Fleet National Bank v. Gray, 375 F.3d 51, 1st Cir. (2004)
Fleet National Bank v. Gray, 375 F.3d 51, 1st Cir. (2004)
3d 51
This appeal from diverging decisions of the bankruptcy and district courts
involves a cautionary tale about the dangers of ignoring the "automatic stay"
that takes effect upon the filing of a bankruptcy petition. All would have been
routine had Fleet National Bank ("Fleet") declined to avail itself of certain
postpetition payments tendered to it by its bankrupt borrower Bankvest Capital
Corp. ("Bankvest"). But having accepted those payments, Fleet, pursued by its
adversaries, found itself in something of a legal labyrinth. While we have yet to
receive the guidance of Ariadne's golden thread, we seek in the following to
chart a reasonable path.
I. Background
2
We base the following on undisputed facts as set forth in the opinions of the
bankruptcy and district courts and in the record.
Debtor, Bankvest, was a lessor of commercial equipment and a buyer and seller
of portfolios of leases. Bankvest financed its operations, in part, by borrowing
from appellee, Fleet. An involuntary Chapter 11 petition was filed against
Bankvest on December 17, 1999. On that date, Bankvest had three principal
credit arrangements with Fleet, consisting of a warehouse line dated August 21,
1998 ("FBNA Warehouse Obligation"), a warehouse line by Fleet's predecessor
in interest, BankBoston, N.A., dated June 3, 1999 ("BB Warehouse
Obligation"), and a conduit facility dated September 30, 1998. These credit
arrangements were secured by substantially all of Bankvest's assets. Fleet's
secured interest was perfected.
During the "gap period" between the filing of the involuntary petition and the
entry of the bankruptcy court's order for relief on January 25, 2000, Fleet,
aware of the bankruptcy filing and in apparent violation of the automatic stay,
11 U.S.C. 362(a),1 accepted the sum of $2,155,427 from assets or property of
Bankvest's estate and applied these "gap payments" against the BB Warehouse
Obligation. On February 23, 2000, the Official Committee of Unsecured
Creditors ("the Committee") was formed. Following discovery of the payments
made to Fleet after the filing of the bankruptcy petition, the Committee moved,
inter alia, for sanctions against Fleet for "violations of the automatic stay and
discovery obligations" pursuant to sections 105(a) and 362 of the Bankruptcy
Code. On January 30, 2001, Fleet filed an opposition to the sanctions motion.2
In December of 2000, Fleet sold a $1.4 billion portfolio of loans to ARK CLO
2000-1, LIMITED ("ARK"). The parties agree that this portfolio included at
least the then-existing balances of the loans between Bankvest and Fleet. The
Purchase and Sale Agreement ("ARK Contract") purported to transfer to ARK,
inter alia, all of Fleet's claims and rights, including bankruptcy claims "whether
known or unknown," against Bankvest or any entity "arising under or in
connection with the related Loan Documents," as well as all property received
by Fleet under these loan documents after October 9, 2000.3
On May 31, 2001, the bankruptcy court confirmed a joint liquidating plan of
reorganization ("Plan") for Bankvest. Neither Fleet nor ARK which, as
Fleet's successor, was negotiating the Plan with Bankvest objected to the
Plan.
Both the Committee and Fleet sought summary judgment on the Emergency
Motion for Sanctions, but the bankruptcy court denied both motions. An
evidentiary hearing was scheduled, but shortly before the hearing, on
November 12, 2001, the Committee's Liquidating Supervisor, Stephen Gray,
filed a complaint pursuant to section 549 of the Bankruptcy Code requesting
that the gap payments made to Fleet be avoided. Fleet moved to dismiss the
avoidance proceeding and for judgment on the pleadings under Fed.R.Civ.P.
12(b)(6) and (c), asserting that Gray's avoidance claim was not preserved under
the confirmed plan, was barred by laches, and was of no benefit to the estate.
The Liquidating Supervisor and the Committee, following oral argument, also
sought judgment on the pleadings. The bankruptcy court denied the motions
and consolidated the avoidance claim with the Committee's emergency motion
for sanctions. All matters were tried together with the consent of the parties in
February of 2002.
During the trial, Fleet moved for judgment as a matter of law, arguing that
avoidance would be for naught. Fleet based the latter point on its contention
that if the court avoided the gap payment transaction requiring Fleet to turn
over to the estate the gap payments it had received Fleet would
simultaneously acquire by virtue of section 502(h) of the Bankruptcy Code a
valid claim against the estate to recover those very same payments, as Fleet's
claims against the bankrupt had been fully secured prior to the filing of the
involuntary petition. The motion was denied.
