Opinion
No. 01-80225
April 26, 2004
OPINION
This highly unusual matter involves a dispute between two Chapter 7 Trustees, one in Pennsylvania and one in Illinois. The Illinois Trustee brought a number of avoidance actions and recovered funds that the Pennsylvania Trustee claims are property of his estate. The Pennsylvania Trustee subsequently sued the same creditors to avoid the same transfers and recovered additional funds which may or may not properly be assets of the Pennsylvania bankruptcy estate.
The Pennsylvania Trustee, Gary F. Seitz, is administering the estate of Jetronic Industries, Inc. ("JETRONIC") in the Eastern District of Pennsylvania. JETRONIC originally filed a voluntary Chapter 11 petition on November 22, 2000, but converted to Chapter 7 on September 6, 2001. Charles E. Covey is the Trustee of Redco, Inc. ("REDCO") here in the Central District of Illinois. An involuntary Chapter 7 petition was filed against REDCO on January 19, 2001. Upon the filing, REDCO ceased operations. The petition was not contro-verted and an order for relief was entered on February 20, 2001.
REDCO is a wholly owned subsidiary of JETRONIC. It is undisputed that many of REDCO'S creditors were paid by checks drawn on a JETRONIC account. Seitz argues that the funds transferred by those checks were property of JETRONIC, not REDCO, and that the funds recovered by Covey from settlement of his adversary complaints to avoid those transfers as preferences are, in fact, assets of JETRONIC'S estate. Seitz puts the amount in question at $179,000.00. Covey's report for the period ending July 31, 2003, discloses preference recoveries of $179,031.59. Accordingly, it appears that Seitz believes that all of the funds recovered for the benefit of REDCO'S estate belong to JETRONIC'S estate.
Covey maintains that he had a good faith belief (which Seitz does not dispute) that the transfers were made with REDCO'S funds. He points out that the adversary defendants that he sued were clearly creditors of REDCO and not JETRONIC. He was also acting on information obtained from REDCO'S former comptroller, Gary Stephens, now deceased, that REDCO and JETRONIC had an arrangement for JETRONIC to process payment of REDCO'S creditors, in that REDCO'S funds were routinely sent to JETRONIC and REDCO would issue check requests to JETRONIC identifying the creditor to be paid and the amount. An attachment to REDCO'S Statement of Financial Affairs represents that between December 1, 2000, and January 17, 2001, REDCO made nine transfers to JETRONIC, totaling $114,500.00. The attachment states that these payments were a departure from past practice when REDCO'S accounts receivable were transferred to its secured lender, Finova Capital Corporation ("FINOVA").
Seitz denies the relationship between the Debtors was merely a cash management arrangement. He contends that the funds used to pay REDCO'S creditors came from a credit facility in the nature of a line of credit provided by FINOVA. Seitz acknowledges that the FINOVA line of credit is a joint and several debt of both REDCO and JETRONIC.
FINOVA has filed a proof of claim and an amended proof of claim against REDCO in the amount of $2,752,405.35. Attached to FINOVA'S claim is a copy of the Loan and Security Agreement dated May 13, 1998, between FINOVA, as lender, and REDCO and JETRONIC, together, as borrower. The Agreement makes REDCO and JETRONIC jointly and severally liable for all funds advanced by FINOVA. It contemplates a revolving line of credit consisting of separate advances against the eligible receivables and eligible inventory of REDCO and JETRONIC, respectively, up to a maximum amount of $6.5 million. It also references two term loans advanced to REDCO, one in an amount not to exceed $430,000.00 secured by REDCO'S machinery and equipment, and a second in an amount not to exceed $2.5 million secured by REDCO'S machinery, equipment and/or real estate. The FINOVA Loan and Security Agreement also calls for the establishment of a lockbox or dominion account into which the proceeds of FINOVA'S collateral, including accounts receivable, were to be deposited. The Agreement does not identify the account or accounts, whether REDCO'S, JETRONIC'S or a joint account, into which the loan proceeds advanced by FINOVA were to be deposited.
Seitz alleges that Covey violated JETRONIC'S automatic stay by bringing actions to avoid transfers of JETRONIC'S funds without first moving for and obtaining relief from stay from the Pennsylvania bankruptcy court, or otherwise initiating a proceeding to determine which Debtor owned the funds from which REDCO'S creditors were paid. It appears, however, that Seitz has done the same thing of which Covey stands accused. Seitz, on behalf of the JETRONIC estate, has sued the same creditors of REDCO sued by Covey to avoid and recover the same transfers, without first obtaining stay relief from this Court. Both Seitz and Covey rely on the same explanation, that their avoidance actions were premised on the theory that the funds transferred were property of their respective Debtor. They both admit that the answer to the question of whose money it really was, is an unresolved and disputed question of fact.
