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Eighth Circuit Affirms Rejection of Bankruptcy Trustee's Unjust Enrichment Claim

Monday, September 12, 2011

Adam Brown | Bloomberg LawIn Re Falzerano, No. 11-bk-6036, 2011 BL 206904 (8th Cir. Aug. 10, 2011) The United States Court of Appeals for the Eighth Circuit affirmed a bankruptcy court's decision denying a bankruptcy trustee's claim seeking turnover under 11 U.S.C. § 542, holding that the trustee's unjust enrichment claim against the owners of cattle managed by the debtor did not qualify as either property or a debt belonging to the estate.

Trustee's Unjust Enrichment Claim

In May 2001, Alvin James Falzerano ("Debtor") ordered 500 tons of hay from Orand Liebelt for use on a cattle ranch owned by his wife Theresa Ann Falzerano. Theresa made a $1,000 down payment to secure the purchase but died on December 4, 2001, just days before the hay was delivered. Under the terms of her will, Debtor was granted a life estate in the ranch. Four of Theresa's five children and the daughter of a fifth child who survived Theresa but was intentionally omitted from the will, received the balance of property, including her cattle and a remainder interest in the ranch. Debtor, the heirs, and the omitted daughter subsequently executed a family settlement agreement, granting the estate's personal representative the right to "distribute such items of [Theresa's] personal property as she deemed necessary or advisable." Debtor was permitted to use the balance of Theresa's personal property, to raise Theresa's cattle for the benefit of her heirs, and to use the ranch's operating profits to cover his living expenses. Separate from the agreement to manage Theresa's cattle, Debtor had agreements in place with two other cattle ranchers, Gladys Bonefield and Dennis Wetzel, to pasture approximately 150 heads of their cattle. When the Liebelt's hay was delivered in December, 2001, and January, 2002, the Debtor used it to feed all the cattle under his management. He refused to make payment to Liebelt, however, claiming that the hay was of "very poor" quality and he only used it as feed out of necessity. Liebelt commenced an action against Debtor in Delaware state court and won a $10,000 judgment, but Debtor filed for Chapter 7 bankruptcy before satisfying the judgment. The trustee of Debtor's bankruptcy estate then brought suit against Theresa's heirs pursuant to 11 U.S.C. § 542, seeking "to recover rent for the pasture and the value of the hay provided to the probate estate's cattle" on an unjust enrichment theory. The bankruptcy court held a trial, after which it ruled in defendants' favor, holding that the terms of the family settlement agreement entitled Debtor "only to the 'net' profits from the estate's cattle, which would necessarily reflect the cost of feeding and maintaining the cattle." The Trustee appealed the ruling.

Section 542(b) Does Not Govern Unjust Enrichment Claims

The Eighth Circuit agreed that defendants were not unjustly enriched in light of the terms of the settlement agreement but affirmed the bankruptcy court's ruling on different grounds. It noted that section 542(b), which governs actions to collect a debt owed to a bankruptcy estate, applies only to debts that are "matured, payable on demand, or payable on order." Moreover, the Eighth Circuit determined that under South Dakota Law, a claim for unjust enrichment constitutes a claim in equity which falls outside to scope of section 542(b). Additionally, the Eighth Circuit rejected the trustee's attempt to couch its claim as one seeking the turnover of property of the bankruptcy estate under section 542(a). Citing its decision in In re Pyatt, 486 F.3d. 423 (8th Cir. 2007), the Eight Circuit explained that section 542(a) only allows a trustee to seek turnover of property of the estate "from entities which have control of property . . . or its proceeds at the time of the turnover demand." Because defendants never had possession of any proceeds from the cattle, the Eighth Circuit held that the trustee's claim was merely a demand on an alleged debt, rather than one for the turnover of property.

Eighth Circuit Affirms Bankruptcy Court's Ruling

Accordingly, the Trustee was not entitled to recover funds related to his unjust enrichment claim, the Eighth Circuit affirmed the judgment. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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