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In re Ellenhorn

August 23, 2005

IN RE: ERIC ELLENHORN A/K/K ERIC LEE ELLENHORN, DEBTOR.
R. KENNETH BARNARD, ESQ., TRUSTEE OF THE ESTATE OF ERIC L. ELLENHORN, PLAINTIFF,
v.
THE EE I RESIDENCE TRUST, ERIC ELLENHORN, AS TRUSTEE OF THE EEI RESIDENCE TRUST, ROBERT M. HEBBLE, AS TRUSTEE OF THE EEI RESIDENCE TRUST, HOWARD W. MUCHNICK, AS TRUSTEE OF THE EEI RESIDENCE TRUST, VANITA ELLENHORN, AND ZACHARY ELLENHORN AND ZOIE ELLENHORN, THE LAST TWO NAMES BEING THE TWO MINOR CHILDREN OF ERIC ELLENHORN AND VANITA ELLENHORN AND THE POTENTIAL BENEFICIARIES OF THE EEI RESIDENCE TRUST, DEFENDANTS.



The opinion of the court was delivered by: Sifton, Senior Judge.

Adv. Proc. No. 1-06-01277-608

Chapter 7

MEMORANDUM OPINION AND ORDER

Plaintiff, R. Kenneth Barnard, Bankruptcy Trustee of the estate of Eric Lee Ellenhorn, commenced this action by filing a complaint in United States Bankruptcy Court for the Eastern District of New York against defendants EE I Residence Trust, Eric Ellenhorn, as Trustee of the Trust, Robert M. Hebble, as Trustee of the Trust, Howard W. Muchnick, as Trustee of the Trust, Vanita Ellenhorn, and Zachary Ellenhorn and Zoe Ellenhorn, the children of Vanita and Eric Ellenhorn and potential beneficiaries of the Trust. Barnard sought to have the Trust declared the alter ego of Eric Ellenhorn and to be given the authority to sell property owned by the Trust as part of the Bankruptcy Estate. Presently before the Court is a motion for withdrawal of reference pursuant to 28 U.S.C. § 157(d) and Rule 5011 of the Federal Rules of Bankruptcy Procedure brought by defendants EE I Residence Trust and Eric Ellenhorn. For the reasons set forth below, defendants' motion is denied without prejudice.

BACKGROUND

The following facts are drawn from the parties' pleadings and submissions in connection with the present motion and are undisputed except as noted.

On July 2, 2001, Eric Lee Ellenhorn ("Debtor") formed the EE I Residence Trust ("Trust"), whose initial Trustees were Debtor and Robert M. Hebble. The Trust then purchased property at 6 Eagle Close, Quogue, New York ("Quogue residence") for $553,000, $456,000 of which was financed by a mortgage from Citibank ("Mortgagee"), under which Debtor, individually and as a Trustee, and Hebble, as a Trustee, were the designated borrowers. Debtor remained personally liable for the debt. The Trust Agreement provided, among other things, that Debtor would retain exclusive use of the residence, rent free, until the earlier of his death or twenty years from the date of the agreement and that, if the property was sold, Debtor would receive an annuity for the life of the Trust. If Debtor survived for more than twenty years from the date of the agreement, the Trust was to be distributed to his children. However, if Debtor died before the completion of that term, the Trust would be distributed to representatives of Debtor's estate. Debtor and his two children, Zachary and Zoie, currently live in the Quogue residence.

On October 20, 2004, Debtor filed for bankruptcy protection under Chapter 7 of Title 11 of the United States Code. R. Kenneth Barnard ("Bankruptcy Trustee") was appointed the Bankruptcy Trustee of the estate.

To resolve their ongoing matrimonial litigation, Debtor and Vanita Ellenhorn, his wife at the time, entered into a Stipulation of Settlement in state court ("Stipulation") on November 9, 2004. In that Stipulation, Debtor agreed to transfer the Quogue residence to Vanita so that it could be sold, with Debtor receiving $40,000 from the net proceeds and Vanita receiving the remaining proceeds from the sale. The state court entered a judgment of divorce incorporating the Stipulation on January 24, 2006. The property was never sold and in May 2006, Debtor requested that the Settlement be vacated as having violated the automatic stay provisions of 11 U.S.C. § 362. On June 22, 2006, the state court denied Debtor's motion. An order to this effect has not yet been signed.

On August 16, 2005, Mortgagee commenced a foreclosure action against the Quogue residence. The state court issued a Decision and Order on April 20, 2006 granting summary judgment against Debtor and appointing a referee to ascertain the amount due Mortgagee. A judgment of foreclosure has not yet been entered.

On May 4, 2006, Bankruptcy Trustee commenced an adversary proceeding in the United States Bankruptcy Court for the Eastern District of New York against the Trust, the Trustees and Beneficiaries of the Trust, and Vanita Ellenhorn. The complaint contains three claims for relief seeking: (1) declaratory judgment that the Trust is the alter ego of Debtor and that ownership of the property held by the Trust is therefore legally and equitably vested in Bankruptcy Trustee; (2) judgment authorizing and directing Bankruptcy Trustee to sell the property and a determination of defendants' interests in the proceeds from that sale; and (3) entry of an order pursuant to 11 U.S.C. § 541 and § 542 declaring the real property held by the Trust to be the property of the Bankruptcy Estate, directing the immediate turnover of that property to Bankruptcy Trustee, authorizing Bankruptcy Trustee to sell that property, and an ordering an accounting of the use and disbursement of the property held by the Trust.

The Trust and Debtor have served an answer to the complaint, in which they demand a jury trial. The Trust and Debtor now move to have the adversary proceeding withdrawn from bankruptcy court and proceed as a jury trial in federal district court.

DISCUSSION

In relevant part, 28 U.S.C. ยง ...


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