Nevin A. Liber and Caryl S. Liber

OCR transcription for search; preserved printed pages are authoritative

AUTHENTICATED Va =

US. GOVERNMENT od
INFORMATION ]

UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF OHIO

In Re: )
) JUDGE RICHARD L. SPEER
Nevin/Cary] Liber )
) Case No. 08-37046
Debtor(s) )
)
DECISION AND ORDER

This cause comes before the Court on the matter filed by the Trustee entitled “Motion to Set
Hearing.” (Doc. No. 78). In this Motion, the Trustee requests that this Court “determine priority to
sale proceeds pursuant to previous order of the court.” In this Court’s previous Order, authority was
given to the Trustee to sell the estate’s interest in real property free and clear of liens, subject only
to the Objection filed by the Central States Pension Fund who claimed, over the Trustee, a superior

right and priority to the proceeds received from a sale of said real property. (Doc. No. 70).

On the matter of priority, both the Trustee and the Central States Pension Fund filed written
arguments in support of their respective positions. The Court has now had the opportunity to review
these arguments. Based upon this review, the Court, for the reasons set forth herein, finds that the
Central States Pension Fund has, insofar as it concerns the Trustee, a superior right to the proceeds

realized from a sale of the property.
FACTS

On March 14, 1997, the Debtor, Nevin Liber, and his brother, Mark Liber, formed a business
entity known as Nev-Mark Development, Ltd. (hereinafter referred to as “Nev-Mark”), each owning
a 50% membership interest in the company. (Doc. No. 85, Ex. 2). At this time, the Debtor also

owned a 100% interest in business operating undgr the name of Cherry Auto Parts (hereinafter

°0437046-rls Doc 86 FILED 05/18/12 ENTERED 05/18/12 16:25:02 Page 10f13

J

In re Nevin and Cary] Liber
Case No. 08-37046

referred to as “Cherry Auto”). Both of these businesses were limited liability companies formed

under Ohio law. (Doc. No. 84, Ex. C).

On September 17, 2008, the Debtor, acting on behalf of Cherry Auto, entered into an
agreement to purchase his brother’s 50% interest in Nev-Mark for the sum of $20,000.00. Under the
terms of their agreement, the Debtor’s brother would be paid the purchase price over a period of five
years. A promissory note was executed to that effect, with the Debtor signing the note on behalf of
Cherry Auto in his official capacity as president of the business. (Doc. 84, Ex. 10). To secure this
transaction, the Debtor attached 13 shares of his stock of Cherry Auto to the promissory note. Id.
However, for reasons unknown, the Debtor’s brother never signed any document formerly

transferring his interest in Nev-Mark to the Debtor. (Doc. 84, Ex. 13).

At the time of these transactions, Cherry Auto was making pension contributions to the
Central States Pension Fund (hereinafter referred to as “Central States”). On September 27, 2008,
however, Cherry Auto ceased making contributions to Central States, incurring a withdrawal liability
of $367,895.45, as determined by the provisions of ERISA.' (Doc. 80, at pg. 2). Three months later,
on December 31, 2008, the Debtor filed a petition in this Court for relief under Chapter 7 of the
United States Bankruptcy Code.

In seeking bankruptcy relief, the Debtor made the following relevant disclosures: (1) a
secured debt in the amount of $20,000.00 owed to his brother for the purchase of Nev-Mark; and (2)
his ownership interest in the business entities of Nev-Mark and Cherry Auto. As well, the Debtor
disclosed an interest in a single parcel of real property titled in the name of Nev-Mark. Pursuant to
an order entered by the Court, the Trustee sold this property, receiving $17,500.00. It is the

disposition of these proceeds which gives rise to the dispute between the Trustee and Central States.

1: Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1002.

Page 2

08-37046-rls Doc 86 FILED 05/18/12 ENTERED 05/18/12 16:25:02 Page 2 of 13

08-

In re Nevin and Caryl Liber
Case No. 08-37046

The Trustee, relying on the Debtor’s ownership of Nev-Mark, claims that she has a superior
interest in the proceeds received from a sale of the property. Central States, on the other hand, asserts
a superior interest to the sale proceeds based upon a judgment it holds against Nev-Mark. The

circumstances giving rise to this judgment are twofold.

