IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
August 6, 2008
No. 07-10955 Charles R. Fulbruge III
Clerk
In The Matter Of: DALE RICHARD GROTJOHN
Debtor
----------------------------------------------
DIANE REED, CHAPTER 7 TRUSTEE
Appellant
v.
DALE RABE; BLUMBERG AND BAGLEY, LLP
Appellees
Appeal from the United States District Court
for the Northern District of Texas
(4:07-CV-031-A)
Before SMITH, WIENER, and HAYNES, Circuit Judges.
PER CURIAM:*
Appellant Diane Reed, Chapter 7 Trustee (the “Trustee”) for the estate of
Debtor Dale Richard Grotjohn (the “Debtor”), appeals the district court’s decision
to exempt from the estate a payment made by Appellee Dale Rabe to Appellee
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
No. 07-10955
Blumberg and Bagley, LLP (“B&B”) or, alternatively, to the Debtor, in exchange
for a fractional interest in several pre-petition legal claims of the Debtor. As the
claims were the property of the estate at all relevant times and not the property
of the Debtor when he purported to convey an interest in them, the transfer from
the Debtor to Rabe was void ab initio. Consequently, the payment in exchange
for an interest in the claims could not have constituted “proceeds . . . of or from
property of the estate” under § 541(a)(6) of the Bankruptcy Code. We therefore
affirm the district court’s affirmance of the bankruptcy court’s grant of summary
judgment.1
I. Facts and Proceedings
In July 2003, the Debtor filed for Chapter 7. In January 2004, the
bankruptcy court entered an order of discharge, and the Chapter 7 phase of this
case was closed. In August 2004, the Debtor was sued in Texas state court over
his purported interest in a business partnership. The Debtor, in turn, asserted
his own counterclaims against that partnership grounded in pre-petition rights.
In September 2004, the Debtor transferred to Rabe a one-third interest in his
claims in the state court litigation in exchange for funds with which to pay B&B
1
Appellees also raise the argument that the Trustee waived this appeal by failing to
timely file a statement of the issues to be presented, as required by Federal Rule of Appellate
Procedure 6(b)(2)(B)(i). We have the discretion to impose sanctions for failure to comply with
this rule, including dismissal of the appeal. See M.A. Baheth Constr. Co. v. Schott (In re M.A.
Baheth Constr. Co.), 118 F.3d 1082, 1083 (5th Cir. 1997). Under the instant circumstances,
however, we decline to dismiss this appeal for non-compliance with Rule 6(b)(2)(B)(i) because
Appellees were given notice of the sole issue raised by the Trustee in a letter that the Trustee
submitted to us in response to a notice that this case had been selected for our appellate
conference program. Even if, arguendo, the Trustee did not comply with Rule 6(b)(2)(B)(i), we
do not believe the interests of justice would be served by imposing the extreme measure of
dismissing this appeal on the sole basis of a procedural technicality because Appellees were not
prejudiced by the Trustee’s non-compliance, and because the Trustee did not show a cavalier
disregard for the rule.
2
No. 07-10955
for attorney’s fees the Debtor had incurred in the state court litigation (the
“Transferred Money”).2
In November 2004, the Debtor moved to reopen his bankruptcy case to
disclose assets previously omitted from his schedules and statement of financial
affairs. These assets included the Debtor’s asserted interest in the partnership
that was the subject of the state court litigation as well as the Debtor’s claims
against this partnership. At the same time, the Debtor sought to exempt these
assets from his estate; the bankruptcy court denied his request.3
In July 2005, a jury ruled against the Debtor in the state court litigation,
finding that there was no partnership and that the Debtor should recover
nothing.
In July 2006, the Trustee filed an adversary complaint in the bankruptcy
court alleging that, because the state court claims transferred by the Debtor to
Rabe were property of the estate at the time of the transfer, the Transferred
Money was “proceeds” as well and thus property of the estate under § 541(a)(6).
The Trustee sought to avoid the post-petition transfer of the Transferred Money
and recover it from Rabe and B&B, jointly and severally.
In October 2006, the bankruptcy court dismissed the Trustee’s claims on
summary judgment, holding, inter alia, that the Transferred Money was not
property of the estate, because the estate was neither used to create the money
nor diminished in exchange for the money. The bankruptcy court recognized
2
The Trustee states that Rabe paid money directly to B&B or, alternatively, that Rabe
paid money to the Debtor to pay B&B. According to the district court, the amount paid was
between $35,000 and $67,000. According to the bankruptcy court, the amount was “in excess
of $40,000 in cash.” The agreement between the Debtor and Rabe stated as follows: “It is
agreed and understood by the undersigned parties that [the Debtor] will assign one third of
any claims that he has . . . in exchange for . . . Rabe advancing a sum of 15,000.00 less any
amount that [the Debtor] may now owe . . . Rabe.” Our holding makes resolution of these
factual discrepancies unnecessary.
3
The Trustee does not dispute that the Debtor’s transferred claims were, at all times,
the property of the estate.
3
No. 07-10955
that “Section 541(a)(6) is drafted broadly to capture any property which is
created by exchange or use of property of the estate” but is not “broad enough to
reach everything that changes hands simply because of property of the estate.”
The following month, the bankruptcy court denied a motion for rehearing.
