In re Flanagan

Decision Date31 March 2009
Docket NumberCivil Action No. 3:06cv1473 (SRU).,Civil Action No. 3:07cv1379 (SRU).,Civil Action No. 3:06cv1472 (SRU).
Citation415 B.R. 29
CourtU.S. District Court — District of Connecticut
PartiesIn re Charles Atwood FLANAGAN, Debtor. Titan Real Estate Ventures, LLC, Appellant, v. MJCC Realty Limited Partnership, Appellee. Bonnie Mangan, as trustee of the bankruptcy estate of Charles Flanagan, Appellant, v. MJCC Realty Limited Partnership and MJCC Corporation, Appellees.

STEFAN R. UNDERHILL, District Judge.

Appellant Titan Real Estate Ventures, LLC ("Titan") appeals from the United States Bankruptcy Court's decisions: (1) denying its applications for prejudgment remedies against Steve and Amy Sullivan (collectively, the "Sullivans") and MJCC Realty Limited Partnership ("MJCC"), In re Flanagan ("Flanagan I"), 348 B.R. 81 (Bankr.D.Conn.2006); and (2) granting MJCC's motion for summary judgment on the remaining counts of Titan's Second Amended Complaint dated March 18, 2005. In re Flanagan ("Flanagan II"), 373 B.R. 216 (Bankr.D.Conn.2007). In the complaint, Titan asserted claims for legal title to, and/or the sale proceeds derived from, property formerly held by MJCC. United States Bankruptcy Judge Albert S. Dabrowski concluded, principally, that Titan failed to demonstrate that it had a viable claim to MJCC's properties.

Appellant Bonnie Mangan, trustee (the "Trustee") of the bankruptcy estate of Charles Atwood Flanagan (the "debtor"), appeals from the Bankruptcy Court's decision denying her motion for contempt against MJCC Realty Limited Partnership and MJCC Corporation (collectively, "MJCC") for the willful violation of the automatic stay provisions of 11 U.S.C. § 363(a)(3). The Trustee alleges that MJCC willfully took possession of, exercised control over, and sold property that the estate had interest in without notice to, or permission from, the Bankruptcy Court. Judge Dabrowski denied the Trustee's motion as time-barred under the applicable statute of limitations, ruling that the estate had lost its opportunity to pursue its interest in MJCC and its property holdings after it failed to pursue its claim within one year after Mangan was appointed Trustee.

The issue presented by these bankruptcy appeals is whether a trustee can successfully act on a debtor's equitable interest in property to bring that property into the estate when the circumstances are such that an equitable interest arose only because the debtor was acting to shield his assets from creditors.

According to the Bankruptcy Court, any claim brought by the debtor to act on his equitable interest under those circumstances would fail due to the in pari delicto doctrine, which "provides that actions brought on illegal or corrupt bargains cannot prevail if the plaintiff is in pari delicto, i.e., where he has been a significant participant in the subject wrongdoing, bearing at least equal responsibility for the violations he seeks to redress." Flanagan II, 373 B.R. at 224.

Because the undisputed facts show that the debtor would only have had an equitable interest in the subject property if he had been acting to evade creditors, I agree with the Bankruptcy Court that, had the debtor sought to assert his equitable interest against the property's legal title-holders, a court sitting in equity would have refused to aid him as a party to an illicit transaction. Because the trustee, when acting on the debtor's rights and interests pursuant to 11 U.S.C. § 541, is subject to the same legal and equitable obstacles that the debtor would face, I hold that the in pari delicto doctrine prevents the trustee from successfully recovering the debtor's equitable interest on behalf of the estate, where the circumstances necessarily demonstrate that the equitable interest arose only because debtor fraudulently sheltered assets from creditors.

Therefore, because its interests in and rights to the subject property are derivative of the Trustee's, Titan has no claim against MJCC under section 541. Furthermore, any claim made pursuant to the Trustee's strong arm powers under 11 U.S.C. § 544 is barred by the statute of limitations. Because neither Titan nor the Trustee has a viable claim against MJCC, the decisions of the Bankruptcy Court are affirmed.

I. Factual Background

The facts relevant to the present appeal are not in serious dispute. The underlying bankruptcy proceedings were initiated on February 17, 1999 when the debtor, Charles Atwood Flanagan, filed a voluntary petition under Chapter 11. One of his primary creditors was the Cadle Company and/or D.A.N. Joint Venture (collectively, "Cadle"). At the time of his filing for bankruptcy, Flanagan failed to disclose any interest, equitable or otherwise, in MJCC, which held title to two pieces of real property in Connecticut. It is those two properties that are the focal point of these appeals.