First, after the Debtor filed for bankruptcy relief, Central States brought suit against Cherry
Auto based upon the liability the business incurred as the result of its withdraw from the ERISA-
qualified pension fund. This suit was brought in the United States District Court for the Northern
District of Illinois, with a judgment thereafter being entered in the favor of Central States. Second,
based upon this judgment entered against Cherry Auto, Central States then brought suit against Nev-
Mark in the same forum, alleging liability because both Nev-Mark and Cherry Auto were under
“common control.” Although having notice of this proceeding, the Trustee did not appear or
otherwise take any action to defend in this lawsuit. On September 15, 2010, a default judgment was

entered against Nev-Mark in the amount of $451,953.01. (Doc. No. 84, Ex. 2).

DISCUSSION

In the controversy now before Court, both the Trustee and Central States claim a superior
interest in the proceeds received by the Trustee from the sale of property titled in the name Nev-
Mark, a business entity in which the Debtor had a prepetition interest. The adjudication of this
matter, as it requires a determination of the estate’s interest in the property, is a core proceeding.
Thus, this Court has been conferred with the jurisdictional authority to enter final orders and
judgments in this matter. 28 U.S.C.A. §§ 157(b)(2)(A)/(E)/(O); see also Wagner v. Amwest Ins.
Group, Inc. (In re Amwest Ins. Group, Inc.), 285 B.R. 447, 455 (Bankr. C.D.Cal. 2002)
(determination of what constitutes property of the bankruptcy estate is akin to a turnover proceeding

concerning the administration of the estate).

Page 3

7046-rls_ Doc 86 FILED 05/18/12 ENTERED 05/18/12 16:25:02 Page 3 of 13

In re Nevin and Cary! Liber
Case No. 08-37046

When a bankruptcy case is commenced, an estate is created comprised of “all legal or
equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C.
§ 541(a). In a case such as this, filed under Chapter 7 of the Bankruptcy Code, a trustee is then
appointed to administer the estate. See 11 U.S.C. § 323, § 701, and § 704. In administering a debtor’s
bankruptcy estate, a primary duty of the trustee is to marshal the assets of the estate for the benefit
of the debtor’s creditors. Crestar Bank v. Neal (In re Kitchin Equipment Co. of Virginia, Inc.), 960
F.2d 1242, 1245 (4" Cir.1992).

The scope of estate property is broad and is intended to “bring anything of value that the
debtors have into the estate.” H.R.Rep. No. 595, 95" Cong., 1 Sess. 176 (1977), U.S.Code Cong.
& Admin.News 1978, p. 6136. Given its broad scope, there is no disagreement that interests held
by a debtor in a business entity, such as stock in a corporation or a membership interest in a limited
liability company, become included in a debtor’s bankruptcy estate. In re Billingsley, 338 B.R. 372
(Bankr. C.D.III. 2006). As a corollary, in a Chapter 7 case, where a debtor owns an interest in a
business entity, the trustee is entitled to administer that interest — as well as any rights derived from
that interest — in the stead of the debtor. Jn re First Protection, Inc., 440 B.R. 821, 830 (9" Cir.
B.A.P. 2010). For example, the trustee could vote a debtor’s interest in shares of stock. In re Reid,

251 B.R. 512, 519 (Bankr. W.D.Mo.2000).

It is upon these precepts which the Trustee’s based her authority to sell the real property

owned by Nev-Mark. In her Motion for Sale, the Trustee stated:

The property is owned by Nev-Mark Development Ltd, which is a real estate
holding Company only. The Debtor, Nevin Liber is the sole member of the
LLC. There is no mortgage on the real estate and there is no available
exemption in the real estate.
(Doc. No. 58). In asserting a first priority to the sale proceeds of the Nev-Mark property, Central

States, while not taking direct issue with these statements made by the Trustee, rests its position on

Page 4

08-37046-rls Doc 86 FILED 05/18/12 ENTERED 05/18/12 16:25:02 Page 4 of 13

08-3

In re Nevin and Caryl Liber
Case No. 08-37046

this undisputed fact: It, and not the Trustee, is a creditor of Nev-Mark, a separate entity which is not

before the Court. This position, as put forth by Central States, is well supported.

The scope of estate property, while very broad in its reach, is limited in a very important
respect: In Bankruptcy Code § 541(a), it is specified that the estate is comprised of only a debtor’s
“Gnterest” in property, not the actual property itself. This distinction is more than just academic. As

previously explained by this Court:

Section 541(a), by limiting the scope of estate property to just that of the
debtor’s “interest” in the property, does not expand or change the scope of the
debtor’s interest in the asset. Rather, § 541(a) merely places that “interest” in
the bankruptcy estate. However, the estate’s interest remains identical to and
also limited to those interests held by the debtor when the petition was filed.
Whatever rights a debtor had at the commencement of the case continue into
bankruptcy-no more, no less.

