In Re Michael Carmine Gallucci, Debtor.angelina Gallucci, Plaintiff-appellant, v. Charles E. Grant, As Trustee, Defendant-appellee, 931 F.2d 738 (11th Cir. 1991)

This case involves a turnover proceeding brought in the Bankruptcy Court for the Middle District of Florida. The trustee in the bankruptcy sought an order requiring Angelina Gallucci (Mrs. Gallucci) to vacate her home in Warwick, Rhode Island and to turn over the possession thereof to him. During the proceeding, Mrs. Gallucci failed to appear for a deposition, and the bankruptcy court, on the trustee's motion, entered an order striking her defensive pleadings as a sanction for her failure to discover. She appealed to the district court, and that court affirmed.

Mrs. Gallucci's son, Michael Gallucci, Jr., became insolvent in 1981,¹  and a trustee, Charles Grant, was appointed to administer the bankruptcy estate.²  In 1984, Grant instituted an adversary proceeding against Mrs. Gallucci, among others,³  claiming that her home was property of the estate and must be turned over to the trustee pursuant to 11 U.S.C. § 542 (1988).⁴  Mrs. Gallucci subsequently filed an action in the Superior Court of Rhode Island to quiet title to the property. Grant removed that action to the United States Bankruptcy Court for the District of Rhode Island; that court transferred it to the Bankruptcy Court for the Middle District of Florida, which consolidated the quiet title and turnover proceedings for trial pursuant to Fed. R. Civ. P. 42(a).

Mrs. Gallucci, an elderly, bedridden widow, relied on her attorneys to defend against the turnover of her home. On December 2, 1986, Chester Trow, counsel for the trustee, served a notice of deposition, and a request for production of documents on Mrs. Gallucci's counsel in Florida, William Day. Trow later contacted Day to schedule the deposition, and Day told him that he was uncertain if Trow would be allowed to depose Mrs. Gallucci because she was just beginning to recover from major exploratory surgery. Day, however, did not seek a protective order.

Believing that the deposition would proceed, Trow traveled to Rhode Island, but Mrs. Gallucci did not appear at the appointed place and time.⁵  Trow returned to the bankruptcy court, asking it to sanction Mrs. Gallucci for the discovery violation, and the court obliged, charging her with the expenses and attorney's fees that Grant had incurred ($3,193.30). See Bankr.R. 7037 (incorporating by reference Fed. R. Civ. P. 37).⁶  Mrs. Gallucci did not pay the sanction within the time allowed by the court,⁷  and, after four extensions, the court struck her pleadings, entering a default against her and barring her from participation at trial⁸  in the turnover proceeding (Nos. 87-250-Civ-Oc-12, 88-48-Civ-Oc-12), and dismissing with prejudice her quiet title action (No. 87-251-Civ-Oc-16). Mrs. Gallucci appealed. The district court affirmed the sanctions order and final judgment in the turnover action--the subject of the instant appeal; when the quiet title action came before the district court (the appeals had proceeded separately), the court stayed it pending the resolution of this appeal.

In his turnover complaint, the trustee alleged that the Rhode Island property was part of the bankruptcy estate as of the commencement of the case or, alternatively, that the property later was conveyed to the estate as a gift. Grant conceded at trial, however, that the debtor did not hold an interest in the property at the commencement of bankruptcy;⁹  he relied entirely on his alternative claim that the estate obtained title to the property by gift in the following series of transactions. Until 1970, Mrs. Gallucci and her husband, Michael Gallucci, Sr., owned the property jointly. On October 2, 1970, Michael Gallucci, Sr., transferred his interest in the property to the couple's daughter-in-law, Patricia Gallucci--the debtor's wife. On November 3, 1972, Mrs. Gallucci also transferred her interest in the property to Patricia Gallucci, leaving Patricia with a fee simple interest in it. In June 1980, Patricia purported to convey the property to Robert Gaudio, a family friend residing in Florida.¹⁰  Gaudio, in turn, quitclaimed the property to the trustee in January 1984.¹¹ 

