Opinion
District Court Cause No. IP 02-0040-C-M/S, Case No. 99-3364-AJM-11, Case No. 99-3363-AJM-11, Jointly Administered Under 99-3364-AJM-11, Adversary Proceeding No. 00-298, Consolidated for Purposes of Appeal, Adversary Proceeding No. 00-296
May 9, 2003.
Melissa J. De Groff, DANN PECAR NEWMAN KLEINMAN PC, Indianapolis, IN
Charleyne Gabriel, KUNZ OPPERMAN, Indianapolis, IN
ORDER
This cause is before the Court on an appeal from a decision of the Bankruptcy Court on cross-motions for summary judgment in the adversary proceedings brought by the adversary plaintiff, Mellon Bank, N.A. ("Mellon"), against two defendants, GE Supply Company ("GE") and Dick Corporation ("DC") (collectively, the "Defendants"). The Bankruptcy Court granted summary judgment to GE and DC and denied summary judgment to Mellon. On appeal, Mellon asserts that the Bankruptcy Court erred when it found that it lacked jurisdiction over the proceedings because the assets at issue had been transferred out of the estate and because Mellon lacked standing. Mellon also avers that the Bankruptcy Court erred in denying its summary judgment motion on the merits. The Bankruptcy Court also denied Mellon's motion for reconsideration, which Mellon asserts as error.
For the reasons discussed herein, the Court REVERSES the decision of the Bankruptcy Court that finds a lack of subject matter jurisdiction and AFFIRMS the decision of the Bankruptcy Court that Mellon lacks standing to bring suit against the Defendants.
I. FACTUAL PROCEDURAL BACKGROUND
Qualitech Steel Corporation ("Qualitech") was launched as a start-up project finance venture. Appellant's Exh. 2, at 2. It was intended that Qualitech be a state-of-the-art specialty producer of steel with facilities in Pittsboro, Indiana and Corpus Christi, Texas. Id. Qualitech was a wholly-owned subsidiary of Qualitech Steel Holdings Corp. ("Holdings") (collectively, Qualitech and Holdings, "Debtors"). Id.
To finance the operation, Qualitech borrowed in excess of $265,000,000.00 from a group of financiers (the "Prepetition Senior Lenders") in the form of both term and revolving loans. Id. These loans were secured by first priority liens upon and security interests in substantially all of Qualitech's assets. Id. at 3.
On or about June 20, 1996, DC contracted with Qualitech for the construction of a proposed state of the art special bar quality mini-mill in Pittsboro, Indiana. According to the complaint filed against DC, in or about February 1999, DC received payments in the approximate amount of $550,000.00 from Qualitech in accordance with contractual arrangements. Appellees' Exh. 1.
GE sold gas turbine engines to Qualitech; it also serviced and supplied parts for those engines. According to the complaint filed against GE, it received alleged preference payments from Qualitech for those services and supplies in the amount of $344,349.65 during the period from January 26, 1999, through March 10, 1999. Appellant's Exh. 14.
On March 22, 1999, Qualitech and Holdings filed for Chapter 11 relief in the United States Bankruptcy Court for the Southern District of Indiana. Appellees' Exh 1. The record reflects that the bankruptcy action was filed in an effort to facilitate the sale of the Debtors' assets. See Appellees' Exh. 3, Exh. C., ¶ 5; Appellant's Br. at 4. At the time of the filing of the bankruptcy case, Qualitech owed DC in excess of $7,000,000.00; Qualitech owed GE in excess of $1,500,000.00. Appellant's Exh. 23, ¶ 3. Qualitech also owed the Prepetition Senior Lenders a large portion of the funds it originally borrowed.
When the Debtors filed their petition, they sought a financing order that would permit them to borrow from a group of lenders (the "DIP Lenders") the funds necessary to sustain operations. The DIP Lenders agreed to the loan in exchange for obtaining a super-priority lien in accordance with § 364 of the Bankruptcy Code. Appellant's Exh. 1, Interim Order (I) Authorizing the Debtors to Obtain Postpetition Financing with Administrative Superpriority and Secured by Senior Liens on and Security Interest in the Assets of the Debtors Pursuant to 11 U.S.C. § 364(c)(1), (2), (3), 364(d)(1) and to Utilize Cash Collateral Pursuant to 11 U.S.C. § 363 (II) Granting Adequate Protection and (III) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001, at 1 ("Interim Financing Order"). According to the Bankruptcy Court, because the Debtors had no unencumbered assets with which to secure new loans, and because of the Debtors' poor operational status and continuing losses, they were forced to obtain financing on a super-priority, priming lien basis. Id. at 8, ¶¶ K L.
On March 23, 1999, the Bankruptcy Court entered an order approving interim post-petition financing (the "Interim Financing Order"). See id. Pursuant to the interim financing order, the new senior liens granted to the DIP Lenders and the ongoing use of the prepetition collateral effectively displaced and subordinated the Prepetition Senior Lenders' liens on the prepetition collateral. Under those circumstances, the Bankruptcy Court determined that the Prepetition Senior Lenders were entitled to adequate protection of their interests in the prepetition collateral. Id. at 9 (citing 11 U.S.C. § 361, 363(e), 364(d)(1)).
Specifically, in its Final Financing Order the Bankruptcy Court granted the Prepetition Senior Lenders "a replacement security interest in and lien upon all the Collateral, subject and subordinate only to the Senior Liens granted to the Banks pursuant to this Order and the Credit Agreement" ("replacement lien") and "a priority claim pursuant to section 507(b) of the Bankruptcy Code, subject and subordinate only to the Superpriority Claims granted to the Banks," both of which were "limited in amount to the aggregate diminution in value following the Petition Date as a result of the utilization of Cash Collateral and the granting of Senior Liens." Appellant's Exh. 3, Final Order (I) Authorizing the Debtors to Obtain Postpetition Financing with Administrative Superpriority and Secured by Senior Liens on and Security Interests in the Assets of the Debtors Pursuant to 11 U.S.C. § 364(c)(1), (2), (3) 364(d)(1) and to Utilize the Cash Collateral Pursuant to 11 U.S.C. § 363 and (II) Granting Adequate Protection, May 13, 1999, at 20 ("Final Financing Order"). The Bankruptcy Court later determined that the amount of diminution in value of the Collateral was an amount not less than $30 million. Appellant's Exh. 10, Order Determining the Extent of the Prepetition Senior Lenders [sic] Replacement Lien Pursuant to the Final Financing Order, at 4 ("Replacement Lien Order").
In the Final Financing Order, the Bankruptcy Court defined "Collateral" as
all now existing or hereinafter acquired personal and real property of the Debtors or their estates, of any kind or nature whatsoever, and the products and proceeds thereof, including, without limitation, all real property, personal property, general intangibles, claims, equipment, accounts receivable and inventory of the Debtors (as more particularly described in the Credit Agreement).
Appellant's Exh. 3, Final Financing Order, at 2. The Credit Agreement specifically described "Avoidance Recovery Property and Avoidance Claims of each of the Borrower and the Parent" as Collateral. Id. Exh. A, First Amended Postpetition Credit and Guarantee Agreement, § 5.2(ix). These terms included avoidance actions of the Debtors pursuant to 11 U.S.C. § 547 and 550, and any proceeds therefrom. Id. § 1.1.
An "Avoidance Claim" was defined: "Any claim of either the Borrower or the Parent to avoid a transfer either of the Borrower or the Parent under the Bankruptcy Code, including, without limitation, any claim for avoidance arising under sections 542, 544, 546, 547, 548, 549, 550, 551 or 553 of the Bankruptcy Code or otherwise." Appellant's Exh. 3, Exh. A, First Amended Postpetition Credit and Guarantee Agreement, § 1.1. Correspondingly, "Avoidance Recovery Property" was defined: "Any property of either of the Borrower or the Parent that has been or could be recovered through the successful pursuit of an Avoidance Claim."
The Bankruptcy Court supported its rulings with the following findings:
M. The Debtors are unable to obtain unsecured credit allowable under section 503(b)(1) of the Bankruptcy code as an administrative expense or pursuant to sections 364(a) or (b) of the Bankruptcy Code except on the terms and conditions set forth herein. Financing on a postpetition basis is not otherwise available to the Debtors without the Debtors (i) granting, pursuant to section 364(c)(1) of the Bankruptcy Code, claims having priority over any and all administrative expenses . . ., (ii) securing, pursuant to section 364(c) and 364(d) of the Bankruptcy Code, such indebtedness with perfected first priority senior security interests in and liens upon all of the Collateral, and (iii) providing adequate protection of the Prepetition Senior Lenders' and Prepetition Subordinated Lenders' interests in the Collateral.
N. Under the circumstances, no other source of financing exists, on terms more favorable than those offered by the Banks.
Id., Final Financing Order, at 9.
