French (Trustee) v. Smithey et al

OCR transcription for search; preserved printed pages are authoritative

UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF OHIO

In Re: )
) JUDGE RICHARD L. SPEER
James Lee Smithey )
) Case No. 10-3135
Debtor(s) )
) (Related Case: 10-30310)
Bruce Comly French, Trustee )
_
Plaintiff(s) )
)
Vv. )
)
James Smithey, et al. )
)
Defendant(s) )
DECISION AND ORDER

This cause is before the Court on two Motions filed by the non-trustee Plaintiffs, Frost & Co.,
Inc., Frost Mechanical, Inc., Dick Nagel Electric, Inc. and John McCormick. (Doc. No. 56). For their
first Motion, the non-trustee Plaintiffs seek “leave to amend the Complaint to include an additional
party Defendant, Choctaw Properties, LLC.” (Doc. No. 56). For their second Motion, the non-trustee
Plaintiffs request that this “Court schedule a Pre-Trial and Trial so that this matter may be heard and

determined on the merits.” (Doc. No. 55). The Trustee, also a Plaintiff in this adversary proceeding,

- is not a party to either of these Motions. For the reasons delineated below, the Motions of the non-

trustee Plaintiffs will be Denied.

QuTuenmicaten, 798
7 a Doc 57 FILED 09/10/12 ENTERED 09/10/12 16:46:15 Page 1 of 7

Bruce Comly French, Trustee v. James Smithey
Case No. 10-3135

BACKGROUND

10-9

The Defendant, James Smithey, is the Debtor in this adversary proceeding, having filed-a~
petition in this Court on January 22, 2010, for relief under Chapter 7 of the United States Bankruptcy
Code. On September 16, 2010, the Court entered an order of discharge in favor of the Debtor. On
August 8, 2012, the Trustee filed a Final Account and Certification that the Estate has been Fully

Administered.

This adversary proceeding was commenced on May 16, 2010, by the non-trustee Plaintiffs
to avoid certain fraudulent transfers allegedly made by the Defendant/Debtor. (Doc. No. 1). Pursuant
to a later order entered by the Court, the Trustee was substituted as the plaintiff and the real party-
in-interest in this adversary proceeding. (Doc. No. 24). At the same time, the Court also ordered that

the plaintiff in this case be re-captioned as “Bruce Comly French, Trustee.” /d.

Subsequently, as a part of a proposed global settlement concerning multiple matters related
to the Defendant/Debtor’s bankruptcy case, the Trustee sought to assign all of his interest in this
adversary proceeding to the non-trustee Plaintiffs. (Main Case Doc. No. 89, § 7). An order,
approving the assignment, was subsequently entered by the Court. (Doc. No. 42). After an appeal
of this order was voluntarily dismissed, this adversary proceeding was administratively closed. (Doc.

No. 53).
DISCUSSION

It is apparent that the non-trustee Plaintiffs, in bringing their two Motions before the Court,
seek authority to litigate in this Court matters regarding alleged fraudulent transfers made by the
Defendant/Debtor. This Court, however, is not the proper forum for the non-trustee Plaintiffs to

litigate such matters. This determination is predicated foremost on the concern that this Court lacks

Page 2

3135-rls_ Doc5/7 FILED 09/10/12 ENTERED 09/10/12 16:46:15 Page 2 of 7

Bruce Comly French, Trustee v. James Smithey
Case No. 10-3135

any jurisdictional basis to hear and determine the fraudulent transfer action brought by the non-

trustee Plaintiffs.

Ina bankruptcy case, a fraudulent transfer action is governed by § 548. As well, if applicable
nonbankruptcy law permits, a fraudulent transfer action may be maintained under § 544(b). Both of
these provisions, however, expressly vest the power to avoid a fraudulent transfer action in just one
person, the bankruptcy trustee. Hence, the basis of this Court’s order to substitute the Trustee, Bruce

French, as the plaintiff in this matter, as he is the real party-in-interest.

In an analogous situation, involving whether a creditor could use § 506(c) of the Code to
surcharge the estate, despite the provision’s grant of such authority to only the bankruptcy trustee,
the United States Supreme Court decided against the creditor. Hartford Underwriters Ins. Co. v.
Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942 (2000). In doing so, the Court observed that
“Tw]here a statute names the parties granted the right to invoke its provisions, such parties only may

act.” 530 U.S. at 6-7. (citation and internal punctuation omitted).

To be sure, it is still recognized that, despite the holding in Hartford Underwriter, a creditor
may still come before the Court to seek derivative standing to pursue a fraudulent transfer action on
behalf of the trustee. Hyundai Translead, Inc. v. Jackson Truck & Trailer Repair, Inc. (Inre Trailer
Source, Inc.), 555 F.3d 231 (6" Cir. 2009). The concept of derivative standing, however, still means
that the real party-in-interest is the trustee. This, however, is not the case in this adversary

proceeding.