On November 12, 2003, Seitz filed his motion seeking leave of this Court to commence an adversary proceeding against Covey in the Pennsylvania bankruptcy court for turnover of the disputed funds recovered by Covey (the "Motion"). Citing the Barton doctrine, Seitz correctly acknowledges that a bankruptcy trustee may not be sued for acts performed within the scope of his administrative capacity unless leave to do so is obtained from the bankruptcy court in which he was appointed. Matter of Linton, 136 F.3d 544 (7th Cir. 1998). Covey maintains that since funds now held in the REDCO estate are at issue, the ownership of the funds should be determined here. He also raises the defense of laches.
There is no question that the contemplated action is an "official liability" action, directed only at recovering assets of the REDCO estate subject to Covey's administration. See, In re Markos Gurnee Partnership, 182 B.R. 211, 220-21 (Bankr.N.D.Ill. 1995). It is also conceded by Seitz that a narrow exception to the Barton doctrine, relating to the operation of a business connected to property within a trustee's control, has no application here. See, Id. at 221.
Prior thereto, on April 7, 2003, Seitz had filed a proof of claim on behalf of the JETRONIC estate against the REDCO estate for an unsecured claim in an amount "not less than $432,250.01." No documentation or explanation is attached to the claim. To date, the claim has not been disputed by Covey. No proof of claim has been filed by the REDCO estate against JETRONIC.
ANALYSIS
Because of the nature of the Motion before the Court, requesting leave to commence a proceeding to determine disputed rights in property, the hearings on the Motion were non-evidentiary. Although it was necessary to identify the disputed questions of fact, it was neither necessary nor appropriate for the Court to attempt to resolve them at this stage. Indeed, resolution of the Motion will determine in which venue those issues will be heard, Pennsylvania or Illinois.
There are facts in the record that give rise to inferences that support each Trustee's position. In support of his position that the transferred funds were owned exclusively by JETRONIC, Seitz represents that the checks in question were drawn on a JETRONIC account. Without conceding that all of the avoided transfers were made by a JETRONIC check, Covey does not dispute this general statement of fact. Seitz makes no claim that any funds transferred by a REDCO check were property of JETRONIC.
Covey's position is supported by the FINOVA Loan and Security Agreement that provides for advances based on REDCO'S receivables and inventory. REDCO certainly had a property interest in the funds advanced by FINOVA on the basis of its collateral. Whether those funds were used to make the subject payments to REDCO'S creditors, is an unresolved question of fact. It is possible that REDCO also had a property interest in funds advanced on the basis of JETRONIC'S collateral, if deposited into a joint account or because of an agreement to that effect between REDCO and JETRONIC. At this point, however, the record contains no evidence of the flow of funds from FINOVA to the Debtors, of the agreement between JETRONIC and REDCO as to the ownership and use of the funds, or of how either Debtor accounted for the funds advanced by FINOVA and accounted for payments to creditors.
Covey's position finds support in the case law. It is well established that a preferential transfer need not be made directly by the debtor, but that an indirect transfer made by a third party to a creditor on behalf of the debtor may also be avoidable under Section 547(b). Warsco v. Preferred Technical Group, 258 F.3d 557, 564 (7th Cir. 2001); In re Grumbling, 99 B.R. 515 (Bankr.D.Conn. 1989). In deciding whether a third party's payment constitutes a preference, the key issue is whether the debtor had an interest in the property transferred such that the property would have been part of the estate had it not been transferred before the commencement of the bankruptcy case. Begier v. I.R.S., 496 U.S. 53, 110 S.Ct. 2258, 2263, 110 L.Ed.2d 46 (1990). Where a lender advances funds to more than one borrower under a single credit facility, that are deposited into a common fund from which creditors are paid, the question of whether, and to what extent, each borrower has a property interest in the common fund is an issue of fact to be decided on the evidence. In re RDM Sports Group, Inc., 253 B.R. 298 (Bankr.N.D.Ga. 2000).
In seeking leave to sue Covey in Pennsylvania, Seitz suggests, to the extent Covey may have violated JETRONIC'S automatic stay by commencing and prosecuting adversary proceedings to obtain possession of property of JETRONIC'S estate, that Covey's actions are void ab initio. Not only is this argument incompatible with Seitz' request for turnover of the funds, it assumes a conclusion not yet reached and which will not be reached if it is determined that REDCO had a property interest in the transferred funds, and does not support Seitz' Motion.
