In re the V Companies

• Decision Date: 01 May 2003
• Docket Number: No. 02-8051.,02-8051.
• Citation: 292 B.R. 290
• Parties: In re THE V COMPANIES, et al., Debtors. Jefferson County Board of County Commissioners; Virgil E. Brown, Trustee, Plaintiffs-Appellees, v. Christine A. Voinovich; Deborah Voinovich McCann; Paul M. Voinovich; Vocon Design, Inc., Defendants-Appellants.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

292 B.R. 290

In re THE V COMPANIES, et al., Debtors.

Jefferson County Board of County Commissioners; Virgil E. Brown, Trustee, Plaintiffs-Appellees, v. Christine A. Voinovich; Deborah Voinovich McCann; Paul M. Voinovich; Vocon Design, Inc., Defendants-Appellants.

No. 02-8051.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued March 5, 2003.

Decided and Filed May 1, 2003.

ARGUED: Michael D. Zaverton, Benesch, Friedlander, Coplan & Aronoff, Cleveland, Ohio, for Appellants. ON BRIEF: Michael D. Zaverton, Benesch, Friedlander, Coplan & Aronoff, Cleveland, Ohio, for Appellants.

Alan R. Lepene, Thompson Hine, Cleveland, Ohio, for Appellees. ON BRIEF Alan R. Lepene, Thompson Hine, Cleveland, Ohio, for Appellees.

Before AUG, HOWARD, and LATTA, Bankruptcy Appellate Panel Judges.

OPINION

HOWARD, Bankruptcy Judge.

Appellants, Christine A. Voinovich, Deborah Voinovich McCann, Paul M. Voinovich and Vocon Design, Inc. appeal the order of the bankruptcy court denying their motion to dismiss an adversary proceeding filed against them by the Jefferson County Board of County Commissioners ("the Board"). The bankruptcy court's order also substituted Virgil E. Brown, the Chapter 7 Trustee ("the Trustee"), as the plaintiff in the adversary proceeding. For the reasons set out below, we AFFIRM the bankruptcy court's decision.

I. ISSUE ON APPEAL

The issue before the Panel is whether the bankruptcy court erred as a matter of law in determining that the Board had derivative standing to pursue avoidance actions against the Appellants. In deciding that issue the Panel must specifically consider whether the Sixth Circuit case of Canadian Pac. Forest Prods., Ltd. v. J.D. Irving, Ltd. (In re Gibson Group, Inc.), 66 F.3d 1436 (6th Cir.1995) is effectively overruled by the Supreme Court case of Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000).

The Appellants also contend that the bankruptcy court erred in substituting the Trustee as plaintiff in the adversary proceeding. Their position was based on their contention that the Trustee could not be substituted for a party whose standing to sue was granted in error. In light of our decision concerning the issue of derivative standing, we need not address this issue.

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Northern District of Ohio has authorized appeals to the BAP. The "final order" of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it "ends the litigation on the merits and leaves nothing for the courts to do but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (internal quotations and citations omitted). The denial of a motion to dismiss is not a final order. Archie v. Lanier, 95 F.3d 438, 442 (6th Cir.1996); Kelly, Howe & Scott v. Giguere (In re Giguere), 188 B.R. 486, 488 (D.R.I.1995). However, the panel may grant leave to appeal absent a motion for leave to appeal, if a notice of appeal is timely filed. See United States v. Eggleston Works Loudspeaker Co. (In re Eggleston Works Loudspeaker Co.), 253 B.R. 519, 521 (6th Cir. BAP 2000). The Panel granted leave to appeal on December 3, 2002.

Conclusions of law are reviewed de novo. See Nicholson v. Isaacman (In re Isaacman), 26 F.3d 629, 631 (6th Cir.1994). "De novo review requires the Panel to review questions of law independent of the bankruptcy court's determination." First Union Mortgage Corp. v. Eubanks (In re Eubanks), 219 B.R. 468, 469 (6th Cir. BAP 1998) (citation omitted).

III. FACTS

The Appellants, Christine A. Voinovich, Deborah Voinovich McCann, Paul M. Voinovich, and Vocon Design, Inc., are all officers/directors/insiders of The V Companies, Inc. and V-S Architects, Inc., the Debtors in this case, and are some of the defendants in the above-referenced adversary proceeding. The Debtors were involved in construction and project management businesses. In a prior opinion approving the conversion of the Debtors' cases to cases under chapter 7, the bankruptcy court gave an in-depth description of the relationships between the Debtors and their various affiliates, officers, directors and shareholders, including the Appellants. See In re v. Companies, 274 B.R. 721 (Bankr.N.D.Ohio 2002). The Debtors are controlled by Paul V. Voinovich who is the spouse of Appellant Christine A. Voinovich, and the father of Appellants Deborah Voinovich McCann and Paul M. Voinovich. Further, Christine A. Voinovich is the sole shareholder of Appellant Vocon Design, Inc. which is operated by her children, Deborah Voinovich McCann and Paul M. Voinovich. Id. at 728-29, 736.

