In re King Mountain Tobacco Co.

Decision Date23 November 2020
Docket NumberCase No. 20-01808-WLH11
CourtU.S. Bankruptcy Court — Eastern District of Washington
Parties IN RE: KING MOUNTAIN TOBACCO COMPANY, INC., Debtor.

James L. Day, Richard B. Keeton, Bush Strout & Kornfeld LLP, Seattle, WA, for Debtors.

Gary W. Dyer, U.S. Trustee's Office, Spokane, WA, for U.S. Trustee.

MEMORANDUM OPINION

Whitman L. Holt, Bankruptcy Judge

The world is an uncertain place where risks abound. Risks an ordinary person might tolerate could be bad bets for a bankrupt business – most debtors in bankruptcy are insolvent and need to maximize their limited estates for creditors. The Bankruptcy Code therefore contains various mechanisms to shelter bankruptcy estates from risks that Congress determined may be unacceptable.

This case involves a dispute about one such mechanism: the rule in Bankruptcy Code section 345(b) creating special requirements for financial institutions at which money of the bankruptcy estate is deposited or invested. The debtor seeks a waiver of these banking requirements, but the local United States trustee (the "UST") contends that the court lacks the power to grant such a waiver and, in any event, that no waiver is warranted. For the reasons detailed below, the court disagrees with the UST's positions.

BACKGROUND & PROCEDURAL POSTURE

The debtor, a manufacturer of tobacco products, commenced this bankruptcy case due to developments in a long-running dispute with the Alcohol and Tobacco Tax and Trade Bureau.1 As part of its suite of first-day motions, the debtor moved for authority to continue to use its prepetition cash management system, bank accounts, and escrow accounts, as well as for a general waiver of the requirements of Bankruptcy Code section 345(b).

The specific accounts implicated by the debtor's motion are:

• Three operational accounts at Heritage Bank: a business checking account with a petition-date balance of $561,872.48,2 as well as an EFT account and a wire account each maintained with a $0 balance;3
• Another operational account at Truist Bank in the form of a second business checking account with a petition-date balance of $1,017,560.94;4 and
• A collection of 21 segregated escrow accounts at Truist Bank with an aggregate balance of $51,771,426.71 on the petition date.5 Each account corresponds to a particular state in which the debtor's tobacco products are sold and which have laws requiring the funding of "reserve funds" to effectively collateralize potential claims the particular state might assert against the debtor.6 The debtor represents that it is permitted to invest the escrowed funds but cannot use the balance of these accounts for any purpose other than to satisfy potential state claims.

The debtor supported its motion with a declaration from its CEO and Corporate Vice President explaining that these accounts are integral to the debtor's business and that establishing new bank accounts would cause delay and disruption.7 The motion further argued that the two banks "are reputable, financially-stable banking institutions" with which the debtor has "long-established and cooperative relationships."8

The UST objected to the debtor's request to waive the requirements of Bankruptcy Code section 345(b) regarding the two checking accounts and the escrow accounts, arguing that the statutory requirement is mandatory and "does not have any exceptions written into it" and that the debtor had not justified a deviation in this case.9 The parties agreed to continue the matter to explore whether the UST's objections could be resolved; the court entered an interim order to facilitate those efforts.10 Unfortunately, negotiations resulted in an impasse, leaving a dispute for the court's resolution. The matter is now ready for decision.

DISCUSSION
Jurisdiction & Power

The court has subject matter jurisdiction regarding this bankruptcy case and the debtor's motion pursuant to 28 U.S.C. §§ 157(a) & 1334(b) and LCivR 83.5(a) (E.D. Wash.). The parties' dispute regarding the application of Bankruptcy Code section 345 is statutorily "core" and "the action at issue stems from the bankruptcy itself."11 Accordingly, the court may properly exercise the judicial power necessary to finally decide this dispute.

