Bankr. L. Rep. P 76,185
Keith T. HARSTAD, doing business as Harstad Companies;
Diane N. Harstad, doing business as Harstad
Companies, Appellants,
v.
FIRST AMERICAN BANK, formerly known as Drovers First
American Bank of South St. Paul, Appellee.
No. 94-1389.
United States Court of Appeals,
Eighth Circuit.
Submitted Oct. 10, 1994.
Decided Nov. 9, 1994.
James L. Baillie, Minneapolis, MN, for appellants.
Daniel Beck, St. Paul, MN, for appellee.
Before BOWMAN, WOLLMAN, and HANSEN, Circuit Judges.
BOWMAN, Circuit Judge.
Keith and Diane Harstad, doing business as Harstad Companies, appeal from the order of the District Court1 affirming the decision of the Bankruptcy Court2 granting the motion of First American Bank (the Bank) to dismiss.3 We affirm.I.
On February 16, 1990, the Harstads filed a voluntary Chapter 11 (reorganization) bankruptcy petition. Nearly two and one-half years later, on August 21, 1992, they submitted an amended disclosure statement to the Bankruptcy Court, which included only this statement concerning preferencеs:4
Debtors and the Committee of Unsecured Creditors have not yet completed the analysis of pre-petition preferential transfers subject to avoidance under 11 U.S.C. Sec. 547. Debtors do not know at the present time whether or not there are any avoidable preferential transfers.
Debtors' Amended Disclosure Statement art. IV(A) (Aug. 21, 1992). This was the only reference to preferential transfers in the document. On October 19, 1992, the Bankruptcy Court confirmed the Harstads' Amended Plan of Reorganization, without any update to the preference disclosure (or lack thereof) earlier filed with the Bankruptcy Court.5
By January 15, 1993, just three months after the Plan was confirmed, the Harstads evidently had "completed the analysis of pre-petition transfers," because they filed adversary proceedings in the Bankruptcy Court seeking avoidance and recovery of approximately $841,850.00 in alleged preferential transfers, including $140,663.00 from the Bank for an amount paid to it on December 8, 1989, to cover an insufficient funds check issued by the Harstads.6 The Bank filed a motion to dismiss, which was treated as a motion for summary judgment, see supra n. 3, and was granted by the Bankruptcy Court. Harstad v. First American Bank (In re Harstad),
II.
The Harstads challenge the Bankruptcy Court's conclusion that they do not have standing to bring the preference action against the Bank.
The bankruptcy trustee has the discretionary power to avoid and to recover preferential transfers. See 11 U.S.C. Secs. 547(b), 550(a) (1988); supra n. 4. When the Harstads filed their voluntary Chapter 11 bankruptcy petition, they assumed the status of "debtor in possession," see id. Secs. 1101(1), 101(13) (1988 & Supp. V 1993), and, as such, they acquired most of the rights and powers (and duties) of a bankruptcy trustee, see id. Sec. 1107(a) (1988). Therefore the Harstads, while serving the function of debtor in possession, had the power to avoid and to recover preferences. The Harstads failed to exercise those powers while they were acting as the debtor in possession (before their reоrganization plan was confirmed, see In re Grinstead,
As Chapter 11 debtors, the Harstads could have brought a post-confirmation action on "any claim or interest belonging to the debtor or to the estate" (or could have designated some other entity to do so) if their Plan had provided for "the retention and enforcement [of that claim or intеrest] by the debtor, by the trustee, or by a representative of the estate appointed for such purpose." 11 U.S.C. Sec. 1123(b)(3) (1988). Nowhere in the Plan, however, did the Harstads make such a provision.
The Harstads argue that a portion of the Plan's Article X can be read as reserving the preference cause of action for them as post-confirmation debtors:
The Court will retain jurisdiction until this Plan has beеn fully consummated for the following purposes: ... determination of all causes of actions [sic] between Debtors and any other party, including but not limited to any right of Debtors to recover assets pursuant to the provisions of the Bankruptcy Code....
