Matter of Koran Enterprises, Inc.

• Decision Date: 21 February 1986
• Docket Number: Adv. No. 85-0281-1-3-11.,Bankruptcy No. 85-01612-1-3-11
• Citation: 61 BR 321
• Parties: In the Matter of KORAN ENTERPRISES, INC., Debtor. ASSOCIATES FINANCIAL SERVICES COMPANY OF TEXAS, INC., Plaintiff, v. KORAN ENTERPRISES, INC., Kevin K. Koran, Kathleen D. Koran, Fred M. Cox, Dorothy D. Cox and Carston C. Johannsen, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Missouri

61 B.R. 321 (1986)

In the Matter of KORAN ENTERPRISES, INC., Debtor ASSOCIATES FINANCIAL SERVICES COMPANY OF TEXAS, INC., Plaintiff, v. KORAN ENTERPRISES, INC., Kevin K. Koran, Kathleen D. Koran, Fred M. Cox, Dorothy D. Cox and Carston C. Johannsen, Defendants.

Bankruptcy No. 85-01612-1-3-11, Adv. No. 85-0281-1-3-11.

United States Bankruptcy Court, W.D. Missouri, W.D.

February 21, 1986.

Michael R. Roser, Berman, Deleve, Kuchan & Chapman, Kansas City, Mo., for plaintiff.

David B. Sexton, Schulz, Bender, Maher, & Blair, P.C., Kansas City, Mo., for defendants.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND FINAL JUDGMENT FOR PLAINTIFF AND AGAINST DEFENDANT KEVIN K. KORAN IN THE SUM OF $19,675.00 AND OTHERWISE DENYING PLAINTIFF'S PRAYER FOR RELIEF AGAINST OTHER NAMED DEFENDANTS

DENNIS J. STEWART, Bankruptcy Judge.

Plaintiff, a creditor of the debtor entity holding a valid and perfected security interest in a portion of the accounts receivable of the debtor, seeks to recover the value of the diminution of the cash proceeds thereof from the principals of the debtor who are alleged to have used them without any authorization of the bankruptcy court as is contemplated by §§ 361-363 of the Bankruptcy Code.¹ The action came on before the bankruptcy court for hearing of its merits on November 26, 1985. The plaintiff then appeared by Michael R. Roser, Esquire, its counsel. Of the defendants, only the defendant Johannsen appeared formally, both personally and by counsel, David B. Sexton, Esquire. The defendants Cox and Kathleen D. Koran appeared only informally and without counsel and were satisfied not to participate actively in the trial of the action.² The defendant Kevin K. Koran, although properly summoned and notified of the trial,³ did not appear at all, but rather defaulted. The evidence which was then adduced warrants the following findings of material fact.

Findings of Fact

The debtor organization filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on March 29, 1985, in the United States Bankruptcy Court for the District of Kansas. At the time of filing, the defendant Kevin Koran was the chief executive and managing officer of the debtor organization. He, along with his wife, the defendant Kathleen Koran and the defendants Cox, were all the stockholders, directors, and officers of the debtor entity.⁴ The great majority of the existing cash of the debtor which was in existence at the time of filing of the petition for relief was the cash collateral of accounts receivable in which the plaintiff had a valid and perfected security interest.⁵ According to the information transmitted by Kevin Koran to Carston C. Johannsen, the debtor's chapter 11 attorney, there were other accounts receivable which were producing cash proceeds which were not subject to the security interest of the plaintiff or to any other security interest.⁶ With knowledge that the Bankruptcy Code contemplates no use of cash collateral unless and until leave of court has been sought and obtained, Mr. Johannsen, according to uncontradicted testimony rendered by him, sought to have the United States Bankruptcy Court for the District of Kansas set a hearing on the issue of use of cash collateral. The earliest hearing date which he could obtain from that court was May 6, 1985. In the meantime, Mr. Johannsen advised Mr. Koran that cash collateral could be used only for barest necessities for keeping the business running — utilities, payroll, and other miscellaneous necessary upkeep.⁷ It was his intention — again, according to his uncontradicted testimony in the hearing of the merits of this action — that only the unsecured cash collateral be used for this purpose and that, when a hearing could be held on the issue of the use of plaintiff's cash collateral, it was his idea to widen the use of cash collateral by granting the plaintiff a postpetition security interest in yet other unsecured property. But, before the hearing could be held on the issue of use of cash collateral, the Kansas Bankruptcy Court transferred the proceedings to this court.⁸ Promptly after transfer of the proceedings to this court, a trustee was appointed and the debtor's officers were ousted of possession.⁹ The evidence adduced in the hearing of this action clearly shows that the cash collateral of the plaintiff had a level at the time of filing in the District of Kansas which had by the time of the appointment of a trustee by this court diminished by the sum of $19,675.00.^9a Mr. Johannsen states that he first learned of this unauthorized use of cash collateral in the course of the hearing held by this court on May 10, 1985, on the issue of whether a trustee should be appointed. Throughout the time periods in question, the defendant Kevin Koran was in active control of the affairs of the debtor entity; the defendant Kathleen Koran and the defendants Cox had no active control.¹⁰