On April 18, 2002, the bankruptcy court issued an opinion finding for Gray
against Fleet in the avoidance proceeding and granting the Committee's
Emergency Motion for Sanctions. Bankvest Capital Corp. v. Fleet Boston (In re
Bankvest Capital Corp.), 276 B.R. 12, 32 (Bankr.D.Mass. 2002). The
bankruptcy court ordered Fleet to pay over to the Liquidating Supervisor the
amount of the gap payments, $2,155,427, plus interest, for a total of
$2,445,924.65. In re Bankvest, 276 B.R. at 29-31. The court further ordered the
Liquidating Supervisor to hold this judgment in escrow pending a determination
of whether ARK had a claim to any part of the monies from Fleet. Id. The court
ruled that Fleet's transaction with ARK "divested [Fleet] of any claim upon
return of the Post-Petition [gap] Payments," and, therefore, found no "need to
conduct any further proceedings to determine whether Fleet's behavior warrants
subordination pursuant to section 501(c) [sic]." Id. The court found this remedy,
which caused Fleet to lose the full amount of the gap payments, "harsh enough
that it may defer similar future behavior," so it did not rule on the contempt
contentions. Id. at 31.
10
Fleet appealed to the United States District Court for the District of
Massachusetts. The district court vacated the portion of the bankruptcy court's
judgment pertaining to the avoidance claim. Contrary to the bankruptcy court,
the district court determined that Fleet had never sold to ARK its own claim to
the gap payments and was thus not divested of that claim. The district court
went on to rule that, because the postpetition payments transferred to Fleet by
Bankvest had been secured, Fleet, as a secured creditor, could now recover
them under its so-called 502(h) claim4 , to which it had become entitled
following avoidance, thus rendering futile Gray's right to avoidance. The
district court remanded the matter to the bankruptcy court to determine what
sanction, if any, should be imposed upon Fleet to punish its conduct in
connection with its acceptance of the gap payments. Fleet Nat'l Bank v. Gray
(In re Bankvest Capital Corp.), Nos. 02-40100-DPW and 02-40101-DPW,
2003 WL 1700978, at *8 (D.Mass.2003).
11
II. Discussion
A. Jurisdiction
12
While not earlier raised by either party, we have asked for briefing of this
court's appellate jurisdiction, noting that the district court's appealed order
might lack finality as required by 28 U.S.C. 158(d) and thus be nonappealable, given the remand of the open sanctions issue to the bankruptcy
court. See In re Spillane, 884 F.2d 642, 644 (1st Cir.1989); In re Recticel Foam
Corp., 859 F.2d 1000, 1002 (1st Cir.1988) (stating, "a court has an obligation to
inquire sua sponte into its subject matter jurisdiction"). The parties have
responded, and, even more to the point, they have notified us that they have
settled the sole issue left open upon remand, to wit, what sanction would be
appropriate against Fleet for its conduct in connection with its receipt and
retention of the gap payments in violation of the automatic stay. The parties'
settlement has since been approved by the bankruptcy judge.5
13
Other than the issues determined by the district court and presented on this
appeal, there are now no issues remaining open in the case; we accordingly see
no finality problem with the appealed order. See, e.g. Estancias La Ponderosa
Dev. Corp. v. Harrington (In re Harrington), 992 F.2d 3, 5 (1st Cir.1993).
Even if the open sanctions issue caused the order to lack finality when first
appealed, a matter we do not decide, the sanctions issue has been finally
resolved and is now moot, leaving no possibility that, if we decide the appeal,
more will be left to determine. Since the fact of finality is clear enough now,
and the parties are desirous that the case be resolved, we see no impediment to
the exercise of our appellate jurisdiction.
14
B. Whether the Receiver Has The Right To Bring The Avoidance Action
15
Reiterating its argument before the bankruptcy and district courts, Fleet
contends that the liquidating plan ("Plan") did not preserve the right of Gray to
bring this avoidance action. We, like the bankruptcy and district courts, find
this argument lacking in merit.
16
17
18
18
19
Fleet contends that this language does not preserve the right to pursue claims as
it fails specifically to mention the claim against Fleet. Compare D & K Props.
Crystal Lake v. Mut. Life Ins. Co. of N.Y., 112 F.3d 257, 260-61 (7th Cir.1997)
(stating, "[a] blanket reservation that seeks to reserve all causes of action
reserves nothing."). We disagree. See Bergner, 140 F.3d at 1117 (stating, "[t]he
courts that have spoken of the need for `specific' and `unequivocal' language
have focused on the requirement that plans unequivocally retain claims of a
given type, not on any rule that individual claims must be listed specifically.")