On June 30, 1999, the Debtors conducted an auction of their "assets." Appellant's Exh. 6, In re: Qualitech Steel Corporation, Qualitech Steel Holdings Corp., Case No. 99-03364-AJM-11, Tr. of Auction Proceedings, June 30, 1999 ("Sale Tr."). At the auction, the "assets" were described by the auctioneer as "two facilities" and several leases and executory contracts associated with those two facilities. Id. at 5-8. The Prepetition Senior Lenders proffered a credit bid for both facilities in the amount of $180 million; which was determined to be the highest bid. Id. at 32-35.
On August 13, 1999, the Bankruptcy Court entered an order that approved the sale of substantially all of the assets of the Debtors (the "Sale Order"). Appellant's Exh. 7, Order Approving the Sale of Substantially all of the Debtors' Assets Free and Clear of all Liens, Claims, Encumbrances and Interests Pursuant to 11 U.S.C. § 363 and the Assumption and Assignments of Executory contracts and Unexpired Leases Pursuant to 11 U.S.C. § 365 ("Sale Order"). The Bankruptcy Court determined that the Prepetition Senior Lenders' credit bid was "the highest or otherwise best offer for the Assets, is reasonable and necessary and is in the best interests of the Debtors, their estates and their creditors." Id. at 4. The Bankruptcy Court defined "Assets" as
all of the Debtors' rights, title and interests in and to the Collateral described by and contained in the Final Financing Order and the Prepetition Loan Documents together with such inventory, accounts receivable, materials ordered but not yet delivered to the Debtors, provided that with respect to the material ordered and not yet delivered to the Debtors, such materials have been or will be paid for. For the purposes of this Order such Collateral shall be referred to herein as the Assets.
Id. at 4 n. 2. Subsequently, the sale occurred on August 25, 1999, where "substantially all of the Debtors' assets were sold . . . to the Prepetition Senior Lenders' designees, Qualitech Steel SBQ, LLC and Qualitech Steel Iron Carbide Corp," (collectively, the "Purchasers"). Appellant's Exh. 11, Stipulation and Order (A) Authorizing Prepetition Senior Lenders to Prosecute Avoidance Actions on Behalf of the Debtors and (B) Modifying the Automatic Stay to Permit Prepetition Senior Lenders to Apply Proceeds to Avoidance Actions, at 2 ("Avoidance Actions Order").
Several months later, on November 3, 1999, the Official Committee of Unsecured Creditors of Qualitech Steel Corporation (the "Committee") filed a motion seeking leave of the Bankruptcy Court to bring the Debtor's avoidance actions. Appellant's Exh. 8, Motion by the Official Committee of Unsecured Creditors: (A) To Determine Rights Under the Postpetition Financing Orders to Proceeds from Avoidance Actions; or in the Alternative, (B) to Convert These Cases to Cases Under Chapter 7, at 1 ("Committee's Motion"). The Committee's primary argument was that the value of the Debtors' Collateral had increased postpetition as a result of the postpetition financing arrangement and changes in the market for the Debtors' products. Id. at 4-5. Therefore, no lien could arise in favor of the Prepetition Senior Lenders under the Final Financing Order. Id. at 5.
Mellon opposed the motion, arguing in part:
Other than to observe that the Committee's lawyers have been unsuccessful in coercing the Senior Lenders into paying their fees above and beyond the negotiated "carve-out", one wonders why the Committee has insisted on engaging this dispute now, in advance of any showing that there are any preference recoveries to be pursued for the benefit of the estates. (Clearly, this would be necessary before the Court could authorize the expenditure of further fees by Committee counsel in pursuit of these recoveries. See In re STN Enterprises, 779 F.2d 901 (2d Cir. 1985). (The Committee has made no showing in this regard, otherwise leading one to conclude that its motion is not ripe for adjudication.)
That being said, the Senior Lenders and the Debtors have undertaken such a preference analysis and recognize that there are recoveries to be pursued, albeit for the benefit of the Senior Lenders under their replacement and other liens.
Appellees' Exh. 4, Response of the Senior Lenders to Motion by Creditors' Committee to Determine Rights Under Financing Orders or to Convert the Cases to Cases Under Chapter 7, at 2 n. 2.
However, on March 14, 2000, the Bankruptcy Court issued an order that denied the Committee's motion and ruled that there was a diminution in value of the Prepretition Senior Lenders' Collateral of not less than $30 million. Appellant's Exh. 10, Replacement Lien Order, at 4. Specifically, the Bankruptcy Court made the following pertinent findings:
2. The aggregate diminution in the value of the Collateral of the Prepetition Senior Lenders from the Petition Date through the Sale Date as the result of the use of Cash Collateral and the granting of senior security interests and liens in the Collateral exceeds $30,000,000 and the Replacement Lien, the validity and priority of which hereby are reaffirmed without any derogation of its validity and priority arising under and by virtue of the Final Financing Order, which order in all respects shall remain unaffected by any provision of this Order, has attached to the assets of the Debtors comprising the Collateral, including the Avoidance Recovery Property, other than those assets transferred pursuant to the Sale Order.
3. As a result, the extent of the Replacement Lien granted to the Prepetition Senior Lenders pursuant to the Final Financing Order in all Collateral, including the Avoidance Recovery Property, be and hereby is fixed in an amount of not less than $30,000,000.
Id. The Committee appealed the Bankruptcy Court's order to both the United States District Court for the Southern District of Indiana and the Seventh Circuit. See In re Qualitech Steel Corp., 276 F.3d 245 (7th Cir. 2001); Official Comm. of Unsecured Creditors v. Bank Group, No. IP00-0496-C-H/G, 2001 WL 899637 (S.D.Ind. July 5, 2001) (BA543062). Both courts affirmed the Bankruptcy Court's decision.
On or about June 5, 2000, the Bankruptcy Court approved a Stipulation and Order (A) Authorizing Pre-Petition Senior Lenders to Prosecute Avoidance Actions on Behalf of the Debtors and (B) Modifying the Automatic Stay to Permit Pre-Petition Senior Lenders to Apply Proceeds of Avoidance Actions ("Authorization Stipulation") between Qualitech and Mellon. Appellant's Exh. 11, Authorization Stipulation. The Authorization Stipulation states the following relevant facts:
WHEREAS, pursuant to that certain "Order Determining the Extent of the Prepetition Senior Lenders Replacement Lien [P]ursuant to the Final Financing Order," entered on March 14, 2000 (the "Replacement Lien Order"), this Court determined that (a) the aggregate diminution in value of the collateral of the Prepetition Senior Lenders from the Petition Date through the Sale Date as the result of the use of cash collateral and the granting to the Banks of senior security interests and liens in the collateral exceeds $30,000,000 and (b) as a result, the amount of the Replacement Lien granted to the Prepetition Senior Lenders pursuant to the Final Financing Order in all Collateral, including, without limitation, the Avoidance Claims and Avoidance Recovery Property, is not less than $30,000,000; and
WHEREAS, as a result of the foregoing, the Prepetition Senior Lenders have senior liens upon and security interests in the Collateral, including, without limitation, all Avoidance Claims and Avoidance Recovery Property; and
WHEREAS, the Debtors have analyzed the Avoidance Claims and determined that there is no equity in the Avoidance Claims for the Debtors or their Chapter 11 estates; and
WHEREAS, the Debtors desire that the Prepetition Senior Lenders prosecute all Avoidance Claims on behalf of the Debtors in order to avoid burdening the Debtors' estates with further litigation expense.
Id. at 3. The Authorization Stipulation contained the following agreements, among others:
A. The Prepetition Senior Lenders shall have the right, but not the obligation, to commence and prosecute adversary proceedings in the name of, and on behalf of, the Debtors, to recover Avoidance Recovery Property. With respect to any Avoidance Actions that the Prepetition Senior Lenders elect not to pursue, such Avoidance Actions shall be the subject of further order of the Court following the earlier of: (I) the full adjudication of all Avoidance Actions commenced by the Prepetition Senior Lenders, and (ii) 60 days before the expiry of the statute of limitations with respect to such actions.
B. The Prepetition Senior Lenders shall have authority, but shall not be required, to settle any or all of the Avoidance Claims on terms satisfactory to the Prepetition Senior Lenders subject to the provisions of Bankruptcy Rule 9019; . . .
C. The Agent for the Prepetition Senior Lenders shall have the authority to collect all Avoidance Recovery Property, net of reasonable costs of collection which shall be subject to Court approval, in repayment of the indebtedness secured by the Replacement Lien subject to disgorgement by the Agent for the Prepetition Senior Lenders to the extent that such net proceeds actually paid over to the Agent for the Prepetition Senior Lenders exceed the greater of: (i) the Replacement Lien; (ii) the Replacement Lien plus the amount of the pro rata share of the Prepetition Senior Lenders of any balance available for distribution to unsecured creditors; or (iii) the pro rata share of the Prepetition Senior Lenders of any amount available for distribution to unsecured creditors, all as may be determined by a final disposition of the determination of the extent of the Replacement Lien. . . .
