In re Troutman Enterprises, Inc.
| Decision Date | 24 January 2000 |
| Docket Number | Bankruptcy No. 92-01988. Adversary No. 99-3099. |
| Court | U.S. Bankruptcy Court — Southern District of West Virginia |
| Parties | In re TROUTMAN ENTERPRISES, INC., Converted Debtor. Donald F. Harker, Chapter 7 Trustee, Plaintiff, v. Rufus Troutman, Terry Troutman, and Lester Troutman, as Surviving Shareholders of Troutman Enterprises, Inc., Defendant. |
William A. Sherman, II, Tim J. Robinson, Cincinnati, OH, for Movants.
Donald F. Harker, III, Dayton, OH, Chapter 7 Trustee.
Ira Rubin, Dayton, OH, Special Counsel for Trustee, Donald F. Harker, III.
DECISION ON ORDER GRANTING IN PART AND DENYING IN PART TRUSTEE'S COMPLAINT FOR TURNOVER AND AUTHORIZING DISTRIBUTION OF FUNDS
The issues presented for determination in this case highlight the Congressionally-designed default effect of confirmation in connection with property of the estate in a Chapter 11 case and a deviation from that effect caused by a disingenuous debtor. The relevant pleadings include the Chapter 7 Trustee's Complaint for Turnover of Property (Doc. 1-1) and the Third-Party Defendants' Motion to Dismiss Complaint Pursuant to Fed.R.Civ.P. 12(b)(6) and Fed. R.Bankr.P. 7012(b)(6), or, Alternatively, for Summary Judgment Dismissing Complaint and Memorandum of Law in Support Thereof (Doc. 9-1). Pursuant to the parties' agreement and a prior order (Doc. 21-1), the Chapter 7 Trustee's Complaint and the Third-Party Defendants' Motion are determined as a matter of summary judgment. The Chapter 7 Trustee's Complaint is DENIED in part and GRANTED in part.
On July 11, 1986, Troutman Enterprises, Inc. ("TEI") purchased a $500,000 life insurance policy (the "First Policy") on Larry Troutman, a shareholder and officer of TEI. TEI was both the owner of the policy and the named beneficiary at the time it was purchased, and on April 23, 1992, the date TEI filed a Chapter 11 bankruptcy case. On September 1, 1993, TEI's Amended Plan of Reorganization was confirmed (Doc. 165-1). The existence of TEI's interest as owner and beneficiary of the First Policy was not listed in the filed Schedule B — Personal Property, nor was any information concerning the First Policy included in the Disclosure Statement or the Confirmed Amended Plan, nor was any information concerning TEI's interest in the First Policy otherwise disclosed in the Chapter 11 proceedings or until after the case was converted to a Chapter 7.
On January 30, 1995, approximately seventeen months following the entry of the confirmation order, TEI, as the Reorganized Debtor, purchased a $1,000,000 life insurance policy (the "Second Policy") on Roger Troutman, also a shareholder and officer of TEI. As in the First Policy, TEI was both the owner and named beneficiary of the Second Policy.
On January 4, 1996, TEI's Chapter 11 case was converted to a Chapter 7 case. On April 22, 1996, during the pendency of the Chapter 7 case and without disclosure of any information concerning the policies in any filing with the court, and without the Trustee's knowledge or consent, TEI executed documents which purported to transfer ownership of both Policies from TEI to Roger Tee Enterprises, Inc., a related corporation. TEI, however, remained at all times the named beneficiary of each Policy. On April 25, 1999, the deaths of Larry Troutman and Roger Troutman occurred, and the proceeds of both Policies became payable to TEI.
On May 14, 1999, over seven years after the initial Chapter 11 schedules were filed, the current Vice-President of TEI filed an "Amendment to Schedule B, Category Number 9" which, for the first time in any filing in the bankruptcy records, disclosed TEI's interest in the First and Second Policies. Following the disclosure of TEI's interest in the Policies, the Chapter 7 Trustee brought an adversary proceeding against the insurer for turnover of all proceeds to which TEI had become entitled upon the deaths of the insureds.1 The Remaining Shareholders of TEI subsequently intervened in the litigation as Third-Party Defendants, asserting they were entitled to the proceeds of the Policies and moving for dismissal of the Trustee's complaint for failure to state a claim, or in the alternative, for summary judgment.
