Lead Opinion
Opinion by Judge KOZINSKI; Dissent by Judge D.W. NELSON.
We consider whether the Bankruptcy Code preempts a state statute that gives an assignee selected by the debtor the power to void, preferential transfers that could not be voided by an unsecured creditor.
Facts
Thinklink Corp., a unified messaging service provider, entered into an agreement with Lycos, which operates a network of web sites. Lycos agreed to promote Thinklink’s messaging service on Lycos web sites exclusively for two years. Thinklink eventually defaulted on one of its payments; Lycos nevertheless continued to display links to Thinklink’s messaging service. Lycos and Thinklink renegotiated their agreement, shortening the exclusivity period to 90 days and reducing Thinklink’s remaining payments from over $17 million to $1 million plus stock. Thinklink delivered the $1 million but not the stock, and about two months later made a voluntary general assignment for the benefit of creditors to Sherwood Partners. Sherwood shut down Thinklink’s business and sued Lycos in state court under Cal.Civ.Proc.Code § 1800 to recover the $1 million payment as a preferential transfer.
Lycos removed to federal court on diversity grounds and moved to dismiss, arguing that section 1800 was preempted by the Bankruptcy Code. The district court denied Lycos’s motion and eventually granted summary judgment to Sherwood. Lycos appeals.
Discussion
Congress has broad authority to preempt state laws, but whether Congress has done so in a particular instance is a matter of congressional intent. This intent is most easily detected where the statute expressly preempts other laws, but preemption may also be inferred where it is clear from the statute and surrounding circumstances that Congress intended to occupy the field, leaving no room for state regulation. The Supreme Court, in Pacific Gas & Electric Co. v. State Energy Resources Conservation & Development Commission,
Absent explicit pre-emptive language, Congress’ intent to supersede state law altogether may be found from a “ ‘scheme of federal regulation ... so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it,’ because ‘the Act of Congress may touch a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject,’ or because ‘the object sought to be obtained by the federal law and the character of obligations imposed by it may reveal the same purpose.’ ”
Id. at 203-04,
There can be no doubt that federal bankruptcy law is “pervasive” and involves a federal interest “so dominant” as to “preclude enforcement of state laws on the same subject” — much like many other areas of congressional power listed in Article I, Section 8, of the Constitution, such as patents, copyrights, currency, national defense and immigration. The Bankruptcy Clause, which grants Congress the power to make bankruptcy laws, U.S. Const. art. 1, § 8, cl. 4, stresses that such rules must be “uniform.” Bankruptcy law occupies a full title of the United States Code. It provides a comprehensive system of rights, obligations and procedures, as well as a complex administrative machinery that includes a special system of federal courts and United States Trustees.
At the same time, federal law coexists peaceably with, and often expressly incorporates, state laws regulating the rights and obligations of debtors (or their assignees) and creditors. See, e.g., 11 U.S.C. § 522(b)(2) (incorporating state personal exemptions to the bankruptcy estate); id. § 544(b) (making state law on voidable transfers available to the bankruptcy trustee); id. § 543(d)(2) (excusing some assignees for the benefit of creditors from compliance with property turnover requirements). In determining whether Cal.Civ.Proc.Code § 1800 is preempted, we must consider whether it is merely another creditor rights provision of the kind that is tolerated by the Bankruptcy Code, or whether it gives the state assignee powers that are within the heartland of bankruptcy administration.
Sherwood argues that the preference avoidance provisions of section 1800 are not only tolerated but specifically incorporated by the Bankruptcy Code through section 544(b), which allows a bankruptcy trustee to avoid any transfers voidable by unsecured creditors under “applicable law” (including state law).