(citations omitted); Harstad, 39 F.3d at 903 (ruling that debtors "should have
specifically reserved the right to pursue claims of this sort postconfirmation.");
Cohen v. TIC Fin. Sys. (In re Ampace Corp.), 279 B.R. 145, 160 (Bankr.D.Del.
2002) (stating, "the Bankruptcy Code contemplates that debtors may seek
confirmation of their plans prior to litigating all avoidance actions ...
[t]herefore, in my opinion, a general reservation in a plan of reorganization
indicating the type or category of claims to be preserved should be sufficiently
specific to provide creditors with notice that their claims may be challenged
post-confirmation.") (citations omitted). The cases upon which Fleet primarily
relies involve provisions of a far more general nature. See D & K Properties
Crystal Lake, 112 F.3d at 259 (plan purported to reserve "all causes of action
existing in favor of the Debtor."); Harstad, 39 F.3d at 902 (plan purported to
reserve "any right of Debtors to recover assets pursuant to the provisions of the
Bankruptcy Code."). The Plan, we believe, adequately preserves Gray's right to
bring avoidance actions.
C. Judicial Estoppel and Laches
20
Fleet argues that the doctrine of judicial estoppel bars appellant from arguing
that Fleet is divested of its claim to the avoided gap payments.7 Fleet argues
that appellant has taken a position here that contradicts its position in a prior
adversary proceeding against ARK, in which Gray argued that ARK did not
have an interest in the avoided gap payments. Fleet contends that appellant now
takes the position that Fleet is divested of its claim to these proceeds because it
transferred the claim to ARK. Even assuming that appellant's current position
contradicts its position in the ARK adversary proceeding, Fleet's argument
fails. 8
21
The doctrine of judicial estoppel takes effect when the proponent has shown
that the party to be estopped "succeeded previously with a position directly
inconsistent with the one [it] currently espouses." Lydon v. Boston Sand &
Gravel Co., 175 F.3d 6, 13 (1st Cir.1999); see also New Hampshire v. Maine,
532 U.S. 742, 749, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001) (stating, "[t]his
rule, known as judicial estoppel, `generally prevents a party from prevailing in
one phase of a case on an argument and then relying on a contradictory
argument to prevail in another phase.'") (quoting Pegram v. Herdrich, 530 U.S.
211, 227 n. 8, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000)). In determining
whether the party "succeeded" in a prior proceeding, we look to whether the
prior forum "accepted the legal or factual assertion alleged to be at odds with
the position advanced in the current forum...." Gens v. Resolution Trust Corp.
(In re Gens), 112 F.3d 569, 572-73 (1st Cir.1997).
22
Gray and the Committee did not succeed in the adversary proceeding against
ARK. On June 3, 2002, Gray filed a complaint containing the factual
allegations that Fleet believes contradict appellant's position here. On July 3,
2002, ARK answered, denying those allegations. On October 10, 2002, before
any substantive proceedings were scheduled to begin, the action was settled.
On November 13, 2002, the bankruptcy court approved the settlement. At no
time did the bankruptcy court accept the legal or factual assertions of the
complaint. See also Bates v. Long Island R.R. Co., 997 F.2d 1028, 1038 (2d
Cir.1993) (stating, "`settlement neither requires nor implies any judicial
endorsement of either party's claims or theories, and thus a settlement does not
provide the prior success necessary for judicial estoppel.'") (quotations
omitted); Water Technologies Corp. v. Calco Ltd., 850 F.2d 660, 665-66
(Fed.Cir.1988); Edwards v. Aetna Life Ins. Co., 690 F.2d 595, 599 (6th
Cir.1982) (stating, "[i]f the initial proceeding results in settlement, the position
cannot be viewed as having been successfully asserted.") (citations omitted).
Accordingly, the doctrine of judicial estoppel does not bar appellant from
arguing that Fleet is divested of its claim to the gap payments.
23
Further, Fleet argues that because Bankvest did not seek avoidance of the gap
period payments before Fleet's sale to ARK, the avoidance action came too late.
This laches-type argument fails. Rejecting a similar contention below, the
bankruptcy court said, "Fleet's argument that it was lulled into believing that no
adversary proceeding would be commenced and therefore it was somehow
duped into withdrawing its objection to confirmation is simply wrong." The
court did not abuse its discretion. See Ansin v. River Oaks Furniture, Inc., 105
F.3d 745, 757 (1st Cir. 1997) (stating, "[w]e review the district court's
determination as to laches for abuse of discretion.").
24
25
Gray was not appointed until months after the sale to ARK. Thereafter, Gray
brought this action only ten months after Fleet's disclosure of the gap payments
and little more than five months after he was appointed. Any delay was not
unreasonable.
