In re Julien Co.
| Decision Date | 13 November 1990 |
| Docket Number | Bankruptcy No. 90-20283-B. |
| Citation | 120 BR 930 |
| Court | U.S. Bankruptcy Court — Western District of Tennessee |
| Parties | In re The JULIEN COMPANY, Debtor. |
Jef Feibelman, David J. Harris, Burch, Porter & Johnson, Memphis, Tenn., for Jack F. Marlow, Trustee.
Lewis R. Donelson, John R. Branson, Heiskell, Donelson, Bearman, Adams, Williams & Kirsch, Memphis, Tenn., for Julien J. Hohenberg.
Julie C. Chinn, Asst. U.S. Trustee, Memphis, Tenn.
This contested matter arises from the amended motion1 filed by Jack F. Marlow, Chapter 11 Trustee, which motion seeks to amend the bankruptcy petition in order to identify the debtor as "Julien J. Hohenberg d/b/a The Julien Company." The Court has received memoranda and heard legal arguments as to the standing of the Trustee to bring such a motion and the authority of the Court to entertain the motion. Proof on the merits was reserved until after the Court ruled on these preliminary but critical issues, and this Opinion contains the Court's ruling that the Trustee's motion is not a proper one and that the Court should not exercise its 11 U.S.C. § 105(a) powers in this motion context to seize in personam jurisdiction over Mr. Hohenberg or in rem jurisdiction over his personal assets. The motion presents core issues under 28 U.S.C. § 157(b)(2)(A) and (O); however, should the Court have allowed the merits to be reached, non-core issues would have been presented, as will be discussed.
This bankruptcy case was initiated January 10, 1990, by an involuntary Chapter 7 filing against The Julien Company, a Tennessee corporation engaged in cotton trading. The corporation did not resist its adjudication as a debtor; however, upon the debtor's request and without opposition the case was converted to Chapter 11, and a Chapter 11 Trustee was authorized by the Court. After the appropriate involvement of the U.S. Trustee, Jack F. Marlow was appointed Trustee. The Trustee has proceeded in an orderly liquidation of substantial assets, consisting largely of cotton inventories and equities. Also, the Trustee has initiated numerous adversary proceedings, including avoidance actions against Julien J. Hohenberg. At this point, Mr. Hohenberg's counsel have not filed proofs of claim on behalf of their client and they have sought to avoid voluntarily submitting to the bankruptcy court's jurisdiction. In the avoidance actions to which he is a defendant, Mr. Hohenberg has demanded jury trials. In response to this specific motion to amend the petition, Mr. Hohenberg has appeared specially through counsel, again without consenting to this Court's personal jurisdiction over him.
It is the Trustee's position that this Court should "invoke its equitable powers pursuant to Section 1052 of the Bankruptcy Code to effect the substantive consolidation of the assets and liabilities of the debtor's estate with the assets and liabilities of Hohenberg's personal estate." (Trustee's Memorandum, pp. 1-2) Further, the Trustee asserts that he has standing to bring such a motion, as well as to bring an adversary proceeding, if he so chooses, to pierce the corporate veil of the debtor's corporation. In summary, the Trustee argues:
Amending the petition and schedules to, in effect, pierce the corporate veil of the Debtor is a much more expeditious and equitable method of sorting out the myriad entanglements devised by JJH Hohenberg, and would be with little or no relative prejudice to the creditors or JJH or the Debtor\'s other shareholders.
(Amended Motion, p. 5).
As previously indicated, Mr. Hohenberg takes the position that he is not subject to the personal jurisdiction of this Court through a motion which has been served only on his counsel. Assuming that the Trustee has standing, Mr. Hohenberg asserts that the remedy sought would require an adversary proceeding, as this is in reality a proceeding "to recover money or property." Bankruptcy Rule 7001(1). However, according to Mr. Hohenberg, the Trustee lacks standing to bring this action which amounts to an effort to pierce the corporate veil of the present debtor.
The U.S. Trustee for this region takes the position that the attempted procedure to substantively consolidate the debtor's estate with that of Mr. Hohenberg, who is not a debtor in bankruptcy, is not a proper one.
Because of the Court's conclusion, it will not be necessary for the Court to reach all of the issues presented by the conflicting positions of the parties. The Court concludes that the motion filed by the Trustee is not an authorized or appropriate procedure for accomplishing substantive consolidation of the estates of this bankruptcy debtor and an individual not in bankruptcy.
