Gibson Group, Inc., In re

• Decision Date: 28 September 1995
• Docket Number: No. 94-3567,94-3567
• Citation: 66 F.3d 1436
• Parties: , 28 Bankr.Ct.Dec. 5, Bankr. L. Rep. P 76,651 In re The GIBSON GROUP, INC., Debtor. CANADIAN PACIFIC FOREST PRODUCTS LIMITED, Plaintiff-Appellant, v. J.D. IRVING, LIMITED, Blum International Inc., West Indies Pulp & Paper Ltd., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1436

66 F.3d 1436

64 USLW 2210, 28 Bankr.Ct.Dec. 5, Bankr.

L. Rep. P 76,651

In re The GIBSON GROUP, INC., Debtor CANADIAN PACIFIC FOREST PRODUCTS LIMITED, Plaintiff-Appellant, v. J.D. IRVING, LIMITED, Blum International Inc., West Indies Pulp & Paper Ltd., Defendants-Appellees.

No. 94-3567.

United States Court of Appeals Sixth Circuit.

Argued Aug. 1, 1995.

Decided Sept. 28, 1995.

Jeffrey Alan Marks (argued and briefed), Taft, Stettinius & Hollister, Cincinnati, OH, for Canadian Pacific Forest Products Limited.

Quintin F. Lindsmith (argued and briefed), Bricker & Eckler, Columbus, OH, for J.D. Irving, Limited.

Michael G. Kohn, Cincinnati, OH, for Blum International Inc.

John D. Luken (briefed), Douglas W. Campbell, Dinsmore & Shohl, Cincinnati, OH, for West Indies Pulp & Paper Ltd.

Before: MARTIN, GUY, and DAUGHTREY, Circuit Judges.

BOYCE F. MARTIN, Jr., Circuit Judge.

This appeal addresses the question of whether Congress intended to confer exclusive authority to file an action to avoid preferential or fraudulent transfers, pursuant to 11 U.S.C. Secs. 547 and 548, on a trustee or debtor-in-possession, or whether a creditor might have standing to file such an action. Specifically, we must decide whether Canadian Pacific Forest Products Limited has standing to file an action to avoid allegedly preferential and fraudulent transfers made by the debtor-in-possession, The Gibson Group, Inc. The bankruptcy court dismissed Canadian Pacific's complaint for lack of standing--even though the debtor-in-possession refused to file an action--and Canadian Pacific appeals from the district court's decision affirming the bankruptcy court. Canadian Pacific also appeals the district court's decision affirming the bankruptcy court's denial of its subsequent motion to supplement the record to prove standing.

We believe that Congress has not precluded the bankruptcy court from granting standing to a creditor if such standing furthers Congress's purpose in creating the avoidance actions found in 11 U.S.C. Secs. 547 and 548 in the context of a Chapter 11 reorganization. We decide, therefore, that a bankruptcy court may permit a single creditor in a Chapter 11 case to initiate an action to avoid a preferential or fraudulent transfer instead of the debtor-in-possession if the creditor: 1) has alleged a colorable claim that would benefit the estate, if successful, based on a cost-benefit analysis performed by the bankruptcy court; 2) has made a demand on the debtor-in-possession to file the avoidance action; 3) the demand has been refused; and, 4) the refusal is unjustified in light of the statutory obligations and fiduciary duties of the debtor-in-possession in a Chapter 11 reorganization. We also hold that, while the creditor has the initial burden to allege facts showing that the refusal to file suit is "unjustified," the debtor-in-possession must rebut the presumption if the creditor carries its initial burden. Contrary to the district court's view, we believe that a creditor need not plead facts alleging the debtor-in-possession's reason or motive for the inaction, but may meet its burden to allege unjustified inaction through notice pleading by alleging the existence of an unpursued colorable claim that would benefit the estate. See Fed.R.Civ.P. 8; Fed.R.Bankr.P. 7008 (making Fed.R.Civ.P. 8 applicable in bankruptcy adversary proceedings). If the debtor-in-possession gives no reason for its inaction when a demand is made, the bankruptcy court may presume that its inaction is an abuse of discretion ("unjustified") if the complaint alleges a colorable claim.

This case arises out of Gibson's voluntary filing for a Chapter 11 reorganization. Gibson is a broker of paper products, often buying on credit from suppliers in order to have inventory to sell to its customers. In early December 1989, two of Gibson's customers, West Indies Pulp & Paper Ltd. and Blum International Inc., owed Gibson in excess of $3 million dollars for paper products they had purchased. Gibson, in turn, owed one of its suppliers, J.D. Irving, Ltd., in excess of $4.5 million. Gibson's debt to J.D. Irving was unsecured and in arrears.

