Israel, Esq.,

William H. Stassen, Esq.,

Philadelphia, PA

Bernard C. Pattie, Esq.,

St. Croix, U.S.V.I.

For Appellees

MEMORANDUM OPINION

Lewis, Chief Judge

THIS MATTER comes before the Court on the consolidated appeal of five Orders entered by the Bankruptcy Division of the District Court of the Virgin Islands ("Bankruptcy Court") as a result of the conduct of Jeffrey J. Prosser ("Prosser" or "Debtor") and his wife, Dawn Prosser, who the Bankruptcy Court found had dissipated and destroyed a collection of fine wines that had been adjudicated to be property of Jeffrey Prosser's Bankruptcy Estate. On February 23, 2017, this Court issued a Memorandum Opinion and Order that resolved twelve of the thirteen issues that the Prossers had raised in their appeal brief. (Dkt. Nos. 58, 59). In so doing, the Court affirmed: (1) the Bankruptcy Court's September 18, 2012 "Contempt Order," which found the Prossers in contempt of certain Bankruptcy Court Orders that required them to safeguard the wine collection, and subjected them to sanctions representing the value to the Estate of the dissipated and destroyed wines; (2) the January 18, 2013 "Contempt Fees Order," which directed the Prossers to pay the Trustee $528,086.07—representing the attorney's fees and expenses incurred in litigating the Trustee's "Motion to Enforce Turnover Order, for Contempt and for Sanctions"; and (3) the May 24, 2013 "Supplemental Sanctions Order" which directed the Prossers to pay the Trustee $419,135.59—reflecting the net damages to the Chapter 7 Estate resulting from the destruction and dissipation of the wine collection.

On the other hand, the February 23, 2017 Memorandum Opinion and Order reversed, in part, the May 31, 2013 "Compliance Order," which required the Prossers, inter alia, to convey title to certain real property they owned at Estate Shoys on St. Croix (the "Anna's Hope Property" or "the Property") to the Chapter 7 Estate to be administered as an Estate asset and sold to satisfy the amount due in the Contempt Fees Order, with the balance, if any, to be applied to pay theamount due the Estate in the Supplemental Sanctions Order. In addition, the February 2017 Memorandum Opinion and Order reversed in part the "Rule 70 Order," entered on August 23, 2013, which authorized the Trustee to execute Quitclaim Deeds on behalf of the Prossers, and transfer the Anna's Hope Property to the Chapter 7 Estate to sell the Property to satisfy the Contempt Fees Order and the Supplemental Sanctions Order.

In reversing in part the Compliance Order and Rule 70 Order, the District Court held that the ruling in Law v. Siegel, 134 S. Ct. 1188 (2014), did not permit the Bankruptcy Court to use exempt property to pay a Trustee's administrative expenses—specifically, the $528,086.07 in attorney's fees and expenses awarded in the Contempt Fees Order. The Court ordered additional briefing on the issue of whether, in light of Law, the exempt Anna's Hope Property could be conveyed to the Chapter 7 Estate and sold to pay the $419,135.59 awarded in the Supplemental Sanctions Order.

For the reasons that follow, the Court will reverse those remaining portions of the Bankruptcy Court's Compliance Order and Rule 70 Order that required the conveyance of title, or the transfer by Quitclaim Deed, of the Anna's Hope Property to the Chapter 7 Estate to sell the Property to satisfy the amount due the Estate under the Supplemental Sanctions Order. The Court will remand the case to the Bankruptcy Court for further proceedings consistent with this Memorandum Opinion as well as with the February 23, 2017 Memorandum Opinion.

I. PROCEDURAL HISTORY

Because the background and procedural history of these consolidated appeals were set forth at length in the February 23, 2017 Memorandum Opinion, the Court repeats here only the background necessary to provide a context for the ruling at issue.

Jeffrey Prosser as an individual debtor, and two companies he owned, filed petitions forbankruptcy protection under Chapter 11 of the Bankruptcy Code in July 2006. Jeffrey Prosser's individual Chapter 11 case was subsequently converted to a Chapter 7 liquidation proceeding in October 2007 and James P. Carroll was appointed Chapter 7 Trustee. In December 2007, the Chapter 7 and 11 Trustees filed a complaint against Prosser, Dawn Prosser, and their children, pursuant to 11 U.S.C. § 542, seeking all personal property in the Prossers' possession acquired with company funds, which included a collection of fine wine worth between $2.15 and $2.28 million. The Bankruptcy Court entered a Preliminary Injunction ("Turnover Order") directing the Prossers to inventory their personal property and to keep that property, including the wines, "in secure locations and protect [them] from destruction, damage, modification, theft, removal or transfer pending [their] turnover to the Trustee." (No. 07-ap-03010, Dkt. No. 79 at 7; A18)