While the Chapter 11 Trustee in his Reply Memorandum points to specific factual allegations in support of an argument that "the Julien Company is but an instrumentality or alter-ego of Julien J. Hohenberg," the Court has not considered the merits of any factual allegations; rather, the Court is concerned at this point with whether the Bankruptcy Code authorizes such a procedure as that attempted by the Trustee. If not, is there persuasive non-Code authority to justify the bankruptcy court's allowance of the present motion? The Court is aware, both from the excellent memoranda provided by the parties and from its independent research, that there is case authority to support the Trustee's position. Therefore, an analysis of some of the cases on point will be beneficial in explaining how the Court reached its ultimate conclusion.3
The Bankruptcy Court for the District of Columbia has considered a similar issue, but in the factual context in which creditors of the Chapter 11 debtor in possession sought to pierce the corporate veil to reach individuals behind the corporation and further to find other corporate entities to be alter egos of those individuals. As a result, that Court was asked to "effectively consolidate the named corporate entities, together with the individuals as debtors, and to consolidate their estates in connection with this pending Chapter 11 case." In re 1438 Meridian Place, N.W., Inc., 15 B.R. 89, 91 (Bankr.D.C.1981) (hereinafter "Meridian Place"). That Bankruptcy Court agreed with the creditors after an evidential hearing. Id. In response to the Meridian Place debtor's argument of lack of personal jurisdiction, that Court admitted the argument "is not without merit in a theoretical context," but that it overlooks "the broad jurisdictional grant to the United States Bankruptcy Court (see 28 U.S.C. § 1471(e) which grants jurisdiction to the Court over all the debtor's property wherever located), as well as the Court's broad powers as a Court of equity (citations omitted)." Id. at 94. The Meridian Place decision of course predates the 1984 Amendments to the Judicial and Bankruptcy Codes, resulting from Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), which recognized a limit on how Congress could vest jurisdiction in the bankruptcy courts. See, e.g., In Matter of Wood, 825 F.2d 90, 93 (5th Cir.1987).
Further, Meridian Place predates the Supreme Court's recent clear pronouncements on the limits of the bankruptcy court's equity powers. As that Court said in Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 108 S.Ct. 963, 968-69, 99 L.Ed.2d 169 (1988):
Whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.
See also, In re C-L Cartage Co., 899 F.2d 1490 (6th Cir.1990).
A more basic distinction between Meridian Place and the present motion is that in Meridian Place known creditors of the named debtor filed the motion. Here, it is the Trustee bringing the motion. The Court is aware, from other proceedings in The Julien Company case, that some creditors of Mr. Hohenberg are suing him in state and other federal courts. No creditors have appeared to support the Trustee's motion. In Meridian Place, that Court stated that the moving creditors were creditors of only the Meridian Place debtor; therefore, those creditors could not bring an involuntary bankruptcy proceeding against the target debtors. In The Julien Company case, it is obvious from the known suits in other courts against Mr. Hohenberg, as well as from the adversary proceedings against him in this Court, that Mr. Hohenberg has creditors who presumably are capable of bringing an involuntary bankruptcy petition against Mr. Hohenberg. The Trustee may in fact be such a potential creditor. There clearly has been no showing to this Court that the present motion is the only available remedy against Mr. Hohenberg. In fact, the very status of the case speaks otherwise. There are pending preference and fraudulent conveyance adversary proceedings against Mr. Hohenberg. Those proceedings provide potential remedies to the Trustee; however, they also provide procedural protections to the defendant Hohenberg. If the Court permitted the Trustee's motion to go forward and if the Trustee prevailed, the adversary proceedings would become moot, since the defendant Hohenberg would then be the debtor Hohenberg. The Trustee would have reached Mr. Hohenberg's assets by means of a motion practice which lacks all of the procedural due process protections of an adversary proceeding or an involuntary petition. See, In re Alpha & Omega Realty, Inc., 36 B.R. 416, 417 (Bankr.D.Idaho 1984).
Under former Bankruptcy Rule 701, the Meridian Place Court found that a motion to amend the caption and effectively consolidate nondebtor entities was not an adversary proceeding. Meridian Place, 15 B.R. at 94-95. This Court, under the present Code and Rules, disagrees. The primary desired result of the Trustee's...
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