Court Opinion

ID: 3037071
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:55:36.86344+00
Date Added: 2024-06-11T11:48:44.529193
License: Public Domain

United States Bankruptcy Appellate Panel
                             FOR THE EIGHTH CIRCUIT

                                      ________

                                     04-6059EM
                                      ________

In re:                                    *
                                          *
Louise M. Litzinger,                      *
                                          *
         Debtor.                          *
                                          *
Louise M. Litzinger,                      *
                                          *        Appeal from the United States
         Debtor-Appellant,                *        Bankruptcy Court for the
                                          *        Eastern District of Missouri
              v.                          *
                                          *
The Estate of Victor Litzinger,           *
                                          *
         Claimant-Appellee.               *

                                      ________

                             Submitted: February 8, 2005
                   Filed: March 15, 2005 (Corrected March 25, 2005)
                                      ________

Before KRESSEL, Chief Judge, DREHER, and MAHONEY, Bankruptcy Judges.
                               ________

DREHER, Bankruptcy Judge.

      This is an appeal from an order of the bankruptcy court allowing a claim by
The Estate of Victor Litzinger in the amount of $130,553.38. In allowing the claim
the bankruptcy court held that debtor had participated in the conversion of at least
that amount of probate estate assets. We remand with instructions to the bankruptcy
court to address a jurisdictional issue which was never raised or briefed before the
bankruptcy court or this Bankruptcy Appellate Panel.

                           BACKGROUND AND FACTS

       Victor Litzinger (Victor) had two heirs, his nephews Guy Litzinger (Guy) and
Warren Rosenfelder (Warren). Debtor, Louise Litzinger (Louise), was Guy's wife.
Victor was an elderly man when, on July 7, 1997, he signed a durable power of
attorney naming Guy his attorney-in-fact. The power of attorney gave Guy full
authority, in his sole discretion, to deal with Victor's assets without limitation, except
those imposed by statute. Only a few months later, on October 16, 1997, Victor
executed a Last and Will and Testament which named Guy as Personal
Representative of Victor's estate. After making a few special bequests, the will left
all assets which Victor owned at the time of his death to Guy and Warren equally.

       Using Victor's assets, on March 19, 1998, Guy opened a brokerage account
(Victor/Guy account) at a brokerage company where Guy and Louise also had a joint
account (Guy/Louise account). No one could find any documents evidencing the
opening of this account. Guy did sign a Substitute W-9 which indicated that the
account was opened as a joint account and the evidence showed that the brokerage
company considered the account a joint account with right of survivorship. The
parties further stipulated that Victor signed no document in connection with the
opening of the Victor/Guy account.

       Between July 1997 and Victor's death, Guy paid all of Victor's living expenses
out of a separate checking account which Victor owned. No draws were made on the
Victor/Guy account between the time it was opened and Victor's death.

                                           -2-
       On January 7, 2000, Victor died. Shortly thereafter, on February 9, 2000, Guy
signed a Letter of Authorization closing the Victor/Guy account. Pursuant to
instructions from Guy, the assets in the Victor/Guy account, valued on January 1,
2000, at $219,392.86, were transferred to the Guy/Louise account. Immediately prior
to the transfer, the Guy/Louise Account had a balance of $51,367.83. The only
evidence of Louise's complicity in this transfer was the testimony of both Guy and
Louise that, at Guy's direction, she called the broker to find out what steps needed to
be taken to effect a transfer and then conveyed that information to Guy. Guy was the
only person legally authorized to effect the transfer. Louise testified she thought the
transfer was perfectly proper because Victor wanted Guy to receive the account and
Warren to receive his real estate.

       In March 2000 Guy, as Personal Representative of Victor's estate, opened
Victor's probate estate in Michigan. On November 6, 2001, Guy filed an inventory
in the Michigan probate proceedings which listed a parcel of real estate in Michigan
and the Guy/Louise Account as Victor's only assets. This is apparently the first and
only time until the claim was filed in this case that Guy took the position that the
money in the Guy/Louise account was an asset of Victor's estate. On March 14, 2003,
Guy resigned as Personal Representative of the probate estate and Warren was
substituted in his place. The record does not indicate whether there has been any
other activity in the Michigan probate proceeding.

