Gold v. Davis (In re Zelazny)

• Docket Number: Case No. 20-50976,Adv. Pro. No. 21-4141
• Decision Date: 19 April 2024
• Citation: 659 B.R. 544
• Parties: IN RE: Donald Joseph ZELAZNY, Debtor. Stuart A. Gold, Trustee, Plaintiff, v. Myles Davis, and Dentalkeeping, LLC, a/k/a Infinity Growth Solutions, a/k/a Dental Software Solutions, LLC, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

659 B.R. 544

IN RE: Donald Joseph ZELAZNY, Debtor.

Stuart A. Gold, Trustee, Plaintiff, v. Myles Davis, and Dentalkeeping, LLC, a/k/a Infinity Growth Solutions,a/k/a Dental Software Solutions, LLC, Defendants.

Case No. 20-50976

Adv. Pro. No. 21-4141

United States Bankruptcy Court, E.D. Michigan, Southern Division

Signed April 19, 2024

Elias T. Majoros, Gold, Lange, Majoros & Smalarz, P.C., Southfield, Michigan, Attorney for PlaintiffTrustee.

H. Nathan Resnick, Resnick Law, P.C., Bloomfield Hills, Michigan, Attorney for Defendants.

POST-TRIAL OPINION

Thomas J. Tucker, United States Bankruptcy Judge

I.Introduction

This adversary proceeding arose from the Chapter 7 bankruptcy of Donald Joseph Zelazny("Zelazny" or "the Debtor"), a dentist.Pre-petition, in May 2017, Zelazny sold the assets of his dental practice, some of which were owned by Zelazny personally and some of which were owned by Zelazny's professional corporation, Donald J. Zelazny DDS, P.C.("Zelazny PC").The sale transaction generated $200,000.00 in sale proceeds, but $90,000.00 of those proceeds were transferred to DefendantDentalkeeping, LLC("Dentalkeeping"),¹ whose sole and controlling member was DefendantMyles Davis.Myles Davis, in turn, received the full benefit of the $90,000.00 transfer.

The PlaintiffChapter 7Trustee filed this adversary proceeding against Myles Davis and Dentalkeeping, seeking to avoid and recover the $90,000.00 transfer as a fraudulent transfer, and also based on a breach of contract theory.After holding a bench trial, the Court now finds in favor of the Trustee, but only in part.

II.Background and brief statement of the case

In June 2016, the DefendantMyles Davis formed Dentalkeeping,² and has been its sole member, and has controlled Dentalkeeping, at all relevant times.In August 2016, Myles Davis entered into a written agreement with the Debtor Zelazny and the Debtor's dental practice, Zelazny PC.Under that agreement, Myles Davis was to provide capital contributions and business support services to the Debtor's dental practice, through Dentalkeeping, with the expectation of expanding the Debtor's dental practice and sharing in the increased profits that would be generated as a result of the expansion.In return, the Debtor would continue to provide dental services to the patients of his dental practice.

Unfortunately, the August 2016 agreement did not result in the expansion of the Debtor's dental practice or any profits.After less than seven months of operating under the agreement, the Debtor and Myles Davis decided that it was best for the Debtor to sell his dental practice.The Debtor sold substantially all of the assets of the dental practice to another dentist for $200,000.00.Out of the $200,000.00 sale price, the Debtor and Zelazny PC received a total of $110,000.00, and Dentalkeeping received $90,000.00.Almost three and a half years after the sale of his dental practice, the Debtor filed bankruptcy under Chapter 7.

The TrusteeStuart A. Gold, Chapter 7Trustee in the Debtor's bankruptcy case, filed a three-count adversary complaint (the "Complaint") against Myles Davis and Dentalkeeping, seeking (1) avoidance, as a fraudulent transfer, and recovery of the $90,000.00 transfer to Dentalkeeping, under 11 U.S.C. §§ 544(b), and550(a), andMich. Comp. Laws.§§ 566.34(1)(a),566.34(1)(b), and566.35(1);(2) a money judgment against both Defendants, jointly and severally, in the amount of $90,000.00 for the Defendants' alleged breach of the August 2016 agreement; and (3) disallowance of any claim filed by the Defendants under 11 U.S.C. § 502(d)(Counts I, II, and III of the Trustee's Complaint).³

The Trustee alleges that the Defendants were insiders of the Debtor, and that on the date of the $90,000.00 transfer to Dentalkeeping, the Debtor was insolvent, or that the transfer rendered the Debtor insolvent, and that the Debtor received no consideration for the $90,000.00 transfer to Dentalkeeping.The Trustee alleges that neither the Debtor nor his dental practice had any obligation, under the August 2016 agreement or otherwise, to pay Dentalkeeping any of the sale proceeds.For these reasons, the Trustee alleges that allocating $90,000.00 of the sale proceeds to Dentalkeeping was both a fraudulent transfer, and a breach of the August 2016 agreement.The Trustee alleges further that the Defendants also breached the August 2016 agreement by failing to perform all of their obligations under it, including an obligation to make the Debtor a member of Dentalkeeping.

The Court held a bench trial,⁴ and now will decide this adversary proceeding.

