Bankr. L. Rep. P 74,056,
37 Cont.Cas.Fed. (CCH) 76,104
UNITED STATES of America, et al., Appellants,
v.
INSLAW, INC.
INSLAW, INC.
v.
UNITED STATES of America, et al., Appellants.
INSLAW, INC.
v.
UNITED STATES of America, et al., Appellants.
INSLAW, INC.
v.
UNITED STATES of America, et al., Appellants.
Nos. 90-5052 to 90-5055.
United States Court of Appeals,
District of Columbia Circuit.
Argued Jan. 17, 1991.
Decided May 7, 1991.
Rehearing and Rehearing En Banc
Denied in No. 90-5052
July 12, 1991.
Appeals from the United States District Court for the District of Columbia (Civil Action Nos. 88-00698, 88-00697, 88-00696).
Mark B. Stern, Atty., Dept. of Justice, Washington, D.C., with whom Stuart M. Gerson, Asst. Atty. Gen., William J. Birney, Acting U.S. Atty., William Kanter and Robert M. Loeb, Attys., Dept. of Justice, were on the brief, for appellants in 90-5052, 90-5053, 90-5054 and 90-5055.
Michael E. Friedlander, Washington, D.C., with whom Charles R. Work, Jacqueline E. Zins, Philip L. Kellogg and James L. Lyons were on the brief, for appellee in all cases.
Before BUCKLEY, WILLIAMS and RANDOLPH, Circuit Judges.
Opinion for the Court filed by Circuit Judge STEPHEN F. WILLIAMS.
STEPHEN F. WILLIAMS, Circuit Judge:
Section 362(a) of the Bankruptcy Code imposes an automatic stay of "any act to obtain possession of property of the estate ... or to exercise control over property of the estate." 11 U.S.C. Sec. 362(a)(3) (1988). Inslaw, Inc., after filing for reorganization under Chapter 11 of the Bankruptcy Code, invoked Sec. 362(a) to secure bankruptcy court adjudication of a large segment of its prolonged dispute with the Department of Justice over the Department's right to use a case-tracking software system that Inslaw had provided under contract. Inslaw claimed that the Department had violated the stay provision by continuing, and expanding, its use of the software program in its U.S. Attorneys' offices. The bankruptcy court found a willful violation, see In re Inslaw, Inc.,
* Inslaw has built itself around one software product, the Prosecutor's Management Information System, known by the acronym "PROMIS". Until January 1981, Inslaw was a nonprofit organization that relied on a variety of public funds to develop a version of PROMIS ("old PROMIS") that the parties agree is in the public domain. On becoming a for-profit corporation, it continued to make substantial improvements to PROMIS, using private funds. These enhancements, which appear in the version of thе software referred to as "enhanced PROMIS", are the "lifeblood" of Inslaw--"the nucleus of its assets."
Under a March 16, 1982 contract with the Department (No. JVUSA-82-C-0074), Inslaw agreed to provide and install old PROMIS on minicomputers in 20 large U.S. Attorneys' offices and to develop and install a word processor-based version of old PROMIS for use in 74 smaller offices.
Because the Department had not selected or acquired hardware to run PROMIS in-house, Inslaw agreed in the meantime to provide PROMIS to the 20 larger offices on a time-sharing basis through telephone links to its own computers, in much the same way LEXIS and WESTLAW provide their services to subscribers.
In November 1982 the Department asked Inslaw, under the terms of the contract, for a copy of "all computer programs and supporting documentation developed for or relating to" the contract.
The request touched off the central, but by no means the only, dispute between the parties--whether the Department was entitled, under the contract, to receive the PROMIS enhancements without further payments.
From August 1983 until January 1984, Inslaw proceeded under the contract to install enhanced PROMIS on minicomputers in 22 large U.S. Attorneys' offices.
Inslaw filed a petition for reorganization under Chapter 11 of the Bankruptcy Code on February 7, 1985. One month later, Inslaw's contract with the Department expired, by which timе Inslaw had received almost all of the original $9.6 million contract price. Brief for Appellants at 8. Between June 24, 1985 and September 2, 1987, the Department installed enhanced PROMIS in 23 additional U.S. Attorneys' offices.
On October 17, 1985, Inslaw filed a claim with the contracting officer, under the provisions of the Contract Disputes Act, 41 U.S.C. Secs. 601-613 (1988), alleging (among other сlaims) that the Department had refused to identify and pay for proprietary enhancements not covered by the original contract, and that it had made copies of enhanced PROMIS for use in additional offices after the contract expired. See J.A. at 195, 198-200. Inslaw asked for $2.9 million in license fees for use of the enhancements. Mem.Op. at 9; see J.A. at 198-200. The contracting officer ruled against Inslaw on February 21, 1986. J.A. at 213, 215. Inslaw did not pursue these claims when it appealed the cоntracting officer's decision to the Department of Transportation Board of Contract Appeals (apparently the appropriate appellate body, its name being a vestige of an earlier, more limited jurisdiction). See DOTCBA No. 1775, Complaint filed September 19, 1986.