       During 2000, Guy and Louise withdrew $121,616.35 from the Guy/Louise
Account for payment of their own living expenses. In an action which apparently
sparked Guy's ire, Louise herself withdrew $40,000 of that sum from the account
shortly before she filed for divorce on December 29, 2000.

       Louise testified that she believed they were entitled to the money upon Victor's
death. While Guy's current position is that the Guy/Louise account belongs to the
estate, he took multiple actions which demonstrated otherwise. For example, Guy

                                          -3-
and Louise filed joint income tax returns for 2000 and 2001 in which they claimed
the gains on the Guy/Louise account as theirs and paid taxes on them. Guy filed his
own separate tax returns for 2002 and 2003, claiming once again that the earnings on
the Guy/Louise account were his, and he paid taxes on them. Meanwhile, on January
6, 2003, Dorothy Litzinger, Guy's mother, obtained a judgment against Guy and
Louise for $160,625.00 she claimed they both owed her. On February 28, 2003,
Dorothy garnished the Guy/Louise account and obtained $90,553.38. Guy, who was
still the Personal Representative of Victor's estate at that time, took no steps on behalf
of Victor's estate to object to the garnishment. He testified that he failed to do so
because he thought he and Louise owed his mother the money. Shortly thereafter,
Guy resigned as Personal Representative and Warren was appointed in his place.

       On August 13, 2003, Louise filed for Chapter 7 relief under the Bankruptcy
Code. On December 2, 2003, Guy, on behalf of the estate, filed a proof of claim
asserting that the estate was owed $130,553.38 ($40,000 for the amount taken by
Louise from the Guy/Louise account on the day she filed for divorce and $90,553.38
taken by the garnishment). The parties later agreed that, while the claim should have
been filed by Warren, this would not be considered a cause for objection to the claim.
The estate's theory was that the transfer of funds from the Victor/Guy account to the
Guy/Louise account was a conversion of the probate estate's property. The estate
asserted that Louise was culpable because she knowingly participated in the
conversion and took the benefit of the funds.

      After trial, the bankruptcy court allowed the estate’s claim. First, the
bankruptcy court noted that the parties had agreed that Missouri law applied to the
question of whether there had been a conversion and itself agreed that such was the
applicable law based on the quantity and quality of contacts with the State of
Missouri. The bankruptcy court went on to hold that under Missouri law conversion
consists in the wrongful unauthorized assumption of the right of ownership over
personal property of another, that the money in the Victor/Guy account was subject

                                           -4-
to a fiduciary duty on Guy’s part not to use it as his own, that Louise knew of the
durable power of attorney and that Guy was not authorized to use the money as his
own, and that when Guy transferred the funds from the Victor/Guy account to the
Guy/Louise account both Guy and Louise wrongfully assumed ownership of the
account. The bankruptcy court held Louise liable for conversion because she assisted
Guy in the conversion of the account and used the funds as her own. The bankruptcy
court rejected Louise’s argument that Guy’s filing of the claim on behalf of the
probate estate was a wrongful attempt to keep the money out of the divorce
proceedings which are still pending. The bankruptcy court further rejected the
argument that Guy’s actions had been inconsistent with his current claim that the
Victor/Guy account was property of Victor’s estate and he was estopped from making
that claim now. While in final argument at the conclusion of the evidence the parties
discussed Missouri law regarding who owned the Victor/Guy account when it was
transferred to the Guy/Louise account, no one raised the effect of Missouri or
Michigan probate law on the ownership issue and everyone assumed that the
bankruptcy court had subject matter jurisdiction of the dispute.

                                     DECISION

A.    STANDARD OF REVIEW

       "The question of subject matter jurisdiction is subject to de novo review. When
subject matter jurisdiction is at issue, we are required to reach the jurisdictional
question before turning to the merits." United Taconite, LLC. v. Minnesota Dept. of
Rev. (In re Eveleth Mines, LLC), 318 B.R. 682, 686 (B.A.P. 8th Cir. 2004)(citing
Hoffman v. Bullmore (In re Nat'l Warranty Insurance Risk Retention Group), 384
F.3d 959, 962 (8th Cir. 2004). Even though the parties did not specifically raise a
jurisdictional issue, as with all appellate courts, we have an obligation to examine our
own jurisdiction. Vincent v. Fairbanks Capital Corp. (In re Vincent), 301 B.R. 734,
736-37 (B.A.P. 8th Cir. 2003)(citing Lewis v. United States, 992 F.2d 767, 771 (8th

                                          -5-
Cir. 1993)). Similarly, the trial court had an obligation to examine its own
jurisdiction even though no party raised it. Id.

