Court Opinion

ID: 2669987
Source: CourtListenerOpinion
Date Created: 2014-04-15 17:31:09.225095+00
Date Added: 2024-06-11T13:07:02.886851
License: Public Domain

FILED
                                                        United States Court of Appeals
                                                                Tenth Circuit

                                                               April 15, 2014
                                   PUBLISH                 Elisabeth A. Shumaker
                                                               Clerk of Court
                    UNITED STATES COURT OF APPEALS

                              TENTH CIRCUIT

 In the Matter of: C.W. MINING
 COMPANY,
              Debtor.
 _________________________________

 GARY E. JUBBER, *

               Appellant,
          v.                                           No. 12-4174
 BANK OF UTAH; HIAWATHA COAL
 COMPANY, INC.; P.P.M.C., INC.,

               Appellees.

                    APPEAL FROM THE UNITED STATES
                     BANKRUPTCY APPELLATE PANEL
                           (BAP No. 11-098-UT)

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

P. Matthew Cox, Snow Christensen & Martineau, and Steven J. McCardell,
Durham Jones & Pinegar, P.C. (David F. Klomp and Jessica G. Peterson, Durham
Jones & Pinegar, P.C.; Kim R. Wilson, Snow Christensen & Martineau; and Peter
W. Guyon, The Law Office of Peter W. Guyon, P.C., with them on the briefs),
Salt Lake City, Utah, for Appellees.

      *
      We grant the motion to substitute Gary E. Jubber, Chapter 11 Trustee, for
Kenneth A. Rushton, Chapter 7 Trustee. Fed. R. App. 43(b).
Before TYMKOVICH, BRORBY, and MURPHY, Circuit Judges.

MURPHY, Circuit Judge.

I.    Introduction

      The Chapter 7 Trustee in this matter (the “Trustee”) filed a complaint with

the bankruptcy court seeking to recover a post-petition transfer to the Bank of

Utah (the “Bank”). The bankruptcy court granted summary judgment in favor of

the Bank, concluding the Bank was a fully secured creditor and, thus, the transfer

caused no damage to the Estate. After the Bankruptcy Appellate Panel (“BAP”)

affirmed the ruling of the bankruptcy court, the Trustee brought this appeal.

      Exercising jurisdiction pursuant to 28 U.S.C. § 158(d), we affirm the grant

of summary judgment to the Bank.

II.   Factual Background

      The facts underlying the complex financial transactions entered into by the

parties are not in dispute and have been fully set out by both the bankruptcy court

and the BAP. Rushton v. Bank of Utah (In re C.W. Mining Co.), 477 B.R. 176,

180-81 (B.A.P. 10th Cir. 2012); Rushton v. Bank of Utah (In re C.W. Mining Co.),

465 B.R. 266, 229-30 (Bankr. D. Utah 2011). The facts set forth herein are

limited to those relevant to this appeal.

                                            -2-
      In August 2007, C.W. Mining, an entity operating a coal mine in Utah,

deposited $362,000 with the Bank; in turn, the Bank issued a certificate of deposit

to C.W. Mining in that same amount. In January 2008, creditors filed an

involuntary Chapter 11 bankruptcy petition against C.W. Mining. In November

2008, the Chapter 11 proceeding was converted to a Chapter 7 proceeding and

Kenneth Rushton was appointed to administer the Estate. In February 2009, the

Bank liquidated the certificate of deposit, which then had a value of $383,099.

Utilizing its common-law right of offset, it applied the proceeds to the balance

owing on two of three promissory notes executed by C.W. Mining in favor of the

Bank in 2005, 2006, and 2007. 1 Although the Bank knew of the bankruptcy

proceeding when it liquidated the certificate of deposit, it did not inform the

Trustee. The Trustee became aware of the transfer after the Bank assigned its

remaining secured interest in the promissory notes and loan agreements to a third

party and the third party sought payment from the Estate. 2

      The Trustee then commenced an adversary proceeding seeking to recover

$383,099 from the Bank. The parties filed cross-motions for summary judgment.

In his motion, the Trustee argued the transfer should be avoided under 11 U.S.C.

      1
        The three promissory notes were payable in accordance with the terms of
three loan agreements entered into between C.W. Mining and the Bank (the
“Loans”) and were secured by mining equipment.
      2
          The Trustee paid the full principal and interest owing on the assigned
claims.

