Opinion
Nos. 93 Civ 1115 (CSH), 93 Civ 1149 (CSH)
April 19, 1994
Opinion
Defendant Resolution Trust Corporation ("RTC") moves for an order pursuant to 28 U.S.C. § 157(d) and Bankruptcy Rule 5011 withdrawing the reference by this Court to the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court") of the preference claims asserted by Plaintiff-Debtors ("Debtors") against RTC in the captioned adversary proceeding filed in the Bankruptcy Court.
BACKGROUND
Debtors Best Products Co., Inc., a Virginia corporation ("Best"), BAC Holdings Group, Inc., a Delaware corporation, Best Ashland; Inc., a Virginia corporation, Best California, Inc., a Virginia corporation, Best Products Co., Inc., a New York corporation, and First Land Development, Inc., a Virginia corporation, ("Debtors") are a group of affiliated debtor corporations who have filed for reorganization in the Bankruptcy Court under Chapter 11 of the Bankruptcy Code. Defendant RTC is receiver for two failed depository institutions, (the "Banks") FarWest Savings Loan Association ("FarWest") and ABQ Federal Savings Bank ("ABQ"), and in that capacity holds certain promissory notes in the Bank's favor.
In late 1988 and early 1989, Best was the subject of a competitive leveraged buyout. The leveraged buyout was largely financed by approximately $1 billion in borrowed funds. These funds were borrowed pursuant to a note purchase agreement dated March 3, 1989 in which Best issued certain Subordinated Bridge Notes in an aggregated principal amount of $175,000,000 to ABQ and FarWest. See Complaint, ¶ 2. Best agreed to pay the principal amount of the Bridge Notes on January 31, 1990, subject to an extension under certain specified circumstances. After Best failed to repay the Bridge Notes on or prior to the extended maturity date of July 13, 1990, FarWest commenced an action against Best under the Bridge Notes in the United States District Court for the Southern District of New York seeking judgment against Best in the approximate amount of $26 million, plus interest and costs. See Complaint, ¶ 9.
On January 4, 1991, Best and certain of its subsidiaries each filed a Chapter 11 petition in the United States Bankruptcy Court for the Southern District of New York. On or about January 11, 1991, the Director of the Office of Thrift Supervision took possession of the assets and properties of FarWest and appointed the RTC as its conservator. Thereafter the Office of Thrift Supervision placed FarWest into receivership and appointed RTC as receiver. On or about March 15, 1990, the Office of Thrift Supervision placed ABQ into receivership and appointed RTC as receiver. Id.
Thereafter, on October 29, 1991, RTC individually and as agent on behalf of the Banks, filed separate proofs of claim against Best and the other debtors, each in the amount of $34,127,453.98 (collectively, the "proofs of claim") based upon certain promissory notes issued to the Banks and another in connection with the leveraged buyout and interest accrued thereon, plus costs and fees. On December 29, 1992, Best, pursuant to section 544(b) of the Bankruptcy Code, commenced this adversary proceeding against the RTC as receiver for the Banks and other financial institutions seeking, inter alia, to void the leveraged buyout as a fraudulent conveyance because it rendered Best insolvent and left it with insufficient capital to conduct its business. The action also sought to recover hundreds of millions of dollars in payments and transfers made to the Banks and other named party defendants. On December 30, 1992, Best also commenced a separate adversary proceeding against RTC as receiver for the Banks and McDonnell Douglas Finance Corporation to void certain transfers and payments as voidable preferences under section 547 of the Bankruptcy Code (the "preference action"). See Plaintiffs' Opposition Memorandum of Law, pp. 4-5.
RTC now moves under 28 U.S.C. § 157(d) to withdraw the reference to the Bankruptcy Court of the claims asserted by Debtors adversary proceeding. RTC contends that § 157 requires the withdrawal of reference by this Court since the plaintiffs' complaint against RTC triggers a collision between the Bankruptcy Code and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") a non-bankruptcy statute.
DISCUSSION
Under 28 U.S.C. § 157(a), district courts may provide that "any or all cases under [the Bankruptcy Code] and any or all proceedings arising under [the Bankruptcy Code] or arising in or related to a case under [the Bankruptcy Code] shall be referred to the bankruptcy judges for the district." 28 U.S.C. § 157(a). However, 28 U.S.C § 157(d) provides:
The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of a party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce. 28 U.S.C. § 157(d).
