In re Johnson

• Decision Date: 10 February 2017
• Docket Number: Case No. 16–10798
• Citation: 565 B.R. 835
• Parties: IN RE Terry Roscoe JOHNSON, Debtor
• Court: U.S. Bankruptcy Court — Southern District of Ohio

565 B.R. 835

IN RE Terry Roscoe JOHNSON, Debtor

Case No. 16–10798

United States Bankruptcy Court, S.D. Ohio, Western Division.

Signed February 10, 2017

Robert A. Goering, Cincinnati, OH, for Debtor.

MEMORANDUM OF DECISION AND ORDER GRANTING MOTION FOR RELIEF FROM STAY

Jeffrey P. Hopkins, United States Bankruptcy Judge

Before the Court is the Motion for Relief from Stay ("Motion") (Doc. 27) under 11 U.S.C. § 362 (d)(1) filed by creditors Jeannette Crain and Joyce Chiles, individually (hereinafter referred to as "Crain," "Chiles," or collectively as "the Movants") and on behalf of ET Building Partnership ("Partnership") and Enterprise Travel, Inc. ("Enterprise Travel").

The Motion asks that the Court grant relief "for the limited purpose of seeking [a] State Court ruling on the proper distribution of ET Building Partnership proceeds from the sale of its real property."¹

Ostensibly, the Motion asks this Court to allow the State court to wind up the Partnership under Ohio's version of the Uniform Partnership Act and to determine the Debtor's economic interest, if any, after those proceedings have been terminated, included as property of the bankruptcy estate. See Ohio Rev. Code § 1776.

The Debtor opposes the Motion, contending that the "automatic stay prohibits Movants from altering debtor's status in the partnership and subsequently liening the partnership property." See Doc. 46 at 1.

The Debtor argues that the Movants have wrongfully attempted to dissociate him from the Partnership, in violation of 11 U.S.C. § 365(e)(2)(A), under an ipso facto provision of state law, based on his having filed a petition in bankruptcy. See Ohio Rev. Code § 1776.51(F)(1). Further, the Debtor contends that the actions taken by the Movants after the bankruptcy filing have unlawfully divested him of his managing partnership interest and reduced the economic value of his Partnership ownership stake. According to the Debtor, the Court should declare any acts done in violation of the automatic stay void and should direct the removal of the mortgage placed on the Partnership's real estate.

The parties' lawyers were asked to file trial briefs and to present evidence in support of their arguments at a hearing on the Motion established for that purpose. On this score, however, both attorneys' efforts fell well short of the mark. See Docs. 43 and 46. Neither side presented any witness testimony and nothing other than the Partnership Agreement was ever offered into evidence. Both attorneys stated at the hearing that the issues before the Court were purely legal. However, the Court finds that statement without merit.

Arguments of counsel are not evidence. The Court would have benefitted from having witnesses testify with firsthand knowledge of the events leading up to the April 27, 2016 Partnership meeting and the events which took place directly afterwards. As it were, the Court has had to piece together, from the briefs, the admissions of the parties through statements of counsel, and the Partnership Agreement, the facts upon which to predicate its decision.

SUMMARY OF PRE–PETITION FACTS

As can best be surmised from the scant record presented in the case, the key facts are undisputed. On November 2, 1987, the Debtor and Movants started a business called Enterprise Travel. A few years later, on June 18, 1991, the Debtor and the Movants formed E.T. Building Partnership. The Partnership was created for the sole purpose of owning and operating real estate. On the same day that it was formed, the Partnership purchased real estate located at 3508 W. Galbraith Road in Cincinnati, Ohio 45239 ("Galbraith Rd. Property"). Enterprise Travel moved its offices into the Galbraith Rd. Property and became a tenant in the building. Enterprise Travel paid monthly rent to the Partnership, which the Partnership used to cover the mortgage, property taxes, insurance, and upkeep and maintenance costs on the Galbraith Rd. Property.

Under the terms of the Partnership Agreement, the Debtor holds a 55% interest, Crain a 35% interest, and Chiles a 10% interest. Debtor's Schedule A/B also lists his Partnership interest at 55%. Paragraph 8.1 of the Partnership Agreement called for the Debtor to serve as managing partner of the Partnership. In addition, the Debtor served as president of Enterprise Travel. The Movants and the Debtor are the only three shareholders of Enterprise Travel. Enterprise Travel formerly employed between five to eight people. The Debtor's duties as president of Enterprise Travel had included making monthly rental payments to the Partnership. In turn, the Debtor's duties as managing partner had been to make the monthly mortgage, insurance, and tax payments on behalf of the Partnership.

