By: Scott B. Riddle, Esq.

Welt v. MJO Holdings, Inc. (In re Happy Hocker Pawn Shop, Inc.), No. 05-16182, 2006 U.S. App. LEXIS 31639 (11th Cir. December 21, 2006).

Prior to filing bankruptcy, the debtor pawn shop had transferred its inventory to the plaintiff in satisfaction of a debt, and the plaintiff thereafter also operated a pawn shop.  After the debtor filed a Chapter 7, and listed as assets personal property located at the pawn shop, the Chapter 7 Trustee mistakenly shut down the plaintiff’s business.  Plaintiff filed an adversary seeking a declaratory judgment that the debtor had transferred its assets and had no further interest in the shop, and the business was re-opened a few days later.  The plaintiff and Trustee then entered into an agreed-upon final judgment in the adversary, which was not appealed, which concluded that the inventory had been transferred to the plaintiff prior to debtor’s Bankruptcy filing.

Plaintiff then  filed a Motion for Leave to Sue Trustee in State Court for various tort claims, including trespass, conversion and tortious interference with contract.  The Trustee opposed the Motion, arguing that his actions were within the scope of his duties and he should have qualified immunity.  He alternatively argued that the proceeding should be pursued in Bankruptcy Court as it was either a core proceeding because it was within the scope of his duties, or  "related to" the underlying Bankruptcy case. The Bankruptcy Court granted the plaintiff’s motion and the District Court affirmed.

The Eleventh Circuit affirmed.  The proposed complaint was not a core proceeding, as it involves property (the inventory that had been transferred to the plaintiff pre-petition) that was never property of the estate. The complaint was also based entirely on state law claims, and Title 11 does not give a Trustee the right to seize property of a non-debtor.  The proposed complaint also does not invoke "related to" jurisdiction because the Trustee was acting outside the scope of his authority, and the damages sought would not come out of the debtor’s estate. Alternatively, if the Trustee prevailed, the estate would not derive any benefit.