In re Housecraft Industries Usa, Inc.

• Court: U.S. Court of Appeals — Second Circuit
• Writing for the Court: B. Parker, Jr.
• Citation: In re Housecraft Industries Usa, Inc., 310 F.3d 64 (2nd Cir. 2002)
• Decision Date: 24 October 2002
• Docket Number: Docket No. 01-7998.
• Parties: In re HOUSECRAFT INDUSTRIES USA, INC. Gleb Glinka, Esq., trustee and Howard Hoppenheim, trustee in bankruptcy for Robojo, Inc., Plaintiffs-Appellees, Banque Nationale de Paris, (Canada), Plaintiff-Counter-Defendant-Appellee, v. Abraham Murad, Defendant-Counter-Claimant, Abraham and Rose Company, Ltd., f/k/a 142761 Canada, Inc., Abraham and Rose, Inc., a/k/a Abraham & Rose, Inc., Roy Murad and Allen Stern, Defendants, v. Federal Plastics Manufacturing, Ltd., Defendant-Appellant.

310 F.3d 64

In re HOUSECRAFT INDUSTRIES USA, INC.

Gleb Glinka, Esq., trustee and Howard Hoppenheim, trustee in bankruptcy for Robojo, Inc., Plaintiffs-Appellees, Banque Nationale de Paris, (Canada), Plaintiff-Counter-Defendant-Appellee, v. Abraham Murad, Defendant-Counter-Claimant, Abraham and Rose Company, Ltd., f/k/a 142761 Canada, Inc., Abraham and Rose, Inc., a/k/a Abraham & Rose, Inc., Roy Murad and Allen Stern, Defendants, v. Federal Plastics Manufacturing, Ltd., Defendant-Appellant.

Docket No. 01-7998.

United States Court of Appeals, Second Circuit.

Argued: May 8, 2002.

Decided: October 24, 2002.

Norman Williams, Gravel and Shea, Burlington, VT (Heather A. Rider, Robert F. O'Neill, on the brief), for Defendant-Appellant.

Andre D. Bouffard, Downs Rachlin Martin, P.C., Burlington, VT (Gleb Glinka, Glinka & Schwidde, Cabot, VT, on the brief), for Plaintiffs-Appellees and Plaintiff-Counter-Defendant-Appellee.

Before: VAN GRAAFEILAND, KEARSE, and B.D. PARKER, Circuit Judges.

B.D. PARKER, JR., Circuit Judge.

Plaintiffs Gleb Glinka (the "Trustee"), the trustee in bankruptcy for Housecraft Industries USA, Inc., and Banque Nationale de Paris ("BNP"), Housecraft's primary secured creditor,¹ brought claims against defendant Federal Plastics Manufacturing, Ltd. pursuant to 11 U.S.C. §§ 548 and 549, seeking to recover the proceeds of property that Housecraft had fraudulently transferred to Federal Plastics both before and after Housecraft filed for bankruptcy. The United States District Court for the District of Vermont (William K. Sessions, III, Judge) denied Federal Plastics' motion to dismiss for lack of subject matter jurisdiction and to dismiss BNP for lack of standing. Glinka v. Abraham & Rose Co. Ltd., 199 B.R. 484 (D.Vt.1996). Following a bench trial, the court below entered judgment in favor of the plaintiffs. Federal Plastics appeals the denial of its motion to dismiss as well as the District Court's denial of its request to set off against the judgment the value of materials shipped post-petition. We affirm.

BACKGROUND

Housecraft manufactured and assembled housewares and a variety of other plastic products at its plant in St. Albans, Vermont using raw plastic supplied by Federal Plastics. In August 1990, Housecraft entered into a two-year contract with one of its customers, Santé Naturelle, LTEE, to produce containers for Nutribar, a dietary product sold by Santé. By 1991, Housecraft was experiencing serious financial difficulties affecting its ability to pay suppliers such as Federal Plastics, and, as a result, scaled back its manufacturing activities. By the end of June 1991, Housecraft owed Federal Plastics $88,992.

In September 1991, Housecraft wrote to Santé directing it to send payment for shipments of Nutribar containers to a company known as Primex Plastics, claiming that Primex was an affiliate of Housecraft. In fact, Primex was an unaffiliated Canadian company controlled by the son of the owner of Federal Plastics. Thereafter, Housecraft shipped the containers to Federal Plastics instead of Santé, and Federal Plastics sold the containers to Santé through Primex. Federal Plastics collected the payments made by Santé for the Nutribar containers, either directly or through Primex.

Housecraft filed for Chapter 11 bankruptcy protection in October 1991. (The case was converted to Chapter 7 in March 1992.) Housecraft's bankruptcy spawned criminal bankruptcy fraud charges against numerous individuals, including the president of Housecraft, Abraham Murad, who pled guilty to bankruptcy fraud in March 1995. In filing for bankruptcy, Housecraft failed to list the Nutribar container contract on its schedule of executory contracts. Following the filing, Housecraft continued to transfer Nutribar containers to Federal Plastics, and Federal Plastics continued to sell these containers to Santé and to collect payments from Santé. This case arose from these transfers of containers both before and after Housecraft filed for bankruptcy protection.