RTC contends that the Debtors, by suing RTC under title 11, have ignored the FIRREA receivership process and, in particular, a FIRREA provision codified in 12 U.S.C. § 1821(d)(13)(D) which states that "no court" shall have jurisdiction over "any" claim for payment from a depository institution for which RTC has been appointed receiver, or over any action seeking a determination of rights with respect to the assets of such an institution, unless the claimant has presented its claim to RTC pursuant to the mandatory claims process under FIRREA. Since the Debtors in this case have not presented their claims to RTC under that statutory process, RTC argues that the subject matter jurisdiction that would otherwise be exercisable by this Court and the Bankruptcy Court is nullified. Even if the Court were to reject this claim, RTC also argues that the court must consider § 1821(d)(13)(D) in resolving the Debtors' claims and must grant the motion to withdraw reference under § 157(d). I reject these arguments.
Another subsection of FIRREA, 12 U.S.C. § 1441a(b)(4) confers on RTC all of the powers set forth in 12 U.S.C. § 1821(d) which had previously been enacted to confer the § 1821(d) powers on the Federal Deposit Insurance Corporation ("FDIC").
Congress enacted FIRREA for the purpose of resolving the numerous claims against RTC arising from the collapse of hundreds of depository institutions in this country. In arguing for the motion to withdraw reference, RTC contends all actions against RTC as receiver must first be brought through FIRREA's administrative process. However, to follow RTC's line of reasoning would be to ignore RTC's voluntary action of filing proofs of claim with the Bankruptcy Court against Best.
In Langenkamp v. Culp, 498 U.S. 42 (1990), reh'g denied, 498 U.S. 1043 (1991), a trustee for two of bankrupt financial institutions instituted adversary proceedings under 11 U.S.C. § 547(b) to recover, as avoidable preferences, payments which certain creditors had received immediately prior to the institutions' filing of bankruptcy. The central issue before the Court was whether the creditors, who had filed the Proofs of Claim against the bankrupt institutions in respect of other amounts due them, were entitled to a trial by jury on the issue of whether the payments they received from the institutions constituted avoidable preferences. The Court rejected the claim to a jury trial. It held that "by filing a claim against the bankruptcy estate the creditor triggers the process of `allowance and disallowance of claims' thereby subjecting himself to the bankruptcy court's equitable power." Id. at 44, (citing Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989)) The Court found the filing of the proof of claim and the ensuing preference action by the trustee to be "integral to the restructuring of the debtor-creditor relationship through the bankruptcy court's equity jurisdiction." Id.
Similarly, RTC, by submitting proofs of claim in Best's bankruptcy proceeding, submitted itself to the equitable jurisdiction of the Bankruptcy Court. The preference and fraudulent transfer actions commenced by the debtors directly stem from the "allowance and disallowance of claims" of the initial bankruptcy proceedings. The court in Langenkamp also noted that if the creditors had not submitted claims against the bankruptcy estate, they would not have waived the right to jury trial. Id. at 45. By analogy, if RTC had not submitted a claim against the bankruptcy estate of Best it also would not have waived its right to demand that Best pursue administrative remedies within FIRREA prior to bringing its claim against RTC in the bankruptcy court.
The RTC argues that the Court in Langenkamp did not intend to overrule the principle that jurisdiction can only be imposed by statute, and that the Court's phrase "the bankruptcy court's equitable power" is simply used to contrast actions "at law" which are triable by a jury. I do not agree. First, the bankruptcy Court gains jurisdiction over the defendants because RTC filed a voluntary proof of claim against the debtors in the bankruptcy proceeding. The bankruptcy court has jurisdiction over all cases arising under the Bankruptcy Code. 28 U.S.C. § 1334(a). Second, the distinction between actions "at law" and actions in "equity" is not relevant in this case. The Court stated in Langenkamp that "if a creditor is met, in turn, with a preference action from the trustee, that action becomes part of the claims-allowance process which is only triable in equity." Id. at 44.