But the trustee’s powers under section 544(b) are limited to those of unsecured creditors — -such as the right of an individual unsecured creditor to set aside fraudulent conveyances under state law. See, e.g., Decker v. Advantage Fund Ltd.,
To make Stellwagen and section 544(b) cover this case would require us to read the term “creditor” in section 544(b) as encompassing representatives of creditors such as Sherwood. We doubt that Congress had Sherwood in mind when describing unsecured creditors in section 544(b). The Bankruptcy Code defines “creditor,” in relevant part, as an “entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.” 11 U.S.C. § 101(10)(A). “Custodian” is a different concept, which includes receivers, trustees and “assigneefs] under a general assignment' for the benefit of the debtor’s creditors.” Id. § 101(11). In fact, Congress defined custodian using the word “creditor” in two places. See id. § 101(11)(B), (C). Custodians, instead of being by then-nature creditors, stand in a certain fiduciary relation to creditors.. But Congress did not mention custodians alongside creditors in section 544(b). We are therefore unable to read “creditor” in section 544(b) to include custodians. See Dubis v. B.W. Supply . (In re Delta Group),
The question remains whether the section 1800 assignee’s special avoidance powers, though not expressly incorporated into the Bankruptcy Code by section 544(b), nevertheless can peaceably coexist with the federal bankruptcy scheme. To answer this question we must consider the essential goals and purposes of federal bankruptcy law, and then determine whether section 1800 is consistent with them.
From the creditors’ viewpoint, chapter 7 establishes the concept of equitable distribution among creditors of a debtor’s resources which, in most cases, are insufficient to permit full payment to all. From the individual debtor’s vantage point, chapter 7 permits the honest debtor to obtain a new financial life through the discharge of unpaid debts. Neither concept is dependent on the other. Thus, in many chapter 7 cases, which may also be called “no-asset” cases, the debtor has no property realizable by creditors. Nevertheless, unless the debtor has committed [certain acts, he] is entitled to a full discharge and release from all debts except those rendered nondischargeable.... The distribution to creditors is also not affected by tohether or not the debtor obtains a discharge. Should discharge be denied, and property exists in the chapter 7 estate available to creditors, distribution will occur.
1 Collier on Bankruptcy ¶ 1.03[2][a], at 1-22 (emphasis added) (footnotes omitted).
We know, because the Supreme Court has repeatedly told us, that state statutes that purport to perform the first of these functions, by giving debtors a discharge of their debts, are preempted. See Int'l Shoe Co. v. Pinkus,
What goes for state discharge provisions also holds- true for state statutes that implicate the federal bankruptcy law’s other major goal, namely equitable distribution. Bankruptcy law accomplishes equitable distribution through a distinctive form of collective proceeding. This is a unique contribution of the Bankruptcy Code that makes bankruptcy different from a collection of actions by individual creditors. In a world of individual actions, each creditor knows that if he waits too long, the debt- or’s assets will have been exhausted by the demands of the quicker creditors and he will recover nothing. The creditors race to the courthouse, all demanding immediate payment of their entire debt. Like piranhas, they make short work of the debtor, who might have survived to pay off more of his debts with a little bit of reorganization — or at least might have more equitably fed the slower piranhas. See, e.g., In re Hoskins,
Federal bankruptcy law seeks to avoid this scenario by “creat[ing] a whole system under federal control which is designed to bring together and adjust all of the rights and duties of creditors and embarrassed debtors alike.” MSR Exploration, Ltd. v. Meridian Oil, Inc.,
One of the major powers the Code gives the trustee is the power to avoid preferential transfers.
It is clear that if a state assignee under section 1800 recovers a preferential transfer and distributes its proceeds to creditors, this will preclude a federal trustee from recovering the same sum under the federal preference statute if a federal bankruptcy proceeding is begun. The creditor who disgorged the transfer cannot disgorge it twice; the creditors who later received the recovered money may be impossible to identify; and even if they can be identified, they may be gone or in financial difficulty themselves. The distribution of the recovered sum will then have been made by a state assignee subject to state procedures and substantive standards, rather than by the federal trustee subject to bankruptcy law’s substantive standards and procedural protections.
Sherwood points out that the creditor may be able to avoid this result by quickly filing an involuntary federal bankruptcy petition, which would have the effect of
In any event, the affected creditor (like Lycos) may not be able to run to federal court because in most cases (i.e., those where there are more than eleven creditors) at least three creditors are required to force the debtor into bankruptcy. 11 U.S.C. § 303(b)(1). And the action of the state assignee may diminish the likelihood that Lycos will be able to obtain the consent of other creditors. After all, if the state assignee succeeds in recovering the preferential transfer under state law, the other creditors may share in that bounty and might therefore have no interest in invoking the potentially more expensive and time-consuming federal processes.
