In re Erickson
| Decision Date | 20 June 1995 |
| Docket Number | Bankruptcy No. 5-93-319. |
| Parties | In re Ernest E. ERICKSON, d/b/a Erickson's Nursery, Debtor. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota |
COPYRIGHT MATERIAL OMITTED
David A. Orenstein, Minneapolis, MN, for debtor.
Michael J. Farrell, Chapter 12 Trustee, Barnesville, MN.
Max J. Ruttger, III, Brainerd, MN, for Ryan, Ruttger & Drake, P.A., as a scheduled creditor.
ORDER DENYING MOTION "TO PROCEED WITH CHAPTER 12 CASE"
This Chapter 12 case came on before the Court on January 12, 1995, for hearing on the motion of Ernest E. Erickson, Jr. for an order authorizing the continuation of this case and the administration of the bankruptcy estate notwithstanding the death of the named debtor. Upon the moving and responsive documents, the record made at the hearing, and all of the other relevant files, records, and proceedings in this case, the Court makes the following order.
The named debtor, Ernest E. Erickson, was a resident of Brainerd, Minnesota. He conducted business in the nursery and landscaping trade in the Brainerd area for several decades. At all relevant times, he operated his business as a sole proprietorship, employing members of his immediate family in both management and production phases of the operation.
On June 23, 1993, the Debtor commenced this case by filing a voluntary petition for relief under Chapter 11. On December 10, 1993, the Court granted his motion to convert the case to one for family farmer reorganization under Chapter 12.1 The Debtor then timely filed a plan of reorganization, and obtained confirmation of it on April 7, 1994. After that, he continued to operate the family nursery and its ancillary landscaping business, with the assistance of his wife and sons. At all relevant times, he remained current on payments under his confirmed plan; as reported by the Trustee at the hearing on the motion at bar, there was no default on account of the plan as of early January, 1995.
After he filed his plan, the Debtor commenced two adversary proceedings that involved a common defendant. In the first, Erickson v. Ruttger, et al., ADV 5-94-9, he sought a money judgment against his former attorney and the attorney's spouse, alleging that those defendants had failed to fully pay him for landscaping work he had rendered at their homestead. In the second, Erickson v. Ryan, Ruttger & Drake, P.A., et al., ADV 5-94-11, he sued that same attorney, his law firm, and all of its shareholders. In the complaint for the latter proceeding, the Debtor alleged that the attorney had committed malpractice during the course of his representation of the Debtor in a lawsuit in the Crow Wing County District Court, and that the resultant entry of judgment had caused the financial stress that required him to file for bankruptcy relief. Both adversary proceedings have gone ahead through the stages of litigation.
On October 21, 1994, the Debtor died unexpectedly. Since his death, the members of his family have carried on the business and have assisted counsel in the pending litigation. On December 13, 1994, the Court denied a motion to "appoint" the Movant as an "agent" for the Debtor, so as to vest him with the power to prosecute Erickson v. Ruttger, et al., ADV 5-94-9.2
The motion at bar follows on the heels of the earlier one. While styled somewhat differently, the Movant seeks the same result in a more "global" sense. He invokes FED. R.BANKR.P. 10163 as his primary authority. Under color of this and other provisions of the Bankruptcy Code and Rules, several persons would be empowered to carry on the deceased Debtor's business, to continue performance under his confirmed plan, and to administer the bankruptcy estate. Each person would take on a specific share of the duties and functions that the Debtor formerly bore in their entirety. His surviving spouse and at least two of his children would continue to operate the business, doing the physical work, generating the income, and managing the cashflow. The Movant, acting as an "agent" pursuant to his status as special administrator and/or personal representative of the Debtor's probate estate,4 would perform such "ministerial functions" as signing checks on the debtor-in-possession bank account through which the business revenues would continue to flow. The standing Chapter 12 Trustee would assume all of the remaining legal and functional duties in connection with the administration of the estate, to the extent that the Debtor had had such duties independent of the Trustee. There would be one exception: because the family members would continue to do so, the Trustee would be excused from "operating the debtor's farm," as otherwise contemplated by 11 U.S.C. §§ 1203 and 1202(b)(5).
