IN RE BANKVEST CAPITAL CORPORATION

2003 | Cited 0 times | D. Massachusetts | March 28, 2003

MEMORANDUM AND ORDER

During the slightly more than one month period after the petition for involuntary bankruptcy was filed in this matter — but before the entry of the order for relief — the debtor transferred over $2 million to a secured creditor. That creditor applied the monies to the debtor's secured debt. Neither the debtor nor the secured creditor disclosed these post-petition "gap period" payments to the Bankruptcy Court or to the other creditors until after the secured party had sold the balance of its claims to another entity. When disclosure finally occurred, the unsecured creditors objected and the Bankruptcy Court, after trial, held the gap period payments void, ordered the secured creditor to return them to the estate with interest and found the secured creditor had divested itself of any claim to the funds. In re BankVest Capital Corp., 276 B.R. 12 (Bank. D. Mass. 2002). The secured creditor appeals.

I will vacate so much of the Bankruptcy Court's judgment as holds the secured party no longer has a secured interest in the monies and will remand the matter to the Bankruptcy Court to determine what sanction, if any, is appropriate for the failure of the secured party timely to inform the court and other interested parties of the gap period payments.

I. BACKGROUND

Appellant Fleet National Bank ("Fleet"), formerly BankBoston, N.A.,1 was a secured creditor of BankVest Capital Corporation ("BankVest" or the "Debtor"). At times relevant to this litigation, BankVest was in the business of originating and servicing equipment leases, and buying, selling, and securitizing portfolios of leases.

On December 17, 1999, an involuntary Chapter 11 petition was filed against BankVest. As of December 17, 1999, BankVest had three principal credit agreements with Fleet: (i) a warehouse line with Fleet Bank dated August 21, 1998 (the "FBNA Warehouse Loan"); (ii) a warehouse line with BankBoston, N.A. dated June 3, 1999 (the "BankBoston Warehouse Loan"); and (iii) a conduit facility dated September 30, 1998 (the "Conduit Facility").

According to proofs of claim Fleet filed in June 2000, as of the petition date, BankVest owed Fleet a total of $15,661,992.38. In the proof of claim, Fleet listed the value of the collateral security as `undetermined.'"

On January 25, 2000, the Bankruptcy Court entered an order for relief with BankVest's consent. Meanwhile, during the period between the filing of the petition on December 17, 1999 and the entry of the order for relief on January 25, 2000 (the "gap period"), Fleet received $2,155,427 million from the estate (the "gap period payment").2

The gap period payments were generated from two sources — the sale of a lease portfolio to Marlin Financial & Leasing Company and lessee payments pursuant to their respective leases. The gap period payments were applied by Fleet to the BankBoston Warehouse Loan. Fleet and BankVest concede their knowledge of the bankruptcy at the time the payments were made.

On February 23, 2000, appellee Official Committee of Unsecured Creditors (the "Committee") was formed.3

A. Nondisclosure in the First Settlement Motion

On June 12, 2000, Fleet and BankVest filed a stipulation and joint motion (the "First Settlement Motion") seeking to modify the automatic stay nunc pro tunc so that Fleet might receive certain proceeds from the estate. The papers in support of this motion did not mention Fleet's receipt of the gap period payments, but rather represented that BankVest and FINOVA had "been retaining the collections associated with" Fleet's collateral.

The Committee filed an opposition to the First Settlement Motion on June 27, 2002. The Committee objected that the motion "contains inadequate information in that it fails to indicate the value of the Fleet Warehouse Lines Collateral, whether Fleet is oversecured or undersecured as to each Fleet Warehouse Line, and whether grounds exist under 11 U.S.C. § 362 for granting the relief" from the automatic stay requested by Fleet.

The Bankruptcy Court found that the papers in support of the motion did not "address the issue of the then-outstanding indebtedness, other than to state that" the unpaid balances of the Warehouse Lines totaled approximately $15,000,000. Accordingly, on August 25, 2000, the First Settlement Motion was denied without prejudice by the Bankruptcy Court, in light of the lack of sufficient information provided by the Debtor and Fleet.

