Opinion
20-12409-MKN
09-08-2022
In re: HARTLAND MMI, LLC, Debtor.
HARTLAND MMI, LLC ATTN: OFFICER OR MANAGING AGENT HARTLAND MMI, LLC ATTN: OFFICER OR MANAGING AGENT JAMES J. JIMMERSON, ESQ. JAMES M. JIMMERSON, ESQ. THE JIMMERSON LAW FIRM
Date: July 20, 2022
Chapter 11
HARTLAND MMI, LLC ATTN: OFFICER OR MANAGING AGENT
HARTLAND MMI, LLC ATTN: OFFICER OR MANAGING AGENT
JAMES J. JIMMERSON, ESQ. JAMES M. JIMMERSON, ESQ. THE JIMMERSON LAW FIRM
ORDER ON MOTION FOR ORDER FOR DISGORGEMENT OF ATTORNEY FEES AND MOTION TO DISMISS CHAPTER 11 CASE
In this Order, reference will be made to documents filed in both federal and state judicial proceedings. All references to "ECF No." are to the numbers assigned to the documents filed in the proceedings before the bankruptcy court.
Honorable Mike K. Nakagawa, United States Bankruptcy Judge
On July 20, 2022, the court heard the Motion for Order for Disgorgement of Attorney Fees and Motion to Dismiss Chapter 11 Case ("Dismissal Motion") brought by Robert W. Lueck, Esq. ("Attorney Lueck"). The appearances of counsel were noted on the record. After arguments were presented, the matter was taken under submission.
Pursuant to FRE 201(b), the court takes judicial notice of all materials appearing on the docket in the above-captioned bankruptcy proceeding as well as the public records of other judicial proceedings. See U.S. v. Wilson, 631 F.2d 118, 119 (9th Cir. 1980). See also Burbank-Glendale-Pasadena Airport Auth. v. City of Burbank, 136 F.3d 1360, 1364 (9th Cir. 1998) (taking judicial notice of court filings in a state court case where the same plaintiff asserted similar claims); In re Blas, 614 B.R. 334, 339 n.27 (Bankr. D. Alaska 2019)("This court may take judicial notice of the docket of other courts."); Bank of Am., N.A. v. CD-04, Inc. (In re Owner Mgmt. Serv., LLC Trustee Corps.), 530 B.R. 711, 717 (Bankr. C.D. Cal. 2015) ("The Court may consider the records in this case, the underlying bankruptcy case and public records.").
On April 16, 2014, a proceeding to probate a holographic will was commenced in the probate department of the Eighth Judicial District Court, Clark County, Nevada ("Probate Court"), styled as In the Matter of the Estate of Ailene E. Hart, aka, Toni Hart, Deceased, Case No. P-14-080879-E ("Probate Matter"). One of the assets of the decedent's estate ("Probate Estate") consisted of the decedent's interest in a Nevada limited liability company known as Hartland MMI, LLC ("Hartland" or "Debtor"). The primary asset of the Debtor consisted of real property located at 1040 S. Sixth Street, Las Vegas, Nevada, commonly known as the Hartland Mansion.
All references to "Probate ECF No." are to the numbers assigned to the documents filed in the Probate Matter.
The petition to commence the probate proceeding was filed by Larry D. Hart, Linda S. Hart, and Garry L. Hart. All three petitioners were appointed as the co-personal representatives and executors of the probate estate. (Probate ECF No. 11). Thereafter, Linda Hart voluntarily resigned as a co-personal representative and executor. Upon her resignation, Larry Hart and Garry Hart agreed to the appointment of Larry Bertsch ("Bertsch"), certified public accountant, as the third co-executor to replace Linda Hart. That agreement was approved by an order of the Probate Court entered on September 9, 2015. (Probate ECF No. 209). Thereafter, Larry Hart died, leaving Garry Hart and Bertsch as the remaining co-executors of the Probate Estate.