At trial, the bankruptcy court considered the possibility that Mrs. Gallucci's entitlement to the property was superior to the trustee's. First, it noted that in a deed, dated January 12, 1983, Gaudio purportedly conveyed his interest in the property to Decorative Statues, Inc. (a corporation in which Patricia Gallucci had a majority stake); another deed, dated February 25, 1983, conveyed the property from Decorative Statues to Mrs. Gallucci. If these two deeds, both executed prior to the deed from Gaudio to the trustee, were valid, then Mrs. Gallucci would be the record owner of the property. The bankruptcy court found, however, that the deed from Gaudio to Decorative Statues was forged and, consequently, that even though the appellant held a deed conveying the property from Decorative Statues to her, she could not claim under it. Thus, it entered a final judgment ordering Mrs. Gallucci to turn over the property to the bankruptcy estate.

On appeal to us, appellant contends that the bankruptcy court (1) did not have jurisdiction to decide the turnover action against Mrs. Gallucci since that action involved property that concededly never had belonged to the debtor; and (2) abused its discretion by (a) sanctioning Mrs. Gallucci rather than her attorney for discovery abuse; (b) striking Mrs. Gallucci's pleadings although she did not willfully disobey the court's sanctions order; and (c) refusing to remove the trustee's counsel from the case due to his conflicts of interest.¹²  Thus, Mrs. Gallucci contends, the district court erred in affirming the bankruptcy court's orders and final judgment.

We conclude that the bankruptcy court lacked jurisdiction to order a turnover of this property and that, consequently, the case must be dismissed; accordingly, we do not discuss Mrs. Gallucci's other challenges.

Although bankruptcy courts by statute may hear "any or all cases under title 11 and any or all core proceedings arising under title 11 or arising in or related to a case under title 11," 28 U.S.C. § 157(a) (1988), they may not entertain cases involving noncore, unrelated matters, see, e.g., Pacor Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984) (" [J]urisdiction over nonbankruptcy controversies with third parties who are otherwise strangers to the civil proceeding and to the parent bankruptcy does not exist.") (quoting In re Haug, 19 B.R. 223, 224-25 (Bankr.D.Ore.1982)); In re Holland Indus., 103 B.R. 461, 465 (Bankr.S.D.N.Y. 1989) ("Bankruptcy courts have no jurisdiction to entertain civil proceedings that are neither core proceedings nor related proceedings."). The instant case involves property that never belonged to the debtor but that a third party, Gaudio, quitclaimed to the trustee to "compromise" the trustee's concededly baseless claim against him.¹³  We now consider whether the bankruptcy court had jurisdiction to entertain a turnover action involving this property, i.e., was this action a core or related proceeding to Michael Gallucci, Jr.'s bankruptcy.¹⁴ 

Applications for turnover orders ordinarily are core proceedings within the jurisdiction of the bankruptcy courts. See 28 U.S.C. § 157(b) (2) (E) (1988) (core proceedings include "orders to turn over property of the estate"). Whenever a trustee brings a turnover action, he must establish, however, as part of his invocation of the bankruptcy court's summary jurisdiction, that the property he seeks to recover in the turnover action is "property of the bankruptcy estate" (property that will be available for distribution by the trustee). See 11 U.S.C. § 541 (1988) (defining property of the estate). If the action does not involve property of the estate, then not only is it a noncore proceeding, it is an unrelated matter completely beyond the bankruptcy court's subject-matter jurisdiction.¹⁵  This can be gleaned from a general principle of bankruptcy law: if the resolution of litigation cannot affect the administration of the estate, the bankruptcy court does not have jurisdiction to decide it. For example, in In re Denalco Corp., 57 B.R. 392 (N.D. Ill. 1986), two secured creditors asked the bankruptcy court to determine which of them had the superior interest in a piece of the debtor's equipment; the bankruptcy trustee disclaimed any interest in the equipment since the creditors' claims exceeded its value. On these facts, the district court held that the action was a noncore, unrelated matter; the resolution of the creditors' competing claims could not affect either the assets or the liabilities of the debtor's estate. Id. at 395; see also Pacor Inc., 743 F.2d at 995; In re Dickenson Lines, 47 B.R. 653, 656 (Bankr.D. Minn. 1985) ("The usual test for determining whether a civil proceeding is related to a bankruptcy proceeding is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy."); In re McKinney, 45 B.R. 790, 791-92 (Bankr.W.D. Ky. 1985) ("it is only upon 'property of the estate' that this Court has ever been permitted to have any direct judicial impact").