       This Court reviews the bankruptcy court’s conclusions of law de novo and its
findings of fact for clear error. Tax 58 v. Froehle (In re Froehle), 286 B.R. 94, 96
(B.A.P. 8th Cir. 2002). “A finding [of fact] is ‘clearly erroneous’ when although
there is evidence to support it, the reviewing court on the entire evidence is left with
the definite and firm conviction that a mistake has been committed.” Waterman v.
Ditto (In re Waterman), 248 B.R. 567, 570 (B.A.P. 8th Cir. 2000)(citing Anderson v.
City of Bessemer City, 470 U.S. 564, 573 (1985)).

B.    THE ISSUES RAISED ON APPEAL

       Louise raises three issues on appeal. First, she argues there was inadequate
evidence to support the finding that she participated in the conversion. Second, she
argues that, because the probate estate was making a claim for money owed, a general
debt arising out of her $40,000 withdrawal and the $90,553.38 garnishment, it was
required to trace the commingled assets. Third, she argues that Guy was estopped
from arguing that the Guy/Louise account was an asset of Victor's estate because he
took numerous steps which evidenced his belief that the account belonged to him,
including failing to object on behalf of the probate estate when his mother garnished
the account to pay his personal obligation to her. In response, the estate argues that
the bankruptcy court was not clearly erroneous in finding that Louise participated in
the conversion; that under Missouri Revised Statute section 473.340 if money is
placed in trust and wrongfully transferred there is no need to trace; and that Victor's
self interested and wrongful actions cannot be attributed to the estate for estoppel
purposes.

                                          -6-
C.    THE JURISDICTIONAL ISSUE

       We think these arguments miss the mark. The important question is whether
resolution of this dispute lies exclusively within the jurisdiction of the Michigan
probate court. This jurisdictional question was not raised by the parties or considered
by the bankruptcy court. Since the issue of ownership of the Victor/Guy account was
the centerpiece of resolving this claim dispute, we think the bankruptcy court must
first determine its own jurisdiction before the bankruptcy court resolves the claim
dispute. We have reached this conclusion based upon the following discussion of the
law.

      1.     CONVERSION

      Conversion is the "unauthorized assumption of the right of ownership over the
personal property of another to the exclusion of the owner's rights." Mertz v.
Blockbuster, Inc., 32 S.W.3d 130, 133 (Mo. App. 2000)(quoting Colton, McMichael,
Lester, Auman, Visnovske, Inc. v. Mueller, 896 S.W.2d 741, 742 (Mo. App. 1995)).
Under Missouri law, which we will assume applies for purposes of determining
whether a conversion occurred, conversion can occur in one of three ways:

      1) by tortious taking; 2) by any use or appropriation to the use of the
      person in possession, indicating a claim of right in opposition to [the]
      owner's rights; or 3) by refusal to give up possession to the owner on
      demand, even though the defendant's original possession of the property
      was proper.

Walker v. Henke, 992 S.W.2d 925, 930 (Mo. App. 1999)(quoting Collins v.
Trammell, 911 S.W.2d 635, 637 (Mo. App. 1995)). All three types of conversion
require proof that the property alleged to have been converted was owned by
someone other than the alleged converter because you cannot steal from yourself.
Here, the question of who owned the Guy/Victor account on the date of the alleged

                                          -7-
conversion when that account was rolled into the Guy/Louise account was an
essential element of the bankruptcy court's findings, but one that the bankruptcy court
may have been without jurisdiction to make.

