In re Great Western Coal, Inc.
| Decision Date | 06 May 1992 |
| Docket Number | Bankruptcy No. 92-43375-H3-11,92-43377-H3-11,92-43378-H2-11 and 92-43376-H4-11,Adv. No. 92-4232. |
| Citation | 146 BR 702 |
| Parties | In re GREAT WESTERN COAL, INC.; Great Western Land Management, Inc.; Harlan Fuel Company; Great Western Coal (Kentucky), Inc., Debtors. GREAT WESTERN COAL, INC. and Great Western Coal (Kentucky), Plaintiffs, v. Mary P. BROWN, Clerk of the Court for Berkeley County, South Carolina, Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
Patrick L. Hughes, Sheinfeld, Maley & Kay, Houston, Tex., for plaintiff Great Western Coal, Inc.
Daniel H. Johnston, Jr., Baker, Brown, Sharman & Parker, Houston, Tex., Henry J. White, Office of South Carolina, Atty. Gen., Columbia, S.C., for defendant.
ORDER GRANTING INJUNCTIVE RELIEF
Great Western Coal, Inc. and Great Western Coal (Kentucky), Inc., plaintiffs and debtors in this adversary proceeding, filed an emergency motion to compel turnover of funds in excess of $34,000,000 held in the registry of the Clerk of Court for Berkeley County, South Carolina, Mary P. Brown. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E), with jurisdiction provided under 28 U.S.C. § 1334, § 157(a), and this district's general order of reference.
On April 10, 1992, debtors (along with two other related entities) filed voluntary petitions under Chapter 11 of the Bankruptcy Code. A motion to jointly administer all cases was granted. Each of the debtors are operating as debtors-in-possession under 11 U.S.C. § 1108.
After debtors filed for bankruptcy, they made demand upon Ms. Brown for turnover of the funds held pursuant to two writs of attachment obtained by the South Carolina Public Service Authority (commonly referred to as "Santee Cooper") against the debtors. A second letter was sent on April 15, 1992, and after receiving no response from the Clerk, debtors commenced this adversary proceeding.
This adversary proceeding and the motion for turnover pertaining thereto were brought solely against Ms. Brown. The Attorney General for the State of South Carolina made a limited appearance to prosecute her motion to dismiss on Eleventh Amendment grounds. Santee Cooper also made a limited appearance through counsel to raise the same Eleventh Amendment immunity defense. Citibank, the debtors' major secured lender with an alleged lien on substantially all of the assets of the debtors, including the funds held in the Clerk's registry, appeared in support of debtors' motion to compel turnover.
The Attorney General on behalf of Ms. Brown has moved to dismiss on grounds of insufficiency of service of process, citing F.R.Civ.P. 4(d)(6). Rule 4(d)(6) requires personal service on the "chief executive officer" of a governmental organization subject to suit or service as prescribed under state law. Debtors failed to personally serve Ms. Brown, who is certainly the "chief executive officer" of the Clerk of Court for Berkeley County, and failed to effect service under South Carolina law.
Rule 4(d)(6), however, must be read together with Rule 7004 of the Federal Rules of Bankruptcy Procedure. See FRBP 7004(a). FRBP 7004(b) permits service "within the United States by first class mail." FRBP 7004(d) authorizes nationwide service of process of the summons and complaint. Service upon Ms. Brown was made by facsimile, Federal Express delivery, and first class mail. The Attorney General has not argued that FRBP 7004 is unconstitutional. Due process was clearly served.
Debtors at this juncture do not seek use of but only transfer of the funds held in the Clerk's registry with all competing liens, claims, encumbrances, or rights of any party attaching thereto. Since Santee Cooper has not been joined, this request for Order compelling turnover in no way prejudices its rights and claims to those funds. This Court, however, must determine as between the parties to this adversary proceeding: the debtors, the Clerk, and Citibank, whether the funds are property of the estate for purposes of determining whether under Section 345 the funds are adequately protected and whether those funds would be better served in the registry of the Clerk of the Court of the Southern District of Texas.
Nevertheless, the Attorney General for the State of South Carolina on behalf of Ms. Brown and Santee Cooper argue vigorously that this Court cannot determine whether those funds in the Clerk's registry are property of the estate under Section 541. They maintain that this Court is limited to looking solely to the adequacy of the security of those funds under Section 345. The defendant and those parties aligned with the defendant misconstrue the nature of the complaint and the relief debtors seek. Debtors seek turnover of property of the estate, based primarily, but not exclusively, on Section 345. This Court could not order turnover unless it found that the funds were in fact property of the estate at least as between the parties to this adversary proceeding. Santee Cooper in any subsequent proceeding will not be foreclosed from arguing its assertion that the funds are not property of the estate. The Court will therefore proceed on that basis with its analysis of the complex issues presented in this litigation.
