Rushton v. Bank of Utah (In re C.W. Mining Co.)

• Decision Date: 05 September 2012
• Docket Number: BAP No. UT-11-098,Bankr. No. 08-20105,Adv. No. 10-02712
• Parties: IN RE C.W. MINING COMPANY, Debtor. KENNETH A. RUSHTON, Trustee, Plaintiff - Appellant, v. BANK OF UTAH, Defendant - Appellee, and BANK OF UTAH, Third-Party-Plaintiff Appellee, v. HIAWATHA COAL COMPANY, INC., and P.P.M.C., INC., Third-Party-Defendants -Appellees.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Tenth Circuit

IN RE C.W. MINING COMPANY, Debtor.
KENNETH A. RUSHTON, Trustee, Plaintiff - Appellant,
v.
BANK OF UTAH, Defendant - Appellee,
and
BANK OF UTAH, Third-Party-Plaintiff Appellee,
v.
HIAWATHA COAL COMPANY, INC.,
and P.P.M.C., INC., Third-Party-Defendants -Appellees.

BAP No. UT-11-098
Bankr. No. 08-20105
Adv. No. 10-02712

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE TENTH CIRCUIT

DATED: September 5, 2012

PUBLISH
Chapter 7
OPINION
Appeal from the United States Bankruptcy Court for the District of Utah

Michael N. Zundel (T. Edward Cundick with him on the brief) of Prince, Yeates & Geldzahler, Salt Lake City, Utah, for Plaintiff – Appellant.

Steven J. McCardell (David F. Klomp and Jessica G. Peterson with him on the brief) of Durham Jones & Pinegar, P.C., Salt Lake City, Utah, for Defendant – Appellee.

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Before NUGENT, KARLIN, and HALL^* , Bankruptcy Judges.

HALL, Bankruptcy Judge.

Before the Court is the appeal of Appellant Kenneth A. Rushton, Trustee ("Trustee"), of the bankruptcy court's Memorandum of Decision which granted Appellee Bank of Utah's ("Bank") motion for summary judgment and denied Trustee's motion for summary judgment. For the reasons that follow, the Court AFFIRMS the bankruptcy court's decision.

I. Jurisdiction

This Court has jurisdiction over the instant appeal under 28 U.S.C. § 158(b) because: the appeal was timely made pursuant to Rule 8002(a) of the Federal Rules of Bankruptcy Procedure; the challenged order is a final order; and no party has elected to have the appeal heard by the district court as required by 28 U.S.C. § 158(c).

II. Standard of Review

"The applicable standard of review for orders granting summary judgment is de novo, and this Court is required to apply the same legal standard as was used by the bankruptcy court to determine whether either party is entitled to judgment as a matter of law."¹

III. Background

The pertinent facts in this case are undisputed as set forth more fully in the bankruptcy court's findings of fact.² Although the bankruptcy case and related

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adversary proceedings are complex, and both parties burdened the record with many extraneous and irrelevant fact allegations, the relevant facts necessary for this Court's analysis are relatively simple and straightforward.

Debtor C.W. Mining Company ("Debtor") operated a coal mine. To finance the purchase of certain equipment, Debtor entered into three loan agreements ("Debtor Loans") with Bank. Debtor executed promissory notes for each loan agreement (the "Notes"). The interest rate was in excess of 4.31 percent. The Notes were secured by the purchased equipment, and all of the Notes contained cross-collateralization provisions.³ Thus, collateral securing one Note also secured all other Notes. An entity named P.P.M.C., Inc. ("PPMC") guaranteed the Debtor Loans.

In August 2007, Debtor entered into a letter of credit transaction with Bank in order to obtain an irrevocable standby letter of credit in favor of the Utah Department of Natural Resources Division of Oil, Gas, Mining, and Office of Surface Mining ("DOGM"). Pursuant thereto, Debtor deposited $362,000 with Bank, and Bank in turn issued a certificate of deposit ("CD") with a 4.31 percent interest rate. Debtor also executed a promissory note in favor of Bank in the amount of $362,000 with an interest rate of 6.75 percent (the "CD Note"). Debtor's obligation under the CD Note was secured by an assignment of the CD, and the CD Note also contained a cross-collateralization provision.⁴ As a consequence, the CD Note was also secured by the collateral securing the Notes. Bank then issued the letter of credit to DOGM.