Bankruptcy Code Section 345(b)

I. Operation of the Statute Generally

The commencement of a bankruptcy case creates a new entity – the estate – comprised of most of a debtor's property.12 A trustee is often appointed as a fiduciary to administer the estate in accordance with the Bankruptcy Code, although in a chapter 11 case such as this one, the debtor in possession generally has the rights, powers, and duties of a trustee, including regarding administration of the estate and preserving estate property as a fiduciary for creditors.13

One category of property common to almost every debtor, to a greater or lesser extent, is money.14 The Bankruptcy Code accordingly has specific provisions regarding money that becomes estate property. Among these, 11 U.S.C. § 345(a) broadly authorizes a trustee to "make such deposit or investment of the money of the estate for which such trustee serves as will yield the maximum reasonable net return on such money, taking into account the safety of such deposit or investment," which essentially comports with the "prudent investor" standard applicable under various nonbankruptcy laws.15 Section 345(b) limits the reach of section 345(a) by detailing specific requirements regarding counterparties to a bankruptcy trustee's deposit or investment transactions:

Except with respect to a deposit or investment that is insured or guaranteed by the United States or by a department, agency, or instrumentality of the United States or backed by the full faith and credit of the United States, the trustee shall require from an entity with which such money is deposited or invested—
(1) a bond—
(A) in favor of the United States;
(B) secured by the undertaking of a corporate surety approved by the United States trustee for the district in which the case is pending; and
(C) conditioned on—
(i) a proper accounting for all money so deposited or invested and for any return on such money;
(ii) prompt repayment of such money and return; and
(iii) faithful performance of duties as a depository; or
(2) the deposit of securities of the kind specified in section 9303 of title 31;
unless the court for cause orders otherwise.16

Section 345(b) accounts for the reality that banks fail and that full recovery of deposited funds is unlikely in this unfortunate event. An ordinary deposit account simply creates an unsecured promise to pay that a depositor may assert against the bank.17 As previewed by the initial clause of section 345(b), insurance provided as a result of Federal Deposit Insurance Act protects depositors against loss, but such insurance is capped leaving balances exceeding the cap at risk.18 When the depositor is a bankruptcy estate, creditors are often the residual claimants of the accounts and thus the parties bearing the ultimate risk of loss – despite their typical lack of control over how the funds are held. Section 345(b) is designed to reduce this risk to creditors by converting the funds' status from an unsecured claim into one better protected by either a bond or deposit of permitted securities.19

To effect the protective measures contained in section 345(b), the UST approves banking institutions in which to deposit estate funds and provides Uniform Depository agreements. This role is consistent with the UST's general supervisory duties imposed by 28 U.S.C. § 586(a)(3) and its specific approval role under Bankruptcy Code section 345(b)(1)(B). The UST has approved neither Heritage Bank nor Truist Bank for the deposit of estate funds in this district. And the banks are apparently unable to make other arrangements that satisfy section 345(b) for the debtor's case. As such, compliance with section 345(b) requires the debtor to move its operational and escrow accounts to other banks.

II. Operation of the "Orders Otherwise Clause"

As one of various amendments made by the Bankruptcy Reform Act of 1994, Congress added the final clause of section 345(b) : "unless the court for cause orders otherwise" (the "Orders Otherwise Clause"). The debtor and the UST disagree about the operation of this clause. The debtor contends that the clause allows the court to alter the requirements of section 345(b)(1), (b)(2), or both. The UST, on the other hand, asserts that the clause allows the court to modify the requirements of (b)(2) alone. Therefore, the UST contends, the court lacks power to modify the requirements of (b)(1). For the reasons set forth below, the court concludes that the debtor's construction of the statute is the correct one.

When working with the Bankruptcy Code, one must always start with the text.20 Textual interpretation involves consideration of the grammar and punctuation used in the statute.21 Indeed, seemingly minor uses of punctuation can sometimes be an outcome-determinative feature of a statute.22

Applying principles of statutory interpretation to the provision at issue here, the court first notes that section 345(b) is a single, 151-word sentence. The sentence begins with a lengthy exception clause, sets forth a declarative mandate ("the trustee shall require from an entity with which such money is deposited or invested"), provides disjunctive alternatives for satisfying the mandate (the very lengthy (b)(1) with multiple subparts and the more compact (b)(2)) separated by a semicolon, and concludes with the Orders Otherwise Clause set off by another semicolon. The grammar and punctuation of the sentence demonstrate that the Orders Otherwise Clause applies to the entirety of the preceding text, both (b)(1) and (b)(2). If the drafters intended the Orders Otherwise Clause to operate only regarding (b)(2), then it should be included as part of the same clause and separated by a comma. The semicolon that appears in the statute is stronger...

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