Keeper Foundation v. Kenneth A. Nathan, Chapter 7 Tr., David Findling, Special Counsel for Tr., Byzantine Holdings, LLC (In re Reed)
| Decision Date | 01 March 2017 |
| Docket Number | Adv. Pro. No. 16-05089,Case No. 14-53838-MBM |
| Parties | In the matter of: Gregory James Reed, Debtor. Keeper of the Word Foundation, Plaintiff, v. Kenneth A. Nathan, Chapter 7 Trustee, David Findling, Special Counsel for Trustee, Byzantine Holdings, LLC, Dwellings Unlimited, LLC, Debtor's Estate, John Does, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
The motions before the Court are Defendants Kenneth A. Nathan and David Findling's Motion for Summary Judgment and Defendant Dwelling Unlimited LLC'S Motion to Dismiss. For the following reasons, Defendants Findling and Nathan's Motion for Summary Judgment is GRANTED, Defendant Dwellings Unlimited, LLC's Motion to Dismiss is GRANTED, and Plaintiff's Complaint is Dismissed as to all Defendants.
In 1996, Debtor Gregory Reed, Norwaine Reed and Sharon Lawson filed Articles of Incorporation for the "Keeper of the Word Foundation" ("KWF"). KWF was established as a non-profit corporation whose purpose was to collect and preserve items of historic interest, primarily for educational purposes.
On October 3, 2000, Verladia Blount filed for divorce from Debtor. A Judgment of Divorce was entered on May 16, 2003. Ultimately, Blount was awarded $230,000 in the divorce proceedings, payable by Debtor. Blount was unable to collect on her judgment and, on September 6, 2013, David Findling was appointed by the Wayne County Circuit Court as receiver in the divorce case.
On August 28, 2014, Gregory Reed filed a voluntary petition under Chapter 7 of the Bankruptcy Code. Kenneth Nathan was appointed as the Chapter 7 Trustee in the case. Kenneth Nathan will hereinafter be referred to as the "Trustee". On February 4, 2015, this Court entered an Order Approving the Application for Employment of David Findling as Special Counsel to the Chapter 7 Trustee. David Findling will hereinafter be referred to as "Special Counsel."
On December 15, 2014, Blount filed a claim in the amount of $230,000. (Claim No. 2). On March 15, 2016, this Court entered an Order Denying Debtor's Objection to Blount's Claim. (Case No. 14-53838, Docket No. 481)1. This ruling was later affirmed by the Federal District Court for the Eastern District of Michigan (Docket No. 589).
On February 25, 2015, KWF filed a pleading entitled "Notice of Appearance of Counselfor Keeper of the Word Foundation, Interested Party." (Docket No. 107).
On June 15, 2015, the Trustee filed a Motion for Turnover of Property of the Estate, seeking to marshal all of Debtor's assets.
While investigating Debtor's assets, the Chapter 7 Trustee became concerned that Debtor had commingled his assets with those of KWF to such an extent that KWF might no longer qualify as a non-profit corporation. On September 1, 2015, Special Counsel sent a letter to the State of Michigan, Office of the Attorney General, detailing his concerns about the non-profit designation of KWF and requesting that the attorney general institute quo warranto proceedings pursuant to MCR 3.306(B).2 The Trustee's letter stated:
Michigan law allows for an action of quo warranto against a corporation for "any misuser, nonuser, or surrender, forfeited its corporate rights, privileges and franchises ..." MCL § 600.4521. MCR 3.306(B). In the case of People ex rel O'Brien v. Society of Good Neighbors, 327 Mich. 620 (1950), quo warranto proceedings were allowed to dissolve a nonprofit where the allegations included the president converting the funds of the corporation for the personal use of he and his wife and the property was not acquired, held, and disposed of as required under the applicable act.
(Docket No. 211, Letter from Special Counsel to William Bloomfield, Assistant Attorney General, State of Michigan).
On September 28, 2015, Chief Legal Counsel for the Office of the Attorney General senta response to the Trustee's counsel. That letter stated in relevant part:
On October 7, 2015, this Court commenced an evidentiary hearing on the Trustee's Motion for Turnover. Before the Court started taking testimony, the Trustee argued that KWF was, in essence, an alter ego of the Debtor Gregory Reed, and therefore KWF should be dissolved. In response to that argument, this Court stated:
Mr. Thornbladh (representing KWF), your brief just argued on behalf of KWF that it's a legitimate non-profit corporation. I've already ruled that. I'm with you. That's not the issue. The issue is if the corporation is action for a - the income is being used for an improper purpose, can it be dissolved, and if it's going to be dissolved, where should that take place?
The Court went on to say:
. . . because what I'm tempted to do is just send that specific issue to state court and authorize the Trustee to bring an action in state court against Keeper of the Word;
(Docket No. 266, Transcript of October 7, 2015 hearing, p. 8).
As the record in the bankruptcy case demonstrates, the Trustee chose not to seekdissolution of KWF and never filed a state court action seeking that remedy.
The evidentiary hearing on the Trustee's Motion for Turnover was conducted over three days: October 7, 2015, October 15, 2015 and November 2, 2015. Sharon Lawson and Debtor testified on behalf of KWF and Debtor also testified on his own behalf.
On December 17, 2015, this Court issued an Opinion Requiring Debtor to Turnover Assets to the Bankruptcy Estate. The Opinion set forth the assets owned or controlled by Debtor and entered an Order requiring turnover of those assets to the Chapter 7 Trustee. One of the assets which this Court included as property of the bankruptcy estate is real property located at 1201-1209 Bagley, Detroit, MI (the "Bagley Property"). This Court found that, although the Bagley Property was titled in KWF's name, Debtor had co-mingled his assets with those of KWF to such an extent that Debtor's 50% interest in the Bagley Property was property of the bankruptcy estate. Specifically, the Opinion stated:
(Docket No. 344, Opinion, p. 27-28.)
The Court went on to detail the transaction in which Debtor had used KWF to borrow money for his own real estate development project and how Debtor used KWF bank accounts to hide money paid directly to Debtor. (Docket No. 344, Opinion, pp. 26-32.) The Court concluded, as stated above, that Debtor's 50% interest in the Bagley property was an asset of Debtor's bankruptcy estate. The Order effectuating that Opinion states in relevant part:
On December 23, 2015, Debtor Gregory Reed and Keeper of the Word Foundation appealed this Court's December 17, 2015 ruling.
On January 4, 2016, this Court entered an Amended Order Granting Chapter 7 Trustee's Motion for Turnover.4
On August 17, 2016, the Court entered an Ex-Parte Order Authorizing Trustee's Employment of Realtor. The Order authorized the Trustee to employ Dwellings Unlimited, LLC as the real estate broker to market and sell the Bagley Property. (Docket No. 618).
On August 30, 2016, the Trustee filed a Motion for Order Authorizing Sale of RealProperty (hereinafter "Motion for Sale"). The Trustee sought to sell the Bagley Property to Byzantine Holdings, LLC for $1,060,000.00. The Trustee and the Charles H. Brown Trust (the co-owner of the Bagley Property) accepted the offer subject to Court approval and the entry of an order authorizing the sale of the Property.
Between September 19, 2016 and September 30, 2016, KWF, Debtor Gregory Reed, Gregory J. Reed & Associates, P.C., the Gregory J. Reed Scholarship Foundation, and two individuals, K. El Hakim and L. Wilson, filed objections to the Motion for Sale of the Bagley Property.
On October 11, 2016, the United States District Court for the Eastern District of Michigan issued its Amended Opinion and Order Affirming the Bankruptcy Court's January 4, 2016 Order...
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