The facts at bar closely resemble those of the numerous bankruptcy court decisions holding that the filing of a proof of claim by RTC in a bankruptcy case creates an independent basis for bankruptcy court jurisdiction notwithstanding the procedures under FIRREA. The Defendants have not cited any cases in which the Court held the opposite. In In Re Tamposi, 159 B.R. 631 (Bkrtcy. D.N.H. 1993), the plaintiffs, husband and wife, both filed for bankruptcy relief under Chapter 11. Within three months of this filing, the New Hampshire Superior Court issued an order granting the request of a New Hampshire Bank and Trust for a pre-judgment attachment totalling $575,000.00 from the husband and wife's estate. The plaintiffs attempted to avoid their attachments pursuant to 11 U.S.C. § 547(b). The FDIC maintained that pursuant to 12 U.S.C. § 1821(d)(13)(D) there was a complete statutory bar to the bankruptcy court's subject matter jurisdiction. Counsel for the plaintiffs argued that by filing proofs of claims in plaintiffs' respective bankruptcy proceedings the FDIC had created an independent basis for the bankruptcy courts' jurisdiction. In accepting plaintiff's counsel's argument, the court cited the "consistent string of Supreme Court decisions" ( 151 B.R. 1 at 634) which have held that by filing a proof of claim in a bankruptcy proceeding, the creditor submits itself to the "process of allowance and disallowance of claims which is at the heart of the bankruptcy court's subject matter jurisdiction." Id.
After the New Hampshire Bank and Trust was declared insolvent the FDIC was appointed its receiver.
In Parker North American Corp. v. Resolution Trust Corporation (In re Parker North American Corp.), 148 B.R. 925 (Bankr.C.D.Cal. 1992), the chapter 11 debtor sought to avoid $4.6 million in payments to Old Sooner Savings and Loan ("Old Sooner") as preferences under the Bankruptcy Code. RTC filed a proof of claim against the debtor as receiver for Old Sooner. As in this case, the debtor did not file a claim with RTC in accordance with the administrative claims procedures under FIRREA. On appeal from the bankruptcy court, the district court reversed the earlier ruling and held that RTC waived any immunity that it had and submitted to bankruptcy court jurisdiction by filing a proof of claim in the bankruptcy court. The court held: "To prevent [the debtor] from having its day in court to attempt to void the preferences would vitiate the purpose of Section 106(a), . . . Accordingly, the RTC by filing a claim against [the debtor], has created an independent basis for jurisdiction. This independent basis prevents [the debtor] from having to exhaust administrative remedies." Id. at 929
In Continental Resources, Inc. v. FDIC (In re Continental Financial Resources, Inc.) 149 B.R. 260 (Bkrtcy. D.Mass. 1993), the bankruptcy court, in denying the FDIC's motion to dismiss the preference action as a result of the debtor's failure to exhaust the administrative claims procedures of FIRREA, held that the bankruptcy court's jurisdiction is not subject to challenge after the filing of a proof of claim by the FDIC in the bankruptcy case. The court reasoned that the FDIC, by filing the claim, had actively sought to participate in the distribution of the debtor's estate. As a result, the bankruptcy court could not thereafter be stripped of jurisdiction over the equivalent of a counterclaim to the original FDIC's proof of claim.
The claims of Best are similarly the equivalent of counterclaims to RTC's original proof of claim against Best's bankruptcy estate. As in the bankruptcy court cases previously cited, the Debtors' claims against RTC directly stem from RTC's filing of the proof of claim. Accordingly, RTC's filing of a proof of claim in Best's Chapter 11 case resulted in RTC's submission to the jurisdiction of the bankruptcy court to determine both RTC's claims against Best and the debtors' preference actions against RTC.
RTC seeks to avoid this line of authority by relying upon Board of Governors of the Federal Reserve System of the United States v. MCorp. Financial, Inc., 112 S.Ct. 459 (1991) ("MCorp"). In MCorp, the issue before the Court was whether the provision in the Financial Institutions Supervisory Act of 1966 ("FISA"), 12 U.S.C. § 1818(i)(1), that "no court shall have jurisdiction to affect by injunctions or otherwise" regulatory action under FISA prevented a bankruptcy court from exercising its jurisdiction under 28 U.S.C. § 1334(b) and (d). The Court held that the phrase "no court shall have jurisdiction" must be strictly followed. As a result the Court ruled that FISA's preclusive language precluded the bankruptcy court from giving injunctive relief otherwise available under the jurisdictional grants of 28 U.S.C. § 1334(b) and (d).
