Carousel Intern. Corp., Matter of, 96-1098

• Decision Date: 10 July 1996
• Docket Number: No. 96-1098,96-1098
• Citation: 89 F.3d 359
• Parties: -5370, 29 Bankr.Ct.Dec. 427 In the Matter of CAROUSEL INTERNATIONAL CORPORATION, Debtor. Appeal of LINCOLN OFFICE SUPPLY COMPANY, INCORPORATED.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 359

89 F.3d 359

78 A.F.T.R.2d 96-5370, 29 Bankr.Ct.Dec. 427

In the Matter of CAROUSEL INTERNATIONAL CORPORATION, Debtor Appeal of LINCOLN OFFICE SUPPLY COMPANY, INCORPORATED.

No. 96-1098.

United States Court of Appeals Seventh Circuit.

Argued May 14, 1996.

Decided July 10, 1996.

Timothy J. Cassidy (argued), Cassidy & Mueller, Peoria, IL, for Lincoln Office Supply Company, Incorporated.

Kurt B. Bickes, Decatur, IL, for Drywall Associates.

Jeffrey C. Taylor, Robbins, Schwartz, Nicholas, Lifton & Taylor, Decatur, IL, Pro Se.

Paul R. Cole, Champaign, IL, Pro Se.

David Stevens, Heller, Holmes & Associates, Mattoon, IL, Rodney Louis Smith, Charleston, IL, for Quantum Chemical Corporation.

David H. Hoff (argued), Office of the United States Attorney, Urbana Division, Urbana, IL, for Internal Revenue Service.

Marilyn J. Smith, Champaign, IL, Pro Se.

Ronald N. Smith, Champaign, IL, Pro Se.

Robert L. Smith, Champaign, IL, Pro Se.

Before POSNER, Chief Judge, and ESCHBACH and EVANS, Circuit Judges.

ESCHBACH, Circuit Judge.

Lincoln Office Supply, Inc., (hereinafter "Lincoln") sought to set aside as void liens filed by the creditors of Carousel International Corporation's shareholders. When the liens in question were filed, they were filed against $250,000 held in escrow by Carousel International Corporation's bankruptcy trustee, pending a final determination as to whether the funds were the property of Carousel's shareholders or property of the bankruptcy estate. Lincoln argued that because the bankruptcy estate had a claim to the money, the entire $250,000 was part of the bankruptcy estate pending final resolution of the dispute. Therefore, according to Lincoln, 11 U.S.C. § 362 prevented the shareholders' creditors from filing liens against the money. The bankruptcy court found that $240,000 of the money was never part of the bankruptcy estate. Accordingly, the bankruptcy court upheld the liens against $240,000 of the $250,000 in dispute, and ruled that 11 U.S.C. § 362 is inapplicable. The district court affirmed. So do we.

I.

On June 24, 1992, Carousel International Corporation and Bryan Leasing, a related company, filed for Chapter 11 bankruptcy protection. As part of the debtors' bankruptcy reorganization plan, an agreement was negotiated with Atlantis Group, Inc., (hereinafter "Atlantis") to buy the debtors' assets. Atlantis refused to purchase the assets, however, absent a non-competition agreement between Atlantis and the debtors' shareholders. Atlantis negotiated a deal with the shareholders, agreeing to pay them $250,000 in consideration for their signing a non-competition agreement. Lincoln objected to the confirmation of the debtors' reorganization plan, arguing that the $250,000 should be paid to the debtors' creditors rather than to the shareholders. Atlantis refused to pay either the bankruptcy estate or the debtors' creditors, arguing that to do so would leave the shareholders' non-competition agreement unsupported by consideration. The buy-out of the debtors' assets by Atlantis was thus placed in jeopardy.

To resolve the dispute and facilitate the sale of the debtors' assets, the shareholders agreed to permit the bankruptcy trustee to hold the $250,000 in escrow on their behalf pending a final determination of whether the $250,000 should be included in the bankruptcy estate. In the light of the shareholders' stipulation to permit the trustee to hold the funds, the bankruptcy court issued an order on March 4, 1993, approving the sale of assets to Atlantis and permitting the bankruptcy trustee to hold the $250,000 "pending further determination of disposition of said sum after motion by any interested party." Shortly after receiving the $250,000, the trustee was served with non-wage garnishments by Drywall Associates, Inc., Quantum Chemical Corporation, and Lincoln, and tax levies by the Internal Revenue Service (collectively "the liens"). The liens were to satisfy debts owed to the lienholders by the shareholders.

The bankruptcy trustee ultimately settled the dispute with the shareholders regarding the disposition of the $250,000, agreeing that only $10,000 of the $250,000 should be retained as property of the bankruptcy estate. Subsequently, the bankruptcy court issued an order approving the settlement and authorizing distribution of the escrowed funds to the shareholders subject to the satisfaction of all liens. Uncertain as to how to distribute the funds, the trustee filed an interpleader action against the shareholders and the lienholders asking the bankruptcy court to determine the priorities of the various claims to the escrowed funds.

Drywall Associates, Inc., (hereinafter "Drywall") filed a motion for summary judgment alleging that the various liens were void because at the time that they were filed the escrowed funds were the property of the bankruptcy estate and could not be attached pursuant to 11 U.S.C. § 362, the bankruptcy code's automatic stay provision. Lincoln, in response to Drywall's motion, adopted the same position taken by Drywall. The United States, on behalf of the IRS, argued in response to Drywall's motion that in fact the $250,000 was not part of the bankruptcy estate because it was consideration paid to the debtors' shareholders, not to the debtors. Therefore, the IRS lien did not violate 11 U.S.C. § 362.

On November 16, 1994, the bankruptcy court ruled as a matter of law that the $250,000 was not part of the debtors' bankruptcy estate and therefore was not subject to the automatic stay provision at the time the liens were filed with the trustee. Lincoln appealed to the district court. The district court affirmed. Lincoln now brings this timely appeal. We have jurisdiction pursuant to 28 U.S.C. § 158(d).

II.

Lincoln unsuccessfully argued before the bankruptcy court that because there was a "genuine dispute" at the time that the liens were filed regarding whether the funds were part of the bankruptcy estate, all of the funds were necessarily property of the bankruptcy estate as a matter of law. On appeal, the district court...