Merchants & Farmers Bank of Dumas, Ark. v. Hill

• Decision Date: 21 December 1990
• Docket Number: No. PB-C-90-335.,PB-C-90-335.
• Parties: MERCHANTS & FARMERS BANK OF DUMAS, ARKANSAS, Plaintiff, v. Jamir R. HILL, Sr., et al., Defendants. MERCHANTS & FARMERS BANK OF DUMAS, ARKANSAS, Cross-Complainant, v. UNITED STATES of America, acting through the FARMERS HOME ADMINISTRATION, Cross-Defendant.
• Court: U.S. District Court — Eastern District of Arkansas

122 B.R. 539 (1990)

MERCHANTS & FARMERS BANK OF DUMAS, ARKANSAS, Plaintiff, v. Jamir R. HILL, Sr., et al., Defendants.

MERCHANTS & FARMERS BANK OF DUMAS, ARKANSAS, Cross-Complainant, v. UNITED STATES of America, acting through the FARMERS HOME ADMINISTRATION, Cross-Defendant.

No. PB-C-90-335.

United States District Court, E.D. Arkansas, Pine Bluff Division.

December 21, 1990.

William A. Waddell, Jr., Friday, Eldredge & Clark, Little Rock, Ark., and Brooks A. Gill, Gill, Johnson & Gill, Dumas, Ark., for plaintiff.

Marjorie M. Kesl, Arens & Alexander, Fayetteville, Ark., and William C. Adair, Jr., U.S. Attorney's Office, Little Rock, Ark., for defendants.

MEMORANDUM AND ORDER

SUSAN WEBBER WRIGHT, District Judge.

This is a suit by Merchants & Farmers Bank of Dumas, Arkansas ("the Bank") to foreclose on certain property held by the Defendants, Jamir and Bonnie Hill and others, for default on a loan. The Hills filed a counterclaim against the Bank, asserting various theories of lender liability. By Order dated November 26, 1990, the Court granted in part the Bank's motion for summary judgment on all lender liability claims except those arising in contract.

Two days before trial, the Hills filed a voluntary petition for bankruptcy under Chapter 12 of the Bankruptcy Code. Counsel for the Hills sent a facsimile copy of the notice of bankruptcy stay to the district clerk's office in Pine Bluff, which was placed in the case file. The following day, counsel submitted by facsimile a motion to remove the trial of the counterclaim from the docket and to refer counterclaim to the bankruptcy court. When informed that the Court had denied her motion and the case remained on the trial schedule for the next morning, counsel for the Hills indicated that she would appear for a hearing on the motion, but would not proceed to trial on the counterclaim.

Because counsel for the Hills persisted in her refusal to try the counterclaim, and because of the legal questions involved in deciding whether to remove the counterclaim from the Court's docket and refer it to bankruptcy court, the Court permitted the parties to argue the motion in order to make their record at a hearing on Wednesday morning, December 5, 1990. At the hearing, counsel for the Bank, who was ready to proceed to trial, moved to dismiss the counterclaim with prejudice. For the reasons set forth below, the Court hereby denies the Hills' motion to remove and refer, and grants the Bank's motion to dismiss with prejudice.

I. MOTION TO REFER TO BANKRUPTCY COURT

A threshold issue is whether proceedings on the Hills' counterclaim are automatically stayed under 11 U.S.C. § 362(a)(1).¹ The statutory language, which refers to actions "against the debtor," and the policy behind the statute, which is to protect the bankrupt's estate from being eaten away by creditors' lawsuits and seizures of property before the trustee has had a chance to marshal the estate's assets and distribute them equitably among the creditors, see H.R.Rep. No. 595, 95th Cong., 1st Sess. 340 (1977), reprinted in 1978 U.S.Code Cong. & Admin. News 5787, indicate that section 362 operates only to stay proceedings against the debtor, and not actions brought by the debtor prior to the bankruptcy petition which inure to the benefit of the estate.²

Although the Eighth Circuit has not yet decided this question, several other circuits have concluded that the automatic stay is inapplicable to actions originally commenced by the bankrupt party. Carley Capital Group v. Fireman's Fund Insurance Co., 889 F.2d 1126, 1127 (D.C.Cir. 1989); Martin-Trigona v. Champion Federal Savings and Loan Ass'n, 892 F.2d 575 (7th Cir.1989); In re Berry Estates, 812 F.2d 67, 71 (2d Cir.1987); Freeman v. Commissioner of Internal Revenue, 799 F.2d 1091, 1092-93 (5th Cir.1986); Cathey v. Johns-Manville Sales Corporation, 711 F.2d 60, 61 (6th Cir.1983); Association of St. Croix Condominium Owners v. St. Croix Hotel Corp., 682 F.2d 446, 448 (3d Cir.1982).

