J.T.R. Corp., In re
| Decision Date | 02 April 1992 |
| Docket Number | Nos. 90-2072,90-2073 and 90-2082,s. 90-2072 |
| Citation | 958 F.2d 602 |
| Parties | , Bankr. L. Rep. P 74,491 In re J.T.R. CORPORATION, t/a the Quarterdeck, Debtor (Three Cases). Richard M. KREMEN, Trustee, Plaintiff-Appellant, v. The HARFORD MUTUAL INSURANCE COMPANY, Defendant-Appellee. Richard M. KREMEN, Trustee, Plaintiff-Appellee, v. The HARFORD MUTUAL INSURANCE COMPANY, Defendant-Appellant (Two Cases). |
| Court | U.S. Court of Appeals — Fourth Circuit |
Christine Marie Barilla, Piper & Marbury, argued (David F. Albright, Richard M. Kremen, Semmes, Bowen & Semmes, Baltimore, Md., on brief), for appellant.
John Louis Wood, Sr., argued (V. Timothy Bambrick, Niles, Barton & Wilmer, on brief), Baltimore, Md., for appellee.
Before RUSSELL, HALL and WILKINSON, Circuit Judges.
This case arises under the Bankruptcy Act. The present appeals derive from the Trustee's efforts to recover property of the estate in bankruptcy. Both the Trustee and the Defendant have appealed from the order of the district court affirming the final order of the bankruptcy court. The Defendant also appeals from an earlier order of the district court in a prior appeal from the bankruptcy court. For the reasons stated more fully below we affirm the decisions of the district court.
This case has been pending for over twelve years and has resulted in several opinions in both the bankruptcy and district courts as well as an opinion from this Court dismissing a prior interlocutory appeal. Its procedural history is, accordingly, byzantine. We detail only so much as is necessary to place the present appeals in context.
In June 1979 JTR Corporation filed a petition for bankruptcy under Chapter 11 of the Bankruptcy Act of 1898 (the "Act"). JTR was controlled and operated by Joseph Kenny. JTR operated a bar and grill known as the Quarterdeck in Baltimore, Maryland, and continued operating the Quarterdeck as debtor-in-possession. On October 21, the Quarterdeck was substantially destroyed by fire. The parties do not dispute that the fire was deliberately caused by Kenny. On October 26, Richard M. Kremen was appointed Trustee. In November, JTR was adjudicated a bankrupt.
Kremen sought to recover on a fire insurance policy issued to JTR by the Harford Mutual Insurance Company ("Harford"). Harford declined to pay, citing the arson by Kenny as a defense. Kremen filed suit against Harford in bankruptcy court claiming that the proceeds of the policy were the property of the estate. In 1982, after a bifurcated trial where only the issue of defenses to liability was tried, the bankruptcy court held that Kenny's arson barred recovery by the estate. The Trustee appealed to the district court.
Meanwhile, in 1980, Harford paid $146,880.04 to Fidelity Federal Savings and Loan association ("Fidelity"), on account of a mortgage given by JTR to Fidelity covering both the Quarterdeck and the Kennys' personal home. After the payment Harford received an assignment of that portion of the mortgage covering the business property.
In December 1986 the district court reversed the order of the bankruptcy court, finding, in essence, that as debtor-in-possession Kenny acted in a fiduciary capacity and his illegal acts were not attributable to the estate. The district court remanded the case to the bankruptcy court for a trial on the issue of damages, and with instructions to ensure that Kenny did not benefit directly or indirectly from any distribution of the insurance proceeds.
On remand, the parties stipulated to the amount of damages as being $223,711.12. In December 1987, the bankruptcy court entered a final order to this effect, but then took under consideration motions to alter or amend filed both by the Trustee and by Harford. The bankruptcy court granted and denied in part both of these motions, and, in October 1989, entered a new final order. This new order awarded the stipulated damages, but allowed Harford a credit for the payment made to Fidelity. Additionally, it awarded prejudgment interest on the amount of damages attributed to the insured contents of the building from sixty days after the proof of loss was filed; it awarded prejudgment interest on the remaining amount only from the date of the December 1987 order.
