Motor Coach Ind. v. Wayne Drewes

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
No. 03-6034 ND
In re: *
*
Etty R. Rosenberg, *
*
Debtor. *
*
Motor Coach Industries, Inc., * Appeal from the United States
* Bankruptcy Court for the
Creditor - Appellant, * District of North Dakota
*
v. *
*
Wayne Drewes, *
*
Trustee - Appellee, and *
*
Etty R. Rosenberg, *
*
Debtor - Appellee. *
Submitted: December 4, 2003
Filed: January 7, 2004
Before SCHERMER, FEDERMAN, and VENTERS, Bankruptcy Judges
SCHERMER, Bankruptcy Judge
Motor Coach Industries, Inc. (“Appellant”) appeals the bankruptcy court order
authorizing Wayne Drewes (“Trustee”) to conduct an examination of the Appellant
pursuant to Federal Rule of Bankruptcy Procedure 2004. We have jurisdiction over
the appeal from the final order of the bankruptcy court authorizing the Rule 2004
examination. See 28 U.S.C. § 158(b). We would have affirmed the bankruptcy court
on the record before it. For the reasons set forth below, however, which include a
stipulation of a material fact which was not available to the bankruptcy court, we
reverse.
ISSUE
The issue on appeal is whether the court properly authorized the Trustee of the
Chapter 7 bankruptcy estate of Etty R. Rosenberg (“Debtor”) to conduct a Rule 2004
examination of the Appellant, the Debtor’s former employer. We conclude that the
court properly authorized the Trustee to conduct a Rule 2004 examination of the
Appellant to permit the Trustee to determine whether or not the estate had a claim
against the Appellant arising out of the termination of the Debtor’s employment.
However, in light of the parties’ stipulation on appeal that the Debtor’s employment
was terminated post-petition and post-conversion of her case from Chapter 13 to
Chapter 7, any claim for wrongful termination is property of the Debtor and not
property of the bankruptcy estate. Therefore, the Trustee should not be allowed to
conduct an examination of the Appellant pursuant to Rule 2004.
BACKGROUND
On June 21, 2002, the Debtor filed a voluntary petition for relief under Chapter
13 of the United States Bankruptcy Code. At that time, the Debtor was employed by
the Appellant. On September 17, 2002, the Debtor filed a motion to convert her case
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to one under Chapter 7 of the United States Bankruptcy Code. On September 19,
2002, the bankruptcy court entered its order converting the Debtor’s case to one under
Chapter 7. On September 20, 2002, the Appellant suspended the Debtor without pay.
In November 2002, the Appellant terminated the Debtor’s employment.
On January 13, 2003, the Debtor filed amended Schedules listing a claim against
the Appellant as an asset with a value of $5,700 and claiming an exemption in the claim
in the amount of $5,700.
On June 2, 2003, the Trustee filed a motion with the bankruptcy court seeking
authority to conduct a Rule 2004 examination of the Appellant. On June 9, 2003, the
Appellant filed its objection to the motion. On June 11, 2003, the bankruptcy court
entered its order directing the Appellant to produce certain documents to the Trustee
pursuant to Rule 2004. The Appellant appeals the June 11 order.
STANDARD OF REVIEW
Decisions authorizing examinations under Federal Rule of Bankruptcy
Procedure 2004 are reviewed for an abuse of discretion. Buckner v. Oklahoma Tax
Comm’n (In re Buckner), 271 B.R. 213 (B.A.P. 10 t h Cir. 2001); Rimsat, Ltd. v.
Hilliard, 207 B.R. 964, 969 (D. D.C. 1997); In re Dinubilo, 177 B.R. 932, 939
(E.D.Cal. 1993); Bank One, Columbus, N.A. v. Hammond (In re Hammond), 140
B.R. 197, 200-01 (S.D. Ohio 1992);. European-American Bank & Trust Co. v. GATX
Aircraft Corp. (In re Hawley Coal Mining Corp.), 47 B.R. 392, 394 (S.D. W.Va.
1984).
DISCUSSION
Pursuant to Federal Rule of Bankruptcy Procedure 2004, a bankruptcy court
may order the examination of any entity relating to the acts, conduct, property,
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liabilities or financial condition of the debtor, or to any matter which may affect the
administration of the debtor’s estate, or the debtor’s right to a discharge. Fed. R.
