Williams v. California 1st Bank
| Decision Date | 06 October 1988 |
| Docket Number | No. 84-050450M7,No. 87-6430,84-050450M7,87-6430 |
| Citation | 859 F.2d 664 |
| Parties | 19 Collier Bankr.Cas.2d 922, 18 Bankr.Ct.Dec. 832, Bankr. L. Rep. P 72,463 Ardelle WILLIAMS, as trustee of the estate of Chacklan Enterprises, Inc., Bankruptcy Caseon behalf of certain investors, Plaintiff-Appellee, v. CALIFORNIA 1ST BANK, a federal bank, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Matthew V. Herron, Meisenheimer and Herron, San Diego, Cal., for plaintiff-appellee.
Arnold Quittner, Herbert Katz, Gendel, Raskoff, Shapiro & Quittner, Los Angeles, Cal., for defendant-appellant.
Appeal from the United States District Court for the Southern District of California.
Before GOODWIN, FLETCHER and FARRIS, Circuit Judges.
This is an interlocutory appeal from two orders, one denying a motion to dismiss, the other denying summary judgment. Appellee Ardelle Williams, a trustee in bankruptcy (Trustee), filed an action for violation of the federal securities laws against California First Bank (CFB or Bank) on behalf of the bankrupt's estate. Appellant CFB filed two motions in response: (1) a motion to dismiss on the ground that the Trustee has no standing; (2) a motion for summary judgment confirming the Bank's right to assert in pari delicto defenses against the Trustee. CFB appeals the denial of both its motions. We reverse the denial of the motion to dismiss.
Prior to its bankruptcy, Chacklan Enterprises, Inc. (the debtor) distributed Mexican seafood in the United States. To finance its business, the debtor offered for sale "investment contracts" and notes guaranteeing a monthly return of ten percent. The Bank acted as the debtor's depository for part of this time. In late 1984, the investment program collapsed and an involuntary bankruptcy petition was filed. Appellee Williams was appointed trustee under chapter 7.
The Trustee submitted an ex parte application to the bankruptcy court, seeking authority to solicit and accept from investors assignments of their claims against CFB. The bankruptcy court granted the application. The Trustee then sent a letter to the investors in which she identified herself, discussed possible claims against CFB and the advantages of letting the estate bring the claims, and set forth the terms of assignment:
If any money is recovered from this action, the funds will first be used to pay approved fees and expenses and other priority claims. After these claims are paid in full, I will request the Bankruptcy Court to disburse the balance of the funds to the investors providing the Assignment according to the size of their respective investments. Further, I will request that the investors who did not assign their claims not participate in this separate distribution.
In response to the letter, 111 investors assigned their claims to the Trustee.
The Trustee filed suit against CFB on behalf of the estate and the investors, alleging state and federal securities law violations arising from the Bank's participation in, knowledge of, or approval of the debtor's "Ponzi" scheme. The Bank moved to dismiss on the ground that the Trustee had no standing to bring the claims of the investors. The district court denied the motion, concluding that the Trustee may bring claims of third party creditors where there was an actual assignment approved by the bankruptcy court, pursuant to the Trustee's "power under 11 U.S.C. Sec. 541."
In its answer to the complaint, the Bank raised several affirmative defenses based on the debtor's pre-petition misconduct. In particular, the Bank contends that the Trustee is subject to the same in pari delicto defenses that would be available against the debtor, since any liability of CFB arose out of the debtor's allegedly fraudulent scheme. The Trustee filed a motion to strike under Rule 12(f), asserting that the Bank could not raise in pari delicto defenses in this case. The court granted the motion, giving CFB leave to amend the setoff defense as a counterclaim. The Bank then filed its amended answer, and the parties filed cross-motions for partial summary judgment on the availability of the in pari delicto defenses. The district court granted the Trustee's motion, ruling that CFB could not use "any pre-bankruptcy acts or omissions of Chacklan Enterprises, Inc. as the basis for a defense, offset or counterclaim to the assigned investor claims." In the same order, the district court certified for immediate appeal both the summary judgment and the order denying CFB's motion to dismiss. This court granted CFB permission to file an interlocutory appeal, which it timely did.
We assert jurisdiction over this appeal pursuant to 28 U.S.C. Secs. 1292(a)(1) and 1294(1). The district court's holdings as to the Trustee's standing and the Bank's permissible defenses are conclusions of law, which we review de novo. In re Dominelli, 788 F.2d 584, 585 (9th Cir.1986).
The Bank argues that a trustee lacks standing to sue a third party on behalf of creditors of the estate. It relies primarily on Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972), in which the Court concluded that a reorganization trustee under Chapter X had no standing under the old Bankruptcy Act to assert, on behalf of the holders of the debtor's debentures, claims of misconduct against a third party, in that case the trustee for the debenture holders under the indenture agreement. See also Rochelle v. Marine Midland Grace Trust Co., 535 F.2d 523, 527 (9th Cir.1976) ().
The Court identified three factors militating against finding standing. First, nowhere in the statute did the Court find any provision enabling the trustee "to collect money not owed to the estate." Caplin, 406 U.S. at 428, 92 S.Ct. at 1685. Second, the Court noted that the debtor had no claim against the indenture trustee. At the most, then, the trustee's claims described a situation where the debtor and the indenture trustee were in pari delicto. Id. at 429-30, 92 S.Ct. at 1685-86. Since it appeared that the indenture trustee would be entitled to be subrogated to the position of the debenture holders against the debtor, the Court saw no advantage to giving the trustee standing to sue. Id. at 430, 92 S.Ct. at 1686. The third problem troubling the Court was the possibility that the trustee's suit on behalf of debenture holders could be "inconsistent with any independent actions that they might bring themselves." Id. at 431-32, 92 S.Ct. at 1687. The Court saw no reason to believe "that by giving petitioner standing to sue on behalf of the debenture holders we would reduce litigation." Id. at 434, 92 S.Ct. at 1688. The Court accordingly affirmed the appellate court's conclusion that the trustee lacked standing, noting that such a grant of standing was a decision "that only Congress can make." Id. at 435, 92 S.Ct. at 1688.
When Congress rewrote the bankruptcy laws in 1978, it considered and rejected a provision which would have expressly overruled Caplin. See In re Ozark Restaurant Equip. Co., 816 F.2d 1222, 1227 & n. 9 (8th Cir.1987). It has since been held that Caplin remains the law under the revised bankruptcy code. Ozark Equip. Co., 816 F.2d at 1228; Koch Refining v. Farmers Union...
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