It necessarily follows then that the trustee, as a representative of the estate,
takes a debtor’s property subject to same restrictions that existed on the
debtor as of the commencement of case. Similarly, the trustee is generally
subject to any defenses which might have been asserted against the debtor but
for the filing of the petition.
French v. Johnson (In re Coomer), 375 B.R. 800, 804 (Bankr. N.D.Ohio 2007) (internal quotations

and citations omitted).

A trustee’s interest in a debtor’s property, thus, does not ordinarily extend beyond those
prepetition interests held by a debtor, a situation which has been described euphemistically as the
trustee stepping into the shoes of the debtor. In this case, therefore, the Trustee, while stepping into
the Debtor’s shoes insofar as it concerns the Debtor’s membership interest in Nev-Mark, takes that
interest subject to any applicable legal limitations imposed on that interest. Such limitations exists
as it concerns the Debtor’s interest, and hence the Trustee’s interest, in the business entity of Nev-

Mark.

Page 5

7046-rls Doc 86 FILED 05/18/12 ENTERED 05/18/12 16:25:02 Page 5 of 13

08-3

In re Nevin and Cary! Liber
Case No. 08-37046

In the absence of a countervailing federal interest or specific bankruptcy provision to the
contrary, limitations on a debtor’s interest in property are created and defined by state law. Kitchen
v. Boyd (Inre Newpower), 233 F.3d 922, 928 (6" Cir. 2000) (“unless a countervailing federal interest
exists, state law determines whether a debtor has a property interest for purposes of § 541(a)(1).”),
citing Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). For this purpose,
Ohio law is applicable, with Nev-Mark being an Ohio limited liability company.

Under Ohio law, a person owning an interest in a limited liability company is denominated
a “member.” O.R.C. § 1705.01(G). A “member” is deemed to hold a “membership interest” in the
company. /d. A “membership interest” entitles the member to a “share of the profits and losses of
a limited liability company and the right to receive distributions from that company.” O.R.C.

§ 1705.01(ED.

A “membership interest” in a limited liability company is personal property. O.R.C.
§ 1705.17. A “membership interest” in a limited liability company, however, does not confer upon
the “member” any specific interest in company property, whether personal property or real property.

Such property is, instead, held and owed solely by the company. As set forth in O.R.C. § 1705.34:

Real and personal property owned or purchased by a limited liability
company shall be held and owned in the name of the company. Conveyance
of that property shall be made in the name of the company.

Similarly, obligations of a limited liability company are specific to the company, with Ohio
law providing: “The debts, obligations, and liabilities of a limited liability company, whether arising
in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the limited liability
company.” O.R.C. § 1705.48(A). As a general rule, therefore, a “member” is not liable for any debt

of a limited liability company solely by reason of that person being a “member” of the company.

Page 6

7046-rls_ Doc 86 FILED 05/18/12 ENTERED 05/18/12 16:25:02 Page 6 of 13

LI

In re Nevin and Caryl Liber
Case No. 08-37046

O.R.C. § 1705.48(B). Furthermore, in the event of the dissolution ofa limited liability company and
the winding up of its affairs, the claims of creditors of the company must be satisfied first, before
any assets of the company are paid to a member on account of their membership interest. O.R.C.

§ 1705.46.

Taken together, these facets of Ohio’s law on limited liability companies lend themselves to
this basic conclusion: A creditor holding a claim against a limited liability company may look to the
assets of the company to satisfy its claim, and that claim must be satisfied in full before assets of the
company are paid to its members or third parties asserting claims against a member of the company.
The simply follows the corporate model. See Inre Richard Osterwalder, 407 B.R. 291, 298 (Bankr.
N.D.Ohio 2008) (“It is .. . settled that, as against corporate assets, claims held by the corporation’s

creditors must be satisfied ahead of those of the corporation’s shareholders.”).

In this case, the property sold by the Trustee was titled solely in the name of Nev-Mark; as
well, the claim asserted by Central States is solely against the business entity of Nev-Mark. Thus,
the Trustee, having only succeeded to the Debtor’s membership interest in Nev-Mark, has no specific
interest in Nev-Mark’s property. Instead, as put forth by Central States, because it, and not the
Trustee, holds a claim Nev-Mark, it is entitled to have its claim satisfied from property held by Nev-

Mark ahead of any interest claimed by the Trustee.