                                           -3-
§ 549 as an unauthorized post-petition transfer and he should be permitted to

recover the $383,099 pursuant to 11 U.S.C. § 550. In the alternative, he sought a

declaration the transfer was void as a violation of the automatic stay under 11

U.S.C. § 362(a) and an order for turnover pursuant to 11 U.S.C. § 542. After

considering all of these arguments, the bankruptcy court entered summary

judgment in favor of the Bank. It prefaced its analysis of the Trustee’s avoidance

and recovery argument by reiterating that the transfer the Trustee sought to avoid

was “a payment to a fully secured creditor in exchange for satisfaction of a

portion of a lien.” The bankruptcy court concluded avoidance would be pointless

because a transfer to a fully secured creditor cannot be avoided under § 549

without also reviving the secured creditor’s lien.

      As to the § 362(a) claim, the bankruptcy court concluded the Trustee failed

to allege the Estate suffered any injury from the liquidation of the certificate of

deposit. Finally, it concluded turnover pursuant to 11 U.S.C. § 542(a) was not

appropriate because it would provide no benefit to the Estate.

      The Trustee appealed to the BAP, advancing the same claims he pursued in

the bankruptcy court. The BAP affirmed the bankruptcy’s court’s ruling. Like

the bankruptcy court, the BAP concluded it would be pointless to avoid the post-

petition transfer under § 549 because 11 U.S.C. § 502(h) would operate to restore

the Bank to its secured status and, therefore, the Bank’s lien in the proceeds of

the certificate of deposit would necessarily be revived. The BAP reasoned that

                                          -4-
the Trustee, therefore, could not state a claim under §§ 549 and 550 because there

was no harm to the Estate from the transfer and no benefit to the Estate from

avoidance and recovery. 3 The BAP also noted that avoidance and recovery would

not fulfill the purpose of § 549(a) which is to permit a trustee to avoid a post-

petition transfer that depletes the estate. Likewise, the purpose of § 550 is to

“restore the estate to the financial condition it would have enjoyed if the transfer

had not occurred.” Weinman v. Fid. Capital Appreciation Fund (In re Integra

Realty Res., Inc.), 354 F.3d 1246, 1266 (10th Cir. 2004) (quotations omitted).

Here, the post-petition transfer did not alter the Estate’s financial condition in any

way. The Bank’s fully secured claim was reduced dollar-for-dollar by the post-

petition transfer.

      The BAP also affirmed the bankruptcy court’s ruling that the Trustee was

not entitled to relief under §§ 362 or 542. Relying on this court’s precedent that

the goal of remedying a violation of the automatic stay is to restore the status quo

for both parties, the BAP concluded that treating the transfer as void would return

the Bank to its status as a secured creditor and provide no benefit to the Estate.

See Franklin Savs. Ass’n v. Office of Thrift Supervision, 31 F.3d 1020, 1022 (10th

      3
        The BAP noted it was not condoning unilateral post-petition transfers but
that granting the Trustee the relief he sought would be a “tacit endorsement of fee
churning” because “the only benefit to be seen by avoidance and recovery of the
Transfer is to Trustee. Funneling the value of the CD through the bankruptcy
estate would drive up administrative costs, which is not a benefit to the
bankruptcy estate.”

                                         -5-
Cir. 1994) (holding relief for violating the automatic stay should return the parties

to the status quo before the violation). Further, turnover was not required

pursuant to § 542(a) because there would be no benefit to the Estate. See 11

U.S.C. § 542(a) (requiring a creditor to turn over estate property unless such

property is “of inconsequential value or benefit to the estate”).

       The matter is now before this court from the Trustee’s appeal of the

decision of the BAP.

III.   Discussion

       Although the Trustee appeals from the BAP’s ruling, this court reviews the

decision of the bankruptcy court. Johnson v. Riebesell (In re Riebesell), 586 F.3d
782, 788 (10th Cir. 2009). We “apply the same standards of review that govern

appellate review in other cases.” Jenkins v. Hodes (In re Hodes), 402 F.3d 1005,

1008 (10th Cir. 2005). Accordingly, this court reviews the bankruptcy court’s

grant of summary judgment de novo. Gen. Elec. Capital Corp. v. Manager of

Revenue & Exofficio Treasurer for the City & Cnty. of Denver (In re W. Pac.

Airlines, Inc.), 273 F.3d 1288, 1291 (10th Cir. 2001). Having reviewed the

appellate record and carefully considered the parties’ arguments, we agree with

the BAP that the bankruptcy court’s decision is thorough, well-reasoned, and

correct.