26
Lastly, Fleet argues that the Committee's silence in the face of its "consensual
offer to reverse the transaction" bars the avoidance action. Fleet relies,
however, entirely on cases that are distinguishable and largely immaterial here.
See Patriot Cinemas, Inc. v. General Cinema Corp., 834 F.2d 208, 212 (1st
Cir.1987) (party represented that it would not pursue an antitrust count and
subsequently repudiated this intention); Lydon, 175 F.3d at 13 (defendant
argued to First Circuit that federal law was plaintiff's exclusive remedy where,
at underlying arbitration proceeding, defendant had succeeded with precisely
the opposite argument); Hurd v. DiMento & Sullivan, 440 F.2d 1322, 1323 (1st
Cir.1971) (plaintiff who wrote to district court in a motion for continuance that
defendant was unable to represent plaintiff was estopped from claiming in front
of First Circuit that defendant had agreed to represent her). We therefore reject
this argument.
D. The Avoidance Action
27
28
U.S.C. 549. "Except as otherwise provided in this section, to the extent that a
transfer is avoided under section ... 549 ... the trustee may recover, for the
benefit of the estate, the property transferred ... from (1) the initial transferee
of such transfer or the entity for whose benefit such transfer was made; or (2)
any immediate or mediate transferee of such initial transferee." 11 U.S.C.
550(a).
29
30
When grounds for avoidance are found, however, a creditor in Fleet's shoes
becomes entitled to pursue whatever claim it may have had in the avoided sum
against the debtor, here Bankvest, unless, of course, (as the bankruptcy court,
in fact, found in Fleet's case) the creditor has somehow relinquished its claim to
the avoided interest. 11 U.S.C. 502(h) (stating, that the claim that arises from
"the recovery of property under section ... 550 ... shall be determined, and shall
be allowed ... the same as if such claim had arisen before the date of the filing
of the petition."); Ralar Distribs., Inc. v. Rubbermaid, Inc. (In re Ralar
Distribs., Inc.), 4 F.3d 62, 66 n. 2 (1st Cir.1993) (stating, "[f]inally, arguably no
`unjust' enrichment would result were [transferor-debtor] to recover from
[transferee]. If [transferee] were required to disgorge, it could file a proof of
claim for the amount of the avoided transfer ... which would be entitled to a pro
rata distribution from the [transferor-debtor] estate."); Verco Indus. v. Spartan
Plastics (In re Verco Indus.), 704 F.2d 1134, 1138 (9th Cir.1983) (stating, "
[a]lthough we acknowledge that [transferor-debtor] has a valid claim for the
unpaid amount of the note from Spartan, we also believe that [transferee]
would have a claim against [transferor-debtor] for the loss it suffered when the
transfer was set aside. [We have] stated that even where the transferee is
responsible for the transfer being invalidated as fraudulent, that factor does not
prevent the transferee from asserting a claim against the transferor ...
[a]ccordingly, [transferee] has a claim against the estate which may be set-off
against [transferor-debtor's] recovery on the note .... [transferee] concedes that
[transferor-debtor] is entitled to invalidate the transfer and retain the property
for the benefit of its creditors.") (citations omitted); Cohen v. Eiler (In re
Cohen), 305 B.R. 886, 898 (9th Cir. BAP 2004) (stating, "[n]or does recovery
from a transferee under avoiding powers unfairly deprive the transferee of
rights against the estate. Upon recovery, the transferee has a claim that is
treated as a prepetition claim. 11 U.S.C. 502(h). It is timely to file such a
proof of claim within 30 days after the judgment becomes final.... The debt will
not be discharged unless it is `provided for by the plan.'") (quoting 11 U.S.C.
1328(a)) (citations omitted); In re Dunes Hotel Associates, No. C/A 94-75715,
1997 WL 33344253, at *12-*13 (Bankr.D.S.C. Sept.26, 1997) (stating, "the
Bankruptcy Code and Rules set out a specific procedure for the filing and
allowance of a claim by the transferee of an avoided transfer ... Congress
intended that such creditors should have a claim against the estate by reason of
the avoidance. See 4 Collier on Bankruptcy 502.LH[10] at 502-113-15 (1997)
(discussing expansion by Congress of the reach of Section 502(h) bringing it
more in line with prior law); ... [i]t is clear to the Court that even upon
avoidance, an event which has not yet occurred and which in fact is contrary to
the present law of the case, [the creditor from whom the avoidance would
recover property] would have a claim which would provide it standing to seek
dismissal of the case.") (citations omitted); In re Toronto, 165 B.R. 746, 753
(Bankr.D. Conn. 1994).
