Court Opinion

ID: 9476917
Source: CourtListenerOpinion
Date Created: 2023-08-05 06:09:06.276226+00
Date Added: 2024-06-11T17:45:35.192102
License: Public Domain

JOHN P. MOORE, Circuit Judge,
dissenting:
I must respectfully dissent for two reasons. First, I believe the court has blurred the essential nature of a supersedeas bond and in the blurring allowed Grubb more than the bond provided. Second, I believe the court has failed to recognize the patina that formal insolvency proceedings gives this case. That failure incorrectly changes Grubb’s status as an unsecured creditor to that of a secured creditor and results in giving Grubb a greater share of the insolvency estate to the detriment of similarly situated creditors of the unsecured class. In the course of reaching my opinion, I have found distinctions in the cases relied upon by the court which I believe make them inapposite here.
Any analysis of the problem before us must begin with an examination of the nature of a supersedeas bond.1 The court holds that the bond secures Grubb’s judgment. I would concur with this conclusion if the holding is construed to mean the bond secures the promise to pay the judgment. See 4A C.J.S. Appeal & Error § 643, at 464 (1957). However, the court then transmutes the bond into security for the debt underlying the judgment. This is where I part company with the court because the transmutation is contrary to the nature of a supersedeas bond.
“Liability under an appeal or supersede-as bond is strictly determinable by the express terms of the contract of undertaking. The obligation is upon the undertaking, an instrument in writihg, not upon the judgment.” 5 Am.Jur.2d Appeal & Error § 1029, at 453-54 (1962) (emphasis added). Because the debt owed Grubb was unliqui-dated until judgment was entered and because that debt was not secured by any security instrument making the debt a secured obligation under Oklahoma law (see Okla.Stat.Ann. tit. 12A, §§ 9 — 105(l)(i) and 1-201(37) (Supp.1984)), the judgment can in no way be considered or become a secured claim in the FNB insolvency.
The court, however, in the transmutation has made the claim a secured claim by effectively holding that the obligation of the supersedeas bonds is on the judgment. In other words, the court holds that because of the liability created by the super-sedeas bond, the formerly unsecured claim of Grubb has become vested with the attributes of a debt protected by a security interest.
Ordinarily, the distinction I draw between liability on the undertaking and liability on the debt makes little practical difference. If a judgment debtor fails to obtain a reversal and then defaults on the payment of the judgment, the surety on the supersedeas bond becomes liable to the judgment creditor. In the eyes of the judgment creditor, it is insignificant how or by whom the judgment debt is satisfied so long as it is paid. Thus, in the case in which during the pendency of an appeal a judgment debtor becomes unable to pay debts but does not resort to an insolvency proceeding to deal with those debts, a su-persedeas bond functions to protect the judgment creditor who has been stayed from collecting upon the judgment.
*228Yet, it cannot be gainsaid that in this latter case the creditor has been made whole because of the obligation of the su-persedeas bond, and not because the debt owed to the creditor was a secured obligation upon which the creditor has foreclosed. The judgment creditor who is protected by a supersedeas bond is a beneficiary of the undertaking, and not a creditor holding a security interest in property to enforce payment of a debt. Indeed,
[t]he purpose of a supersedeas bond is to preserve the status quo while protecting the non-appealing party’s rights pending appeal. A judgment debtor who wishes to appeal may use the bond to avoid the risk of satisfying the judgment only to find that restitution is impossible after reversal on appeal. At the same time, the bond secures the prevailing party against any loss sustained as a result of being forced to forgo execution on a judgment during the course of an ineffectual appeal.
Poplar Grove Planting & Refining Co. v. Bache Halsey Stuart, Inc., 600 F.2d 1189, 1190-91 (5th Cir.1979) (emphasis added). I view that distinction to be critical in the instance in which a formal insolvency proceeding has intervened between the entry of a judgment and the final determination of an appeal.
If we examine, as we must, the precise terms of the contract of undertaking here, we find that FNB undertook to “fully perform and comply with [the] judgment and the further orders or judgment of this Court in the event the same shall be affirmed in whole or in part.” That promise contained in that undertaking is separate from the judgment; it was made after creation of the judgment debt; and it is nothing more than an undertaking to satisfy the judgment if it is not reversed on appeal. It is that promise, not the judgment debt, which is collateralized by the CDs FDIC now claims as estate property. I respectfully suggest that the court has overlooked this distinction in its analysis.
The distinction is important here because if the CDs are collateral for the debt, Grubb is a secured creditor of the insolvent estate with a right to claim the benefits of the collateral against FNB’s unsecured creditors. Contrarily, if the underlying judgment debt is unsecured and if Grubb’s interest in the CDs is only as a beneficiary of a promise made after the debt was created, Grubb must be considered an unsecured creditor of FNB subject to the rules for liquidation of the claims against an insolvent national banking association. Moreover, if Grubb’s debt was secured before the appointment of FDIC, FDIC’s claim to the CDs as assets of the receivership estate is subject to Grubb’s security interest.