On or about February 25, 2015, the Probate Court conducted a hearing concerning a report of the probate commissioner. Thereafter, the Probate Court's oral rulings were memorialized in an "Order From February 25, 2015" that was entered on or about March 31, 2015 ("Probate 2015 Order"). Among other things, the Probate Court found "that Hartland MMI, LLC is a separate legal entity, and that as Manager of the LLC, Larry Hart had the authority to borrow money on behalf of the LLC without Court approval; and that the Decedent was the sole Member of the LLC, and upon her death, her interest in the LLC became an asset of the Estate." Probate 2015 Order_at 2:22-26 (emphasis added).
On December 5, 2016, the Probate Court entered an order providing that Garry Hart, as co-executor, would remain as the sole manager of Hartland. (Probate ECF No. 303).
On February 8, 2017, Hartland commenced a voluntary Chapter 11 reorganization proceeding, denominated Case No. 17-10549 ("First Chapter 11"). (First ECF No. 1). Debtor filed the Chapter 11 proceeding to prevent a pending foreclosure sale of the Hartland Mansion. Bankruptcy counsel for Hartland in the First Chapter 11 case was the Law Offices of David Winterton ("Attorney Winterton").
On July 26, 2018, an order was entered approving the sale of the Hartland Mansion for a gross purchase price of $2.9 million. (First ECF No. 258). The order provided, inter alia, for a variety of claims secured by the property to be satisfied upon the close of the sale, as well as various amounts to be paid to other parties, including to Jeff Manning of Manning Auctions, LLC (together "Manning") and to Attorney Lueck.
On December 10, 2018, an order was entered approving the final application for compensation of Attorney Winterton. (First ECF No. 301).
On December 26, 2018, an order was entered granting the motion of the Office of the United States Trustee ("UST") to dismiss the First Chapter 11 proceeding. (First ECF No. 305).
On March 5, 2019, Debtor filed a civil complaint in the Eighth Judicial District, Clark County, Nevada ("State Court"), denominated Case No. A-19-790498-C ("State Action"). Debtor's complaint sought damages against Manning, for their conduct in connection with the sale of the Hartland Mansion in the First Chapter 11.
On April 3, 2019, Attorney Lueck filed a motion in the Probate Matter seeking to compel Attorney Winterton to turnover to the Probate Estate certain funds held in his attorney-client trust account from the sale of the Hartland Mansion ("Lueck Turnover Motion"). (Probate ECF No. 383).
On April 8, 2019, the First Chapter 11 proceeding was closed. (First ECF No. 308).
On May 2, 2019, Manning filed a petition removing the State Action to the bankruptcy court, (First ECF No. 309), and thereafter filed a motion to reopen the First Chapter 11 Proceeding. (First ECF No. 311).
The removed State Action was denominated Adversary Proceeding No. 19-01068 ("First Adversary"). (First ECF No. 309). All references to "AECF No." are to the numbers assigned to the documents filed in the adversary proceedings commenced in the bankruptcy court..
On June 24, 2019, an order was entered reopening the First Chapter 11 Case. (First ECF No. 321).
On September 3, 2019, this court entered an order remanding the First Adversary to the State Court because, inter alia, the State Action asserted a claim for breach of contract governed by Nevada law. (First Adversary ECF No. 26).
On September 4, 2019, an order was entered re-closing the First Chapter 11 case. (First ECF No. 333).
On March 31, 2020, the Probate Court conducted a hearing on a variety of matters, including the Lueck Turnover Motion. A written order memorializing the Probate Court's determinations was entered on or about April 7, 2020 ("Lueck Turnover Order"). (Probate ECF No. 435). That Order states, in pertinent part, that ".it appearing to the court that the net remaining funds in the trust account of David Winterton, Esq. is $382,849.96 from the sale of the Hart Mansion in the Chapter 11 bankruptcy, that a recent accounting of the trust fund indicates that there has been some dissipation of the funds in the trust account during the time the funds have been in his trust account, and that the funds belong to the estate." Lueck Turnover Order at 1:24 to 2:4 (emphasis added). Based on that determination, the Probate Court ordered, inter alia, "that David Winterton, Esq., shall forthwith issue a trust account check payable to the Shumway Van Trust Account in the amount of $382,849.96 and shall forthwith remit this check to the Shumway Van law firm without deduction of any other expenses or claims.." Id. at 2:58 (emphasis added).
