In Re: Neil O'Donnel v. ( 2005 )

By order of the Bankruptcy Appellate Panel, the precedential effect
of this decision is limited to the case and parties pursuant to 6th
Cir. BAP LBR 8013-1(b). See also 6th Cir. BAP LBR 8010-1(c).
File Name: 05b0004n.06
BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: NEIL J. O’DONNELL, )
) No. 04-8054
Debtor. )
_____________________________________ )
)
In re: KEVIN P. O’DONNELL, )
) No. 04-8056
Debtor. )
_____________________________________ )
)
FRANK J. NORMALI, )
)
Appellant, )
)
)
)
)
v. )
)
NEIL J. O’DONNELL, KEVIN P. O’DONNELL, )
)
Appellees. )
)
)
)
_____________________________________ )
Appeal from the United States Bankruptcy Court
for the Northern District of Ohio, Eastern Division, at Cleveland.
Nos. 03-15956, 03-12833.
Argued: February 2, 2005
Decided and Filed: May 19, 2005
Before: AUG, GREGG, and LATTA, Bankruptcy Appellate Panel Judges.
____________________
COUNSEL
ARGUED: Kenneth J. Freeman, Cleveland, Ohio, for Appellant. David O. Simon, LAW OFFICES
OF DAVID O. SIMON, Cleveland, Ohio, for Appellees. ON BRIEF: Kenneth J. Freeman,
Cleveland, Ohio, for Appellant. David O. Simon, LAW OFFICES OF DAVID O. SIMON,
Cleveland, Ohio, for Appellees.
____________________
OPINION
____________________
JENNIE D. LATTA, Bankruptcy Appellate Panel Judge. Appellant Frank J. Normali
(“Normali”) appeals an order of the bankruptcy court which denied him standing to file proofs of
claim in the individual bankruptcy cases of the Appellees, Neil J. O’Donnell and Kevin P.
O’Donnell (the “Debtors”). The proofs of claim were based upon a judgment rendered in favor of
Normali against three corporations, O’Donnell & Company, O’Donnell Advisory Services, Inc., and
O’Donnell Securities Corp. (the “O’Donnell Corporations”). The Debtors have a relationship with
each of these entities as officers, stockholders, or directors. Each of the O’Donnell Corporations is
a debtor in a chapter 7 bankruptcy case. Normali seeks to recover assets of the O’Donnell
Corporations alleged to have been fraudulently transferred to the Debtors. He filed suit in state court
to recover these assets before the bankruptcy cases for the O’Donnell Corporations were filed. The
trustee for each of the O’Donnell Corporations intervened and caused these lawsuits to be removed
and transferred to the bankruptcy court. In their individual cases, the Debtors objected to the proofs
of claim filed by Normali. The bankruptcy court held that the causes of action asserted by Normali
in his proofs of claim belong to the bankruptcy estates of the O’Donnell Corporations, and can only
be asserted by the bankruptcy trustee for each of those estates. Accordingly, the court held that
Normali lacks standing to pursue those causes of action. Normali asserts that the conclusion of the
bankruptcy court was error, and further, that the Debtors lack standing to object to his proofs of
claim.
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I. ISSUES ON APPEAL
The issues raised on appeal are these:
(1) Whether a judgment creditor with a claim against a debtor corporation has standing to
file a proof of claim in the bankruptcy case of an individual debtor who is alleged to be a transferee
of fraudulent transfers from the debtor corporation.
(2) Whether standing may be considered by the Panel when it is raised for the first time on
appeal.
(3) Whether the Debtors have standing to object to proofs of claim in their individual
bankruptcy cases.
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit (the “Panel”) has jurisdiction to hear
and decide this appeal. The United States District Court for the Northern District of Ohio has
authorized appeals to the Panel. A “final order” of a bankruptcy court may be appealed by right
under 28 U.S.C. § 158(a)(1). For purposes of an appeal, an order is final if it “ends the litigation on
the merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp.
v. United States, 489 U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989) (citations omitted). The decision
of the bankruptcy court sustaining the Debtors’ objections to Normali’s proofs of claim is a final
order. See Malden Mills Indus., Inc. v. Maroun (In re Malden Mills Indus., Inc.), 303 B.R. 688, 696
(B.A.P. 1st Cir. 2004).
This Panel reviews conclusions of law de novo. “‘De novo review requires the Panel to
review questions of law independent of the bankruptcy court’s determination.’” Bailey v. Bailey
(In re Bailey), 254 B.R. 901, 903 (B.A.P. 6th Cir. 2000) (quoting First Union Mortgage Corp. v.