In 1994 and 1995, MJCC purchased two pieces of residential property: 25 Queach Road, Branford, Connecticut (the "Branford Property"), and 230 Millbrook Road, North Haven, Connecticut (the "North Haven Property"). Flanagan funded MJCC's purchase of those properties, though he never took a legal interest in the properties or in MJCC. Instead, Flanagan's mother-in-law, Angela Cimino-Burr, held a 95% interest in MJCC and Flanagan's sister, Sharon Rosen, held the remaining 5% interest. Neither Cimino-Burr nor Rosen ever took an active role in the management and control of MJCC. Cimino-Burr was essentially a figurehead general partner, allowing Flanagan to completely control MJCC and direct the management of its properties as its officially designated agent. Flanagan resided at the North Haven Property and his uncle, William Nygard, resided at the Branford Property.

When Flanagan filed for Chapter 11, he listed the North Haven Property as his mailing address, but did not mention any interest in MJCC in his petition, schedules or statement of financial affairs. Flanagan's creditors, specifically Cadle, suspected he was secreting assets. Cadle made Flanagan's attorney aware of those suspicions and attempted to get the official Unsecured Creditors' Committee (the "Committee") to undertake a fraudulent conveyance action to recover MJCC and its Properties. Despite those suspicions, neither the Committee nor Flanagan, as debtor-in-possession, ever brought an action to bring MJCC and/or its assets into the bankruptcy estate during the pendency of the Chapter 11 case.

Flanagan's Chapter 11 case was converted to a Chapter 7 bankruptcy on January 16, 2003. Bonnie Mangan was appointed trustee of the bankruptcy estate. The Trustee became aware of the Branford and North Haven Properties early on in her tenure as trustee, yet she never initiated an adversary proceeding to bring MJCC and/or its Properties into the Flanagan bankruptcy estate. Her only action with respect to those properties was to file two Affidavits of Facts Relating to Title or Interest in Real Estate on May 23, 2003 relating to the Branford Property and North Haven Property, which stated that title to those properties, held by MJCC, may be affected by the Chapter 7 proceedings.

During the pendency of Flanagan's Chapter 11 case, Cadle came to suspect that several of Flanagan's associates were conspiring with Flanagan to conceal assets. On April 4, 2001, Cadle filed a civil RICO action in the United States District Court for the District of Connecticut against thirteen defendants, including Cimino-Burr. On or about January 19, 2003, Cadle agreed to settle its claims against Cimino-Burr in exchange for her interest in MJCC. Pursuant to the terms of the settlement dated January 21, 2003, Cimino-Burr assigned her 95% interest in MJCC to Cadle in consideration for a release from the RICO action.

On July 8, 2003, the Trustee filed a Notice of Intent to Sell the bankruptcy estate's interest in MJCC and its assets to Cadle for $10,000. That sale never took place. Instead, approximately one year later, on June 17, 2004, the Trustee filed another Notice of Intent to Sell the estate's interest in MJCC and its assets to Titan for $15,000. On August 4, 2004, the Trustee transferred the estate's interest in MJCC and its properties to Titan for $15,000 plus 2.5% of any net recovery that Titan receives as a direct result of its purchase of the estate's rights and interests. Titan is held solely by Stanley Pyrmas, Flanagan's former business partner and another civil RICO defendant.

In the meantime, on March 5, 2004, MJCC (now controlled by Cadle) sold the North Haven property to the Sullivans for $485,000. On December 30, 2004, the Trustee filed the motion for contempt against MJCC for its willful violation of the automatic stay order that governs the Flanagan bankruptcy estate. In that motion, the Trustee sought a declaratory judgment that the Branford and North Haven properties and/or their proceeds were rightfully the property of the estate.

III. Bankruptcy Court Rulings

After a two-day evidentiary hearing in August 2005, Judge Dabrowski denied Titan's applications for prejudgment remedies and the Trustee's motion for contempt. On August 9, 2007, Judge Dabrowski granted MJCC's motion for summary judgment. Those decisions rely on the same legal reasoning, which is why the three appeals are addressed in a single decision.

A. Ruling on MJCC's Motion for Summary Judgment

Judge Dabrowski noted at the outset that Titan's claims to the MJCC assets were "wholly derivative" of the Trustee's rights to those assets by virtue of the August 2004 transfer of interests from the Trustee to Titan. Flanagan II, 373 B.R. at 222. Judge Dabrowski thus concluded that "Titan can prevail on its Claims only if, and to the extent that, the Trustee would have prevailed on identical claims at a point in time immediately prior to her assignment of rights and interests to Titan." Id. Noting that bankruptcy trustee...

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