Harstad v. First American Bank

• Decision Date: 09 November 1994
• Docket Number: No. 94-1389,94-1389
• Citation: 39 F.3d 898
• Parties: 32 Collier Bankr.Cas.2d 542, 26 Bankr.Ct.Dec. 310, Bankr. L. Rep. P 76,185 Keith T. HARSTAD, doing business as Harstad Companies; Diane N. Harstad, doing business as Harstad Companies, Appellants, v. FIRST AMERICAN BANK, formerly known as Drovers First American Bank of South St. Paul, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 898

39 F.3d 898

32 Collier Bankr.Cas.2d 542, 26 Bankr.Ct.Dec. 310,

Bankr. L. Rep. P 76,185

Keith T. HARSTAD, doing business as Harstad Companies Diane N. Harstad, doing business as Harstad Companies, Appellants, v. FIRST AMERICAN BANK, formerly known as Drovers First American Bank of South St. Paul, Appellee.

No. 94-1389.

United States Court of Appeals Eighth Circuit.

Submitted Oct. 10, 1994.

Decided Nov. 9, 1994.

James L. Baillie, Minneapolis, MN, for appellants.

Daniel Beck, St. Paul, MN, for appellee.

Before BOWMAN, WOLLMAN, and HANSEN, Circuit Judges.

BOWMAN, Circuit Judge.

Keith and Diane Harstad, doing business as Harstad Companies, appeal from the order of the District Court ¹ affirming the decision of the Bankruptcy Court ² granting the motion of First American Bank (the Bank) to dismiss. ³ We affirm.

I.

On February 16, 1990, the Harstads filed a voluntary Chapter 11 (reorganization) bankruptcy petition. Nearly two and one-half years later, on August 21, 1992, they submitted an amended disclosure statement to the Bankruptcy Court, which included only this statement concerning preferences: ⁴

Debtors and the Committee of Unsecured Creditors have not yet completed the analysis of pre-petition preferential transfers subject to avoidance under 11 U.S.C. Sec. 547. Debtors do not know at the present time whether or not there are any avoidable preferential transfers.

Debtors' Amended Disclosure Statement art. IV(A) (Aug. 21, 1992). This was the only reference to preferential transfers in the document. On October 19, 1992, the Bankruptcy Court confirmed the Harstads' Amended Plan of Reorganization, without any update to the preference disclosure (or lack thereof) earlier filed with the Bankruptcy Court. ⁵

By January 15, 1993, just three months after the Plan was confirmed, the Harstads evidently had "completed the analysis of pre-petition transfers," because they filed adversary proceedings in the Bankruptcy Court seeking avoidance and recovery of approximately $841,850.00 in alleged preferential transfers, including $140,663.00 from the Bank for an amount paid to it on December 8, 1989, to cover an insufficient funds check issued by the Harstads. ⁶ The Bank filed a motion to dismiss, which was treated as a motion for summary judgment, see supra n. 3, and was granted by the Bankruptcy Court. Harstad v. First American Bank (In re Harstad), 155 B.R. 500 (Bankr.D.Minn.1993) (subsequent history omitted). The Bankruptcy Court held, among other things, that the Harstads lack standing to pursue the preference claim against the Bank. The court also held that the Harstads were precluded from bringing the action in any event, because any recovery would not benefit the estate. The Harstads appealed to the District Court, which affirmed the judgment of the Bankruptcy Court, and they now appeal to this Court. We review de novo. Goldman Fruit & Produce Co. v. Lombardo Fruit & Produce Co. (In re Lombardo Fruit & Produce Co.), 12 F.3d 110, 113 (8th Cir.1993).

II.

The Harstads challenge the Bankruptcy Court's conclusion that they do not have standing to bring the preference action against the Bank.

The bankruptcy trustee has the discretionary power to avoid and to recover preferential transfers. See 11 U.S.C. Secs. 547(b), 550(a) (1988); supra n. 4. When the Harstads filed their voluntary Chapter 11 bankruptcy petition, they assumed the status of "debtor in possession," see id. Secs. 1101(1), 101(13) (1988 & Supp. V 1993), and, as such, they acquired most of the rights and powers (and duties) of a bankruptcy trustee, see id. Sec. 1107(a) (1988). Therefore the Harstads, while serving the function of debtor in possession, had the power to avoid and to recover preferences. The Harstads failed to exercise those powers while they were acting as the debtor in possession (before their reorganization plan was confirmed, see In re Grinstead, 75 B.R. 2, 3 (Bankr.D.Minn.1985)) and now seek to do so post-confirmation.

As Chapter 11 debtors, the Harstads could have brought a post-confirmation action on "any claim or interest belonging to the debtor or to the estate" (or could have designated some other entity to do so) if their Plan had provided for "the retention and enforcement [of that claim or interest] by the debtor, by the trustee, or by a representative of the estate appointed for such purpose." 11 U.S.C. Sec. 1123(b)(3) (1988). Nowhere in the Plan, however, did the Harstads make such a provision.

