Delgado Oil Co., Inc. v. Torres

• Decision Date: 05 March 1986
• Docket Number: No. 84-1064,84-1064
• Citation: 785 F.2d 857
• Parties: Bankr. L. Rep. P 71,041 DELGADO OIL COMPANY, INC., Plaintiff-Appellee, v. Michael R. TORRES, Defendant, James R. Cleveland, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 857

785 F.2d 857

Bankr. L. Rep. P 71,041

DELGADO OIL COMPANY, INC., Plaintiff-Appellee, v. Michael R. TORRES, Defendant James R. Cleveland, Defendant-Appellant.

No. 84-1064.

United States Court of Appeals Tenth Circuit.

March 5, 1986.

Gerald R. Mason of Mason & Twichell, P.C., Pinedale, Wyo., for plaintiff-appellee.

David H. Carmichael of Carmichael, McNiff & Patton, Cheyenne, Wyo., for defendant-appellant.

Before LOGAN and MOORE, Circuit Judges, and WEST, District Judge. ^*

JOHN P. MOORE, Circuit Judge.

This is a diversity case in which plaintiff Delgado Oil Company (Delgado) recovered a judgment from defendant James R. Cleveland (Cleveland) upon a common law theory that Cleveland, a director of an insolvent corporation, Balducci Oil Company, Inc. (Balducci), was liable for losses incurred by the plaintiff. This action was maintained even though Balducci had filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. We hold the filing of the bankruptcy proceeding deprived the district court of subject matter jurisdiction over this case, and we reverse.

In July 1982, Delgado commenced an action which was removed to the United States District Court for the District of Wyoming, averring that defendant Cleveland, as a director of Balducci, made false representations about the company's financial statements on which Delgado relied in extending credit to Balducci. Delgado also claimed Cleveland willfully mismanaged the assets of the company resulting in the preferential payment of certain Balducci creditors whose debts were guaranteed by Cleveland. Plaintiff alleged these actions were taken to protect and promote Cleveland's personal interests to the detriment of the corporation and in breach of his fiduciary obligation to plaintiff. After a bench trial, the district court concluded, under Wyoming law, Cleveland was not liable for fraud. ¹ On the second claim, the court applied Colorado common law and found Cleveland, in his capacity as a director of an insolvent corporation, liable for unlawful preferential payments in breach of his fiduciary duty. The court entered judgment accordingly. ²

Prior to trial, in March 1982, Balducci had filed a petition for reorganization under Chapter 11 of the Bankruptcy Code (11 U.S.C. Secs. 1101-1146) in the United States Bankruptcy Court for the District of Colorado. ³ Because Balducci was not a party in the instant case, the automatic stay provisions of the Bankruptcy Code did not affect the pendency of this suit. More importantly, no party apparently considered the possible effect of the bankruptcy nor presented the question of whether the trial court retained jurisdiction over the issue of a preferential transfer. ⁴

Nevertheless, once addressed, this critical question is dispositive. Subject matter jurisdiction is never presumed. In every case and at each stage of the proceeding, we must satisfy ourselves that our jurisdiction is proper. Treinies v. Sunshine Mining Co., 308 U.S. 66, 60 S.Ct. 44, 84 L.Ed. 85 (1939). Moreover, although the parties never challenged jurisdiction, we must sua sponte raise the issue to assure our proper jurisdiction. ⁵ Tafoya v. U.S. Dept. of Justice, LEAA, 748 F.2d 1389 (10th Cir.1984).

The question presented is whether, under the Bankruptcy Reform Act of 1978 (the Code), ⁶ the filing of a bankruptcy petition by a corporation deprives the district court of jurisdiction to try the issue of a preferential transfer by a corporate director and vests the bankruptcy court with exclusive jurisdiction. After viewing the appropriate statutory provisions, we conclude the question must be answered in the affirmative.

We start our analysis with the provisions of 28 U.S.C. Sec. 1471(a), (e) (1978), which state:

(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.

....

(e) The bankruptcy court in which a case under title 11 is commenced shall have exclusive jurisdiction of all of the property, wherever located, of the debtor, as of the commencement of such case.

Subsection (e) creates exclusive jurisdiction in the bankruptcy court of "all property of the debtor." Breathing life into the latter phrase is the definition of "property of the debtor." Title 11 U.S.C. Sec. 541(a)(3) provides in part:

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located:

....