In opposition to this outcome, the Trustee attacks Central States’ status as a creditor of Nev-
Mark. In doing so, the Trustee takes the position that the withdraw liability imposed upon Nev-Mark
was improperly assessed because it was based upon ERISA’s “common control” doctrine which is
only applicable if the Debtor owned more than 50% of Nev-Mark. According to the Trustee, the

Debtor never reached this ownership threshold in Nev-Mark because, although it may have been

Page 7

08-37046-rls Doc 86 FILED 05/18/12 ENTERED 05/18/12 16:25:02 Page 7 of 13

08-3

In re Nevin and Caryl Liber
Case No. 08-37046

their intent, the Debtor’s brother failed to effectively transfer his interest in Nev-Mark to the Debtor.

The following outlines the underlying legal basis for the Trustee’s position.

Ordinarily, one company is not liable for another company’s debts, even if there exists
between the companies an identity of ownership. See Dombroski v. Wellpoint, Inc., 119 Ohio St.3d
506, 507, 895 N.E.2d 538, 539 (2008) (in order to disregard the corporate form, there must be a
finding of “fraud, an illegal act or similarly unlawful act”). As a general matter, therefore, any debts
incurred by Cherry Auto would not extend to Nev-Mark, notwithstanding that the Debtor held a
major interest in both of these companies. For purposes of imposing liability under ERISA, however,
companies which are found to be under “common control” are jointly and severally liable for one

another’s debts. 29 U.S.C. § 1301(b)(1).

In the type of situation presented here — involving brother-sister corporations, as opposed to
a parent-subsidiary corporate structure — companies will be deemed to be under “common control”
if (1) “five or fewer persons who are individuals, estates, or trusts” own a controlling interest (at least
80 percent of the stock) in two or more organizations and (2) the same persons maintain ‘effective
control’ (more than 50 percent of the stock) over each organization.” Central States, Southeast and
Southwest Areas Pension Fund v. SCOFBP, LLC, 738 F.Supp.2d 840, 846 (N.D.IIl. 2010), citing
26 C.F.R. § 1.414(c)-2.

The Trustee’s position attacks the second requirement, by averting that the Debtor never had
“effective control” over Nev-Mark because, on account of his brother’s failure to effectuate a transfer
of his 50% ownership interest in Nev-Mark, the Debtor never owned more than 50% of the
company. And, as an evidentiary matter, the Trustee’s position may very well have merit. The only

documentation before the Court directly evidencing a transfer of the brother’s interest in Nev-Mark

2 The Trustee pointed out that, after the Debtor filed for bankruptcy relief, she has received an
assignment of the 50% interest held by the Debtor’s brother in Nev-Mark.

Page 8

7046-rls Doc 86 FILED 05/18/12 ENTERED 05/18/12 16:25:02 Page 8 of 13

In re Nevin and Caryl Liber
Case No. 08-37046

to the Debtor is a purchase agreement. An agreement to purchase, however, will not ordinarily by
itself effectuate a transfer of a person’s interest in property. At the very least, this type of

documentation should be coupled with other evidence of a transfer.

Notwithstanding, as a legal matter, the introduction of such evidence on the part of Central
States is not necessary in this particular case. On September 15, 2010, a default judgment was
entered against Nev-Mark by the United States District Court for the Northern District of Illinois in

the amount of $451,953.01. This judgment is res judicata.

For purposes of federal law, applicable here since the judgment was entered by a federal

court, the United States Supreme Court has described the doctrine of res judicata in these terms:

when a final judgment has been entered on the merits of a case it is a finality

as to the claim or demand in controversy, concluding parties and those in

privity with them, not only as to every matter which was offered and received

to sustain or defeat the claim or demand, but as to any other admissible

matter which might have been offered for that purpose. The final judgment

puts an end to the cause of action, which cannot again be brought into

litigation between the parties upon any ground whatever.
Nevada v. United States, 463 U.S. 110, 129-30 103 S.Ct. 2906, 2918 (1983) (internal quotations and
citations omitted). Consistent with this definition, liability against Nev-Mark could only be sustained
if, for purposes of ERISA, it and Cherry Auto were determined to be under the “common control”
of the Debtor. To be sure, with the judgment rendered against Nev-Mark being entered by default,
the matter of the Debtor’s ownership interest in Nev-Mark was not specifically determined by the

district court.

