In re Bruner, 010417 FED6, 15-8031

Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
Attorney:Richard Boydston, BINGHAM GREENEBAUM DOLL LLP, Cincinnati, Ohio, for Appellant. Yelena Bakman, KOURI LAW FIRM, Irvine, California, for Appellees. Richard Boydston, BINGHAM GREENEBAUM DOLL LLP, Cincinnati, Ohio, for Appellant. Yelena Bakman, KOURI LAW FIRM, Irvine, California, for Appellees.
Judge Panel:Before: DELK, HUMPHREY, and OPPERMAN, Bankruptcy Appellate Panel Judges.
Opinion Judge:GUY R. HUMPHREY, Bankruptcy Appellate Panel Judge.
Party Name:In re: Sheryl Bruner, Debtor. v. Michael John Khouri; Khouri Law Firm, Defendants-Appellees. Phaedra Spradlin, Plaintiff-Appellant,
Case Date:January 04, 2017
Docket Nº:15-8031
 
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In re: Sheryl Bruner, Debtor.

Phaedra Spradlin, Plaintiff-Appellant,

v.

Michael John Khouri; Khouri Law Firm, Defendants-Appellees.

No. 15-8031

Bankruptcy Appellate Panel of the Sixth Circuit

January 4, 2017

          Argued: May 26, 2016

         Appeal from the United States Bankruptcy Court for the Eastern District of Kentucky at Lexington. No. 13-51267-Tracey N. Wise, Judge.

         ARGUED:

          Richard Boydston, BINGHAM GREENEBAUM DOLL LLP, Cincinnati, Ohio, for Appellant.

          Yelena Bakman, KOURI LAW FIRM, Irvine, California, for Appellees.

         ON BRIEF:

          Richard Boydston, BINGHAM GREENEBAUM DOLL LLP, Cincinnati, Ohio, for Appellant.

          Yelena Bakman, KOURI LAW FIRM, Irvine, California, for Appellees.

          Before: DELK, HUMPHREY, and OPPERMAN, Bankruptcy Appellate Panel Judges.

          OPINION

          GUY R. HUMPHREY, Bankruptcy Appellate Panel Judge.

         In this appeal, Phaedra Spradlin, Chapter 7 Trustee, appeals the bankruptcy court's order and decision denying the Trustee's request for turnover of funds paid to the debtor's criminal attorney and his firm post-petition from a joint bank account that the debtor shared with her mother. The bankruptcy court held that, assuming the funds belonged to the debtor, once the funds were transferred to the attorney, they no longer belonged to the debtor, and turnover was not an appropriate remedy since the fees were no longer property of the estate. For the reasons stated in this opinion, the Panel affirms the bankruptcy court's decision and order.

         ISSUES ON APPEAL

         1. Whether the bankruptcy court erred in its determination that the Trustee did not meet her burden in proving that the Attorney Fee paid to the Defendants was property of the chapter 7 bankruptcy estate, and thus subject to turnover under § 542 of the Bankruptcy Code.

         2. Whether the bankruptcy court was required to consider whether the payment to the Defendants could be avoided under § 549 of the Bankruptcy Code.

         3. Whether the bankruptcy court abused its discretion by finding that previous testimony proffered into evidence by the Trustee was inadmissible hearsay.

         JURISDICTION AND STANDARD OF REVIEW

         The Bankruptcy Appellate Panel of the Sixth Circuit ("Panel") has jurisdiction to decide this appeal. The United States District Court for the Eastern District of Kentucky has authorized appeals to the Panel, and no party has timely filed to have this appeal heard by the district court. 28 U.S.C. §§ 158(b)(6), (c)(1). A final order of the bankruptcy court may be appealed as of right. 28 U.S.C. § 158(a)(1). For the purpose of an appeal, a final order is one that "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. U.S., 489 U.S. 794, 798, 109 S.Ct. 1494, 1497 (1989) (citation omitted).

         Whether property is part of the bankruptcy estate is a question of law. Kitchen v. Boyd (In re Newpower), 233 F.3d 922, 927 (6th Cir. 2000). The bankruptcy court's legal conclusions are reviewed de novo. Corzin v. Fordu (In re Fordu), 209 B.R. 854, 857 (B.A.P. 6th Cir. 1997). "Under a de novo standard of review, the reviewing court decides an issue independently of, and without deference to, the trial court's determination." Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798, 800 (B.A.P. 6th Cir. 2007) (citation omitted). Essentially, the reviewing court decides the issue "as if it had not been heard before." Mktg. & Creative Solutions, Inc. v. Scripps Howard Broad. Co. (In re Mktg. & Creative Solutions, Inc.), 338 B.R. 300, 302 (B.A.P. 6th Cir. 2006) (citation omitted). "No deference is given to the trial court's conclusions of law." Id. (citation omitted).

