Investment Bankers, Inc., In re

Decision Date17 September 1993
Docket NumberNo. 92-1121,92-1121
Citation4 F.3d 1556
PartiesFed. Sec. L. Rep. P 97,764, Bankr. L. Rep. P 75,448 In re INVESTMENT BANKERS, INC., Debtor. James H. TURNER, Trustee, Plaintiff-Appellee, v. DAVIS, GILLENWATER & LYNCH; Gilbert K. Davis, individually and as a partner of Davis, Gillenwater & Lynch, a partnership, Defendants-Appellants, and O'Connor & Hannan, a partnership, Defendant. Securities Investor Protection Corporation, Appellee.
CourtU.S. Court of Appeals — Tenth Circuit

Maria J. Flora and Adrienne H. Benavidez, Gorsuch, Kirgis, Campbell, Walker and Grover, Denver, CO (on the brief), for appellee James H. Turner, Trustee.

Josephine Wang, Associate Gen. Counsel, Securities Investor Protection Corp., Washington, DC (Theodore H. Focht, Gen. Counsel, and Michael E. Don, Deputy Gen. Counsel, with him, on the brief) for appellee Securities Investor Protection Corp.

Robert T. Copeland of Copeland, Molinary & Bieger, Abingdon, VA (George H. Vaught, Denver, CO, and Gilbert K. Davis, pro se, Vienna, VA, with him, on the brief) for defendants/appellants.

Before BRORBY, Circuit Judge; BARRETT, Senior Circuit Judge, and EBEL, Circuit Judge.

EBEL, Circuit Judge.

The appellee/trustee, James H. Turner, was appointed as the trustee for the debtor, Investment Bankers, Inc. ("IBI"), pursuant to a liquidation proceeding commenced under the Securities Investor Protection Act ("SIPA"), 15 U.S.C. Sec. 78aaa et seq. The trustee subsequently commenced this action in the bankruptcy court against the defendants/appellants, Davis, Gillenwater & Lynch and Gilbert K. Davis, to recover payments of $11,858 and $25,000 that IBI made to the appellants immediately prior to the commencement of the liquidation proceeding. We conclude that the bankruptcy court and the bankruptcy judge of that court had jurisdiction over the trustee's suit, and we affirm the ruling that the payments to the appellants were invalid as preferential and fraudulent transfers. Additionally, we affirm the ruling that the trustee was entitled to pretrial interest.

FACTS

Prior to the SIPA liquidation proceedings, IBI was a securities broker-dealer incorporated in the State of Colorado. On May 8, 1981, IBI became the principal underwriter of 20 million shares of Chipola Oil Corporation ("Chipola") common stock. As a result of a sudden surge in the price of Chipola stock, the Securities and Exchange Commission ("SEC") began to investigate the existence of a stock manipulation scheme, and suspended trading in Chipola stock on July 2, 1981. This suspension caused a devaluation of the shares of Chipola stock still possessed by IBI, and prompted an inquiry from the SEC about IBI's continued compliance with the SEC's net capital requirements. IBI immediately sent a telegram to the SEC stating that it was ceasing its business operations as of July 2, 1981 until its capital complied with the SEC's net capital requirements.

On July 8, 1981, IBI asked Gilbert K. Davis, a partner in the Virginia based law firm of Davis, Gillenwater & Lynch, to represent it and two of its directors, Richard Belknap and William Chandler, in connection with the SEC's stock manipulation investigation and its suspension of trading in Chipola stock. Davis agreed to fly to Colorado to consult with IBI and its directors in exchange for a fee of $10,000. Davis spent two days consulting in Colorado, during which time IBI agreed to give Davis a $25,000 retainer for additional work to be performed by Davis.

On July 10, 1981, the SEC filed suit against IBI, Belknap, and Chandler, seeking to enjoin them from engaging in further securities transactions while IBI was in violation of the SEC's net capital requirements. The same day, the Securities Investment Protection Corporation ("SIPC") filed suit against IBI under the SIPA, seeking the appointment of a trustee for the purpose of Both actions were consolidated in the District Court of Colorado, and a hearing was held on July 10, 1981 at which IBI was represented by Davis. At the conclusion of this hearing, the district court entered a consent order with respect to the SEC action enjoining IBI from doing business and from disbursing funds other than for rent, utilities, and existing employee's salaries. The district court deferred action on the SIPC's request for the initiation of liquidation proceedings.

liquidating IBI. The SIPC's complaint alleged that IBI was in danger of failing to meet its obligations to its customers as a result of its violation of the SEC's net capital requirements.

