A. WILLIAM ERPENBECK
DEBTOR CASE NO. 02-21835
MICHAEL L. BAKER, Trustee in Bankruptcy PLAINTIFF
VS. ADV. NO. 03-2064
A. WILLIAM ERPENBECK, MARCIA ERPENBECK,
B & G HOLDINGS, LLC, BILL ERPENBECK
CHILDREN, LLC, BILL ERPENBECK CHILDREN
TRUST, J. THOMAS FEAGAN, ANGELA FEAGAN,
PEOPLES BANK OF NORTHERN KENTUCKY, INC.,
METCO/LYKINS, LLC, and UNKNOWN LESSEES
AND/OR TENANTS, IF ANY DEFENDANTS
B & G Holdings, LLC ("B & G") is before the court on the Motion of Defendant B & G Holdings, LLC to Dismiss Complaint of Michael L. Baker, Plaintiff/Trustee, Crossclaim of PBNK, Inc. f/k/a Peoples Bank of Northern Kentucky, Inc., and Counterclaim and Crossclaims of Nayia Petroleum, LLC that it filed on March 4, 2004. Count I of the Complaint initiating this proceeding seeks to avoid certain transfers of the interest of A. William Erpenbeck (the "Debtor") in B & G, and Count II seeks to sell certain real property owned by B & G (the "Property") free and clear of the defendants' interests in the Property pursuant to § 363(f) of the Bankruptcy Code. The court interprets B & G's motion as requesting the dismissal of Count II of the Complaint, which is the only claim asserted against B & G, and certain cross-claims against it.
In addition, Nayia Petroleum, LLC ("Nayia") is before the court on the Motion for Jury Trial that it filed in this proceeding on February 23, 2004, which seeks a jury trial on all non-core issues. Furthermore, Metco / Lykins, LLC ("Metco") is before the court on the Motion to Dismiss Metco / Lykins, LLC on Plaintiff's Complaint and Crossclaim of Nayia Petroleum that it filed in this proceeding on March 12, 2004. Having considered the motions, the responses thereto, and the arguments of counsel, the court finds that Count II does not present any genuine issues of material fact and that B & G and Metco are entitled to judgment on that claim as a matter of law. The court further concludes that it lacks subject matter jurisdiction of the cross-claims against B & G and against Metco.
II. Factual and Procedural Background
According to the Complaint, on December 31, 1998 the Debtor transferred his 50% membership interest in B & G to Bill Erpenbeck Children, LLC for no consideration. Then, on December 30, 2000, Bill Erpenbeck Children, LLC transferred that interest to Bill Erpenbeck Children Trust, again for no consideration. B & G owns the Property, located at 321 Mt. Zion Road in Boone County, Kentucky.
On July 31, 2002 an involuntary petition for relief under Chapter 7 of the Bankruptcy Code was filed against the Debtor. On September 18, 2002 the court entered an order for relief. Plaintiff Michael L. Baker (the "Trustee") was appointed trustee of the Debtor's bankruptcy estate on October 4, 2002. He filed the Complaint initiating this adversary proceeding on December 30, 2003. On February 9, 2004 Nayia filed an answer including a counterclaim asserting a right of first refusal with respect to the Property and a cross-claim against B & G for breach of lease and for fraudulently inducing the lease and the purchase of a business located at the Property. The fraud claim was also asserted in a cross-claim against Metco and, by an amendment to the answer, against Peoples Bank of Northern Kentucky, Inc. On February 24, 2004 PBNK, Inc., formerly known as Peoples Bank of Northern Kentucky, Inc. ("PBNK"), filed an answer asserting a cross-claim against B & G (and against J. Thomas Feagan and Angela Feagan) claiming a mortgage on the Property and seeking judgment for the balance of the secured indebtedness.