At least three district courts have reached the same conclusion. In re Transportation Systems International, 110 B.R. 888 (D.Minn.1990); Rett White Motor Sales Co. v. Wells Fargo Bank, 99 B.R. 12 (N.D.Cal.1989); Trans Caribbean Lines, Inc. v. Tracor Marine, Inc., 49 B.R. 360 (S.D.Fla.1985). A slew of bankruptcy court decisions concur, see, e.g., In re Convention Masters, Inc., 46 B.R. 339 (Bkrtcy.D. Md.1985), In re Regal Construction Company, 28 B.R. 413 (Bkrtcy.D.Md.1983); In re Ideal Roofing and Sheet Metal Works, Inc., 9 B.R. 2 (Bkrtcy.S.D.Fla.1980), as well as several state court opinions, see, e.g., Scarborough v. Duke, 532 So.2d 361, 363 (La.Ct.App.1988), Steeley v. Dunivant, 522 So.2d 299, 300 (Ala.Civ.App.1988), Emerson v. A.E. Hotels, 403 A.2d 1192, 1194 (Me.1979).

The Hills equivocate on whether the automatic stay under section 362 is applicable to their counterclaim.³ Any such claim would be too wobbly to withstand the prevailing winds of the aforementioned authority. However, the Hills further argue that for various reasons, as discussed below, they were barred from trying their counterclaim on December 5, 1990, and they request that the Court transfer the counterclaim to bankruptcy court. Each of these arguments will be addressed in turn.

A. Standing to Pursue the Counterclaim Individually

The Hills claim that pursuant to 11 U.S.C. §§ 1203 and 1207 they have become debtors-in-possession of all property of the estate and, therefore, they no longer had standing individually to pursue the counterclaim at the trial scheduled for December 5, 1990.⁴ Relying on In re Ozark Restaurant Equipment Company, Inc., 816 F.2d 1222 (8th Cir.), cert. denied sub nom., Jacoway v. Anderson, 484 U.S. 848, 108 S.Ct. 147, 98 L.Ed.2d 102 (1987) and In re Couch, 43 B.R. 56 (Bankr.E.D.Ark.1984), they reason that upon the commencement of the bankruptcy action, their counterclaim became an asset of the bankruptcy estate created under 11 U.S.C. § 541, and only the debtors in possession have authority to pursue those causes of action belonging to the debtors as of the commencement of the bankruptcy proceedings.

Section 1203 provides that a debtor in possession shall have essentially all the rights and powers of bankruptcy trustee.⁵ A debtor in possession therefore wears two hats: one as an individual debtor, and the other as a trustee. Simply because the Hills have assumed the status of debtors in possession does not mean that their status individually as debtors is destroyed, any more than if a separate trustee was appointed for their estate. The first question in this case, therefore, involves whether the Hills, as individual debtors, could have proceeded to trial on their counterclaim against the Bank.

It is undisputed that causes of action⁶ belonging to the debtor at the commencement of the bankruptcy action are included within the property of the estate. Ozark Equipment, 816 F.2d at 1225. See also 11 U.S.C. § 541(a)(1) (property of the estate comprises the "legal and equitable interests of the debtor"). Accordingly, the trustee in bankruptcy has authority to pursue these causes of action for the benefit of the estate. Id. At least two courts have held that because the trustee in bankruptcy "owns" the causes of action, only the trustee has standing to bring suit on them after the filing of the bankruptcy petition. Folz v. BancOhio National Bank, 88 B.R. 149 (S.D.Ohio 1987); Jefferson v. Mississippi Gulf Coast YMCA, Inc., 73 B.R. 179 (S.D.Miss.1986).

However, it is not a necessary consequence of the trustee's having title to the causes of action that the debtor has lost all authority to proceed in an action instituted by him prior to the commencement of bankruptcy proceedings. As the several cases cited above indicate, the debtor may continue to prosecute an action initiated before the bankruptcy case supervened, and this is so notwithstanding that the title to the claim which the action seeks to enforce becomes vested in the trustee in bankruptcy.

With respect to the trustee's authority to dispose of actions filed prior to the bankruptcy petition, the United States Supreme Court stated in Meyer v. Fleming that

litigation instituted by a creditor may not be defeated merely by reason of the fact that he has become a bankrupt. Title to the claim vests, of course, in the bankruptcy trustee. He is in position to take control of the litigation. He may . . . start a new suit and cause the old one to be abated, or intervene in the old one and obtain such benefits as it affords. The choice may indeed be a valuable one. Rights might be lost if the earlier suit were abated. And the speculative nature of the litigation or the expense involved might indicate to the trustee that it was more provident for him not to intervene in the existing suit, nor to institute a new one, but to let the one which had been started to run its course.

327 U.S. 161, 165, 66 S.Ct. 382, 385, 90 L.Ed. 595 (1946) (citations and footnotes omitted). However, the Court also observed that, "if, because of the disproportionate expense, or uncertainty as to the result, the trustee neither sues nor intervenes, there is no reason why the bankrupt himself should not continue the litigation." Id. at 166, 66 S.Ct. at 385 (quoting Johnson v. Collier, 222 U.S. 538, 540, 32 S.Ct. 104, 105, 56 L.Ed. 306 (1912)) (emphasis added).⁷

Bankruptcy Rule 6009 gives the trustee or debtor in possession the discretionary authority to continue a pending action brought by the debtor prior to the commencement of the bankruptcy case:

With or without court approval, the trustee or debtor in possession may prosecute or may enter an appearance and defend any pending action or proceeding by or against the debtor, or commence and prosecute any action or proceeding in behalf of the estate before any tribunal.

While the trustee or debtor in possession may intervene and assume control of the suit if he wishes, Rule 6009 does not oust the debtor as a party...