In re Evans Products Co.

• Decision Date: 09 May 1986
• Docket Number: Bankruptcy No. 85-00512-BKC-TCB to 85-00519-BKC-TCB.,No. 86-740-CIV-SCOTT,86-740-CIV-SCOTT
• Parties: In re EVANS PRODUCTS CO., et al., Debtors.
• Court: U.S. District Court — Southern District of Florida

60 B.R. 863 (1986)

In re EVANS PRODUCTS CO., et al., Debtors.

No. 86-740-CIV-SCOTT, Bankruptcy Nos. 85-00512-BKC-TCB to 85-00519-BKC-TCB.

United States District Court, S.D. Florida, Miami Division.

May 9, 1986.

Randall H. Brook, Seattle, Wash., for FTC.

Robert Mark, Arky, Freed, Stearns, Watson, Greer & Weaver, P.A., Miami, Fla., for debtors.

MEMORANDUM DECISION

SCOTT, District Judge.

The Federal Trade Commission ("FTC") appeals from an Order Sustaining Objections to FTC's Proofs of Claim entered by the bankruptcy court on March 11, 1986.¹ The FTC's $67 million claim is based on an action currently pending in the district court for the Western District of Washington.² In that action, pursuant to the Federal Trade Commission Act ("FTCA"), the FTC seeks a permanent prohibitory injunction and other equitable relief, including restitution, against the debtors, Evans Products Company and its subsidiary Evans Financial Corporation. The reasons stated by the bankruptcy court for disallowing the FTC's claim will be discussed in the context of the issues they raise upon appeal.

I. JURISDICTION

The FTC initially contends that the bankruptcy court lacked subject matter jurisdiction.

Section 157(b)(1) of Title 28 of the United States Code allows bankruptcy judges to hear and determine "all core proceeding arising under title 11 or arising in a case under title 11. . . ." Core proceedings include matters concerning the administration of the estate. 28 U.S.C. 157(b)(2)(A). The process of determining the allowance of claims is of basic importance to the administration of a bankruptcy estate. Gardner v. New Jersey, 329 U.S. 565, 67 S.Ct. 467, 91 L.Ed. 504 (1947). Moreover, the allowance or disallowance of claims against the estate is defined expressly as a core proceeding by 28 U.S.C. 157(b)(2)(B).

The essence of the bankruptcy court's action was the disallowance of the FTC's claim which is expressly defined as a core proceeding. Although it was necessary for the bankruptcy court to construe federal law in making its determination of allowability,³ that fact does not change the nature of the court's action. In the present action, therefore, under the provisions of 28 U.S.C. 157(b)(1), 157(b)(2)(A), and 157(b)(2)(B), the bankruptcy court had core proceeding jurisdiction to determine the allowability of the FTC's claim.

II. FTC AUTHORITY TO SEEK MONETARY EQUITABLE RELIEF

The bankruptcy court, in disallowing the FTC's claim, reasoned that although § 13(b) of the FTCA provides implicit authority for the FTC to seek monetary equitable relief in some cases, that implicit authority does not embrace the particular FTC claim at issue in the Washington district action.⁴ The FTC argues that under § 13(b), courts have inherent equitable powers to grant monetary relief even though Evans' alleged violations have completely ceased.

Succinctly stated, the issue is whether, incident to its express statutory authority to issue a permanent injunction under § 13(b), a court may exercise the traditional inherent powers of a court of equity and grant ancillary relief when the alleged practices have ceased and are not likely to recur. In making this determination, the often quoted principles are clear.

Unless otherwise provided by statute, all the inherent equitable powers of the District Court are available for the proper and complete exercise of that jurisdiction. And since the public interest is involved in a proceeding of this nature, those equitable powers assume an even broader and more flexible character than when only a private controversy is at stake. Virginian R. Co. v. System Federation, 300 U.S. 515, 552 57 S.Ct. 592, 601, 81 L.Ed. 789. Power is thereby resident in the District Court, in exercising this jurisdiction, "to do equity and to mould each decree to the necessities of the particular case." Hecht Co. v. Bowles, 321 U.S. 321, 329 64 S.Ct. 587, 592, 88 L.Ed. 754..

. . . .

Moreover, the comprehensiveness of this equitable jurisdiction is not to be denied or limited in the absence of a clear and valid legislative command. Unless a statute in so many words, or by a necessary and inescapable inference, restricts the court\'s jurisdiction in equity, the full scope of that jurisdiction is to be recognized and applied. "The great principles of equity, securing complete justice, should not be yielded to light inferences, or doubtful construction." Brown v. Swann, 10 Pet. 497, 503 9 L.Ed. 508. See also Hecht Co. v. Bowles, supra, 321 U.S. 330 64 S.Ct. 592.

Porter v. Warner Holding Co., 328 U.S. 395, 397-98, 66 S.Ct. 1086, 1088-89, 90 L.Ed. 1332 (1946).

