In re Michigan Real Estate Ins. Trust
| Decision Date | 26 April 1988 |
| Docket Number | Adv. P. No. 88-0004.,Bankruptcy No. 88-70256 |
| Citation | 87 BR 447 |
| Parties | In re MICHIGAN REAL ESTATE INSURANCE TRUST, Debtor. Maurice K. CARR as Personal Representative of the Estate of Cecelia F. Carr, Deceased and Maurice K. Carr, individually, Plaintiffs, v. MICHIGAN REAL ESTATE INSURANCE TRUST, Republic Hogg Robinson of Michigan, Inc., a Michigan corporation; Penn General Services of Michigan, Inc., a Michigan corporation; Maurice L. Richards, Jr.; Albert F. Pauly; Steven A. Passon; William D. Johnstone; Mel Durbin; John A. Moss; Ronald N. Williams; James A. Smalley; Steve Grajek and Richard Alexsy, jointly and severally, Defendants. |
| Court | U.S. District Court — Western District of Michigan |
Darlene A. O'Brien, Sandra L. Sorini, Ann Arbor, Mich., for plaintiffs.
Samuel S. Reiter, Owasso, Mich., for defendant MREIT.
Francis Keating, Saginaw, Mich., for defendants Richards, Pauley, Passon, Johnstone, Durbin, Moss, Williams, Smalley, Grajek and Alexsy.
William G. Jamieson, Susan Tukel, Southfield, for defendants Republic Hogg Robinson of Michigan, Inc., and Penn General Services of Michigan, Inc.
ORDER WITHDRAWING REFERENCE TO BANKRUPTCY COURT OF THIS ADVERSARY PROCEEDING
For the reasons stated in the Bankruptcy Judge's report and recommendation regarding various jurisdictional issues, to which no party filed an objection,
IT IS HEREBY ORDERED that the reference of this Court's jurisdiction to the Bankruptcy Court to hear this adversary proceeding, pursuant to 28 U.S.C. § 157(a) is hereby withdrawn. All further proceedings in this adversary proceeding shall occur in the District Court.
Michigan Real Estate Insurance Trust (MREIT), was an unincorporated entity funded by voluntary contributions from individuals in the real estate industry in southeastern Michigan for the purpose of reducing the cost of health care for its members. It filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on December 21, 1984.
At the inception of the bankruptcy case we questioned the debtor and the Chapter 7 trustee as to the debtor's eligibility to file a petition for relief since it appeared that the debtor was an insurance company, and so could not qualify under 11 U.S.C. § 109(b)(2). At the hearing, an official from the Michigan Insurance Bureau testified that MREIT was not a domestic insurance company.
Only a "person", as defined by 11 U.S.C. § 101(33) may file a petition under Chapter 7, and trusts were not included in the definition of "person". Therefore, it was also thought that the debtor was not qualified to file a petition in Chapter 7 since it appeared to be a trust. However, both the debtor's and the trustee's attorneys argued that the debtor was not a passive trust, but was a business, or Massachusetts, trust. The plaintiffs have seemingly acquiesced in such a determination.
A business trust is "an unincorporated business organization created by an instrument by which property is to be held and managed by trustees for the benefit and profit of such persons as may be or may become the holders of transferable certificates evidencing the beneficial interests in the trust's estate." 13 Am.Jur.2d Business Trusts § 1; also see 12A C.J.S. Business Trusts §§ 2 et seq.; In re Wayson Trust, 29 B.R. 58, 8 C.B.C.2d 677 (Bankr.D.Md.1982). It is considered a distinct legal entity. Hemphill v. Orloff, 238 Mich. 508, 213 N.W. 867 (1927), aff'd 277 U.S. 537, 48 S.Ct. 577, 72 L.Ed. 978 (1928) (). The Bankruptcy Code, § 101(8), includes a business trust in the definition of a "corporation". Therefore, the debtor was found to be qualified to file a petition for relief under Chapter 7.