The Court has considered all of the evidence and arguments presented by the parties.This includes the testimony of all the witnesses — namely, DefendantMyles Davis; the Debtor Donald Zelazny; attorney Mark Adams; and Greig Davis.And this includes all of the exhibits, or parts of exhibits, that were admitted into evidence.⁵This Opinion states the Court's findings of fact and conclusions of law.

III.Summary of the outcome

For the reasons stated below, the Court finds in favor of the Trustee on Count I of the Complaint, but only to the extent of $70,000.00; the Court finds in favor of the Defendants on Count II of the Complaint; and the Court finds in favor of the Trustee on Count III of the Complaint.The Court will enter a judgment (1) in favor of the Trustee on Count I and against both Defendants, avoiding and recovering the transfer to Dentalkeeping, but only to the extent of $70,0000.00 of the $90,000.00 total transfer, plus pre-judgment and post-judgment interest; (2) in favor of the Defendants on Count II of the Complaint, dismissing that count with prejudice; and (3) in favor of the Trustee on Count III and against both Defendants, disallowing any claim filed or to be filed in Zelazny's bankruptcy case by either of the Defendants, under 11 U.S.C. § 502(d).

IV.Jurisdiction

This Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(b)(providing for jurisdiction "of all civil proceedings arising under title 11, or arising in or related to cases under title 11"), 157(a) and 157(b)(1), andLocalRule 83.50(a)(E.D. Mich.).The Trustee's claim for avoidance of a fraudulent transfer in Count I of the Complaint is a core proceeding under 28 U.S.C. § 157(b)(2)(H).The Trustee's claim for disallowance of any claims by the Defendants in Count III of the Complaint is a core proceedings under 28 U.S.C. § 157(b)(2)(B).

This proceeding also is "core," with respect to the Trustee's claims in Counts I and III of the Complaint, because each of these counts fall within the definition of a proceeding "arising under title 11" and of a proceeding "arising in"a case under title 11, within the meaning of 28 U.S.C. § 1334(b).Matters falling within either of these categories in § 1334(b) are deemed to be core proceedings.SeeAllard v. Coenen(In re Trans-Industries, Inc.), 419 B.R. 21, 27(Bankr. E.D. Mich.2009).With regard to each of these two counts, this is a proceeding "arising under title 11" because it is "created or determined by a statutory provision of title 11,"id., namely, 11 U.S.C. §§ 544and502(d).And these counts are proceedings "arising in"a case under title 11, because they are proceedings that "by their very nature, could arise only in bankruptcy cases."Id.

For these reasons, this Court has statutory authority, under 28 U.S.C. § 157(b)(1), to enter a final judgment on Counts I and III of the Trustee's claims.If and to the extent this Court might otherwise lack constitutional authority to enter a final judgment, under Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475(2011), such a problem does not exist in this case.This is because all of the parties have expressly, knowingly, and voluntarily consented to this bankruptcy court entering a final order or judgment, as permitted by 28 U.S.C. § 157(c)(2).⁶Given that consent, this bankruptcy court has both statutory and constitutional authority to enter a final judgment on the Trustee's claims in Count I and Count III of the Complaint.SeeRalph Roberts Realty, LLC v. Savoy(In re Ralph Roberts Realty), 562 B.R. 144, 147-48(Bankr. E.D. Mich.2016)(discussing, among other cases, Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665, 135 S.Ct. 1932, 191 L.Ed.2d 911(2015));Dery v. Karafa(In re Dearborn Bancorp, Inc.), 583 B.R. 395, 400(Bankr. E.D. Mich.2018)).

The Court lacks "arising under" or "arising in" jurisdiction over the Trustee's breach of contract claim in Count II of the Complaint, because such claim is not created or determined by any provision of the Bankruptcy Code, and it is a claim that arises only under state law.But the Court concludes that it has "related to" jurisdiction over this claim, because the outcome of this adversary proceeding could conceivably impact the administration of the bankruptcy case.If the Trustee prevails on this claim and is awarded money damages, such damages would be property of the bankruptcy estate, which would be administered for the benefit of the estate.SeeMich. Emp. Sec. Comm'n v. Wolverine Radio Co.(In re Wolverine Radio Co.), 930 F.2d 1132, 1141(6th Cir.1991);USA Promlite Tech., Inc. v. Am. First Nat'l Bank, 636 B.R. 743, 752-53(Bankr. S.D. Tex.2022);Loomis Elec., Inc. v. Lucerne Prods., Inc., 225 B.R. 381, 386(N.D. Ohio1998).

Civil proceedings that fall only within . . . the bankruptcy court's . . . "related to" jurisdiction . . . are noncore.In a non-core proceeding, unless all parties consent, a bankruptcy court cannot enter final orders and judgments, but instead must "submit proposed findings of fact and conclusions of law to the district court," and the district court must enter the final order or judgment.28 U.S.C. §§ 157(c)(1),157(c)(2).⁷

Allard v. Coenen, 419 B.R. at 27-28.In this case, however, all the parties have consented to this Court's entry of a final judgment on all claims.⁸As a...