(3) Any interest in property that the trustee recovers under section 543, 550, 553, or 723 of this title.

This definition of the property of the estate is key to our inquiry and requires that recoveries made by the trustee (11 U.S.C. Sec. 550) ⁷ in actions to void preferential transfers be included in the estate under 11 U.S.C. Sec. 547. Thus, when Sec. 541(a)(4) is applied to 28 U.S.C. Sec. 1471(e), we must conclude that, by statute, the bankruptcy court is the only court with postbankruptcy subject matter jurisdiction over preferential transfers of the debtor's property.

Application of this principle to the instant case circumscribes our jurisdictional inquiry. At the outset, we recognize the filing of the bankruptcy petition instantly alters the rights of a corporation and its creditors. As a general rule, and outside the context of a bankruptcy case, the fiduciary obligation of officers, directors, and shareholders is enforceable directly by the corporation or through a stockholder's derivative action. However, "it is, in the event of bankruptcy of the corporation, enforceable by the trustee. For that standard of fiduciary obligation is designed for the protection of the entire community of interests in the corporation--creditors as well as stockholders." Pepper v. Litton, 308 U.S. 295, 306-307, 60 S.Ct. 238, 245, 84 L.Ed. 281 (1939) (citations omitted). The Sec. 541 estate, thus, includes any right of action the debtor corporation may have to recover damages for misconduct, mismanagement, or neglect of duty by a corporate officer or director. The trustee in bankruptcy succeeds to that right. Its nature is derivative. See 4 Collier on Bankruptcy p 541.10 (15th ed. 1983).

The Chapter 11 debtor, as debtor in possession, is endowed with the powers of a trustee. As a creature of statute, the trustee possesses only those powers conferred upon him by the Code, and he alone can exercise those rights to the exclusion of all others. This special status enables the trustee to achieve an equality of distribution among the corporation's unsecured creditors. Hence, as trustee of the Chapter 11 estate, only Balducci could maintain a postbankruptcy action to recover a preferential transfer. 11 U.S.C. Secs. 1101(1), 1107(a). ⁸ It follows, only the bankruptcy court can entertain the action. Mitchell Excavators, Inc. by Mitchell v. Mitchell, 734 F.2d 129 (2d Cir.1984); In re MortgageAmerica Corp., 714 F.2d 1266 (5th Cir.1983).

Thus, the filing of the bankruptcy petition by Balducci transmuted the legal rights of its creditors seeking recovery of corporate debts. However, plaintiff Delgado invoked the doctrine of Colorado common law imposing liability on a corporate officer or director for the breach of fiduciary duties owed to the corporation's creditors. Crowley v. Green, 148 Colo. 142, 365 P.2d 230 (1961); Rosebud Corp. v. Boggio, 39 Colo.App. 84, 561 P.2d 367 (1977). Delgado sought to impose individual liability on Cleveland as a director for actions which directly and "tortiously" injured Delgado as an unsecured creditor who had extended credit to Balducci as a corporation. Delgado relied on a series of Colorado cases which, under ostensibly similar situations, allowed recovery to creditors or an individual creditor on the theory that directors owe a duty to creditors not to divest corporate property for the director's benefit. ⁹ Central to the common law doctrine is the recognition that creditors may pursue this remedy on behalf of the corporation to ensure that all creditors are treated equally. Ficor, Inc. v. McHugh, 639 P.2d 385 (Colo.1982). ¹⁰

However skillfully pleaded, the instant common law action is preempted by the bankruptcy case. Even under the common law, plaintiff's cause of action is maintainable only through the debtor corporation; hence, it is property of the estate. ¹¹ Defendant Cleveland was not the debtor. Any liability of Cleveland to Balducci creditors for violating a trust relationship was thrust upon him solely because of his capacity as a director of an insolvent corporation indebted to the plaintiff. ¹² Of greater consequence, this trust relationship applied to all the creditors of Balducci, not just this plaintiff. The intervention of the bankruptcy case now prevents the inequity of one creditor recovering more on its debt than the remaining similarly situated creditors can recover on theirs.

The overriding nature of the bankruptcy action to recover a preference cannot be circumvented. When a debtor...