There is a split of authority over whether actions taken in violation of the automatic stay are void or merely voidable. 3 COLLIER ON BANKRUPTCY, ¶ 362.11[4] (15th ed. rev.). Where adversary proceedings have been brought and concluded, it is difficult to conceive of the result of a determination that such actions are "void" as having been filed in violation of the stay. Would the settlement payments be returned to each creditor who would then be subject to suit for avoidance of the transfer (for the third time!)? Such a result would surely be inconsistent with fundamental principles of fair play and justice, not to mention an extravagant waste of time and resources.
Furthermore, it is difficult to accept the premise underlying Seitz' position, that all of the funds recovered for REDCO'S estate should be paid over to JETRONIC'S estate, merely upon a showing that the transfers were made with JETRONIC'S funds. During the last fifty-eight days of the ninety day preference period preceding REDCO'S filing, JETRONIC was operating as a debtor in possession in its Chapter 11 proceeding. Any payments to REDCO'S creditors by JETRONIC during those fifty-eight days, while arguably avoidable by Covey as preferences of REDCO, would not be avoidable by Seitz under either Sections 547 or 548. As postpetition transfers of JETRONIC, the only avoiding power available to Seitz is that found in Section 549. Under that provision, any transfers in the ordinary course of business are excepted from the avoiding power. Accordingly, it may be that the transfers made within the fifty-eight days before REDCO'S filing, are not avoidable by Seitz, even if made with JETRONIC'S funds. If so, JETRONIC'S claim to the proceeds from avoidance of those transfers is considerably weakened, if not eliminated. Why, after all, would JETRONIC be entitled to the proceeds from avoidance actions successfully prosecuted by REDCO, if JETRONIC'S Trustee had no power to avoid those transfers?
Seitz also argues that since JETRONIC'S bankruptcy case was filed prior to REDCO'S, that the "first to file" rule should apply to permit the litigation to proceed in Pennsylvania. The Court fails to perceive any import or even relevance of which bankruptcy case commenced first. Both estates will potentially be affected by the outcome. Further, based on the undeveloped record before the Court, the Court cannot say that one Trustee is more likely to succeed than the other.
Two other factors weigh in favor of denial of Seitz' Motion. First, suits against court appointed bankruptcy trustees in foreign venues are disfavored, particularly while the bankruptcy proceeding is still ongoing. Linton, 136 F.3d at 545. The policy behind the Barton doctrine weighs in favor of not permitting trustees to be sued in other forums absent a showing of good cause. Given the equal standing of the Trustees here, this Court finds that Seitz has not shown good cause. The issue is one that is as readily determinable in this Court as it would be in the Pennsylvania bankruptcy court.
Second, the avoidance actions brought by Covey have been concluded. This is not a situation where the Trustees are disputing which estate has the right of recovery in order to permit the adversary proceedings to be filed in the proper forum. Seitz is asserting a claim to collected funds which are assets of REDCO'S estate. Therefore, it is appropriate that such a claim, like all other claims against REDCO'S estate, should be resolved in the bankruptcy court in which that estate is administered. The issue of the proper disposition of assets of REDCO'S estate is a core proceeding that this Court has the primary interest in deciding.
Seitz may complain, if his theory is correct, that Covey should never have filed the avoidance actions in the first place and that he should not now be "rewarded" by having the dispute litigated in his home court. While, ideally, this issue may have been better decided at the frontend of these bankruptcy proceedings, perhaps in the Pennsylvania court, it wasn't, and history can't be rewritten. The issue now concerns funds contained in REDCO'S estate, which is an issue in which this Court has the predominant interest Covey has not asserted any claim against assets of the JETRONIC estate.
Covey raises the equitable defense of laches in response to Seitz' Motion, arguing that Seitz knew of Covey's actions for almost one year before filing the Motion on November 12, 2003, during which period REDCO'S comptroller died. It is not clear whether Covey asserts the defense against the Motion itself or against the underlying cause of action that Seitz seeks to file against him. This Court does not view the doctrine of laches as a valid defense to the Motion. Given that the underlying cause of action has not yet been commenced, it is premature to consider whether the doctrine is a meritorious defense to the unfiled claim.
For the reasons stated herein, this Court is of the opinion that Seitz' Motion should be denied. This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.
ORDER
For the reasons stated in an Opinion filed this day, IT IS ORDERED that the Motion of Gary F. Seitz, as Chapter 7 Trustee for Jetronic Industries, Inc., for leave of Court to file suit in the U.S. Bankruptcy Court for the Eastern District of Pennsylvania against Charles E. Covey, as Chapter 7 Trustee for Redco, Inc., should be and hereby is DENIED.
IT IS FURTHER ORDERED that Gary F. Seitz, Trustee for Jetronic Industries, Inc., shall be allowed sixty (60) days from the date hereof to file an adversary proceeding in this Court to determine the nature and extent of the interest that the bankruptcy estate of Jetronic Industries, Inc., may have in the assets of the bankruptcy estate of Redco, Inc.