B. Nondisclosure and the Plan of Reorganization

In July 2000, the Debtor and the Committee filed a proposed plan of reorganization.

On August 30, 2000, Fleet sent an e-mail message to the Committee to clarify "Fleet's outstanding balances on the two warehouse loans and the conduit facility." In the message, Fleet referenced the "conduit facility balance" as of May 31, 2000, but provided "warehouse loan figures . . . as of the petition date," thereby failing to alert the Committee to the reduction in the outstanding balance caused by the gap period payments.

C. Nondisclosure in the First September 2000 Motion to Lift the Automatic Stay

After the First Settlement Motion was denied, Fleet, on September 19, 2000, filed motions to lift the automatic stay, under 11 U.S.C. § 362(d), and to foreclose on its collateral. The motions were opposed by BankVest and the Committee. These motions, which also stated the debt as of the petition date, December 17, 1999 — again thereby omitting to alert the court or the Committee to the gap period payments — were subsequently withdrawn.

D. Nondisclosure in the Second September 2000 Motion to Lift the Stay

On September 26, 2000, Fleet and the Debtor filed a second joint motion to approve a stipulation (the "Second Stipulation") that would modify the automatic stay nunc pro tunc. The gap period payments were not disclosed in this motion. The Committee filed a limited opposition. The Second Stipulation was subsequently approved, as modified, by the court.

E. The Sale of Fleet's Claim

In December 2000, ARK CLO 2000-1 ("ARK") purchased a $1.4 billion portfolio of loans from Fleet. Included in the portfolio were the loans to BankVest in which Fleet had a security interest.

The Purchase and Sale Agreement purported to transfer to ARK, inter alia, all claims, including bankruptcy claims, "whether known or unknown," against [BankVest] by [Fleet] as well as:

[A]ll cash, securities, or other property, and all set-offs and recoupments, received or effected by or for the account of [Fleet] under the related Loans and Commitments, if any, and other extensions of credit under the related Loan Documents after the close of business on the Pricing Date,4 including all distributions obtained by or through redemption, consummation of a plan or reorganization, restructuring, liquidation or otherwise . . . or the related Loan Documents, and all cash, securities, interest, dividends, and other property that may be exchanged for, or distributed or collected with respect to, any of the foregoing.

The agreement also transferred interest in "all proceeds of the foregoing."

Fleet, however, did not transfer any "Retained Interest," defined in the document as follows:

[W]ith respect to each Loan Agreement, (i) all interest . . . and other similar ordinary course fees . . . payable under the related Loan Documents in respect of any Loan or Loans that are Current Loans [which included the BankBoston Warehouse Loan] and the Commitments related thereto, if any, that accrue during the period on or prior to the close of business on the Pricing Date [October 9, 2000], together with other property paid or delivered in connection with the related Loan Documents . . . on or prior to the close of business on [October 9, 2000].

F. The Belated Disclosure and the Emergency Motion

On January 9, 2001, Fleet trial counsel sent a letter to Debtor's counsel disclosing the gap-period transfers. The Committee responded by filing on January 25, 2001, an emergency motion for imposition of sanctions against Fleet and ARK for "violations of the automatic stay and discovery obligations" (the "Emergency Motion"). The Emergency Motion was filed pursuant to §§ 362 and 105(a) of the Bankruptcy Code, alleging violation of the automatic stay and contempt respectively by Fleet in receiving and crediting payments from BankVest during the gap period. The motion also sought denial of the motions for relief from the automatic stay and costs and attorneys' fees for Fleet's and ARK's failure to comply with discovery requests in connection with the Committee's preparation for the hearing on Fleet's motions for relief.

Meanwhile, on January 25, 2001, ARK filed a Notice and Evidence of Transfer of Claims stating that "all right, title and interest of Fleet National Bank (the "Transferor") in and to the claims of the Transferor evidenced by" the proofs of claim filed by Fleet on June 2000, "was transferred to ARK CLO 2000-1, Limited . . . on or about December 28, 2000." On January 30, 2001, Fleet and ARK filed a joint opposition to the Emergency Motion. ARK subsequently negotiated a consensual plan of reorganization with BankVest and the Committee.

