March 21, 2017
Authored by: William Maloney
A Chapter 7 debtor’s failure to comply with a bankruptcy court order to preserve a $2 million dollar-plus collection of fine wines has led to the imposition of sanctions of over $1 million, most of which could be charged against the debtor’s otherwise exempt property.
The wine in question, after three years of litigation, was determined to be part of the bankruptcy estate of Jeffrey Prosser. Prosser used to own companies that provided telephone, internet and cable television service to the U.S. Virgin Islands. Both he and his companies filed bankruptcy in 2006. A recent, 66-page opinion from the U.S. District Court in the Virgin Islands sets forth this saga of the wine collection in great detail; if you are taken to oenophilia, be ready to despair. See In re Jeffery L. Prosser, Bankruptcy Case 2006-3009, Civil Action 3:2013-0087 (February 23, 2017, Doc. No. 58).
In its opinion, the district court largely upheld orders by the U.S. Bankruptcy Court of the Virgin Islands holding both Prosser and his wife, Dawn, in contempt for allowing the dissipation and destruction of the wine collection, but reversed an order of the bankruptcy court that would have empowered the trustee to sell real property held by the Prossers to satisfy a $528,086 monetary sanction that would reimburse the trustee for his expenses in prosecuting the contempt action. The property in question, held by the Prossers as tenants by the entireties (the “TBE Property”), had previously been adjudicated as exempt under 11 U.S.C. § 522(b)(3)(B).
The district court held that a sanction intended to reimburse the estate for attorney’s fees and expenses constituted an administrative expense and was barred by 11 U.S.C. § 522(k). However, the district court refrained from ruling on whether exempt property could be ordered sold to satisfy a separate contempt sanction in the amount of $419,136, which was the lost value of the wine collection. Further briefing was ordered.
The Prossers’ wine collection was initially appraised at $2.1 – $2.3 million; Dawn Prosser claimed that that she owned at least a 50-percent interest in the wine. In December 2008, the bankruptcy court approved a stipulation under which one-half of the wine collection would be turned over to the trustee for sale and the other half retained in Dawn Prosser’s possession until her interest in the wine was adjudicated.
The bulk of the wine was stored (climate controlled, of course, or so everyone thought!) the Prossers’s homes Florida and the U.S. Virgin Islands. The wine had been inventoried in January 2008. Since December 2007, the Prossers (along with their children) had been subject to a preliminary injunction that required them to “safeguard certain property that the trustee contended was part of the bankruptcy estate in secure locations and to protect the property from destruction, damage, theft, removal or transfer pending its turnover to the trustees.” The Prossers were further forbidden to “spend, consume, damage, dispose of, sequester, abscond with, secrete or transfer the property” without written consent of the trustees. The stipulation that allowed Dawn Prosser to retain possession of half the wine collection specifically stated that the preliminary injunction continued in force.
In February 2011, three years since the wine was inventoried, the bankruptcy court determined Dawn Prosser had no interest in the wine and so her half of the collection was to be turned over to the Chapter 7 trustee. One month later, the wine stored in Palm Beach was inspected, and four months after that, the wine at the Virgin Islands residence was inspected. What was found was not good; if any of you have ever taken a vacation with the kids left in charge of the house, and then checked the liquor cabinet upon your return, then you know what is coming next.
At the Palm Beach residence, only 459 of the 939 bottles inventoried in 2008 were still in storage. At the U.S. Virgin Islands residence, only 527 bottles remained of the original 980. Furthermore, at the U.S. Virgin Islands residence, the air conditioners were no longer operating and the room had been given over to storage of “miscellaneous household junk.” Mold and insect damage was noted. Most of the labels were damaged and of six bottles sampled, none remained in a condition suitable for sale (although we at The Bankruptcy Cave will drink anything, so we are trying to obtain a bottle). The expert who inspected the wine opined that “the entire collection has been destroyed by careless or willfully negligent storage.” The wine stored at the U.S. Virgin Islands residence was eventually sold “as is, where is” for just $15,739. Total loss of value to the wine collection was $419,136.
In August 2011, the trustee filed a “Motion to Enforce Turnover Order, for Contempt and for Sanctions” against both Jeffrey and Dawn Prosser. The motion sought, among other things, a finding of contempt, sanctions in the form of all legal fees and expenses associated with the trustee’s investigation and liquidation of the wine, and an order permitting the trustee to collect the value of the missing and damaged wine. In a series of orders in 2013, the bankruptcy court ordered the Prossers to pay the estate $528,086 to reimburse it for legal fees and costs associated with obtaining turnover of the wine collection and the related contempt proceedings (“Fee Sanction”) and $419,136 for the diminished value of the wine (“Loss of Value Sanction”).
When the Prossers failed to pay, the bankruptcy court once against found them in contempt and entered an order requiring the Prossers to pay the Fee Sanction by way of 60 monthly payments of $8,801. If they failed to make the required payments, the Prossers were further ordered to convey title to the TBE Property to the trustee. The Prossers never made a single monthly payment and then refused to convey the TBE Property to the trustee.