Id. at 4-5.
Following the entry of the Authorization Stipulation, Mellon, on behalf of and in the name of, the Debtors, commenced a number of adversary proceedings with respect to Avoidance Claims, including the actions against GE and DC. In addition, Mellon commenced an action on behalf of the Debtors' estates seeking to avoid and recover preferential transfers made to Mitsubishi International Corporation ("Mitsubishi") and other related parties in the amount of $13 million. The Bankruptcy Court approved and authorized a settlement of that action in April 2001. Appellant's Exh. 22, Mitsubishi Settlement Agreement. That settlement occurred within the primary bankruptcy case with notice to all creditors, including GE and DC.
The Mitsubishi Settlement Agreement, approved and authorized by the Bankruptcy Court stated, in relevant part:
A. The Motion constitutes a core proceeding and this Court has jurisdiction over this proceeding and the Motion pursuant to 28 U.S.C. § 157 and 1334. Venue in these Cases and this Motion is proper in this district pursuant to 28 U.S.C. § 157(b).
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E. Following the commencement of the Cases, the Debtors sought approval pursuant to Sections 363 and 365 of the Bankruptcy Code for the sale of substantially all of their assets appurtenant to the business operations of the Debtors in connection with their specialty bar quality steel mill in Pitssboro, Indiana (the "SBQ Assets") and with their iron carbide facility in Corpus Christi, Texas (the "IC Assets") (the "Sale"). By Order dated August 13, 1999[(the "Sale Order")], the Court approved the Sale to the Prepetition Senior Lenders or their designee.
F. On or about August 26, 1999, the Sale was consummated and the SBQ Assets were transferred to Qualitech SBQ and the IC Assets were transferred to Qualitech IC.
G. On or about June 24, 1999, MISI filed Proof of Claim No. 295 in the amount of $96,432.83 and Mitsubishi filed Proofs of Claim Nos. 372 and 373 in the respective amounts of not less than $8,821,285.90 and $376,641.50 (together with all other claims, causes of action, rights and interests, known and unknown, now existing or hereinafter arising, in law and in equity, respecting the Debtors and their estates, the Contracts and the IC Plant (the "Mitsubishi Claims")[)].
H. On or about November 29, 1999, the Prepetition Senior Lenders filed an objection to Mitsubishi claim number 372 (the "Claim Objection").
I. In connection with and as provided in the Sale Order, on October 22, 1999[,] Qualitech IC and the Prepetition Senior Lenders moved pursuant to Sections 365 and 105 of the Bankruptcy Code for an order approving the assumption by the Qualitech and the assignment to Qualitech IC of the Contracts, with a determination that the cure amount required for assumption was zero or, in the alternative, for a deferral of the time by which the Contracts must be designated for assumption and assignment (the "Assumption Motion").
J. The Claim Objection and the Assumption Motion constitute "contested matters" in the Cases within the contemplation of Bankruptcy Rule 9014.
K. By Order dated March 14, 2000 (the "Replacement Lien Order"), the Court: determined. . . . there was a diminution in value of the collateral of the Prepetition Senior Lenders in an amount exceeding $30,000,000; held the Replacement Lien of the Prepetition Senior Lenders to attached [sic] to the assets of the Debtors, including the Avoidance Recovery Property;. . . .
L. On June 8, 2000, the Court entered that certain . . . [Authorization Order] and thereby authorized Mellon to commence, prosecute and settle adversary proceedings in respect of avoidance claims of the Debtors arising under and by virtue of Chapter 5 of the Bankruptcy Code in the name of and on behalf of the Debtors.
M. Mellon, on behalf of the estate, commenced: . . . adversary proceeding number 00-381 against Mitsubishi seeking to avoid as preferential and/or fraudulent certain transfers . . . the complaint in such action seeking the recovery on behalf of the estate of Avoidance Recovery Property within the contemplation of the Authorization Order and the Replacement Lien Order.
N. The totality of the litigation between Mellon, on behalf of the estate[s] and in its capacity as Collateral Agent for the Prepetition Senior Lenders, and the Mitsubishi Parties (the "Litigation"), . . . is extremely complex and involves a multitude of hotly contested facts both of a technical and non-technical nature. . . . [T]he litigation comprises several complex legal issues which have engendered, and in all probability will continue to engender, extensive motion practice and require substantial judicial resources to resolve. The prosecution of the Litigation on behalf of the estates has consumed and will continue to consume significant legal fees and litigation expenses, all of which, to the extent reasonable, will diminish a net recovery to the estates.
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P. . . . [T]he Settlement is fair and equitable to the estates, will conserve judicial resources, and is in the best interests of the estates.
Q. The payment to the estates of sixty-five percent of the Settlement Amount (as defined below), net of the reasonable expenses of the Litigation, as set forth in the Motion, is well within the range of reasonableness in the context of the Cases and the Litigation.
NOW, THEREFORE, IT IS HEREBY ORDERED as follows:
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3. At the Closing and in the manner specified in the Agreement: Mitsubishi indefeasibly shall pay to Mellon the sum of fifteen million dollars . . . of which 65% shall be allocated to the estates and 35% shall be allocated and paid over to the Purchasers (as defined by the Motion) (each net of expenses of Litigation); and the Letters of Credit shall be returned to Mitsubishi by Mellon, and upon such payment, the Letters of Credit shall be deemed canceled and the Prepetition Senior Lenders shall be deemed to have released their security interests therein.
Id. at 2-7.
The proceedings giving rise to the instant suit was commenced by Mellon, on behalf of the estates, on June 15, 2000, against GE and DC to recover the allegedly preferential payments made to GE and DC, respectively. On January 23, 2001, Mellon moved for summary judgment against the Defendants requesting, inter alia, that the Bankruptcy Court find as a matter of law that the transfers made to Defendants by Qualitech during the ninety days preceding the commencement of the Chapter 11 cases were preferential and/or fraudulent transfers pursuant to Sections 547 and 548 of the Bankruptcy Code, and that Mellon was entitled to judgment on those transfers against the Defendants under Section 550 of the Bankruptcy Code.
On the same date, both GE and DC filed cross-motions for summary judgment against Mellon. The Defendants argued that (1) Mellon lacked standing to pursue Avoidance Claims on behalf of the estate under Section 547 of the Bankruptcy Code, (2) that the recovery of the Avoidance Claims produced no benefit to the estates under Section 550 of the Bankruptcy Code; and that, in the alternative, (3) the Bankruptcy Court lacked jurisdiction over the matter because Qualitech had abandoned its interest in the Avoidance Claims.
Two months later, in March 2001, the Debtors, through counsel, commenced as co-plaintiff in excess of ninety adversary proceedings to recover preferential transfers on behalf of the Debtor's estate. DeMarco, Aug. 15, 2001, Decl. ¶ 2. Each complaint filed with the Bankruptcy Court contains an averment signed by Debtors' counsel that the Bankruptcy Court had subject matter jurisdiction over the actions. Id. Once the pending adversary proceedings, which "involve disputes among creditors over preferences, warranties, cure payments and liens," have been resolved, Debtors' counsel intends to dismiss the bankruptcy petition. Appellee's Exh. 3, Exh. C, Kohn Decl. ¶ 10.
The Bankruptcy Court held a hearing on the motions in this cause on February 15, 2001. By order dated August 6, 2001, the Bankruptcy Court denied Mellon's Motion for Summary Judgment and granted the Defendants' Motions for Summary Judgment. Order Granting Defs' Mot. for Summ. J., Aug. 6, 2001, at 1-2 ("Bank. Ct. Summ. J. Order"). The Bankruptcy Court found that
Mellon cannot bring the Avoidance Actions because the Avoidance Claims were part of the collateral that was included in the "Assets" that were sold on August 13, 1999. Consequently, the dispute here is between non-debtors which does not involve property of the Debtors' estates and therefore the Bankruptcy Court does not have subject matter jurisdiction over these actions.
In the alternative, the Defendants argue that, even if the Avoidance Claims were still property of the Debtors' estates, Mellon nevertheless lacks standing to bring these actions since only a trustee or debtor in possession is statutorily authorized to pursue such claims.
Id. at 10-11. To support these conclusions, the Bankruptcy Court found the following facts:
7. The Sale Order defines the property to be sold as the "Assets". The "Assets", in turn, consist of "all the Debtors' right, title and interests in and to the Collateral described by and contained in the Final Financing Order." See, footnote 2, page 4 of the Sale Order. The Final Financing Order, in turn defines "Collateral" as that term was defined in Section 5.2 of the document titled "Credit Agreement" which was attached as Exhibit A to the Final Financing Order. See DC Exhibit 4, Ex. A, Sec. 5.2.
