In re Craig's Stores of Texas, Inc.

• Decision Date: 04 March 2005
• Docket Number: No. 03-20888.,03-20888.
• Citation: 402 F.3d 522
• Parties: In the Matter of: CRAIG'S STORES OF TEXAS, INC., Debtor. Craig's Stores of Texas Inc., Appellant, v. Bank of Louisiana, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

402 F.3d 522

In the Matter of: CRAIG'S STORES OF TEXAS, INC., Debtor.

Craig's Stores of Texas Inc., Appellant, v. Bank of Louisiana, Appellee.

No. 03-20888.

United States Court of Appeals, Fifth Circuit.

March 4, 2005.

John H. Glover (argued), Steven J. Knight, Chamberlain, Hrdlicka, White, Williams & Martin, Houston, TX, for Appellant.

Henry L. Klein (argued), Klein Daigle, New Orleans, LA, for Appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before REAVLEY, JONES and DENNIS, Circuit Judges.

PER CURIAM:

This case involves a court's obligations regarding money deposited into the court's registry for a proceeding over which that court had no jurisdiction. During the course of litigation in bankruptcy court between Craig's Stores of Texas, Inc. ("Craig's") and Bank of Louisiana ("the Bank"), Craig's deposited the sum of $252,440.49 into the court's registry. This court decided in In re Craig's Stores of Texas, Inc., 266 F.3d 388 (5th Cir.2001), however, that the bankruptcy court lacked jurisdiction over the adversary proceeding between Craig's and the Bank. The district court released the deposited funds to the Bank because it determined that the funds had been placed in the registry to secure the Bank's account claim. We hold that the district court's disbursement order results in the transfer of funds to which the Bank has never proven entitlement before a court of competent jurisdiction. We must reverse the district court's Order Disbursing Funds and remand this case with instructions to disburse the funds to the party that deposited them.

Pursuant to Rule 67 of the Federal Rules of Civil Procedure, a party may deposit a sum of money with the court. Once funds are deposited, the court should determine ownership and make disbursements. Gulf States Utils. Co. v. Alabama Power Co., 824 F.2d 1465, 1474 (5th Cir.1987). The conclusion that the funds must be returned to Craig's flows from the Agreed Order by which Craig's deposited the money in the registry and from the circumstances surrounding this transaction.

In mid-1996, eighteen months after the approval of Craig's Chapter 11 reorganization plan, Craig's filed an adversary proceeding against the Bank in bankruptcy court alleging that the Bank failed to perform under a charge account contract. At this time, the Bank filed its own adversary proceeding, seeking an injunction to prevent Craig's from disposing of funds within its possession, requesting the bankruptcy court to convert Craig's confirmed Chapter 11 plan to a Chapter 7 liquidation, and seeking to recover money that the Bank contended was owed under the contract between them. Shortly thereafter, the bankruptcy court entered an Agreed Order whereby Craig's would deposit the sum of $252,440.49 into the Bankruptcy Court's registry.

Craig's asserts that it made this deposit for the purpose of discouraging the Bank from attempting to convert Craig's bankruptcy proceedings into Chapter 7 liquidation. Craig's deposited the money in escrow in order to reassure the Bank that Craig's would not transfer or dispose of its liquid funds before the Bank could litigate and liquidate any underlying claim the Bank might have against Craig's.

The Bank urges a different understanding of this deposit. According to the Bank, Craig's deposit represented a concession that it owed the Bank $252,440.49 under the contract. In other words, Craig's was relinquishing its claim to the funds, and the Agreed Order functioned as a kind of "settlement agreement" whereby Craig's recognized its liability to the Bank under the contract. Instead of paying the money directly to the Bank, the Bank made the accommodation that the funds would be deposited in the registry pending Craig's litigation of its state-law claims against the Bank. The money would be released back to Craig's only in the event that Craig's won a judgment against the Bank.

The Agreed Order supports the understanding advanced by Craig's. There are no representations or concessions in this escrow order that the money actually belonged to the Bank. The Bank's argument that the Agreed Order constituted an enforceable "settlement agreement" fails because the Agreed Order treats these funds as disputed. For example, on the first page of the Agreed Order, the Bankruptcy Court noted: "Ordered that on or before Oct. 11, 1996, the Debtor shall deposit... into the registry of this Court (the `Court's Registry') $252,440.49, which BOL represents is the sum of the balances that are 90 days or more past due on the credit card accounts as of August 30, 1996." (Emphasis added).

