John S. Lovald v. Gerald Wayne Falzerano

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
_______________
No. 11-6036
________________
In re: *
*
Alvin James Falzerano, *
*
Debtor. *
*
John S. Lovald, Trustee, *
*
Plaintiff – Appellant, * Appeal from the United States
* Bankruptcy Court for the District of
v. * South Dakota
*
Alvin James Falzerano; Gerald Wayne *
Falzerano; Lorelie Lynn Barth; Douglas *
Dean Falzerano; Warren Craig *
Falzerano; Laura L. Fox; Vanessa *
Michelle Falzerano; The Falzerano *
Children's Trust, by and through its *
Trustees, Warren Falzerano, Vanessa *
Falzerano, and Douglas Falzerano; and *
Theresa Ann Falzerano Estate, by and *
through its Personal Representative *
Douglas Dean Falzerano, *
*
Defendants - Appellees. *
_____
Submitted: July 28, 2011
Filed: August 10, 2011
_____
Before KRESSEL, Chief Judge, SCHERMER, and VENTERS, Bankruptcy
Judges.
_____
VENTERS, Bankruptcy Judge.
The Chapter 7 Trustee, John S. Lovald, appeals the bankruptcy court’s entry of
a judgment in favor of the Defendants on his complaint seeking turnover under 11
U.S.C. § 542 of money allegedly owed to the bankruptcy estate. We have jurisdiction
over this appeal pursuant to 28 U.S.C. § 158(b). For the reasons set forth below, we
affirm the judgment of the bankruptcy court.1
STANDARD OF REVIEW
Findings of fact are reviewed for clear error, and legal conclusions are reviewed
de novo.2
BACKGROUND
The Debtor, Alvin James Falzerano, and Theresa Ann Falzerano were husband
and wife. In May 2001, the Debtor arranged to purchase 500 tons of hay from Orand
Liebelt. Theresa gave Liebelt a $1,000 down payment for the purchase.
Just before the hay was delivered, Theresa died on December 4, 2001. In her
will, she left the Debtor a life estate in 320 acres of real estate (the “Ranch”), and she
left her children, Defendants Douglas Dean Falzerano, Laura L. Fox, Gerald Wayne
Falzerano, and Warren Craig Falzerano, and her grandchild, Vanessa Michelle
Falzerano (collectively, “heirs”), her cattle and all her other property, including a
remainder interest in the Ranch.
1
The Honorable Charles L. Nail, Jr., United States Bankruptcy Court for the
District of South Dakota.
2
See In re Waterman, 248 B.R. 567, 570 (B.A.P. 8th Cir. 2000).
2
Lorelie Lynn Barth (“Lorelie”), Theresa’s daughter and the mother of Vanessa
Falzerano, was intentionally omitted from Theresa’s will. To avoid a threatened will
contest, the Debtor, the heirs, and Lorelie entered into a family settlement agreement
under which the probate estate's personal representative was permitted to “distribute
such items of [Theresa’s] personal property as she deem[ed] necessary or advisable”
to the heirs, and the Debtor was permitted to keep and use Theresa’s remaining
personal property until he no longer needed or wished to do so, at which time it would
be distributed to the heirs. The Debtor was also permitted to “run [Theresa's] cattle
herd and raise the cattle for the heirs” and “use the profits from the land and cattle for
his own living expenses.” As of the date of the trial, no distributions – of cattle or
money – had been made to the heirs pursuant to the will or the settlement agreement.3
In addition to managing the probate estate’s cattle, the Debtor had an
arrangement with Gladys Bonefield to pasture approximately 70 head of her cattle in
return for a share of her calf crop. He also had an arrangement with Dennis Wentzel
to pasture approximately 80 head of Wentzel’s cattle in return for a share of his calf
crop. The Debtor kept all of the cattle on the Ranch for the winter (six months). In
the summer, he moved the cattle to various other locations: the probate estate’s cattle
went to a neighbor's land, Bonefield’s cattle went to “the Indian reservation,” and
Wentzel’s cattle were returned to Wentzel.
The hay ordered from Liebelt was delivered to the Ranch in December 2001and
January 2002 and was fed to all of the cattle under the Debtor’s management in 2002
and 2003. However, the Debtor refused to pay Liebelt for the hay. He testified that
it was “very poor” and that he fed it to the cattle only “because hay was hard to find
then or otherwise [he] wouldn’t have used it at all.”
3
Initially, the probate estate had 107 head of cattle. However, by the time of
trial, the Debtor had sold all but approximately 30 head.