31
In the instant case, the bankruptcy court held that Fleet, by reason of its
transaction with ARK, had divested itself of its 502(h) claim to the avoided
sums. In the court's view, that claim, although contingent at the time of the
sale, was included within the assets Fleet sold to ARK along with its loan
portfolio. Under this analysis, Fleet was left without any 502(h) claim to invoke
after avoidance. It was thus bereft of any avenue of relief as a creditor of
Bankvest. As ARK appears to have released all of its own claims against
Bankvest and its representatives, the bankruptcy court's decision resulted in the
gap sums becoming property of the estate.
32
The district court disagreed with the bankruptcy court's analysis. Instead, it read
the ARK Contract as not having resulted in the sale to ARK of Fleet's then
inchoate 502(h) claim. That claim, the court held, now entitles Fleet as an
original secured creditor of Bankvest to prevail over Gray's avoidable right.
Appellant asks us to endorse the bankruptcy court's result and to reject that of
the district court.
33
To resolve the question of whether in the ARK transaction Fleet divested itself
of its 502(h) claim, we must interpret Fleet's contract with ARK. In so doing,
we apply New York law, following a stipulation written into the ARK Contract
providing that the law of the state of New York governs its interpretation. See
McCarthy v. Azure, 22 F.3d 351, 356 n. 5 (1st Cir. 1994) (concluding court
should generally honor reasonable choice-of-law provision in a contract);
Matter of Stoecker, 5 F.3d 1022, 1028 (7th Cir.1993) (stating, "[c]ontractual
stipulations concerning choice of law ordinarily are honored....").
34
35
36
The ARK Contract governed Fleet's sale to ARK of a $1.4 billion portfolio of
loans, including the loans to Bankvest. It is, in effect, two contracts in one.
First, it is an agreement between Fleet and JJDD LLC, an intermediary, through
which Fleet sold to JJDD LLC a "100% undivided participation interest in the
Participated Loans10 ... and the Transferred Rights related thereto and ... the
Nonparticipated Transferred Rights." Second, it is an agreement between JJDD
LLC and ARK, through which JJDD LLC sold to ARK in exchange for the
purchase price and assumption of the "Assumed Obligations" the 100%
undivided participation interest in the Participated Loans, the Nonparticipated
Transferred Rights11, and all of JJDD LLC's "rights remedies, interests, powers
and privileges" under its agreement with Fleet. Since JJDD transferred to ARK
everything transferred to it from Fleet, the contract, for present purposes,
operates essentially as an agreement between Fleet and ARK.
37
The ARK Contract defines "Transferred Rights" as, inter alia, any and all of
Fleet's and JJDD LLC's right, title and interest in the "related Loans and
39
The bankruptcy court concluded that Fleet's then unknown and inchoate 502(h)
claim fell within the broad definition of "Transferred Rights," but the district
court disagreed, being of the opinion that the 502(h) claim fit within the
definition of "Retained Interest."12 Fleet Nat'l Bank, 2003 WL 1700978 at *7*8. As discussed below, we think the bankruptcy court erred in determining
that Fleet's 502(h) claim fell within the "Transferred Rights" definition. We
also question the district court's view that the 502(h) claim fell expressly within
the "Retained Interest" clause.13 But since Fleet, in any event, neither sold to
ARK the gap payments themselves, nor, as discussed below, its 502(h) claim
relating to them, we conclude that it never divested itself of the latter. That
being so, Fleet is entitled, as the district court ruled, to retain and pursue its
502(h) remedy now.
40
In support of its contention that the 502(h) claim fit within the "Transferred
Rights" definition, appellant argues that the 502(h) claim is a claim of right of
Fleet, either known or unknown at the time of the agreement, against a
borrower, Bankvest, of a loan transferred in the ARK Contract and, therefore,
fell squarely within the definition of "Transferred Rights."
41
The clause defining "Transferred Rights", however, must be read in light of the
ARK Contract's definitions of other terms contained within or related to that
clause. Thus, while it may well be that claims "known or unknown" encompass
future-arising claims such as a subsequent 502(h) claim, the loans transferred
under the ARK Contract, as defined, did not include the portions thereof that
were not outstanding under Schedule 1, nor did they include claims unrelated to
Schedule 1 loans. Neither the gap payments nor claims relating to them formed
part of the scheduled loans.
42
Under the ARK Contract, ARK received Fleet's "right, title, and interest in, to
and under the related Loans and Commitments, if any, and to the extent related
thereto ... all claims (including `claims as defined in Bankruptcy Code
101(5)), suits, causes of action, and any other right ... whether known or
unknown ...." (emphasis added). "Loans" are defined as, "with respect to each
Loan Agreement, the loan(s) outstanding under such Loan Agreement in the
amount(s) specified in Schedule 1, and includes the note(s) (if any) evidencing
such loan(s) issued under such Loan Agreement ....'" (emphasis added). "Loan
Agreement" is defined as any document identified as such on Annex A of the
contract. The Bankvest loans are listed as loan agreements on Annex A.
