Opinion ID: 703932
Heading Depth: 1
Heading Rank: 3

Heading: Issues Relating to Reeves Farms, Inc.

Text: 18 Reeves Farms, Inc. (RFI), is a family corporation formed by Elmer Reeves in 1970, principally for estate planning purposes. At the time in question, Marlin was RFI's president. Its shares are equally owned by Marlin, his mother Ella, and his two sisters. Marlin's twenty-five percent interest is an asset of his bankruptcy estate. In the third action, the trustee seeks to compel the liquidation of RFI in order to realize the estate's twenty-five percent interest, and also seeks to recover $65,000 of the Fuchs Note proceeds that Marlin passed through an RFI bank account on its way to other transferees. The district court concluded that the bankruptcy court lacked jurisdiction to compel RFI's liquidation but that RFI must turn over the $65,000. We disagree with both decisions. 19 A. Involuntary Liquidation. Under Arkansas law, a shareholder may sue to liquidate the assets of a corporation on the ground that the acts of the directors or those in control of the corporation are illegal, oppressive, or fraudulent. Ark.Stat.Ann. Sec. 4-26-1108(a)(1)(B). The trustee, for the estate as shareholder, sues to liquidate RFI because (i) it was a party to various fraudulent conveyances on behalf of Marlin, a controlling director; (ii) management and other shareholders of RFI have discriminated against the estate as a minority shareholder, for example, by failing to notify the trustee of corporate meetings; and (iii) Reeves Farms, Inc. has failed to pay the Trustee any money [but] has retained earnings of $91,978.96 and total equity in the amount of $111,534.70. 20 The bankruptcy court and the district court have jurisdiction over any action that is related to Marlin's Chapter 7 proceeding. See 28 U.S.C. Secs. 157(c)(1), 334(b). An action is related to the bankruptcy case if it affects the amount of property available for distribution or the allocation of property among creditors. Matter of Xonics, Inc., 813 F.2d 127, 131 (7th Cir.1987). See also Celotex, Corp. v. Edwards, --- U.S. ----, ---- - ----, 115 S.Ct. 1493, 1498-1500, 131 L.Ed.2d 403 (1995); Specialty Mills, Inc. v. Citizens State Bank, 51 F.3d 770, 774 (8th Cir.1995) (An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action [and] in any way impacts upon the handling and administration of the bankrupt estate); Abramowitz v. Palmer, 999 F.2d 1274, 1277-78 (8th Cir.1993). We conclude that the trustee's action to liquidate a close corporation in order to realize the value of the estate's shares is related to the underlying bankruptcy. The bankruptcy court has jurisdiction over this claim. 21 Though it has jurisdiction over this noncore proceeding, the district court may abstain in the interest of comity with State courts or respect for State law. 28 U.S.C. Sec. 1334(c)(1). In enacting this specific abstention provision, Congress wisely chose a broad jurisdictional grant and a broad abstention doctrine over a narrower jurisdictional grant so that the district court could determine in each individual case whether hearing it would promote or impair efficient and fair adjudication of bankruptcy cases. In re Salem Mtg. Co., 783 F.2d 626, 635 (6th Cir.1986). 22 Here, the possibility of realizing the estate's twenty-five percent interest in RFI through liquidation supports federal jurisdiction. It does not, however, entitle the trustee to liquidation as a matter of federal law. The trustee's right to involuntary liquidation is a matter of state law, and he stands in the shoes of an ordinary shareholder. An Arkansas court may well be the best forum to determine whether the corporation has been mismanaged or minority shareholders abused and, if so, whether the extraordinary remedy of involuntary liquidation is appropriate. This is an issue committed to the discretion of the district court. It necessitates a remand. 23 B. The Fuchs Note Proceeds. Marlin's attorney initially received Marlin's share of the Fuchs Note settlement. Marlin instructed the attorney to deliver to Marlin a check for $65,000 payable to Reeves Farms, Inc. Apparently without the knowledge or approval of any other director, shareholder, or officer of RFI, Marlin opened a bank account in RFI's name at a remote bank, forging the necessary corporate approvals. He then deposited the $65,000 check in that account and later disbursed these funds to other entities he controlled (primarily RTI). The trustee seeks to recover that $65,000 from RFI. 24 Section 550(a)(2) of the Code provides that the estate may recover property transferred in an avoided transfer from the initial transferee of such transfer or the entity for whose benefit such transfer was made. Because Marlin's transfer of the $65,000 was avoidable, the bankruptcy court held RFI liable to turn over these funds as the initial transferee. The district court affirmed, noting that Marlin's attorney also represented Elmer and Ella in settling the Fuchs Note litigation and therefore they had constructive knowledge of this transfer. On appeal, RFI argues that it is not liable as a transferee under Sec. 550(a)(2). We agree. 25 There is no finding that RFI received any benefit from the $65,000, so the question is whether RFI is an initial transferee for purposes of Sec. 550(a)(2). At least seven other circuits have held that, to be an initial transferee, a party must have dominion and control over the transferred funds. See In re First Sec. Mtg. Co., 33 F.3d 42 (10th Cir.1994); In re Coutee, 984 F.2d 138, 140-41 (5th Cir.1993), and cases cited. We approve of this standard, which neither the bankruptcy court nor the district court applied. 26 Marlin deposited the $65,000 into a new RFI bank account that he concealed well into his bankruptcy. 3 The trustee argues that Marlin had real and apparent authority to act on behalf of RFI and used the corporation as a willing straw man to conceal property from his creditors. However, the trustee cites no authority for the proposition that Marlin's fraudulent misuse of a corporate account for his own benefit makes RFI an initial transferee of the $65,000. While the doctrine of apparent authority would protect a third party that relied on Marlin's apparent power to act for the corporation, it does not convert every unauthorized act by a corporate officer into an act of the corporation. The trustee has ignored the governing dominion and control standard, and we cannot discern from his rather unintelligible recitation of the facts surrounding RFI any basis for concluding that RFI, as opposed to Marlin, ever had dominion and control over the $65,000. And the fact that Marlin's attorney also obtained a power of attorney from Elmer and Ella to settle the Fuchs Note litigation is irrelevant to this issue, since there is no evidence that Marlin's parents controlled RFI or that the attorney dealt with RFI on their behalf. 27 The bankruptcy court and the district court failed to apply the proper dominion or control standard. On this record, we cannot conclude as a matter of law that Marlin's fraudulent use of RFI as a conduit for this portion of the settlement proceeds made the corporation the initial transferee of the $65,000. Of course, to the extent that RFI was a mere conduit for an avoidable transfer of the settlement proceeds to RTI, that corporation becomes the initial transferee for purposes of Sec. 550(a)(2), an issue the bankruptcy court may take up on remand.