Mortgageamerica Corp., In re

• Decision Date: 19 September 1983
• Docket Number: No. 82-2322,82-2322
• Citation: 714 F.2d 1266
• Parties: 9 Collier Bankr.Cas.2d 603, 12 Bankr.Ct.Dec. 151 In re MORTGAGEAMERICA CORPORATION, Debtor. The AMERICAN NATIONAL BANK OF AUSTIN, Plaintiff-Appellant, v. MORTGAGEAMERICA CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1266

714 F.2d 1266

9 Collier Bankr.Cas.2d 603, 12 Bankr.Ct.Dec. 151

In re MORTGAGEAMERICA CORPORATION, Debtor.

The AMERICAN NATIONAL BANK OF AUSTIN, Plaintiff-Appellant, v. MORTGAGEAMERICA CORPORATION, Defendant-Appellee.

No. 82-2322.

United States Court of Appeals,

Fifth Circuit.

Sept. 19, 1983.

Adrian M. Overstreet, Austin, Tex., for plaintiff-appellant.

Richard L. Fuqua, Houston, Tex., for defendant-appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before CLARK, Chief Judge, THORNBERRY and RANDALL, Circuit Judges.

RANDALL, Circuit Judge:

This case comes to us upon a final order of the district court concerning the scope of the automatic stay provided for in section 362 of the Bankruptcy Code. 11 U.S.C. § 362 (Supp. V 1981). The district court held that the stay extends far enough to prevent the American National Bank of Austin from asserting various state-law causes of action in state court against Joe R. Long, who had controlled the MortgageAmerica Corporation before its descent into bankruptcy under chapter 7. 11 U.S.C. §§ 701-766. For the reasons given below, we affirm.

This dispute began in April, 1981, when the bank obtained a jury verdict in state court against MortgageAmerica for $192,554.40. The present case follows from the various efforts the bank has made to collect on that judgment from Long personally, rather than from his insolvent company. Although the parties vigorously disagree about whether Long was an officer or director of MortgageAmerica, neither Long nor his company has challenged the district court's assertion that "[i]t is undisputed ... that Long owned all of the issued and outstanding stock of RJF, Inc., which owned all the issued and outstanding stock of MortgageAmerica Corporation." The essential fact that Long controlled MortgageAmerica thus seems beyond dispute. Cf. Securities Act of 1933, § 15, 15 U.S.C. § 77o (1976) (defining "controlling person" for federal securities law purposes).

The bank's principal collection effort consists of a suit filed against Long in state court in July, 1981. The gist of all three claims in the suit is that because Long deliberately stripped MortgageAmerica of assets in order to benefit himself while defrauding the company's creditors, he is personally liable to one of those creditors, i.e., the bank, for the company's obligations. The suit is based on three allegedly wrongful transfers, all of which occurred in May and June, 1981: the bank claims, first, that Long caused MortgageAmerica to transfer without consideration $200,000 to RJF, which used the money to make a payment on one of its own loans that Long had personally guaranteed; second, that Long caused MortgageAmerica to transfer $100,000 directly to him, personally, also without consideration; and third, that Long caused MortgageAmerica to transfer approximately $2,000,000 to another bank in order partially to repay another loan on which he was personally liable. Long vigorously denies all of these charges.

Meanwhile, business for MortgageAmerica apparently continued to worsen, and the company was forced into involuntary bankruptcy in August, 1981. (Various motions in connection with the bankruptcy court's granting of final relief on November 22, 1982, are still pending in the bankruptcy and district courts.) As far as the present appeal is concerned, the only relevant issue before the bankruptcy court was whether the section 362 automatic stay applied to prevent the bank from pursuing its state-court action against Long. After a combined preliminary and final hearing under section 362, the bankruptcy court determined in January, 1982, that the three state-law causes of action against Long were "property of the [bankrupt's] estate" and that the stay therefore applied. The district court agreed, and ruled that section 362 prohibited the bank from "usurp[ing] causes of action" that rightfully belonged to the bankrupt's estate. The bank appeals from that ruling.

I

The bank's principal argument on this appeal is that under state law the three causes of action in issue all accrue solely to creditors in their individual capacities, not to the company, and that these particular causes of action thus cannot be considered "property of the estate" as that term is defined in the Bankruptcy Code. We therefore pause to examine the state-law causes of action and the protective and rehabilitative scheme established by the new Bankruptcy Code before going on in Part II to determine how the two laws--state and federal--fit together.

