In re McKenzie

• Decision Date: 26 June 2012
• Docket Number: Nos. 1:11–CV–258,1:11–CV–320,1:11–CV–346.,s. 1:11–CV–258
• Citation: 476 B.R. 515
• Parties: In re Steve A. McKENZIE, Debtor.
• Court: U.S. District Court — Eastern District of Tennessee

476 B.R. 515

In re Steve A. McKENZIE, Debtor.

Nos. 1:11–CV–258, 1:11–CV–320, 1:11–CV–346.

United States District Court, E.D. Tennessee.

June 26, 2012.

Harry R. Cash, John P. Konvalinka, Grant, Konvalinka & Harrison, PC, Chattanooga, TN, for Appellant.

John M. Hull, Mark A. Pippenger, Steven W. Keyt, Leitner Williams Dooley Napolitan, PLLC, Clinton P. Sanko, Joshua A. Powers, Cherie Nicole Knotts, Baker, Donelson, Bearman, Caldwell & Berkowitz, Jerrold D. Farinash, Kennedy, Koontz & Farinash, Andrea D. Hayduk, Chattanooga, TN, for Appellee.

Kyle R. Weems, Weems & Ronan, Chattanooga, TN, Richard L. Banks, Richard Banks & Associates, P.C., Cleveland, TN, for Debtor.

MEMORANDUM

CURTIS L. COLLIER, Chief Judge.

Before the Court are three appeals from orders issued by the United States Bankruptcy Court for the Eastern District of Tennessee (Rucker, J.). The first order, which is the subject of the appeal in 1:11–CV–258, dismissed an adversary action filed by Appellant Grant, Konvalinka & Harrison, P.C. (“Appellant”) on the grounds that Appellees Richard L. Banks, Andrew B. Morgan, and Richard Banks & Associates, P.C. (the “Banks Defendants”); F. Scott Leroy, F. Scott Leroy doing business as Leroy & Bickerstaff, Leroy & Bickerstaff, PLLC, and Leroy, Hurst & Bickerstaff, PLLC (the “Leroy Defendants”); and Trustee C. Kenneth Still (the “Trustee”) were entitled to immunity (Case No. 1:11–CV–258, Court File No. 2 (the “August 12, 2011 Order”)). A second and third order are the subject of the appeal in 1:11–CV–320. The second order denied Appellant's motion for leave to file an action against Appellees Steve A. McKenzie and the Trustee in the Circuit Court of Bradley County, Tennessee (Case No. 1:11–CV–320, Court File No. 2–2 (the “August 5, 2011 Order”)) and the third order denied Appellant's motion to alter, amend, and/or otherwise set aside the court's order denying Appellant's motion for leave (Case No. 1:11–CV–320, Court File No. 2–3 (the “September 27, 2011 Order”)). The fourth order, which is the subject of the appeal in 1:11–CV–346, dismissed another adversary action filed by Appellant on the grounds that Appellees the Leroy Defendants and the Trustee were entitled to immunity and that Appellant had failed to state a claim upon which relief could be granted (Case No. 1:11–CV–346, Court File No. 1–13 (the “September 30, 2011 Order”)). The Court held oral arguments for all three appeals on February 8, 2012, and all parties were in attendance.

After giving careful consideration to the parties' arguments, relevant case law, and the evidentiary record, the Court AFFIRMS the judgment of the bankruptcy court in 1:11–CV–258; AFFIRMS the judgment of the bankruptcy court in 1:11–CV–320; and AFFIRMS the judgment of the bankruptcy court in 1:11–CV–346.

I. RELEVANT FACTUAL AND PROCEDURAL BACKGROUND¹

This case began as an involuntary Chapter 7 bankruptcy action filed against debtor Steve A. McKenzie on November 11, 2008, in the United States Bankruptcy Court for the Eastern District of Tennessee. The Chapter 7 bankruptcy was refiled as a voluntary Chapter 11 bankruptcy, and the two cases were later consolidated (Case No. 1:11–CV–258, Court File No. 8 at 25–27). All of the events discussed below arise from this consolidated bankruptcy matter.

A. Facts Relevant to 1:11–CV–258²

On August 5, 2010, Appellee C. Kenneth Still, Trustee, initiated an adversary proceeding against Appellant Grant, Konvalinka & Harrison by filing a complaint in the bankruptcy court before Judge John C. Cook alleging, inter alia, violations of the automatic stay, avoidance of preferences, avoidance of fraudulent transfers, equitable subordination, and claims against insiders (Court File No. 8 at 7–24). The complaint was signed by Appellee Richard L. Banks, attorney for the Plaintiff/Debtor and special litigation attorney for the Trustee, and Appellee F. Scott Leroy, attorney for the Trustee. At the heart of the Trustee's complaint was an allegation that Appellant assisted Nelson Bowers II (a client of Appellant who, along with debtor Steve McKenzie, was a 50% member in a company named Cleveland Auto Mall, LLC) in creating a separate entity called Exit 20, LLC to receive property from Cleveland Auto Mall, LLC after the filing of the involuntary bankruptcy petition and in violation of the automatic stay.

