Gorenz v. State of Ill. Dept. of Agriculture

• Decision Date: 15 July 1981
• Docket Number: No. 80-1337,80-1337
• Citation: 653 F.2d 1179
• Parties: John A. GORENZ, d/b/a Gorenz Grain Company and Edward Limperis, Trustee in Bankruptcy of John A. Gorenz d/b/a Gorenz Grain Co., Plaintiffs-Appellees, v. STATE of ILLINOIS DEPARTMENT of AGRICULTURE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1179

653 F.2d 1179

7 Bankr.Ct.Dec. 1267

John A. GORENZ, d/b/a Gorenz Grain Company and Edward

Limperis, Trustee in Bankruptcy of John A. Gorenz

d/b/a Gorenz Grain Co., Plaintiffs-Appellees, v. STATE of ILLINOIS DEPARTMENT of AGRICULTURE, Defendant-Appellant.

No. 80-1337.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 3, 1980.

Decided July 15, 1981.

Myra Turner, Asst. Atty. Gen., Chicago, Ill., for defendant-appellant.

Steven J. Kadison, Chicago, Ill., for plaintiffs-appellees.

Before BAUER, Circuit Judge, WISDOM, Senior Circuit Judge, ^* and CUDAHY, Circuit Judge.

CUDAHY, Circuit Judge.

The question on appeal is whether the bankruptcy court properly exercised its summary jurisdiction in ordering the Illinois Department of Agriculture (the "Department") to turn over the proceeds realized from the Department's sale of grain taken from the possession of John Gorenz, the bankrupt in this action. Because the record before us is insufficient to support the bankruptcy court's summary adjudication of the Department's claims, we reverse the district court's affirmance of the bankruptcy court's turnover order and remand for further proceedings. ¹

I.

The Illinois Department of Agriculture is charged by statute with responsibility for regulating grain dealers, Ill.Rev.Stat. ch. 111, §§ 301-311 (1979), and grain warehouses, Ill.Rev.Stat. ch. 114, § 214.1 et seq. (1979). On January 12, 1978, the Department seized grain in the possession of John Gorenz, doing business as Gorenz Grain Company, who was, it appears, performing the functions of a grain dealer and/or a grain warehouseman. ² Acting pursuant to Ill.Rev.Stat. ch. 127, § 40.23 (1979), the Department subsequently sold the grain and retained the proceeds of the sale (approximately $38,000). Section 40.23 empowers the Department:

To control surety bonds and trust funds and to establish trust accounts and bank accounts in adequately protected financial institutions, to hold monies received by the Director of Agriculture when acting as trustee, to protect the assets of licensees for the benefit of claimants, to collect and disburse the proceeds of such bonds and trust funds when acting as trustee on behalf of claimants without responsibility for the management and operation of discontinued or insolvent businesses, such funds or additions thereto in which the State of Illinois has no right, title or interest.

On January 23, 1978, Gorenz filed a voluntary petition in bankruptcy and was adjudicated a bankrupt. On March 8, 1978, Edward Limperis was appointed as trustee of the bankrupt's estate, and, on March 12, 1979, Limperis filed a complaint in the bankruptcy court for an accounting and turnover of the grain proceeds held by the Department. The Department refused to consent to the bankruptcy court's summary jurisdiction and filed a motion to dismiss the complaint.

The bankruptcy court denied the Department's motion and held that the Department was required to surrender the proceeds of the grain sale to the trustee pursuant to Sections 2(a)(21) and 69(d) of the Bankruptcy Act ³ and Rule 604 of the Federal Rules of Bankruptcy Procedure. ⁴

The Department appealed this turnover order to the district court, which affirmed the bankruptcy court on February 13, 1980.

II.

It is well established that the bankruptcy court may summarily adjudicate claims pertaining to property in its actual or constructive possession. Katchen v. Landy, 382 U.S. 323, 327, 86 S.Ct. 467, 471, 15 L.Ed.2d 391 (1966). If, however, the property is in the actual or constructive possession of a third person asserting a bona fide adverse claim, ⁵ the bankruptcy court cannot summarily determine the rights of that person in the property, unless by that person's consent. 2 Collier on Bankruptcy, supra, P 23.04 at 453-56.

But the mere assertion of an adverse claim does not oust a court of bankruptcy of its jurisdiction. It has both the power and the duty to examine a claim adverse to the bankrupt estate to the extent of ascertaining whether the claim is ingenuous and substantial. Once it is established that the claim is not colorable nor frivolous, the claimant has the right to have the merits of his claim passed on in a plenary suit and not summarily. Of such a claim the bankruptcy court cannot retain further jurisdiction unless the claimant consents to its adjudication in the bankruptcy court.

Cline v. Kaplan, 323 U.S. 97, 98-99, 65 S.Ct. 155, 156, 89 L.Ed. 97 (1944) (citations omitted).