         FACTS

         On May 16, 2013 Sheryl A. Bruner ("Debtor") filed a chapter 13 bankruptcy petition. Debtor's schedules indicated she had $1, 500 in a checking account and no cash on hand. On December 5, 2013 the Kentucky Attorney General's Medicare Fraud Unit executed a search warrant of the Debtor's home. The search resulted in the seizure of $270, 000 in cash stored in an unlocked safe. As a result of the discovery of the concealed cash, the Chapter 13 trustee moved to convert the case to chapter 7. The court granted that motion on December 27, 2013 and Phaedra Spradlin ("Trustee") was appointed as the Chapter 7 trustee.

         On January 9, 2014 the Debtor was indicted for fraudulently claiming Social Security benefits, bankruptcy fraud, and money laundering. On January 16, 2014 the Debtor's mother, Mary Jane Newton ("Newton"), deposited $51, 000 in cash into a joint bank account she held with the Debtor. Immediately after depositing the money, Newton transferred $50, 000 to the Appellee Khouri Law Firm to retain the firm as the Debtor's criminal counsel. ("Attorney Fee") (Khouri and his law firm shall be referred to as "Defendants"). The Defendants represented the Debtor in her criminal trial in which she was convicted of all counts in March of 2014. Her conviction was affirmed by the United States Court of Appeals for the Sixth Circuit on July 30, 2015.

         On February 11, 2014 the Trustee filed a bare bones complaint, initiating an adversary proceeding to pursue the Attorney Fee. Complaint by Trustee for Turnover, ECF No. 1.1("Complaint"). The Complaint alleged that the Attorney Fee was property of the chapter 7 estate and that the Trustee was entitled to take possession of the fee pursuant to, inter alia, § 541 of the Bankruptcy Code. Other than the title to the Complaint being "Complaint By Trustee For Turnover, " the three-page complaint did not mention that the Trustee was pursuing the Attorney Fee under § 542, nor the theory under which the funds transferred to the Defendants remained property of the estate. The Defendants answered the Trustee's Complaint by denying all substantive allegations and asserting 21 affirmative defenses.

         Before answering the Complaint, the Defendants moved for summary judgment.2Specifically, the Defendants argued that '"The Trustee has failed to tie the $50, 000 retainer in any way, shape, or form to the bankruptcy estate.'" Order Denying Motion for Summary Judgment, Jan. 30, 2015, ECF No. 75 (quoting the Defendants' Motion for Summary Judgment). The bankruptcy court found that: It is undisputed that the immediate source of Defendants' retainer to represent the Debtor in her pending criminal action was a $50, 000 wire transfer from the Debtor's mother, Mary Jane Newton, which in turn came from a cash deposit made into a joint account of the Debtor and Ms. Newton the day before the transfer.

Id. at 1, 2. The bankruptcy court went on to find that: the Trustee had presented evidence to the effect that the Debtor and her mother, Newton, lived together; that all of Newton's cash was seized by police a month before the wire transfer; and that following the seizure of cash from the Debtor and Newton's home, the Debtor withdrew over $130, 000 of cash from various bank accounts. Id. at 2. Based upon these findings, the bankruptcy court determined that there was a "genuine issue of material fact as to whether the Debtor's funds were the source of the cash deposit made by Newton and subsequent wire transfer" and denied the Defendants' Motion for Summary Judgment. Id.

         On February 4, 2015 the bankruptcy court entered the Second Amended Order for Trial, setting the trial date as well as deadlines for trial briefs and stipulations. ECF No. 78. The parties submitted their first Joint Stipulation of Fact on March 17, 2015, stipulating that: 1. Plaintiff is the Chapter 7 trustee in the chapter 7 case of Sheryl Ann Bruner (the "Debtor").

2. Defendant Michael J. Khouri is the counsel for the Debtor as defendant in Criminal Action No. 5:14-CR-5-KKC in the United States District Court for the district styled United States of American, plaintiff v. Sheryl Bruner, defendant (the "Criminal Case").

3. The federal criminal proceeding was commenced with an indictment on January 9, 2014, two weeks after the Debtor's bankruptcy case was converted from Chapter 13 to Chapter 7. The Debtor was arrested on January 10, 2014. After a federal court detention hearing held January 15 and 16, 2014 the Debtor was incarcerated and has remained continuously in federal custody since then.

4. Debtor was found guilty in the Criminal Case on March 13, 2014. Judgment was entered and sentencing was imposed on August 7, 2014.

5. The Debtor, through defendants, is currently pursuing an appeal of the judgment in the Criminal Case in the Court of Appeals in the Sixth Circuit (the "Appeal").

6. Defendants contend that all of the Deposit were funds owned by Mary Jane Newton and were thus not property of the bankruptcy estate.

7. Plaintiff contends the Deposit was entirely of funds...

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