Olsen v. Reuter (In re Reuter)

• Decision Date: 12 September 2013
• Docket Number: Bankruptcy No. 07–21128–DRD–11.,Adversary No. 12–02028.
• Citation: 499 B.R. 655
• Parties: In re Nathan Paul REUTER, Debtor. Jill D. Olsen, Trustee, Plaintiff, v. Nathan Paul Reuter and Kathleen S. Reuter, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Missouri

499 B.R. 655

In re Nathan Paul REUTER, Debtor.Jill D. Olsen, Trustee, Plaintiff,

v.Nathan Paul Reuter and Kathleen S. Reuter, Defendants.

Bankruptcy No. 07–21128–DRD–11.

Adversary No. 12–02028.

United States Bankruptcy Court, W.D. Missouri.

Sept. 12, 2013.

David G. Brown, Columbia, MO, for Plaintiff.

James F.B. Daniels, McDowell Rice Smith & Buchanan, Kansas City, MO, Bryan Bacon, Van Matre Harrison Hollis & Taylor P.C., Columbia, MO, for Defendant.

MEMORANDUM OPINION

DENNIS R. DOW, Bankruptcy Judge.

This matter is before the Court on the Motions to Dismiss of Nathan Paul Reuter (“Debtor”) and Kathleen S. Reuter (the “Motions”). This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(a) and (b). This is a core proceeding which this Court may hear and determine pursuant to 28 U.S.C. § 157(b)(2)(A) & (E). For all the reasons set forth below the Court will grant the Motions in part and deny the Motions in part.

I. FACTUAL AND PROCEDURAL BACKGROUND

On June 15, 2006, certain individual plaintiffs filed a Civil Complaint in the Western District of Missouri against Debtor. Debtor filed a Chapter 11 bankruptcy case on July 27, 2007. The district court case was stayed by Debtor's bankruptcy filing so, in an attempt to recoup their lost investment monies, those plaintiffs filed an adversary proceeding claiming that the respective debts owed should be nondischargeable as they were incurred as a result of Debtor's false pretenses, false representations and/or through actual fraud pursuant to § 523(a)(2)(A). The adversary plaintiffs' claims were litigated and determined to be nondischargeable.

Debtor and his wife (the “Defendants”) are co-trustees of the Kathleen S. Reuter Revocable Trust (the “Kathleen Trust”) and the Nathan P. Reuter Revocable Trust (the “Nathan Trust”) which were created on September 16, 2005 (the “Trusts”). Copies of the Trusts documents are attached to the Complaint along with a copy of an Interspousal Agreement which plays a minimal role in the issues.¹ On April 14, 2010, this Court issued an Opinion in which it held, in the context of denying confirmation of Debtor's proposed plan, that Debtor has interests in property of the Trusts and that such interests are property of the estate. The Court left it to the bankruptcy Trustee, in the event of conversion, to determine what action was necessary to realize on the Debtor's interest in the Trusts.

The case was converted to Chapter 7 on May 28, 2010. The Trustee (or the “Plaintiff”) was appointed and challenged Debtor's rights in the Trusts. Thereafter, the Trustee filed this adversary proceeding claiming the following regarding Debtor's rights in the Trusts: (a) Debtor's rights as trustee to manage and control the trust res, and to make distributions to the estate to pay Debtor's debts, are property of the estate to be exercised at the Trustee's discretion; (b) Debtor's beneficial interest in the Trusts are property of the estate and any purported spendthrift provision is invalid; and (c) Debtor's rights to revoke the Trusts are the Trustee's to exercise. Complaint, ¶ 34. In order to realize the claimed rights in the estate property, the Trustee has sought a declaratory judgment (1) that Debtor has an interest in, and power over, the property of the Kathleen S. Reuter Revocable Trust, declaring the extent of such interest and power, and declaring that such interest and power are property of the bankruptcy estate; (2) that Debtor has an interest in, and power over, the property of the Nathan Trust, declaring the extent of such interest and power, and declaring that such interest and power are property of the bankruptcy estate; (3) ordering Defendants to turnover to the Trustee all interests and powers declared by the Court to be property of the estate; and (4) ordering Debtor to make an accounting of all property of the estate or the value thereof. The Court will discuss the relevant portions of the Trusts in the following Opinion where applicable.

Defendants have filed Motions to Dismiss the Trustee's Complaint for a variety of reasons that are discussed in detail in the following analysis.

II. MOTIONS TO DISMISS

A. Applicable Standard

To withstand a motion under Rule 12(b)(6), a complaint must plead sufficient facts to “state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 577, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); see also, Alexander v. Hedback, 718 F.3d 762 (8th Cir.2013); M.M. Silta, Inc. v. Cleveland Cliffs, Inc., 616 F.3d 872 (8th Cir.2010). To defeat a motion to dismiss for failure to state a claim, the plaintiffs need not provide specific facts in support of their allegations, but they must include sufficient factual information to provide the grounds on which the claim rests, and to raise a right to relief above a speculative level. See Schaaf v. Residential Funding Corp., 517 F.3d 544 (8th Cir.2008). When considering a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), the court must view the facts alleged in the complaint in the light most favorable to the plaintiff. In re Glossip, 331 B.R. 871 (Bankr.W.D.Mo.2005) (citing Burkhalter v. Lindquist & Trudeau, Inc., 2005 WL 1983809 (E.D.Mo.2005)).