Both the Trustee and Harford filed notices of appeal from the October 1989 order. Harford also filed a notice of appeal from the district court's December 1986 order. We consolidated these appeals for further consideration.
We commence with Harford's appeal from the December 1986 order of the district court. 1 Harford argues that the district court erred as a matter of law in finding that Kenny's arson was not attributable to the estate and a bar to recovery.
Both the district court and the parties rely heavily on two cases: In re Light (Dery v. Citizen's Ins. Co. of Am.), 23 B.R. 482 (Bankr.E.D.Mich.1982), and In re Feiereisen (Unigard Mut. Ins. Co. v. O'Dwyer), 56 B.R. 167 (Bankr.D.Ore.1985). In both cases, trustees sought to recover proceeds of fire insurance policies after debtors burned the property. In Light, the debtor burned the property before the bankruptcy petition had been filed. The court held that since the trustee stood "in the debtor's shoes" the trustee could obtain no rights greater than those held by the debtor at the time the petition was filed. Light, 23 B.R. at 484. The debtor was barred from recovery at the time the petition was filed because of his arson; consequently, the trustee was likewise barred. Id. In Feiereisen, the debtor filed for bankruptcy under Chapter 7 and the case was later converted to a Chapter 11 proceeding and a trustee appointed. Subsequently, the case reverted to a Chapter 7 proceeding and the debtor burned the property. The court found that since the arson occurred after the reconversion of the case and after the appointment of the trustee, the trustee was not barred from recovery. Feiereisen, 56 B.R. at 169-70.
The present case falls in the middle ground between Light and Feiereisen: the arson occurred after the bankruptcy petition had been filed but before appointment of the trustee. The district court found that the date of the filing of the petition was the crucial factor, and the distinction in Feiereisen that a trustee had also been appointed was not material.
A debtor-in-possession under Chapter 11 "holds the title and powers of [a] trustee." Stein v. United Artists Corp., 691 F.2d 885, 892 (9th Cir.1982). The debtor-in-possession is a fiduciary and owes the same duties as a trustee. Id.; see Wolf v. Weinstein, 372 U.S. 633, 649-50, 83 S.Ct. 969, 979-80, 10 L.Ed.2d 33 (1963). The debtor-in-possession does not act in his own interests, but rather in the interests of the creditors. Stein, 691 F.2d at 892. Thus, in essence, this case is indistinguishable from Feiereisen--the arson occurred after the petition had been filed and after the equivalent of the appointment of a trustee. JTR was the debtor-in-possession, and at this point Kenny was a third party to the transaction.
Further, we believe that the court in Feiereisen made clear that it was the filing of the petition which was determinative. The court stated,
The Light case is distinguishable from this one, however, in that the debtor committed arson before the filing of the bankruptcy petition.... Here, the loss and intentional wrongdoing committed by the debtor did not occur until well after the reconversion of this case and the appointment of the defendant as trustee. On the date of reconversion, there was no claim for loss under the policy.
Feiereisen, 56 B.R. at 169 (emphasis added). Though it is indisputable that the arson in Feiereisen took place after appointment of the trustee, we believe the highlighted language indicates that the meaningful issue was the filing of the petition. 2 This is true because the debtor at this point ceases to act in his own interests and begins to act for the creditors.
We conclude that since the arson did not take place until after the filing of the bankruptcy petition, the Trustee is not barred from recovery under the policy. Accordingly, we affirm the district court's decision of December 1986.
We now consider the issues raised in the Trustee's appeal. The Trustee challenges two portions of the district court's order: the decision to allow Harford a credit for the payment to Fidelity, and the decision denying prejudgment interest on the entire award. We address these contentions in turn.
In its December 1986 order the district court instructed the bankruptcy court to use its equitable powers to ensure that "no distribution of proceeds of the insurance policy be made directly or indirectly to Mr. Kenny." The Trustee argues that the district court's affirmance of the bankruptcy court's subsequent order allowing credit for the payment to Fidelity violated the language of the December 1986 order.
At the outset, we note that the Trustee's argument is seriously undercut by the action of the district court affirming ...
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