8. Section 5.2 of the Credit Agreement, in turn, defines the Collateral as including "all Avoidance Recovery Property and Avoidance Claims of each of the Borrower and the Parent," i.e. Qualitech Steel Corporation and Qualitech Steel Holdings Corporation.
9. "Avoidance Claims" are defined in the Credit Agreement as "Any claim of either of the Borrower or the Parent to avoid a transfer by either of the Borrower or the Parent under the Bankruptcy Code, including, without limitation, any claim for avoidance arising under sections 542, 544, 546, 548, 549, 550, 551 or 553 of the Bankruptcy Code or otherwise."
10. "Avoidance Recovery Property" is defined in the Credit Agreement as "Any property of either the Borrower or the Parent that has been or could be recovered through the successful pursuit of an Avoidance Claim." INDIANAPOLIS DIVISION, at p. 2.
11. On August 23, 1999, the sale of the Debtors' "assets" (as defined in the Sale Order) to the Prepetition Lenders closed. The assets used in connection with the Debtors' SBQ Facility were transferred to Qualitech Steel SBQ LLC and the assets used in connection with the I/C Plant were transferred to Qualitech Steel Iron Carbide Corp. (together, the "Purchasers"). As is acknowledged by Debtors' counsel, though, as of January 28, 2001, and as a result of the sale "all of Qualitech's assets have been sold or transferred and there are presently no assets in the bankruptcy estate to distribute." McIlvian Decl., Exh. C. ¶ 5.
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19. . . . [C]ertain provisions [of the Authorization Stipulation] allowed the Prepetition Lenders to take action on their own. In particular, the Authorization Stipulation provides the Prepetition lenders with the authority to collect all proceeds of avoidance claims, net of collection costs, including attorneys fees, in repayment of their replacement lien. [Authorization Stipulation, ¶ C.] The Authorized Stipulation provided that these net proceeds of the Avoidance Claims might be "subject to disbursement" (as opposed to required to be paid) to the Debtor's estate [sic] only if the net proceeds exceed $30 million (e.g. the amount of the Replacement Lien), [id.]; and, until such time as the net proceeds in the avoidance claims exceed $30 million, the Authorized Stipulation provided that the automatic stay was modified to give the Prepetition Lenders the right to collect the net proceeds and apply these moneys [sic] to their debt. [Id. ¶¶ C, F.]
20. Although the Authorization Stipulation did not prevent or prohibit the Debtors from commencing any Avoidance Claim on their own behalf, it was recited in the Authorization Stipulation that the Debtors decided not to bring the avoidance action because they "determined that there is no equity in the Avoidance Claim for the Debtors or their Chapter 11 estates." [Id. at 3.]
Id., at 4-9.
II. STANDARD
When it reviews a decision of the Bankruptcy Court, the District Court acts as an appellate tribunal. Therefore, its review is governed by traditional standards of appellate review. Specifically, the Court "is constrained to accept the bankruptcy court's findings of facts unless they are clearly erroneous." In re Excalibur Auto Corp., 859 F.2d 454, 457 n. 3 (7th Cir. 1988). See also In re Fedpak Sys., Inc., 80 F.3d 207, 211 (7th Cir. 1996); In re Longardner Assocs., Inc., 855 F.2d 455, 459 (7th Cir. 1988). "A finding is clearly erroneous if upon review of the entire record the reviewing court is left with the definite and firm conviction that a mistake has been committed." Graham v. Lennington, 75 B.R. 693, 695 (S.D. Ind. 1987). See also Bowyer v. United States Dep't of Air Force, 875 F.2d 732, 636 (7th Cir. 1989), reh'g denied. "Generally, as long as the bankruptcy judge's inferences are reasonable and supported by the evidence, they will not be disturbed." Graham, 75 B.R. at 695.
However, conclusions of law made by the Bankruptcy Court must be reviewed de novo. See Excalibur Auto Corp., 859 F.2d at 457 n. 3; Longardner Assocs., Inc., 855 F.2d at 459. And, where the challenged finding is a mixture of law and fact, the clearly erroneous standard is also inapplicable. See Graham, 74 B.R. at 965. With these general standards in mind, the Court will address the issues raised in the instant appeal.
III. DISCUSSION
A. THE PROCEDURAL POSTURE OF THIS CASE
At the outset, the Court must address the procedural posture of the questions before it. In its briefs Mellon repeatedly refers to the error by the Bankruptcy Court in resolving questions of fact. In other words, Mellon argues that summary judgment in favor of the Defendants on the issue of subject matter jurisdiction was improper because there were underlying factual disputes related to the terms of the sale of the Debtors' assets. However, regardless of the procedural posture in which the Defendants' arguments were raised regarding subject matter jurisdiction, the law on dismissal for lack of subject matter jurisdiction is clear: A court deciding whether or not it has subject matter jurisdiction "is free to weigh the evidence to determine whether jurisdiction has been established. Factual findings rendered during this process are reviewed for clear error." United Phosphorus, Ltd. v. Angus Chem. Co., 322 F.3d 942, 946 (7th Cir. 2003) (en banc) (citations omitted). See also Grafon Corp. v. Hausermann, 602 F.2d 781, 783 (7th Cir. 1979); Ace-Chi. Great Dane Corp., No. 89 C 8456, 1992 WL 44398, at *2 (N.D.Ill. 1992). In other words, the Bankruptcy Court must resolve the jurisdictional facts, and the ultimate decision of subject matter jurisdiction is for the Bankruptcy Court not a jury. See United Phosphorus, 322 F.3d at 963 (J. Wood, dissenting) (citing 5A CHARLES ALAN WRIGHT ARTHRU R. MILLER, FED'L PRACTICE P. § 1350, at 234-35 (2d ed. 1990)). Within the procedural posture of this case regarding the Bankruptcy Court's subject matter jurisdiction, then, the Court will review the Bankruptcy Court's findings of fact for clear error, and its conclusions of law de novo. The party asserting jurisdiction bears the burden of proof. Id. at 946 (opinion of the court).
Mellon makes two primary arguments that the Bankruptcy Court's subject matter jurisdiction findings were in error. First, it asserts that the Bankruptcy Court erroneously determined it lacked subject matter jurisdiction over Mellon's claims against GE and DC because the Avoidance Recovery Property and corresponding Avoidance Claims were in fact sold to the Purchasers in the Asset auction on June 30, 1999. Second, Mellon asserts that the Bankruptcy Court erroneously determined that Mellon lacked standing to bring this suit against GE and DC because Mellon's pursuit of those claims would confer no benefit to the estate under section 550 of the Bankruptcy Code. The Court will address each of these argument in turn.
The Court notes that unlike most disputes about subject matter jurisdiction over third party actions, there is little dispute here about whether recovery of Avoidance Claims as a general matter are within the subject matter jurisdiction of the Bankruptcy Court. The dispute here focuses on specific facts of this case that might have divested the Bankruptcy Court of jurisdiction over the Avoidance Claims at issue.
B. SUBJECT MATTER JURISDICTION — PROPERTY OF THE ESTATE
Mellon first challenges the Bankruptcy Court's finding that the Avoidance Recovery Property was sold to the Purchasers as part of the asset sale; therefore, the Bankruptcy Court lacked subject matter jurisdiction over the instant claims. The Bankruptcy Court found that the definition of "Assets" sold to the Purchasers as described in the Sale Order included Avoidance Claims. Bank. Ct. Summ. J. Order, at 4-5. Specifically, the Bankruptcy Court looked to the definition of "Collateral" in the "Credit Agreement." Id. at 4. The Credit Agreement defined Collateral to include "all Avoidance Recovery Property and Avoidance Claims of each of the [Debtors]." Id. In addition, the Bankruptcy Court found that Debtors' counsel acknowledged during a hearing regarding another subject that as of January 28, 2001, and as a result of the asset sale, "`all of Qualitech's assets have been sold or transferred and there are presently no assets in the bankruptcy estate to distribute.'" Id. at 5 (quoting McIlvian Decl., Exh. C. ¶ 5).
Mellon asserts that these finding ignore other contradictory facts that were before the Bankruptcy Court. Mellon contends that the Sale Order did not effect the sale of the assets to the Purchasers, it merely approved and authorized it; therefore, the definition of "Asset" contained therein is not controlling as to what assets were sold. If anything, Mellon asserts, the Sale Order creates an ambiguity about the definition of "Assets." Specifically, the Sale Order defines "Assets" to include the Collateral described in two other documents: the Final Financing Order and the Prepetition Loan Documents. Sale Order, at 4 n. 2. By their nature, the Prepetition Loan Documents cannot include Avoidance Claims or Avoidance Recovery Property as Collateral because those types of property were not contemplated prior to the Debtors' bankruptcy filing. Therefore, Mellon asserts, the Bankruptcy Court erred when it failed to consider other evidence to resolve the ambiguity about what "Collateral" was actually sold to the Purchasers.