In January 2008, the Trustee inventoried the wine collection located at the Prossers' St. Croix, Virgin Islands and Palm Beach, Florida residences. In March 2011, following a determination that the entirety of the wine collection belonged to the Estate, the Trustee visited the Prossers' Palm Beach home to collect the wine, and found that "[a]bout 49 percent" of the bottles were missing as compared with the number of bottles counted in 2008. The Trustee's representative travelled to the Prossers' St. Croix residence in July 2011 to pack up and ship the wine stored there, but found hundreds of bottles missing and the remaining wine ruined and not acceptable for sale.

On August 4, 2011, the Trustee filed a "Motion to Enforce Turnover Order, for Contempt and for Sanctions" against the Prossers, alleging that the Prossers failed to protect the wine from destruction in violation, inter alia, of the Turnover Order. The Trustee sought a finding of civil contempt against the Prossers, the imposition of sanctions in the form of all legal fees and expenses associated with the Trustee's turnover and contempt litigation, as well as an Order permitting theTrustee to collect the value of the missing and damaged wine from Dawn Prosser's interest in the proceeds of sales of the Prossers' co-owned personal property. (No. 07-ap-03010, Dkt. No. 756 at 4; A62). After an evidentiary hearing, the Bankruptcy Court issued a Memorandum Opinion on September 18, 2012, ruling "that the elements necessary to find the Prossers in civil contempt of court and to sanction were established in this case." (No. 07-ap-3010, Dkt. No. 1005 at 24; A84). The Bankruptcy Court awarded damages to the Estate to compensate for the dissipated and destroyed wine as a sanction against the Prossers, jointly and severally, plus a then-undetermined amount for the Trustee's attorney's fees and expenses. (No. 07-ap-03010, Dkt. No. 1006 at 2-3, A85) ("Contempt Order").

On January 18, 2013, the Bankruptcy Court entered the "Order Approving Amended & Supplemental Application of Chapter 7 Trustee for an Award of Fees and Expenses" ("Contempt Fees Order") which directed the Prossers to pay the Chapter 7 Trustee's attorney's fees and expenses totaling $528,086.07. (No. 07-ap-03010, Dkt. No. 1023; A90). Then, on May 24, 2013, the Bankruptcy Court issued the "Supplemental Sanctions Order," which directed the Prossers to pay the Chapter 7 Trustee $419,135.59—"reflecting the diminution in value of the missing and unmarketable wines." (No. 07-ap-03010, Dkt. No. 1078; A142).

When the Prossers failed to pay the amount due under the Contempt Fees Order, the Trustee filed a motion seeking to coerce compliance. On May 31, 2013, the Bankruptcy Court entered an "Order Coercing the Prossers' Compliance with the January 18, 2013 Contempt Order . . ." (the "Compliance Order"). (No. 07-ap-03010, Dkt. No. 1088; A126). The Compliance Order stated that: 1) the Prossers had not complied with the Contempt Fees Order to pay $528,086.07 in attorney's fees and expenses incurred by the Trustee; 2) they could purge their contempt by paying the amount due in accordance with the terms contained in the Compliance Order; 3) if theydefaulted and failed to cure the default, they were required, without the need for further order of the Court, to execute deeds of title conveying ownership of Plots 168, 169, 170 and 171 of Estate Shoys—the "Anna's Hope Property"—to the Chapter 7 Estate; 4) if they failed to comply with those terms, such failure "shall be punishable as a civil contempt of this Court and shall subject the Prossers to arrest and incarceration until such civil contempt is purged"; and 5) upon conveyance of the Anna's Hope Property to the Trustee and, upon Court order, the Property would be administered as an estate asset and sold "solely for the purpose of satisfying the amount due" under the Contempt Fees Order. Id. at 3-7. The Trustee would also have the option, following sale of the property, of applying any net proceeds exceeding the amount due on the Contempt Fees Order against the amount due the Estate on the Supplemental Sanctions Order. Id. at 6.

The Prossers defaulted under the terms of the Compliance Order, and failed to convey title to the Anna's Hope Property to the Trustee. As a result, the Trustee filed a Motion pursuant to Fed. R. Civ. P. 70 to coerce compliance with the...