Reid v. Wolf (In re Wolf)

• Decision Date: 19 November 2018
• Docket Number: Case No. 14 B 27066,Adversary No. 16 A 00066
• Citation: 595 B.R. 735
• Parties: IN RE: Michael A. WOLF, Debtor. N. Neville Reid, Not Individually But Solely in His Capacity as Chapter 7 Trustee for Bankruptcy Estate of Michael A. Wolf, Plaintiff, v. Michael Wolf, Scott Wolf, Peter Wolf, Zig-Zag, Corp., ZZC, Inc. MMQB, Inc., Hound Ventures, Inc., SHBM, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

595 B.R. 735

IN RE: Michael A. WOLF, Debtor.

N. Neville Reid, Not Individually But Solely in His Capacity as Chapter 7 Trustee for Bankruptcy Estate of Michael A. Wolf, Plaintiff,

v.Michael Wolf, Scott Wolf, Peter Wolf, Zig-Zag, Corp., ZZC, Inc. MMQB, Inc., Hound Ventures, Inc., SHBM, Inc., Defendants.

Case No. 14 B 27066

Adversary No. 16 A 00066

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed November 19, 2018

Daniel P. Dawson, Nisen & Elliott, LLC, Chicago, IL, for Plaintiff.

Scott Wolf, Liberty Lake, WA, Robert M. Fishman, Gordon E. Gouveia, Christina Sanfelippo, Fox Rothschild LLP, Chicago, IL, for Defendant.

Michael Wolf, pro se.

Peter Wolf, pro se.

Zig-Zag, Corp., pro se.

ZZC, Inc. (IL), pro se.

ZZC, Inc. (DE), pro se.

MEMORANDUM OPINION

Honorable Deborah L. Thorne, United States Bankruptcy Judge

Introduction & Background

This matter conies before the court upon the motion of the trustee to have default judgments entered against various defaulted Defendants in these proceedings. Namely, the trustee seeks the entry of a default judgment against Zig Zag Corporation (Zig Zag), ZZC, Inc.,¹ Michael Wolf, Scott Wolf, Peter Wolf, SHBM, Inc. (SHBM), Hound Ventures, Inc. (Hound Ventures), and MMQB, Inc (referred to throughout as MMQB, Inc. so as not to confuse the entity with the underlying "MMQB business" allegedly held by this entity and others). All have been defaulted either for failing to answer or for having disregarded this court's discovery orders.

For reasons given more fully below, the court finds for the trustee and against Scott Wolf on Counts 1, 5, 6, 7, 8, 9, and 12 of the complaint. The court also finds for the trustee and against ZZC, Inc. on Counts 1, 7, 8, 9, and 10 of the complaint. The court further finds for the trustee and against Michael Wolf on Counts 15, 16, 17, and 18 of the complaint. The court would find for the trustee and against MMQB, Inc. on Counts 1, 7, 8, and 9 of the complaint but for constitutional concerns, so the court will issue a separate order delineating Parts II, III, IV, VI.a, VI.g.1, VI.h.1, VI.i.1, and VI.r.2 of this opinion as its proposed findings of fact and conclusions law, with one of the court's ultimate proposed conclusions of law being that judgment be entered in favor of the trustee and against MMQB, Inc. on Counts 1, 7, 8, and 9 of the complaint.

The trustee's theory, in the main, concerns the alleged transfer of a family publishing business, the Monday Morning Quarterback (MMQB business), in late 2011 or early 2012 from one corporation (Zig Zag) wholly owned and controlled by the Debtor, Michael Wolf, to another corporation (ZZC) initially wholly owned and controlled by the Debtor. Allegedly, 51% of the stock in ZZC was, at the time that ZZC still owned the MMQB business, transferred from Michael to Scott Wolf, Michael's son, as well. The MMQB business was then transferred to another corporation (MMQB. Inc.) wholly owned and controlled by Scott Wolf.

Then, as alleged,² MMQB, Inc. funneled income from the business to various other related entities, including Hound Ventures and SHBM, Inc.,³ as well as to Scott Wolf and Michael Wolf. This type of income-transferring happened when the MMQB publishing business was earlier held by the ZZC entity, as well.

Allegedly, the Debtor's marital problems precipitated these transfers. He wanted the value of the business kept out of the hands of his then-existing and potential future creditors, most prominently his then-wife Elizabeth Wolf.

In December of 2013, divorce proceedings commenced. In July of 2014, the Debtor filed for bankruptcy. In early 2016, the trustee filed the present adversary proceeding seeking, in substance, to recover the value of the MMQB business for the benefit of the Debtor's estate.⁴

Some Defendants failed to answer; others failed to comply with discovery orders. These Defendants were then held in default. The trustee's request for default judgment against these Defendants has now followed. This opinion concerns that request.