Moreover, the parties to the sale have never acted as if the Avoidance Claims or Avoidance Recovery Property were sold to the Purchasers. In a sworn statement, Jennifer C. DeMarco ("DeMarco"), counsel for Mellon and present at the closing, affirmed that the Avoidance Claims and/or Avoidance Recovery Property were not transferred out of the estate. Appellant's Exh. 17, DeMarco Decl. ¶ 2. In addition, at the auction, the "assets" were described as "two facilities" and several leases and executory contracts associated with those two facilities. Sale Tr. at 5-8. Furthermore, the Purchasers have never acted as if they owned the Avoidance Claims. In fact, Mellon, the Debtors, the Purchasers and the Bankruptcy Court proceeded as if the Avoidance Claims remained part of the estates as evidenced by the suit against Mitsubishi and related entities, and subsequent settlement thereof. Specifically, the settlement agreement approved by the Bankruptcy Court reflects that the estates recovered the portion of settlement attributed to the Avoidance Claims while the Purchasers recovered the portion of the settlement attributed to non-estate claims. Appellant's Exh. 22, Mitsubishi Settlement Agreement ¶¶ Q 3. Mellon argues that these facts clearly demonstrate that the Avoidance Claims and/or Avoidance Recovery Property were not part of the sale to the Purchasers.
In contrast, the Defendants contend that the Bankruptcy Court properly looked to the Sale Order to determine what assets were sold. Moreover, the definition of Collateral referenced by the Sale Order clearly includes Avoidance Claims and Avoidance Recovery Property. Furthermore, Debtors' counsel, on or about January 26, 2001, by declaration in another matter, stated: "All of Qualitech's assets have now been sold or transferred and there are presently no assets in the bankruptcy estate to distribute." Appellee's App. Exh. 3, McIlvain Decl., Exh. C, Kohn Decl. ¶ 5 ("Kohn Decl."). Therefore, according to documents regarding the assets sold, and Debtors' counsel's understanding of the assets remaining in the estates, the Bankruptcy Court was correct in concluding that the Avoidance Claims and Avoidance Recovery Property were sold to the Purchasers. Furthermore, DeMarco's affidavit is conclusory when it states that the Avoidance Claims and Avoidance Recovery Property were not included in the assets transferred to the Purchasers after the sale; therefore, the Bankruptcy Court correctly excluded it from consideration. In addition, the Defendants argue that the preference suits filed by the Debtors' estate after the motions for summary judgment were filed in this case cannot support Mellon's argument that the Avoidance Claims and Avoidance Recovery Property remained in the estates.
The Court finds that the Bankruptcy Court committed clear error when it determined that the Avoidance Claims and Avoidance Recovery Property were sold as part of assets to the Purchasers. The Court must start with the definition for "Assets" in the Sale Order. That definition references the definitions for "Collateral" in two documents, the Final Financing Order and the Prepetition Loan Documents. The definition of "Collateral" in the Final Financing Order includes "personal and real property of the Debtors or their estates, of any kind or nature whatever . . . as more particularly described in the Credit Agreement." Appellant's Exh. 3, Final Financing Order, at 2. The Credit Agreement specifically describes "Avoidance Recovery Property and Avoidance Claims of each of the Borrower and the Parent" Id. Exh. A. But, the definition of "Collateral" in the Prepetition Loan Documents does not include Avoidance Claims or Avoidance Recovery Property. Therefore, the Sale Order's reference to the two documents to define the assets sold creates an ambiguity, which must be resolved by looking at other facts.
It is clear from the Sale Order that the Bankruptcy Court was approving the sale of assets that had occurred at the auction held on June 30, 1999. The transcript from the auction clearly describes the assets being sold: "two facilities" and several leases and executory contracts associated with those two facilities. Sale Tr. at 5-8. There is no reference to other personal property of the Debtors. Furthermore, on or about February 5, 2001, DeMarco, counsel for Mellon, declared that she had personal knowledge of the extent of the sale to the Purchasers and that the assets sold did not include either Avoidance Claims or Avoidance Recovery Property. Appellant's Exh. 17, DeMarco Decl. ¶ 2. Although this statement seems to contradict that of Debtors' counsel, Kohn, in another proceeding, the Bankruptcy Court apparently ignored other relevant facts consistent with DeMarco's statement and inconsistent with Kohn's statement. First, the declaration in which Kohn made the allegedly contradictory statement also alludes to further proceedings that must occur before the bankruptcy estates could be closed. Appellee's Exh. 3, Kohn Decl. ¶¶ 10-11. Specifically, he declared:
10. Barnes Thornburg's only remaining task as counsel to Qualitech in the bankruptcy proceeding is to dismiss the bankruptcy petition after all remaining "adversary proceedings" are completed. These proceedings involve disputes among creditors over preferences, warranties, cure payments and liens have been litigated and settled.
11. Barnes Thornburg has no role in the adversary proceedings or disputes over preferences, warranties, cure payments and liens and Qualitech has no interest in those proceedings because the bankruptcy court has assigned all of Qualitech's interest to other parties. To the extent the adversary proceedings generate any additional assets for distribution, the bankruptcy court has already entered orders directing how those assets will be distributed.
Id. His statements here allude to further adversary proceedings in which Qualitech would not participate because the Bankruptcy Court had "assigned" those assets to other interested parties. But, the record indicates that the Avoidance Claims and Avoidance Recovery Property had not been "assigned" or otherwise transferred. Specifically, the Replacement Lien Order specifically grants the Prepetition Senior Lenders a security interest on "the assets of the Debros comprising the Collateral, including the Avoidance Recovery Property, other than those assets transferred pursuant to the Sale Order." No assignment or transfer of property occurs here; rather, a lien is created on the Avoidance Recovery Property. Based upon the Bankruptcy Court's reference to the sale in the same sentence, the Avoidance Recovery Property was not an asset transferred pursuant to the Sale Order.
Neither is an assignment or transfer of the Avoidance Claims and/or Avoidance Recovery Property made later when the Bankruptcy Court authorized the stipulation. Specifically, the Authorization Stipulation gave the Prepetition Senior Lenders the right, but not the obligation, to pursue adversary proceedings on behalf of the estates. Authorization Stipulation, at 4, ¶¶ A, B, C. Moreover, the Bankruptcy Court specifically allowed for instances where the Prepetition Lenders chose not to pursue Avoidance Actions. See id. ("With respect to any Avoidance Actions that the Prepetition Senior Lenders elect not to pursue, such Avoidance Actions shall be the subject of further order of the Court. . . ."). The Authorization Stipulation required disgorgement of Avoidance Recovery Property collected by the Prepetition Senior Lenders when the net proceeds exceeded certain values. Id. at 5, ¶ C. The disgorged funds would be available for distribution to unsecured creditors of the estates. Id. Clearly this specific plan for pursuit and recovery of Avoidance Recovery Property would have been unnecessary if the Avoidance Claims and/or Avoidance Recovery Property had been sold to the Purchasers. Moreover, the orders give the Prepetition Senior Lenders the right to pursue the Avoidance Claims on behalf of the estates; there is no assignment or sale of the property.
Likewise, the Bankruptcy Court's later approval of the Mitsubishi Settlement Agreement pursuant to the Replacement Lien Order and the Authorization Stipulation confirms that the parties to the Asset Sale, including the Debtors and the Purchasers, were treating the Avoidance Claims and the Avoidance Recovery Property as assets retained by the estates and subject to further orders of the Bankruptcy Court. While it is true that a party may contest jurisdiction at any point in a proceeding notwithstanding prior orders in the case, as argued by the Defendants here, the fact that the Purchasers did not proceed against either Mitsubishi or the Defendants in this case are facts that tend to show that the Avoidance Claims and Avoidance Recovery Property were not sold. The Mitsubishi Settlement Agreement discloses that the amount recovered in that action is in the millions. Appellant's Exh. 22, Mitsubishi Settlement Agreement ¶ 3. Furthermore, the amounts allegedly recoverable in the instant claims are considerable. It is reasonable to infer that the Purchasers would have tried to pursue these claims on their own behalf if they had purchased the Avoidance Claims and Avoidance Recovery Property at the Asset Sale.
The Court expresses no opinion on whether the Purchasers would have standing to pursue such claims in the Bankruptcy Court or whether such claims would be successful.
In addition, the Purchasers received a share of the Avoidance Recovery Property recovered in the Mitsubishi Settlement Agreement that was associated with non-estate claims. Id. Clearly this division of the proceeds from the Mitsubishi litigation would not have occurred if the Avoidance Claims and Avoidance Recovery Property were sold to the Purchasers; the Purchasers would have been claimed the entirety of the proceeds if they owned the claims.