Jurisdiction of the Bankruptcy Court

Several of the parties have at one time or another during the pretrial processing raised the issue of bankruptcy court jurisdiction. By the time of trial, all parties had formally and explicitly retracted any questions concerning jurisdiction which had previously been raised and had consented to bankruptcy court jurisdiction.¹¹ Nevertheless, it is the duty of the bankruptcy court, under the provisions of § 157(b)(3), Title 28, United States Code, to determine its jurisdiction on its own motion. The facts of this action, as found above, firmly place it within the ambit of bankruptcy court jurisdiction. Although a trustee's or debtor's cause of action for prebankruptcy conversion is not determinable by a bankruptcy court,¹² conversion of estate property committed after bankruptcy has always been considered to be within the summary jurisdiction of a bankruptcy court.¹³ In this action, the collateral of the plaintiff in the possession of the debtor was in the bankruptcy estate by operation of § 541 of the Bankruptcy Code.¹⁴ The prohibited use of cash collateral amounted to postbankruptcy conversion of estate property which has historically been remedied by exercise of the bankruptcy court's summary power of turnover.¹⁵ Nor is it necessary, when estate property has been taken, for the plaintiff to demonstrate that the specific chattels remain in the possession of the converter. See, e.g. South Falls Corp. v. Rochelle, 329 F.2d 611, 619 (5th Cir.1964), to the following effect:

"Had not the Bankrupt\'s dollar been transferred, South Falls would have parted with one of its own. That dollar would have come from its own cash or by liquidation of its ample assets. In effect, it now has a dollar, either in cash or property, which it would not have had but for the transfer of bankrupt funds. Of course, where the misappropriation is that of money, equitable concepts analogous to `tracing\' do not require identification of precise dollars as they go through various commercial mutations. The result is that Maggio now turns against South Falls. Turnover relief is proper, that case held, where `* * * existing chattels or their proceeds\' are available. 33 U.S. 56, 63. Here the `proceeds\' of the cash are the remaining assets saved by this misappropriation of bankruptcy funds."

See also Matter of Citizens Loan and Savings Co., 5 B.R. 510 (Bkrtcy.W.D.Mo.1979), affirmed, Civil Action No. 80-6017-CV-SJ (W.D.Mo. Feb. 27, 1981). On the basis of these well-established legal principles, the court concludes that it has jurisdiction to render judgment in this matter.

Standing of Plaintiff

The defendant Johannsen, at the inception of the trial of this action, raised the issue of the plaintiff's standing to sue in this court, pointing out that plaintiff is not currently a corporation which is registered to do business in Missouri and that it therefore is not entitled to bring suit in any of the state or federal courts located in Missouri.¹⁶ This doctrine, however, is not applicable, under notions of fair play and substantial justice, when plaintiff has been compelled to sue in the bankruptcy court where the debtor's bankruptcy proceedings are lodged.¹⁷ This contention is therefore denied.

Conclusions of Law

The prohibited use of cash collateral by a debtor entity amounts to a conversion of the secured creditor's property. It is well established that a secured creditor has a sufficient ownership interest in property so as to be a proper party to bring suit for its conversion. "Under Missouri law the tort of conversion is completed by the mere sale of livestock or other chattels in which there is a security interest." United States v. Gallatin Livestock Auction, Inc., 448 F.Supp. 616, 621 (W.D.Mo. 1978), affirmed, 589 F.2d 353 (8th Cir. 1978). Further, the use of such collateral without lawful authorization, constitutes an unauthorized exercise of dominion over the property of another in accordance with one standard definition of conversion.¹⁸ And, although fungible money is not ordinarily thought to constitute a chattel which can be the subject of conversion, that is not true when, as in the action at bar, the money represents a special fund as the traceable proceeds of the intangible chattels.¹⁹

Further, the law is clear that it is not only the entity which receives the benefit of a conversion which is liable in conversion, but all others who participated in the conversion are jointly and severally liable as well.²⁰ Under this doctrine, the liability of the debtor corporation and that of the defendant Kevin Koran for conversion is quite clear. The active control of all corporate matters which is demonstrated by the evidence is a sufficient predicate, under the circumstances of this case, for holding Kevin Koran responsible for the conversion of the plaintiff's cash collateral. "Every person is liable in trover who personally or by agent . . . commits an act of conversion, or who participates in the conversion by instigating, aiding, or assisting another, or...