The non-trustee Plaintiffs do not seek to prosecute their fraudulent transfers claims on behalf
of the trustee — that is, for the benefit of the bankruptcy estate. In this regard, if the non-trustee
Plaintiffs were to prevail on their claims, they, and not the bankruptcy estate, would be the only

claimants to benefit. Moreover, for a creditor to pursue derivative standing on behalf of a trustee,

Page 3

10-Q

3135-rls Doc5/7 FILED 09/10/12 ENTERED 09/10/12 16:46:15 Page 3 of 7

Bruce Comly French, Trustee v. James Smithey
Case No. 10-3135

such relief must be specifically sought from the Court and must be grounded in equity, such as where

a trustee unjustifiably refuses to bring an avoidance action. Jd. 242-43. Neither of these prerequisites,

however, is present. —

In fact, in this adversary proceeding, the non-trustee Plaintiffs specifically withdrew their
motion to have themselves reinstated as party plaintiffs. (Doc. No. 34). More importantly, equity
does not support allowing the non-trustee Plaintiffs to use this forum as the place to pursue their
fraudulent transfer action. First, the Trustee in the Defendant/Debtor’s bankruptcy case did not
unjustifiably refuse to bring a fraudulent transfer action. To the contrary, the Trustee was active in
this adversary proceeding, but ultimately determined that, given a cost-benefit analysis for the estate,

this adversary proceeding was not worth pursuing.

It is also relevant that the non-trustee Plaintiffs will not be prejudiced on their fraudulent
transfer claim against the Defendant/Debtor if this Court does not adjudicate the claim. In fact, just
the opposite is true, with the Trustee having assigned his interest in the fraudulent transfer claims
to the non-trustee Plaintiffs. The non-trustee Plaintiffs are, thus, free to pursue their fraudulent

transfer allegations in another forum.

The other forum, moreover, will presumably be an Ohio state court, making it particularly
well-suited to adjudicate the non-trustee Plaintiffs’ fraudulent transfer claim. In this regard, the non-
trustee Plaintiffs cite to “Ohio Revised Code Chapter 1336 Uniform Fraudulent Transfer Act” as the
basis for their fraudulent transfer claim against the Defendant/Debtor. (Doc. No. 1, § 17).

Finally, contrary to what was suggested by the non-trustee Plaintiffs, this Court’s authority
under Bankruptcy Rule 7001(9) to enter “declaratory judgments” does not confer jurisdiction upon
this Court to hear and determine their fraudulent transfer claim. Bankruptcy Rule 7001(9) provides

that this Court can enter declaratory judgment, but limits such authority to only those matters

Page 4

10-

3135-rls Doc5/7 FILED 09/10/12 ENTERED 09/10/12 16:46:15 Page 4 of 7

Bruce Comly French, Trustee v. James Smithey
Case No. 10-3135

“relating to any of the forgoing”’ adversary proceedings for which an otherwise jurisdictional basis

exists. Consequently, since no jurisdictional basis exists, in the first instance, to adjudicate the non-

10-(

trustee Plaintiffs’ fraudulent transfer claim in this Court, Bankruptcy Rule 7001(9) cannot be used

to create jurisdiction where no jurisdiction otherwise exists.

This overall conclusion, that this Court is not the proper forum to adjudicate the fraudulent
transfer claim brought by the non-trustee Plaintiffs, is simply in keeping with the limited goals
bankruptcy law seeks to promote: (1) that of affording a discharge to a deserving debtor, and (2) that
of equitably paying the legitimate claims of the debtor’s creditors. Sherwood Partners, Inc. v. Lycos,
Inc. 394 F.3d 1198, 1203 (9" Cir. 2005). In this case, however, a discharge has been entered in favor
of the Defendant/Debtor and the Trustee has administered all the claims of creditors. Consequently,
no bankruptcy purpose would be served by this Court hearing the non-trustee Plaintiffs’ fraudulent
transfers claims. As this Court noted in a prior decision entered in the Defendant/Debtor’s
bankruptcy case: “for all practicable purposes, [the litigation does] not involve the estate, but is
rather simply a dispute between two parties: the Debtor and John McCormick.” In re Smithey, Slip
Copy, 2011 WL 3102308 (Bankr. N.D.Ohio 2011).

1

An adversary proceeding is governed by the rules of this Part VII. The following are adversary
proceedings:

(9) a proceeding to obtain a declaratory judgment relating to any of the foregoing[.|

Page 5

3135-rls_ Doc5/7 FILED 09/10/12 ENTERED 09/10/12 16:46:15 Page 5 of 7

Bruce Comly French, Trustee v. James Smithey
Case No. 10-3135

Accordingly, for all these reasons, it is hereby

10-(

ORDERED that the Motion for Leave to Amend the Complaint, (Doc. No. 56), be, and is
hereby, DENIED.

IT IS FURTHER ORDERED that the Motion to set a Pre-Trial and Trial, (Doc. No. 55),
be, and is hereby, DENIED.

Dated: September 10, 2012

LL.
Ricfiard L. Speer

United States
Bankruptcy Judge

_”

Page 6

3135-rls_ Doc5/7 FILED 09/10/12 ENTERED 09/10/12 16:46:15 Page 6 of 7

CERTIFICATE OF SERVICE

Copies were mailed this 10" day of September, 2012 to:

Derek A Younkman U.S. Trustee
6th Floor 201 Superior Ave., Ste. 441
Lima, OH 45801 Cleveland, Ohio 44114

Raymond L. Beebe
1107 Adams St
Toledo, OH 43604

Randy Lee Reeves
973 W. North St
Lima, OH. 45805

Michael A. Staudt

Joshua A.Koltak
Courtview Center, Ste. 300
100 South Main Ave.
Sidney, Ohio 45365

Bruce C. French
P.O. Box 839
Lima, Ohio 45802

Quentin M. Derryberry, II
103 South Blackhoof St.
P.O. Box 2056
Wapakoneta, Ohio 45895

/s/ Teresa Y. McBee
Deputy Clerk, U.S. Bankruptcy Court

10-03135-rls Doc57 FILED 09/10/12 ENTERED 09/10/12 16:46:15 Page 7 of 7