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Kelly v. Herrell

United States District Court, W.D. Wisconsin

July 13, 2018

BRIAN J. KELLY, Debtor, and PAUL KELLY, Creditor, Appellants,
PETER F. HERRELL, Trustee, Appellee.



         This case arises out of an involuntary petition filed on December 12, 2002 under chapter 7 of the Bankruptcy Code against debtor Brian Kelly. Over the past 15 years, the appellants, Kelly and his father, Paul Kelly, have filed numerous appeals in the Bankruptcy Court for the Western District of Wisconsin, this court and the Court of Appeals for the Seventh Circuit. Now before the court is their appeal of an order entered by the bankruptcy court on October 5, 2017, allowing trustee Peter Herrell to sell a farm allegedly owned by Brian Kelly to the Jerry Johnson Revocable Trust. Dkt. #2.

         The sole issue raised in the appeal is whether the bankruptcy court entered the October 2017 order without proper notice and a fair hearing, in violation of appellants' rights under the due process clause. For the reasons explained below, I am dismissing the appeal.

         The following facts are drawn from the bankruptcy court record (Bankr. dkt.), Bankr. Case No. 02-18037, unless noted otherwise. Because this case has an exhaustive procedural history spanning more than 15 years, only those events relating to the issues raised on appeal are summarized below.


         On January 10, 2017, Peter Herrell, the Chapter 7 bankruptcy trustee, filed a motion in the bankruptcy court seeking authority under sections 105, 363 and 365 of the bankruptcy code to sell real estate purportedly owned by Brian Kelly to the Jerry Johnson Revocable Trust for the sum of $44, 000, free and clear of all liens, claims, encumbrances and interests, except for real estate taxes. Bankr. dkt. #335. The trustee specifically requested that the bankruptcy court find the sale to be a legal, valid and effective transfer of the real estate, the real estate is owned solely by the debtor and there are no other persons or entities having any rights or interests in the real estate in accordance with 11 U.S.C. § 363(f) and the buyer is purchasing the property in good faith in accordance with 11 U.S.C. § 363(m). Id. Accompanying the motion was a notice to appellants and other potentially interested parties, stating that they had 21 days to file a request for a hearing and a written response. Id.

         On January 31, 2017, appellants filed an objection to the sale, arguing that (1) the events leading up to the involuntary petition, the involuntary petition itself and the subsequent involuntary proceeding were all tainted with fraud; and (2) because Paul Kelly purchased the real estate and placed the title in his son Brian's name while Paul occupied it as his residence and operated the farm, Paul has an interest in the real estate based on a “right of adverse possession” that precludes a sale under 11 U.S.C. § 363(f). Bankr. dkt. #336, #357 at 3. Appellants also requested a hearing on the matter. The bankruptcy court held a preliminary telephonic hearing on March 8, 2017, at which the parties agreed to submit written briefs on the motion to sell the property. Bankr. dkt. #349.

         After considering the lengthy briefs filed by the trustee, appellants and other parties, bankr. dkt. ##350-57, the bankruptcy court issued a written decision on October 5, 2017. Bankr. dkt. #357. The bankruptcy court declined to consider appellants' fraud arguments, concluding that they had been raised and ruled on in previous bankruptcy proceedings and were referred to on appeal in the United States District Court for the Western District of Wisconsin and the Court of Appeals for the Seventh Circuit. Id. at 3-4. (Neither this court nor the court of appeals has ruled on the merits of the fraud claims because the bankruptcy court has not yet issued a final appealable order in this case. Id.; W.D. Wis. case no. 13-cv-633-bbc, dkt. #21.) With respect to appellants' second objection to the sale, the bankruptcy court found that Paul Kelly did not have title to the real estate or a right to the property by adverse possession. Bankr. dkt. #357 at 4-5. However, the bankruptcy court noted that the United States trustee alleged that Paul and Patricia Kelly may have some interest in the property.

         Although the bankruptcy court rejected both of appellants' objections to the sale of the property, it determined that the specific conditions requested by the trustee under 11 U.S.C. §§ 363(f) and (m) could not be granted. In support of his position that the property was free and clear of all liens, claims and encumbrances, the trustee relied on a report from a title company and a 2009 state court decision in a fraudulent transfer action, ordering the property returned to Brian Kelly. However, the bankruptcy court found that neither the title report nor the state court judgment made it clear whether there were any liens, claims or encumbrances attached to the real estate, including any interest that may be held by Paul Kelly. The bankruptcy court also noted that although the parties had agreed that the motion for approval of the sale be decided on briefs without an evidentiary hearing, a review of the record revealed that there were questions of fact as to the status of the title that could be determined only after an evidentiary hearing. However, it concluded that ordering an extensive evidentiary hearing to make the findings necessary to satisfy 11 U.S.C. §§ 363(f) and (m) would contravene the court of appeals' admonishment that this case had consumed too many resources and should be resolved expeditiously. Kelly v. Herrell, 602 Fed.Appx. 642, 647 (7th Cir. 2015) (“This case has consumed far more resources-judicial and otherwise-than it should have. We trust that the bankruptcy court will now be in a position to resolve it expeditiously.”). The bankruptcy court also noted that the status of the property's title was an issue best left for the state courts. Bankr. dkt. #357 at 6-8.

         In the end, the bankruptcy court declined to approve the sale of the property under 11 U.S.C. § 363(f) and make the findings that the trustee requested. However, it concluded that “the [t]rustee should be authorized to sell the real estate to the proposed purchaser pursuant to a trustee's deed, subject to all liens, claims, and encumbrances and without the requested findings” and that “[t]he proposed purchaser can decide if the conveyance is sufficient to give it the title it needs” or “whether it wants to go forward with the purchase and resort to a state court action to clear title, or to forgo the purchase.” Bank. dkt. #357 at 9.


         A. Proper Appellants

         As a preliminary matter, it is necessary to address the role of Paul Kelly in this case. In ruling on a prior appeal filed by Brian and Paul Kelly in the underlying bankruptcy case, the Court of Appeals for the Seventh Circuit held that

Kelly's father, Paul Kelly (who has a law degree but was disbarred in Wisconsin in 1982), not only signed the notice of appeal but also his son's appellate briefs. Yet as far as we can tell, the senior Kelly does not have a cognizable interest in the Chapter 7 estate. He calls himself a creditor, but that characterization is questionable. He did not file a claim against the estate, nor is he identified as a creditor on the Claims Register. Neither can we find anything in the record from Brian Kelly indicating that his father was one of his creditors at the time the Chapter 7 case was filed. Paul Kelly first surfaced in December 2011-nine years after the involuntary petition was filed-when he objected to the settlement with the trustee. At the hearing in 2013 on the debtor's motion to vacate the transfer to a different bankruptcy judge, the senior Kelly participated in the conference, “appearing personally.” The bankruptcy and district courts seem to have tolerated this shadowing of his son, but Kelly's father was not legitimately involved in the bankruptcy case and is not a proper appellant. In addition to these serious flaws, Paul Kelly has not explained how the district court's decision or any ruling of the bankruptcy court injured him in a way that we ...

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