3
Liebelt sued Debtor in state court, and on September 6, 2007, the state court
entered a judgment against the Debtor for $10,000, plus interest and costs. Before the
judgment was satisfied, voluntarily or otherwise, the Debtor filed a petition for relief
under Chapter 7 of the Bankruptcy Code on November 16, 2007. John S. Lovald was
appointed as the trustee of the Debtor’s bankruptcy estate. On November 12, 2009,
he filed a complaint under 11 U.S.C. § 542 against the Defendants to recover rent for
the pasture and the value of the hay provided to the probate estate’s cattle. The
Trustee argued in his complaint that the Defendants were liable to the bankruptcy
estate under an unjust enrichment theory.
After conducting a trial on the matter, the bankruptcy court entered judgment
in favor of the Defendants. The bankruptcy court held, inter alia, that the Defendants
were not unjustly enriched because the Debtor was appropriately compensated for
pasturing and feeding the estate’s cattle because the family settlement agreement
under which the parties were operating provided that the Debtor was entitled only to
the “net” profits from the estate’s cattle, which would necessarily reflect the cost of
feeding and maintaining the cattle.4
DISCUSSION
We can affirm on any basis supported by the record.5 The bankruptcy court
entered judgment in favor of the Defendants on the grounds that the Trustee failed to
establish all of the elements of a claim for unjust enrichment. Specifically, the court
found that, although the probate estate and the heirs benefitted from having the hay
4
Douglas Falzerano, Warren Falzerano, Laura Fox, Lorelie Barth, Vanessa
Falzerano, and the Theresa Ann Falzerano Estate, by its Personal Representative,
Laura Fox, filed a counterclaim against the Trustee seeking to recover any amount
that might be awarded to the Trustee on his complaint. The bankruptcy court
dismissed the counterclaim after denying the Trustee relief on his complaint. That
ruling was not appealed.
5
See Phipps v. FDIC, 417 F.3d 1006, 1010 (8th Cir. 2005).
4
fed to the cattle, under the family settlement agreement the Debtor was entitled to
receive the net profit from the probate estate’s cattle and the cost of the hay would
have been factored into the determination of the net profits. The same was true for the
use of the Ranch’s pastures. Therefore, since the Debtor had retained all of the net
profits from the cattle, the bankruptcy court concluded that the probate estate and the
heirs had effectively compensated the Debtor for the hay and the use of the pasture.
While we find no clear error in the bankruptcy court’s determination that the
Defendants were not unjustly enriched, and therefore not indebted to the bankruptcy
estate,6 we affirm on the more fundamental ground that the relief sought by the
Trustee was beyond the scope of 11 U.S.C. § 542.
Our analysis “begin[s] where all such inquiries begin: with the language of the
statute itself.”7 Section 542 provides in pertinent part:
(a) Except as provided in subsection (c) or (d) of this section, an entity,
other than a custodian, in possession, custody, or control, during the
case, of property that the trustee may use, sell, or lease under section 363
of this title, or that the debtor may exempt under section 522 of this title,
shall deliver to the trustee, and account for, such property or the value of
6
There is ample evidence in the record to support this finding. Ironically, if
the Debtor had been permitted to recover for the hay provided to the estate's cattle,
he would have been the one unjustly enriched. Theresa paid only $1,000 (of
presumably $11,000 due) for the hay, and the Debtor benefitted by feeding it to
Bonefield’s and Wentzel’s cattle (in addition to the probate estate's cattle), from
which he received a share of the calves born. It is also ironic that the estate is
seeking payment for hay the Debtor refused to pay for because he believed it was
of extremely poor quality.
7
United States v. Ron Pair Enter. Inc., 489 U.S. 235, 241, 109 S.Ct. 1026,
1030, 103 L.Ed.2d 290 (1989).
5
such property, unless such property is of inconsequential value or benefit
to the estate.
(b) Except as provided in subsection (c) or (d) of this section, an entity
that owes a debt that is property of the estate and that is matured,
payable on demand, or payable on order, shall pay such debt to, or on
the order of, the trustee, except to the extent that such debt may be offset
under section 553 of this title against a claim against the debtor.8
The Trustee contends that the debt allegedly owed by Defendants is property
of the estate under § 541(a)(1) and is subject to turnover under§ 542(a)(2). Under the
plain language of the statute, however, actions to collect a debt owed to an estate are
governed by § 542(b), not § 542(a).9 And § 542(b) applies only to debts that are
“matured, payable on demand, or payable on order.” An action to collect a disputed
debt based on unjust enrichment is not any of these.10
8
11 U.S.C. § 542 (West 2011) (emphasis added).
9
11 U.S.C. § 542.
10
11 U.S.C. § 542(b) (West 2011); In re Cassidy Land and Cattle Co., Inc.,
836 F.2d 1130, 1132-339 (8th Cir. 1988) (holding that trustee could pursue action
to foreclose on a mortgage and collect on promissory note under § 542(b) where
contract debtor had defaulted and the debt had “matured”). See also, In re Charter
Co., 913 F.2d 1575, 1579 (11th Cir.1990) (“Turnover proceedings are not to be
used to liquidate disputed contract claims.”); In re Asousa P'ship., 264 B.R. 376,
384 (Bankr. E.D. Pa. 2001) (“[Turnover under § 542] cannot be used to determine
the rights of parties in legitimate contract disputes.”); Weiner's, Inc. v. T.G. & Y.