In Mitchell v. DeMario Jewelry, Inc., 361 U.S. 288, 80 S.Ct. 332, 4 L.Ed.2d 323 (1960), the Supreme Court reaffirmed these principles when it stated:

When Congress entrusts to an equity court the enforcement of prohibitions in a regulatory enactment, it must be taken to have acted cognizant of the historic power of equity to provide complete relief in light of the statutory purposes. As this Court long ago recognized, `there is inherent in the Courts of Equity a jurisdiciton to . . . give effect to the policy of the legislature.\' Clark v. Smith, 13 Pet. 195, 203.

361 U.S. at 391.92, 80 S.Ct. at 334-35.

Applying these principles to § 13(b), there is no indication that Congress intended to restrict the court's broad inherent equitable powers. F.T.C. v. United States Oil & Gas Corp., 748 F.2d 1431 (11th Cir. 1984); F.T.C. v. H.N. Singer, Inc., 668 F.2d 1107 (9th Cir.1982). Accordingly, "a grant of jurisdiction such as that contained in § 13(b) carries with it the authorization for a district court to exercise the full range of equitable remedies traditionally available to it." F.T.C. v. Southwest Sunsites, Inc., 665 F.2d 711, 718 (5th Cir.1982) (Emphasis added). In the exercise of this inherent equitable jurisdiction, a district court may order any ancillary relief necessary to accomplish complete justice and to give effect to the policy of the legislature. Support for this conclusion also comes from F.T.C. v. Evans Products Co., 775 F.2d 1084 (9th Cir.1985), where the Court stated:

Evans also argues that our previous refusal to allow the FTC to obtain restitution in a cease-and-desist proceeding under § 5(b), see Heater v. F.T.C., 503 F.2d 321, 323 (9th Cir.1974), should bar the FTC from obtaining rescission and restitution in both its permanent and ancillary preliminary injunction actions. Heater, however, delineated the "scope of the powers given the Commission" to order remedies under its statute-born cease-and-desist authority, see 503 F.2d at 327 (emphasis added), rather than the power of the district court to remedy violations brought to its attention by the FTC acting as a litigant. See Heater, 503 F.2d at 326 (noting that the FTC Act "does not expressly confer any general power, of the kind possessed by a court of equity, to compel restitution, or otherwise to so mold the decree as to do substantial justice.") (quoting Henderson, The Federal Trade Commission 71 (1924)).

Id. at 1087, n. 1. In the case at bar, therefore, the FTC does have the authority to seek monetary equitable relief.

This Court rejects the Lenders' contention that ancillary equitable relief can only be ordered where primary injunctive relief has been granted. Although the statute speaks only of enjoining an allegedly unlawful act of practice, virtually identical statutes permitting the Securities Exchange Commission to seek injunctive relief have been interpreted as invoking the full equitable jurisdiction of the district court such that ancillary relief may be ordered though no injunctive relief is granted. SEC v. Wencke, 622 F.2d 1363 (9th Cir.1980); SEC v. Penn Central, Co., 425 F.Supp. 593 (E.D.Pa.1976); SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir.1972); SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301 (2d Cir.), cert. denied, 404 U.S. 1005, 92 S.Ct. 561, 30 L.Ed.2d 558 (1971). These cases clearly hold that under a grant of jurisdiction such as that contained in § 13(b), courts have inherent equitable powers to grant ancillary relief other than injunctive relief, when future violations of the law are not likely to recur. See also, F.T.C. v. Evans Products Co., 775 F.2d 1084, 1088 (9th Cir.1985) (citing with approval SEC v. Wencke, 622 F.2d 1363 (9th Cir.1980) and SEC v. Penn Central Co., 425 F.Supp. 593 (E.D.Pa.1976)). Accordingly, in the case at bar, the district court's power under § 13(b) to exercise the full range of equitable remedies, including rescission and restitution, is not diminished by the fact that primary injunctive relief might not be granted.

III. THE FTC'S STATUS IN BANKRUPTCY

While conceding that the FTC's action was not a class action in form, the bankruptcy court nevertheless reasoned that the substance of the action was so similar to a class action that in essence, the FTC was not a creditor but rather a class representative thereby precluding the allowance of its claim. The FTC contends that as a federal administrative agency, it is a creditor in its own right enforcing a statutory obligation in the public interest.

Section 501(a) of the Bankruptcy Code provides that "a creditor or an indenture trustee may file a proof of claim. An equity security holder may file a proof of interest." Similarly, Bankruptcy Rule 3003(c)(1) states that "any creditor or indenture trustee may file a proof of claim within the time prescribed by subdivision (c)(3) of this rule." A "creditor" is defined as an "entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor." 11 U.S.C. § 101(9)(A). An "entity" is then defined as a "person, estate, trust, and governmental unit." 11 U.S.C. § 101(14) (emphasis added).

In Nathanson v. National Labor Relations Board, 344 U.S. 25, 73 S.Ct. 80, 97 L.Ed. 23 (1952), the Supreme Court considered whether the National Labor Relations Board was a creditor within the meaning of the...