See Probate Court Minutes - All Pending Motions (03/31/2020).
On April 17, 2020, Attorney Winterton filed a motion for partial reconsideration of the Lueck Turnover Order ("Winterton Reconsideration Motion"). (Probate ECF No. 440).
On May 18, 2020, Debtor commenced the instant Chapter 11 proceeding ("Second Chapter 11"). (Second ECF No. 1). The voluntary Chapter 11 petition is accompanied by the Debtor's schedules of assets and liabilities ("Schedules") and statement of financial affairs ("SOFA"). The Chapter 11 petition, Schedules and SOFA are signed by Garry Hart, as manager of the Debtor. Debtor's property Schedule "A/B" lists three categories of property of the Second Chapter 11 bankruptcy estate: cash in the amount of $382,849.96 held in the trust account of Attorney Winterton; miscellaneous office equipment and furnishings having a value of $151,664.00; and various contingent and unliquidated claims against multiple parties, including Manning, attorneys and other professionals, and service providers having an aggregate value of $1,536,000.00. The total current value of all assets of the Debtor is scheduled at $2,070,513.96. Debtor's secured creditor Schedule "D" lists Attorney Winterton as having a claim in the amount of $30,004.18, secured by a statutory lien against the cash held in Attorney Winterton's trust account. No other secured creditors are listed.
Debtor's unsecured creditor Schedule "E/F" lists 14 claimants or notice-only parties having priority and non-priority claims totaling $75,950.00. Debtor's co-debtor Schedule "H" lists the Estate of Ailene Hart, the Estate of Larry David Hart, and Garry Hart as co-debtors of various obligations owed by the Debtor, with Garry Hart as the executor, co-executor, or principal of the co-debtor party. Debtor's SOFA, at Item 11.1, discloses that its current bankruptcy counsel, Johnson &Gubler, P.C. ("Johnson Firm"), was not paid a retainer before the filing of the Chapter 11 petition, but received jewelry from Garry Hart's spouse as collateral for payment. At Item 13.1, the SOFA lists only one transfer of money or property outside of the ordinary course of business to another person within 2 years: the sale of the Hartland Mansion on September 10, 2018, for the amount of $2.9 million. At Item 28, the SOFA lists Garry Hart and the Estate of Ailene Hart (with Garry Hart as co-executor), respectively, as the only manager and member of the Debtor. On the same date the Chapter 11 petition was filed, a notice of bankruptcy was entered ("Bankruptcy Notice") scheduling a meeting of creditors for June 25, 2020. (Second ECF No. 4).
On May 21, 2020, the Probate Court heard the Winterton Reconsideration Motion and orally ruled that the proceeds from the sale of Hartland Mansion were assets of the Probate Estate.
On June 11, 2020, Debtor filed its operating report for the month of May 2020. (Second ECF No. 18).
On June 17, 2020, the Probate Court entered a written order on the Winterton Reconsideration Motion ("Probate Reconsideration Order"). (Probate ECF No. 454). That order provides "that the net proceeds remaining in the trust account of David Winterton, Esq. as of March 26, 2020, $382,849.96 are deemed to be an asset of the probate estate and therefore usable for payment of the administrative claims of the probate." (Emphasis added). Probate Reconsideration Order at 2:14-17.