Stores Co., 191 B .R. 30, 32 (S.D. N.Y. 1996) (“[An] action to determine the
amount of a claimed debt to the estate that is, as yet, wholly disputed and
unliquidated cannot properly be styled an action to ‘turn over’ estate ‘property.’ ”).
6
Under South Dakota law,11 a claim for unjust enrichment is an action in equity
implying the existence of a contract “when a party confers a benefit upon another
party who accepts or acquiesces in that benefit and it is inequitable to receive that
benefit without paying.”12 Such a debt defies characterization as “matured, payable
on demand, or payable on order.” Thus, the Trustee’s action exceeded the scope of
§ 542 and the bankruptcy court was correct in entering judgment in favor of the
Defendants.
In his reply brief, the Trustee points to In re NWFX, Inc.,13 as precedent for
pursuing an unjust enrichment claim under § 542(a). The Court of Appeals’ holding
in NWFX, though, undermines rather than supports the Trustee’s case.
In NWFX, the Chapter 11 trustee of Northwest Financial Express (NWFX), a
business previously engaged in the marketing of money orders to grocery stores,
sought turnover of the value of all of the money orders that a grocery store chain, Rice
Food Markets, Inc., had sold to third parties but for which it had not remitted the
proceeds (minus a commission) to NWFX. Rice argued that there was no contract
between the parties governing their rights in the money order proceeds and refused to
turn them over because it was concerned that its customers would hold it liable for the
now-valueless money orders they had purchased. As of the trial on the matter, Rice
had already used some of the proceeds to reimburse affected customers.
11
In re Wade, 219 B.R. 815, 821 (B.A.P. 8th Cir. 1998) (“It is fundamental
that state law controls the underlying rights parties may have to property, contracts,
and the like.”).
12
Miller v. Jacobsen, 714 N.W.2d 69, 81 (S.D. 2006) (quoting Sporleder v.
Van Liere, 569 N.W.2d 8, 12 (S.D. 1997)).
13
864 F.2d 588 (8th Cir. 1988).
7
The bankruptcy court and district court denied the trustee’s demand for
turnover, finding that there was no contract between the parties and, therefore, the
estate had no interest in the proceeds received by Rice.14 The Eighth Circuit Court of
Appeals agreed that the estate had no contractual right to the proceeds, but it held that
Rice had been unjustly enriched by retaining the proceeds, and therefore, the Trustee
had an equitable interest in the proceeds in Rice’s possession, which had to be turned
over pursuant to § 542(a).15
Notably, the Court of Appeals did not recognize unjust enrichment as a basis
for collecting a debt under § 542(a), as the Trustee seeks to do here; rather, it viewed
unjust enrichment as the basis for the estate’s interest in certain property, i.e., the
money order proceeds in Rice’s possession.
Despite the absence of a legally valid agreement, however, there is an
equitable interest equal to the reasonable value of the excess benefits
Rice has received from its dealings with Northwest. These equitable
interests constitute property of the estate. 11 U.S.C. § 541(a)(1). As
NWFX property in Rice's possession, it is subject to turnover under 11
U.S.C. § 542(a).16
This reading of In re NWFX comports with the language used by the Court of Appeals
and the structure of §§ 542(a) and (b), which separately address turnover of property
of the estate, on one hand, and the collection of debts owed to an estate, on the other.
Moreover, the limitation in In re NWFX on the trustee’s right of turnover to the
proceeds in Rice’s possession comports with the Court of Appeals’ more recent ruling
14
Id. at 589-90.
15
In re NWFX, Inc., 864 F.2d at 591-92.
16
Id. at 592 (emphasis added).
8
in In re Pyatt,17 wherein it stated unequivocally that § 542(a) permits a trustee “to
compel turnover only from entities which have control of property of the estate or its
proceeds at the time of the turnover demand.”18 At the time of the Trustee’s demand
in this case, the Defendants did not have (and, apparently, have never had)19
possession of any proceeds from the estate’s cattle, and the Trustee’s claim can be
construed as nothing other than a demand on an alleged debt.
CONCLUSION
For the reasons stated above, the judgment of the bankruptcy court denying the
relief sought in the Trustee’s complaint for turnover is hereby affirmed.
17
486 F.3d 423 (8th Cir. 2007).
18
Id. at 528 (emphasis added).
19
The record indicates that the proceeds from the sale of the probate estate’s
cattle were paid to a bank holding a security interest in the cattle. It is unclear,
however, whether any of the Defendants had momentary control over those
proceeds.
9