Springel v. Prosser (In re Innovative Comm'n Corp.)

Decision Date05 August 2011
Docket NumberAdv. No. 08-3004,Bankruptcy No. 07-30012,Related to Doc. Bankruptcy No. 1 & 117
PartiesIN RE INNOVATIVE COMMUNICATION CORPORATION, Debtor. STAN SPRINGEL, CHAPTER 11 TRUSTEE OF THE BANKRUPTCY ESTATE OF INNOVATIVE COMMUNICATION CORPORATION EMERGING COMMUNICATIONS, INC., AND INNOVATIVE COMMUNICATION COMPANY, LLC, Plaintiff v. LYNDON ADRIAN PROSSER, MICHELLE LABENNETT PROSSER, SYBIL G. PROSSER, AND JOHN JUSTIN PROSSER, Defendants
CourtU.S. District Court — Virgin Islands, Bankruptcy Division
MEMORANDUM OPINION1

Before the court is the Original Complaint Against the Adult Prosser Children to Recover Pre-Petition Fraudulent Transfers and Unauthorized Post-Petition Transfers ("Complaint"), Adv. Doc. No. 1, filed by Stan Springel, the Chapter 11 Trustee of the bankruptcy estates of InnovativeCommunication Corporation ("New ICC"), Emerging Communications, Inc. ("EmCom" or "Emerging"), and Innovative Communication Company, LLC ("ICC-LLC", collectively the "ICC Debtors"). Trustee Springel seeks to avoid and recover transfers made to or for the benefit of Lyndon Adrian Prosser ("Adrian Prosser"), Michelle LaBennett Prosser ("Michelle LaBennett"), Sybil G. Prosser, and John Justin Prosser ("Justin Prosser") (collectively, "Defendants" or "Adult Prosser Children"). This adversary proceeding was consolidated for the purposes of discovery and trial with Adv. No. 07-3010 ("Turnover Action"), in which the Adult Prosser Children, inter alios, are also Defendants. See Scheduling Order and Discovery Plan, Adv. Doc. No. 52.2 Trial was held on November 17-20, 2008, December 8-10, 2008, February 9-11, 2009,3 March 10, 2009, and March 23-26, 2009, with closing arguments held on July 23, 2009.

For the reasons expressed herein, we find that the Chapter 11 Trustee met his burden as to certain of the transfers identified and established multiple fraudulent conveyances and post-petition transfers which he is entitled to avoid and recover from the Defendants as provided herein. As to other transfers addressed, he has not met his burden for the reasons expressed in this Memorandum Opinion.

Background

New ICC is a management and holding company that owned, at the times relevant to this adversary proceeding, directly or indirectly, 100% of the common stock of various operating subsidiaries that provide telephone, newspaper, and other services to the citizens of the United States Virgin Islands and surrounding areas.4 New ICC is a wholly-owned subsidiary of Emerging, which, in turn, is directly and indirectly owned by ICC-LLC (collectively, Emerging and ICC-LLC are referred to as the "Parent Debtors"). Jeffrey Prosser was Chairman of the Board, President, and CEO of New ICC and sole member of its ultimate parent company, ICC-LLC.

Although there were prior filed involuntary bankruptcy cases then pending, on July 31, 2006, Emerging, ICC-LLC, and Jeffrey Prosser each filed voluntary petitions seeking relief under chapter 11 of the Bankruptcy Code, commencing Case Nos. 06-30007, 06-30008,5 and 06-30009, respectively. The commencement of the voluntary cases constituted orders for relief.

Subsequently, Jeffrey Prosser's case was converted to a chapter 7, and John Ellis was appointed as trustee. See Case No. 06-30009, Doc. No. 865. Mr. Ellis later resigned, and James Carroll was appointed and continues to serve as Chapter 7 Trustee. Case No. 06-30009, Doc. No. 948.

On July 5, 2007, the Greenlight Entities6 filed an Involuntary Petition against New ICC, commencing Case No. 07-30012. An Order for Relief was entered on September 21, 2007. See Case No. 07-30012, Doc. No. 60. Stan Springel was appointed Trustee in the Chapter 11 cases. Case No. 06-30007, Doc. No. 543, on March 15, 2007; Case No. 06-30008, Doc. No. 523, on March 15, 2007; Case No. 07-30012, Doc. No. 125, on October 4, 2007. Jeffrey Prosser's control of the Parent Debtors was severed when the trustee was appointed in these bankruptcy cases. Thereafter, he was removed from the Board of Directors of New ICC.