RTC argues that the holding in MCorp must be applied to the case at bar since the FIRREA provision uses the identical language as FISA and thus prevents the bankruptcy court from imposing its jurisdiction. RTC further argues that this case is an even stronger one than MCorp for the preclusion of bankruptcy jurisdiction since § 1821(d)(13)(D) was enacted several years after the bankruptcy jurisdictional provisions found in § 1334(a), (b) and (d) on which the Debtors rely.
But MCorp is distinguishable. The Court observed that allowing the agency administrative action to go forward, "seems unlikely to impair the Bankruptcy Court's exclusive jurisdiction over the property of the estate protected by 28 U.S.C. § 1334(d)." 112 S.Ct at 465.
The case at bar stands in stark contrast. Allowing the RTC to use § 1821(d)(13)(D) to force the withdrawal of the reference to the district court after the RTC had filed a proof of claim would be antithetical to the purpose of 28 U.S.C. § 1334 and would dramatically impair the bankruptcy court's ability to administer the debtors' estates. There is no support for such an expansive interpretation of the holding in MCorp, which in any event dealt with a statutory limitation of remedies, and not a bar to jurisdiction ab initio.
The RTC also cites RTC v. Elman, 949 F.2d 624 (2d Cir. 1991) andCook County National Bank v. United States, 107 U.S. 445 (1883) as standing for the proposition that specific federal banking laws prevail over general bankruptcy statutes. These cases are not relevant because neither involves a situation where the federal government receiver had already filed a proof of claim in the plaintiffs' bankruptcy proceeding.
The RTC also argues that its assertion of a claim against Best does not excuse the debtors from compliance with the administrative claims procedure of FIRREA since § 1821(d)(13)(D)'s defeat of jurisdiction also applies to counterclaims. As previously stated, the debtors' claims against the RTC are analogous to counterclaims to the RTC's initial filing of a proof of claim in Best's bankruptcy proceedings. The RTC cites Federal Savings Loan Insurance Corporation v. Shelton, 789 F. Supp. 1367 (M.D.La. 1992), in which the court recognized:
the jurisdictional void presented by its interpretation of FIRREA since it is possible to find subject matter jurisdiction over a case while not being able to adjudicate . . . counterclaims which arise in the same law suit. However, this anomaly does not allow the Court to create jurisdiction where Congress has expressly forbidden the Court to exercise such authority. 789 F. Supp. at 1373.
The RTC argues that this case, and others that followed a similar line of reasoning, all preclude bankruptcy court jurisdiction over counterclaims by reason of § 1821(d)(13)(D). I do not agree.
None of the cases cited by the RTC took place in the context of bankruptcy proceedings. The RTC argues by analogy that the bankruptcy claims-allowance process is the same as the other situations in which the courts severed the counterclaims due to FIRREA's mandatory administrative process. However, courts have consistently held that the bankruptcy context is different than other counterclaims that might fall under § 1821(d)(13)(D). The preference action by a debtor against the RTC is best resolved by the bankruptcy court as part of the bankruptcy restructuring process. I am cited to no case holding that § 1821(d)(13)(D) should be interpreted to interfere with this clear statutory process. As the court correctly held in Continental, 149 B.R. at 262, after "the FDIC has sought to avail itself of the court's power to allow its claim and participate in any distribution to be received from the Debtor's reorganization this court [the bankruptcy court] is not deprived of jurisdiction over this counterclaim to the FDIC's proof of claim."
The RTC also argues that the Supreme Court's holding in McNeil v. United States, 113 S.Ct. 1980 (1993), supports its motion to withdraw the reference from the bankruptcy court to this court under § 1821(d)(13)(D). However, the holding in McNeil has no bearing on the issue of whether the filing of a proof of claim in a bankruptcy proceeding provides an independent basis for jurisdiction for the bankruptcy court. The Court in McNeil held that the statutory language employed in the Federal Tort Claims Act requires the exhaustion of administrative remedies before a court action may be commenced. The RTC contends that the Court should apply similar reasoning to this case under § 1821(d)(13)(D). But the Court in McNeil was not concerned with an ongoing bankruptcy proceeding in which the party challenging jurisdiction had filed proofs of claim. Once the RTC filed its proof of claim in the bankruptcy court, it subjected itself to the jurisdiction of that court until the bankruptcy claims are resolved.
CONCLUSION
For the foregoing reasons, the RTC's motion to withdraw the reference to the bankruptcy court is denied.
It is SO ORDERED.