Canadian Pacific, a supplier of paper products to Gibson, held a security interest in Gibson's accounts receivable, including the $3 million that West Indies and Blum International owed to Gibson. Canadian Pacific alleges that Gibson and J.D. Irving agreed to reduce its debt to J.D. Irving through a "scheme" whereby Gibson would use its accounts receivable to pay off a large portion of its debt to J.D. Irving. The "scheme" involved Gibson issuing $3 million of credits to West Indies and Blum International, thus reducing their debt to Gibson by that amount. Canadian Pacific claims these were fraudulent transfers under 11 U.S.C. Sec. 548(a). In return, West Indies and Blum International agreed to sign promissory notes directly to J.D. Irving for $3 million, reducing Gibson's unsecured debt to J.D. Irving by that amount. Canadian Pacific alleges that this transfer occurred within ninety days before Gibson filed its bankruptcy petition and otherwise qualifies as a preferential transfer under 11 U.S.C. Sec. 547(b). The result of this series of transactions was to reduce Gibson's accounts receivable, and therefore Canadian Pacific's collateral, by $3 million.

After filing for bankruptcy relief on January 19, 1990, Gibson became a debtor-in-possession without the appointment of a trustee. On January 8, 1992, Canadian Pacific filed a motion with the bankruptcy court requesting authorization to prosecute, on behalf of Gibson's estate, an adversary proceeding to avoid and recover the allegedly preferential and fraudulent transfers described above. On January 17, 1992, the bankruptcy court granted Canadian Pacific's motion, but reserved for later decision the issue of whether Canadian Pacific had standing to bring an avoidance action. Canadian Pacific promptly filed its complaint.

J.D. Irving and West Indies then moved to dismiss the complaint under Fed.R.Civ.P. 12(b)(6) for lack of standing. See Fed.R.Bankr.P. 7012 (applying Fed.R.Civ.P. 12 in a bankruptcy proceeding). In addition, Blum International filed a motion to dismiss on other grounds. On July 21, the bankruptcy court granted the motions to dismiss for lack of standing. The bankruptcy court believed that a single creditor could be authorized to file an avoidance action in place of the trustee or a debtor-in-possession if certain prerequisites were met: (1) if the creditor made a demand for action on the debtor-in-possession and the creditors' committee; (2) if both refused to file the suit; and (3) if their refusal to pursue the action was "unjustified." The bankruptcy court then erroneously decided that Canadian Pacific had to allege facts describing the reason why the debtor-in-possession or the creditors' committee failed to act. The court stated:

All that plaintiff has shown is that indeed request was made both of plaintiff and creditors' committee, and it is alleged that both refused to file suit. Absolutely no showing is made as to the reason that these parties refused to initiate the litigation.

143 B.R. 111, 113 (Bankr.S.D.Ohio 1992) (emphasis added). Canadian Pacific counters that it does not have to allege the specific reason for the inaction; Canadian Pacific argues that the existence of an unpursued colorable claim that would benefit the estate is sufficient to meet its burden to show that the inaction was unjustified. We agree. Relying on various opinions by bankruptcy judges, however, the bankruptcy court concluded that Canadian Pacific had failed to meet its burden to prove that the inaction was "unjustified" because it did not show more than a mere refusal by the debtor-in-possession to take action. Concluding erroneously that Canadian Pacific had failed to meet its pleading burden, the bankruptcy court found it unnecessary to determine whether Canadian Pacific had stated a colorable claim or whether pursuing the claim would benefit the estate.

Canadian Pacific subsequently filed a motion to alter or amend the judgment, claiming that the bankruptcy court should let it conduct discovery so that it might allege with specificity the reason why the debtor-in-possession or the creditors' committee had not filed suit. On November 30, the bankruptcy court denied the motion.

On August 24, 1993, the district court affirmed both orders. The district court agreed that a single creditor could have standing to bring an avoidance action in place of the debtor-in-possession, but believed that bankruptcy court case law showed that a creditor had to meet certain requirements before bringing an avoidance suit. In particular, the district court held that a creditor had to allege "unjustified inaction with specificity," just as a plaintiff would have to in a fraud case under Fed.R.Civ.P. 9(b). Fed.R.Bankr.P. 7009 (applying Fed.R.Civ.P. 9 in a bankruptcy adversary proceeding). The district court reasoned that this heightened pleading requirement "aids the Court in winnowing out frivolous claims." The district court also approved of the bankruptcy court's denial of Canadian Pacific's motion to amend its complaint, reasoning that information to prove that the inaction was unjustified must not exist if after almost three years of bankruptcy proceedings Canadian Pacific could not allege the reason for inaction with specificity. The district court also did not discuss whether the claim Canadian Pacific wanted to pursue was a colorable claim that would benefit the estate, presumably because the bankruptcy court did not first address the issue.

We begin our analysis by noting once again, as we stated in In re Granger Garage, Inc., 921 F.2d 74 (6th Cir.1990), that bankruptcy courts are courts of limited jurisdiction. Id. at 77 (see generally, White Motor Corp. v. Citibank, N.A., 704 F.2d 254, 263 (6th Cir.1983)) (discussing Northern Pipeline v. Marathon Pipe Line Co., ...