By construing the supersedeas bonds as an undertaking to secure the judgment debt and not as security for the promise to pay that debt, the court has given Grubb more protection than the terms of the bonds provide. Additionally, the court effectively has deprived the receivership of assets which should be made available to all the unsecured creditors of that estate. I believe this result is not warranted and is unsupported by a close examination of the authorities upon which the court has relied.
The court draws support from Mid-Jersey Nat’l Bank v. Fidelity-Mortgage Investors, 518 F.2d 640 (3d Cir.1975). I find this case inapposite simply because there was no undertaking by the judgment debtor. In Mid-Jersey, the judgment debtor requested relief from filing a formal superse-deas bond. In its place, the debtor conveyed to the court negotiable certificates of deposit payable to the clerk of the court to secure the stay. By contrast, here the bonds given are precise in the extent of the liability they created and were collateral-ized with specific property. The collateral was transferred to the possession of the court to hold pending appeal, but the judgment debtor effected no conveyance of the collateral to the court. In Mid-Jersey, the stay was secured by property; in this case, the stay is secured by a bond. Hence, when the Mid-Jersey court stated: “[I]n the context of this case, such a deposit is not the property of the debtor,” Id. at 643 (emphasis added), it was saying the debtor had relinquished its property to the court in place of giving a bond. Indeed, the court *229stated the judgment debtor “part[ed] with its ownership.” Id. at 644. This parting is one of the controlling aspects of Mid-Jersey.
Under the circumstance of the judgment debtor’s conveyance of its ownership rights, the Mid-Jersey court could properly find that the property was not subject to the judgment debtor’s insolvency proceedings because the property had been relinquished prior to the date of insolvency. In the instant case, however, FNB did not relinquish a property interest in the CDs to the court; it merely transferred possession for the purpose of collateralizing the bonds.
This case is not one in which FNB’s property rights, and those of its successor receiver, were divested by surrender, nor did the giving of the bond result in a constructive trust. In part, the holding of the Mid-Jersey court was predicated upon its conclusion that the conveyance of property to a court to secure a stay results in a trust in which the court is vested with a duty to the beneficiaries. I believe that conclusion must be read in the context of the fact of the debtor’s divestment of interests which is not present in the instant case. Because of this important distinction, I do not believe Mid-Jersey supports this court’s conclusion. The same distinctions are present in Saper v. West, 263 F.2d 422 (2d Cir.), cert. denied, 360 U.S. 916, 79 S.Ct. 1433, 3 L.Ed.2d 1532 (1959), relied upon by the court, making that case equally inapposite.2
I concede when a judgment debtor has relinquished ownership of property, regardless of the method, and retains no proprietary interest in the property, the problem which concerns me in this case does not exist. I judge that to be the proposition for which both Mid-Jersey and Saper stand. I cannot agree with this court’s holding, however, that the simple act of using property as collateral works the same divestment. The party giving the collateral still retains an ownership interest in the property despite the pledge. The most that can be said for the deposit in this instance is that it created a right of defea-sance of FNB’s property interest upon the condition of its default on the undertaking in the supersedeas bond. Nonetheless, FNB still retained ownership of the CDs.
Finally, the court relies upon Ticonic Nat’l Bank v. Sprague, 303 U.S. 406, 58 S.Ct. 612, 82 L.Ed. 926 (1938), for the proposition that even if the title to the CDs is in FDIC, the CDs can nonetheless be omitted from the receivership. Facially, Ticonic would support that proposition but for one critical fact not present here. Although Ticonic did not involve the precise question present in this case, it did involve consideration of the rights of creditors following the insolvency of a national bank. Prior to insolvency, the bank had held certain trust deposits which were collateralized by United States bonds. The collateral was required by the Federal Reserve Act which stated: “In the event of the failure of such bank the owners of the funds held in trust for investment shall have a lien on the bonds ... so set apart in addition to their claim against the estate of the bank.” 12 U.S.C. § 248(k) (1918), quoted in Ticonic, 303 U.S. at 408, 58 S.Ct. at 613 (emphasis added). As a consequence of this statutory provision, when the Ticonic bank became insolvent, by operation of law the trust depositors became lien holders of the bonds which secured their deposits. It is for that reason the Court held the deposits were secured and the depositors had a right to recover their claims from the proceeds of the bonds. The Court did not hold, as the majority here implies, that the depositors were secured creditors of the bank simply because their accounts were collateralized. The statute granting a lien — a security interest — in those bonds was the instrument by which the trust depositors became secured creditors of the failed bank. This distinction has been ignored by this court when it suggests Ticonic simply held “that the trust depositor was entitled to be paid from the bonds as against the claims of *230general creditors.” Ante, at 225. I believe this reading of Ticonic is an oversimplification that fails to give cognizance to the significance of the statutorily created security interest that gave the trust depositors their right of recovery.
