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In re Guild and Gallery Plus

January 4, 1996

IN RE: THE GUILD AND GALLERY PLUS, INC. DEBTOR JOHN B. TORKELSEN APPELLANT

v.

CARMEN J. MAGGIO



On Appeal from the United States District Court for the District of New Jersey (D.C. No. 94-cv-05619)

BEFORE: MANSMANN, COWEN and SEITZ, Circuit Judges

COWEN, Circuit Judge.

Argued November 28, 1995

Filed January 4, 1996)

The question presented in this case is whether various state-law claims against a bankruptcy trustee in his individual capacity can be either a "core" bankruptcy proceeding under 28 U.S.C. Section(s) 157(b)(2)(A) ("matters concerning the administration of the estate") or a noncore, related proceeding under 28 U.S.C. Section(s) 158(c)(2). The plaintiff alleged that the trustee negligently lost or intentionally stole property that at one time was in the estate's possession, but was never "property of the [bankrupt] estate," as defined in 11 U.S.C. Section(s) 541. Both the bankruptcy court and the district court below held that such a case was a "core proceeding," which the bankruptcy court had the power to decide, subject to ordinary appellate review.

As it is uncontroverted that the property alleged to have been lost or stolen by the trustee (a painting held by the debtor in its capacity as a bailee) was never "property of the estate," as defined by Section(s) 541(a)(1) of the Bankruptcy Code, and as it is equally undisputed that the outcome of appellant's suit against the trustee would have no effect on the bankrupt estate, we conclude that this case is neither a core proceeding nor a noncore, related proceeding under controlling precedent. Because the courts below lacked subject matter jurisdiction to consider appellant's actions against the trustee, we will reverse the order of the district court entered March 31, 1995, and remand this matter to the district court with instructions that it remand the matter back to the bankruptcy court with a direction that the bankruptcy court dismiss the complaint for lack of subject matter jurisdiction.

I.

The Guild and Gallery Plus, Inc., ("the Gallery") filed a petition under Chapter 11 of the Bankruptcy Code while the Gallery was in possession of seventeen paintings owned by appellant John B. Torkelsen. Torkelsen had sent these paintings to the Gallery for storage while renovations were being done on his home. One of the paintings was entitled "Summertime--Collecting Wild Flowers--1902" by Peter Mark Monstadt ("the Summertime painting").

On December 7, 1991, after the Chapter 11 petition had been filed, Torkelsen sent his fiancee, Pamela Rogers, his attorney, Penny Bennett, his brother, his son and an unidentified third man ("the Torkelsen party") to the Gallery in order to remove all seventeen paintings and bring them back to him. When the Torkelsen party arrived at the Gallery, Anton Borics, who supervised the Gallery on behalf of the trustee, Carmen J. Maggio, opposed the removal of the paintings. Alarmed, Borics contacted Maggio by phone. Maggio also objected to the removal of the paintings. Nonetheless, when it became clear that the Torkelsen party was determined to remove all of the paintings immediately, Maggio agreed, albeit under duress, that the paintings could be removed. *fn1 Maggio insisted, however, that the Torkelsen party provide him with a written list of everything that had been removed from the Gallery.

Pursuant to Maggio's request, attorney Penny Bennett prepared a receipt for the paintings that had been removed from the Gallery on December 7. Attorney Bennett, Pamela Rogers and Julie Lapitino, a Gallery employee, signed the receipt. It provided that "The undersigned hereby acknowledge that seventeen (17) pieces of art owned by John Torkelsen were removed from the Guild Gallery on this day. The undersigned have confirmed that the attached inventory dated June 12, 1991, entitled Guild Gallery, accurately lists and identifies the seventeen pieces of art concerned." App. at 480.

Shortly thereafter, Torkelsen conducted an unsuccessful search for the Summertime painting. Torkelsen assumed that the painting had been left behind at the Gallery. In a letter dated December 9, 1991, Torkelsen's attorney requested that Maggio return the Summertime painting. Maggio responded by advising counsel to file the appropriate motion. On December 20, 1991, Torkelsen filed a motion for reclamation of property seeking to recover the Summertime painting.