Based on the facts and history of this case and upon review of the entire record, the Court "is left with the definite and firm conviction that a mistake has been committed." Graham, 75 B.R. at 695. The Bankruptcy Court's finding that the Avoidance Claims and/or Avoidance Recovery Property were sold to the Purchasers at the Asset Sale was clear error. Therefore, the Bankruptcy Court's conclusion that it lacked subject matter jurisdiction over the instant action was also in error. The decision of the Bankruptcy Court on the issue of lack of subject matter jurisdiction because the Avoidance Claims and/or Avoidance Recovery Property had been sold to the Purchasers is hereby REVERSED.
C. STANDING
Mellon next asserts that the Bankruptcy Court erred when it concluded that Mellon lacked standing to bring Avoidance Claims against the Defendants. Specifically, Mellon challenges the Bankruptcy Court's finding that "the instant avoidance actions do not meet the `for the benefit of the estate' requirement under § 550" of the Bankruptcy Code. Bank. Ct. Summ. J. Order, at 2. To support this conclusion, the Bankruptcy Court found the following facts:
24. At the February 15th oral argument on the cross motions for summary judgment, counsel for Mellon admitted that the avoidance actions will not exceed 30 million dollars, thus preventing the estate from receiving any proceeds of the preference actions.
25. The Debtor's counsel's sole remaining task is to dismiss the bankruptcy petition after all remaining adversary proceedings have been completed. See McIlvain Dec. [sic], Exh. C, ¶¶ 5, 10. These adversary proceedings "involve disputes among creditors over preferences, warranties, cure payments and liens . . ." and Qualitech has no interest in these proceedings. McIlvain Dec. [sic], Exh. C, ¶¶ 10, 11 (emphasis added).
Id. at 10. Mellon argues that the Bankruptcy Court erred when it found that the $30,000,000.00 post-petition loan did not benefit the estate. Mellon cites P.A. Bergner Co. v. Bank One, Milwaukee, N.A. (In re P.A. Bergner Co.), 140 F.3d 111, 1118 (7th Cir. 1998), Citicorp Acceptance Co. v. Robison (In re Sweetwater), 884 F.2d 1323 (10th Cir. 1989), and In re Trans World Airlines, 163 B.R. 964, 969-71 (Bankr.D.Del. 1994), for the proposition that a "benefit to the estate" need not occur after the recovery of an Avoidance Claim, but rather may have occurred long before an avoidance action was filed. The Bankruptcy Court declined to accept this argument stating, in relevant part:
[U]nlike the situations in either Bergner or Trans World Airlines, unsecured creditors in this case have received nothing. There was no plan. There was no reorganization, and unsecured creditors have no stake in the success of the reorganized debtor because there is no reorganized debtor. There was no fund established from which proceeds are to be distributed to unsecured creditors. As recovery of the avoidance claims will not reach the $30 million threshold, the Prepetition [Senior] Lenders will be the sole beneficiaries of the requested recoveries from Dick Corporation and GE Supply, bringing these action[s] will not inure to the benefit of the estate.
29. There is no bankruptcy or reorganizational purpose to be served by permitting this action to go forward particularly where, as here, there is no plan, there will be no distribution to unsecured creditors and the bankruptcy case, upon conclusion of these preference actions, will be dismissed. "Where recovery will benefit an entity other than the estate, Section 550's requirement that recovery be for the benefit of the estate is not satisfied." In re Huntsville Small Engines, Inc., 228 B.R. 5, 13 (Bankr.N.D.Ala. 1998); In re Metal Brokers Int'l, Inc., 225 B.R. 920 (Bankr.E.D.Wis. 1998). See also In re Burlington Motor Holdings, Inc., 231 B.R. 874, 877 (Bankr.D.Del. 1999 (holding that successor corporation which had acquired all of the Chapter 11 debtors' assets lacked standing to bring preference actions, as "any recovery by the Successor Corporation is not for the benefit of the estate as required by § 550(a)"). See also Congress Credit Corp. v. AJC Intern., 186 B.R. 555 (D.P.R. 1995) (finding no benefit to the estate and party asserting claims has no standing where party asserting preference action had a lien on the proceeds of the recovery of preference actions, requiring proceeds to go directly to that party and where unsecured creditors received none of the proceeds).
Id. at 24-25.
In contrast, the Defendants assert that the Bankruptcy Court properly determined that the avoidance claims in the instant suit would not produce a benefit to the estates. Because Mellon has admitted that the Prepetition Senior Lenders would be the only beneficiary of any money recovered from this suit, the Defendants argue that there is no benefit to the estates. Therefore, Mellon cannot have standing to pursue the claims pursuant to § 550. The Defendants also aver that the instant claims have not been properly assigned to Mellon pursuant to § 1123 of the Bankruptcy Code, therefore, the assignment provisions do not help Mellon's case. GE and DC also argue that Trans World Airlines does not apply in this case because unlike in this case, the avoidance actions in Trans World Airlines were brought by a representative of the estate pursuant to a confirmed plan. There is no such plan in the instant suit. Defs.' Am. Resp. Br., at 21. Moreover, the facts of the instant case are different from those in Bergner where the estate's representative funded a $0.33 on the dollar payout to unsecured creditors under a reorganization plan. Id. Furthermore, the Defendants argue that notwithstanding the Authorization Order, the plain meaning of § 547 of the Bankruptcy Code prohibits anyone other than the trustee from bringing an Avoidance Claim. Id. at 22-25.
The Court finds that Mellon lacks standing to bring the instant claims. At the outset, the Court notes that the circumstances of this case are fairly unique in the context of the avoidance actions at issue in this case. The underlying bankruptcy case was filed under Chapter 11 for reorganization of the debtors. However, no reorganization plan was ever filed and the real and personal property of the debtors was sold. In that respect the case has proceeded more like a case filed under Chapter 7 for liquidation. In addition, no trustee has ever been appointed and the original counsel for the debtors has stated in the past that after the avoidance claims are closed, there is no work left for the bankruptcy court. As a result of these unusual circumstances, the parties have presented no precedential case law directly on point, nor was the Court able to find any. Therefore, the Court must carefully focus on the statutes under which Mellon seeks to recover in this case, law interpreting those statutes or closely analogous statutes, and the facts of this case. The facts pertinent to the standing issue are not in dispute.
There is one unpublished district court opinion worth noting because it comes close to the factual scenario of this case. All Star Int'l Trucks, Inc. v. Burlington Motor Carriers, Inc. (In re Burlington Motor Holdings, Inc.), No. 95-1559(JFK), 2002 WL 63595 (D.Del. Jan. 17, 2002). Pursuant to a plan of reorganization, the new owners of the debtor paid an amount to be distributed directly to the unsecured creditors and assumed liability for other types of claims. Id. at *3. In exchange for this consideration, the new owners received substantially all of the debtors assets including the avoidance claims. Id. The court in Burlington Motor Holdings found that it would be inequitable not to allow the creditor to pursue the actions because it had bargained for the right to do so, and the original bargain had benefitted the estate, including unsecured creditors at the time it was made. Id. (citing In re Maxwell Newspapers, Inc, 189 B.R. 282 (Bankr.S.D.N.Y. 1995); In re Churchfield Mgmt. Inv. Corp., 122 B.R. 76 (Bankr.N.D.Ill. 1990)).
Standing is an issue of law; therefore, the Court reviews the Bankruptcy Court's findings de novo. See In re Davis, 194 F.3d 570, 573 (5th Cir. 1999). Cf. In re James Wilson Assocs., 965 F.2d 160, 168 (7th Cir. 1992) (treating an the issue of standing as one of law to review de novo). To have standing to invoke a statute, in this case § 550, Mellon must be one of the entities that the statute is intended to protect. See In re James Wilson Assocs., 965 F.2d at 168; Tucker v. Dep't of Commerce, 958 F.2d 1411, 1416 (7th Cir. 1992). Section 550 states, in pertinent part:
(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property. . . .11 U.S.C. § 550(a).
A plain reading of the statue would require that the trustee recover any avoidance recovery property for the benefit of the estate. Similarly, the language of § 547 and § 548, which form the basis for Mellon's claims against the Defendants, refer to "the trustee" as the operative party. Id. § 547 (stating that "the trustee may avoid any transfer of an interest of the debtor in property. . . ."); id. § 548 (stating that "[t]he trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition. . . ."). In other words, under a plain reading of the statutes at issue, there are two questions, whether or not Mellon may stand in the shoes of the trustee and whether or not recovery by Mellon would benefit the estate.
Section 1107(a) gives a debtor-in-possession similar power. 11 U.S.C. § 1107(a) (stating that subject to certain limitations, "a debtor in possession shall have all the rights . . ., and powers, and shall perform all the functions and duties . . . of a trustee serving in a case under this chapter").