Just prior to the July 10 hearing, Davis received two checks from IBI that he immediately converted into cashiers checks. The first check, in the amount of $11,858, covered Davis' $10,000 legal fee and $1,858 in expenses for the two days he spent consulting in Colorado. The second check, in the amount of $25,000, constituted payment of the retainer that IBI had negotiated with Davis for future legal services.

On July 14, 1981, the SEC renewed its application for injunctive relief against IBI, alleging that the debtor had issued checks in violation of the July 10 consent order. The following day, the district court approved the SIPC's application for a protective decree and appointed the current trustee to oversee the liquidation of IBI. Following the appointment of the trustee, the liquidation proceeding was removed to the bankruptcy court. With the commencement of the liquidation proceedings, the SEC withdrew its renewed application for injunctive relief against IBI.

On September 1, 1981, Davis filed a written claim with the trustee against IBI's estate for a cash credit balance and some securities. The trustee issued no determination of the claim. Rather, on January 19, 1982, the trustee commenced the instant suit against Davis and Lynch in the bankruptcy court seeking the return of the $36,858 that IBI paid to Davis on July 10, 1981. The trustee claimed that the payment of $11,858 was voidable as a preference under 11 U.S.C. Sec. 547 1 and that the payment of $25,000 was voidable as a fraudulent transfer under 11 U.S.C. Sec. 548. 2 The appellants filed two The trustee's claim proceeded to trial on August 7, 1984, and concluded on July 19, 1985 after several lengthy continuances. The bankruptcy court rejected the argument that Article III prevented it from hearing actions seeking recovery of preferences and fraudulent conveyances and it also rejected the argument that the bankruptcy judge was appointed in violation of Article II. However, the bankruptcy court did conclude that it lacked statutory jurisdiction to entertain suits brought under the aegis of the SIPA. Notwithstanding its conclusion that it lacked jurisdiction, the bankruptcy court proceeded to the merits of the trustee's claim and held that the $11,858 payment to Davis constituted a preference under 11 U.S.C. Sec. 547 and the $25,000 payment to Davis constituted a fraudulent transfer under 11 U.S.C. Sec. 548.

counterclaims seeking reimbursement for a hotel bill in the amount of $469.95 incurred by Davis while consulting with IBI in Denver and for legal fees in the amount of $13,819.32 for services rendered to IBI, Belknap and Chandler.

The trustee appealed the bankruptcy court's decision to the district court. In its order of October 5, 1989, the district court reversed the bankruptcy court's determination that it lacked jurisdiction and affirmed its determination that the two payments to Davis were voidable under 11 U.S.C. Secs. 547 and 548. The trustee subsequently moved the court to amend its order for an award of prejudgment interest, and in an order dated May 15, 1990 the court referred this question to the bankruptcy court, 136 B.R. 1008. The bankruptcy court subsequently determined that the trustee was entitled to prejudgment interest, 135 B.R. 659. The appellants appealed this decision to the district court which affirmed the bankruptcy court's determination on March 31, 1992. The appellants subsequently filed the current appeal.

DISCUSSION

The appellants present the following claims on appeal: 1) the bankruptcy court lacked jurisdiction under Article III to hear actions to recover preferences and fraudulent transfers, 2) the bankruptcy judge lacked authority to preside over the trustee's suit because he was appointed in violation of Article II, 3) the bankruptcy court lacked statutory jurisdiction to hear cases under the SIPA, 4) the bankruptcy court erred in finding that the $11,858 and $25,000 payments by IBI to the appellants were invalid as preferential and fraudulent transfers respectively under 11 U.S.C. Secs. 547 and 548, and, 5) the bankruptcy court erred in awarding prejudgment interest to the trustee.

When reviewing challenges to the decisions of the bankruptcy courts, we apply the same standard of review as the district court. Fidelity Sav. & Inv. Co. v. New Hope Baptist, 880 F.2d 1172, 1174 (10th Cir.1989). Accordingly, the bankruptcy court's findings of fact are reviewed under a clearly erroneous standard while the court's conclusions of law are subject to de novo review. Id.; Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1543 (10th Cir.1988).

I. The Jurisdiction of the Bankruptcy Court Under Article

III

Title 15 United States Code Sec. 78fff(b) states that a liquidation proceeding under the SIPA is to be conducted "in accordance with, and as though it were being conducted under ... Title 11." Title 28 U.S.C. Sec. 157(b)(1) states that bankruptcy courts "may hear and determine ... all core proceedings arising under title 11." Section 157(b)(2) defines a core proceeding to include "proceedings to determine, avoid or recover preferences" and "proceedings to determine, avoid, or recover fraudulent conveyances." Pursuant to these provisions, the trustee brought suit against the appellants in the bankruptcy court seeking to avoid IBI's payment of attorney's fees to the appellants as preferential and fraudulent transfers. The appellants argue that the...

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