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In re McKenzie

United States Court of Appeals, Sixth Circuit

December 17, 2013

In re: Steve A. McKenzie, Debtor.
v.
C. Kenneth Still, Appellee. Grant, Konvalinka & Harrison, P.C., Appellant,

Argued: October 8, 2013

Appeal from the United States District Court for the Eastern District of Tennessee at Chattanooga. Nos: 1:11-cv-00192; 1:11-cv-00274; 1:12-cv-00025. Curtis L. Collier, Chief District Judge.

ARGUED:

Harry R. Cash, GRANT, KONVALINKA & HARRISON, P.C., Chattanooga, Tennessee, for Appellant.

Jerrold D. Farinash, KENNEDY, KOONTZ & FARINASH, Chattanooga, Tennessee, for Appellee.

ON BRIEF:

Harry R. Cash, John P. Konvalinka, GRANT, KONVALINKA & HARRISON, P.C., Chattanooga, Tennessee, for Appellant.

Jerrold D. Farinash, KENNEDY, KOONTZ & FARINASH, Chattanooga, Tennessee, for Appellee.

Before: BOGGS, CLAY, and GILMAN, Circuit Judges.

OPINION

RONALD LEE GILMAN, Circuit Judge

Grant, Konvalinka & Harrison, P.C. (GKH), a Tennessee-based law firm, seeks relief from the automatic stay of adversary proceedings resulting from the bankruptcy of one of its former clients, Steve A. McKenzie. GKH contends that it is entitled to an equity interest in certain assets that McKenzie pledged to the firm shortly before he was placed into bankruptcy. The bankruptcy trustee, C. Kenneth Still (Trustee), opposes GKH's motion for relief from the automatic stay on the basis that the pledges constitute preferential transfers.

After conducting multiple hearings on the matter, the bankruptcy court issued orders denying in part GKH's motion for relief from the stay. The district court affirmed. For the reasons set forth below, we AFFIRM the judgment of the district court. In the course of doing so, we resolve the following two issues of first impression in the Sixth Circuit: (1) which party bears the burden of establishing the validity of a creditor's security interest in the debtor's property, and (2) whether a trustee may use his hypothetical lien-creditor status and avoidance powers to oppose a motion for relief from the automatic stay after the expiration of the two-year statutory limitation on avoidance actions under 11 U.S.C. § 546(a)(1)(A).

I. BACKGROUND

A. Factual background

McKenzie was a prominent entrepreneur in Cleveland, Tennessee. A group of McKenzie's creditors filed an involuntary bankruptcy petition against him under Chapter 7 of the Bankruptcy Code in November 2008. When McKenzie filed a voluntary Chapter 11 petition the following month, the bankruptcy cases were consolidated. The bankruptcy court approved the appointment of a Chapter 11 trustee in February 2009, and the case was converted to a Chapter 7 bankruptcy in June 2010.

A flurry of lawsuits between GKH and the Trustee followed. Indeed, this is not the first appeal by GKH involving the McKenzie bankruptcy. See In re McKenzie, 716 F.3d 404 (6th Cir. 2013). GKH alleged in that appeal that the Trustee and his attorneys maliciously prosecuted several lawsuits against GKH. See id. at 408-09 (discussing the facts of the case). This court resolved the prior appeal in the Trustee's favor. See id. at 409 (affirming the bankruptcy court's dismissal of GKH's adversary complaints against the Trustee and his attorneys).

Several weeks before the Chapter 7 involuntary bankruptcy petition was filed against him, McKenzie executed a promissory note and a pledge agreement in favor of GKH for the purpose of securing legal fees owed to the law firm. The pledge agreement listed almost two dozen entities in which McKenzie held an ownership interest. McKenzie later executed an amended pledge agreement listing ...


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