B. Procedural Issues

1. This Court is a “Court of the United States” as defined in 28 U.S.C. § 451 and has authority to make or enter declaratory judgments under 28 U.S.C. § 2201.

Debtor argues that this Court cannot enter a declaratory judgment in the case as Plaintiff seeks because it is not a “court of the United States” as required under § 2201. A bankruptcy judge is authorized to hear and determine all core proceedings arising under title 11 or arising in a case under title 11 and to enter appropriate orders and judgments in those proceedings. 28 U.S.C. § 157(b)(1). A bankruptcy judge may also hear a proceeding that is not core but “otherwise related to” the bankruptcy case and submit proposed findings of fact and conclusions of law to the district court for entry of final order or judgment. 28 U.S.C. § 157(c)(1).

The Court acknowledges that other circuits are split on the issue but there is no clear majority. Although it is often dependent upon the context, some courts hold the bankruptcy court cannot be considered a “court of the United States.” See, e.g., IRS v. Brickell Investment Corp., 922 F.2d 696 (11th Cir.1991); In re Courtesy Inns, Ltd., 40 F.3d 1084 (10th Cir.1994); Miller v. Cardinale (In re DeVille), 280 B.R. 483 (9th Cir. BAP 2002). Other courts come to the opposite conclusion. See, e.g., In re Schaefer Salt Recovery, Inc., 542 F.3d 90 (3rd Cir.2008); Adair v. Sherman, 230 F.3d 890 (7th Cir.2000); Baker v. Latham Sparrowbush Assoc. (In re Cohoes Indus. Terminal, Inc.), 931 F.2d 222 (2nd Cir.1991); In re Yochum, 89 F.3d 661, 669 (9th Cir.1996); In re Grewe, 4 F.3d 299, 304 (4th Cir.1993). However, the law in the Eighth Circuit is clear.

In the most recent Eighth Circuit case on the issue, the court held that the bankruptcy court has the power to issue declaratory judgments when the matter in controversy regards the administration of a pending bankruptcy estate. See Sears, Roebuck and Co. v. O'Brien, 178 F.3d 962, 964 (8th Cir.1999) (citing National Union Fire Ins. Co. v. Titan Energy, Inc. (In re Titan Energy, Inc.), 837 F.2d 325, 329–30 (8th Cir.1988)). This Court has agreed in In re Weller, 316 B.R. 708 (Bankr.W.D.Mo.2004), and also noted that the party seeking a declaratory judgment must bear the burden of proof in these proceedings. See Reliance Life Ins. Co. v. Burgess, 112 F.2d 234, 238 (8th Cir.1940); see also, DeBold v. Case (In re Tri—River Trading, LLC), 317 B.R. 65 (Bankr.E.D.Mo.2004). Debtor cites In re Arkansas Communities, Inc., 827 F.2d 1219 (8th Cir.1987), to support his position that this Court is not a court of the United States. However, the Sears, Roebuck case comes twelve years after that case and is thus clearly the current binding precedent on the issue in this Circuit.

Debtor also argues that the Federal Rules of Bankruptcy Procedure do not provide for declaratory judgment in the form of a “bankruptcy equivalent” to Federal Rule of Civil Procedure 57 and, therefore, the Court does not have the power to exercise declaratory judgment powers as does a district court. Although the Bankruptcy Rules do not specifically provide for and govern a declaratory judgment action, declaratory relief is provided for in the Bankruptcy Rules. Fed. R. Bankr.P. 7001(9) states that a proceeding to obtain a declaratory judgment relating to the subject matter of any of the various adversary proceedings listed in the Rule is an adversary proceeding itself. See Advisory Committee Note to Rule 7001. In this case, the proceeding is seeking to obtain declaratory judgment relating to the type of claim listed in Rule 7001(2), “a proceeding to determine the validity, priority, or extent of a lien or other interest in property....” Such a proceeding is thus governedby the rules in Part VII, which provide the needed procedural framework for processing the Trustee's claims.

Finally, Debtor argues that the Supreme Court held, in the recent case of Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), that a bankruptcy court is not an adjunct to the district court and therefore does not have statutory powers under 28 U.S.C. § 451 to enter a final judgment in this case. The Court disagrees with Debtor's contention that a bankruptcy judge lacks the constitutional power to enter a final judgment in this adversary proceeding. The Supreme Court held in the Stern case that the bankruptcy court lacked constitutional authority to enter a final judgment on a state law counterclaim based on tortious interference, but that it had the statutory authority to do so under § 157(b)(2)(C). Further, a turnover proceeding like this one is a paradigmatic exercise of the Court's in rem jurisdiction, very different from the scenarios considered in Stern....