Schedule 1 incorporates the amounts of the loans as listed in Annex B.
43
Thus, in selling to ARK "the related Loans and Commitments," Fleet sold only
the "loan(s) outstanding under such Loan Agreement in the amount(s) specified
in Schedule 1," and in selling "claims" it did so only to the extent related thereto
(i.e. related to the outstanding loans specified in Schedule 1).
44
45
46
We next ask whether Fleet's 502(h) claim is secured or unsecured. The district
Appellant argues that section 502(h) merely provides that a claim thereunder
shall be allowed as if it had arisen prepetition and does not relate to whether the
claim is secured or unsecured.
Section 502(h) provides as follows:
48
A claim arising from the recovery of property under section 522, 550, or 553 of
this title shall be determined, and shall be allowed under subsection (a), (b), or
(c) of this section, or disallowed under subsection (d) or (e) of this section, the
same as if such claim had arisen before the date of the filing of the petition.
49
50
paid therefor. Such a result would clearly be inequitable.'" Id. at 1138 (quoting
Misty Management Corp. v. Lockwood, 539 F.2d 1205, 1214 (9th Cir.1976)). A
similarly inequitable result would occur here if Fleet's prepetition secured
claim became an unsecured 502(h) claim after avoidance; for the gap payments
would then presumably be distributed among other creditors, thus providing a
windfall to the estate and depriving Fleet of the amount to which it was entitled.
Fleet, it is true, acted improperly, but that impropriety can be remedied, and
under the recent settlement will be remedied, by an appropriate sanction. See
footnote 5, supra.
51
52
53
The foregoing seems to us sensible. We hold that upon avoidance of the gap
payments, Fleet would become entitled to a secured claim to the gap payments
pursuant to section 502(h).
54
Appellant argues, however, that this is no ordinary section 502(h) case since
Fleet, postpetition, sold to ARK "any and all of ... [its] right, title, and interest
in" the Bankvest loans and "all Lender Collateral and security of any kind in
respect" of those loans. Fleet, appellants insists, relinquished the very same
property that had made it a secured creditor. Appellant notes that to be a
secured creditor Fleet must be the owner of a "lien," which is defined in the
Code as a "charge against or interest in property to secure payment of a debt or
performance of an obligation." 11 U.S.C. 101(37) & 101(51).
55
56
By the time the ARK Contract was consummated, Fleet was in possession of
the gap payments themselves which, under its loan arrangements with
Bankvest, had, of course, been owed to it by Bankvest and, but for the
bankruptcy, were properly received by it in extinction of Bankvest's debt. Fleet,
having ostensibly been paid off as to the gap indebtedness by the debtor, had
no further interest in the security relative to those payments. Indeed, Fleet did
not purport to transfer any security relating to the gap payments themselves to
ARK. As discussed earlier, the gap payments and claims pertaining thereto
were not included in the transferred assets.
57
In any event, what is crucial under section 502(h) is Fleet's undoubted status as
a fully secured creditor relative to the gap payments as of the time of the filing
of the petition. It is this which validates Fleet's current claim. The present issue
is not a claim against security existing at the time of avoidance but a claim as to
the gap payments themselves. See Adams v. Hartconn Assocs., Inc. (In re
Lastly, appellant argues that even if Fleet would otherwise receive a secured
claim, it is barred from litigating this issue because the confirmed Plan
rendered Bankvest's assets free and clear of liens and the confirmation of a plan
of reorganization is given res judicata effect. The Plan provides that, upon
confirmation, all of Bankvest's assets (including causes of action and "proceeds
and recoveries on Causes of Action"), "wherever situated," vest in the debtor
free and clear of all liens, claims, and encumbrances, other than those
specifically reserved in the Plan. Fleet did not object to the Plan. Appellant
argues that since the term "proceeds and recoveries" clearly encompasses the
amounts received under the avoidance action, these amounts return to the estate
free and clear of all liens save those specified in the plan. Accordingly, it
argues, Fleet's failure to preserve the possibility of asserting a security interest
after being forced to return the gap payments bars it from asserting that interest
here. The district court did not address this argument, but even if it had, our
review would be de novo. Jamo v. Katahdin Fed. Credit Union (In re Jamo),
283 F.3d 392, 399 (1st Cir.2002). Even assuming that appellant's construction
of the Plan is correct, its argument fails.
