In Re: Newpower
| Decision Date | 13 June 2000 |
| Docket Number | 99-1239,Nos. 99-1211,s. 99-1211 |
| Citation | 233 F.3d 922 |
| Parties | (6th Cir. 2000) In re: George D. Newpower, Jr., Debtor. Robert Kitchen; Harriet Kitchen; New Properties, Inc., Movants-Appellees/Cross-Appellants, v. James W. Boyd, Chapter 7 Trustee, Respondent-Appellant/Cross-Appellee. Argued: |
| Court | U.S. Court of Appeals — Sixth Circuit |
Appeal from the United States District Court for the Western District of Michigan at Grand Rapids. No. 98-00418--Douglas W. Hillman, District Judge. [Copyrighted Material Omitted]
[Copyrighted Material Omitted] Ronald A. Schuknecht, LEWIS & SCHUKNECHT, Traverse City, Michigan, for Appellant.
Jonathan R. Moothart, BOWERMAN, BOWDEN & MOOTHART, Traverse City, Michigan, for Appellees.
Before: KENNEDY, BOGGS, and BATCHELDER, Circuit Judges.
KENNEDY, J., delivered the opinion of the court, in which BOGGS and BATCHELDER, JJ., concurred except as to part III-B. BATCHELDER, J. (pp. 934-37), delivered a separate opinion, in which BOGGS, J., concurred, which constitutes the opinion of the court with respect to the issue addressed in part III-B.
Robert Kitchen ("Kitchen") and New Properties, Inc., ("NPI") (collectively referred to as "movants") moved the bankruptcy court to lift the 11 U.S.C. §362 automatic stay in bankruptcy with respect to money that debtor George D. Newpower, Jr., ("Newpower" or "debtor") embezzled. Movants argued that the embezzled funds were not property of Newpower's bankruptcy estate because: as a thief Newpower did not take title to the funds he embezzled; Newpower was acting as an agent and thus never had title to money loaned to NPI; money was held by Newpower pursuant to an express trust. The bankruptcy court held that the $171,516.48 that Newpower transferred directly to third parties from NPI was not property of Newpower's estate, but declined to lift the stay on the remaining $582,463. The Kitchens and NPI appealed the bankruptcy court's ruling to the district court, which held that none of the embezzled funds were property of Newpower's bankruptcy estate, and thus, were not subject to the automatic stay in bankruptcy. For the reasons that follow, we shall affirm in part and reverse in part.
The facts of this case were extensively detailed by the district court in In re Newpower, 229 B.R. 691 (W.D. Mich. 1999). However, for the purpose of analysis, we include a summary of those facts critical to the decision.
In January of 1996, Kitchen and Newpower, a licensed Michigan real estate broker, entered an agreement to form NPI. The corporation's purpose was to purchase and develop real estate in northern Michigan. Kitchen and Newpower were the sole shareholders and directors of the corporation. Kitchen was named vice president and secretary and Newpower was named president and treasurer.
Kitchen and Newpower agreed that Newpower would identify properties in Michigan for purchase and development by the corporation. If both shareholders agreed to purchase the property, NPI would do so, with a loan in the amount of 50% of the purchase price to the corporation by each shareholder. At the time the agreement was entered into, Kitchen lived in Alaska and Newpower lived in Michigan.
The first property that the shareholders agreed to purchase was an eighty-acre parcel in Kalkaska County, Michigan. The price of the property was $400,000, and as agreed, Kitchen and his wife (the "Kitchens") sent a check to Newpower for $200,000. The memo portion of the check stated that the check was for NPI, and contained a portion of the legal description of the property to be purchased. Instead of using the money to purchase the agreed upon property, Newpower deposited the check in his personal account and used the $200,000 for his own purposes.
Thereafter, for the remainder of 1996, Kitchen and Newpower conducted regular telephone discussions regarding the Kalkaska property, as well as four other parcels. Prior to each closing, Newpower would tell Kitchen how much money was needed to purchase the specified property. The Kitchens would then wire funds totaling one-half of the purchase price of the property to the corporate account, on which Newpower was the sole authorized signatory. Newpower continued his practice of misappropriating the funds for his own use with respect to these transfers as well. At the same time Newpower reported to Kitchen that everything was progressing as planned and even went so far as to travel to Alaska to meet with Kitchen and deliver fraudulent copies of deeds for the agreed upon properties.