On June 17, 2020, Attorney Lueck filed a "Motion to Exclude Funds as Property of the Estate" ("Exclusion Motion"). (Second ECF No. 21). Attorney Lueck seeks entry of an order determining that the funds held by Attorney Winterton on the commencement of the Second Chapter 11 proceeding are assets of the Estate of Ailene Hart under the jurisdiction of the State Court. The Exclusion Motion was noticed to be heard on July 22, 2020 but was continued to be heard concurrently with the Dismissal Motion. (Second ECF Nos. 22 and 43).
On June 25, 2020, Debtor filed an amended Chapter 11 petition. (Second ECF No. 25). The amended Chapter 11 petition bears the electronic signature of Garry Hart as manager of the Debtor.
On June 25, 2020, an order was entered granting the employment of the Johnson Firm as Chapter 11 counsel to represent the Debtor ("Employment Order"). (Second ECF No. 26). The Employment Order provides that "of the proceeds obtained from the Law Offices of David J. Winterton post-petition, Johnson &Gubler, P.C. will hold $15,000.00 for its retainer, plus the filing fee of $1,717.00 in trust until further Order of this Court, and the balance shall be returned to the Debtor to be deposited inter the Debtor In Possession account." Employment Order at 2:16-19.
On May 18, 2020, Debtor filed an application to employ the Johnson Firm as Chapter 11 counsel. (Second ECF No. 5). Attached to the Application is the Declaration of Mathew Johnson attesting that a retainer of $15,000 plus $1,717 for filing fees would be provided from funds held by Attorney Winterton.
On June 26, 2020, Attorney Lueck filed an "Emergency Ex Parte Motion to Stay Order (#26) Entered on June 25, 2020 Requiring Turnover of Funds From Trust Account of David Winterton." (Second ECF No. 29).
The motion was not accompanied by a supporting declaration or affidavit, nor by a proposed order.
On June 26, 2020, Manning filed a motion under Section 1104(a) to appoint a Chapter 11 trustee ("Trustee Motion"). (Second ECF No. 30). The Trustee Motion was noticed to be heard on August 5, 2020. (Second ECF No. 31). By stipulation, the hearing was continued to August 12, 2020. (Second ECF No. 38).
On June 29, 2020, Attorney Lueck filed a petition in the Probate Court seeking to remove Garry Hart as a co-executor of the Probate Estate and to replace Garry Hart as the manager of Hartland ("Lueck Replacement Motion"). (Probate ECF No. 456).
On July 7, 2020, Debtor filed an opposition to the Exclusion Motion, along with a declaration of Garry Hart. (Second ECF Nos. 34 and 35).
On July 15, 2020, the Probate Court heard and orally granted the Lueck Replacement Motion. See Probate Court Minutes - Show Cause Hearting (07/15/2020).
On July 17, 2020, Attorney Lueck filed his reply to the opposition to the Exclusion Motion. (Second ECF No. 41).
On July 23, 2020, the Probate Court entered a written order memorializing its decision granting the Lueck Replacement Motion ("Lueck Replacement Order"). (Probate ECF No. 490). That Order included a number of findings, including that "the estate was the proper owner of those funds in the trust account of David Winterton," see Lueck Replacement Order at 5:8-19 (emphasis added), and that the "court has always held that the estate was the owner of the LLC and that any net income from any sale of the property would be an estate asset." Id. at 5:12-14 (emphasis added). Moreover, the Probate Court expressly ordered the removal of Garry Hart as co-executor of the Probate Estate as well as the immediate suspension of Garry Hart as manager of the Debtor. Id. at 10:13-16. The Probate Court also temporarily appointed Bertsch as sole manager of the Debtor inasmuch as there were no remaining executors of the Probate Estate. Id. at 10:16-17.
Among other things, Bertsch was directed to consider whether he wanted to be the fulltime manager of Hartland and whether Hartland should continue to pursue the Second Adversary Proceeding against Manning. Id. at 10:18-22.
On July 29, 2020, Debtor filed its opposition to the Trustee Motion. (Second ECF No. 44).