Eubanks (In re Eubanks), 219 B.R. 468, 469 (B.A.P. 6th Cir. 1998) (omitting citations)). The Panel
must “‘affirm the underlying factual determinations unless they are clearly erroneous.’” Bailey, 254
B.R. at 903 (quoting Hart v. Molino (In re Molino), 225 B.R. 904, 906 (B.A.P. 6th Cir. 1998) (citing
National City Bank v. Plechaty (In re Plechaty), 213 B.R. 119, 121 (B.A.P. 6th Cir. 1997))). A
factual determination is clearly erroneous “when although there is evidence to support it, the
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reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has
been committed.” Bailey, 254 B.R. at 903 (citations omitted).
III. FACTS
Debtor Kevin P. O’Donnell filed a chapter 7 bankruptcy petition on March 10, 2003. Debtor
Neil J. O’Donnell filed a chapter 7 bankruptcy petition on May 7, 2003.
On November 19, 2001, Normali had an arbitration award against the O’Donnell
Corporations reduced to a judgment in the Cuyahoga County Common Pleas Court in the amount
of $309,600, plus interest at 10 percent. The award was based on Normali’s claim against the
O’Donnell Corporations for wrongful termination of employment.
On November 30, 2001, Normali filed another suit in the Cuyahoga County Court of
Common Pleas against the Debtors and various O’Donnell family trusts, asserting that certain
transfers of assets from the O’Donnell Corporations to them violated Ohio Revised Code § 1336.07.
Normali alleged that Kevin and Neil O’Donnell had, in an attempt to prevent him from collecting
his judgment against the O’Donnell Corporations, fraudulently transferred the assets of the
O’Donnell Corporations to themselves individually or into family trusts. Subsequently, the Debtors
filed their individual bankruptcy petitions. Normali filed an adversary complaint against Kevin
O’Donnell which was virtually identical to the state fraudulent conveyance action, and asserted that
Kevin O’Donnell’s discharge should be denied pursuant to 11 U.S.C. § 727(a)(2), (3), (5) and (7)
and that the debt owed by Kevin O’Donnell to Normali should be declared nondischargeable
pursuant to 11 U.S.C. § 523(a)(4) and (6). Normali also filed proofs of claim in the individual
bankruptcy case of each of the Debtors, asserting that the Debtors were individually liable on the
judgment obtained by Normali against the O’Donnell Corporations due to their fraudulent conduct
in transferring or causing the transfer of the assets of the corporations to the individual Debtors
and/or into trusts that were established for the benefit of the individual Debtors. Normali attached
to the proofs of claim a copy of the complaint filed against the individual Debtors and the family
trusts.
The Debtors filed objections in their individual cases to Normali’s proofs of claim, asserting
that Normali’s claims were not against the Debtors individually but were against the O’Donnell
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Corporations. The Debtors noted in their objections that since each of the O’Donnell Corporations
had filed its own chapter 7 petition, only the chapter 7 trustee for each of those estates had the right
to prosecute the claims against the individual Debtors for the alleged wrongful transfer of assets.
The bankruptcy court, after a hearing, sustained Debtors’ objections to Normali’s proofs of
claim, holding that Normali did not have standing to file a proof of claim to recover money
fraudulently transferred to the Debtors or their trusts by the O’Donnell Corporations, since any such
action belonged to the chapter 7 trustee serving for each of the O’Donnell Corporations. The
bankruptcy court opined at the hearing that perhaps Normali could pursue his claims against the
individual Debtors if he were to successfully move to have the individual Debtors’ cases
substantively consolidated with those of the O’Donnell Corporations. In a marginal order, the
bankruptcy court sustained the individual Debtors’ objections to Normali’s claims. The court
delayed the entry of judgment in the adversary proceeding to permit Normali to determine whether
he wished to file a motion for substantive consolidation. Nothing in the record indicates that a
motion was filed or that the adversary proceeding was disposed of by the bankruptcy court. The
disposition of the adversary proceeding, if any, is not part of this appeal.
Normali filed his timely notice of appeal in each Debtor’s case. The Panel entered an order
granting the parties’ joint motion to consolidate the appeals for briefing and submission. For the
first time on appeal, Normali argues that the Debtors do not have standing to object to his proofs of
claim.
IV. DISCUSSION
A. Does Appellant have Standing to File Proofs of Claim Against the Debtors?
This case turns on whether Normali has standing to file proofs of claim in the Debtors’ cases.
If not, the decision of the bankruptcy court should be affirmed and the other issues raised by
Normali are moot. A trial court, or any appellate court, may sua sponte deny any claim for lack of
standing of the party attempting to bring the claim. See, e.g., FW/PBS, Inc. v. City of Dallas, 493
U.S. 215, 231, 110 S. Ct. 596, 607 (1990) (holding that “[t]he federal courts are under an
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independent obligation to examine their own jurisdiction, and standing ‘is perhaps the most
important of [the jurisdictional] doctrines’”).