      2.     THE DURABLE POWER OF ATTORNEY

      The durable power of attorney, as the bankruptcy court seemed to have
concluded, did not allow Guy to take Victor's funds and make them his own before
Victor's death. If Missouri law applies, the duties of attorney in fact are set forth in
Missouri Revised Statute section 404.714, which states, in part, that:

      An attorney in fact who elects to act under a power of attorney is under
      a duty to act in the interest of the principal and to avoid conflicts of
      interest that impair the ability of the attorney in fact so to act. A person
      who is appointed an attorney in fact under a power of attorney, either
      durable or not durable, who undertakes to exercise the authority
      conferred in the power of attorney, has a fiduciary obligation to exercise
      the powers conferred in the best interests of the principal, and to avoid
      self-dealing and conflicts of interest, as in the case of a trustee with
      respect to the trustee's beneficiary or beneficiaries; and in the absence
      of explicit authorization, the attorney in fact shall exercise a high degree
      of care in maintaining, without modification, any estate plan which the
      principal may have in place, including, but not limited to, arrangements
      made by the principal for disposition of assets at death through
      beneficiary designations, ownership by joint tenancy or tenancy by the
      entirety, trust arrangements or by will or codicil.

MO. REV. STAT. § 404.714. This statute prohibited Guy from commingling the
accounts or making a gift to himself. See In re the Estate of Herbert, 2004 WL
2282143 (Mo. App. 2004)(unpublished). Further, section 404.710.6(3) requires that
written authorization would have been required by Victor prior to Guy making any
gift to himself. See Id. at *12.

                                          -8-
       If Michigan law applies the result would be the same. Under Michigan law,
the grant of a power of attorney "forms a fiduciary relationship between the grantor
and grantee." Kegerreis v. Smit (In re Harrington), 2000 WL 33421289 *3 (Mich.
App. 2000)(unpublished)(citing In re Conant Estate, 343 N.W.2d 593, 595 (Mich.
1984)). A fiduciary is precluded from creating a joint account, without the express
consent of the grantor, because "[a] fiduciary in his personal capacity shall not
personally derive any profit from the purchase, sale, or transfer of any property of the
estate." MICH. STAT. ANN. § 561(1)(1999); see also Harrington, 2000 WL 33421289
*3 (holding that § 561(1) fiduciary duties apply to an attorney-in-fact).

       Thus, the bankruptcy court’s assumption that the funds in the Victor/Guy
account were Victor’s property on the date of his death, in spite of Guy's transfer of
Victor's assets into a joint account using the durable power of attorney, was correct.
Guy had no right to transfer Victor's money to himself or into a joint account with
right of survivorship prior to Victor's death. The transfer to the Victor/Guy account
was a breach of fiduciary duty and void. The real issue, however, is whether
ownership devolved to Guy and Warren on the date of death so that Guy was free to
pass that interest to Louise by depositing the proceeds into the Guy/Louise joint
account.

      3.     MICHIGAN AND MISSOURI PROBATE LAW

      It appears from our initial analysis that in both Michigan and Missouri, the
beneficiaries under a will become the owner of the property bequeathed to them on
the date of the decedent's death.1

      1
       The Michigan probate code was revised effective April 1, 2000, after the
date of Victor's death. The revised act, however, is applicable "to a proceeding in
court pending on that date or commenced after that date regardless of the time of
the decedent's death" unless the court decides that "former procedure should be
made applicable in a particular case in the interest of justice or because of the
                                          -9-
Pursuant to Michigan law:

      An individual's power to leave property by will, and the rights of
      creditors, devisees, and heirs to his or her property, are subject to the
      restrictions and limitations contained in this act to facilitate the prompt
      settlement of estates. Upon an individual's death, the decedent's property
      devolves to the persons to whom the property is devised by the
      decedent's last will or to those indicated as substitutes for them in cases
      involving lapse, disclaimer, or other circumstances affecting devolution
      of a testate estate, or in the absence of testamentary disposition, to the
      decedent's heirs or to those indicated as substitutes for them in cases
      involving disclaimer or other circumstances affecting devolution of an
      intestate estate, subject to homestead allowance, family allowance, and
      exempt property, to rights of creditors, to the surviving spouse's elective
      share, and to administration.

MICH. COMP. LAWS § 700.3101(2002).