On June 10, 1986 Inslaw filed a four-count complaint against the government in bankruptcy court, alleging that the Department was willfully violating Sec. 362(a), the automatic stay provision of the Bankruptcy Code. The assеrted violation lay primarily in the Department's continuing to use Inslaw's property--enhanced PROMIS--without Inslaw's consent. Inslaw sought declaratory and injunctive relief, as well as compensatory damages, punitive damages, costs and attorney's fees. Stating that "[t]he scope of the automatic stay is 'extremely broad' ", the bankruptcy court denied the government's motion to dismiss the proceeding. In re Inslaw, Inc.,
In response to a separate motion by Inslaw, the bankruptcy court also found that the Department had violated the automatic stay by urging the Director of the Executive Office of the United States Trustees1 to seek conversion of Inslaw's Chapter 11 reorganization proceeding into one under Chapter 7 looking to the liquidation of Inslaw. See
On appeal, the district court upheld the judgments of the bankruptcy court but reduced the damage award by $655,200.
II
Section 362(a) provides that the filing of a bankruptcy petition
operates as a stay, applicable to all entities, of--
. . . . .
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate....
11 U.S.C. Sec. 362(a) (1988) (emphasis added). Because we find as a matter of law that none of the acts or omissions alleged by Inslaw would amount to a violation of the automatic stay, wе conclude that the bankruptcy court should have granted the Department's motion to dismiss.
* Inslaw's major allegation concerns the Department's use of enhanced PROMIS after the filing of the bankruptcy petition. The bankruptcy court concluded first that the privately-funded enhancements to PROMIS were proprietary trade secrets owned by Inslaw,
The automatic stay protects "property of the estate". This estate is created by the filing of a petition and comprises property of the debtor "wherever located and by whomever held", including (among other things) "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. Sec. 541(a)(1) (1988). It is undisputed that this encompasses causes of action that belong to the debtor, as well as the debtor's intellectual property, such as interests in patents, trademarks and copyrights. See H.R.Rep. No. 595, 95th Cong., 1st Sess. 367 ("House Report"); S.Rep.No. 989, 95th Cong., 2d Sess. 82 ("Senate Report"), U.S.Code Cong. & Admin.News 1978, p. 5787; United States v. Whiting Pools, Inc.,
In its brief Inslaw refers rather vaguely to its interest in the enhanced PROMIS software as the "property of the estate" over which the Department supposedly exercised control. But for meaningful analysis, Inslaw's interests must be examined separately. Onе set of interests consists of (1) the computer tapes containing copies of the source and object codes that Inslaw sent to the Department on April 20, 1983 and (2) the copies of enhanced PROMIS that Inslaw installed on Department hardware between August 1983 and January 1984. As to these, Inslaw held no possessory interest when it filed for bankruptcy on February 7, 1985. Nor can it claim a possessory interest over them through the Code's turnover provisions, as could the debtor-in-possession in Whiting Pools, bеcause, as Inslaw freely admits, the Department held possession of the copies under a claim of ownership (its view of the contract and Modification 12) and claimed the right to use enhanced PROMIS without further payment. It is settled law that the debtor cannot use the turnover provisions to liquidate contract disputes or otherwise demand assets whose title is in dispute. See In re Charter Co.,
The bankruptcy court instead identified the relevant property as Inslaw's intangible trade secret rights in the PROMIS enhancements.