When the Bankruptcy Court analyzed these two questions, it determined that the question of whether or not a creditor may stand in the shoes of the trustee turned on whether the creditor was pursuing interests common to all creditors. Bankr. Ct. Summ. J. Order, at 16 (citing Ducker Spradling Metzger v. Baum Trust (In re P.R.T.C., Inc.), 177 F.3d 774, 781 (9th Cir. 1999)). See also id. at 17-20 (analyzing the "representative of the estate" element of § 1123 and determining that the focus of the inquiry is whether the appointed representative's recovery would benefit the estate (citing In re Sweetwater, 884 F.2d 1323, 1327 (10th Cir. 1989); In re Trans World Airlines, Inc. v. Travellers Int'l AG, 163 B.R. 964, 973 (Bankr.D.Del. 1994); N. Atl. Millwork Corp., 155 B.R. 271 (Bankr.D.Mass. 1993)). Therefore, the Bankruptcy Court focused its analysis on whether Mellon's recovery in this case would benefit the estate.
There is no question that in certain circumstance some courts have allowed individual creditors to bring avoidance actions on behalf of a trustee or a debtor. See Avalanche Maritime, Ltd. v. Parekh (In re Parmatex, Inc.), 199 F.3d 1029 (9th Cir. 1999); Duckor Spradling metzger v. Baum Trust (In re P.R.T.C., Inc.), 177 F.3d 774 (9th Cir. 1999); Canadian Pac. Forest Prods. Ltd. v. J.D. Irving, Ltd. (In re Gibson Group), 66 F.3d 1436 (6th Cir. 1995); In re STN Enters. 779 F.2d 901 (2d Cir. 1985); McCarthy v. Navistar Fin. Corp. (In re Vogel Van Storage, Inc.), 210 B.R. 27, 32 (N.D.N.Y. 1997). But see SouthTrust Bank v. WCI Outdoor Prods., Inc. (In re Huntsville Small Engines, Inc.), 228 B.R. 9 (N.D.Ala. 1998); Met-al, Inc., v. Gabor (In re Metal Brokers Int'l, Inc.), 225 B.R. 920 (E.D.Wis. 1998); Fleet Nat'l Bank v. Doorcrafters (MI of VT) (In re N. Atl. Millwork Corp.), 155 B.R. 271 (D.Mass. 1993). Many of those courts require special circumstances to exist before the creditor has standing. See Parmatex, Inc., 199 F.3d at 1031 (requiring that the trustee stipulate that creditor could sue on his behalf and the bankruptcy court approved such stipulation); In re P.R.T.C., 177 F.3d at 781 (requiring that a creditor pursue "interests common to all creditors"); In re Gibson Group, 66 F.3d at 1446 (requiring that a creditor or creditor committee show four elements before it may have derivative standing, including that the inaction of a trustee or debtor in possession is "an abuse of discretion" or unjustified); In re STN Enters. 779 F.2d at 904 (requiring that the bankruptcy court approve creditor's action and that creditor show that debtor in possession had unjustifiably failed to initiate adversary proceeding); In re Vogel Van Storage, 210 B.R. at 32 (requiring extraordinary circumstances, and finding them under the facts presented where the estate would maximize its recovery for the benefit of all creditors because the creditor had insulated the estate from loss by promising to pay the estate regardless of the outcome of the suit).
Although never squarely addressing the issue, the Seventh Circuit has suggested that a creditor may bring a form of derivative suit in the name of the debtor to recover for allegedly fraudulent conveyances; however, the creditor must first "convince the court that the debtor was shirking its statutory responsibilities." In re Xonics Photochem., Inc., 841 F.2d 198, 203 (7th Cir. 1988) (citing In re Automated Bus. Sys., Inc., 642 F.2d 200 (6th Cir. 1981); In re Jones, 37 B.R. 969 (Bank. N.D. Tex. 1984); cf. Fox Valley AMC/Jeep, Inc. v. AM Credit Corp., 836 F.2d 366 (7th Cir. 1988)). This requirement is similar, in part, to the view adopted by the Sixth Circuit, which requires satisfaction of four elements before a creditor may have standing to initiate an avoidance action:
1) a demand has been made upon the statutorily authorized party to take action; 2) the demand is declined; 3) a colorable claim that would benefit the estate if successful exists, based on a cost-benefit analysis performed by the court, and 4) the inaction is an abuse of discretion ("unjustified") in light of the debtor-in-possession's duties in a Chapter 11 case. A creditor has met its burden to show standing to file an avoidance action if it has fulfilled the first three requirements and the trustee or debtor-in-possession declined to take action without stating a reason. The burden then shifts to the debtor-in-possession to establish, by a preponderance of the evidence, that its reason for not acting is justified.
In re Gibson Group, 66 F.3d at 1446. Moreover, the Sixth Circuit has also held that "the lack of funds to pursue the suit [is] a sufficient reason for permitting [a] creditor to proceed in the trustee's stead." Id. at 1443 (citing In re Automated Bus. Sys., 642 F.2d at 201).
Presuming, without deciding, that the Seventh Circuit would adopt the approach of the Sixth Circuit, which requires the creditor to show four elements before it has standing to pursue avoidance claims, Mellon's case clearly falls short. The facts in the instant suit establish that Mellon and the Debtors proffered a stipulation to the Bankruptcy Court that stated
the Debtors have analyzed the Avoidance Claims and determined that there is no equity in the Avoidance Claims for the Debtors or their Chapter 11 estates; and . . . the Debtors desire that the Prepetition Senior Lenders prosecute all Avoidance Claims on behalf of the Debtors in order to avoid burdening the Debtors' estates with further litigation expenses.
Appellant's Exh. 11, Authorization Stipulation, at 3. Having assumed that the Avoidance Claims were property of the estates, the Authorization Stipulation evidences that Mellon demanded that the Debtors take action, that the Debtors declined to take such action, and that the Debtors were "shirking [their] statutory responsibilities" because they refused to pursue the Avoidance Claims to avoid the expense. In re Xonics Photchem., 841 F.2d at 203.
But, the Sixth Circuit's test also requires that the creditor show that "a colorable claim that would benefit the estate if successful exists, based on a cost-benefit analysis performed by the court." In re Gibson Group, 66 F.3d at 1446. Although, arguably, the Authorization Stipulation provides the cost-benefit analysis for the Bankruptcy Court when it states that "the Debtors have analyzed the Avoidance Claims and determined that there is no equity in the Avoidance Claims for the Debtors or their Chapter 11 estates; and . . . the Debtors desire that the Prepetition Senior Lenders prosecute all Avoidance Claims on behalf of the Debtors in order to avoid burdening the Debtors' estates with further litigation expense," the analysis proves too much. The Authorization Stipulation states that the Debtors see no "equity" in the Avoidance Claims for either themselves or their estates. In the context here, the Court interprets "equity" to mean "value" or "benefit." Therefore, the evidence shows that regardless of whether or not a "colorable claim" exists, the Debtors and the Prepetition Senior Lenders agreed in the Authorization Stipulation that there is no benefit to the estates in recovering on the claims. Moreover, Mellon repeated this assertion in writing. Appellees' Exh. 4, Response of the Senior Lenders to Motion by Creditors' Committee to Determine Rights Under Financing Order or to Convert Cases Under Chapter 7, at 2 n. 2. Under the Sixth Circuit's test for standing of a creditor to bring avoidance actions, Mellon has not shown the third element, that a colorable claim exists that would benefit the Debtors' estates if successful.
Even if the Seventh Circuit would apply a less stringent test than the Sixth Circuit and find that Mellon could stand in the shoes of a trustee or the Debtors in this case simply because the Debtor decided not to pursue them, the Court finds that the Bankruptcy Court correctly concluded that Mellon's recovery of any avoidance claims in this case would not "benefit the estate" as required by § 550. As discussed above, the Authorization Stipulation specifically delineates the Debtors' view that "there is no equity in the Avoidance Claims for the Debtors or their Chapter 11 estates." Appellant's Exh. 11, Authorization Stipulation, at 3. Mellon argues, however, that the benefit to the estate may have occurred prior to recovery of the avoidance property. Specifically, Mellon asserts that the Bankruptcy Court ignored
the substantial benefit to the estate that resulted from the subordination of the [Prepetition Senior Lenders'] liens to new money, which permitted the Debtor to continue to meet its operating expenses to its employees and creditors (like GE Supply) in the ordinary course of its business and resulted in the distribution to the unsecured creditors in connection with the sale of a $7.5 million note.
Appellant Reply, at 8 (internal citations omitted). This is a "benefit" that occurred well prior to the recovery on any Avoidance Claims here. Mellon primarily relies upon three cases to support its position: P.A. Bergner Co. v. Bank One, Milwaukee, N.A. (In re P.A. Bergner Co.), 140 F.3d 111, 1118 (7th Cir. 1998), Citicorp Acceptance Co. v. Robison (In re Sweetwater), 884 F.2d 1323 (10th Cir. 1989), and In re Trans World Airlines, 163 B.R. 964, 969-71 (Bankr.D.Del. 1994). In Bergner, an alleged preference transferee argued that the Bergner debtor in possession lacked standing to bring an avoidance action under § 550, in part, because the recovery would not benefit the estate. In re P.A. Bergner, 140 F.3d at 1118. The preference transferee argued that because the unsecured creditors had already recovered on their claims, pursuant to the approved reorganization plan, those creditors would not benefit from the recovery of any alleged preference transfer. Id. In addition, the preference transferee argued that recovery by the reorganized debtor would only benefit the new owners of the reorganized entity. Id.
