In re JE Jennings, Inc.

• Decision Date: 08 February 1985
• Docket Number: Bankruptcy No. 83-03251K,Adv. No. 84-0883K.
• Citation: 46 BR 167
• Parties: In re J.E. JENNINGS, INC. d/b/a Kids Point of View (J.E. Jennings of Florida, Inc. d/b/a Kids Point of View—Bankruptcy No. 83-03256K consolidated with this case), Debtor. J.E. JENNINGS, INC., etc., Plaintiff, v. WILLIAM CARTER CO., Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

46 B.R. 167 (1985)

In re J.E. JENNINGS, INC. d/b/a Kids Point of View (J.E. Jennings of Florida, Inc. d/b/a Kids Point of View—Bankruptcy No. 83-03256K consolidated with this case), Debtor J.E. JENNINGS, INC., etc., Plaintiff, v. WILLIAM CARTER CO., Defendant.

Bankruptcy No. 83-03251K, Adv. No. 84-0883K.

United States Bankruptcy Court, E.D. Pennsylvania.

February 8, 1985.

Christopher Kuhn, Philadelphia, Pa., to debtor.

Leon Forman, Philadelphia, Pa., to defendant William Carter Co.

James Adelman, Philadelphia, Pa., to Creditors' Committee.

OPINION

WILLIAM A. KING, Jr., Bankruptcy Judge.

The issue before the Court is the defendant's motion for judgment on the pleadings or for summary judgment in a suit brought by the debtors to recover a preferential transfer. The defendant argues that a preference action cannot be litigated after a Chapter 11 plan has been confirmed, and therefore, the complaint should be dismissed as a matter of law. For the reasons stated herein, we will deny the motion.

The facts relevant to consideration of the motion are not in dispute:

Voluntary petitions under Chapter 11 of the Bankruptcy Code ("Code") were filed by J.E. Jennings, Inc. on August 16, 1983 and by J.E. Jennings of Florida, Inc. on August 17, 1983¹ (hereinafter referred to as "debtors-in-possession" or "debtors"). The cases were substantively consolidated on April 10, 1984.

The instant adversary proceeding to avoid a preference² was filed by the debtors on August 20, 1984. William Carter Co. ("defendant") responded to the complaint by filing an answer generally denying the allegations of the complaint and by filing the instant motion for judgment on the pleadings pursuant to Fed.R.Civ.P. 12(c)³ or, in the alternative, for summary judgment pursuant to Fed.R.Civ.P. 56.⁴

The debtors' Chapter 11 plan was confirmed by the Court on August 21, 1984, one day after the preference action was filed. The plan provides for a twenty percent (20%) payment to unsecured creditors and does not indicate whether the amount paid will be increased or otherwise affected by the recovery of preferences.

Identical motions for judgment on the pleadings or summary judgment have been filed by three (3) other defendants in other preference actions brought by the debtors. The motions were consolidated for hearing on January 21, 1985, at which time we held them under advisement.

The avoidance powers of the Code are intended for the benefit of the debtor's creditors. In re Black & White Cattle Co., 30 B.R. 508, 516 (Bankr.App. 9th Cir.1983); In re Wilson, 4 B.R. 605, 607 (Bankr.E.D. Wash.1980). Thus, the debtor-in-possession holds avoidance powers in trust for the benefit of creditors. In re Monsour Medical Center, 5 B.R. 715 (Bankr.W.D.Pa. 1980). The power to avoid a preference is one which is to be exercised in the interests of securing equality of distribution among creditors. In re Kennesaw Mint, Inc., 32 B.R. 799, 805 (Bankr.N.D.Ga.1983); In re Sapolin Paints, Inc., 11 B.R. 930 (Bankr. E.D.N.Y.1981). Where no benefit to the estate will result, a debtor-in-possession may not exercise the avoidance powers of a trustee. Whiteford Plastics Co., Inc. v. Chase National Bank of New York City, 179 F.2d 582 (2d Cir.1950).

In the briefs filed with the Court, the defendant gives several reasons why the Court should not permit the debtors to continue to prosecute preference actions post-confirmation. Upon review of the arguments of the defendant, we are not convinced that summary judgment or judgment on the pleadings is appropriate at this juncture.