In the instant case, the trustee contends that the Rhode Island property became property of the estate as a result of Gaudio's quitclaim deed to him. Grant notes that property of the estate includes, in addition to "all legal and equitable interests of the debtor in property as of the commencement of the case," 11 U.S.C. § 541(a) (1), " [a]ny interest in property that the estate acquires after the commencement of the case," id. Sec. 541(a) (7) (emphasis added). Thus, according to the trustee, the property became "property of the estate" through Gaudio's gift, and the bankruptcy court, in the subsequent turnover action, simply could assert jurisdiction on the basis of the title documents, regardless of the debtor's interest in the property or the relation of the property to the bankruptcy estate. In other words, the trustee established jurisdiction by compromise, insulating from inquiry the nature of the property and its connection with the bankruptcy estate prior to settlement.¹⁶ 

Although the after-acquired property provision, section 541(a) (7), could be read broadly to include any interest that the estate acquires after the commencement of the bankruptcy, regardless of the debtor's interest in it, we do not think that this was Congress' intent. We agree with the trustee that section 541(a) (7) allows him to contract on behalf of the estate or to recover beneficial rights and interests that the debtor may have in property of another; according to the legislative history of this provision,

[section 541(a) (7) ] clarifies that any interest in property that the estate acquires after the commencement of the case is property of the estate; for example, if the estate enters into a contract, after the commencement of the case, such a contract would be property of the estate. The addition of this provision by the House amendment merely clarifies that section 541(a) is an all-embracing definition which includes charges on property, such as liens held by the debtor on property of a third party, or beneficial rights and interests that the debtor may have in property of another. However, only the debtor's interest in such property becomes property of the estate. If the debtor holds bare legal title or holds property in trust for another, only those rights which the debtor would have otherwise had emanating from such interest pass to the estate under section 541.

124 Cong.Rec. 32,399 (1978) (House); id. at 33,999 (Senate); see also 4 Collier on Bankruptcy p 541.20 (15th ed. 1991). We do not believe, however, that Congress intended section 541(a) (7) to extend to gifts of property having no connection to the debtor and not contracted for by the estate--in effect, conveyances coerced by the trustee.

In the instant case, the trustee concedes that the debtor never had an interest in the Rhode Island property;¹⁷  rather, the trustee sought turnover based upon the deed he obtained from Gaudio.¹⁸  The bankruptcy court relied entirely upon the "compromise" the trustee convinced Gaudio to enter to determine whether the property the trustee sought was property of the estate. We believe, however, that the bankruptcy court should have inquired, sua sponte, into the compromise and determined if it, in fact, resulted in the acquisition of property of the estate. Cf. In re Denalco Corp., 57 B.R. at 395 (the court "is obligated to raise the jurisdictional issue sua sponte where it appears with certainty the parties should have known their dispute would have no impact on the administration of ... bankruptcy"). In other words, the court must examine a compromise in which property is transferred to the estate (and thus is alleged to be property of the estate) and determine if the compromise merely effected a return of the debtor's property¹⁹  or, rather, was a gift of property unrelated to the debtor and the bankruptcy estate. If the court finds the latter, the turnover action is a noncore, unrelated matter that the court must dismiss for want of jurisdiction. This was the case here.²⁰ 

Since the bankruptcy court lacked jurisdiction to decide this case, we VACATE the district court's judgment and direct the district court to vacate the bankruptcy court's sanctions order and to dismiss this action for want of subject-matter jurisdiction in the bankruptcy court.

IT IS SO ORDERED.