On March 1, 2004 the court entered an Order Appointing Warning Order Attorney, appointing an attorney to give notice of the pendency of this proceeding to the tenants of the Property. As indicated above, B & G filed its motion to dismiss on March 4, 2004, seeking the dismissal of the Trustee's claim against it as well as PBNK's and Nayia's cross-claims against it. The Trustee filed a response to the motion on March 5, 2004 but neither PBNK nor Nayia have done so. The Trustee's response does not address the merits of the motion, but merely asks the court to bifurcate Counts I and II of his Complaint. As also indicated above, Metco filed its motion to dismiss, seeking the dismissal of the Trustee's claim against it as well as Nayia's cross-claim against it. Nayia filed a response to the motion on March 18, 2004, but the Trustee has not done so.
A. Trustee's Claim
B & G's motion relies on two grounds: that the court lacks subject matter jurisdiction of the claims against B & G, and that those claims fail to state claims against B & G upon which relief can be granted. Metco's motion also relies on the jurisdictional basis, and adds that it has no interest in the Property. It is not necessary to consider the court's jurisdiction in addressing the Trustee's claim under § 363. Rather, the court need only consult the language of the statute.
Subsection (b) of Bankruptcy Code § 363 authorizes the trustee to sell "property of the estate" outside the ordinary course of business, and Subsection (f) authorizes the trustee to sell property under Subsection (b) free and clear of third parties' interests in "such property" under certain circumstances. Accordingly, the Trustee in this case may sell the Property free and clear of B & G's and other interests only if the Property constitutes "property of the estate." Section 541(a)(1) of the Code defines "property of the estate" as "all legal or equitable interests of the debtor in property as of the commencement of the case," "wherever located and by whomever held." Section 541(a)(3) adds that "[a]ny interest in property that the trustee recovers under section . . . 550 . . . of this title" is also "property of the estate." Section 541(a)(4) adds that "[a]ny interest in property preserved for the benefit of or ordered transferred to the estate under section 510(c) or 551 of this title" is also "property of the estate." (1) The Complaint does seek to preserve the membership interests for the benefit of the estate under § 551. (2) Accordingly, if the Trustee prevails on Count I of the Complaint, the membership interests would constitute "property of the estate" subject to being sold under § 363.
B & G's real Property is another question. B & G is a legal entity separate from its members. See K.R.S. §§ 275.010, 275.015(15). (3) Indeed, Section 275.240(1) of the Kentucky Revised Statutes expressly provides that "[p]roperty transferred to or otherwise acquired by a limited liability company shall be the property of the limited liability company and not of the members individually." Accordingly, the Debtor does not and never has held a "legal or equitable interest" in the Property. Moreover, the Property is not sought to be recovered under § 550 and the Trustee does not ask that the Property be preserved for the benefit of or ordered transferred to the estate under § 510(c) or 551. Thus, the Property does not constitute property of the estate and may not, therefore, be sold under § 363 of the Bankruptcy Code. In re Acadiana Elec. Serv., Inc., 52 B.R. 609, 613 (Bankr. W.D. La. 1985).
For this reason, the court must dismiss Count II of the Complaint as to the movants, B & G and Metco. The court, on its own motion, will also dismiss Count II as against the other parties that were named defendants solely vis-á-vis Count II, namely PBNK, Nayia, and the other lessees of the Property. The court will also dismiss Nayia's counterclaim against the Trustee, which consists of allegations in the nature of a denial or affirmative defense with respect to the Trustee's allegations.
B. PBNK's and Nayia's Cross-Claims
The cross-claims asserted by Nayia against B & G and Metco and the cross-claim asserted by PBNK against G & G do appear to state claims upon which relief can be granted. Accordingly, the court must turn to B & G's and Metco's alternative ground for relief, i.e., that the court lacks subject matter jurisdiction of those claims.
The federal courts' bankruptcy jurisdiction is conferred by § 1334 of Title 28 of the United States Code, which grants to the district courts "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). The statute also grants the district courts "exclusive jurisdiction of all of the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate." Id. § 1334(e). (4) The jurisdictional scheme is completed by 28 U.S.C. § 157(a), which authorizes the district courts to refer to their districts' bankruptcy judges "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."