On August 5, 2020, Manning filed its reply to Debtor's opposition to the Trustee Motion. (Second ECF No. 45). On August 12, 2020, Attorney Lueck filed a joinder to Trustee Motion ("Lueck Joinder"). Attached to the Lueck Joinder are various documents filed the Probate Matter. (Second ECF No. 54).
On August 12, 2020, Manning again removed the State Action to this bankruptcy court, which was assigned Adversary Proceeding No. 20-01090-mkn ("Second Adversary"). (Second AECF No. 1).
On August 20, 2020, an order was entered granting the Trustee Motion ("Trustee Order"). (Second ECF No. 57). On the same date, an order was entered denying the Exclusion Motion ("Exclusion Order"). (Second ECF No. 59). The Exclusion Motion was denied without prejudice in light of the appointment of a Chapter 11 trustee to investigate the acts, conduct, assets, liabilities and financial condition of the Debtor.
On August 31, 2020, an order was entered approving the appointment of Timothy W. Nelson ("Trustee Nelson") as the Chapter 11 trustee in the instant case. (Second ECF No. 66).
On September 17, 2020, the 341 Meeting was concluded. (Second ECF No. 76).
On October 15, 2020, Attorney Lueck filed the instant Dismissal Motion, along with a declaration of Robert W. Lueck. (Second ECF Nos. 81 and 82).
On October 19, 2020, the Dismissal Motion was noticed to be heard on November 18, 2020. (Second ECF No. 83)
On October 23, 2020, the Johnson Firm filed its first and final interim application for compensation for services provided to the Debtor. On this same date, the Johnson Firm filed an amended first and final interim application for compensation ("Johnson Fee Application") which was noticed to be heard on November 25, 2020. (Second ECF Nos. 86, 87 and 88).
By stipulation, the hearing on the Dismissal Motion was continued to December 17, 2020. (Second ECF No. 91).
On October 26, 2020, Manning filed a summary judgment motion ("Manning MSJ") in the Second Adversary, along with a statement of undisputed facts. The Manning MSJ was noticed to be heard on December 17, 2020. (Second AECF Nos. 5, 6 and 7).
On November 4, 2020, a stipulated order was entered continuing both the Johnson Fee Application and the Dismissal Motion to December 17, 2020, to be heard along with the Manning MSJ in the Adversary Proceeding. (Second ECF No. 93).
On December 17, 2020, the Manning MSJ hearing was continued to February 10, 2021. (AECF No. 13). Additionally, the hearing on both the Johnson Fee Application and the Dismissal Motion were continued to February 10, 2021. (Second ECF Nos. 103 and 104).
On December 23, 2020, a global settlement conference ("Global Settlement Conference") was scheduled for January 29, 2021, before U.S. Bankruptcy Judge Christopher Jaime, regarding the Johnson Fee Application and the Dismissal Motion. (Second ECF No. 105; Second AECF No. 15).
The Global Settlement Conference was continued several times before ultimately being vacated on June 14, 2022 (Second ECF No. 203; Second AECF No. 87).
On January 21, 2021, Attorney Lueck filed a Petition for Writ of Mandamus before the United States District Court for the District of Nevada ("USDC"), assigned Case No. 21-cv-00114-GMN-NJK ("Mandamus Proceeding"). (USDC ECF No. 1). Attorney Lueck sought an order from the USDC to compel this bankruptcy court to dismiss the instant Chapter 11 proceeding with prejudice and to vacate all other orders entered in the case. Due to the pendency of the Mandamus Proceeding, the Global Settlement Conference was continued on multiple occasions.
All references to "USDC ECF No." are to the numbers assigned to the documents filed in the Mandamus Proceeding.
On February 23, 2021, an order was entered denying Manning's amended ex parte application to have the Manning MSJ heard on shortened time. (Second AECF No. 29).