The initial argument of the defendant is based on the legal proposition that all assets of the estate revest in the debtor upon confirmation of a plan. Therefore, the defendant argues, any post confirmation recovery of preferential payments in this case will result in a "windfall" to the debtors and not be distributed to creditors as intended by the Code. The legal proposition is correct, but only if the plan does not contain language indicating otherwise. Clearly, section 1141(b) of the Code allows the debtor to insert language in the plan and order confirming the plan which permits the Bankruptcy Court to retain jurisdiction over some or all of the assets of the estate:

"Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor." (emphasis added)

Reference to the plan and the order confirming the plan in this case indicate that the debtors intended and expressly provided for retention of jurisdiction by the Bankruptcy Court over actions pending at the time of confirmation and actions commenced after the time of confirmation, and over any assets recovered as a result of these actions. The language is specific and seemingly overrides the broader and more general language in Article VII of the plan which states that the debtors will be revested with their assets upon confirmation. While the language in Article VII appears to be in conflict with the later provision in the plan providing for retention of jurisdiction, when the plan is read as a whole, the later provision is more specific and establishes the intent of the debtors to recover assets on behalf of creditors of the estate. Nevertheless, defendant claims that the language in the plan and in the Order is not specific enough to preserve jurisdiction over suits to avoid preferences.⁵

After a careful reading of the language in question, we reject the argument of the debtor. Article IX of the plan provides as follows:

"Retention of Jurisdiction

Subject to Article VII hereof, the Bankruptcy Court will retain jurisdiction until this Plan has been fully consummated, including, but not limited to, the following purposes:

. . . 2. The determination of all questions and disputes regarding title to the assets of the estate, and determination of all causes of action, controversies, disputes, or conflicts, whether or not subject to action pending as of the date of confirmation, between the Debtors and any other party, including but not limited to, any right of the Debtors to recover assets pursuant to the provisions of the Code." (emphasis added)

The Order confirming the plan contains nearly identical language:

"ORDERED that the United States Bankruptcy Court for the Eastern District of Pennsylvania shall retain jurisdiction until the plan has been fully consummated, for the purposes of, but not limited to:

(a) Completion of all outstanding litigation not settled as of the date of this Order.

(b) The determination of all questions and disputes pertaining to the assets of the estate, and the determination of all causes of action, controversies, disputes and conflicts, whether or not subject to action pending as of the date of this Order, by the Debtor or any other party, including but not limited to any right of the Debtor to recover assets pursuant to the Bankruptcy Code."

Clearly, the instant causes of action to avoid preferences pursuant to section 547 of the Code are encompassed by the language "any right of the Debtors to recover assets pursuant to the provisions of the Code."

In proceedings for arrangement under Chapter XI of the Bankruptcy Act, Courts upheld post confirmation jurisdiction to recover preferential payments where the plan provided for retention of jurisdiction. In re Centennial Industries, Inc., 12 B.R. 99 (Bankr.S.D.N.Y.1981); Texas Consumer Finance Corp. v. First National City Bank, 365 F.Supp. 427 (S.D.N.Y.1973). The Court in Texas Consumer Finance stated: "If the debtor-in-possession has the powers of a trustee and if jurisdiction is specifically retained in the plan, the order of confirmation should not be the occasion for a windfall to the preferential transferee." Id. at 432. Cf. In re Oceana International, Inc., 376 F.Supp. 956 (S.D.N.Y.1974) (court found no jurisdiction after confirmation because plan did not provide for retention of jurisdiction).

In Centennial Industries, the plan provided for retention of jurisdiction to hear objections to claims. Approximately one month after the plan was confirmed, the debtor-in-possession filed a complaint objecting to the defendant's claim and seeking recovery of preferential payments under 57(g) of the Act.

The defendant filed a motion to dismiss raising three (3) arguments: (1) the Bankruptcy Court lacked jurisdiction; (2) recovery of the preferential transfer would give the debtor a windfall; and (3) the debtor lacked standing to bring the adversary proceeding to recover a preference post confirmation. The Court denied the motion to dismiss and held that a retention of jurisdiction to hear objections to claims was a retention of jurisdiction to hear all controversies affecting the allowance process including a 57(g) objection. Reasoning that the recovery of the preferential transfer would be beneficial to creditors even after confirmation by providing additional assets for fulfillment of the plan, the Court stated: "We find no reason to hold that the rights of this debtor-in-possession cease until consummation of the arrangement." 12 B.R. at 101-102.

Finally, the debtors have responded to defendant's allegations that debtors are seeking a windfall for themselves with affidavits and exhibits establishing that any funds recovered from this action or any other preference action will be distributed to creditors. Obviously, since this Court will adjudicate the preference actions, creditors will have ample opportunity to raise appropriate objections in the event that the debtors' commitment to creditors is not carried out.

The defendant's second, third, and fourth arguments in favor of dismissal of this action must also fail. The defendant contends that the debtors had a fiduciary duty to disclose their intentions regarding recovery of preferences in the disclosure statement and that by concealing their intention to file suits against fifty-three (53) creditors to recover alleged...