In re Allen

Decision Date26 September 2014
Docket NumberNo. 13–3543.,13–3543.
Citation768 F.3d 274
PartiesIn re Daniel W. ALLEN, Sr., Debtor. Advanced Telecommunication Network, Inc., Appellant.
CourtU.S. Court of Appeals — Third Circuit

Jason H. Baruch, Esq., Argued, Trenam Kemker, Tampa, FL, Edward L. Paul, Esq., Sklar & Paul, Voorhees, NJ, Counsel for Appellant.

Daniel W. Allen, Sr., Argued, Ocean City, NJ, pro se Appellee.

Before: FISHER, SCIRICA and COWEN, Circuit Judges.

OPINION OF THE COURT

FISHER, Circuit Judge.

Although the facts of this case include details of money transfers and offshore asset protection trusts in sunny South Pacific locales, its ultimate resolution involves nothing more exotic than the interpretation of the Bankruptcy Code. We consider the Code's provisions defining the property of a bankruptcy estate and determine what is required for a trustee to “recover” that property for the benefit of the estate, as provided in 11 U.S.C. § 550. The property at issue here is $6 million that was fraudulently transferred by Appellant Advanced Telecommunication Network (ATN) to two of its former owners, including Appellee Daniel W. Allen, Sr. (“Allen”), as part of a shareholder litigation settlement in 1999. ATN avoided that transfer and obtained a recovery order in its separate bankruptcy proceedings in the United States Bankruptcy Court for the Middle District of Florida (the Florida Bankruptcy Court). Allen subsequently filed the present bankruptcy case in the District of New Jersey, and argues that the funds were never recovered and are therefore property of his estate subject to the Code's automatic stay provision. We conclude that the District Court applied too narrow a definition of “recover” and hold that where a debtor (like ATN) avoids a fraudulent transfer and obtains a recovery order, it has sufficiently “recovered” those funds such that they are a part of that debtor's estate under the Code. Accordingly, we will reverse and remand this case to the District Court.

I.

In 1989, Allen and Gary Carpenter (“Carpenter”) founded ATN, a company engaged in reselling long distance telephone service. Allen and Carpenter each owned 50% of the voting stock in ATN, while Allen's brother David Allen and Carpenter's father Robert Carpenter owned the remaining non-voting stock. Allen and Carpenter had a falling out in the spring of 1996, and Carpenter ultimately terminated Allen's employment with ATN on August 14, 1996.

A. The Allen–Carpenter shareholder litigation

Allen sued Carpenter and ATN in New Jersey state court in April 1996, asserting several claims pertaining to the management of ATN. During trial, Daniel and David Allen (the “Allens”) and Carpenter (along with their respective attorneys) entered into a handwritten settlement agreement that relieved Carpenter of any liability to the Allens in exchange for, inter alia, a $1.25 million payment to the Allens' attorneys, a $6.25 million payment to the Allens in two installments ($250,000 and $6 million), and a stipulation of dismissal with prejudice upon execution. A formal written agreement outlining substantially the same terms was signed on January 12, 1999, and the $6 million transfer (at issue in the present case) was made on June 1, 1999.1

B. The ATN bankruptcy

On January 10, 2003, ATN filed for Chapter 11 bankruptcy protection in the Florida Bankruptcy Court. ATN also filed an adversary proceeding against the Allens on April 28, 2003, seeking, inter alia, to avoid the $6 million transfer pursuant to §§ 544 and 5502 of the Bankruptcy Code, as well as the New Jersey Uniform Fraudulent Transfer Act (the “New Jersey UFTA), N.J. Stat. Ann. § 25:2–20 et seq. The adversary complaint alleged that the $6 million payment to the Allens on June 1, 1999, was fraudulent insofar as ATN did not receive reasonably equivalent value in exchange.

After commencing the adversary proceeding in the Florida Bankruptcy Court, ATN sought a preliminary injunction to freeze the funds at issue. The Allens moved for a continuance, which the court granted. In the interim, the Allens took the following actions: Daniel Allen transferred the the [sic] Assets under his control to a Cook Islands self-settled asset protection trust known as the Shingle Oak Family Trust ... and ... David Allen ... transferred approximately $150,000 to a Cook Islands self settled [sic] asset protection trust known as the Southern Breeze Trust.” App. at 124. The Florida Bankruptcy Court found that, as a result of these actions, [g]ood cause exists to believe that Defendants acted in bad faith in twice requesting a continuance of the Preliminary Injunction Hearing,” thus allowing them time to transfer the money to the Cook Islands trusts. App. at 129. The court granted preliminary injunctive relief and ordered that the funds be repatriated. When the Allens failed to comply with the court order, the Florida Bankruptcy Court twice held Daniel Allen in contempt of court.