On February 25, 2022, orders were entered continuing the Global Settlement Conference to June 23, 2022, and continuing status conferences on the Dismissal Motion and the Johnson Fee Application to July 6, 2022. (Second ECF Nos. 170 and 171).
On March 11, 2022, the USDC entered an order in the Mandamus Proceeding denying all requested relief. (USDC ECF No. 37).
On May 18, 2022, Trustee Nelson filed a motion for an extension of time to commence actions encompassed by Section 546(a) ("Extension Motion") that was noticed to be heard on June 22, 2022. (Second ECF Nos. 183, 184 and 185).
On June 10, 2022, Attorney Lueck filed notices rescheduling the hearings on the Dismissal Motion and the Exclusion Motion for July 13, 2022, along with additional points and authorities regarding both matters. (Second ECF Nos. 197, 198 and 199).
On June 14, 2022, an order was entered vacating the Global Settlement Conference and scheduling a status conference for July 20, 2022. (Second ECF No. 203).
On June 22, 2022, the Extension Motion was heard. At the hearing, the court ordered that the Exclusion Motion, the Dismissal Motion, the Johnson Fee Application, and the Manning MSJ would be heard on July 20, 2022, that any additional oppositions must be filed by July 6, 2022, and that any additional replies be filed by July 13, 2022.
On July 5, 2022, Debtor filed its opposition to the Dismissal Motion. (Second ECF No. 214).
On July 6, 2022, Trustee Nelson filed an omnibus opposition to the Dismissal Motion, the Exclusion Motion, and the Johnson Fee Application as well as a declaration of Elizabeth Fletcher. (Second ECF Nos. 215 and 216).
On July 6, 2022, Manning filed a limited joinder to Trustee Nelson's omnibus opposition. (Second ECF No. 217).
On July 7, 2022, an errata to Trustee Nelson's omnibus opposition was filed. (Second ECF No. 218).
On July 12, 2022, Attorney Lueck filed a Reply Points and Authorities in Support of the [Dismissal Motion], the [Exclusion Motion], and Trustee's Response to Amended [Johnson Fee Application] ("First Dismissal Reply") along with a declaration of Attorney Lueck, and supplemental exhibits in support of the First Dismissal Reply. (Second ECF Nos. 222, 223 and 224).
On July 14, 2022, Attorney Lueck filed another "Reply Points and Authorities" in support of the Dismissal Motion, but this time it relates only to the Dismissal Motion ("Second Dismissal Reply"). (Second ECF No. 225).
On July 15, 2022, Debtor filed a joinder to Trustee Nelson's opposition to the Dismissal Motion, the Exclusion Motion, and Trustee Nelson's response to the amended Johnson Fee Application. (Second ECF No. 226).
The Debtor's joinder was filed by the Johnson Firm as attorneys for the Debtor. It is not entirely clear how the Johnson Firm had authority on July 15, 2022, to file a document on behalf of the Debtor when Trustee Nelson already had been appointed. By that time, Garry Hart also had been removed as a co-executor and as the manager of the Debtor. Bertsch was the only remaining executor of the Probate Estate and he was represented by the Shumway Van law firm. Bertsch also had been appointed as the sole manager of the Debtor. In other words, the Johnson Firm apparently had no authority to file anything on behalf of the Debtor at the time the joinder was filed. Presumably, the joinder was intended by the Johnson Firm to address only the Johnson Fee Application.
On July 20, 2022, arguments were heard regarding the Johnson Fee Application, the Dismissal Motion, the Manning MSJ, and the Exclusion Motion, whereupon all matters were taken under submission.
Separate orders have been entered contemporaneously herewith on the Johnson Fee Application, the Manning MSJ, and the Exclusion Motion.