“Creditor” includes any “entity that has a claim against the debtor that arose at the time of
or before the order for relief concerning the debtor . . . .” 11 U.S.C. § 101(10)(A). A “claim,” is
a:
(A) right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured; or (B) right to an equitable remedy for breach of
performance if such breach gives rise to a right to payment, whether
or not such right to an equitable remedy is reduced to judgment,
fixed, contingent, matured, unmatured, disputed, undisputed, secured,
or unsecured;
11 U.S.C. § 101(5).
Pursuant to 11 U.S.C. § 501(a), any creditor of a debtor may file a proof of claim. Pursuant
to 11 U.S.C. § 502(a), “[a] claim . . . proof of which is filed under section 501 of this title, is deemed
allowed, unless a party in interest . . . objects.” The initial burden of stating a claim rests with the
claimants:
The burden of proof for claims brought in the bankruptcy court under
11 U.S.C.A. § 502(a) rests on different parties at different times.
Initially, the claimant must allege facts sufficient to support the
claim. If the averments in his filed claim meet this standard of
sufficiency, it is ‘prima facie’ valid. In other words, a claim that
alleges facts sufficient to support a legal liability to the claimant
satisfies the claimant’s initial obligation to go forward.
In re Allegheny Int’l, Inc., 954 F.2d 167, 173-74 (3d Cir. 1992). Only the statement of a prima facie
case invokes the presumptive validity of a proof of claim. Namer v. Sentinel Trust Co. (In re AVN
Corp.), 248 B.R. 540, 547 (Bankr. W.D. Tenn. 2000).
Normali is a creditor of and has a claim against the O’Donnell Corporations. Normali’s
complaint against the Debtors is an attempt to recover the assets of the O’Donnell Corporations to
enable him to collect his claim. The O’Donnell Corporations are currently debtors in bankruptcy,
and the trustee in each of the corporate bankruptcies has intervened as a party plaintiff and removed
Normali’s fraudulent transfer claim to the bankruptcy court. A creditor does not have standing to
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bring an action that belongs to the bankruptcy trustee. Honigman v. Comerica Bank (In re Van
Dresser Corp.), 128 F.3d 945, 947 (6th Cir. 1997); see also Whirlpool Corp. v. CIT Group/Business
Credit, Inc., 258 F. Supp. 2d 1140 (D. Haw. 2003) (providing a historical overview of the
development of the law in this area and citing Glenny v. Langdon, 98 U.S. 20, 25 L. Ed. 43 (1878)).
If the trustee in the O’Donnell Corporations’ bankruptcies is successful against the Debtors, he will
establish a claim against the Debtors for the value of assets fraudulently transferred to them. This
would benefit all of the creditors of the O’Donnell Corporations, including Normali.
As a result of the filing of the corporate bankruptcy cases, Normali no longer has standing
to pursue the recovery of the value of corporate assets for his sole benefit. A single creditor may
not maintain an action on its own behalf if that creditor shares an injury common to all creditors and
has been injured only in an incidental manner. Hall v. Sunshine Mining Co. (In re Sunshine
Precious Metals, Inc.), 157 B.R. 159, 163 (Bankr. D. Idaho 1993). Normali does not have an
individual right to payment and therefore no longer has a “claim” against the individual Debtors.
Therefore, the bankruptcy court below properly held that Normali did not have standing to
file a proof of claim in Appellees’ cases, and the bankruptcy court will be affirmed.
B. May the Appellant Raise the Issue of Standing for the First Time on Appeal?
Normali raises for the first time on appeal the issue of the Debtors’ standing to file objections
to his proofs of claim. The Sixth Circuit Court of Appeals has stated that “because lack of standing
is a jurisdictional bar, an appellate court may consider questions of standing sua sponte.” Bittel v.
Yamato Int’l Corp. (In re Bittel), No. 94-1396, 1995 WL 699672, at *2 (6th Cir. Nov. 27, 1995)
(citing Community First Bank v. Nat'l Credit Union Admin., 41 F.3d 1050, 1053 (6th Cir. 1994)
(holding that appellee's failure to cross appeal did not waive standing issue; “[s]tanding is not an
affirmative defense that must be raised at risk of forfeiture”); see also Bd. of County Comm'rs v.
W.H.I., Inc., 992 F.2d 1061, 1063 (10th Cir. 1993) (standing is a threshold issue that must be
resolved before the federal court acquires jurisdiction, and, therefore, standing may be raised at any
time). Even though it is raised for the first time in this appeal, the Panel may consider Normali’s
assertion that the Debtors lack standing to object to the proofs of claim.
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C. Do the Debtors Have Standing to Object to Appellant’s Proofs of Claim?