This proposal is ingenious, and not without some attractiveness on its surface. It would leave the existing horticultural operation intact for the benefit of the Debtor's surviving spouse and several of his adult children, under the protection of the Bankruptcy Court and subject to the debt restructuring of his confirmed plan. In a non-technical sense, further administration of the estate on an operating basis is possible; at least as long as the family members continue to work the business with the nursery stock on hand, they can generate cashflow to funnel through the Trustee for payments under the plan. There is no evidence of record to counter the Movant's assertion that continuing the case would be in the best interests of the creditors that are entitled to ongoing distributions.
Beyond this, no party to the case has raised a colorable defense to the motion. The Standing Trustee points to the currency of the cash inflow into his coffers as his main reason not to object to the movant's proposal. He takes no position on the legal merits. For some reason, the U.S. Trustee did not make an appearance on this motion despite its novel fact basis and deeper substantive dimension. The only objection is that of Ryan, Ruttger & Drake, P.A., a creditor whose invocation of abstract principles of jurisdiction is belied by its manifest self-interest in a denial of the motion.5 Its main argument is terse, shallow, and without merit,6 and its subsidiary argument does not quite hit the mark.7
Notwithstanding the lack of a meritorious objection by a party in interest, however, the motion at bar suffers from an organic infirmity that is just too substantial to ignore, and it must be denied.
The reason is quite basic: a grant of the motion would leave all of the income-generating tangible assets of the estate in the possession and under the immediate control of persons who are not vested by law with the status of fiduciaries. One natural person petitioned for relief in this case, became a debtor in possession by operation of law, and then was chargeable with fiduciary duties to his creditors. He is now dead. Perforce, he can no longer carry out those responsibilities. His surviving spouse did not join in his original petition. In the technical terms of legal accountability to this Court, she is a stranger to this case. As a result, she cannot claim any sort of implicit right of survivorship to the status of debtor in possession. In re Martin, 26 B.R. 39, 40 (Bankr.D.W.Va.1982). Neither can the Movant; he did not join in the original petition either, and was legally incapable of doing so.8
The seat of the debtor in possession, then, was left utterly empty when the original petitioner died during the pendency of the case,9 and it cannot be filled under the provisions of the Bankruptcy Code that apply to this case. There is no provision in Chapter 12 that allows for the substitution of another person or entity as debtor in possession in a pending case.
This sole circumstance directs the outcome of this motion. It all stems from the fact that the status of debtor in possession imposes substantial responsibilities on the holder. The most salient and central of these is the obligation to subordinate one's own financial interests to those of one's creditors — the beneficiaries of the trust imposed by law upon the commencement of a bankruptcy case. E.g., In re Burke, 147 B.R. 787, 800 (Bankr.N.D.Okla.1992); In re Spoor-Weston, Inc., 139 B.R. 1009, 1016-1017 (Bankr.N.D.Okla.1992). In the reorganization context, that obligation translates to a duty to utilize the continuing possession of the assets of the estate so as to promote creditors' interests in their value.10In re Halux, Inc, 665 F.2d 213, 216 (8th Cir.1981) (case under Bankruptcy Act of 1898); In re Schmidt, 145 B.R. at 986. As a fiduciary, the debtor in possession may not self-deal in the subject matter of the trust; it is legally chargeable with acting to preserve and enhance the estate's value so creditors' returns will be maximized. In re Thurmond, 41 B.R. 464, 465 (Bankr.D.Ore.1983).
In something more than an abstract sense, such heightened duties exceed those that could otherwise be imposed under contract, or pursuant to court order. At the very least, the imposition of a fiduciary status means that a creditor questioning the past performance of fiduciary duties bears a lighter burden of proof and persuasion in a court proceeding brought to vindicate the beneficiary of those duties.11 This more stringent liability for lapses in duty is a significant incentive for honesty, fairness, and dispatch on the part of individual debtors in possession.
As the Code is now constituted, there is no way that the Court can vest a successor third party with any sort of fiduciary status in a Chapter 12 case, unless he or she is a standing trustee duly appointed by the U.S. Trustee pursuant to 28 U.S.C. § 586(b). Even then, this would be possible only when the standing trustee succeeds to a direct operating role pursuant to 11 U.S.C. § 1202(b)(5), after removal of the debtor from possession pursuant to 11 U.S.C. § 1204. This, of course, is not what the Movant proposes, and...
To continue reading
Request your trial