59
The term "res judicata" is frequently used to refer to either claim preclusion or
issue preclusion, but appellant does not specify the theory upon which it relies.
It does, however, rely solely on a case in which we applied the issue preclusion
standard namely, Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973, 978
(1st Cir.1995). Accordingly, we analyze this issue under the issue preclusion
standard. In order to invoke issue preclusion, appellant "must demonstrate that:
(1) both the [current proceedings] and the confirmation proceedings involved
the same issue of law or fact; (2) the parties actually litigated the issue in the
confirmation proceedings; (3) the bankruptcy court actually resolved the issue
in a final and binding judgment (viz., its confirmation order); and (4) its
resolution of that issue of law or fact was essential to its judgment (i.e.,
necessary to its holding)." Id. (citing Grella v. Salem Five Cent Sav. Bank, 42
F.3d 26, 30 (1st Cir.1994); Piccicuto v. Dwyer, 39 F.3d 37, 40 (1st Cir.1994);
Here, the parties did not actually litigate the issue of whether the gap payments
should be avoided during confirmation, let alone whether the 502(h) claim was
secured or unsecured, so issue preclusion does not apply. At the time of
confirmation, Fleet had already sold the balance of its outstanding Bankvest
loans to ARK and was therefore not a creditor. Accordingly, ARK rather
than Fleet participated in the negotiation of the Plan. Moreover, at that time,
it was unclear that an avoidance action would be filed against Fleet; only a
motion for sanctions had been filed. Indeed, at no time prior to the confirmation
of the Plan did Bankvest or appellant advise Fleet that they would pursue this
avoidance action. Nor could the issue of avoidance have been litigated at the
confirmation proceeding. The confirmation process constitutes a contested
matter under the Bankruptcy Rules; whereas an avoidance action such as this
one must be commenced as a separate adversary proceeding under Federal Rule
of Bankruptcy 7001. See Peltz v. World-Net, Corp. (In re USN
Communications, Inc.), 280 B.R. 573, 587 (Bankr.D.Del.2002) (discussing
same with preference action); Sunrise Energy Co. v. Maxus Gas Mktg. (In re
Sunpacific Energy Mgmt., Inc.), 216 B.R. 776, 779 (Bankr.N.D.Tex.1997); see
also Grella v. Five Cent Sav. Bank, 42 F.3d 26, 33 (1st Cir.1994). Accordingly,
Fleet did not have a full and fair opportunity to litigate the issue of whether the
502(h) claim was secured or unsecured until, at the earliest, appellant
successfully avoided the gap payments in an adversary proceeding. See
Blonder-Tongue Lab. v. Univ. of Illinois Found., 402 U.S. 313, 328, 91 S.Ct.
1434, 28 L.Ed.2d 788 (1971) (in order to further interests of finality and
judicial economy, issue preclusion doctrine requires that litigant be afforded
"one full and fair opportunity for judicial resolution" of issue). Clearly, then,
Fleet and appellant did not actually litigate this issue at confirmation.
61
62
Accordingly, we, like the district court, conclude that Fleet's 502(h) claim
would have the status of a prepetition secured claim, entitling it to full recovery
of the gap proceeds were we to undertake the exercise of avoiding the gap
payments. Fleet Nat'l Bank, 2003 WL 1700978 at *7-*8 (stating, "
Affirmed.
Notes:
1
(6) any act to collect, assess, or recover a claim against the debtor that arose
before the commencement of the case under this title;
(7) the setoff of any debt owing to the debtor that arose before the
commencement of the case under this title against any claim against the debtor;
and
(8) the commencement or continuation of a proceeding before the United States
Tax Court concerning the debtor.
While in its appellate brief Fleet denies without elucidation that its acceptance
of the gap payments violated the automatic stay, we can find no meaningful
argument to that effect. We proceed in this opinion on the assumption, also held
by the bankruptcy and district courts, that a violation occurred and that the
Liquidating Supervisor's subsequent avoidance of Fleet's receipt of those
payments was in order except for reasons otherwise discussed herein.
2
Fleet filed this motion jointly with ARK. Thereafter, Bankvest, the Committee,
and ARK reached an agreement regarding the treatment of ARK's claims, and
ARK was dismissed as a party
Fleet did not transfer, however, its "Retained Interest," which included all
interest payable under the related loan documents in respect of any loans that
were "Current Loans" that accrued on or prior to the close of business on
October 9, 2000, together with other property paid or delivered in connection
with the related loan documents on or prior to the close of business on October
9, 2000
The Bankruptcy Code grants in a transferee who has returned property pursuant
to an avoidance action a claim in the property transferred. Section 502(d) states,
"the court shall disallow any claim of any entity from which property is
recoverable under section ... 550 ... or that is a transferee of a transfer avoidable
under section ... 549 ... unless such entity or transferee has paid the amount, or
turned over any such property, for which such entity or transferee is liable
under section ... 550 ...." It is implicit in this section that a transferee of an
avoidable transfer has an allowable claim once it turns over such property for
which it is liableSee also Petitioning Creditors of Melon Produce, Inc. v.