The bankruptcy cases (jointly administered) were originally filed under Chapter 11 on January 7, 2000. The Debtors operated the companies as debtors-in-possession for over two years. On May 2, 2001, the U.S. Trustee filed a motion to convert to Chapter 7. While the motion was pending, the Board sought leave of court to pursue avoidance actions for the benefit of the Debtors' estates. During the course of the case, the Board requested that the Debtors file adversary actions against several individuals and entities to recover allegedly fraudulent and preferential transfers. The Board asserted that various officers, directors, shareholders and insiders of the Debtors, including the Appellants, had engaged in practices that resulted in the Debtors' insolvency and bankruptcy.

These alleged practices include organizing and operating competing companies, diverting Debtors' assets to other affiliates, selling property in which the Debtors had an interest without accounting for the Debtors' interests and other unlawful practices to the detriment of the Debtors' estates. The Debtors refused to file any avoidance actions. After a hearing on January 7, 2002, the bankruptcy court granted the Board leave to file a complaint against the Appellants and others within the two year limitations period set out in 11 U.S.C. § 546(a). The complaint sought to avoid transfers made by the Debtors to nineteen defendants, including Appellants.

The bankruptcy court entered an order converting the cases from Chapter 11 to Chapter 7 on March 8, 2002, finding that cause existed for conversion of the cases based on the failure of the debtors-in-possession (or Debtors) to provide meaningful information about their finances, their filing of materially inaccurate operating reports, fiduciary breaches by management in engaging in questionable transactions, and self-dealing. The Trustee was appointed on March 12, 2002, but did not become the case trustee until April 16, 2002. On April 17, 2002, he filed a motion seeking to add himself as co-plaintiff with the Board in the adversary proceeding. Meanwhile, on March 25, 2002, the Appellants had filed a motion to dismiss the complaint on the grounds that the Board lacked standing to pursue avoidance actions.

The bankruptcy court denied the motion to dismiss on August 2, 2002, and on the same date substituted the Trustee as the sole plaintiff in the adversary proceeding. The Appellants filed their notice of appeal on August 12, 2002, without seeking leave to appeal the interlocutory order. The Panel issued an order to show cause why the appeal should not be dismissed for lack of appellate jurisdiction. As previously stated, on December 3, 2002, the Panel issued an order pursuant to 28 U.S.C. § 158(a)(3) granting the Appellants leave to appeal, and directing the parties to address the issue of derivative standing.

IV. DISCUSSION

The Appellants' contend that a creditor may not be granted derivative standing to pursue an avoidance action as the power to bring such actions is granted exclusively to the trustee pursuant to 11 U.S.C. §§ 547 and 548. These sections provide that "the trustee may avoid" preferential and fraudulent transfers, respectively. The Appellants' position is based on the Supreme Court's ruling in Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) that an administrative claimant does not have independent standing to bring a claim under 11 U.S.C. § 506(c), and that in fact "entities other than the trustee are not entitled to use § 506(c)." Id. at 7, 120 S.Ct. 1942. Section 506(c) provides that "[t]he trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim." The Appellants contend that the ruling in regard to this section must inform any determination in regard to any statute which delineates the powers of the trustee.

When the bankruptcy court granted the Board leave to file the adversary proceeding, it did so pursuant to the holding in Canadian Pac. Forest Prods. Ltd. v. J.D. Irving, Ltd. (In re Gibson Group), 66 F.3d 1436, 1438 (6th Cir.1995). There the court held that

a bankruptcy court may permit a single creditor in a Chapter 11 case to initiate an action to avoid a preferential or fraudulent transfer instead of the debtor-in-possession if the creditor: 1) has alleged a colorable claim that would benefit the estate, if successful, based on a cost-benefit analysis performed by the bankruptcy court; 2) has made a demand on the debtor-in-possession to file the avoidance action; 3) the demand has been refused; and, 4) the refusal is unjustified in light of the statutory obligations and fiduciary duties of the debtor-in-possession in a Chapter 11 reorganization.

Id. The bankruptcy court determined that the Board had met these conditions, and granted leave to file the adversary proceeding. As the bankruptcy court points out in its opinion, Gibson Group is binding precedent in...