DISCUSSION
By the instant Dismissal Motion, Attorney Lueck seeks to dismiss the Second Chapter 11 case and the entry of an order requiring the Johnson Firm to disgorge $15,000 that the firm was provided as a retainer to file the Debtor's Chapter 11 petition. The court has considered the written and oral arguments of counsel and the parties, as well as the materials submitted and the record in the First Chapter 11 and the Second Chapter 11. The court concludes that dismissal of the Second Chapter 11 case is unwarranted. The court also concludes that disgorgement is appropriate of any funds over which the Probate Court exercised jurisdiction prior to the commencement of this Chapter 11 proceeding. Several reasons require these results.
First, pendency of the Probate Matter does not preclude the bankruptcy court's exercise of jurisdiction over the Debtor. Debtor is a fictitious entity separate and apart from the decedent in the Probate Matter. The Probate Estate is not a "person" that is eligible to seek bankruptcy protection, see Estate of Taplin, 641 B.R. 236, 241-43 (Bankr.E.D.Cal. 2022), but a limited liability company is eligible. See In re CW Nevada LLC, 602 B.R. 717 725 (Bankr.D.Nev. 2019). The Probate Court expressly recognized that the Debtor is an entity separate from the decedent in its 2015 Order. The First Chapter 11 was commenced by Garry Hart as the Debtor's manager and the Hartland Mansion was sold. No one contested that the Debtor was able to seek Chapter 11 relief without interfering with the jurisdiction of the Probate Court. At the time the Second Chapter 11 was commenced, Garry Hart was still the sole manager of the Debtor. Debtor remains a separate entity separate and apart from the decedent in the Probate Matter. No one suggests that the Debtor has been dissolved under Nevada law. After the instant proceeding was commenced, Garry Hart was replaced by Bertsch as the manager of the Debtor. Thereafter, Trustee Nelson was appointed to serve as Chapter 11 trustee of the Debtor.
Second, the so-called "probate exception" to federal court jurisdiction applies when a state probate court exercises jurisdiction over specific property of the decedent, i.e., it asserts in rem jurisdiction. See Bergeron v. Loeb, 100 Nev. 54, 58 (Nev. 1984); see also Pal v. Hafter, 2020 WL 7409589, at *3 n.45. The probate exception prevents conflicts from arising where a state court and a federal court assert in rem jurisdiction over the same res. See Marshall v. Marshall, 547 U.S. 293, 308-312 (2006). This is particularly important in bankruptcy cases where bankruptcy jurisdiction itself is in rem. See Estate of Tapin, 641 B.R. at 244, citing 28 U.S.C. §1334(e)(1)[exclusive jurisdiction over property of the bankruptcy estate] and 11 U.S.C. §541(a)(1) [bankruptcy estate property includes all legal and equitable interests wherever located on commencement of case]. The Probate Matter clearly was pending when the First Chapter 11 was commenced. No one suggests that the probate exception was applicable in the First Chapter 11 proceeding that resulted in the sale of the Hartland Mansion. No one suggests that the bankruptcy court lacked jurisdiction in the First Chapter 11 case unless they also are suggesting that the sale of the Hartland Mansion is void.
The probate exception requires federal courts to defer to state courts for "(1) probate or annulment of a will; (2) administration of a probate estate; and (3) disposition of property that is in the in rem custody of a state probate court." Estate of Tapin, 641 B.R. at 244. See also Mattei of Nolan, 2022 WL 327927, at *1 (9th Cir. Feb. 3, 2022).
Third, after the First Chapter 11 was dismissed, the Probate Court entered an order finding that the remaining net proceeds from the sale of the Hartland Mansion, held in trust by Attorney Winterton, belong to the Probate Estate. See Lueck Turnover Order at 2:4. The Probate Court's order was issued orally on March 31, 2020, and entered in writing on April 7, 2020. Although reconsideration of the Lueck Turnover Order was sought from the Probate Court, that order was still in effect when the Second Chapter 11 Case was commenced on May 18, 2020. In other words, after the First Chapter 11 was dismissed and before the Second Chapter 11 was commenced, the Probate Court determined that the funds held in Attorney Winterton's trust account constituted the identifiable res of the Probate Estate. The Probate Court's determination has not been vacated or stayed. As a result, the probate exception applies to the sale proceeds that were held by Attorney Winterton at the commencement of this bankruptcy proceeding and the probate exception still applies as of the date of hearing on the instant Dismissal Motion.