As noted, this Court must first determine whether the funds in the Clerk's registry are property of the debtors' estate and subject to mandatory injunction for prospective relief in the nature of a turnover order under Sections 542 and 543 of the Bankruptcy Code. At a hearing held on April 23, 1992, to determine whether permanent injunctive relief should be granted, debtors offered testimony and exhibits with respect to ownership of the funds held in the Clerk's registry.
Debtors and Santee Cooper have had a contractual relationship since 1978. Debtors delivered coal pursuant to this contract. Sometime in April of 1991, Santee Cooper began to deposit in the Clerk's registry amounts due for debtors' periodic coal deliveries. Santee Cooper sued debtors, its own officer, and an officer of the debtors on various fraud theories. Thereafter, Santee Cooper initiated a prejudgment attachment proceeding under South Carolina law. See S.C.Code Ann. § 15-19-10 et seq. (1976). Santee Cooper obtained two prejudgment attachment orders, the validity of which are on appeal to the South Carolina Supreme Court. The attachment orders now extend to the entire res of over $34,000,000 in the Clerk's registry. As required under the statute, Santee Cooper posted a bond in a de minimis amount. Santee Cooper subsequently increased its prejudgment bonds, which now total at least $12,000,000.
11 U.S.C. § 541(a) provides that property of the estate "is comprised of all the following property, wherever located and by whomever held: . . . all legal or equitable interests of the debtor in property as of the commencement of the case." Crucial to this case is the general rule that Section 541 includes as property of the estate any property made available to the estate by other provisions of the Bankruptcy Code. United States v. Whiting Pools, Inc., 462 U.S. 198, 203, 103 S.Ct. 2309, 2313, 76 L.Ed.2d 515, 520 (1983).
Sections 542 and 543 are such provisions. Section 542(a) requires a noncustodial entity holding property that a debtor-in-possession can use under Section 363 to turn such property over to the debtor-in-possession. Section 543 requires a custodian (subject to exceptions not relevant here) to deliver to the debtor-in-possession "any property of the debtor held by or transferred to such custodian." 11 U.S.C. § 543(b)(1). The Clerk is certainly a custodian under Section 101(10), and at least one court has so held. See In re Vescovo, 125 B.R. 468 (Bankr.W.D.Tex.1990).
To the extent that Section 106(c) constitutes a Congressional restriction on a state's right to assert Eleventh Amendment immunity, Section 542 contains the necessary trigger word "entity" for Section 106(c) to be invoked. See 11 U.S.C. §§ 106(c)(1) and 101(27) (); see also this opinion, infra, pp. 709-11. Section 543, however, contains none of the necessary trigger words under Section 106(c)(1) to invoke a waiver of sovereign immunity as to a state or arm thereof. To the extent that the Clerk has no sovereign immunity to be limited, however, Section 543 would obviously apply.
The debtors' ownership of the funds is shown by Santee Cooper's deposit of funds in the Clerk's registry, deposits that resulted directly from payments demanded by the debtors upon their submission of invoices for deliveries of coal under its contract with Santee Cooper. Santee Cooper's unliquidated claims against the debtors, however meritorious, do not change these facts. Santee Cooper's claims to ownership of these specific funds were extinguished upon its deposit of those funds into the Clerk's registry and its prejudgment attachment of those funds to satisfy any judgment it might ultimately receive.
This would arguably be a different case if Santee Cooper had not chosen the trial strategy of pretrial attachment and had retained these funds due on the contract in its own accounts. Nevertheless, the funds now in the Clerk's registry are not funds in the state's coffers. Instead, these funds are a specific, identifiable, and traceable fund or res, segregated either from other funds in the Clerk's registry or funds held generally in any accounts in the control of Santee Cooper.
Attachment under South Carolina law presumes that the property or res to be attached is property of the party subject to the remedy of attachment. See S.C.Code Ann. § 15-19-10 et seq. (1976); Harrison v. Morris, 370 F.Supp. 142 (D.S.C.1974). An attachment proceeding by its very nature deprives the defendant of the lawful use and possession of its own property until such time as ...
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