The Seventh Circuit held that a benefit to the reorganized entity in that case was sufficient to satisfy the "benefit of the estate" requirement of § 550. Id. (citing In re Acequia, Inc., 34 F.3d 800, 811 (9th Cir. 1994); In re Trans World Airlines, Inc., 163 B.R. 964, 969-71 (Bankr.D.Del. 1994)). The Seventh Circuit reasoned that the benefit to creditors under § 550 need not be direct. Id. Under the facts in Bergner, the Seventh Circuit agreed that the new owners of the reorganized entity would benefit from recovery of the avoidance claims. But, the new owners were the debtor's largest under-secured creditor, which in exchange for the equity in the new entity, funded $25 million of the distribution to the general unsecured creditors of the debtor. Id. Therefore, the Seventh Circuit concluded that to prohibit the creditor from pursuing the claim "would be in serious tension with the right of the debtor under § 1123 to continue pursuing claims after plan confirmation, as that right would mean little if it could be defeated by showing that recovery would not go to the original creditor group in its original form." Id.
Similarly to the factual scenario in Bergner, in Trans World Airlines, the alleged preferential transferee argued that the debtor in possession lacked standing to bring an avoidance action under § 550 because the recovery would go directly to a single creditor as payment on secured notes, rather than benefit the estate for payment to other creditors. In re Trans World Airlines, Inc., 163 B.R. at 969. The single creditor had loaned a significant amount of money to the debtor in possession in exchange for secured, super priority notes, payable by a certain date or payable upon recovery of the preference claim at issue. Id. at 968.
The District Court of Delaware held that standing was proper. Id. The Trans World Airlines court reasoned that § 550 merely required a benefit to the "estate;" a broader term than "creditors." Id. at 972. "There is no requirement that an avoidance action recovery be distributed (or `committed') in whole or in part to creditors." Id. Moreover, under the facts in Trans World Airlines, the reorganization plan provided that each "unsecured creditor received, in full satisfaction of their claims, a pro-rata share of $58,440,000 in principal amount of new seven-year notes and 3,365,000 shares of new preferred stock." Therefore, the Trans World Airlines court found that "not only do the unsecured creditors benefit as shareholders, they benefit as noteholders. To the extent that the recovery will enhance the value of reorganized TWA, the noteholders, as well as other creditors of TWA, will benefit." Id. at 973. Moreover, the court concluded that "[t]he basic purpose of a recovery pursuant to § 550(a) is to enlarge the estate for the benefit of creditors. Any recovery by TWA here will do that." Id.
The instant facts are significantly different. Unlike in Bergner or Trans World Airlines where there was a confirmed reorganization plan that provided for some recovery of claims by unsecured creditors, or provided that either under-secured or unsecured creditors obtain equity in the reorganized debtor, there is no confirmed reorganization plan in this case. Therefore, the protections normally afforded unsecured creditors through the confirmation process are absent. Moreover, there is no evidence that the unsecured creditors in this case have a stake in any reorganized debtor. In fact, the parties agree that no creditor other than the Prepetition Senior Lenders will benefit from the avoidance action at bar. In other words, no one save the Prepetition Senior Lenders is better off because of the recovery action.
Mellon argues that the estate and thereby it creditors were benefitted in the past by the DIP financing because the loans provided payment for goods or services provided to the Debtors prior to the sale of substantially all of the Debtors' assets. In addition, the DIP financing allowed for the sale of an ongoing concern and, ultimately, the assignment of a $7.5 million note payable to the Official Unsecured Creditor's Committee by the Purchasers. Mellon avers that this was a significant benefit to the estate and the creditors; therefore, the "benefit of the estate" requirement of § 550 is met. But, under the circumstances of this case, there is no plan or other commitment of a benefit on the part of the Prepetition Senior Lenders directly or indirectly to the other creditors (whether secured or unsecured). In fact, it seems as if the transactions that occurred in this case were entirely for the benefit of the Prepetition Senior Lenders because the Prepetition Senior Lenders financed the Debtors until a sale to the Prepetition Senior Lenders, at a loss to the Prepetition Senior Lenders, so that the Prepetition Senior Lenders could recover Avoidance Claims to pay off their loss. In other words, recovery in this case benefits no one but the Prepetition Senior Lenders. Finally, there were never any assurances by the Bankruptcy Court that the Prepetition Senior Lenders would recover more than their fair share of the proceeds of the asset sale; their interest in the Avoidance Recovery Property was always contingent on a proper showing of standing. Cf. In re N. Atl. Millwork, 155 B.R. at 284 (commenting that although the sale order in the case authorized pursuit of avoidance claims by a creditor, nothing prevented the defendants from contesting the creditor's standing).
Mellon also relies upon the case In re Sweetwater, 884 F.2d 1323 (10th Cir. 1989). However, the facts of that case are much different from the scenario here. In Sweetwater, the administrative claimants agreed to different treatment of their claims pursuant to a reorganization plan that was affirmed by the bankruptcy court. Id. at 1324. The reorganization plan called for each administrative claimant to receive an interest equal to the allowed amount of their claim in a fund of cash and assets. Id. at 1325. The assets included the potential proceeds from an avoidance claim against a certain bank. Id. A trustee of the fund was appointed by the reorganization plan to recover any proceeds from the avoidance claim, reduce the assets to cash and disperse the funds to the administrative claimants according to the agreed plan. Id. Any overage was to revert to the debtor's estate for further distribution to other creditors. Id. The bank challenged the standing of the trustee arguing that there was no benefit to the estate.
The Sweetwater court held that the trustee had standing. Id. at 1326. The Sweetwater court reasoned that it was clear that the trustee's obligation was to prosecute the avoidance claims for the benefit of the administrative claimants pursuant to the confirmed plan. Id. at 1327. Moreover, to the extent the claims paid more than required by the administrative claims, there would be more funds available to satisfy other unsecured creditors. Id. The Sweetwater court also held that the claims were not "assigned" to the trustee, rather, the claims belonged to the estate consistent with 11 U.S.C. § 1123. Id.
The instant case is clearly distinguishable. As already discussed above, there was no plan in this case in which any creditors agreed to different treatment of their claims. There was an agreement by the Prepetition Senior Lenders to subordinate their loans; however, that agreement did not purport to change the status of any other creditor's claim. Furthermore, there was no agreement by the creditors in this case to appoint Mellon or the Prepetition Senior Lenders to represent the interests of the creditors. To the contrary, the Official Creditors' Committee has asserted itself against the Prepetition Senior Lenders on other issues. See In re Qualitech Steel Corp., 276 F.3d 245 (7th Cir. 2001); Official Comm. of Unsecured Creditors v. Bank Group, No. IP00-0496-C-H/G, 2001 WL 899637 (S.D.Ind. July 5, 2001) (BA543062). Finally, there is no evidence in this case that the recovery by Mellon would directly benefit any other entity than itself. For these reasons, the Court is not persuaded that the instant case should be likened to In re Sweetwater.
The Court has found that Mellon lacks standing to bring the instant action because it has failed to show that it may stand in the shoes of the Debtors and because it has failed to show that recovery in this case will benefit the estates. Therefore, the Bankruptcy Court's ruling that summary judgment in favor of GE and DC is appropriate should be AFFIRMED.
The Defendants also argue, in the alternative, that the Debtors have abandoned these claims, therefore, Mellon lacks standing. Having found that Mellon lacks standing for other reasons, the Court will not reach the Defendants' third argument.
Having found that summary judgment in favor of GE and DC was proper, the Court declines Mellon's invitation to address the merits of its summary judgment motion.
IV. CONCLUSION
The Court has found that the Bankruptcy Court erred when it found that the Avoidance Claims at issue in this case were sold to the Purchasers in the asset sale, and therefore, the Bankruptcy Court lacked jurisdiction over the action. Therefore, the decision of the Bankruptcy Court that it lacked subject matter jurisdiction over the claims is REVERSED. However, the Court has also found that Mellon lacks standing to bring adversary proceedings against GE Supply Company and Dick Corporation because it failed to evidence that it could stand in the shoes of the Debtors and because it failed to show recovery would benefit the estates. Accordingly, the Bankruptcy Court's ruling that summary judgment in favor of GE Supply Company and Dick Corporation should be granted because Mellon lacks standing is AFFIRMED. Mellon's claims against GE Supply Company and Dick Corporation are dismissed without prejudice.
IT IS SO ORDERED