The Agreement is neutral on the ultimate recipient of the deposited funds, as evidenced by a paragraph providing for disbursement of accumulated interest "upon further order of the court." Likewise, the order authorizes holding the deposited balance in the registry "pending further order of this Court." In neither paragraph is there a reference to a settlement agreement or to any certainty as to which party will be entitled to the funds.

Finally, the Agreed Order expressly contemplated and permitted the Bank to assert claims against Craig's — claims that would be unnecessary if the Agreed Order constituted a settlement. On the fifth page of the Agreed Order, the bankruptcy court stated: "ORDERED that leave is hereby granted to BOL to file (I) an amended answer and (ii) a counterclaim against the Debtor in the Adversary Proceeding No. 96-4354."¹

According to the terms of the Agreed Order, ownership of the money in the court's registry was at all times disputed and the funds were not deposited pursuant to a "settlement agreement."² The funds could be disbursed to the Bank only if there had been a judgment on the merits in its favor by a court of competent jurisdiction. After the underlying litigation was dismissed, however, the Bank never filed an independent lawsuit in state or federal court to adjudicate any contractual breach. Craig's may well be liable to the Bank for contract damages; unfortunately for the Bank, no such decision has been made in the course of litigation before a court possessing jurisdiction.

For these reasons, when the underlying litigation was dismissed for lack of jurisdiction, the disputed registry funds should have been disbursed back to the party that deposited them in the registry — Craig's.³

Accordingly, we REVERSE the district court's Order Disbursing Funds and REMAND with instructions to the district court that the funds be disbursed to Craig's.

REVERSED AND REMANDED WITH INSTRUCTIONS.

DENNIS, Circuit Judge, concurring in the decree insofar as it reverses the district court's judgment and remands the case to that court, but otherwise dissenting:

The bankruptcy and district courts were retroactively deprived of bankruptcy jurisdiction by an intervening change-of-law decision by this court. See In re Craig's Stores of Texas, Inc., 266 F.3d 388, 391 (5th Cir.2001)("adopt[ing a] more exacting theory of post-confirmation bankruptcy jurisdiction."). Nevertheless, in my opinion, the district court continues to have the jurisdiction or inherent judicial power, and the statutory duty, to determine the rightful ownership of funds within its possession and to distribute them accordingly. Consequently, the district court's decision that it did not have authority to make that determination and distribution was based on a legal error. Therefore, I agree that the district court's judgment must be reversed and that the case should be remanded, but I disagree with the majority's peremptory instruction that the district court must distribute the funds to one of the parties without making a determination of whether that party is the rightful owner. The district court should, instead, be instructed to determine rightful ownership and to distribute the funds accordingly pursuant to Federal Rule of Civil Procedure 67 and 28 U.S.C. §§ 2041 and 2042.

The district court has the jurisdiction or inherent judicial power to undo the wrongs done by the bankruptcy court's process and distribute the funds in the court's registry to the rightful owners according to law and equity pertinent to this limited purpose.¹ Anglo-American courts in general, including the Supreme Court and this court, have long held that, after a reversal of a district court's judgment, for either lack of jurisdiction or legal error, the district court has the inherent judicial power with respect to the parties before it, to distribute funds in its custody, or to order restitution of property wrongly obtained because of its erroneous or void judgment, according to equitable principles.²

The right of restitution of what one has lost by the enforcement of a judgment subsequently reversed was recognized from a very early period in the law of England and early in our history by the United Supreme Court.³ In Northwestern Fuel Co. v. Brock,⁴ the Supreme Court again recognized that right and further held that, when the judgment of a court of origin is reversed for lack of jurisdiction, that court has the inherent power, to "correct by its own order that, which, according to the judgment of its appellate court, it had no authority to do in the first instance," while the parties are before it and the subject matter of the controversy is in its custody.⁵ "Jurisdiction to correct what had been wrongfully done must remain with the court so long as the parties and the case are properly before it, either in the first instance or when remanded to it by an appellate tribunal."⁶ Moreover, the original court has this inherent corrective power even though the mandate of reversal fails to provide for restitution.⁷ The Supreme Court explained:

The gist of the whole complaint is that the reversal by this court being for want of jurisdiction in the Circuit Court... that court had no authority to act further in the matter than as directed by the mandate; and that that went only to the reversal of...