Those trust depositors were secured creditors at the time of insolvency because they possessed valid security interests not held by the general creditors of the bank. This court can point to no similar interest held by Grubb which secured the judgment debt and which allows Grubb to recover that debt “against the claims of general creditors.” Ante, at 225. The court adds to the obfuscation of the importance of the existence of the statutory lien with the statement: “For the purpose of this case, we see no distinction between a lien created by statute and a lien created by a contract [the bond] that is required by the court as a condition of staying execution of the judgment.” The distinction, however, is that the bond does not secure the underlying debt. As I initially have pointed out, and as the court has not refuted, the whole purpose of a supersedeas bond is to secure the promise made by the appellant to obtain the stay. The court may not see the distinction as relevant, but I do. It must be remembered, the only security given Grubb was the security for the promise to pay the judgment debt. That promise created an obligation wholly separate from the judgment debt which arose from a jury verdict finding the bank guilty of a securities fraud. To me, it is inescapable that the debt arising from that judgment is and should remain an unsecured obligation.
The court claims, however, that what was once an unsecured obligation can be converted to a secured debt by agreement of the parties, thus protecting one creditor against claims of others. Except to the extent such a transaction would constitute a voidable preference in a liquidation proceeding, I take no issue with that claim. That is not what happened here, however, because the bond can apply only to the promise to pay the judgment. Moreover, the bond was the consideration given to secure the stay, and not to secure the debt. The court suggests to the contrary by stating “Grubb gave additional value by foregoing the right to immediately collect on the judgment.” Indeed, but this forbearance was the consideration for the bond. Without the bond, the promise to pay the judgment would not have resulted in the stay, and without the promise to pay, the debt would have been immediately collectable. Any attempt to sweep the promise to pay the judgment and the underlying debt into one pile is an expedient which ignores a legal distinction I strongly believe must be preserved, regardless of any hypothetical societal consequence preservation might work on banks which become insolvent in future.
Because Grubb can claim no actual property interest in the CDs, whether by operation of law, as in Ticonic, or by actual relinquishment and conveyance, as in Mid-jersey and Saper, Grubb’s judgment debt cannot be given preferential treatment over those of the general creditors of the receivership. Moreover, FNB retained its ownership of the CDs prior to creation of the receivership, and that ownership passed to FDIC with the declaration of insolvency. 10 Am.Jur.2d Banks § 768, at 732 (1963). The CDs are part of the insolvency estate, and Grubb must resort to the liquidation proceedings for satisfaction of that debt if the judgment is affirmed on appeal. Any other construct abuses the tenor of the supersedeas bond given in this case.
The court seeks to avoid this conclusion with the notion that contrary results are compatible with 28 U.S.C. § 2408 and the purpose of supersedeas bonds. I cannot agree. First, because of what I previously referred to as the “patina of insolvency proceedings,” the application of § 2408 here has nothing to do with the ability of the United States to pay Grubb’s judgment. While I would not quarrel with the court’s interpretation of § 2408 as a general proposition, the insolvency proceedings create a different situation. Here, the United States suffers a legal impediment to payment of Grubb in full unless the assets in the insolvency estate are sufficient to pay all unsecured creditors in full. This impediment should be a reason to grant, rather than deny, the pending motion.
While I sympathize with Grubb’s plight, I do not believe sympathy should stand in the way of the law. Grubb has unfortunately been caught in the vicissitude of FNB’s insolvency. Had Grubb recovered on the judgment prior to insolvency, Grubb may have escaped inclusion in the insolvency proceedings. Yet, the fact that recovery did not occur makes Grubb’s position entirely different from that of a judgment creditor whose debtor simply defaulted on its promise to pay the judgment. I would grant the motion because it is the insolvency proceeding, and not the act of exoneration, which defeats Grubb’s interest in the CDs.

. Since it is critical to my later discussion, there is no disagreement raised in any quarter that we are dealing with supersedeas bonds. What is unique about this case is that the collateral for the bonds was deposited with the clerk of the district court. While the distinction appears insignificant at first, I shall later demonstrate its importance.

. In Saper, a bankruptcy trustee sued to recover, as a preferential transfer, funds paid into court and transferred to judgment creditors in satisfaction of a judgment. As noted by the Saper court, there was a complete conveyance to the court of all the judgment debtor’s property interests in the funds which were subjected to the trustee's recovery efforts. Thus, the critical circumstances are remarkably dissimilar to those present here because the judgment debtor had relinquished all ownership interests prior to insolvency.