Jurisdiction and Venue

In their Answer to the Complaint, the Adult Prosser Children assert that this court lacks subject matter jurisdiction.7 Adv. Doc. No. 25, at 2. The Defendants contend that this is not a core proceeding and that venue is not proper in the Bankruptcy Division of the District Court of the Virgin Islands. Id. Venue is proper pursuant to 28 U.S.C. §1409. Although this is a core proceeding pursuant to 28 U.S.C. §157, a recent Supreme Court decision requires a deeper look at subject matter jurisdiction.

On July 6, 2011, Defendants filed a Motion to Dismiss based upon the recent Supreme Court decision Stern v. Marshall, No. 10-179, 2011 U.S. LEXIS 4791 (June 23, 2011).See Motion to Dismiss, Adv. Doc. No. 117.8 In Marshall, the Court held that, although the bankruptcy court had the statutory authority pursuant to 28 U.S.C. §157(b)(2)(C) to enter a final judgment on the debtor's counterclaim, Article III of the Constitution did not permit the bankruptcy court to do so. See Marshall, 2011 U.S. LEXIS 4791, at *38. The Court explained:

Although the history of this litigation is complicated, its resolution ultimately turns on very basic principles. Article III, §1, of the Constitution commands that "[t]he judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish." That Article further provides that the judges of those courts shall hold their offices during good behavior, without diminution of salary. Ibid. Those requirements of Article III were not honored here. The Bankruptcy Court in this case exercised the judicial power of the United States by entering final judgment on a common law tort claim, even though the judges of such courts enjoy neither tenure during good behavior nor salary protection. We conclude that, although the Bankruptcy Court had the statutory authority to enter judgment on [the] counterclaim, it lacked the constitutional authority to do so.

Id. at *15-16. The Court's broad rationale in reaching its conclusion has resulted in much speculation of the ultimate impact of the decision on other matters considered to be core. Nonetheless, the Court expressly stated that its holding was narrow: "We do not think the removal of counterclaims such as [the one at issue] from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree with the United States that the question presented here is a 'narrow' one." Id. at *73. In conclusion, the Court reemphasized this point: "We conclude today that Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984. The Bankruptcy Court below lacked theconstitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim." Id. at *74 (emphasis added). As the Supreme Court deems its holding to be narrow, we take the Court at its word.

The Motion to Dismiss also refers to Marshall as it cites to Granfinanciera v. Nordberg, 492 U.S. 33 (1989). However, as in Marshall, despite the Court's broad rationale, the holding of the Court was limited:

We do not decide today whether the current jury trial provision -- 28 U.S.C. §1411 (1982 ed., Supp. V) -- permits bankruptcy courts to conduct jury trials in fraudulent conveyance actions like the one respondent initiated. Nor do we express any view as to whether the Seventh Amendment or Article III allows jury trials in such actions to be held before non-Article III bankruptcy judges subject to the oversight provided by the district courts pursuant to the 1984 Amendments. We leave those issues for future decisions. We do hold, however, that whatever the answers to these questions, the Seventh Amendment entitles petitioners to the jury trial they requested.

492 U.S. at 64. In a footnote, the Court explains that "however helpful it might be for us to adjudge every pertinent statutory and constitutional issue presented by the 1978 Act and the 1984 Amendments, we cannot properly reach out and decide matters not before us. The only question we have been called upon to answer in this case is whether the Seventh Amendment grants petitioners a right to a jury trial. We hold unequivocally that it does." Id. at 64, n.19. Collier on Bankruptcy comments on the characterization of avoidance actions as core proceedings and adjudication of these actions by non-Article III bankruptcy judges and specifically addresses Granfinanciera:

In Granfinanciera, on the other hand, while specifically avoiding the issues, the Supreme Court seemed to point to a result that such actions, at least where the defendant has not filed a proof of claim and has properly demanded trial by jury, must be heard in the United States district courts, if the parties do not consent to a jury trial in the bankruptcy court pursuant to 28 U.S.C. §157(e). This result is notbased upon whether an avoidance action is core or not (it is core) but has to do with jury trial rights. While other avoidance actions, such as those arising under sections 544, 545 and 549, are not included in the list of section 157(b)(2), these, too, are core proceedings.

See 1 Collier on Bankruptcy ¶3.02[3][b] (Alan N. Resnick & Henry J. Sommer eds, 16th ed.). While we note that the Supreme Court made limited holdings, we recognize the rationale expressed within the Court's opinions in Marshall and Granfianciera and proceed cautiously so as not to exceed the limits of our jurisdiction. We are not faced with a circumstance where a jury trial applied. As the Adult Prosser Children state in their Motion to Dismiss, "they did not timely perfect their request for a jury trial." Adv. Doc. No. 117, at 3.

In this adversary proceeding, the Trustee seeks to avoid and recover prepetition fraudulent conveyances and unauthorized postpetition transfers. An action to avoid and recover unauthorized...

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