However, a party seeking to obtain a default judgment must still establish the elements of a
prima facie case with competent evidence. Thus, it is recognized that, in the absence of fraud,

collusion, or lack of jurisdiction, a judgment obtained by default is no less binding in a subsequent

Page 9

08-37046-rls Doc 86 FILED 05/18/12 ENTERED 05/18/12 16:25:02 Page 9 of 13

08-3

In re Nevin and Caryl Liber
Case No. 08-37046

suit as a judgment entered after a determination on the merits of the complaint. 10A Fed. Prac. &
Proc. Civ. § 2684 (3d ed.). In this matter, however, no grounds were raised warranting a finding that
the judgment entered by the district court in Illinois was improper. Of particular note, the Trustee
readily acknowledges that she had notice of the action proceeding in the district court in INinois

against Nev-Mark.

The Court, while it is sympathetic to the Trustee’s position that the Debtor’s estate did not
have the financial resources available to defend a non-debtor party in an inconvenient forum, cannot
simply set aside a judgment ofa district court on this ground alone. Judgments entered by courts are
presumed to be valid, and a party wishing to contest the validity of a judgment should either appeal
the judgment or bring an action in the court rendering the judgment to have the judgment set aside.
46 Am. Jur. 2d Judgments § 32. For example, under Rule 55 of the Rules of Civil Procedure, the

court rendering a judgment by default may set it aside for “good cause.”

For all these reasons, the Court finds that Central States is entitled to the proceeds held by
the Trustee on account of the sale of the real property owned by the Debtor’s company, Nev-Mark.
However, pursuant to 11 U.S.C. § 105(a), the Court finds that the Trustee shall be entitled to deduct,
from those funds subject to turnover, the direct costs she incurred to effectuate a sale of said
property. In reaching the conclusions found herein, the Court has considered all of the evidence,
exhibits and arguments of counsel, regardless of whether or not they are specifically referred to in

this Decision.

Page 10

/046-rls Doc 86 FILED 05/18/12 ENTERED 05/18/12 16:25:02 Page 10 of 13

In re Nevin and Caryl Liber
Case No. 08-37046

Accordingly, it is

ORDERED that the Trustee, Ericka Parker, is directed to turnover to Central States Pension
Fund those funds she received from the sale of the real property owned and titled in the name of
Nev-Mark Development, Ltd. Pursuant to 11 U.S.C. § 105(a), the costs the Trustee incurred directly
related to the sale of said property are not subject to this order of turnover, and may be retained by

the Trustee.

Dated: May 18, 2012

(/ RGhard L. Speer

United States
Bankruptcy Judge

Page 11

08-37046-rls Doc86 FILED 05/18/12 ENTERED 05/18/12 16:25:02 Page 11 of 13

CERTIFICATE OF SERVICE

Copies were mailed this 18" day of May, 2012 to:

Benjamin Heywood

Lyden, Liebenthal & Chappell, Ltd.
5470 Main St

#300

Sylvania, OH 43560

Central States, Southeast and Southwest Areas Pension Fund

9377 W. Higgins Road
Rosemont, IL 60018

Erik G Chappell

Lyden, Liebenthal & Chappell
5470 Main Street

Suite 300

Sylvania, OH 43560

HUNTINGTON NATIONAL BANK
519 Madison Avenue
Toledo, OH 43604

Beth Ann Schenz
The Huntington National Bank
6101 West 130th Street, NEO1
Parma, OH 44130

Scott D. Fink

Weltman, Weinberg & Reis Co., L.P.A.
323 W. Lakeside Avenue

Suite 200

Cleveland, OH 44113

John J Hunter, Jr.
1700 Canton Ave
Canton Sq

#1

Toledo, OH 43604

Recovery Management Systems Corporation
25 S.E. 2nd Avenue, Suite 1120
Miami, FL 33131

08-37046-rls Doc 86 FILED 05/18/12

ENTERED 05/18/12 16:25:02 Page 12 of 13

Caryl S. Liber
7243 Saint Roberts Ln
Toledo, OH 43617-2219

Nevin A. Liber
7243 Saint Roberts Ln
Toledo, OH 43617-2219

Elliot H Feit

420 Madison Ave
1010 Ohio Bidg
Toledo, OH 43604

Ericka S Parker
232 10th Street
Toledo, OH 43604

/s/Dawn Serna-Gensch
Deputy Clerk, U.S. Bankruptcy Court

08-37046-rls Doc 86 FILED 05/18/12 ENTERED 05/18/12 16:25:02 Page 13 of 13