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In re Blasingame

United States Court of Appeals, Sixth Circuit

April 3, 2019

In re: Earl Benard Blasingame; Margaret Gooch Blasingame, Debtors
v.
Earl Benard Blasingame and Margaret Gooch Blasingame (18-5549/5623); Blasingame Family Residence Generation Skipping Trust (18-5549); Blasingame Family Business Investment Trust (18-5623), Defendants-Appellees. Church Joint Venture, L.P., on behalf of Chapter 7 Trustee, Plaintiff-Appellant,

          Appeal from the Bankruptcy Appellate Panel of the Sixth Circuit; Nos. 17-8009/8011/8029-Guy R. Humphrey, Daniel S. Opperman, and Tracey N. Wise, Bankruptcy Appellate Panel Judges.

         United States Bankruptcy Court for the Western District of Tennessee at Memphis; Nos. 2:08-bk-28289; 2:15-ap-00339; 17-ap-00049-Jennie D. Latta, Judge.

         ON BRIEF:

          Bruce W. Akerly, MALONE AKERLY MARTIN PLLC, Dallas, Texas, for Appellant.

          Michael P. Coury, GLANKLER BROWN, PLLC, Memphis, Tennessee, for Appellees.

          Before: GRIFFIN, KETHLEDGE, and THAPAR, Circuit Judges.

          OPINION

          THAPAR, CIRCUIT JUDGE.

         Earl and Margaret Blasingame (the "Blasingames") filed for bankruptcy, claiming they did not have much money to their name. One of their creditors, Church Joint Venture ("Church"), said otherwise. In fact, Church alleged that the Blasingames engaged in a decades-long scheme of fraud to hide their assets. So Church filed multiple actions to recover those assets. Two of Church's actions are now before us, and we affirm the bankruptcy court's dismissal of each.

         I.

         Over a decade ago, the Blasingames filed for bankruptcy. They sought to discharge $7.7 million in debt, claiming they made under $900 per month and owned less than $6, 000 worth of assets. Their creditors, including Church, were skeptical. Church investigated and allegedly discovered fraud on a massive scale. Specifically, Church said that the Blasingames made over $300, 000 per year and had at least $18 million in assets, including "a 28-acre, gated residence compound" complete with a heated swimming pool and lighted tennis courts, 1, 700 acres of "prime farmland," and hundreds of thousands of dollars in cash and financial assets. 09-00482 Adversary Proceeding Record ("A.P.R.") 1 ¶¶ 2-23. These assets all belonged to a handful of trusts and corporations under the Blasingames' control. Church contended that these trusts and corporations were mere shams to defraud creditors and were in reality "one and the same" with the Blasingames. Id. ¶ 3. Thus, Church claimed that these assets should be available to the Blasingames' creditors to satisfy their debt. The question was how Church could reach these assets.

         To understand Church's options, we need to take a step back for some context on how bankruptcy proceedings work. When debtors, like the Blasingames, file for bankruptcy, their property generally becomes property of the (newly-created) bankruptcy estate. The government can then appoint a bankruptcy trustee to administer that estate. 11 U.S.C. §§ 323, 541(a), 701. The bankruptcy trustee's goal is to maximize the value of the estate and, in turn, to maximize the amount the creditors will get paid. See Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 352 (1985); 11 U.S.C. § 704(a)(1). Along with ordinary types of property (cash, real estate, etc.), the bankruptcy estate's property also includes causes of action that the debtors "could have . . . brought" before they filed for bankruptcy. Tyler v. DH Capital Mgmt., Inc., 736 F.3d 455, 462 (6th Cir. 2013). Thus, if the debtors could have sued somebody or some entity for damages or property before they filed for bankruptcy, then the trustee may also bring that suit. Relatedly, the bankruptcy trustee may also sue to invalidate property transfers that the debtors made before they filed for bankruptcy. In this way, the trustee brings that property back where it belongs: in the bankruptcy estate. See 11 U.S.C. §§ 544, 548; see, e.g., In re Moore, 608 F.3d 253, 257-62 (5th Cir. 2010) (noting that causes of action for fraudulent-transfer and alter-ego were property of the bankruptcy estate under state law).

         Sometimes the bankruptcy trustee does not want to do the dirty work, and sometimes the trustee simply cannot-like when it has run out of money to pay for lawyers. See, e.g., In re Trailer Source Inc., 555 F.3d 231, 241, 244 (6th Cir. 2009). The trustee has several options in these situations, two of which are relevant here. First, the bankruptcy trustee can allow a creditor to sue on the trustee's behalf, giving the creditor "derivative standing." Id. at 241 (describing derivative standing as a "well-established practice"). The creditor becomes an additional named party, but the suit continues in the bankruptcy court and any recovery goes to the bankruptcy estate, not the creditor. See id. Second, like any other asset of the bankruptcy estate, the trustee can decide to sell the cause of action. See In re Moore, 608 F.3d at 257-58. The proceeds of that sale increase the bankruptcy estate, but the sale also means that the bankruptcy trustee gives up its right to sue based on that cause of action. Thus, that cause of action can no longer affect the value of the bankruptcy estate, which means the bankruptcy court no longer has jurisdiction over it. See In re Wolverine Radio Co., 930 F.2d 1132, 1140-42 (6th Cir. 1991) (citing 28 U.S.C. § 1334). So the purchaser of the cause of action generally must sue in a different court.

         Turning back to the Blasingames' bankruptcy, the Bankruptcy Trustee initially tried to recover the assets Church found. Specifically, the Bankruptcy Trustee authorized Church to sue derivatively on its behalf in bankruptcy court. But a few years into that proceeding, the Bankruptcy Trustee changed course and decided to sell the cause of action instead. Church bought the cause of action for a lump sum payment and a reduction in Church's claim against the bankruptcy estate. R. 356, ¶ 2-4 (the "Sale Order").

         Since the sold cause of action could no longer affect the value of the bankruptcy estate, the bankruptcy court dismissed Church's case for lack of jurisdiction. So Church filed a new lawsuit against the Blasingames and their trusts in district court and claimed that the Blasingames' trusts were their "alter-egos." But the district court dismissed this lawsuit, concluding that Tennessee would not recognize Church's alter-ego theory outside of the corporate context. Church Joint Venture v. ...


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