Judge Cook dismissed the Trustee's claims pursuant to Rule 12(b) (6) of the Federal Rules of Civil Procedure on December 16, 2010 (Court File No. 8 (“December 16, 2010 Order”), at 98–99). Among other things, Judge Cook concluded that the real estate at issue was not property of the bankruptcy estate as a matter of law (Court File No. 8 at 108–110). He noted that whether Cleveland Auto Mall, LLC could properly be called “property of the estate,” “property of the debtor,” or an “interest of the debtor in property” turned on state law. In Tennessee, a limited liability company has an existence apart from its members. Therefore, the Court held the alleged transfers involved property of Cleveland Auto Mall, LLC-as opposed to debtor McKenzie—and was therefore not property of the estate ( id.). Judge Cook concluded Appellees failed to state a plausible claim on which relief could be granted.

On February 11, 2011, Appellant filed a complaint in bankruptcy court and brought two state law claims against Appellees: malicious prosecution and abuse of process (Court File No. 8 at 1–6). Bankruptcy Judge Shelley Rucker handled this matter. On August 12, 2011, Judge Rucker dismissed Appellant's claims pursuant to Rule 12(b)(6) and 12(c) on the grounds that Appellees were entitled to immunity (Court File No. 2–2 (“August 12, 2011 Order”)). Appellant appealed the August 12, 2011 Order by filing a notice of appeal on August 19, 2011.

B. Facts Relevant to 1:11–CV–320³

On August 6, 2010, Appellees Trustee Still and Steve McKenzie via counsel filed a complaint in Bradley County, Tennessee against Appellant, Nelson Bowers II, Exit 20 Auto Mall, LLC, and an additional party (Court File. No. 10 at 1–14). The Bradley County action involved claims for breach of fiduciary duty and conflict of interest, assisting a fiduciary in committing a breach of duty, and civil conspiracy.

Appellant filed a motion to dismiss. On January 26, 2011, the Chancery Court of Bradley County dismissed two of Appellees' claims due to the passing of the applicable statute of limitations (Court File No. 10–2 at 92–93). On March 4, 2011, the parties entered an agreed order dismissing the remaining counts in the Bradley County action (Court File No. 10–1).

On April 22, 2011, Appellant filed a motion for leave of court to file a complaint in Bradley County against Trustee Still and his attorneys alleging claims of malicious prosecution and abuse of process (Court File No. 2–4). The bankruptcy court denied Appellant's motion for leave on August 5, 2011 (Court File No. 2–2). Appellant filed a subsequent motion to alter, amend, and/or otherwise set aside the court's order denying Appellant's motion for leave of court (Court File No. 10–4). The bankruptcy court denied this motion on September 27, 2011 (Court File No. 2–3). On October 4, 2011, Appellant filed a notice of appeal with respect to the August 5, 2011 Order and the September 27, 2011 Order.

C. Facts Relevant to 1:11–CV–346⁴

On July 23, 2010, Appellee Trustee Still, through counsel Appellee F. Scott Leroy, filed a complaint in Hamilton County, Tennessee for Appellant and other related parties to turn over files, books, records, and other related documents believed to be in their possession and allegedly belonging to the bankruptcy estate of debtor Steve McKenzie (Court File No. 1–3 at 22–24). The Hamilton County action was dismissed on November 5, 2010, by the parties through an agreed order of dismissal (Court File No. 1–3 at 128–29).

On February 18, 2011, Appellant filed a motion for leave of court to file an action in Hamilton County against Appellees for filing the July 23, 2010 complaint. The bankruptcy court denied Appellant's motion for leave on July 21, 2011. Appellant did not appeal the order, but the following day, filed a complaint in the bankruptcy court against Trustee Still and the Leroy Defendants claiming the filing of the Hamilton County action was both an act of malicious prosecution and abuse of process (Court File No. 1–3 at 1–17). On September 30, 2011, the bankruptcy court dismissed Appellant's July 22, 2011 complaint (Court File Nos. 1–12, 1–13). Appellant filed a notice of appeal on October 12, 2011.

II. STANDARD OF REVIEW

The district court has appellate jurisdiction to hear appeals from final judgments and orders of the bankruptcy court pursuant to 28 U.S.C. § 158(a)(1). The bankruptcy court's factual findings are reviewed for clear error and its conclusions of law are reviewed de novo. In re Behlke, 358 F.3d 429, 433 (6th Cir.2004). A finding of fact is considered clearly erroneous if “the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” Heights Cmty. Cong. v. Hilltop Realty, Inc., 774 F.2d 135, 140 (6th Cir.1985).

A bankruptcy court's decision to dismiss a case is generally reviewed for abuse of discretion. In re DSC, Ltd., 486 F.3d 940, 944 (6th Cir.2007). Abuse of discretion is also the proper standard for any equitable determinations of the bankruptcy court. Mayor of Baltimore v. W. Va. (In re Eagle–Picher Indus., Inc.), 285 F.3d 522, 527 (6th Cir.2002).

Several of Appellant's claims were dismissed by the bankruptcy court under Rules 12(b) and 12(c) of the Federal Rules of Civil Procedure, which were expressly adopted by Federal Rule of Bankruptcy Procedure 7012(b). A motion to dismiss filed pursuant to Rule 12(b)(6) “allow[s] a defendant to test whether, as a matter of law, [a] plaintiff is entitled to legal relief even if everything alleged in the complaint is true.” Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir.1993). The complaint must...