G. Confirmation of the Liquidating Plan

On May 31, 2001, the court confirmed a liquidating plan (the "Plan") of reorganization for BankVest. Stephen Gray was appointed the Liquidating Supervisor under the confirmed Plan.

H. The Adversary Proceeding

On November 12, 2001, BankVest, through Gray, filed an adversary proceeding (the "Adversary Proceeding") against Fleet pursuant to 11 U.S.C. § 549 "for avoidance of postpetition transfers made by BankVest to Fleet Boston."

I. The Consolidated Trial and the Bankruptcy Court Judgment

The Adversary Proceeding under § 549 and the Emergency Motion under §§ 362 and 105(a) were consolidated for trial. On April 18, 2002, the court issued an opinion granting the Committee's Emergency Motion and entering judgment for BankVest in the Adversary Proceeding. As a remedy for violation of the automatic stay and for transfer avoidance, the Bankruptcy Court ordered Fleet Bank to pay the liquidating supervisor $2,155,427, the amount of post-petition payments, plus prejudgment interest at the rate of 5.99%, equaling $290,497.65, for a total of $2,445,924.65. In re BankVest Capital Corporation, 276 B.R. at 29-31. The court ordered the Liquidating Supervisor to hold the judgment amount pending a determination of ARK's claim to the amount. Id.5 The Liquidating Supervisor was to file a determination regarding ARK's claim to the judgment amount within forty-five days of the Bankruptcy Court's order. Id. Having found the remedy it opposed "harsh enough that it may defer similar future behavior," the Bankruptcy Court did not act on the contempt contentions. Id. at 31. And, having determined that Fleet's transaction with ARK "divested [Fleet] of any claim upon return of the Post-Petition [gap] Payments," the Bankruptcy Court found no "need to conduct any further proceedings to determine whether Fleet's behavior warrants subordination pursuant to section 501(c)[sic]."6 Id.

II. DISCUSSION

The Bankruptcy Court provided comprehensive findings of fact and conclusions of law in support of its judgment. Nevertheless, I must part company with the Bankruptcy Court in its finding that the transaction with ARK divested Fleet of its secured claim to the post-petition payments. Consequently, I conclude the Bankruptcy Court must conduct further proceedings to determine the proper sanction, if any, for Fleet's violation of the automatic stay and its failure timely to disclose the transactions that constituted that violation. In inquiring regarding sanction, the Bankruptcy Court may wish to evaluate whether subordination of Fleet's claim to the post-petition gap payments is warranted. In order to explain my reasons for reaching this conclusion, I will take up element by element the basic building blocks of the Bankruptcy Court's determination.

A. Both the Liquidating Supervisor and Fleet Have Standing to Litigate the Issues

The parties to this appeal engage in preliminary skirmishing over the standing of the opposing side to pursue this litigation.

For its part, Fleet contends the Liquidating Supervisor lost the right to avoid post-petition transfers after the adoption of the plan. Citing Harstad v. First American Bank, 39 F.3d 898, 902-03 (8th Cir. 1994), Fleet argues that after a plan has been confirmed, debtors may only bring an avoidance action where a plan expressly provides for "the retention and enforcement" of claims and interests by a debtor, trustee, or a representative.

In Harstad, the court determined that the parties' plan did not reserve the debtors' claim "to recover preferences paid by the debtors but never disclosed by them during the pre-confirmation hearings." Id. at 902. The article in the plan at issue there was entitled "Continuing Jurisdiction" and provided that the Bankruptcy Court would retain jurisdiction until "the Plan has been fully consummated" for the purposes of determining all causes of action between the debtors and other parties, "including but not limited to any right of Debtors to recover assets pursuant to the provisions of the Bankruptcy Code." Id. at 902. The Harstad court ruled that because this provision concerned "the ongoing jurisdiction of the bankruptcy court," it did not reserve the debtors a right to bring post-confirmation claims. Id.

Here, however, the Plan provides the Liquidating Supervisor authority "to investigate, prosecute and if necessary, litigate, any Cause of Action, except for the D & O claims, on behalf of the Debtor and shall have standing as an Estate representative." "Causes of action," as defined in the Plan, specifically include "Avoidance Actions" brought under § 549. Thus, appellees clearly have standing to maintain an avoidance action under § 549.