As previously discussed at 4-6, supra, the Winterton Reconsideration Motion was filed in the Probate Matter on April 17, 2020, and was denied by the Probate Court by its oral ruling on May 21, 2020, and in its written order entered June 17, 2020. The Probate Court expressly confirmed its prior rulings that the proceeds of the Hartland Mansion sale are an asset of the Probate Estate.
Thereafter, the Probate Court entered a further order confirming that the Probate Estate is the owner of the funds held in trust by Attorney Winterton." Lueck Replacement Order at 5:819.
Fourth, the Debtor remains a person eligible for bankruptcy relief because it has not been dissolved. For the reasons discussed above, the proceeds of the Hartland Mansion sale are subject to the prior in rem jurisdiction of the Probate Court and cannot be administered in the Debtor's bankruptcy proceeding. If the Debtor has other legal or equitable interests over which the Probate Court had not taken jurisdiction prior to the commencement of the Chapter 11 proceeding, however, those interests would be property of the current bankruptcy estate under Section 541(a). Because there may be property of the Debtor's bankruptcy estate that is not encompassed by the probate exception, dismissal of the Chapter 11 proceeding is not required.
The bankruptcy court cannot dissolve the Debtor as only Nevada courts have exclusive authority to dissolve a Nevada limited liability company. See State of Montana v. Blixseth (In re Blixseth), 484 B.R. 360, 369-70 (B.A.P. 9th Cir. 2012).
The bankruptcy court's subject matter jurisdiction over this Chapter 11 proceeding is distinct from considerations of its in rem jurisdiction over the sale proceeds or even personal jurisdiction over the parties. See Superpumper, Inc. v. Leonard, Trustee for Bankruptcy Estate of Morabito, 499 P.3d 101, 105-07 (Nev. 2021). Before this Chapter 11 proceeding was commenced, the State Court established its in rem jurisdiction over the sale proceeds held by Attorney Winterton.
Fifth, the commencement of a Chapter 11 proceeding in "bad faith" may constitute "cause" for dismissal or conversion of a case under Section 1112(b)(1), see, e.g., Marsch v. Marsch (In re Marsch), 36 F.3d 825 (9th Cir. 1994), but appointment of a Chapter 11 trustee under Section 1104(a) also is permitted as an alternative. See 11 U.S.C. §1112(b)(1) (the court shall convert or dismiss a case "for cause unless the court determines that the appointment under section 1104(a) of a trustee.. .is in the bests interests of creditors and the estate."). A Chapter 11 trustee has been appointed as being in the best interests of creditors and the estate under Section 1104(a)(2). See Trustee Order at 8:3-4 &n. 12. Thus, irrespective of whether the instant Chapter 11 was commenced in bad faith or for lack of good faith, those circumstances have been addressed through the appointment of Trustee Nelson.
Finally, the Employment Order requires the Johnson Firm to hold in trust any retainer funds received from the Debtor. See discussion at 6, supra. Counsel is not permitted to draw any such funds until its compensation is approved by the court. Until such time as resolution of the Johnson Fee Application authorizes counsel to draw on such funds, disgorgement of the funds held in the Johnson Firm trust account is premature.
The Probate Court, of course, has in rem jurisdiction over any funds of the Probate Estate in possession of the Johnson Firm.
Under these circumstances, the court concludes that dismissal of this Chapter 11 proceeding is unwarranted and that disgorgement of the retainer funds held by the Johnson Firm is premature.
IT IS THEREFORE ORDERED that Motion for Order for Disgorgement of Attorney Fees and Motion to Dismiss Chapter 11 Case, brought by Robert W. Lueck, be, and the same hereby is, DENIED.