In April 1992, the Trustee and BNP brought claims against two Abraham Murad companies for turnover of property that had been seized by the FBI while investigating the Housecraft bankruptcy. Federal Plastics intervened, claiming possession of some of the seized property. The Trustee and BNP then amended their complaint to include claims against Federal Plastics pursuant to §§ 548 and 549 of the Bankruptcy Code to recover the value of the Nutribar containers.² Section 548(a)(1) provides for avoidance of pre-petition fraudulent transfers based on a showing of actual or constructive fraud.³ Section 549(a), which pertains to the avoidance of post-petition transfers, provides that "the trustee may avoid a transfer of property of the estate ... that occurs after the commencement of the case ... [and] that is not authorized under this title or by the court."

Federal Plastics moved to dismiss BNP for lack of standing, arguing that §§ 548 and 549 only authorize trustees or debtors-in-possession — not creditors — to bring avoidance actions. The motion also sought to dismiss the claims for lack of subject matter jurisdiction under 28 U.S.C. § 1334(b), which grants district courts jurisdiction over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." In support of this assertion, Federal Plastics argued that § 1334(b) only confers jurisdiction over claims that can conceivably affect the bankruptcy estate, and the claims against it could not affect the estate because, as a secured creditor, BNP alone would be entitled to any recovery from the litigation.

In response to the motion, the Trustee moved for retroactive ratification of an agreement between himself and BNP for joint prosecution of the adversary proceeding (the "Agreement"). Under this agreement, the Trustee and BNP were required to prosecute the claims against Federal Plastics jointly, and BNP was to bear the cost of the litigation. The Agreement provided that "BNP and [the] Trustee will confer on decisions concerning the claims to be jointly prosecuted, and all such claims may be compromised or settled only with the express consent of BNP." In return for BNP's financial assistance, the Trustee agreed that any recovery from the litigation would be paid in the following order: (1) litigation costs and attorney's fees to BNP, (2) $15,000 to Housecraft's estate, and (3) the balance to be split, 80% for BNP and 20% for the estate. In support of the motion for ratification, the Trustee asserted that "Housecraft's Estate, the Trustee, and Trustee's counsel do not have the present resources to prosecute the ... [l]itigation" and that "[w]ithout BNP's commitment to devote its own resources to prosecute the ... [l]itigation,... the exercise of sound business judgment would require the Trustee to abandon these Claims." (Gleb Glinka, Trustee's Mot. for Ratification of Agreement Between Trustee and Banque Nationale de Paris (Canada) for Joint Prosecution, Apr. 19, 1995, at 2.)

Federal Plastics opposed the motion, claiming that the Agreement amounted to a collusive sale to BNP of a claim belonging exclusively to the Trustee for the sole purpose of creating federal jurisdiction. BNP and the Trustee maintained that the Agreement was a legitimate settlement of a potential dispute between them over the right to the proceeds of the litigation. Although both plaintiffs agreed that BNP's claim to the Nutribar containers had priority, the Nutribar containers had been sold, leaving recovery of a money judgment for the value of the containers as the sole viable remedy. The plaintiffs claimed that the Agreement originated in part from their uncertainty over whether a secured creditor with a pre-petition lien on fraudulently transferred inventory could also assert a lien on the trustee's right to recover its value, and that the Agreement represented a fair compromise of their anticipated dispute over this issue.

In June 1995, the Bankruptcy Court ratified the Agreement, finding that pursuing Federal Plastics to recover sizable fraudulent conveyances was "in the best interest of the Estate and creditors."⁴ The District Court then denied Federal Plastics' motion to dismiss for lack of subject matter jurisdiction, as well as its motion to dismiss BNP for lack of standing. Glinka, 199 B.R. 484. The court found that it had subject matter jurisdiction over the Title 11 claims because 28 U.S.C. § 1334(b) confers "arising under" jurisdiction on any claim that "relies on Title 11 for its cause of action." Id. at 490. The District Court also found that BNP had standing despite the fact that Title 11 expressly authorizes only the trustee or a debtor-in-possession to bring §§ 548 and 549 claims. Id. at 493-94. In making this determination, the court relied upon our decision in Unsecured Creditors Committee v. Noyes (In re STN Enterprises), 779 F.2d 901, 904 (2d Cir.1985) ("STN"), which permitted a committee of unsecured creditors to bring suit on behalf of a bankruptcy estate when the trustee unjustifiably refused to do so. Although the Trustee of Housecraft's estate was a willing participant in this lawsuit, the District Court held that BNP had standing pursuant to STN because it was in the best interest of the estate. Glinka, 199 B.R. at 494. The court reasoned that:

The creditor is bearing the cost of the litigation. Under the terms of the joint prosecution agreement, in order to be reimbursed out of any recovery, litigation expenses must be "reasonable." Any application for attorneys' fees will be subject to judicial scrutiny. If their suit is successful, the plaintiffs have agreed upon their respective shares of any recovery, with the intention of avoiding additional litigation over BNP's ability to assert a security interest in a recovery.

Because the suit presents colorable claims for relief; because Trustee would have failed to pursue the suit without the assistance of BNP; and because...