For their part, appellees contend that Fleet may not make any claim (other perhaps than that of an unsecured creditor) for the monies it was ordered by the Bankruptcy Court to return. This argument references the Bankruptcy Court's holding that "Fleet's status at the time of the disclosure of its violation of the automatic stay had changed" because it had "already sold its claim to ARK and what claim it gets upon return of the Postpetition Payments cannot ignore this sale." In re BankVest, 276 B.R. at 28. This is where my fundamental disagreement with the Bankruptcy Court is located. I find that the "Retained Interest" defined in the Fleet/ARK Purchase and Sale Agreement, in fact, retained for Fleet the claims for interest, fees or property paid or delivered on or prior to October 9, 2002, a date following the post-petition gap period transfers at issue here.

B. Fleet's Application of the Post-Petition Gap Payments Were in Derogation of the Automatic Stay

The filing of a bankruptcy petition stays, inter alia, the enforcement of liens against property of an estate. 11 U.S.C. § 362(a). This "automatic stay," — as the name suggests — "operates without the necessity for judicial intervention." In re Jamo, 283 F.3d 392, 398 (1st Cir. 2002); Sunshine Dev., Inc. v. FDIC, 33 F.3d 106, 113 (1st Cir. 1994); see In re Soares, 107 F.3d 969, 975 (1st Cir. 1997). The imposition of the automatic stay "is critical because it prevents a `race to the debtor's assets' — one of the central problems that the bankruptcy law seeks to avoid." Joseph Mullin, Comment, Bridging the Gap: Defining the Debtor's Status During the Involuntary Gap Period, 61 U. Chi. L. Rev. 1091, 1096 (1994); see Soares, 107 F.3d at 975; see also H.R. Rep. No. 595, 95th Cong. 1st Sess. 340, reprinted in 1978 U.S.C.C.A.N. 5787, 6296-97.

A majority of courts have taken the position that the automatic stay applies equally upon the filing of an involuntary petition. See, e.g., Interpool, Ltd. v. Certain Freights of the M/Vs Venture Stare, Mosman Star, Fjord Star, Lakes Star, Lily Star, et al., 878 F.2d 111, 112 n. 4 (3d Cir. 1989); Equal Employment Opportunity Comm'n, 834 F.2d 398, 398 (4th Cir. 1987); In re MortgageAmerica Corp., 714 F.2d 1266, 1273 (5th Cir. 1983); In re E.D. Wilkins, 235 B.R. 647, 649 (Bankr.E.D.Cal. 1999); In re Pieper, 202 B.R. 294, 297 (Bankr.D.Neb. 1996); In re Colonial Realty Co., 122 B.R. 1, 4 (Bankr.D.Conn. 1990). But see In re Acelor, 169 B.R. 764, 765 (Bankr.S.D.Fla. 1994). To be sure, the Code does grant an involuntary debtor the ability to operate during the gap period. 11 U.S.C. § 303(f).7 Nevertheless, the fact that section 303(f) specifically exempts debtors from § 363 of the Code, but does not exempt debtors from any other Code sections, indicates that the affairs of involuntary debtors are subject to all other sections of the code, including § 362, the automatic stay provision. Mullin, Bridging the Gap, at 1095. In any event, § 303(f) does not by terms provide protection for a creditor such as Fleet. Furthermore, § 362 states that "a petition filed under section 301, 302, or 303 of this title . . . operates as a stay, applicable to all entities . . ." 11 U.S.C. § 362.

Violations of the automatic stay are characterized as void. Mann v. Chase Manhattan Mortgage Co., 316 F.3d 1, 3 (1st Cir. 2003); In re Soares, 107 F.3d at 976; Interstate Commerce Comm'n v. Holmes Transportation, Inc., 931 F.2d 984, 987-88 (1st Cir. 1991); In re Smith Corset Shops, Inc., 696 F.2d 971, 987 (1st Cir. 1982). As a result, "the burden of validating the action after the fact" is placed "squarely on the shoulders of the offending creditor." In re Soares, 107 F.3d at 976. This burden "best harmonizes with the nature of the automatic stay and the important purposes that it serves." Id. at 976.