Braunstein, 112 F.3d 1232, 1237 (1st Cir. 1997) (interpreting section 502(d)
and stating, "[o]nce the preference recipient complies with the payment or
turnover order of the bankruptcy court, it may file a proof of claim."). Here, the
appellant has brought this avoidance action pursuant to section 549. Thus, if the
avoidance action were successful, Fleet would be required to return the gap
payments pursuant to section 550 and having done so, would have, pursuant to
section 502(d), a claim to those payments. Id. Moreover, section 502(h)
provides that Fleet's claim would "be determined, and ... allowed under
subsection (a), (b), or (c) of this section, or disallowed under subsection (d) or
(e) of this section, the same as if such claim had arisen before the date of the
filing of the petition." Accordingly, claims of this nature are often referred to as
"502(h) claims." See, e.g., Official Comm. of Unsecured Creditors of Toy King
Distribs., Inc. v. Liberty Savings Bank, FSB (In re Toy King Distribs., Inc.),
256 B.R. 1, 199 (Bankr.M.D. Fla. 2000).
5
The parties inform us that on February 19, 2004, the bankruptcy court entered
an order approving their settlement of the sanctions issue. The approved
settlement requires that Fleet pay to the Liquidating Supervisor a settlement
payment of $250,000, reserves the Liquidating Supervisor's right to pursue the
present appeal, and requires, in the event that the Liquidating Supervisor
prevails in this appeal, that the settlement payment shall be credited against any
net obligation of Fleet
The bankruptcy court treated Gray as a trustee, stating, "[s]ection 549 permits a
trustee to avoid postpetition payments in all but the most narrow of
circumstances. The trustee, in this case the Liquidating Supervisor, ...."In re
Bankvest, 276 B.R. at 30. Fleet has raised no issue as to Gray's capacity.
As we find that the doctrine of judicial estoppel does not apply here, we need
not address whether Fleet waived the judicial estoppel argument
"Participated Loans" are any loans listed in the contract other than the
"Nonparticipated Loan Agreements" listed in Annex D of the contract. The
Bankvest Loans are "Participated Loans."
11
Gray does not contend that the 502(h) claim was included in the
"Nonparticipated Transferred Rights", so we need only address the
participation interest and, in particular, the "Transferred Rights" related thereto
12
13
The definition of "Retained Interest" may be divided into two essential parts
namely, "ordinary course fees ... payable under the related Loan Documents in
respect of any Loan or Loans that are Current Loans and the Commitments
related thereto" and "any other property paid or delivered in connection with the
related Loan Documents on or prior to the close of business on [October 9,
2000]." The 502(h) claim does not seem specifically to fall within either section
The former is unequivocally limited to loans that are "Current Loans and the
Commitments related thereto." The ARK Contract defines "Current Loans" as
"the Loans set forth on Annex B." While that definition, alone, would indicate
that all of the loans on Annex B are Current Loans, Annex B contains language
which further limits Current Loans to those listed as "CURR." In particular,
Annex B contains a spreadsheet with five columns, one of which is entitled,
"Current Loans ("CURR")." Under that column, the Bankvest loans are listed
as "NON-CURR." Accordingly, they do not appear to fall within the definition
of "Current Loans" and, therefore, do not appear to be covered by this section
of the "Retained Interest" definition.
As to the latter, the result is the same. To be sure, Fleet received the gap
payments prior to January 25, 2000, so the gap payments themselves certainly
constitute property paid or delivered prior to October 9, 2000. The problem is
that Fleet's 502(h) claim does not appear to have arisen prior to October 9,
2000. Fleet, itself, does not dispute that the 502(h) claim arose after October 9,
2000. In its brief, it stated, "Fleet believes a 502(h) Claim, which `aris[es] from
the recovery of property under Section ... 550,' has not arisen and will not arise
until the Debtor actually recovers the avoided transfer." Accordingly, while
Fleet's current 502(h) claim relates to the pre-October 9th payments that were
not sold to ARK, the claim itself does not appear to be property paid or
delivered prior to that date.
Thus, any conclusion that the 502(h) claim falls within the definition of
"Retained Interest" would seem doubtful.
14
As they refer to the same amounts, there is no reason to believe that there is a
meaningful distinction between the "Loans" and "Commitments" in this case
15