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Keeper of Word Foundation v. Charles H. Brown Trust

United States District Court, E.D. Michigan, Southern Division

February 12, 2018

KEEPER OF THE WORD FOUNDATION, et al., Appellants,
v.
CHARLES H. BROWN TRUST, et al., Appellees.

          ORDER AFFIRMING BANKRUPTCY COURT'S APRIL 25, 2017, ORDER ASSESSING SANCTIONS AGAINST APPELLANTS

          MATTHEW F. LEITMAN UNITED STATES DISTRICT JUDGE.

         This appeal arises out of an adversary proceeding in the Chapter 7 Bankruptcy of Debtor Gregory Reed. In that proceeding, the Bankruptcy Court entered an order imposing sanctions (the “Sanctions Order”) on Appellants Reed, Keeper of the Word Foundation (“KWF”), Mic-Arian Corporation (“MAC”), the Gregory J. Reed Scholarship Foundation (“the Scholarship Foundation”), James Harris, and the Law Offices of James Harris (the “Harris Law Office”). (For ease of reference, the Court will refer to all of the Appellants except for Reed as the “Reed Affiliates.”) Reed and the Reed Affiliates now appeal the Sanctions Order. (See ECF #1.) For the reasons explained below, the Sanctions Order is AFFIRMED.

         I

         Reed filed for bankruptcy under Chapter 7 of the Bankruptcy Code on August 28, 2014. On December 17, 2015, the Bankruptcy Court entered an order in which it held, among other things, that (1) certain assets in KWF's possession were property of Reed's bankruptcy estate and (2) KWF needed to turnover the assets to the estate's Trustee, Kenneth Nathan (the “Turnover Order”). Those assets included a 50-percent interest in real property located at 1201-1209 Bagley in Detroit, Michigan (the “Bagley Property”). KWF appealed the Turnover Order to this Court, and this Court affirmed. See Reed v. Nathan, 558 B.R. 800 (E.D. Mich. 2016), aff'd, No. 16-2685 (6th Cir. Sept. 7, 2017).

         In August 2016, the Bankruptcy Court authorized Nathan to employ Dwellings Unlimited, LLC (“Dwellings”) as a real estate broker to market and sell the Bagley Property. Nathan and the co-owner of the Bagley Property, the Charles H. Brown Trust (the “Trust”), eventually agreed to sell the property, and the Bankruptcy Court entered an order authorizing the sale.

         Thereafter, KWF, MAC, and the Scholarship Foundation filed an action against, among others, Dwellings, the Trust, and the Brown Companies (“BC”) in the Wayne County Circuit Court seeking to stop the sale of the Bagley Property and partition that property. Harris and the Harris Law Office represented KWF, MAC, and the Scholarship Foundation in that state-court action.

         Dwellings, the Trust, and BC removed the state-court action to the Bankruptcy Court, and it was assigned adversary proceeding case number 17-04125. KWF, MAC, and the Scholarship Foundation objected to the removal. The Bankruptcy Court overruled that objection, retained jurisdiction, and declined to remand to state court.

         On March 6, 2017, Dwellings, the Trust, and BC served Reed and the Reed Affiliates with a “safe harbor” letter and draft sanctions motion pursuant to Bankruptcy Rule 9011.[1] (See ECF #3 at Pg. ID 210.) In the “safe harbor” letter, Dwellings, the Trust, and BC said that if the Complaint was not withdrawn, they would file the sanctions motion in the Bankruptcy Court. (See id.) Neither Reed nor the Reed Affiliates responded to the “safe harbor” letter, and the Complaint was never withdrawn.

         Dwellings, the Trust, and BC then filed two motions in the Bankruptcy Court: (1) a motion to dismiss the Complaint and (2) a motion to impose sanctions against Reed and the Reed Affiliates. The Reed Affiliates were served with the two motions through the Bankruptcy Court's electronic filing system. However, Reed was not a named party to, nor counsel in, the adversary proceeding, and thus he did not receive the motions through the Bankruptcy Court's electronic filing system. And Dwellings, the Trust, and BC did not personally send either of the motions to Reed by regular mail or otherwise. Neither Reed nor the Reed Affiliates filed any response to the motion to dismiss or the motion for sanctions.

         On April 25, 2017, the Bankruptcy Court entered two orders granting the motions: an order dismissing the Complaint in the adversary proceeding and the Sanctions Order. In the Sanctions Order, the Bankruptcy Court awarded Dwellings, the Trust, and BC “all reasonable attorney fees and expenses in the prosecution of their sanctions motion.” (ECF #3 at Pg. ID 203.) The Bankruptcy Court issued these sanctions against Reed and the Reed Affiliates “jointly and severally.” (Id. at Pg. ID 204.) The Sanctions Order further reflected the Bankruptcy Court's belief that Reed had “been served” with the sanctions motion. (Id. at Pg. ID 202.)

         The Reed Affiliates were served with the Sanctions Order through the Bankruptcy Court's electronic filing system. However, because Reed was not a named party to, nor counsel in, the adversary proceeding, he did not receive electronic service of the Sanctions Order through the court's system. Instead, counsel for Dwellings, the Trust, and BC mailed the Sanctions Order to Reed on April 26, 2017. (See adversary proceeding at Dkt. #30.)

         On May 9, 2017, the Reed Affiliates filed objections to the Bankruptcy Court's two orders, and Reed filed a separate objection to the orders. The Bankruptcy Court overruled the objections in written orders entered on May 15, 2017.

         Reed and the Reed Affiliates timely appealed the Sanctions Order ...


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