This points to yet another vice of the state proceedings: Once they are commenced, they will affect the incentives of various parties as to whether they wish to avail themselves of federal bankruptcy law. The creditor whose ox is being gored by the state assignee may have a new incentive to begin an involuntary federal proceeding; other creditors, for the reasons explained above, may have diminished incentives. The provisions of the Bankruptcy Code, including those that explicitly incorporate certain state laws (like voluntary assignments, or preference recovery provisions available to unsecured creditors) carefully delineate the circumstances under which federal bankruptcy proceedings are to be initiated. We do not believe Congress contemplated state laws that would sharpen or blunt the effect of those statutory incentives.
Stellwagen, on which Sherwood relies heavily, is not to the contrary. As noted above, see pages 1201-02 supra, the Supreme Court in Stellwagen did uphold a statute that allowed a state trustee to recover preferential transfers, but the preferential avoidance power the trustee exercised in that case was one that could have been exercised by any creditor.
Conclusion
Because we hold that the California statute, Cal.Civ.Proc.Code § 1800, is preempted by the Bankruptcy Code, we remand to the district court for dismissal of the complaint.
REVERSED.
Notes
. The statute provides that:
[T]he assignee of any general assignment for the benefit of creditors ... may recover any transfer of property of the assignor:
(1) To or for the benefit of a creditor;
(2) For or on account of an antecedent debt owed by the assignor before the transfer was made;
(3) Made while the assignor was insolvent;
(4) Made on or within 90 days before the date of the making of the assignment ...; and
(5) That enables the creditor to receive more than another creditor of the same class.
Cal.Civ.Proc.Code § 1800(b).
. Section 544(b) provides, in relevant part, that "the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim.” 11 U.S.C. § 544(b).
. The state statute at issue in Stellwagen was not a true preference statute, like Cal.Civ.Proc.Code § 1800 and 11 U.S.C. § 547, in that it required that the transfer have been made in contemplation of insolvency or with an intent to defraud creditors, making it more akin to a fraudulent conveyance statute. This distinction does not make a difference for purposes of our analysis.
. We note that the Supreme Court, frowning on extending the meaning of statutory terms for policy reasons, has recently declined to read "trustee” in 11 U.S.C. § 506(c) as-in-eluding administrative claimants. See Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A.,
. The trustee may avoid preferences either under 11 U.S.C. § 547(b) or under state law (as incorporated into the Bankruptcy Code by section 544(b)) to the extent such transfers could be voided by an unsecured creditor.
. This is not a matter for federal concern when the assignee has no special avoidance rights. If individual unsecured creditors can sue to recover preferences under state law, the same powers are also available to a bankruptcy trustee under section 544(b); there is obviously no conflict then between federal law and state law giving those powers to an assignee. To the extent a state assignee, who is less procedurally constrained than a bankruptcy trustee, may be free to engage in self-dealing, he can do nothing more than individual creditors, who are free to engage in all the self-dealing they want.
. Perkins v. Petro Supply Co. (In re Rexplore Drilling, Inc.),
. We do not, as the dissent claims, question the validity of voluntary assignments for the benefit of creditors, which have a venerable common-law pedigree, were upheld in Pobres-lo and are specifically contemplated in the Bankruptcy Code. See, e.g., 11 U.S.C. §§ 101(11)(B), 543(d)(2). The Pobreslo Court specifically noted that the voluntary assignment process it upheld did not create any new rights that did not already belong to the debt- or or creditors:
*1206 [T]he [state voluntary assignment] law merely governs the administration of trusts created by deeds like that in question, which do not differ substantially from those arising under common law assignments for the benefit of creditors. The substantive rights under such assignments depend upon contract; the legislation merely governs the execution of the trusts on which the property is conveyed. And as proceedings under any such assignment may be terminated upon petition of creditors filed within the time and in the manner prescribed by the federal Act ... it is apparent that Congress intended that such voluntary assignments, unless so put aside, should be regarded as not inconsistent with the purposes of the federal Act.