During the operation of the stay, if a "party in interest" wishes to enforce a claim or lien against property of the estate, it must obtain relief from the stay from the Bankruptcy Court. 11 U.S.C. § 362(a), (d). See In re Wilkins, 235 B.R. at 649. The First Circuit has held that § 362(d) "permits bankruptcy courts to lift the automatic stay retroactively and thereby validate actions which otherwise would be void." In re Soares, 107 F.3d at 976. But because the stay operates as a "fundamental protection for all parties affected by the filing of a petition in bankruptcy," the award of retroactive relief "should be the long-odds exception, not the general rule." In re Soares, 107 F.3d at 976. In In re Soares, the court provided examples of the "unusual and unusually compelling" circumstances in which a court may exercise its limited discretion to grant retroactive relief: where a creditor lacked notice and where a debtor acted in bad faith. Id. at 977. The court then found that the post-petition issuance of a foreclosure judgment violated the automatic stay and that "because this case involves no sufficiently unusual circumstances," retroactive relief from the stay was unwarranted. Id. at 978. Nor are there any such circumstances here. By engaging in the gap period payments, Fleet acted in violation of the automatic stay.

C. Fleet's Violation of the Automatic Stay Must Be Unwound

Although the gap period payments are technically characterized as void in violation of the stay, difficult questions arise when determining in what actions treated as void may actually be undone.

In the context of court judgments issued in violation of an automatic stay, Bankruptcy Courts have held that, unless a party moves under § 362(d) to annul or otherwise terminate the stay, the action is void ab initio. In re Payphones, 279 B.R. 92, 98 (Bankr.S.D.N.Y. 2002); see In re Soares, 107 F.3d at 976 (placing the "burden of validating the action after the fact squarely on the shoulders of the offending creditor"); see also In re Vierkant, 240 B.R. 317 (B.A.P. 8th Cir. 1999). See generally Schwartz v. United States, 954 F.2d 569, 571-72 (9th Cir. 1992) (noting that "[i]t is entirely consistent to reason that, absent affirmative relief from the Bankruptcy Court, violations of the stay are void").

Where complex financial transactions and not judgments simpliciter are concerned, however, it is hardly sufficient merely to declare that payments made in violation of an automatic stay are void ab initio. Although as a theoretical matter such actions are void and not voidable, see generally In re Soares, 107 F.3d at 976, on a practical level it appears that an adversely affected party must bring suit not merely to have the payments declared void but also unwound. The question then becomes how the unwinding of the transactions should be accomplished.

D. Section 549 Is a Proper Vehicle to Unwind the Void Post-Petition Gap Payment but This Avoidance Does Not Here Deprive Fleet of Its Secured Claim.

Section 549 of the Bankruptcy Code allows a trustee to avoid certain post-petition transfers of property. 11 U.S.C. § 549. But here success by the Debtor's representative in the avoidance action simply means that the parties are returned to the "status quo" at the time of the gap period payments. This result would entitle Fleet to a security interest in the $2.155 million in gap payments because these pre-October 9, 2002 receipts were among the retained interests of Fleet under the Purchase and Sale Agreement with ARK. Consequently, returning any payment to BankVest would be futile because Fleet would be returned to its status as a secured creditor, the status it was in when the gap period payments were made. As the Bankruptcy Court observed, "[o]nce a transfer is avoided under section 549, the party whose transfer is avoided gets a claim under section 502(h)." In re BankVest, 275 B.R. at 31. Section 502(h) in turn provides that a claim arising from the recovery of property under such circumstances is to be addressed "the same as if such claims had arisen before the date of filing," i.e., prior to October 9, 2002. To be sure, the Bankruptcy Court read the ARK Purchase and Sale Agreement to divest Fleet of this pre-October 9, 2002 reinstatement claim. I, however, read the retained interest provisions of the Agreement to mean that Fleet is not divested of such a claim.