The Panel has already determined that Normali lacked standing to file proofs of claim in the
Debtors’ bankruptcy cases. Because standing is a jurisdictional issue that may be raised by the
Panel itself, the filing of an objection by the Debtors is not necessary to the Panel’s decision, and
was not necessary to the bankruptcy court’s decision. However, while not strictly necessary to the
Panel’s decision, the Panel will review the question of whether the Debtors had standing to object
to Normali’s proofs of claim. As noted above, 11 U.S.C. § 502(a) provides that a proof of claim is
deemed allowed “unless a party in interest . . . objects.” See also Fed. R. Bankr. P. 3008. The term
“party in interest” is not defined in the Code.
[Party in interest] has been described as ‘an expandable concept
depending on the particular factual context in which it is applied.’ In
re River Bend-Oxford Associates, 114 B.R. 111, 113 (Bankr. D. Md.
1990). In various contexts, a ‘party in interest’ has been held to be
one who has an actual pecuniary interest in the case, Kapp v.
Naturelle, Inc., 611 F.2d 703, 706 (8th Cir. 1979); anyone who has
a practical stake in the outcome of a case, In re Amatex Corporation,
755 F.2d 1034, 1041-44 (3rd Cir. 1985); and those who will be
impacted in any significant way in the case, In re Johns-Manville
Corp., 36 B.R. 743, 754 (Bankr. S.D.N.Y. 1984).
Morton v. Morton (In re Morton), 298 B.R. 301, 307 (B.A.P. 6th Cir. 2003) (citing In re Cowan, 235
B.R. 912, 915 (Bankr. W.D. Mo. 1999)). A party in interest includes those persons with a personal
stake or pecuniary interest in the outcome of the controversy. In most cases, only a chapter 7 trustee
may file objections to proofs of claim. United States v. Jones, 260 B.R. 415, 418 (E.D. Mich. 2000).
A debtor generally lacks standing to object to a proof of claim. Kapp v. Naturelle, Inc., 611 F.2d
703 (8th Cir. 1979); Woodmar Realty Co. v. McLean (In re Woodmar Realty Co.), 241 F.2d 768 (7th
Cir. 1957); Gregg Grain Co. v. Walker Grain Co., 285 F. 156 (5th Cir. 1922); Caserta v. Tobin, 175
B.R. 773 (S.D. Fla. 1994); Silverman v. Leucadia, Inc. (In re Silverman), 37 B.R. 200 (S.D.N.Y.
1982); In re Creditors Serv. Corp., 206 B.R. 174 (Bankr. S.D. Ohio 1997); In re Woods, 139 B.R.
876 (Bankr. E.D. Tenn. 1992).
There are two exceptions to the general rule that the chapter 7 debtor lacks standing to object
to proofs of claim, however. A chapter 7 debtor may file an objection to a proof of claim: (1) where
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assets are more than sufficient to pay all administrative expenses and creditors in full; or (2) where
the claim involved may not be discharged. Willard v. O’Neil (In re Willard), 240 B.R. 664 (Bankr.
D. Conn. 1999) (citations omitted). Where a judgment debt may never be discharged pursuant to
11 U.S.C. § 523, the debtor has a direct pecuniary interest in the outcome of the action, and thus has
standing to object to the claim. Id. In Kevin O’Donnell’s case, Normali’s complaint objected to
Kevin O’Donnell’s discharge and objected to the dischargeability of the debt owed to him. Success
on the complaint is necessary to the establishment of Normali’s (now the trustee’s) claim. The proof
of claim entails the possibility of personal liability for Kevin O’Donnell. Thus Kevin O’Donnell
has standing to object to the proof of claim. In Neil O’Donnell’s case, Normali has not filed a
complaint objecting to discharge or the nondischargeability of the particular debt, only because he
received an extension of time to file a complaint pending the outcome of the Debtors’ objections to
his claim. Therefore, the proof of claim filed in Neil O’Donnell’s case also entails the possibility
of personal liability. Neil O’Donnell has standing to object to the proof of claim.
Normali responds that there is a possibility that the corporate estates may be solvent if
fraudulent transfers are recovered and some claims are not allowed. Therefore, Normali argues that
Neil O’Donnell and Kevin O’Donnell may not be liable on the claims because the estates may be
able to pay the claims. This argument ignores the fact that the complaint against the Debtors is a
complaint for the recovery of the very assets that may make the corporate estates solvent. It seeks
to recover assets presently in the hands of the Debtors as transferees of fraudulent transfers. The
determination of whether the individual Debtors have standing to object to the proofs of claim filed
by Normali turns on whether the claims may subject the Debtors to personal liability. Clearly they
may, and the Debtors thus have standing to object.
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V. CONCLUSION
Because the claims he seeks to assert belong to the bankruptcy estates of the O’Donnell
Corporations, the Panel concludes that Normali lacks standing to file proofs of claim in the
individual Debtors’ cases. The decision of the bankruptcy court is AFFIRMED.
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