On December 27, 1991, Maggio instructed Gallery employee Diane Lane to search for the Summertime painting in the Gallery's storage areas. On the same day, Lane claimed to have located the Summertime painting at the Gallery. On January 7, 1992, based upon Lane's representation, Borics wrote Maggio a letter advising him that the Gallery was still in possession of one of Torkelsen's paintings. Maggio then agreed, by consent order dated March 16, 1992 ("Consent Order"), to return the Summertime painting. The Consent Order provided that the trustee would "abandon, turn over and arrange for movant to retrieve `Summertime--Collecting Flowers--1902' by Peter Mark Monstadt, within 10 days from the date hereof. . . . " App. at 450.

After the bankruptcy court had approved the Consent Order, the Summertime painting could not be located. Unable to retrieve his property, Torkelsen filed an adversary complaint against Maggio in the Bankruptcy Court for the District of New Jersey "seeking damages for the loss of the `Summertime' painting based on theories of wrongful possession, negligence, res ipsa loquitur, bailment, conversion and breach of warranty." In re Guild & Gallery, No. 94-5619, slip op. at 3 (D.N.J. Mar. 31, 1995). Maggio filed a counterclaim seeking to: (1) vacate the Consent Order due to mistake of fact; (2) require Torkelsen to defray any loss by collecting insurance proceeds covering the Summertime painting; and (3) recover damages against Torkelsen resulting from the trespass that occurred on December 7, 1991.

On August 16-17, 1994, this case was tried. On the day before the trial commenced, a conference call was held in which the court and counsel for both parties participated. During this conversation, the court informed the parties that since all of Torkelsen's claims against the trustee hinged upon the factual contention that the Summertime painting remained in the Gallery after December 7, 1991, the court would hear the parties' evidence on this specific issue and make a finding of fact before other matters would be considered. Counsel for both parties consented to this arrangement.

On August 17, 1994, the bankruptcy court found that Torkelsen had not proved by a preponderance of the evidence that the Summertime painting remained at the Gallery after December 7, 1991. In reaching this decision, the court "placed significance, among other things, . . . on the credibility of the witnesses that [it] had the opportunity to observe. . . . " App. at 441-42. The bankruptcy court did not find Diane Lane's testimony to be convincing. On the issue of whether Lane had identified the Summertime painting in the Gallery on December 27, the court noted Lane's "subsequent doubt and contradictory testimony" and her inability "to confirm that the painting that she saw on December 27th was, in fact, Summertime." Id. at 437. Thus, the court concluded that any statements by Maggio, Borics or the trustee's attorney that the Summertime painting had been located in the Gallery after December 7 were based solely upon their erroneous belief about the accuracy of Lane's report.

As for the receipt which certified that seventeen paintings had been removed, the bankruptcy court noted that the three women who signed the receipt on December 7, 1991, had testified to their belief in its accuracy on that date. Moreover, the court observed that at least two of the women had compared the list, double-checked it, and concluded that all of Torkelsen's paintings had been accounted for, including the Summertime painting.

On August 17, 1994, the bankruptcy court granted the first count of Maggio's counterclaim seeking to vacate the Consent Order on the ground that it was based upon a mistake of fact. All of Torkelsen's claims against Maggio were dismissed with prejudice. Maggio's remaining counterclaims also were dismissed with prejudice.

On September 6, 1994, Torkelsen filed a motion with the bankruptcy court seeking to have the bankruptcy judge recuse himself from the case before a final order was entered. On September 26, a hearing was held on the recusal motion. The motion was denied the following day. The bankruptcy court's final order dismissing all of Torkelsen's claims was entered on October 11, 1994. *fn2

Torkelsen appealed to the United States District Court for the District of New Jersey. By order dated March 31, 1995, the district court affirmed all aspects of the ...


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