Bankr. P. 2004(a) and (b). The Debtor listed the claim against the Appellant as an
asset in her amended schedules. In so doing, she brought an asset of the estate to the
Trustee’s attention. The Trustee is required to collect and reduce to money property
of the estate as expeditiously as is compatible with the best interests of parties in
interest. 11 U.S.C. § 704(1). Once the Trustee learned of the existence of the claim
against the Appellant, he had a duty to investigate the claim and determine if any value
existed for the benefit of the estate. The Trustee asked the Court to authorize him to
use the examination powers available through Rule 2004 to investigate the claim as an
asset of the estate. This was required for the Trustee to fulfill his statutorily mandated
responsibilities. The scope of the requested examination related to the claim which
was listed as an asset of the estate. Accordingly, the examination ordered by the court
was within the scope of Rule 2004. Fed. R. Bankr. P. 2004(b).
A bankruptcy trustee is placed in a precarious position when faced with a
potential lawsuit as an asset of the estate. The trustee must be certain that a cause of
action exists before filing a suit. Otherwise the trustee may be subject to sanctions for
filing a frivolous claim. 1 On the other hand, the creditors of the bankruptcy estate
expect the trustee to pursue all valid claims on behalf of the estate. As a fiduciary, the
trustee has the duty to determine whether the claim has value which can be realized for
the benefit of creditors of the estate. Rule 2004 provides the mechanism for a trustee
to fulfill this obligation.
1
For example, Rule 11 subjects a party to sanctions for filing a claim if the
allegations and other factual contentions do not have evidentiary support. Fed. R.
Civ. P. 11( b).
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Notwithstanding our conclusion that the court acted within its discretion in
authorizing the Rule 2004 examination, on appeal the parties disclosed2 the fact that
the Appellant did not suspend or terminate the Debtor’s employment until after the
Debtor had filed her bankruptcy petition and converted her case to Chapter 7. As a
result of the parties’ stipulation, it is now apparent that any claim which the Debtor
may have against the Appellant is not property of her bankruptcy estate.
An estate was created when the Debtor filed her Chapter 13 petition on June 21,
2002. 11 U.S.C. § 541(a). The estate consisted of all property of the Debtor as of
that date. As of June 21, 2002, the Debtor was employed by the Appellant and had
no claim against it relating to suspension or termination. In a Chapter 13 case,
property of the estate also includes additional property which the debtor acquires
during the course of the Chapter 13 reorganization. 11 U.S.C. § 1306(a)(1).
Accordingly, had the Appellant suspended or terminated the Debtor’s employment
during the course of her Chapter 13 proceeding, any claim related to such suspension
or termination would have become property of her Chapter 13 estate. The suspension
and subsequent conversion did not occur until after the Debtors’ case was converted
to Chapter 7, however, therefore, any claim against the Appellant did not become
property of her Chapter 13 case.
Absent bad faith, when a case is converted from Chapter 13 to Chapter 7,
property of the estate in the Chapter 7 case consists of the property of the estate as
of the original Chapter 13 petition date which remains in the debtor’s control at the
time of conversion. 11 U.S.C. § 348(f)(1)(A). The Debtor’s claim for wrongful
suspension or termination did not exist as of the original petition date and therefore did
not become property of her Chapter 7 bankruptcy estate. To the extent the claim is
2
At oral argument, we invited clarification of the date of the Debtor’s
termination. The parties submitted a stipulation on December 4, 2003 setting forth
the dates of suspension and termination.
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not property of the Debtor’s bankruptcy estate, any examination by the Trustee of the
Appellant does not fall within the scope of Rule 2004. Fed. R. Bankr. P. 2004(b). In
light of the new facts presented by the parties in the stipulation, we reverse the order
authorizing the Trustee to undertake the examination of the Appellant pursuant to Rule
2004.
CONCLUSION
The bankruptcy court did not abuse its discretion in authorizing the Trustee to
conduct an examination of the Appellant pursuant to Rule 2004 to determine if the
estate had a claim arising out of the Appellant’s termination of the Debtor’s
employment. However, in light of the parties’ stipulation on appeal that the Debtor’s
employment was terminated post-petition and post-conversion to Chapter 7, any claim
for wrongful termination is property of the Debtor and not property of the bankruptcy
estate. Therefore, the order authorizing the Trustee to examine the Appellant pursuant
to Rule 2004 is reversed.
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE
EIGHTH CIRCUIT
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