The Harstads argue that a portion of the Plan's Article X can be read as reserving the preference cause of action for them as post-confirmation debtors:

The Court will retain jurisdiction until this Plan has been fully consummated for the following purposes: ... determination of all causes of actions [sic] between Debtors and any other party, including but not limited to any right of Debtors to recover assets pursuant to the provisions of the Bankruptcy Code....

The Harstads' argument must fail. Article X, captioned "Continuing Jurisdiction," concerns the ongoing jurisdiction of the Bankruptcy Court for matters that arise after plan confirmation. ⁷ Noting the retention of the court's statutory jurisdiction to hear post-confirmation matters is a far cry from reserving to the debtors a right to bring post-confirmation claims to recover preferences paid by the debtors but never disclosed by them during the pre-confirmation proceedings. We hold that the above-quoted language is not a retention of the claim at issue here--much less the "specific and unequivocal" retention that some courts require. See, e.g., Retail Mktg. Co. v. Northwest Nat'l Bank (In re Mako), 120 B.R. 203, 209 (Bankr.E.D.Okla.1990), quoted in Retail Mktg. Co. v. King (In re Mako, Inc.) 985 F.2d 1052, 1055 n. 3 (10th Cir.), appeal decided, 5 F.3d 547 (10th Cir.1993) (table). We agree with the Bank that, if the Harstads wished to retain the power to enforce this claim pursuant to Sec. 1123(b)(3), it would have been a simple matter to do so with straightforward language (although not so easy to do without alerting their creditors and the Bankruptcy Court to the possibility of viable preference claims).

The Harstads would have us rely on 11 U.S.C. Sec. 1141(b) (1988), rather than Sec. 1123(b)(3), in deciding whether they may maintain this cause of action, and they urge us to follow the decision in J.E. Jennings, Inc. v. William Carter Co. (In re Jennings, Inc.), 46 B.R. 167 (Bankr.E.D.Pa.1985). Section 1141(b) states that "the confirmation of [the] plan vests all of the property of the estate in the debtor," unless the plan provides otherwise. The Harstads argue that this cause of action is "property of the estate" because their Plan does not provide otherwise (that is, it does not vest an entity other than themselves with enforcement powers under Sec. 1123(b)(3)), and thus it is now theirs to maintain in the Bankruptcy Court. We disagree.

Were we to adopt the Harstads' argument, we would render Sec. 1123(b)(3) a nullity. As the Harstads see it, Sec. 1123(b)(3) gives debtors discretion to reserve to themselves, in their plans, post-confirmation claims, which claims are subsumed in the broad category of "property of the estate" that already vests in the debtors automatically upon plan confirmation under Sec. 1141. Why then would a debtor ever bother to retain a power by specific plan language when the Bankruptcy Code gives him that power automatically? We think that the affirmative course of action set forth in Sec. 1123(b)(3), to be followed by the debtor who wishes to retain the right to bring preference claims, preempts the general provision of Sec. 1141 that dumps all remaining post-confirmation estate property into the lap of the debtor. The court in Jennings adopted the argument the Harstads put forth here, but did not even consider the implications of its holding on Sec. 1123(b)(3). In fact, nowhere in the opinion was the section mentioned. For that reason alone, Jennings is not persuasive.

We view Sec. 1123(b)(3) as, at least in part, a notice provision. Creditors have the right to know of any potential causes of action that might enlarge the estate--and that could be used to increase payment to the creditors. Even if, as the Harstads claim, they gave notice of such claims by indicating in their disclosure statement that the availability of such claims was being investigated, the creditors are entitled to know if the debtors intend to pursue the preferences in post-confirmation actions. Compliance with Sec. 1123(b)(3) gives notice of that intent. Only then are creditors in a position to seek a share of any such recoveries, contingent though they may be, and to have the mechanics of the preference-sharing spelled out in the plan. Creditors are in no position to do so if they are not on notice that the debtor retains the power to pursue recovery. See Amarex, Inc. v. Marathon Oil Co. (In re Amarex), 74 B.R. 378, 381 (Bankr.W.D.Okla.1987) (holding the retention requirement of Sec. 1123(b)(3) was satisfied where disclosure statement and plan said preference claims, with actions begun before confirmation, were passed to post-confirmation successor in interest), aff'd, 88 B.R. 362 (W.D.Okla.1988).

We are not swayed by the Harstads' argument that our analysis works a forfeiture of the preference claims and gives a windfall to the Bank. As with any cause of action, at some point there must be repose. In many cases, that repose is effectuated by the limitations statute governing the action. In this case, the Harstads had more than two and one-half years prior to the confirmation of their Plan to identify, to avoid, and to recover any preferential transfers they might have made. And if that was not adequate time (although it is a mystery to us why the Harstads could not have identified in two and one-half years an alleged preferential transfer they personally made fewer than ninety days before filing bankruptcy), then they should have specifically...