The Harstads' argument must fail. Article X, captioned "Continuing Jurisdiction," concerns the ongoing jurisdiction of the Bankruptcy Court for matters that arise after plan confirmation.7 Noting the retention of the court's statutory jurisdiction to hear post-confirmation matters is a far cry from reserving to the debtors a right to bring post-confirmation claims to recover preferences paid by the debtors but never disclosed by them during the pre-confirmation proceedings. We hold that the above-quoted language is not a retention of the claim at issue here--much less the "sрecific and unequivocal" retention that some courts require. See, e.g., Retail Mktg. Co. v. Northwest Nat'l Bank (In re Mako),
The Harstads would have us rely on 11 U.S.C. Sec. 1141(b) (1988), rather than Sec. 1123(b)(3), in deciding whether they may maintain this cause of action, and they urge us to follow the decision in J.E. Jennings, Inc. v. William Carter Co. (In re Jennings, Inc.),
Were we to adopt the Harstads' argument, we would render Sec. 1123(b)(3) a nullity. As the Harstads see it, Sec. 1123(b)(3) gives debtors discretion to reserve to themselves, in their plans, post-confirmation claims, which claims are subsumed in the broad category of "property of the estate" that already vests in the debtors automatically upon plan confirmation under Sec. 1141. Why then would a debtor ever bother to retain a power by specific plan language when the Bankruptcy Code gives him that power automatiсally? We think that the affirmative course of action set forth in Sec. 1123(b)(3), to be followed by the debtor who wishes to retain the right to bring preference claims, preempts the general provision of Sec. 1141 that dumps all remaining post-confirmation estate property into the lap of the debtor. The court in Jennings adopted the argument the Harstads put forth here, but did not even consider the implications of its holding on Sec. 1123(b)(3). In fact, nowhere in the opinion was the section mentioned. For that reason alone, Jennings is not persuasive.
We view Sec. 1123(b)(3) as, at least in part, a notice provision. Creditors have the right to know of any potential causes of action that might enlarge the estate--and that could be used to increase payment to the creditors. Even if, as the Harstads claim, they gave notice of such claims by indicating in their disclosure statement that the availability of such claims was being investigated, the creditors are entitled to know if the debtors intend to pursue the preferences in post-confirmation actions. Compliance with Sec. 1123(b)(3) gives notice of that intent. Only then are creditors in a position to seek a share of any such recoveries, contingent though they mаy be, and to have the mechanics of the preference-sharing spelled out in the plan. Creditors are in no position to do so if they are not on notice that the debtor retains the power to pursue recovery. See Amarex, Inc. v. Marathon Oil Co. (In re Amarex),
We are not swayed by the Harstads' argument that our analysis works a forfeiture of the preference claims and gives a windfall to the Bank. As with any cause of action, at some point there must be repose. In many cases, that repose is effectuated by the limitations statute governing the action. In this case, the Harstads had more than two and one-half years prior to the confirmation of their Plan to identify, to avoid, and to recover any preferential transfers they might have made. And if that was not adequate time (although it is a mystery to us why the Harstads could not have identified in two and one-half years an alleged preferential transfer they personally made fewer than ninety dаys before filing bankruptcy), then they should have specifically reserved the right to pursue claims of this sort post-confirmation. If the claim in this case can be characterized as forfeited, and if the Bank has received a windfall, then it is the Harstads in the role of debtor in possession who worked the forfeiture and awarded the windfall, perhaps breaching the fiduciary duty owed to their creditors in the process. See Yellowhouse Mach. Co. v. Mack (In re Hughes),
Having considered all the Harstads' arguments, we agree with both of the lower courts that the Harstads lack standing to bring this action.
III.
Even if we were to assume for the sake of argument that the Harstads have standing in this cause, they still cannot prevail.
To the extent that the trustee may avoid a preference under Sec. 547, he "may recover, for the benefit of the estate " the transferred property or the value of the property. 11 U.S.C. Sec. 550(a) (emphasis added). The Harstads contend that a recovery on the claim at issue would benefit the estate, both directly and indirectly, but the Bankruptcy Court found otherwise, and held that this ground precludes the Harstads' action.
While a direct benefit to the Harstads themselves is crystal clear, any direct benefit that would accrue to the estate is quite difficult to discern. The Plan does not provide for the distribution of any preference recoveries to creditors. Moreover, the Harstads are not suggesting that they voluntarily will turn over additional funds to creditors or that they will seek a modification of the Plan in order to insure that the creditors share in any recovery. Cf. In re Jennings, Inc.,
The Harstads contend that the Bankruptcy Court erred in treating the terms "estate," as used in Sec. 550(a), and "creditors" as synonymous, see In re Harstad,
But even if we accept the argument that the "estate" and the "creditors" are not the same entity in post-confirmation actions under Sec. 550(a), the Harstads must lose. Once a plan of reorganizatiоn is confirmed, and unless the plan provides otherwise (which the Plan here does not), the property of the bankruptcy estate vests in the debtor and the debtor is discharged from his pre-petition debts. 11 U.S.C. Sec. 1141 (1988). Ordinarily, then, subject to exceptions not relevant here, the rule is that the estate is dissolved upon confirmation of the plan. See, e.g., In re NTG Indus.,
Even the cases cited by the Harstads recognize that it is the creditors that must benefit from post-confirmation preference actions. See, e.g., Tennessee Wheel & Rubber Co. v. Captron Corp. Air Fleet (In re Tennessee Wheel & Rubber Co.),
The Harstads argue thаt, in any case, there is a benefit, albeit indirect, to the creditors. According to the Harstads, any recovery of the alleged preference will increase the likelihood that they will be able to pay their creditors as the Plan requires, even though it will not increase the amount paid to the creditors. We know, however, that the Bankruptcy Court would not have confirmed the Plan had it not been fеasible, see 11 U.S.C. Sec. 1129(a)(11) (1988); see also Clarkson v. Cooke Sales & Serv. Co. (In re Clarkson),
We do not hold that a bankruptcy trustee or a debtor in possession (or a debtor or an appointed representative under powers reserved via Sec. 1123(b)(3)) must demonstrate a direct benеfit to the creditors in the form of a distribution to the creditors of the preference recovery9 (although that would certainly make this a much easier issue to decide). See Kroh Bros. Dev. Co. v. United Mo. Bank of Kansas City, N.A. (In re Kroh Bros. Dev. Co.),
IV.