A

The three causes of action asserted in the state-court suit are based upon the "corporate trust fund" doctrine, the "denuding the corporation" theory, and the Texas Fraudulent Transfers Act, Tex.Bus. & Com.Code Ann. §§ 24.02-.03 (Vernon 1968).

Although the "corporate trust fund" doctrine is the theory that has been the most thoroughly studied by both courts and commentators, it is nonetheless often poorly understood. It was first established in 1824 by Chief Justice Story sitting alone as a Circuit Justice on the Circuit Court for the District of Maine, see Wood v. Dummer, 30 F.Cas. 435 (Story, Circuit Justice 1824) (No. 17,944), and, since then, has become such a source of confusion that a leading commentator has introduced his forty-page treatment of the subject with the warning that "[p]erhaps no concept has created as much confusion in the field of corporate law as has the 'trust fund doctrine.' " 15A W. Fletcher, Cyclopedia of the Law of Private Corporations § 7369 (rev. perm. ed. 1981). The doctrine does not, in fact, involve the application of any actual "trust" at all:

When a court of equity does take into its possession the assets of an insolvent corporation, it will administer them on the theory that they in equity belong to the creditors and stockholders rather than to the corporation itself. In other words, and that is the idea which underlies all these expressions in reference to "trust" in connection with the property of a corporation, the corporation is an entity, distinct from its stockholders as from its creditors. Solvent, it holds its property as any individual holds his, free from the touch of a creditor who has acquired no lien; free also from the touch of a stockholder who, though equitably interested in, has no legal right to, the property. Becoming insolvent, the equitable interest of the stockholders in the property, together with their conditional liability to the creditors, places the property in a condition of trust, first, for the creditors, and then for the stockholders. Whatever of trust there is arises from the peculiar and diverse equitable rights of the stockholders as against the corporation in its property and their conditional liability to its creditors. It is rather a trust in the administration of the assets after possession by a court of equity than a trust attaching to the property, as such, for the direct benefit of either creditor or stockholder.

Hollins v. Brierfield Coal & Iron Co., 150 U.S. 371, 383, 14 S.Ct. 127, 129-30, 37 L.Ed. 1113 (1893) (emphasis added). Although any controlling person who breaches this "trust" is personally liable for the damage he does, the trust fund doctrine was established principally to permit a court of equity to marshal and distribute a corporation's assets upon its insolvency and dissolution in much the same way as would a modern bankruptcy court. See Wood, supra, at 436-37. Born of necessity in 1824 when federal bankruptcy and state corporation laws were as yet ill-established, ¹ the doctrine is rarely resorted to today.

The Texas courts have upon a number of occasions discussed the nature and scope of the doctrine in Texas. ² For our purposes, the Texas version of the theory has three significant aspects--the relationship of the doctrine to the dissolution provisions of the Texas Business Corporation Act, Tex.Bus.Corp.Act Ann. arts. 6.01-7.12 (Vernon 1980 & Supp.1982) (corresponding to Model Bus.Corp.Act §§ 82-105 (1980)), the identity of those who have standing to bring the action (whether creditors or shareholders), and the distribution of funds recovered under the theory (whether on a pro-rata or first-come-first-served basis).

The Texas Supreme Court undertook an analysis of the first issue just two years ago in Hunter v. Fort Worth Capital Corp., 620 S.W.2d 547 (Tex.1981), when it was presented with the question whether a tort action arising eleven years after a defendant corporation's statutory dissolution could proceed under the trust fund theory despite the three-year limitation in section 7.12 of the Business Corporation Act. See Tex.Bus.Corp.Act Ann. art. 7.12 (corresponding to MBCA § 105). The court's language is worth reproducing in full:

As early as 1879, the Texas legislature began enacting remedial statutes which embodied the trust fund theory.... These statutes were carried forward by subsequent legislatures, with only minor changes, until repealed in 1955 with the enactment of Article 7.12 [and most of the rest of the Model Business Corporation Act].... Under these remedial statutes, the legislature had given creditors of a dissolved corporation "the same broad measure of relief which equity would have afforded in the absence of legislation." ... The effect of these statutes was to supplant the equitable trust fund theory by declaring a statutory equivalent. In Texas, recognition of the trust fund theory, as applied to dissolved corporations, did not exist apart from these statutes.

620 S.W.2d at 550 (citations omitted). The court cited extensively, and ultimately adopted the solution recommended by, a law review article, see Norton, supra note 1, and concluded that actions brought after the limitation period in the state dissolution statute are time-barred. Hunter and the law review article--which extensively discussed Justice Story's opinion in Wood v. Dummer --make it unmistakably clear that the trust...