The parties in the instant case agree that the bankruptcy court did not have actual or constructive possession of the grain proceeds. Therefore, the summary turnover order of the bankruptcy court can be sustained only if that court's preliminary inquiry demonstrated that the Department's claim to the proceeds "is so unsubstantial and obviously insufficient, either in fact or law, as to be plainly without color of merit, and a mere pretense." Harrison v. Chamberlin, 271 U.S. 191, 195, 46 S.Ct. 467, 469, 70 L.Ed. 897 (1926). ⁶

Here the bankruptcy court held, in its unpublished order dated July 30, 1979, that the Department did not have a substantial claim to the proceeds because its claim was

(d)erivative from the debtor's estate. It is not an adverse claim of a lien or priority creditor whose possession at the time of filing the petition in bankruptcy could defeat summary jurisdiction of the bankruptcy court.

....

Since the State's role here is that of a custodian, agent or assignee, standing in the shoes of the debtor, its claim here is not adverse (to the estate) so as to defeat summary jurisdiction of the bankruptcy court. Such claim is not real or substantial but merely colarable (sic). Beneficial Finance Co. v. Ray, (5th Cir. 1954) 328 F.2d 55.

In affirming the bankruptcy court, the district court, in its unpublished order dated February 13, 1980, accepted the bankruptcy court's characterization of the facts and determined that the Department's claim to the proceeds rose no higher than that of the farmers for whose benefit the grain was seized:

While it is true that the farmers ... may have a bona fide legal claim to the $38,000, they had not taken any steps to perfect that claim prior to the date on which the bankruptcy petition was filed. Hence ... at the relevant time they were in neither actual nor constructive possession of the assets in issue. This means that the farmers, at the time of filing, were not adverse claimants and the state, which was holding for their benefit, cannot be deemed a "custodian for ... adverse claimant(s)." (citing Phelps v. United States, 421 U.S. 330, 337, 95 S.Ct. 1728, 1732, 44 L.Ed.2d 201 (1975).) ⁷

But the holdings of both the bankruptcy court and the district court rest on the premise that the farmers had sold their grain to Gorenz and were, therefore, unsecured creditors of the bankrupt for the purchase price. In these circumstances, the Department was viewed as a "mere naked bailee (for a group of creditors)," Phelps v. United States, 421 U.S. 330, 337, 95 S.Ct. 1728, 1732, 44 L.Ed.2d 201 (1975), having no substantial claim to the grain (or to the proceeds of its sale by the Department) adverse to the bankrupt.

The Department argues, however, that the summary record does not show that the farmers had sold their grain to Gorenz. Rather, the Department maintains, Gorenz appears to have been serving as a grain warehouseman (albeit without a license). If so, the farmers would presumably have retained ownership of their grain, and Gorenz would have been a mere bailee for them. Since, in these circumstances, Gorenz would have had no ownership interest in the grain, the trustee in bankruptcy could acquire no such interest, see Cattle Owners Corp. v. Arkin, 252 F.Supp. 34 (S.D.Iowa 1966), and the Department, as trustee on behalf of the farmers who retained ownership of the grain, ⁸ would have a claim to the grain sale proceeds of sufficient merit to avoid the bankruptcy court's summary jurisdiction.

The trustee maintains that the Department's argument is without merit because it is not supported by any evidence in the record. ⁹ The trustee fails to recognize, however, that "the burden of proof in a turnover proceeding is at all times on the receiver or trustee; he must at least establish a prima facie case. After that, the burden of explaining or going forward shifts to the other party, but the ultimate burden or risk of persuasion is upon the receiver or trustee." 2 Collier on Bankruptcy, supra, P 23.10 at 566. See also Maggio v. Zeitz, 333 U.S. 56, 68 S.Ct. 401, 92 L.Ed. 476 (1948).

As part of his prima facie case, the trustee must demonstrate through clear and convincing evidence that the property or proceeds in question are a part of the bankrupt's estate. Maggio v. Zeitz, supra, 333 U.S. at 64, 68 S.Ct. at 405; Fox Jewel Co. v. Lee, 264 F.2d 720 (5th Cir.), cert. denied, 361 U.S. 815 (1959). ¹⁰ The quantum of evidence necessary to satisfy the trustee's burden of persuasion will necessarily vary according to the circumstances of individual cases. In the instant case, however, we believe the trustee did not introduce sufficient evidence to establish that Gorenz had title to the grain seized by the Department. The only evidence in the record before us concerning ownership of the grain consists of two pages of an apparently unsigned "Statement of Affairs for Bankrupt Engaged in Business," attached as an "exhibit" to the brief filed by the trustee in the district court. The second of these pages, entitled "Schedule B-2. Personal Property," lists 105,000 bushels of corn (valued at $189,000) and 5,000 bushels of soy beans (valued at $25,000) as "inventory."

Perhaps an affidavit from Gorenz stating that he had purchased the seized grain from the farmers would have been sufficient to meet the trustee's burden of persuasion. But we do not know who prepared the statement before us and we therefore cannot determine whether it was prepared by someone...