        While the personal representative is entitled to exercise the "same power over
the title to estate property that an absolute owner would have, in trust, however, for
the benefit of creditors or others interested in the estate," MICH. COMP. LAWS §
700.3711, "tangible personal property may be left with or surrendered to the person
presumptively entitled to that property unless or until, in the personal representative's
judgment, possession of the property will be necessary for purposes of
administration." MICH. COMP. LAWS § 700.3709. If the bankruptcy court lacks
jurisdiction, however, all of these issues should be left to the Michigan probate court
to unwind and should not involve the bankruptcy court until the probate estate is
administered.2

infeasibility of applying this act's procedure." MICH. COMP. LAWS §
700.8101(2)(b).
      2
        We should also note that Guy, not Louise, was responsible to the estate on
Victor's death with settling and distributing assets of the estate and that Guy was
liable to the estate for any losses suffered. "The personal representative is a
                                          -10-
      Missouri law is comparable. Pursuant to Missouri Revised Statute section
473.260 entitled "Devolution of Estate at Death," Guy and Warren became the legal
owners of all of Victor's property on the date of his death, except for any special
bequests made in the will that are not at issue in this case. The section states:

      When a person dies, his real and personal property, except exempt
      property, passes to the persons to whom it is devised by his last will, or,
      in the absence of such disposition, to the persons who succeed to his
      estate as his heirs; but it is subject to the possession of the executor or
      administrator and to the election of the surviving spouse and is
      chargeable with the expenses of administering the estate, the payment
      of other claims and allowances to the family, except as otherwise
      provided in this law.

MO. REV. ST. § 473.260. Thus, under Missouri law, if it applies, at the time that Guy
transferred the property from his joint account with Victor to his joint account with
Louise, he may have been the legal owner of the asset, subject to Warren's interest
and to payment of the expenses of administration of the estate. See State v. Cox, 784
S.W.2d 244, 245 (Mo. Ct. App. 1989) (stating that, according to § 473.260, title to
property passes to the beneficiaries of a will at the testator's death); Basler v.
Delassus, 690 S.W.2d 791, 795 (Mo. 1985) (stating that § 473.260 does not
distinguish between real and personal property). In addition, under section 473.260
Guy, as the executor of the estate, also had a right of possession to the property.

fiduciary of the estate who is charged with settling and distributing the estate. The
personal representative must use his authority in the best interest of the estate and
in the interests of the parties." McTaggart v. Lindsey, 509 N.W.2d 881, 884 (Mich.
App. 1993)(citing Steinway v. Bolden, 460 N.W.2d 306 (1990)). "A fiduciary is
liable for a loss to an estate that arises from embezzlement by the fiduciary [or] for
a loss through commingling estate money with the fiduciary's money[.]" MICH.
COMP. LAWS § 700.1308. (same under the prior statute MICH. COMP. LAWS
700.544(1999)).
                                         -11-
      Thus, in applying either Michigan or Missouri law, in our reading of the law,
Guy was the likely owner of the Guy/Victor account, along with Warren, upon
Victor's death, subject to specific requests and claims of administration. But, because
ownership of the account was a cornerstone of the bankruptcy claims resolution
process and of the probate administration process, the bankruptcy court must first
determine if it had jurisdiction to determine that the estate had any interest in the
property.

      4.     THE PROBATE EXCEPTION TO BANKRUPTCY COURT JURISDICTION

       The parties agree that the bankruptcy court had jurisdiction over the allowance
or disallowance of claims against the estate. 28 U.S.C. § 157(b)(2)(B). The claim
objection, however, raised an issue that relates to the settlement of the estate of a
deceased person. In Michigan, probate courts have exclusive jurisdiction, including
but not limited to the following proceedings:

      (a) Matters relating to the settlement of the estate of a deceased person,
      whether testate or intestate, who was at the time of death domiciled in
      the county or was at the time of death domiciled out of state leaving an
      estate within the county to be administered, including, but not limited to,
      the following proceedings:
      (i) The internal affairs of the estate.
      (ii) Estate administration, settlement, and distribution.
      (iii) Declaration of rights involving estates, devisees, heirs, and
      fiduciaries.
      (iv) The construction of a will.
      (v) The determination of heirs.

MICH. COMP. LAWS § 700.21(1999)3

      3
       We assume that jurisdiction is determined as of the date of death, however,
the revised statute, MICH. COMP. LAWS § 700.1302(2002), is essentially the same.
                                         -12-
      A federal court may:

      entertain suits in favor of creditors, legatees and heirs and other
      claimants against a decedent's estate to establish their claims so long as
      the federal court does not interfere with the probate proceedings or
      assume general jurisdiction of the probate or control of the property in
      custody of the state court.