If, as I hold, Fleet is not divested of the claim, avoidance under § 549 does not appear to change Fleet's priority. Its claim was merely reduced by the debtor's gap period payments, something that would have happened in any event. Cf. In re Adams, 212 B.R. 703, 714 (Bankr.D.Mass. 1997) ("[N]othing would be achieved by recovering payment to a secured creditor who in any event is entitled to the payment ahead of other creditors").]

E. Sanction for Violations of the Automatic Stay by Fleet and for Its Failure to Make Timely Disclosure of the Gap Period Payments Must Proceed from the Court's Contempt or Equitable Subordination Powers

The Bankruptcy Court viewed its decision forcing return of the gap period payments with "no claim against this estate" when coupled with an interest award to be "coextensive" with an award on the motion for sanctions for violation of the stay. But, as sanctions, the award sweeps too broadly without being identifiably tailored to the compensatory and deterrent purposes sanctions are meant to cover.

From a compensatory dimension, the estate and the Committee are plainly entitled to the costs they would not have incurred but for the stay violation and its belated disclosure. What these are has not been determined; but they are unlikely to approximate the Bankruptcy Court's award.

From a deterrent dimension, the court is entitled to vindicate the integrity of the automatic stay and the need for candor in Court filings. The court's contempt powers under § 105(a) can provide a source of authority to remedy an antecedent violation of the automatic stay. Cf. In re Jamo, 283 F.2d 392, 404 (1st Cir. 2002); Bessette v. Avco Fin. Services, 230 F.3d 439, 445 (1st Cir. 2000). But see Dyer v. Lindblade, 2003 WL 1090176 at *12 (9th Cir. Mar. 13, 2003) (questioning authority under § 105(a) to award "serious punitive penalties").

The Bankruptcy Court may also consider whether equitable subordination of some portion of the revived Fleet claim under § 510(c) can be employed to fashion an appropriate sanction proportionate to such inequitable conduct as the court finds.

Without presuming to prejudge whether the Bankruptcy Court will on remand find misconduct requiring sanction and, if so, how that sanction is tailored, I note that in tailoring a remedy to address such misconduct as it does find, care must be paid to insure that the remedy fits the offense and serves the purposes of §§ 105(a) and 510(c) without undue harshness.

III. CONCLUSION

For the reasons set forth more fully above, I hereby DENY appellees' motion to strike,8 VACATE the Bankruptcy Court's judgment, and REMAND for further proceedings consistent with this opinion.

1. Fleet National Bank is the result of the merger of Fleet Bank, N.A. with and into Fleet National Bank, formerly BankBoston, N.A., in March 2000.

2. The parties agree that BankVest instructed FINOVA Loan Administration, Inc. ("FINOVA"), which had taken over the lease servicing of the Fleet and BankBoston Warehouse Leases, "to remit the lease proceeds it collected pursuant" to the loans to Fleet as of January 1, 2000.

3. As noted in the bankruptcy order, the Official Committee of Unsecured Creditors became the Post-Effective Date Committee on the effective date of the Plan. The committees are identical and are referred to in this Memorandum and Order as the "Committee."

4. The document defines the Pricing Date as October 9, 2000.

5. In the opinion, the court interprets the agreement between Fleet and ARK to mean that Fleet no longer has a right to any claim. In BankVest Capital Corporation, 276 B.R. at 31. The court, however, did not determine the amount of ARK's claim. Id. at 30 n. 32. At oral argument of this appeal, the Committee's counsel reported that ARK's claim had been compromised by agreement and that consequently these monies would be available to the unsecured creditors of the estate.

6. I assume that this was a typographical error resulting from a transposition of numbers. I proceed on the assumption that a reference to section 510(c) was intended.

7. Section 303(f) reads: "Notwithstanding section 363 of this title, except to the extent that the court orders otherwise, and until an order for relief in the case, any business of the debtor may continue to operate, and the debtor may continue to use, acquire, or dispose of property as if an involuntary case concerning the debtor had not been commenced."

8. The papers appellees seek to strike are in the record of the underlying BankVest bankruptcy proceedings and consequently are generally part of the court's record of the case. They are, in any event, papers of which I may take judicial notice. As is evident from this memorandum, these papers, however were not material to my disposition of this appeal.

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