If the bankruptcy court's idea of the scope of "exercise of control" were correct, the sweep of Sec. 362(a) would bе extraordinary--with a concomitant expansion of the jurisdiction of the bankruptcy court. Whenever a party against whom the bankrupt holds a cause of action (or other intangible property right) acted in accord with his view of the dispute rather than that of the debtor-in-possession or bankruptcy trustee, he would risk a determination by a bankruptcy court that he had "exercised control" over intangible rights (property) of the estate.2 In making that determination (one way or the other), the bankruptcy court would be exercising its "core" jurisdiction over the dispute, subject to review by an Article III court on fact issues only under the deferential "clearly erroneous" standard. See 28 U.S.C. Sec. 158; Bankruptcy Rule 8013; 1 King, Collier on Bankruptcy p 3.03; see also 28 U.S.C. Sec. 157(b) (1988) (identifying "core" proceedings); Budget Service Co. v. Better Homes of Virginia, Inc.,
Such assertions of bankruptcy court jurisdiction raise severe constitutional problems. As the Supreme Court made clear in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co.,
Even apart from constitutional concerns, Inslaw's view of Sec. 362(a) would take it well beyond Congress's purpose. The object of the automatic stay provision is essentially to sоlve a collective action problem--to make sure that creditors do not destroy the bankrupt estate in their scramble for relief. See House Report at 340; Senate Report at 49, 54-55. Fulfillment of that purpose cannot require that every party who acts in resistance to the debtor's view of its rights violates Sec. 362(a) if found in error by the bankruptcy court. Thus, someone defending a suit brought by the debtor does not risk violation of Sec. 362(a)(3) by filing a motion to dismiss the suit, though his resistance may burden rights asserted by the bankrupt. Martin-Trigona v. Champion Fed. Sav. & Loan Ass'n,
The limits of the turnover provisions in the bankruptcy code underscore the improbability that Congress intended Sec. 362(a) to have the sweeping scope that Inslaw would assign it. It is common ground that these cannot be used against property held by another under a claim of legal right. See cases cited at p. 1472 above. As Inslaw's view would turn every act of the possessor that implicitly asserts his title over disputed property into a violation of Sec. 362(a), it would give the bankruptcy court jurisdiction over all such disputes, creating a kind of universal end-run arоund the limits on turnover.
Our understanding of Sec. 362(a) does not expose bankrupts to any troubling hazard. Here, for example, Inslaw retains whatever intangible property rights it had in enhanced PROMIS at the time of filing. If the Department has violated the contract or Modification 12, Inslaw as debtor-in-possession has all the access to court enjoyed by any victim of a contract breach by the United States government. If Modification 12 was induced by fraud, as the bankruptcy court found, then Inslaw has its contract remedies or perhaps a suit for conversion. Assuming that its privately-funded enhancements to PROMIS qualify as proprietary trade secrets, as the bankruptcy court found, it may be able to sue the government under the Trade Secrets Act or even under the Administrative Procedure Act for improper disclosures of its trade secrets by government officials. See Megapulse, Inc. v. Lewis,
Extending the expansive mood expressed in its decision on use of enhanced PROMIS, the bankruptcy cоurt found two violations arising from the Department's failure to cure alleged pre-petition misconduct. First, having found fraud in the inducement of Modification 12, it found a violation in the Department's failure to cure the fraud.
Here the bankruptcy court appears to have left the words of the statute in the dust. The automatic stay, as its name suggests, serves as a restraint only on acts to gain possession or control over property of the estate. Nowhere in its language is there a hint that it creates an affirmative duty to remedy past acts of fraud or bias or harassment as soon as a debtor files a bankruptcy petition. The statutory language makes clear that the stay applies only to acts taken after the petition is filed. See 11 U.S.C. Sec. 362(a); In re Stucka,
Like the defendant in Northern Pipeline, the Department has been hauled in front of the bankruptcy court simply because Inslaw filed for bankruptcy, and Inslaw has succeeded in convincing the bankruptcy court to adjudicate its contract, tort (conversion), trade secret, and administrative law (impartiality) disputes with the Department, although the court had no basis under the Bankruptcy Code to do so. Because the Department has taken no actions since the filing of the bankruptcy petition that violate the automatic stay, the bankruptcy court must, as both a statutоry and constitutional matter, defer to adjudication of these matters by other forums.
B
In a separate order, the bankruptcy court held that the Department violated the automatic stay by contacting the Director of the Executive Office of the United States Trustees in an effort to have Inslaw's Chapter 11 reorganization converted into a liquidation under Chapter 7.
* * *
The bankruptcy and district courts here both concluded that the Department "fraudulently obtained and then converted enhanced PROMIS to its own use".
So ordered.
Notes
The United States Trustees are a corps of "generally autonomous" or "semiautonomous" officials appointed by the Attorney General to serve as bankruptcy trustees. See 1 King, Collier on Bankruptcy p 6.25
Under this view, it does not matter whether the Department has possession of the PROMIS enhancements under a claim of outright title, as they do, or under a more limited lease or license. In both situations, a party in possession of an asset in which the bankrupt has an interest would violate Sec. 362(a) by any act inconsistent with the bankrupt's claims as determined by the bankruptcy court. As a result, a wide range of disputes, such as a bankrupt lessor's claims against a lessee, or a bankrupt co-owner's claims against other holders of concurrent property interests, would slide into bankruptcy court
In adding the "exercise control" language to Sec. 362(a)(3) in the 1984 Bankruptcy Amendments, see