The cross-claims in question are not property of the Debtor's estate and those claims arise under state law, not the Bankruptcy Code. Thus, the question presented to the court is whether the claims "arise in" or are "related to" the Debtor's bankruptcy case within the meaning of §§ 1334(b) and 157(a). "These references operate conjunctively to define the scope of jurisdiction. Therefore, for purposes of determining section 1334(b) jurisdiction, it is necessary only to determine whether a matter is at least 'related to' the bankruptcy." Mich. Employment Sec. Comm'n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1141 (6th Cir. 1991) (citation omitted).
"[C]laims will be considered 'related to' the . . . bankruptcy proceeding if 'the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.'" Browning v. Levy, 283 F.3d 761, 773 (6th Cir. 2002) (quoting Sanders Confectionary Prods., Inc. v. Heller Fin., Inc. (In re Sanders Confectionary Prods., Inc.), 973 F.2d 474, 482 (6th Cir. 1992)). "Stated another way, a claim is 'related to' the bankruptcy proceeding if it would have affected the debtor's rights or liabilities." Id. (citing Lindsey v. O'Brien, Tanski, Tanzer & Young Health Care Providers of Conn. (In re Dow Corning Corp.), 86 F.3d 482, 489 (6th Cir. 1996)). "A controversy, the resolution of which may have only speculative, indirect or incidental effect on the bankruptcy estate, is unrelated to the bankruptcy action and not one over which the bankruptcy court can exercise jurisdiction." Cook v. Chrysler Credit Corp., 174 B.R. 321, 327 (M.D. Ala. 1994); accord, e.g., 176-60 Union Turnpike, Inc. v. Howard Beach Fitness Ctr., Inc., 209 B.R. 307, 313 (S.D.N.Y. 1997); Showalter v. Rinard, 126 B.R. 596, 599 (D. Ore. 1991).
First, whether Metco has any liability to Nayia could have no conceivable effect on the Debtor's bankruptcy estate or his rights and liabilities. The same is true with respect to Nayia's cross-claim against PBNK and PBNK's cross-claim against J. Thomas or Angela Feagan (the "Feagans"). Thus, those claims must be dismissed.
Whether B & G has liability to PBNK under the promissory note secured by the mortgage on the Property, the validity and extent of PBNK's mortgage, and B & G has any liability to Nayia for breaching its lease with B & G or for defrauding Nayia would affect the extent of B & G's net worth and, therefore, the value of the Debtor's equity interest in B & G (if the transfers thereof are successfully avoided), but that effect is too attenuated to support jurisdiction under § 1334(b). For example, in the recent case of DVI Financial Services, Inc. v. National Medical Imaging, LLC (In re DVI, Inc.), 305 B.R. 414 (Bankr. D. Del. 2004), the debtor financed certain equipment acquisitions then sold the leases and loans to separately incorporated securitization trusts, retaining the right to service the loans and leases, id. at 416. The debtor (apparently as agent for the trusts) filed a complaint against certain of the lessees and borrowers and, in response to a motion to dismiss, argued that the value of the debtor's interest in the securitization trusts would be affected by the litigation. Id. at 418. The court rejected the argument:
A debtor may not invoke "related to" jurisdiction where the action "may have only speculative, indirect or incidental effect on the estate." The mere fact that [the debtor] holds an equity interest in the Trusts is too tenuous and insufficient to confer jurisdiction on this Court. If [the debtor] were correct, then the Court's jurisdiction would expand to include every claim by or against any entity in which any debtor owned stock. That is simply not true.
Consequently, we find that the funds sought to be collected are not property of the estate and the outcome of this adversary proceeding would have no direct effect on the [debtor's] bankruptcy estate. Therefore, we conclude that there is no "related to" bankruptcy jurisdiction over this adversary proceeding.
Id. So, too, in this case the mere fact that the bankruptcy estate may be determined to hold an equity interest in B & G is "too tenuous and insufficient to confer jurisdiction on this Court." The court's jurisdiction does expand to include PBNK's and Nayia's claims against an entity the Debtor's estate in which is sought to be recovered by the estate, so "we conclude that there is no 'related to' bankruptcy jurisdiction over this adversary proceeding."
