Paul Kelly v. Peter Herrell ( 2019 )

NONPRECEDENTIAL DISPOSITION
To be cited only in accordance with Fed. R. App. P. 32.1
United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
Submitted July 30, 2019*
Decided August 2, 2019
Before
ILANA DIAMOND ROVNER, Circuit Judge
DAVID F. HAMILTON, Circuit Judge
MICHAEL B. BRENNAN, Circuit Judge
No. 18-2539
BRIAN J. KELLY, Appeal from the United States District
Debtor-Appellant, Court for the Western District of Wisconsin.
v. No. 17-cv-793-bbc
PETER F. HERRELL, Barbara B. Crabb,
Trustee-Appellee. Judge.
ORDER
Brian Kelly appeals an order approving the sale of his bankruptcy estate’s only
asset—his family farm—subject to all liens and encumbrances, including his parents’
purported ownership interests. The court-appointed trustee for Kelly’s estate had
originally asked the bankruptcy court to sell the property free and clear of those
interests; therefore, Kelly contends, he received inadequate notice of the possibility of
the ordered result, in violation of the Due Process Clause of the Fifth Amendment. The
district court rejected this challenge, and we affirm that judgment.
* We have agreed to decide this case without oral argument because the briefs
and record adequately present the facts and legal arguments, and oral argument would
not significantly aid the court. FED. R. APP. P. 34(a)(2)(C).
No. 18-2539 Page 2
Kelly’s involuntary Chapter 7 bankruptcy proceedings began in 2002 and are
described in our earlier decision in this case. Kelly v. Herrell, 602 F. App’x 642, 644
(7th Cir. 2015). In Kelly’s last appeal, he alleged that a fraudster, Bernard Seidling, had
forced him into bankruptcy through debts he had purchased or manufactured through
sham entities. Id. at 644. We dismissed that appeal for lack of an appealable final order.
Id. at 647. In doing so, we expressed hope that the decade-old bankruptcy case would be
finished expeditiously. Id.
Another two years passed before the trustee moved to sell Kelly’s farm to the
Jerry Johnson Revocable Trust for $44,000. The trustee asked the bankruptcy court to
authorize the sale free and clear of all interests except tax liens under 11 U.S.C. § 363(f)
and to certify that Jerry Johnson was a good-faith purchaser under § 363(m), thereby
immunizing the sale from challenge.
Though Kelly has had apparent title in the farm since 1990, his father, whom we
will refer to as Paul, contends that he owns the farm under Wisconsin law through
various theories, including adverse possession. Kelly’s stepmother, Patricia, has also
claimed interests in the farm through a mortgage owned by her Red Cedar Roth Escrow
Trust. Kelly executed the so-called “Red Cedar Mortgage” in 1998, though it was not
recorded until 2006. In 2002, he transferred the farm to Red Cedar (which remains on
the deed, according to the trustee’s title search). But that transfer was set aside as
fraudulent in a state-court judgment voiding any “mortgages, liens, encumbrances or
any other clouds on the title entered on April 18, 2002, and into the future” by Kelly,
Patricia, Red Cedar, and others. This judgment does not mention Paul, and no party can
confirm whether it vitiated the mortgage, which was not yet recorded in 2002.
Based on Paul’s purported ownership of the land and their insistence that the
bankruptcy proceeding was fraudulent, Kelly and Paul objected to the sale. They also
accused the Jerry Johnson Trust of being another of Seidling’s sham entities. The United
States Trustee appeared to think that this latter assertion could have some merit. He
filed his own objection noting that Jerry Johnson was conducting the sale through a
lawyer who represented C & A Investments—a known Seidling entity and one of
Kelly’s bankruptcy creditors, see Kelly, 602 F. App’x at 644. Moreover, the court-
appointed trustee had not disclosed any side deals, though it was later revealed that he
had promised, as part of the sale, to withdraw a motion seeking $35,000 from C & A (an
entity ostensibly unrelated to Jerry Johnson). Given these concerns and the disputed
ownership, the U.S. Trustee proposed that the best way to resolve the bankruptcy
No. 18-2539 Page 3
expeditiously would be to sell the land subject to Paul and Patricia’s purported interests
and to have the Kellys and Jerry Johnson sort out their claims in state court instead.
The bankruptcy court agreed with the U.S. Trustee and approved the sale of the
farm subject to all liens, claims, encumbrances, and interests. The order stated that the
sale was approved “pursuant to section 363(b) of the Bankruptcy code, NOT pursuant
to section 363(f).” The bankruptcy court also refused to stay the sale during the time
available to appeal, see FED. R. BANKR. P. 6004(h), though appeal Kelly did.
