Reeves, In re

• Decision Date: 28 August 1995
• Docket Number: 94-3259,94-3261,Nos. 94-2956,94-3263 and 94-3343,s. 94-2956
• Citation: 65 F.3d 670
• Parties: Bankr. L. Rep. P 76,620, 27 UCC Rep.Serv.2d 590 In re Marlin E. REEVES, Debtor. James C. LUKER, Trustee, Plaintiff-Appellee/Cross-Appellant, v. Billie Fern REEVES; Reeves Trucking, Inc.; Reeves Farms, Inc.; Ella Reeves, Individually and as Executrix of the Estate of Elmer Reeves; Sherry Smith, Defendants- Appellants/Cross-Appellees, Marlin E. Reeves (Debtor); Marlin Lynn Reeves; Bank of Brinkley; United States Commodity Credit Corporation, Defendants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 670

65 F.3d 670

Bankr. L. Rep. P 76,620, 27 UCC Rep.Serv.2d 590

In re Marlin E. REEVES, Debtor.

James C. LUKER, Trustee, Plaintiff-Appellee/Cross-Appellant, v. Billie Fern REEVES; Reeves Trucking, Inc.; Reeves Farms, Inc.; Ella Reeves, Individually and as Executrix

of the Estate of Elmer Reeves; Sherry

Smith,

Defendants-

Appellants/Cross-Appellees,

Marlin E. Reeves (Debtor); Marlin Lynn Reeves; Bank of

Brinkley; United States Commodity Credit

Corporation, Defendants.

Nos. 94-2956, 94-3259, 94-3261, 94-3263 and 94-3343.

United States Court of Appeals,

Eighth Circuit.

Submitted April 12, 1995.

Decided Aug. 28, 1995.

Fletcher Long, Jr., Forrest City, AR, argued, for appellants.

Daniel K. Schieffler, West Helena, AR, argued, for appellee.

Before LOKEN, Circuit Judge, and HENLEY and FRIEDMAN, ^* Senior Circuit Judges.

LOKEN, Circuit Judge.

These consolidated appeals arise out of the bankruptcy of Marlin Reeves, an Arkansas businessman whose farming operations and real estate investments soured in the late 1980s. Marlin ¹ was denied a bankruptcy discharge because of his efforts to conceal assets from his creditors. In these adversary proceedings, the trustee has avoided various fraudulent and preferential asset transfers to Marlin's relatives and to entities controlled by the Reeves family. The transferees appeal the relief afforded the trustee, and the trustee cross-appeals the district court's decision that it lacks jurisdiction to dissolve a close corporation in which the bankruptcy estate is a shareholder. We reverse the district court's jurisdictional decision and its order that a family corporation must turn over money it never actually received. In all other respects, we affirm.

I. Transfers to Reeves Trucking, Inc.

In the first action, the trustee seeks to seize all assets of Reeves Trucking, Inc. ("RTI"), for the bankruptcy estate. Marlin's wife formed RTI in September 1986, receiving all its issued shares. Marlin then transferred substantial assets to RTI, including farm equipment and the assets of a former sole proprietorship, Reeves Trucking. After this change in ownership, Marlin operated his businesses through RTI, and the Reeveses paid a substantial portion of their living and other personal expenses from RTI funds. Marlin filed his Chapter 7 petition in December 1987.

The bankruptcy court found that Marlin fraudulently transferred business assets to RTI to shield those assets from his creditors. The court concluded that RTI is a "sham," imposed a constructive trust on all its assets in favor of the bankruptcy estate, and decreed that "everything of value in the corporation, including post-petition profits, constitutes property of the estate."

The district court agreed that RTI is a sham, that Marlin fraudulently conveyed assets to RTI prior to filing for bankruptcy, and that those assets are part of the bankruptcy estate. However, with respect to RTI's post-petition activities, the court concluded that Sec. 541(a)(6) of the Bankruptcy Code limits the trustee's recovery to the "rents, profits, or proceeds" of the original estate. Therefore, the court modified the bankruptcy court's order to provide that RTI may retain any assets it proves are the product of Marlin's post-petition labors or other infusions of new value.

On appeal, RTI argues that the bankruptcy court and the district court erred in disregarding RTI's corporate existence and in imposing a constructive trust on its assets. We conclude this is an appropriate case to employ the constructive trust remedy. There is ample evidence supporting the fraudulent conveyance finding, as RTI virtually concedes. The issue then becomes one of remedy. Under Arkansas law, a constructive trust is a broad equitable remedy used when the legal title to property has been obtained through fraud, misrepresentation, concealment, or any other circumstance making it unjust for the holder to retain the property. Bragg v. Hartney, 92 Ark. 55, 121 S.W. 1059, 1060 (1909); see also N.S. Garrott & Sons v. Union Planters Nat'l Bank of Memphis (In re N.S. Garrott & Sons), 772 F.2d 462 (8th Cir.1985). Marlin placed his business assets beyond the reach of his creditors and then commingled those assets with other assets through numerous pre-petition and post-petition transactions. A constructive trust may be used to make the estate whole.