In accordance with the Standing Order of Reference entered in this district on July 30, 1984, the court has jurisdiction in this matter pursuant to 28 U.S.C. § 1334(a) and (b). The within matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) — matters concerning the administration of the estate; § 157(b)(2)(E) — orders to turn over property of the estate; and § 157(b)(2)(O) — other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship.
Summary judgment is appropriate where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Slone-Stiver v. Mazer Corp. (In re Interstate Graphics, Inc.), 223 B.R. 116, 122 (Bankr. S.D.Ohio 1998) (quoting Gibson v. Gibson (In re Gibson), 219 B.R. 195, 198 (6th Cir. BAP 1998)). There are no disputed issues of fact among the parties; accordingly, the Trustee's Complaint and the Third-Party Defendants' Motion will be determined as a matter of law.
Although courts acknowledge trepidation in connection with a "`venture into analysis of the impact of a confirmed plan of reorganization upon a subsequent conversion to Chapter 7,'" In re D & D Furniture, Inc., 239 B.R. 54, 55 (Bankr. E.D.Pa.1999) (quoting In re Pavlovich, 952 F.2d 114, 116 (5th Cir.1992)), the applicable statutes and developed decisions provide illuminated, but divergent, pathways, which, in the circumstances of this Chapter 7 case, result in the Trustee obtaining the proceeds of the First Policy, but not of the Second Policy.
While the final resolution of the issues presented requires an analysis of the interrelationships of various sub-sections of 11 U.S.C. §§ 348 (Effect of conversion), 521 (Debtor's duties), 541 (Property of the estate), 554 (Abandonment of property of the estate) and 1141 (Effect of confirmation), the starting point is a recognition of every debtor's duty to begin the bankruptcy process with honest, complete, and accurate information as required by § 521(1). "The debtor shall — (1) file a list of creditors, and unless the court orders otherwise, a schedule of assets and liabilities, a schedule of current income and expenditures, and a statement of the debtor's financial affairs." 11 U.S.C. § 521(1).
A further essential component of the analysis is a determination of property of the estate in this present Chapter 7 case. The Chapter 7 Trustee is entitled to the proceeds of the Policies only to the extent that the proceeds are property of the estate in this converted Chapter 7. Section 541(a) provides:
11 U.S.C. § 541(a)(1) & (6).
It is essential to recognize the all-encompassing nature of § 541(a) is often significantly limited when a confirmed Chapter 11 case is subsequently converted to a Chapter 7. This is because the entity created upon confirmation and operating postconfirmation pursuant to a confirmed Chapter 11 plan — the Reorganized Debtor —is legally distinct from the entity which existed preconfirmation and whose assets will be administered in the converted Chapter 7 — the Converted Debtor. Upon the confirmation of a plan in a Chapter 11, the effect of confirmation is determined by § 1141(b) & (c):
(b) Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor. (c) Except as provided in subsections (d)(2) and (d)(3) of this section and except as otherwise provided in the plan or in the order confirming the plan, after confirmation of a plan, the property dealt with by the plan is free and clear of all claims and interests of creditors, equity security holders, and of general partners in the debtor.
11 U.S.C. § 1141(b) & (c).
Neither the Order Confirming the Plan nor the Confirmed Amended Plan contain any provisions altering the effect of § 1141(b) & (c). The Plan simply states: "All property of the estate shall revert to the Debtor at confirmation . . . and the Debtor shall continue its operation and make payments as provided for in the confirmed Plan." As the Seventh Circuit has held, "Section 1141(c) provides with immaterial exceptions that `except as provided in the plan or in the order confirming the plan, after confirmation of a plan, the property dealt with by the plan is free and clear of all claims and interests of creditors, equity security holders, and of general partners in the debtor.'" In re Penrod, 50 F.3d 459, 462-463 (7th Cir. 1995). Accordingly, all property of the estate vested in the Reorganized Debtor free and clear of the claims of creditors upon confirmation of the Amended Plan.
The question becomes what effect, if any, does the conversion of the Chapter 11 case, with its confirmed plan, to a Chapter 7 case have on the confirmed plan or property which has vested in the Reorganized Debtor? In the context of this case, the answer is virtually none. Conversion of the Chapter 11 to a Chapter 7 case does not invalidate the plan previously confirmed in the Chapter 11 or in any way affect the property which has vested in the Reorganized Debtor. The effect of conversion is governed by § 348(a), which merely states, "Conversion of a case . . . constitutes an order for relief...
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