When the Kitchens traveled to Michigan in December 1996 to check on the status of the properties, they quickly discovered that no properties had actually been purchased by Newpower. By investigating Newpower's financial records, the Kitchens were able to determine what Newpower had done with their money. Among other things, Newpower: bought a Corvette, a four-wheel drive pickup truck, and a power boat; built a new house for his girlfriend; loaned $60,000 to a former fiance; invested $50,000 in the production of a music CD for another girlfriend; spent tens of thousands of dollars in "loan repayments" to customer trust accounts for Newpower's real estate business; and made thousands of dollars of cash distributions to himself for "walking around money."
The Kitchens also filed a complaint with the Michigan Attorney General's office and a Michigan State Police investigation was commenced. Newpower initially fled, but eventually turned himself in and pled guilty to embezzlement. He was sentenced to six-to-ten years in prison and ordered to pay $755,000 in restitution to the Kitchens. Shortly thereafter, Newpower filed for bankruptcy and the Kitchens' lawsuit against the transferees of the embezzled funds was automatically stayed by the bankruptcy court on November 7, 1997, pursuant to the automatic stay provisions of 11 U.S.C. §362. The Kitchens and NPI moved to lift the stay or order an abandonment so that they could proceed with their state court action.
Following a hearing on movants' motion to lift the automatic stay, the bankruptcy court granted movants' motion in part and denied it in part. The bankruptcy court concluded that the funds which were transferred by Newpower directly from the NPI account to a third party, without passing through Newpower's personal account, were not property of the estate. Accordingly, the court concluded that the Kitchens were entitled to proceed on their actions to recover such funds from the recipients. However, as to money that passed through Newpower's hands in any way or that was used to purchase assets titled in Newpower's name, the court concluded that it was property of the estate. Thus, the bankruptcy court lifted the stay on $171,516.48 of assets that Newpower transferred directly to third parties from NPI but declined to lift the stay on the remaining $582,463 of assets traceable to the money that the Kitchens loaned NPI1.
Kitchen and NPI appealed the bankruptcy court's ruling to the district court. The district court held that the bankruptcy court erred in concluding that property traceable to the Kitchens' embezzled funds were property of Newpower's estate. Consequently, the district court reversed the bankruptcy court's decision to the extent that it declined to lift the automatic stay under 11 U.S.C. § 362 with respect to the remaining $582,463 of property traceable to movants' funds.
In considering an appeal from a decision of the district court, which reviewed a decision of the bankruptcy court, this court independently reviews the bankruptcy court's decision. In re Koenig Sporting Goods, Inc., 203 F.3d 986, 988 (6th Cir. 2000). In doing so, we will review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. In re Century Boat Co., 986 F.2d 154, 156 (6th Cir.1993). Because the only question presented-- whether the embezzled funds at issue and proceeds thereof are part of debtor's bankruptcy estate pursuant to 11 U.S.C. § 541--is a legal one, we review the bankruptcy court's decision de novo.
This appeal raises the question of whether the money misappropriated by debtor, money and property traceable to the misappropriated funds, and claims or causes of action to recover money and property traceable to the misappropriated funds are property of debtor's bankruptcy estate. If the $582,463 of assets traceable to the money the Kitchens lent NPI is estate property, then pursuant to 11 U.S.C § 541, the trustee must collect and distribute the money in proportional shares to all creditors of the bankruptcy estate.
Section 541 provides: 11 U.S.C. § 541(a). What qualifies as a property interest is determined by reference to state law, unless some federal interest requires a different result. Butner v. United States, 440 U.S. 48, 54-55 (1979).
The district court concluded that none of the funds and property at issue were part of debtor's bankruptcy estate because, as a thief, debtor took no title to the funds, an express trust existed under the circumstances, and debtor held the embezzled funds as an agent. Based on its conclusions, the district court reversed the bankruptcy court's order and remanded for entry of an order granting relief from stay as to the $582,463 and causes of action to recover that sum.
Unless a countervailing federal interest exists, state law determines whether a debtor has a property interest for purposes of § 541(a)(1). Butner v. United States, 440 U.S. 48 (1979); In re Van Dresser Corp., 128 F.3d 945 (6th...
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