On January 8, 2008, an involuntary Chapter 11 petition was filed against

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Debtor.⁵ The bankruptcy court entered an order for relief in the involuntary Chapter 11 case on September 26, 2008.⁶ Thereafter, on November 13, 2008, Debtor's Chapter 11 case was converted to one under Chapter 7, and Trustee was appointed as the Chapter 7 trustee.⁷

Subsequently, Bank did not renew the letter of credit.⁸ On February 19, 2009, Bank liquidated the CD (which had a value of $383,099) and applied $79,487 and $303,612 on two of the Notes in partial satisfaction of its claims ("Transfer").⁹ Bank was aware of the pending bankruptcy when it made the Transfer and reduced the outstanding balance of the Notes.¹⁰ Bank later sold the Debtor Loans, the outstanding balance of which had been previously reduced by the Transfer, to PPMC and assigned all of its interest in the Debtor Loans and related documents to PPMC.¹¹

Trustee brought his complaint against Bank on September 14, 2010, seeking a money judgment for $383,099 on two claims: (1) avoidance of the Transfer under 11 U.S.C. § 549¹² as an unauthorized post-petition transfer and

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recovery of $383,099 under § 550(a)(1); and (2) a declaration that the Transfer was void as a violation of the automatic stay under § 362(a) and for an order directing turnover of $383,099 under § 542.¹³

The parties filed cross-motions for summary judgment.¹⁴ The bankruptcy court denied Trustee's motion for summary judgment and granted Bank's motion for summary judgment.¹⁵ Trustee then timely brought this appeal.

IV. Analysis

A. Trustee's Argument

Trustee's complaint seeks relief on two claims: (1) avoidance of the Transfer under 11 U.S.C. § 549 and for recovery of $383,099 under 11 U.S.C. § 550; and (2) a declaration that the liquidation of the CD is void as a violation of the automatic stay pursuant to 11 U.S.C. § 362(a) and that Trustee is entitled to the CD as an asset of the bankruptcy estate. Both claims ask that Bank be required to pay Trustee $383,099 free and clear of Bank's lien.

Trustee's first prong of attack is that the Transfer, if not deemed void under § 362, is avoidable as an unauthorized post-petition transfer under § 549. Thus, Trustee contends he is entitled, under § 550, to a money judgment for the value of the CD. Trustee argues that Bank does not have a lien against the CD since it made the ill-advised decision to liquidate the CD and apply the proceeds to the Debtor Loans without prior court approval and then sold the reduced balance Debtor Loans to PPMC. In other words, Bank "cannot escape the consequences of that act."

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Under his second prong, Trustee insists that Bank's liquidation of the CD was void, that is without legal effect, and that the CD remained property of the bankruptcy estate. Because the CD represents an obligation of Bank to the bankruptcy estate, and it is as if the liquidation and offset never occurred due to the automatic stay, then Bank, as a matter of law, still owes a debt to the bankruptcy estate. Consequently, Bank should be required to turnover the value of the CD to Trustee under § 542. Trustee's argument goes even further and posits that Bank no longer enjoys the position of a secured creditor, because through its own poor business decisions and no fault of anyone else, it sold the Debtor Loans to PPMC.

Trustee contends that the bankruptcy court erred when it denied his motion for summary judgment. He argues that the bankruptcy court erroneously concluded it would be pointless to order turnover of the CD or its value because Bank was a secured creditor and would be entitled to have its lien recognized. Trustee rejects the bankruptcy court's conclusion that granting relief for Trustee would be tantamount to stripping Bank of its lien, would be punitive in nature, and would create an inequitable windfall for the bankruptcy estate. Finally, Trustee also rejects the bankruptcy court's conclusion that relief under either of Trustee's claims would be pointless because it would not benefit the bankruptcy estate.

B. Bank's Argument

Bank counters that Trustee's claims under § 362 and §549 are mutually exclusive but, regardless, Trustee cannot prevail under either theory of recovery for several reasons. First, with respect to the §§ 549 and 550 claim, § 550(a) explicitly requires that any recovery by Trustee be for the benefit of the bankruptcy estate. Bank contends there would be no benefit to the bankruptcy estate because it would remain a secured creditor if the Transfer were avoided since doing so would return the parties to the status quo before the Transfer was

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made. If the pre-Transfer status quo were re-imposed, then Bank not only would have an obligation to Debtor by virtue of the CD, but Bank would also have a secured interest in the CD since its lien would be revived. In that instance, administering the CD through the bankruptcy estate would not result in any augmentation of the bankruptcy estate. More importantly, the only party in interest that would recognize any true financial gain from avoidance and recovery would be Trustee.

Next, Bank claims that adopting Trustee's argument that its lien would not be revived – that it no longer has a valid secured position because it sold its Debtor Loans to PPMC after the Transfer – would constitute an unconstitutional taking. Indeed, under Trustee's argument, Bank would no longer be considered even an unsecured creditor because it is no longer...