According to the plaintiff's complaint, Cecelia F. Carr was a participant in MREIT whose premiums for family health insurance coverage were paid up-to-date when she fell ill and eventually died. Her medical expenses for her last illness total $160,716.50. MREIT audited these expenses and approved their payment. Because the claim was in excess of the $30,000 primary coverage within one year, MREIT made a claim for the excess upon Lloyds of London, which reinsured MREIT. Lloyds paid the claim by instructing its agent, defendant Republic Hogg Robinson of Michigan, Inc. (RHR) to issue drafts made payable jointly to MREIT and the specific providers of the medical services to Mrs. Carr. MREIT refused the tender of these drafts and directed that payment be made solely to it. RHR honored that request. The complaint further alleges, however, that at present, the bankruptcy trustee, Mark C. McCabe, (who is representing the interest of MREIT in this proceeding) is now holding checks from RHR which indicate that the payment should go to the medical care providers. However, the bankruptcy trustee refuses to pay those amounts to, whom the plaintiff contends are, the intended beneficiaries.
In Counts I and II, the plaintiff seeks a determination that the checks held by the bankruptcy trustee are not property of the bankruptcy estate but are held in trust for the benefit of Mrs. Carr's health care providers, and an order compelling the trustee to release those funds to the beneficiaries. In Count III, the plaintiff seeks a determination that the first $900 of its claim has priority under the Bankruptcy Code as one for a consumer deposit, pursuant to 11 U.S.C. § 507(a)(6).
He also alleged that "Penn General . . . and defendant trustees . . . each fraudulently violated a fiduciary duty to plaintiffs by failing to disclose to plaintiffs that defendant Penn General and defendant RHR are inter-related companies. . . . and by failing to properly fund and administer the MREIT insurance plan." He further claims that the aforesaid conduct amounted to a "scheme to defraud plaintiffs of their insurance premiums paid and their right to obtain reimbursement of medical and hospital expenses. . . ." He also alleges that the defendants "conspired to violate 18 U.S.C. § 1962(a) . . . (b) and . . . (c), in violation of 18 U.S.C. § 1962(d)." Finally, he alleges that in perpetration of their scheme, the defendants used the mails and interstate telephone lines and obtained income from a "pattern of racketeering activity".
Count V seeks the imposition of a constructive trust upon those funds received by MREIT from all of its participants' premium payments and on all payments from re-insurance carriers.1
In Count VII, the plaintiff seeks a money judgment against Penn General, RHR and MREIT's former trustees for common law negligence. Counts VIII and IX seek a money judgment against the same defendants for fraudulent misrepresentations and for innocent misrepresentations causing the plaintiff damage, respectively.
MREIT's bankruptcy trustee answered the complaint, alleging that the checks were property of the estate not subject to earmarking for the plaintiff's claims. He also brought a cross-claim against defendant Penn General, parroting the negligence allegations contained in the plaintiff's complaint. In addition, the cross-claim added a count seeking the avoidance of an allegedly preferential transfer of $27,075.18 from MREIT to Penn General. Finally, the trustee seeks a money judgment against Penn General for breach of its fiduciary duties to MREIT in not disclosing to MREIT the complete details of its self-dealing in purchasing re-insurance coverage from RHR, allegedly its own affiliate.
The former trustees of MREIT moved to dismiss the case as against them for "lack of jurisdiction". They argued that the case against them was not a "core proceeding" as defined by 28 U.S.C. § 157(b),2 and that since there would be at most a minimal impact on the bankruptcy estate no matter how the action against them was resolved, it is not even a proceeding "related to" the bankruptcy case. Therefore, they argue that this Court lacks jurisdiction to even hear the case, let alone to determine it. In the alternative, they requested the Court to abstain, pursuant to 28 U.S.C. § 1334(c)(1).3
In June, 1987, defendants Penn General and RHR also moved to dismiss the plaintiff's claims and the bankruptcy trustee's cross-claims against them, arguing that 28 U.S.C. § 157(b) is unconstitutional and that the actions against them were neither core nor related proceedings and so the bankruptcy court lacked subject matter jurisdiction. They also argued that since they had filed an affirmative defense that the causes of action against them were pre-empted by the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. (ERISA), the determination of this action would require consideration of both title 11 and "other laws of the United States regulating organizations or activities affecting interstate commerce"...
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