Upon the trustee’s motion, the bankruptcy court next entered an order pursuant to Rule 70 of the Federal Rules of Civil Procedure (the “Rule 70 Order”) directing the trustee to execute quit claim deeds and any other documents required to transfer the TBE Property to the bankruptcy estate. The property, which had been valued at approximately $2.2 million, was to be sold and the proceeds first applied to the Fee Sanction, with any surplus then applied to the Loss of Value Sanction.
The Prossers appealed everything. The district court upheld the decisions of the bankruptcy court, except for the Rule 70 Order, which was partially reversed, with further briefing ordered on a single issue. Among the district court’s holdings:
- The Prossers’ argument that the bankruptcy court lacked subject matter jurisdiction to impose the injunction was untimely and should have been filed when the order commanding turnover of the wine (and making the preliminary injunction permanent) was entered in 2011. Consequently, subject matter jurisdiction had been established as the law of the case.
- The bankruptcy court did not err as a matter of law nor abuse its discretion in finding the Prossers in civil contempt for violating the injunction regarding the preservation of assets.
- That the imposition of sanctions against the Prossers was not barred due to the trustee’s failure to insure the wine (which the Prossers had maintained was not property of the estate).
- The bankruptcy court’s rejection of a Daubert challenge to the trustee’s wine expert was affirmed. The expert, Mary Ewing-Mulligan, is the author of “Wine for Dummies.” The district court also noted that one argument made by the Prossers, that the expert was not qualified because she had not previously been qualified to provide expert testimony, if accepted would create a world without experts, as every expert witness has to have a first time.
- The bankruptcy court did not err in denying the Prossers’s motion that the ruined wine be abandoned as an asset of the estate, noting that it would set an unfortunate precedent if a debtor was allowed to destroy a valuable estate asset in violation of a court order and then seek to compel the trustee to abandon the ruined asset.
- That the as-is, where-is auction of the damaged wine was not commercially unreasonable, an argument the Prossers supported in part by claiming the trustee’s prosecution of the contempt proceeding created bad publicity that disparaged the wines throughout the Virgin Islands.
In all, the district court rejected 12 of 13 arguments made by the Prossers. However, by reversing (at least in part) the bankruptcy court’s Rule 70 Order, the district court has so far preserved the exemption of the TBE Property. The district court rejected two arguments for affirming the Rule 70 Order made by the trustee.
First, the trustee took the position that the TBE Property was no longer exempt property because by obtaining sanctions against the Prossers, he had become a creditor of both the husband and wife. Under Virgin Island law, property held as tenants by the entireties is not exempt from process as to creditors of both spouses. The district court held that the bankruptcy estate was created upon the filing of the case and, at that time, the TBE Property was exempt and remained so despite the Prossers having incurred a joint, post-petition debt to the estate.
Having determined that the TBE Property remained exempt, the district court next considered whether the bankruptcy court’s sanction authority under 11 U.S.C. § 105(a) allowed, after a finding of contempt, exempt property to be sold to reimburse the trustee for administrative expenses incurred in the contempt litigation and reimburse the bankruptcy estate for the lost value of the wine.
At least with regard to the administrative expenses that were to be reimbursed under the Fee Order, the district court held that the bankruptcy court lacked authority to order the sale of the TBE Property, relying on a 2014 U.S. Supreme Court decision in Law v. Siegal, 134 S. Ct. 1188 1188. In Law, the Supreme Court reversed a decision that allowed a trustee to surcharge a debtor’s homestead exemption to recover fees and expenses incurred in overcoming a lien the debtor had fraudulently created in an effort to preserve equity in his home beyond the statutory exemption.
The Supreme Court held that the powers created under 11 U.S.C. § 105(a) did not include the power to override an explicit mandate in another section of the Bankruptcy Code. The Supreme Court held that the prohibition contained in 11 U.S.C. § 522(k), which provides that exempt property “is not liable for payment of any administrative expense,” precluded the surcharge. The district court held the Law case to be applicable here; the Fee Sanction constituted an administrative expense and therefore exceeded the authority provided under 11 U.S.C. § 105(a).
Finally, the district court stated that the effect of Law upon the Loss of Value Sanction, which called for the Prossers to reimburse the estate for losses caused by their contemptuous actions, was less clear. Noting that Law was issued after briefing on the Prosser appeal had been concluded and that neither party subsequently brought the case to the district court’s attention, the parties were ordered to provide additional briefing on the issue. Pursuant to a schedule established by the district court, the additional briefing should be concluded by April 6, 2017.
Certainly, this is a sad tale, a complete loss of value and waste of money, and the Prossers come out of this tale with red grape stains running down their formal wear. By the same token, we are surprised that the trustee did not insure the wine collections, or follow up on their storage. The case is a helpful reminder to all of the need to really pay attention to collateral or other assets that are so easily moved, spoiled, or drank and celebrated.