       A trustee may avoid a post-petition transfer of estate property that was not

authorized by the Bankruptcy Code or the court. 11 U.S.C. § 549. An avoided

                                         -6-
transfer, or the value of the property transferred, may be recovered for the benefit

of the estate pursuant to 11 U.S.C. § 550. Under 11 U.S.C. § 502(h), however, a

claim by a creditor arising after the return of property pursuant to § 550 shall be

allowed or disallowed “the same as if such claim had arisen before the date of the

filing of the petition.”

       Relying on a ruling from the First Circuit, both the bankruptcy court and

the BAP concluded that avoidance of the Bank’s post-petition transfer pursuant to

§ 549 and recovery by the Estate pursuant to § 550 would revive the Bank’s lien

because it was a fully secured creditor before the filing of the petition. Fleet

Nat’l Bank v. Gray (In re Bankvest Capital Corp.), 375 F.3d 51, 66-68 (1st Cir.

2004) (holding secured creditor with a § 502(h) claim to avoided property is not

stripped of its secured status). Although the Trustee argues In re Bankvest was

wrongly decided, we believe the reasoning of the First Circuit on this point to be

sound and hereby adopt it. A fully secured creditor’s lien is revived under

§ 502(h) upon avoidance and recovery of the property transferred. Id. at 67

(“[T]he 502(h) claim takes on the characteristics of the original claim, including

. . . its secured status.”); id. at 71 (“The fact that [the secured creditor] would be

entitled to receive exactly what it would be forced to return through avoidance

renders avoidance pointless.”). Accordingly, the relief of avoidance under § 549

and recovery under § 550 would be futile under the circumstances presented in

                                           -7-
this case because the Estate would be required to pay the Bank’s secured claim of

$383,099 in full, 4 resulting in no benefit to the Estate.

      Neither is the Trustee entitled to the value of the certificate of deposit

pursuant to 11 U.S.C. § 362(a). Section 362(a)(3) provides that the filing of a

bankruptcy petition operates as a stay of “any act to obtain possession of property

of the estate or of property from the estate or to exercise control over property of

the estate.” Any transfer made in violation of the automatic stay is void and the

parties are returned to the status quo as it existed before the violation occurred. 5

Franklin Savs. Ass’n, 31 F.3d at 1022. As we have already concluded, returning

the parties to the status quo before the transfer would mean the Bank regains its

status as a secured creditor. As a consequence, the Bank obtained no benefit from

its violation of the automatic stay and the Trustee has not shown that the Estate

suffered any damage. Thus, the Trustee is not entitled to any relief as a result of

the violation. Goldston v. United States (In re Goldston), 104 F.3d 1198, 1201

(10th Cir. 1997) (“The only effect of violation of the automatic stay, other than

the possibility of contempt, is the unenforceability of any benefit the creditor

obtained as a result of the violation.”); 11 U.S.C. § 362(k) (providing for the

recovery of actual damages for a willful violation of the automatic stay).

      4
       Setting his conclusory statements aside, the Trustee has failed to show that
a genuine issue of material fact exists as to whether the Bank would file such a
claim or whether it would be allowed by the bankruptcy court. See supra n.2.
      5
          The Bank concedes it violated the automatic stay provisions of § 362.

                                           -8-
      The Trustee also argues the Bank should be compelled, pursuant to § 542,

to turn over the value of the certificate of deposit to the Estate. See 11 U.S.C.

§ 542(a) (requiring a creditor to turn over estate property in its possession). As

the bankruptcy court correctly ruled, turnover is not appropriate under § 542(a) if

“the property is of inconsequential value or benefit to the estate.” 11 U.S.C.

§ 542(a). Here, there would be no benefit to the Estate because the Trustee would

be required to pay the Bank an amount equal to the value of the certificate of

deposit. 6 The lack of a benefit to the Estate forecloses the Trustee from seeking

turnover pursuant to § 542.

IV.   Conclusion

      The grant of summary judgment in favor of the Bank is affirmed for

substantially the reasons stated by the bankruptcy court in its order dated

September 30, 2011.

      6
        Nothing in the record or the case law supports the Trustee’s argument that
the Bank’s sale of the Loans to a third party extinguished the Bank’s secured
status. As the BAP correctly noted, the “Bank’s later sale of the [Loans] to [the
third party] is immaterial to deciding if Bank is entitled to a . . . secured claim;
Bank was a secured creditor with a valid secured claim on the petition date.”

                                          -9-