Alternatively, RTI argues that the trustee may recover only assets Marlin conveyed to RTI prior to filing for bankruptcy, plus any assets purchased with funds obtained from the sale of those original assets. In addition, RTI contends that the district court erred in making RTI prove which of its present assets may not be subject to a constructive trust. In other words, RTI would place the burden on the trustee to prove that a particular RTI asset is directly traceable to a pre-petition fraudulent conveyance.

In our view, this part of the remedy question is unnecessarily muddled by the trustee's attempt to disregard RTI's corporate existence. RTI was formed over one year before Marlin filed for bankruptcy. Had Marlin simply incorporated Reeves Trucking in September 1986--for example, to gain the benefits of limited liability--his creditors likely could not have complained. Thus, incorporation did not defraud creditors; it was placing ownership of the resulting corporation in Marlin's wife that was the fraudulent conveyance. Therefore, it is not the corporate assets which should be placed in the bankruptcy estate, it is RTI's stock.

Clarifying that it is RTI stock to which the bankruptcy estate is entitled greatly reduces the impact of Sec. 541(a)(6) on the remedy analysis. If the fraudulent conveyance was the transfer of Reeves Trucking assets to RTI, then avoiding that transfer results in the assumption that Marlin went into bankruptcy operating Reeves Trucking as a sole proprietorship. In that event, his bankruptcy estate would include the business and its assets at the time of filing, plus the "proceeds, product, offspring, rents, or profits of or from" those assets. Sec. 541(a)(6). But in determining post-petition rents and profits, the statute excludes "services performed by an individual debtor after the commencement of the case." The manner in which to divide post-petition earnings of a proprietorship between the trustee and the individual debtor under Sec. 546(a)(6) has badly divided other courts. Compare FitzSimmons v. Walsh (In re Fitzsimmons), 725 F.2d 1208 (9th Cir.1984), with In re Cooley, 87 B.R. 432 (Bankr.S.D.Tex.1988), with In re Herberman, 122 B.R. 273 (Bankr.W.D.Tex.1990). But here Marlin chose the corporate form of doing business well before filing, and the fraudulent conveyance was his indirect transfer of the corporation's ownership to his wife. Therefore, the corporate stock becomes an asset of the estate, and the Sec. 541(a)(6) exclusion is an issue only to the extent RTI's earnings are attributable to Marlin's uncompensated services.

Viewing the situation in this light also puts to rest RTI's other contentions. First, under this approach, the corporate entity is not ignored. Rather, a constructive trust is imposed on RTI stock in the hands of Marlin's wife, who received that stock for no value with the intent to defraud Marlin's creditors. Second, focusing on RTI's stock makes it apparent that the trustee's remedy is not limited, as RTI argues, to the specific assets initially transferred to the corporation and any proceeds traceable to those assets. Because the estate owns RTI stock, the question is whether to exercise the bankruptcy court's remedial discretion to segregate and exclude from the bankruptcy estate any post-petition additions to the RTI enterprise.

Turning to that question, if RTI's assets now include the fruits of post-petition infusions of capital, made by or on behalf of RTI's owners on the assumption that RTI was not part of Marlin's Chapter 7 estate, then it would violate the "fresh start" principle of bankruptcy to pull those assets into the estate simply because many years passed while determining that RTI's stock was in fact part of the estate. Cf. In re Lotta Water Land Co., 25 B.R. 32, 36 (Bankr.N.D.Tex.1982). Therefore, to the extent that RTI can establish that it has acquired post-petition assets through transfers to RTI or uncompensated services by Marlin that would not have occurred had the estate owned its stock, then those assets should be segregated and returned to the corporation's prior owners. Though it reached this result by a somewhat different analysis, that is precisely what the district court ordered the bankruptcy court to determine on remand. That order was well within the court's considerable equitable discretion in fashioning an appropriate bankruptcy remedy. See 11 U.S.C. Sec. 105(a). Therefore, the district court's Order dated August 1, 1994, in bankruptcy case No. A.P. 89-2018 is affirmed.

II. The Transfer to Elmer and Ella Reeves.

In the second action, the trustee seeks to compel Marlin's parents, Elmer and Ella Reeves, to turn over a $200,000 payment as a voidable preference under Sec. 547 of the Bankruptcy Code. The issue is whether the transaction was a preferential repayment of Marlin's antecedent debt to his parents.

In March 1982, Marlin acquired an interest in a $426,000 promissory note, referred to in this litigation as the "Fuchs Note." Later in 1982, Elmer and Ella lent Marlin $260,000 to finance unrelated transactions. After the Fuchs Note went into default, Marlin executed an "Assignment" purporting to convey "all of his right, title, and interest" in the Fuchs Note to his parents. The Assignment was backdated April 3, 1982. Despite the Assignment, Marlin personally pursued litigation to collect the Fuchs Note and ultimately received $325,976 in a complex settlement. In January 1987, Marlin transferred $200,000 of the settlement proceeds to his parents, within one year of his bankruptcy. See Sec. 547(b)(4)(B). Elmer's books...