When the case proceeded to trial, the Allens prevailed. The Florida Bankruptcy Court found that ATN's claim was barred by the applicable statute of limitations and that its fraudulent transfer claims failed on the merits under the New Jersey UFTA. The Court of Appeals for the Eleventh Circuit reversed. Advanced Telecomm. Network, Inc. v. Allen (In re Advanced Telecomm. Network, Inc.), 490 F.3d 1325 (11th Cir.2007). The Eleventh Circuit held that ATN had proved a fraudulent transfer under the New Jersey UFTA insofar as: (1) it was insolvent at the time of the $6 million transfer; and (2) it received no reasonably equivalent value for the transfer. Id. at 1332–38. On remand, the Florida Bankruptcy Court avoided the transfers to the Allens and entered a $6 million judgment on January 15, 2010, in favor of ATN on its fraudulent transfer claims. ATN then sought to collect on its judgment pursuant to Federal Rule of Bankruptcy Procedure 7069. In response, the Florida Bankruptcy Court entered an order directing Daniel Allen: (i) to repatriate all monies currently held in his Shingle Oak Trust to counsel for ATN within 30 days of the entry of [the] order, (ii) to provide an accounting of all monies deposited in and transferred from the Shingle Oak Trust within 60 days of the entry of [the] order, and (iii) to otherwise immediately freeze any other use or transfer of any monies in the Shingle Oak Trust.” App. at 208. When Allen failed to comply with the second repatriation order, ATN brought a motion to hold Allen in contempt on August 30, 2011. No action was taken on that motion because on September 21, 2011, Allen filed a Chapter 7 bankruptcy petition in the Bankruptcy Court for the District of New Jersey (the Bankruptcy Court).

C. Proceedings in the present case

ATN filed the instant adversary proceeding in the Bankruptcy Court shortly after Allen filed his Chapter 7 petition. ATN sought an order “determining that the ATN/Allen Litigation [in the Florida Bankruptcy Court] was not stayed pursuant to [Allen's] bankruptcy filing because ATN was seeking to collect its own estate assets and not those of [Allen];” or, in the alternative, “granting ATN relief from the automatic stay to continue with the ATN/Allen Litigation and collection of the Judgment and waiving the 14 day stay of effectiveness of order.” App. at 288. ATN maintains that the funds at issue should not be subject to the automatic stay3 in Allen's bankruptcy case pursuant to § 362(d) of the Code, which allows a court to grant relief from the stay “for cause.” 11 U.S.C. § 362(d)(1).

Following a hearing, the Bankruptcy Court denied ATN's motions by concluding that: (1) any property in the Cook Islands trusts was not property of ATN's bankruptcy estate pursuant to 11 U.S.C. § 541,4 but was instead property of Allen's estate and thus subject to the automatic stay upon Allen's bankruptcy filing; and (2) the funds were not held by Allen in constructive trust for the benefit of ATN under New Jersey law. As is relevant here, the Bankruptcy Court concluded that the funds did not fit within the Bankruptcy Code's definition of “property of the estate” because ATN—despite having avoided the transfer—did not actually recover tangible possession of the funds under § 550. Absent actual tangible recovery, Allen had a superior interest in the funds, which were thus the property of his estate (not ATN's) and subject to the automatic stay. The Bankruptcy Court entered its opinion on March 2, 2012, and ATN appealed.

On July 19, 2013, the District Court affirmed for essentially the same reasons. It also rejected ATN's argument that the New Jersey Bankruptcy and District Courts (the “New Jersey Federal Courts) lacked jurisdiction to hear the adversary proceeding. ATN filed a timely notice of appeal to this Court on August 19, 2013. On October 11, 2013, the Bankruptcy Court entered an order discharging Allen's debts pursuant to 11 U.S.C. § 727.

II.

The District Court had jurisdiction to hear the appeal below pursuant to 28 U.S.C. § 158(a), and we have jurisdiction pursuant to 28 U.S.C. § 158(d). “Our review of the District Court's decision effectivelyamounts to review of the bankruptcy court's opinion in the first instance.” In re Hechinger Inv. Co. of Del., 298 F.3d 219, 224 (3d Cir.2002). Because this issue involves interpretation of the Bankruptcy Code, it is a question of law subject to plenary review. Id.

III.

We address two issues in this appeal. First, we consider whether the New Jersey Federal Courts had subject matter jurisdiction over ATN's adversary proceeding. Second, we consider whether the $6 million payment was a part of ATN's bankruptcy estate in Florida such that it was not affected by the automatic stay provisions triggered by Allen's bankruptcy proceedings in the present case. We consider each issue below.

A. Subject matter jurisdiction

ATN argues that the New Jersey Federal Courts lacked jurisdiction under the doctrine set forth in Princess Lida of Thurn and Taxis v. Thompson, 305 U.S. 456, 59 S.Ct. 275, 83 L.Ed. 285 (19...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT