Bankr. L. Rep. P 71,041 Delgado Oil Company, Inc. v. Michael R. Torres, James R. Cleveland, 785 F.2d 857, 10th Cir. (1986)

785 F.
2d 857
Bankr. L. Rep. P 71,041

DELGADO OIL COMPANY, INC., Plaintiff-Appellee,
v.
Michael R. TORRES, Defendant,
James R. Cleveland, Defendant-Appellant.
No. 84-1064.
United States Court of Appeals,

Tenth Circuit.
March 5, 1986.
Gerald R. Mason of Mason & Twichell, P.C., Pinedale, Wyo., for

plaintiff-appellee.
David H. Carmichael of Carmichael, McNiff & Patton, Cheyenne, Wyo.,
for defendant-appellant.
Before LOGAN and MOORE, Circuit Judges, and WEST, District
Judge.*
JOHN P. MOORE, Circuit Judge.
This is a diversity case in which plaintiff Delgado Oil Company (Delgado)

recovered a judgment from defendant James R. Cleveland (Cleveland) upon a
common law theory that Cleveland, a director of an insolvent corporation,
Balducci Oil Company, Inc. (Balducci), was liable for losses incurred by the
plaintiff. This action was maintained even though Balducci had filed a petition
for reorganization under Chapter 11 of the Bankruptcy Code. We hold the
filing of the bankruptcy proceeding deprived the district court of subject matter
jurisdiction over this case, and we reverse.
In July 1982, Delgado commenced an action which was removed to the United
States District Court for the District of Wyoming, averring that defendant
Cleveland, as a director of Balducci, made false representations about the
company's financial statements on which Delgado relied in extending credit to
Balducci. Delgado also claimed Cleveland willfully mismanaged the assets of

the company resulting in the preferential payment of certain Balducci creditors
whose debts were guaranteed by Cleveland. Plaintiff alleged these actions were
taken to protect and promote Cleveland's personal interests to the detriment of
the corporation and in breach of his fiduciary obligation to plaintiff. After a
bench trial, the district court concluded, under Wyoming law, Cleveland was
not liable for fraud.1 On the second claim, the court applied Colorado common
law and found Cleveland, in his capacity as a director of an insolvent
corporation, liable for unlawful preferential payments in breach of his fiduciary
duty. The court entered judgment accordingly.2
3
Prior to trial, in March 1982, Balducci had filed a petition for reorganization
under Chapter 11 of the Bankruptcy Code (11 U.S.C. Secs. 1101-1146) in the
United States Bankruptcy Court for the District of Colorado.3 Because
Balducci was not a party in the instant case, the automatic stay provisions of
the Bankruptcy Code did not affect the pendency of this suit. More importantly,
no party apparently considered the possible effect of the bankruptcy nor
presented the question of whether the trial court retained jurisdiction over the
issue of a preferential transfer.4
Nevertheless, once addressed, this critical question is dispositive. Subject

matter jurisdiction is never presumed. In every case and at each stage of the
proceeding, we must satisfy ourselves that our jurisdiction is proper. Treinies v.
Sunshine Mining Co., 308 U.S. 66, 60 S.Ct. 44, 84 L.Ed. 85 (1939). Moreover,
although the parties never challenged jurisdiction, we must sua sponte raise the
issue to assure our proper jurisdiction.5 Tafoya v. U.S. Dept. of Justice, LEAA,
748 F.2d 1389 (10th Cir.1984).
The question presented is whether, under the Bankruptcy Reform Act of 1978
(the Code),6 the filing of a bankruptcy petition by a corporation deprives the
district court of jurisdiction to try the issue of a preferential transfer by a
corporate director and vests the bankruptcy court with exclusive jurisdiction.
After viewing the appropriate statutory provisions, we conclude the question
must be answered in the affirmative.
We start our analysis with the provisions of 28 U.S.C. Sec. 1471(a), (e) (1978),
which state:
(a) Except as provided in subsection (b) of this section, the district courts shall
have original and exclusive jurisdiction of all cases under title 11.
....
(e) The bankruptcy court in which a case under title 11 is commenced shall
have exclusive jurisdiction of all of the property, wherever located, of the
debtor, as of the commencement of such case.
10
Subsection (e) creates exclusive jurisdiction in the bankruptcy court of "all

property of the debtor." Breathing life into the latter phrase is the definition of
"property of the debtor." Title 11 U.S.C. Sec. 541(a)(3) provides in part:
11
(a) The commencement of a case under section 301, 302, or 303 of this title
creates an estate. Such estate is comprised of all the following property,
wherever located:
12
....
13
(3) Any interest in property that the trustee recovers under section 543, 550,
553, or 723 of this title.
14
This definition of the property of the estate is key to our inquiry and requires
that recoveries made by the trustee (11 U.S.C. Sec. 550)7 in actions to void
preferential transfers be included in the estate under 11 U.S.C. Sec. 547. Thus,
when Sec. 541(a)(4) is applied to 28 U.S.C. Sec. 1471(e), we must conclude
that, by statute, the bankruptcy court is the only court with postbankruptcy
subject matter jurisdiction over preferential transfers of the debtor's property.
15
Application of this principle to the instant case circumscribes our jurisdictional

inquiry. At the outset, we recognize the filing of the bankruptcy petition
instantly alters the rights of a corporation and its creditors. As a general rule,
and outside the context of a bankruptcy case, the fiduciary obligation of
officers, directors, and shareholders is enforceable directly by the corporation
or through a stockholder's derivative action. However, "it is, in the event of
bankruptcy of the corporation, enforceable by the trustee. For that standard of
fiduciary obligation is designed for the protection of the entire community of
interests in the corporation--creditors as well as stockholders." Pepper v. Litton,
308 U.S. 295, 306-307, 60 S.Ct. 238, 245, 84 L.Ed. 281 (1939) (citations
omitted). The Sec. 541 estate, thus, includes any right of action the debtor
corporation may have to recover damages for misconduct, mismanagement, or
neglect of duty by a corporate officer or director. The trustee in bankruptcy
succeeds to that right. Its nature is derivative. See 4 Collier on Bankruptcy p
541.10 (15th ed. 1983).

16
The Chapter 11 debtor, as debtor in possession, is endowed with the powers of

a trustee. As a creature of statute, the trustee possesses only those powers
conferred upon him by the Code, and he alone can exercise those rights to the
exclusion of all others. This special status enables the trustee to achieve an
equality of distribution among the corporation's unsecured creditors. Hence, as
trustee of the Chapter 11 estate, only Balducci could maintain a postbankruptcy
action to recover a preferential transfer. 11 U.S.C. Secs. 1101(1), 1107(a).8 It
follows, only the bankruptcy court can entertain the action. Mitchell
Excavators, Inc. by Mitchell v. Mitchell, 734 F.2d 129 (2d Cir.1984); In re
MortgageAmerica Corp., 714 F.2d 1266 (5th Cir.1983).
17
Thus, the filing of the bankruptcy petition by Balducci transmuted the legal
rights of its creditors seeking recovery of corporate debts. However, plaintiff
Delgado invoked the doctrine of Colorado common law imposing liability on a
corporate officer or director for the breach of fiduciary duties owed to the
corporation's creditors. Crowley v. Green, 148 Colo. 142, 365 P.2d 230 (1961);
Rosebud Corp. v. Boggio, 39 Colo.App. 84, 561 P.2d 367 (1977). Delgado
sought to impose individual liability on Cleveland as a director for actions
which directly and "tortiously" injured Delgado as an unsecured creditor who
had extended credit to Balducci as a corporation. Delgado relied on a series of
Colorado cases which, under ostensibly similar situations, allowed recovery to
creditors or an individual creditor on the theory that directors owe a duty to
creditors not to divest corporate property for the director's benefit.9 Central to
the common law doctrine is the recognition that creditors may pursue this
remedy on behalf of the corporation to ensure that all creditors are treated
equally. Ficor, Inc. v. McHugh, 639 P.2d 385 (Colo.1982).10
18
However skillfully pleaded, the instant common law action is preempted by the
bankruptcy case. Even under the common law, plaintiff's cause of action is
maintainable only through the debtor corporation; hence, it is property of the
estate.11 Defendant Cleveland was not the debtor. Any liability of Cleveland to
Balducci creditors for violating a trust relationship was thrust upon him solely
because of his capacity as a director of an insolvent corporation indebted to the
plaintiff. 12 Of greater consequence, this trust relationship applied to all the
creditors of Balducci, not just this plaintiff. The intervention of the bankruptcy
case now prevents the inequity of one creditor recovering more on its debt than
the remaining similarly situated creditors can recover on theirs.
19
The overriding nature of the bankruptcy action to recover a preference cannot

be circumvented. When a debtor corporation has made a transfer of its assets
which results in the preference of one or more creditors over others, the purpose
of an action against those transferees is to return assets to the debtor's estate for
equitable distribution to all creditors. While the common law action to recover
a preferential transfer can be maintained by creditors under certain
circumstances, the intervention of the events of bankruptcy and the pervasive
jurisdiction of the bankruptcy court must negate the common law right of
recovery. The negation occurs to satisfy the basic bankruptcy purpose of
treating all similarly situated creditors alike. To do this, the trustee in
bankruptcy is given power to recover, as property of the debtor, preferentially
transferred property or the value of that property.
20
We cannot ignore the significance of the recovery in the context of our case.
Even in the common law action, the property allegedly preferentially
transferred by Balducci was not that of Delgado but of Balducci. In the light of
the creation and function of the bankruptcy estate, only the trustee has the right
to reach out and recover the value of that property.
21
Accordingly, the judgment of the trial court is reversed, this case is remanded,
and the trial court is directed to dismiss the action for preferential transfer
against the defendant.
Honorable Lee R. West, United States District Judge for the District of
Oklahoma, sitting by designation
The court found that Cleveland did not actively participate in any fraud and that
Delgado did not rely on the financial statement in deciding to extend credit to
Balducci
Delgado's action was instituted against both Cleveland and Michael R. Torres,
the comptroller of Balducci. Torres is not a party to this appeal
Delgado filed a claim as an unsecured creditor in the bankruptcy court and was
a member of the creditors' committee. However, according to the record,
Delgado received nothing from the bankruptcy distribution
The first claim for alleged fraud was obviously beyond the purview of the
bankruptcy proceeding; but, at trial, the court held for the defendants on this
claim, and that finding has not been appealed
After we raised the jurisdictional question, the parties were given the
opportunity to submit supplemental briefs confined solely to the issue of
whether the filing of the bankruptcy petition had the effect of depriving the
district court of jurisdiction to try the issue of the existence of a preferential
transfer
6
Although repealed by the Bankruptcy Amendments and Federal Judgeship Act

of 1984, provisions of the Code applicable at the time of trial are referenced
throughout this opinion
This section provides: "[T]o the extent that a transfer is avoided under section
... 547 ... of this title, the trustee may recover, for the benefit of the estate, the
property transferred, or ... the value of such property...."
Indeed, according to the supplemental record, the trustee in this case brought
such an action in the bankruptcy court. In its order filed December 24, 1984,
the bankruptcy court granted summary judgment in favor of Cleveland on the
issue of alleged preferential transfers. On appeal to the district court, the order
was reversed and trial of the issue was set
Appellant cites Crowley v. Green, 148 Colo. 142, 365 P.2d 230 (1961); La
Fond v. Basham, 683 P.2d 367 (Colo.Ct.App.1984); Rosebud Corp. v. Boggio,
39 Colo.App. 84, 561 P.2d 367 (1977); Fishel v. Goddard, 30 Colo. 147, 69 P.
607 (1902)
10
Although a single creditor recovered a judgment in Ficor, the court emphasized

that the equitable distribution principle was preserved since plaintiff was the
only unpaid creditor of the defendant corporation
11
A contrary result would be anomalous. Plaintiff's suit is akin to a shareholder's

derivative action which, upon the filing of a petition in bankruptcy, is property
of the estate. Accord Mitchell Excavators, Inc. by Mitchell v. Mitchell, 734
F.2d 129; In Re MortgageAmerica, 714 F.2d 1266. See also 4 Collier on
Bankruptcy p 541.10 (15th ed. 1983). Delgado also cites this section of Collier:
The trustee, however, stands in the shoes of the debtor corporation in
prosecuting a cause of action belonging to the debtor, and where the applicable
state law makes such obligations or liabilities run to the corporate creditors
personally, rather than to the corporation, such rights of action are not assets of
the estate under section 541(a) that are enforceable by the trustee.
However, as Collier further notes, the trustee has other powers to bring such
actions; and, as noted in In re MortgageAmerica, the action "can most properly
be thought of as 'belonging' to the corporation...."
12
Plaintiff never argued alter ego or piercing the corporate veil as a means of
fixing liability on Cleveland

Bankr. L. Rep. P 71,041 Delgado Oil Company, Inc. v. Michael R. Torres, James R. Cleveland, 785 F.2d 857, 10th Cir. (1986)

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Bankr. L. Rep. P 71,041 Delgado Oil Company, Inc. v. Michael R. Torres, James R. Cleveland, 785 F.2d 857, 10th Cir. (1986)

Uploaded by

Copyright:

Available Formats

785 F.

Bankr. L. Rep. P 71,041

United States Court of Appeals,

Gerald R. Mason of Mason & Twichell, P.C., Pinedale, Wyo., for

This is a diversity case in which plaintiff Delgado Oil Company (Delgado)

Balducci. Delgado also claimed Cleveland willfully mismanaged the assets of

Nevertheless, once addressed, this critical question is dispositive. Subject

Subsection (e) creates exclusive jurisdiction in the bankruptcy court of "all

Application of this principle to the instant case circumscribes our jurisdictional

541.10 (15th ed. 1983).

The Chapter 11 debtor, as debtor in possession, is endowed with the powers of

The overriding nature of the bankruptcy action to recover a preference cannot

Although repealed by the Bankruptcy Amendments and Federal Judgeship Act

Although a single creditor recovered a judgment in Ficor, the court emphasized

A contrary result would be anomalous. Plaintiff's suit is akin to a shareholder's

fixing liability on Cleveland

You might also like