In August 2007, the district court affirmed the bankruptcy court’s
summary judgment dismissing the Trustee’s claims, ruling that no transfer of
property had ever taken place, and thus no “proceeds . . . of or from property of
the estate” under § 541(a)(6) could have been generated. The district court held
that the Debtor never had any legal interest in the claims transferred to Rabe
in consideration for the Transferred Money because the claims had always been
property of the estate. Thus the Debtor had no legal power or authority to
assign an interest in these claims to Rabe or anyone else. According to the
district court, there could be “no transfer to avoid” because, as a matter of law,
there had never been a transfer of estate property at all.
The Trustee timely filed a notice of appeal.
II. Standard of Review
“In reviewing cases originating in bankruptcy, we perform the same
function as did the district court: Fact findings of the bankruptcy court are
reviewed under a clearly erroneous standard and issues of law are reviewed de
novo.”4 Accordingly, in the instant matter, we review the grant of summary
judgment by the bankruptcy court and the district court de novo.5
III. Analysis
Section 541(a)(6) defines the property of a Chapter 7 bankruptcy estate to
include the “[p]roceeds, product, offspring, rents, or profits of or from property
4
Texas v. Soileau (In re Soileau), 488 F.3d 302, 305 (5th Cir. 2007) (internal quotation
marks omitted).
5
Century Indem. Co. v. Nat’l Gypsum Co. Settlement Trust (In re Nat’l Gypsum Co.), 208
F.3d 498, 504 (5th Cir. 2000).
4
No. 07-10955
of the estate.” The Trustee contends that the bankruptcy court and district court
erred in relying on the narrower Uniform Commercial Code (the “UCC”)
definition of “proceeds” instead of § 541(a)(6)’s more expansive definition.
According to the Trustee, “proceeds” should be broadly construed so that the
Transferred Money is categorized as property of the estate because the
Transferred Money was derived “of or from property of the estate.” As the
Trustee argues, “but for” the Debtor’s legal claims, which were unquestionably
property of the estate, there would have been no Transferred Money; therefore,
the Transferred Money is “proceeds” and thus property of the estate. W e
agree that § 541(a)(6) is a “generous provision [that] sweeps into the bankruptcy
estate all interests held by the debtor — even future, non-possessory, contingent,
speculative, and derivative interests.”6 So, too, did Congress intend “proceeds”
to be construed broadly, not limited to the UCC definition of “proceeds,” but
rather “encompassing any conversion in the form of property of the estate, and
anything of value generated by property of the estate,” including any interest in
property generated after the commencement of the case.7 An expansive view of
what constitutes “proceeds . . . of or from property of the estate” under §
541(a)(6) serves the “overarching” Bankruptcy Code purpose of “marshal[ing]
and consolidat[ing] the debtor’s assets into a broadly defined estate from which,
in an equitable and orderly process, the debtor’s unsatisfied obligations to
creditors are paid to the extent possible.”8
We need not determine how far the § 541(a)(6) “proceeds” reach extends,
however, because, as the district court stated, “the crux of this appeal is whether
6
Fuentes v. Newhouse (In re McLain), 516 F.3d 301, 313 (5th Cir. 2008) (internal
quotation marks omitted).
7
Id. (internal quotation marks omitted).
8
Andrews v. Riggs Nat’l Bank of Wash., D.C. (In re Andrews), 80 F.3d 906, 909-10 (4th
Cir. 1996).
5
No. 07-10955
there was a transfer of estate property in the first instance,” not whether Rabe’s
funds constitute “proceeds” of estate property.9 As earlier discussed, in
November 2004, the Debtor tried, but failed, to exempt his state court claims
from the estate. These claims were undeniably property of the estate, not of the
Debtor, when the Debtor purported to transfer an interest in them to Rabe,
meaning that the Debtor assayed to deal with property with which he had no
authority to deal. In the context of Chapter 7, it is generally the prerogative of
a trustee, not a debtor, to alienate property of the estate.10 “The Bankruptcy
trustee is vested with title to all assets of the estate and becomes the
representative entity.”11 Once the Debtor failed in his attempt to exempt these
claims from the estate, the “property of the estate [was] in custodia legis,” and
thus “administered exclusively by a specifically designated fiduciary, a
trustee.”12 The Transferred Money cannot qualify as “proceeds” of estate
property because there never was a transfer of estate property. As the transfer
of an interest in those claims from the Debtor to Rabe was void ab initio, the
Transferred Money could not and does not constitute “proceeds . . . of or from
property of the estate” pursuant to § 541(a)(6). The question whether the
Transferred Money should have or would have been exempted from the estate
if it had been received in consideration for a transfer of estate property is simply
not presented here.
9
The Trustee has nearly ignored this key issue in her briefs.
10
See 11 U.S.C. §§ 323(a) and 363(b)(1).
11
Westwood Community Two Ass’n, Inc. v. Barbee (In re Westwood Community Two
Ass’n, Inc.), 266 B.R. 223, 226 (S.D. Fla. 2001).
12
Hopkins v. Foothill Mt., Inc. (In re Hopkins), 346 B.R. 294, 303 (Bankr. E.D.N.Y.
2006); see also Green v. Kasishke (In re Kasishke), 40 B.R. 712, 714 (Bankr. N.D. Tex. 1984)
(holding that, in Chapter 7 context, “the debtors had no power to transfer the property without
the approval of the trustee”).
6
No. 07-10955
IV. Conclusion
In the context of the discrete facts of this case, the Debtor never had the
legal power or authority to transfer the legal claims at issue, which were the
property of the estate. Therefore, no transfer of estate property occurred, so the
Transferred Money could not have been, and was not, “proceeds . . . of or from
property of the estate” under § 541(a)(6). The judgment of the district court,
affirming the judgment of the bankruptcy court, is AFFIRMED.
7