In May of 2015, the Debtor was admitted into a rehabilitation center. Neither side presented evidence of what the Debtor's condition had been or how long was his stay in the Center. Subsequently, Crain assumed management responsibilities for the Partnership. The Court is left to assume that Crain became managing partner sometime around May, 2015, given the lack of testimony on the subject. After taking over those duties, Crain alleges in the pleadings that she discovered numerous accounting irregularities. These consisted of erroneous or fraudulent distributions or payments by the Partnership to unknown or fabricated payees. The Movants also allege that the Debtor concealed these unauthorized distributions from them during his tenure as managing partner. Finally, the Movants allege that fraudulent payments appear on the account ledgers for both the Partnership and Enterprise Travel.²

As noted, none of the books or records of the Partnership were ever offered into evidence to support the allegations of fraud or that the Partnership's account ledgers had been falsified. Debtor's counsel, however, did not object to these allegations in the briefs. Nor did the Debtor's counsel argue at the hearing that these allegations were false.

On January 26, 2016, the Movants filed a complaint in State court against the Debtor. The State court complaint was not entered into evidence. Thus, the Court must rely on factual representations appearing in the Motion and briefs filed by the parties. Counsel for the Movants contends that the complaint seeks to dissociate the Debtor from the Partnership for wrongful conduct and to wind up the Partnership under Ohio Rev. Code § 1776. However, on March 8, 2016, the Debtor filed a bankruptcy petition under Chapter 13, which stayed any further litigation in the State court proceedings.

SUMMARY OF POST–PETITION FACTS

On April 27, 2016, the Movants held a Partnership meeting, which the Debtor did not attend. The Debtor did not contest whether he received notice of the meeting. At the meeting, the Movants took a vote and resolved to dissociate the Debtor, based on his past wrongful conduct towards the Partnership and other partners. The Movants also voted to dissolve and wind up the Partnership.³ The Movants subsequently elected Crain to serve as the managing partner to replace the Debtor.

Also, at the April 27 meeting, Crain agreed to loan the Partnership $100,000 to cover the Partnership's liabilities. The Partnership signed a promissory note for $100,000 in favor of Crain. The promissory note was secured by a mortgage on the Galbraith Rd. Property. Crain recorded the mortgage on April 27, 2016, the same day the two documents were signed. Crain's mortgage is the only encumbrance on the Galbraith Rd. Property.

In September 2016, the Partnership entered into a sales contract for the Galbraith Rd. Property with a potential buyer. The sales contract was not introduced into evidence at the hearing. Nor did the Movants identify the potential buyer or the sales price for the property.

The Court held a preliminary hearing on the Movants' Motion for Relief from Stay. Thereafter, the Court set a date for a final evidentiary hearing and established the briefing schedule previously mentioned.

ISSUES

1) Whether the actions taken by the Movants on April 27, 2016, after the Debtor's March 8, 2016 bankruptcy filing, constituted a violation of the automatic stay under 11 U.S.C. § 362(a) ?

2) If those acts violated the automatic stay, whether the stay should be annulled under 11 U.S.C. § 362(d) and the actions taken by the Movants permitted to stand?

3) Whether cause exists to grant the Motion for Relief from Stay under 11 U.S.C. § 362(d)(1) so that the Partnership wind up proceedings can continue in state court, pursuant to Ohio Rev. Code § 1776?

LAW AND ANALYSIS

1. The Debtor's interest in the Partnership is property of the bankruptcy estate.

The analysis in this case begins with 11 U.S.C. § 541(a). The filing of a bankruptcy petition by a debtor creates a bankruptcy estate comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1).

It is well settled law that the assets and property owned by a partnership are not included in the bankruptcy estate of an individual partner. In re Olszewski , 124 B.R. 743, 746 (Bankr. S.D. Ohio 1991). Moreover, a partnership may be a debtor in its own right, under 11 U.S.C. §§ 109(a) and 101(41), but a partnership may not seek joint relief with another person, including one of the general partners. Id.

In the bankruptcy context, "the debtor's interest in the partnership is included in the estate." In re Newman , 875 F.2d 668, 670 (8th Cir. 1989) ; In re Olszewski , 124 B.R. at 746 ; In re Foos , 405 B.R. 604, 607 (Bankr. N.D. Ohio 2009) (a debtor's interest in specific partnership property never becomes property of the bankruptcy estate in the first instance). The nature and extent of the debtor's partnership interests are determined by state law.

Butner v. United States , 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) ; In re F a rris , 41 F.3d 1506 (6th Cir. 1994).

Ohio Rev. Code § 1776.01(P) defines a "partnership interest" as "all of a partner's interests in the partnership,...