Pobreslo,
Dissenting Opinion
dissenting.
I respectfully dissent because I disagree with the majority’s preemption analysis. The majority states that California Civil Procedure Code § 1800 is preempted by federal bankruptcy law. However, the reasoning by which the majority reaches this result would preempt any number of state laws governing voluntary assignments for the benefit of creditors because those laws have the effect of altering the incentives of various affected parties to initiate bankruptcy proceedings. Under the majority’s reasoning, any state statutory scheme, including those governing voluntary assignments for the benefit of creditors, that “give[s] state assignees or trustees avoidance powers beyond those that may be exercised by individual creditors trench[es] too close upon the exercise of the federal bankruptcy power.” Majority Op. at page 1205. State voluntary assignments, by definition, give the assignee more power than may be exercised by an individual creditor.
Voluntary assignments for the benefit of creditors have their origins in English common law, and exist as an alternative to formal bankruptcy proceedings. See Credit Managers Ass’n v. Nat’l Indep. Bus. Alliance,
In Pobreslo v. Boyd Co., the Supreme Court upheld a state scheme allowing voluntary assignment for the benefit of creditors, stating, “[I]t is apparent that Congress intended that such voluntary assignments ... should be regarded as not inconsistent with the purposes of the federal Act.”
Yet the majority holds that section 1800 is preempted because it alters the incentives of creditors to initiate involuntary bankruptcy proceedings, thereby interfering with bankruptcy’s goal of equitable distribution of a debtor’s assets. The majority’s concerns about section 1800 are not distinguishable from concerns about voluntary assignment provisions generally. See, e.g., Majority Op. at pages 1203-05 (describing how state law interferes with the unique collective form of proceeding established by bankruptcy law; discussing use of “hand-picked” trustee in state proceedings). As the majority recognizes, Majority Op. at page 1205 n. 8, it is well established that there is a common-law right to make an assignment of property for the benefit of creditors. It is thus illogical that state laws that provide a forum for the equitable distribution of that property should be preempted by federal bankruptcy law.
The majority argues that if a preferential transfer is recovered by the assignee under section 1800, the same sum could not be recovered if a federal bankruptcy proceeding were initiated later. Majority Op. at pages 1204. But California’s preference recovery provision is, by design, virtually identical to the bankruptcy code’s preferential transfer statute. See 11 U.S.C. .§ 547(b), Cal. Civ. Proc. Code § 1800(b); see also Angeles Electric Co. v. Superior Court,
When the majority’s reasoning is carried to its logical extension, it has the effect of pushing corporations threatened with insolvency from the less stigmatic, and less costly, voluntary assignment scheme into the world of federal bankruptcy. This should not have to be the case. I believe that both voluntary assignments and the bankruptcy system can “peaceably coexist” as twin mechanisms aimed at distributing the resources of an insolvent debtor. That voluntary assignments are incorporated into bankruptcy law, and that they have existed alongside bankruptcy law since its inception without causing an interference with the goal of equitable distribution, supports my conclusion that state voluntary assignments, and the laws that effectuate them, should not be preempted by bankruptcy law. “[Fjederal regulation of a field of commerce should not be deemed preemptive of state regulatory power in the absence of persuasive reasons — either that the nature of the regulated subject matter permits no other conclusion, or that the Congress has unmistakably so ordained.” Florida Lime & Avocado Growers, Inc. v. Paul,
. The majority asserts that it does not question the validity of assignments for the benefit of creditors and that it invalidates section 1800 because it gives the state assignee new powers that are not derived from trust or contract law.- Majority Op. at page 1205 n. 8. The state assignee, regardless of the powers granted by section 1800, distributes a debtor’s ' assets among creditors and otherwise exercises powers on behalf of all creditors, thus exercising powers greater than any one creditor could exercise. I find it thus difficult to draw a line between the majority’s arguments regarding section 1800 and problems with voluntary assignments, generally.