Markham v. Allen, 326 U.S. 490, 494 (1946) (internal quotation marks omitted).
A two-part inquiry has been used by the Second Circuit to determine whether a
particular lawsuit implicates "probate matters." Moser v. Pollin, 294 F.3d 335, 340
(2nd Cir. 2002). “An affirmative answer to either prong requires that the case be
dismissed from federal court for lack of subject matter jurisdiction.” Id. First, is the
bankruptcy court being asked to directly probate a will or administer an estate?
Second, does entertaining the action cause the bankruptcy court to "’interfere with the
probate proceedings or assume general jurisdiction of the probate or control of
property in the custody of the state court." Id. (citation omitted). The Second Circuit
held that the "interference prong" was in practice “the workhorse of the probate
exception” and determined that an impermissible interference may arise in one of
three ways: if, by adjudicating the complaint, the federal district court (1) "interferes
with the probate proceedings;" (2) "assumes general jurisdiction of the probate;" or
(3) asserts "control of property in the custody of the state court." Id. (quoting
Markham, 326 U.S. at 494; and citing 13B CHARLES ALAN WRIGHT, ARTHUR R.
MILLER & EDWARD H. COOPER, FEDERAL PRACTICE & PROCEDURE § 3610 (2d ed.
1984)).

        The decision of the bankruptcy court may have done all three although, at least
initially, that is for the bankruptcy court to decide. We are concerned that the
bankruptcy court confirmed the statement of inventory filed by Guy and in effect
resolved to distribute the account assets already taken by Guy, back to Guy via

                                          -13-
Louise's bankruptcy estate. But, had the bankruptcy court ruled otherwise and
sustained the objection to the claim, the bankruptcy could have effectively removed
the asset from the probate estate. Louise would have been declared to have no
liability to the probate estate for taking an asset which may belong to the probate
estate. Moreover, were we to reverse the bankruptcy court's decision, we would, in
effect, determine that the estate had no ownership interest in the asset at Victor's
death.

       Victor apparently owned two assets on the date of his death; the money in the
Victor/Guy joint account and real property located in Michigan. The record suggests
that Louise believed that the estate would be divided in just that fashion. Guy would
receive the money in the account, Warren would receive the property. Depending
upon the value of the real estate and the expenses of administration, that may have
been a reasonable assumption. Several scenarios may arise if the Michigan probate
court has exclusive jurisdiction. The probate court could decide that Guy has already
received his distribution from the estate when he transferred Victor's money into the
Guy/Louise joint account. Warren would then receive an equivalent value from the
sale of the Michigan real property, and the sale proceeds may be adequate to pay all
the administrative expenses. As a result, the estate may be settled without the
necessity to recover anything from either Guy or from Louise's bankruptcy estate.
Our concern is that the bankruptcy court’s decision to allow Victor's estate to recover
anything from Louise may impact the distribution of property of the estate by
preemptorily denying the probate court the opportunity to decide that Guy has already
received his distribution. Pursuant to Michigan law, section 700.21(a)(ii), it seems
that only the probate court has jurisdiction over the settlement and distribution over
the property of the decedent.

                                         -14-
                                   CONCLUSION

              If the bankruptcy court decides it is without jurisdiction, it cannot
determine the validity or amount of the claim until the estate is settled and the
distribution determined by the probate court. Accordingly, we remand to the
bankruptcy court with instructions that it vacate its order allowing the claim and that
it consider the extent of its own jurisdiction.
                        ______________________________

MAHONEY, Bankruptcy Judge, concurring

       I concur in the result only. I agree that a determination of the bankruptcy
court’s subject matter jurisdiction needs to be made by the bankruptcy judge prior to
any determination with regard to allegations of conversion. However, I do not see
either the wisdom or the necessity for an appellate court to advise the trial court
concerning the law of Michigan or Missouri on the issue of subject matter
jurisdiction. If this case comes before us on another appeal, we will certainly have
the opportunity to discuss our understanding of Michigan and Missouri law at that
time.

                                         -15-