375 F.3d 51 (1st Cir. 2004), 03-1613, In re Bankvest Capital Corp.

Docket Nº:03-1613.
Citation:375 F.3d 51
Party Name:In re BANKVEST CAPITAL CORP., Debtor. Fleet National Bank, Appellee, v. Stephen C. Gray, as Liquidating Supervisor for Bankvest Capital Corp.; The Official Committee of Unsecured Creditors for Bankvest Capital Corp., a/k/a Post Effective Date Committee, Appellants.
Case Date:July 12, 2004
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

Page 51

375 F.3d 51 (1st Cir. 2004)


Fleet National Bank, Appellee,


Stephen C. Gray, as Liquidating Supervisor for Bankvest Capital Corp.; The Official Committee of Unsecured Creditors for Bankvest Capital Corp., a/k/a Post Effective Date Committee, Appellants.

No. 03-1613.

United States Court of Appeals, First Circuit

July 12, 2004

Heard Oct. 8, 2003.

Page 52

[Copyrighted Material Omitted]

Page 53

[Copyrighted Material Omitted]

Page 54

Charles R. Bennett, Jr. with whom Kathleen E. Cross, David C. Kravitz and Hanify & King, P.C. were on brief for appellants.

Sabin Willett with whom Julie Frost-Davies, Rheba Rutkowski and Bingham McCutchen LLP were on brief for appellee.

Before LIPEZ, Circuit Judge, CAMPBELL, Senior Circuit Judge, and HOWARD, Circuit Judge.

Page 55

LEVIN H. CAMPBELL, Senior Circuit Judge.

This appeal from diverging decisions of the bankruptcy and district courts involves a cautionary tale about the dangers of ignoring the "automatic stay" that takes effect upon the filing of a bankruptcy petition. All would have been routine had Fleet National Bank ("Fleet") declined to avail itself of certain postpetition payments tendered to it by its bankrupt borrower Bankvest Capital Corp. ("Bankvest"). But having accepted those payments, Fleet, pursued by its adversaries, found itself in something of a legal labyrinth. While we have yet to receive the guidance of Ariadne's golden thread, we seek in the following to chart a reasonable path.

I. Background

We base the following on undisputed facts as set forth in the opinions of the bankruptcy and district courts and in the record.

Debtor, Bankvest, was a lessor of commercial equipment and a buyer and seller of portfolios of leases. Bankvest financed its operations, in part, by borrowing from appellee, Fleet. An involuntary Chapter 11 petition was filed against Bankvest on December 17, 1999. On that date, Bankvest had three principal credit arrangements with Fleet, consisting of a warehouse line dated August 21, 1998 ("FBNA Warehouse Obligation"), a warehouse line by Fleet's predecessor in interest, BankBoston, N.A., dated June 3, 1999 ("BB Warehouse Obligation"), and a conduit facility dated September 30, 1998. These credit arrangements were secured by substantially all of Bankvest's assets. Fleet's secured interest was perfected.

During the "gap period" between the filing of the involuntary petition and the entry of the bankruptcy court's order for relief on January 25, 2000, Fleet, aware of the bankruptcy filing and in apparent violation of the automatic stay, 11 U.S.C. § 362(a), 1 accepted the sum of $2,155,427

Page 56

from assets or property of Bankvest's estate and applied these "gap payments" against the BB Warehouse Obligation. On February 23, 2000, the Official Committee of Unsecured Creditors ("the Committee") was formed. Following discovery of the payments made to Fleet after the filing of the bankruptcy petition, the Committee moved, inter alia, for sanctions against Fleet for "violations of the automatic stay and discovery obligations" pursuant to sections 105(a) and 362 of the Bankruptcy Code. On January 30, 2001, Fleet filed an opposition to the sanctions motion. 2

In December of 2000, Fleet sold a $1.4 billion portfolio of loans to ARK CLO 2000-1, LIMITED ("ARK"). The parties agree that this portfolio included at least the then-existing balances of the loans between Bankvest and Fleet. The Purchase and Sale Agreement ("ARK Contract") purported to transfer to ARK, inter alia, all of Fleet's claims and rights, including bankruptcy claims "whether known or unknown," against Bankvest or any entity "arising under or in connection with the related Loan Documents," as well as all property received by Fleet under these loan documents after October 9, 2000. 3

On May 31, 2001, the bankruptcy court confirmed a joint liquidating plan of reorganization ("Plan") for Bankvest. Neither Fleet nor ARK--which, as Fleet's successor, was negotiating the Plan with Bankvest--objected to the Plan.