Before the district court, Kelly argued that the order to sell his farm under
§ 363(b) was entered without notice because the trustee had moved for a sale under
§ 363(f). The district court affirmed the bankruptcy court’s order, concluding that
subsections (b) and (f) were not mutually exclusive. Kelly had notice that the court
could authorize a sale, and that was enough. Though the district court and this court
denied the Kellys’ motions to stay the sale, the farm still has not been sold. In response
to the U.S. Trustee’s motion to abandon the farm as estate property, C & A confirmed
that Jerry Johnson will close the sale if this court affirms the judgment.
As in Kelly’s previous appeal, we run into a preliminary problem: Paul Kelly has
signed the notice of appeal, pronouncing himself a “creditor” and “interested party,”
though he appeared as neither in the bankruptcy court. We rejected this assertion in
Kelly’s last appeal, Kelly, 602 F. App’x at 645, and nothing has changed. We will again
strike him from the caption. The district court gave Paul the benefit of the doubt
because the bankruptcy court had opined that he did not have title to the farm when
summarizing his arguments. But those statements were not essential to the judgment
and thus not preclusive. See Taylor v. Sturgell, 553 U.S. 880, 892 (2008); In re Estate of Rille,
728 N.W.2d 693, 702 (Wis. 2007). And a non-party, like Paul, may appeal without
intervening only if an order “concludes the rights of the affected person, who cannot
litigate the issue in some other forum.” SEC v. Enter. Tr. Co., 559 F.3d 649, 651 (7th Cir.
2009). The bankruptcy court here did the opposite: it refused to adjudicate Paul’s rights
and directed him to state court.
With only one appellant, Brian Kelly, we can now move on to his argument.
Kelly maintains that the bankruptcy court deprived him of property without due
process of law when it sold his farm subject to encumbrances, rather than free and clear
of them under § 363(f). In Kelly’s view, the court changed course—from § 363(f) to
§ 363(b)—without notice; he contends that the bankruptcy court was constitutionally
obligated to request briefing on subsection (b) before approving the sale.
No. 18-2539 Page 4
Kelly’s unstated premise is that the Fifth Amendment requires a federal court to
notify a litigant of the statutory authority for any action it intends to take. But even if
that were true, his argument fails for at least three reasons. First, as the district court
explained, 11 U.S.C. § 363(f) and (b) are not mutually exclusive. Subsection (f) provides
that “[t]he trustee may sell property under subsection (b) … of this section free and
clear of any interest” under certain conditions. Thus, property of the estate is still sold
under subsection (b) when subsection (f)’s conditions to sell it free and clear are met.
Notice as to subsection (f) was, therefore, necessarily also notice as to subsection (b).
Second, Kelly received notice that the court was considering selling the property
subject to any interests because the U.S. Trustee asked for the very relief that the
bankruptcy court ordered. The court was not obligated to inform Kelly that it was
considering a party’s on-the-record argument. If Kelly believed he needed the court’s
permission to file a response to the U.S. Trustee’s objection, he could have asked for it.
Third, Kelly cannot demonstrate any prejudice. Unless later augmented, the
bankruptcy estate contains exactly the property that the debtor has at commencement,
no more, no less. See 11 U.S.C. § 541(a)(1); In re Thorpe, 881 F.3d 536, 539 (7th Cir. 2018).
As the bankruptcy court explained, “a trustee’s sale involves a sale of whatever interest
a debtor has in the asset” with “no warranties of assurances of good title associated
with the sale.” If the court had ordered the sale under § 363(f), as Kelly knew it might,
Kelly, as the debtor, still would have lost his entire interest in the farm. Yet Kelly does
not challenge the validity of the sale, only the purported lack of notice. Patricia and Paul
were likewise not prejudiced by the bankruptcy court’s decision not to extinguish their
interests, if any, in the farm. They can still assert their claims to the land in state court,
without limiting their recoveries to the assets of the estate. And the estate now has
fewer claims to pay, leaving more potential residue for Kelly.
One final matter: the private trustee asks us to modify the bankruptcy court’s
order so that the sale is free and clear of interests under § 363(f). He provides no
argument or authority in support of this request. Though we may affirm a judgment on
a ground not passed on by the lower courts, “[w]e may not grant additional relief
unless the appellee files a cross-appeal,” Lewert v. P.F. Chang's China Bistro, Inc., 819 F.3d
963, 970 (7th Cir. 2016), and no one—not the trustee nor C & A nor Jerry Johnson—has
done so.
AFFIRMED