For these reasons, the court must dismiss the cross-claims against B & G and Metco. The court, on its own motion, will also dismiss Nayia's cross-claim against PBNK.
For the foregoing reasons, the court will enter a separate order dismissing Count II of the Complaint, (5) Nayia's counterclaim against the Trustee, and all of Nayia's and PBNK's cross-claims. (6) Accordingly, the only claim left standing will be Count I of the Complaint and the only parties remaining defendants will be the Debtor, his spouse, and the Debtor's children's limited liability company and trust; in addition, B & G and the Feagans will remain defendants solely for the purpose of effectuating any fraudulent conveyance judgment entered in this proceeding against the other defendants. As Nayia is no longer a party to this adversary proceeding, its motion for a jury trial will be overruled as moot.
Paige Leigh Ellerman, Esq.
Michael L. Baker, Esq.
Goering & Goering
William K. Fulmer II, Esq.
Beverly Storm, Esq.
Steven R. Dowell, Esq.
Steven L. Schiller, Esq.
Robert P. Gettys, Esq.
Richard A. Sadoff, Esq.
1. None of the other categories of property described in § 541(a) has any applicability under the facts of this case.
2. Although the Complaint does not seek to recover the Debtor's membership interest in B & G under § 550, presumably the Trustee would seek such relief if the transfers are avoided.
3. Section 275.010 gives the limited liability company "the powers to do all things necessary or convenient to carry out its business and affairs." Section 275.015(15) defines "person" to include corporations, limited liability companies, and "other legal entities." While no Kentucky statute or court decision appears expressly to hold that an LLC is a legal entity separate from its members, case law from other jurisdictions does. E.g., Abrahim & Sons Enters. v. Equilon Enters., LLC, 292 F.3d 958, 962 (9th Cir. 2002) (citing PacLink Communications Int'l, Inc. v. Super. Ct. of Los Angeles County, 109 Cal. Rptr. 2d 436, 439 (Cal. Ct. App. 2001)); UCA, L.L.C. v. Lansdowne Cmty. Dev., LLC., 215 F. Supp. 2d 742, 756 (E.D. Va. 2002) (citing Jordan v. Commonwealth, 549 S.E.2d 621, 622-23 (Va. Ct. App. 2001)); Cabrini Dev. Council v. LCA-Vision, Inc., 197 F.R.D. 90, 95 (S.D.N.Y. 2000), vacated & remanded on other grounds, 292 F.3d 134 (2d Cir. 2002); Fraser v. Major League Soccer, L.L.C., 97 F. Supp. 2d 130, 134 (D. Mass. 2000); Glod v. Baker, 851 So. 2d 1255, 1265 (La. Ct. App.), cert. denied, 860 So. 2d 1135 (La. 2003); First Nat'l Bank v. Maynard, 815 A.2d 1244, 1248 (Conn. Ct. App.), cert. denied, 821 A.2d 768 (Conn. 2003); Delta Dev. & Inv. Co. v. Hsiyuan, No. 47192-9-1, 2002 WL 31748937, at *15(Wash. Ct. App. Dec. 9, 2002), review denied, 78 P.3d 656 (Wash. 2003).
4. The only other jurisdictional grant set forth in the statute is the grant of jurisdiction over bankruptcy cases proper, as opposed to proceedings related to bankruptcy cases, 28 U.S.C. § 1334(a), and the cross-claims in question are clearly not part of the Debtor's Chapter 7 case, Robinson v. Michigan Consol. Gas Co., 918 F.2d 579, 583 (6th Cir. 1990).
5. The dismissal will be without prejudice to the Trustee's rights, if any, to apply to a court of competent jurisdiction for authority to liquidate B & G's assets pursuant to applicable nonbankruptcy law in the event that the Trustee prevails in avoiding the Debtor's membership interest in B & G.
6. Because the lessees of the Property are being dismissed from this proceeding, the court will also vacate the Order Appointing Warning Order Attorney entered on March 1, 2004.