Discussion

I. Jurisdiction and Authority

a. Jurisdiction

The District Court has jurisdiction over all proceedings "arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). Most of the counts in this case - those based on turnover, fraudulent conveyance, preference, and post-petition transfer theories - arise under title 11, namely sections 542, 544, 547, and 548, and 549 of the Bankruptcy Code. The same is true of the counts relating to the Debtor's discharge, which arise under section 727 of the Bankruptcy Code.

Some of the remaining counts - those based on state law alter ego,⁵ constructive trust, resulting trust, and breach of fiduciary duty / corporate waste theories, which could exist outside of the bankruptcy and which do not in and of themselves arise under any provision of title 11 - are at least "related to" the underlying bankruptcy case because their outcome affects the amount of property in the bankruptcy estate. See Zerand-Bernal Grp., Inc. v. Cox , 23 F.3d 159, 161-62 (7th Cir. 1994).

The remaining state law counts - those based on the injury to the estate caused by the Debtor's alleged tortious interference with the estate's post-petition contracts and business relations - "arise in a case under title 11" because, while based on state law tortious interference theories, the causes of action could not exist outside of this bankruptcy proceeding due to the fact that they arise out of an alleged post-petition injury practiced upon the estate, its business relations, and its contract rights vis-a-vis the attempted liquidation (sale) of property of the estate. See Matter of Wood , 825 F.2d 90, 97 (5th Cir. 1987) ("In other words, ‘arising in’ proceedings are those that are not based on any right expressly created by title 11, but nevertheless, would have no existence outside of the bankruptcy.").⁶

"Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district." 28 U.S.C. § 157(a) (emphasis added). All of the proceedings created by the assertion of these causes of action may therefore be referred by the District Court to the Bankruptcy Court. All of the proceedings created by these causes of action have, in fact, been referred to this Bankruptcy Court by the District Court for the Northern District of Illinois. See N.D. Ill. L.R. 40.3.1(a).

Jurisdiction therefore exists over all of these causes of action.

b. Statutory Authority

"Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title." 28 U.S.C. § 157(b)(1). The statute then goes on to give examples of core proceedings. See 28 U.S.C. § 157(b)(2).

Here, the fraudulent transfer counts, both those based directly on section 548 and those based on the UFTA/section 544(b), are core. See 28 U.S.C. § 157(b)(2)(H). On the facts of this case, the constructive/resulting trust counts are also statutorily core,⁷ since these trust counts both concern an alleged transfer of property for no consideration (or consideration supplied by the Debtor) in fraud of creditors' rights giving rise to an equitable ownership interest in favor of creditors the enforcement of which would effectively unwind (avoid and recover) the fraudulent transfer; that is, the trust counts' strong substantive resemblance in this case to true statutory UFTA/548 fraudulent conveyance actions makes them statutorily core. Cf. Republic Credit Corp. I v. George K. Boyer (In re Boyer) , 372 B.R. 102, 105 (D. Conn. 2007), aff'd , 328 F. App'x 711 (2d Cir. 2009).⁸

Both the preference count, see 28 U.S.C. § 157(b)(2)(G), and the section 549 count, see In re Auxano, Inc. , 96 B.R. 957, 960 (Bankr. W.D. Mo. 1989), are core. There is also no doubt that the objection to the Debtor's discharge is core. 28 U.S.C. § 157(b)(2)(J). Likewise, the turnover count is core. 28 U.S.C. § 157(b)(2)(E). The tortious interference counts are also core because they arose post-petition in favor of the estate based on a post-petition contract entered into for the purpose of liquidating estate property (one of the pieces of real property owned by the estate). See 28 U.S.C. § 157(b)(2)(A), (O).

For the remaining counts, each is core if "it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case." Barnett v. Stern , 909 F.2d 973, 981 (7th Cir. 1990) (internal quotations and citations omitted). A state law alter ego action would not seem to fit this definition, and nowhere is such an action listed in section 157(b)(2). Nevertheless, perhaps because this type of action normally seeks a declaration that certain property only nominally held by third-parties is really property of the estate, it has been said that such an action is statutorily "core." See Matrix IV, Inc. v. Am. Nat. Bank & Tr. Co. of Chicago , 649 F.3d 539, 550 (7th Cir. 2011) (noting that the action before the bankruptcy court in the Barnett case, an action to declare a trust to be the alter ego of the debtor and the assets of the trust to be property of the estate, was a core proceeding); but see Barnett , 909 F.2d at 981 (declining to adopt the broader formulation of core proceedings as those that have the effect of bringing property into the estate); Matter of U.S. Brass Corp. , 110 F.3d 1261, 1268 (7th Cir. 1997). As such, the court will treat the alter ego / reverse-veil piercing claim in this case as statutorily core.

Finally, what of the cause of action asserted against officer/director-of-ZZC Scott Wolf for allegedly breaching a fiduciary duty and/or wasting ZZC's corporate assets? Such a...