Lovald v. Falzerano (In re Falzerano)

No. 11-6036
The Eighth Circuit BAP affirmed the judgment against the Trustee in his turnover action that was predicated entirely upon an unjust enrichment claim. The BAP held that section 542(b) and not 542(a) governed the dispute as the Trustee's unjust enrichment claim was aimed to collect a debt owed to the estate. The BAP reviewed the statutory language and found that section 542(b) could not include that sounding in unjust enrichment as the statute applies only to debts that are matured, payable on demand, or payable on order. The court further noted the South Dakota law governing the requirements of unjust enrichment and concluded that it could not meet the requirements of 542(b). The BAP explicitly rejected the Trustee's attempts to rely upon the Eighth Circuit's decision in In re NWFX by noting that the holding in that case had found unjust enrichment was the basis for the estate's interest in certain property--not the basis for collecting the debt. The BAP proceeded to apply the more recent Eighth Circuit decision in In re Pyatt that limited the trustee's turnover rights to those entities that controlled the property at the time of the demand and found that the trustee's demand in this case could not qualify as it was merely a demand on an alleged debt.
Procedural context:
Trustee filed a complaint under section 542 against the non-debtor defendants on the basis of an unjust enrichment theory. A trial was held and the bankruptcy court entered judgment in favor of the defendants. The bankruptcy court held that defendants were not unjustly enriched because the debtor received fair compensation for the services rendered under the terms of the contract between the debtor and the non-debtor defendants which provided for debtor to receive only the net profits from the non-debtors' cattle. Trustee timely appealed.
Debtor received a life estate in 320 acres of real estate from his spouse who passed away pre-petition. The children and grandchild received all other property including her cattle and a remainder interest in the land. However, one child was excluded from the will and this caused the parties to execute a settlement agreement to avoid a will contest. The settlement agreement permitted discretionary distributions by the probate estate representative and allowed the debtor to keep and use the decedent's personal property for as long as he chose. The settlement agreement also permitted the debtor to run the decedent's cattle herd, raise the cattle on behalf of the heirs, and to use the profits from the land and cattle for his own living expenses. There were no distributions under the settlement agreement at the time of the bankruptcy. However, Trustee commenced his turnover action to recover the rents for the pasture and value of the hay provided to the cattle owned by the probate estate that was run by the debtor.
Kressel, Schermer, and Venters

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