We have taken with the case the Harstads' motion to strike a letter that the Bank submitted to the Court before oral argument, ostensibly pursuant to Federal Rule of Appellate Procedure 28(j). Rule 28(j) is designed to allow a party to supplement authority for issues already argued in that party's brief. The Bank's letter cites authority purported to suрport a statute of limitations defense to the Harstads' claims, a defense neither raised in the motion to dismiss nor decided by the Bankruptcy Court in its summary judgment order. The letter provides supplemental authority for an argument that would not be properly before the Court, because it was not raised below, even if it were before the Court at all, which it is not because it was not even mentioned in the Bank's brief. The Harstads' motion is granted.
The judgment of the District Court affirming the judgment of the Bankruptcy Court is affirmed.
Notes
The Honorable Donald D. Alsop, Senior Judge, United States District Court for the District of Minnesota
The Honorable Robert J. Kressel, Chief Judge, United States Bankruptcy Court for the District of Minnesota
The Bankruptcy Court treated the Bank's motion to dismiss as a motion for summary judgment pursuant to Federal Rule of Civil Procedure 12(b) and Federal Rule of Bankruptcy Procedure 7012(b), which provide for such treatment when the court, in ruling on a motion to dismiss, considers matters outside the pleadings
In general terms and for our purposes here, a preference is a transfer of property to a creditor in payment for a debt, made when the debtor is insolvent or within ninety days before the filing of a bankruptcy petition, and in an amount exceeding thаt which the creditor would have received under the Chapter 11 reorganization. The bankruptcy trustee may avoid and recover such transfers. 11 U.S.C. Secs. 547(b), 550(a) (1988)
The Harstads assert that their business records were made available to creditors, Appellants' Reply Brief at 1, with the implication that the creditors therefore had all the information that was required for them to identify the preferences fоr themselves. If the unidentified preferences should have been obvious to the Harstads' creditors, however, then why were they not obvious to the Harstads themselves, who would have been intimately familiar with their own business dealings?
According to the Bank, the transfer was made to the Bank to pay a debt incurred as the result of a check-kiting scheme that the Harstads perpetrated with the assistance of one of their business partners. The Harstads deny this (Keith Harstad in his affidavit calls the problem an "overdraft"). They question why the Bank did not report them to the proper authorities if they believed they were dealing with a kite, but instead only threatened the Harstads with prosecution if they did not pay up (a threat that evidently worked, notwithstanding the Harstads' assertion of innocence). Despite the pejorative accusations from both sides, neither the origin of the debt nor its legitimacy is relevant to the issues before us
We hasten to add that Article X cannot and does not confer jurisdiction upon the court, as only Congress may do that. We view it instead as merely setting forth the understanding of the Harstads, the court, and the creditors as to what actions would be brought in the bankruptcy court post-confirmation
There is nothing in the recоrd to indicate that the Harstads are finding their obligations under the Plan impossible to meet. The Harstads argue that this lack of evidence indicates a genuine issue of material fact, and so summary judgment here was inappropriate. The Harstads, however, may not come before this Court and intimate that there may be a genuine fact issue. They had the opportunity in the Bankruptcy Court to come forward with affidavits or other evidence showing a genuine issue for trial, see Fed.R.Civ.P. 56(e), but they did not do so and cannot now simply assert in this Court that one may exist
The Bankruptcy Court's decision in this case was roundly criticized by the bankruptcy court in Trans World Airlines, Inc. v. Travellers Int'l AG. (In re Trans World Airlines, Inc.),