Both the Committee and Fleet sought summary judgment on the Emergency Motion for Sanctions, but the bankruptcy court denied both motions. An evidentiary hearing was scheduled, but shortly before the hearing, on November 12, 2001, the Committee's Liquidating Supervisor, Stephen Gray, filed a complaint pursuant to section 549 of the Bankruptcy Code requesting that the gap payments made to Fleet be avoided. Fleet moved to dismiss the avoidance proceeding and for judgment on the pleadings under Fed.R.Civ.P. 12(b)(6) and (c), asserting that Gray's avoidance claim was not preserved under the confirmed plan, was barred by laches, and was of no benefit to the estate. The Liquidating Supervisor and the Committee, following oral argument, also sought judgment on the pleadings. The bankruptcy court denied the motions and consolidated the avoidance claim with the Committee's emergency motion for sanctions. All matters were tried together with the consent of the parties in February of 2002.

During the trial, Fleet moved for judgment as a matter of law, arguing that avoidance would be for naught. Fleet based the latter point on its contention that if the court avoided the gap payment transaction--requiring Fleet to turn over to the estate the gap payments it had received--Fleet would simultaneously acquire by virtue of section 502(h) of the Bankruptcy Code a valid claim against the estate to recover those very same payments,

Page 57

as Fleet's claims against the bankrupt had been fully secured prior to the filing of the involuntary petition. The motion was denied.

On April 18, 2002, the bankruptcy court issued an opinion finding for Gray against Fleet in the avoidance proceeding and granting the Committee's Emergency Motion for Sanctions. Bankvest Capital Corp. v. Fleet Boston (In re Bankvest Capital Corp.), 276 B.R. 12, 32 (Bankr.D.Mass.2002). The bankruptcy court ordered Fleet to pay over to the Liquidating Supervisor the amount of the gap payments, $2,155,427, plus interest, for a total of $2,445,924.65. In re Bankvest, 276 B.R. at 29-31. The court further ordered the Liquidating Supervisor to hold this judgment in escrow pending a determination of whether ARK had a claim to any part of the monies from Fleet. Id. The court ruled that Fleet's transaction with ARK "divested [Fleet] of any claim upon return of the Post-Petition [gap] Payments," and, therefore, found no "need to conduct any further proceedings to determine whether Fleet's behavior warrants subordination pursuant to section 501(c) [sic]." Id. The court found this remedy, which caused Fleet to lose the full amount of the gap payments, "harsh enough that it may defer similar future behavior," so it did not rule on the contempt contentions. Id. at 31.

Fleet appealed to the United States District Court for the District of Massachusetts. The district court vacated the portion of the bankruptcy court's judgment pertaining to the avoidance claim. Contrary to the bankruptcy court, the district court determined that Fleet had never sold to ARK its own claim to the gap payments and was thus not divested of that claim. The district court went on to rule that, because the postpetition payments transferred to Fleet by Bankvest had been secured, Fleet, as a secured creditor, could now recover them under its so-called 502(h) claim 4, to which it had become entitled following avoidance, thus rendering futile Gray's right to avoidance. The district court remanded the matter to the bankruptcy court to determine what sanction, if any, should be imposed upon Fleet to punish its conduct in connection with its acceptance of the gap payments. Fleet Nat'l Bank v. Gray (In re Bankvest Capital Corp.), Nos. 02-40100-DPW and 02-40101-DPW, 2003 WL 1700978, at *8 (D.Mass.2003).

Page 58

From the district court's judgment, Gray, as Liquidating Supervisor for Bankvest, and the Committee (collectively, "appellant"), now appeal.

II. Discussion

A. Jurisdiction

While not earlier raised by either party, we have asked for briefing of this court's appellate jurisdiction, noting that the district court's appealed order might lack finality as required by 28 U.S.C. § 158(d) and thus be non-appealable, given the remand of the open sanctions issue to the bankruptcy court. See In re Spillane, 884 F.2d 642, 644 (1st Cir. 1989); In re Recticel Foam Corp., 859 F.2d 1000, 1002 (1st Cir. 1988) (stating, "a court has an obligation to inquire sua sponte into its subject matter jurisdiction"). The parties have responded, and, even more to the point, they have notified us that they have settled the sole issue left open upon remand, to wit, what sanction would be appropriate against Fleet for its conduct in connection with its receipt and retention of the gap payments in violation of the automatic stay. The parties' settlement has since been approved by the bankruptcy judge. 5

Other than the issues determined by the district court and presented on this appeal, there are now no issues remaining open in the case; we accordingly see no finality problem with the appealed order. See, e.g. Estancias La Ponderosa Dev. Corp. v. Harrington (In re Harrington), 992 F.2d 3, 5 (1st Cir. 1993). Even if the open sanctions issue caused the order to lack finality when first appealed, a matter we do not decide, the sanctions issue has been finally resolved and is now moot, leaving no possibility that, if we decide the appeal, more will be left to determine. Since the fact of finality is clear enough now, and the parties are desirous that the case be resolved, we see no impediment to the exercise of our appellate jurisdiction.

B. Whether the Receiver Has The Right To Bring The Avoidance Action

Reiterating its...

To continue reading