IN RE: CALUMET FARM, INC. DEBTOR CASE NO. 91-51414
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
CALUMET FARM, INC.
DEBTOR CASE NO. 91-51414
PHOENIX CORPORATION, formerly
known as CALUMET FARM, INC. PLAINTIFF
V. ADV. NO. 93-5089
JANICE HEINZ, SUSAN MCGEE,
LARRY RICHARDSON DEFENDANTS
The Second Amended Complaint of the plaintiff debtor in possession, Phoenix Corporation, formerly known as Calumet Farm, Inc., ("Phoenix"), asserts that the transfer by the debtor, Calumet Farm, Inc., of a 1990 WILD AGAIN season to the defendant Larry Richardson ("Richardson") was a fraudulent conveyance under Kentucky Revised Statute ("KRS") 378.020 as made applicable by 11 U.S.C. § 544(b). Phoenix requests avoidance of the transfer on the ground it was made without consideration, and Phoenix seeks judgment for the value of the season. 11 U.S.C. § 550.
Richardson counters that the two-year statute of limitations set out in 11 U.S.C. § 546(a) bars this action and that even if the action is not so barred, the conveyance is not avoidable under KRS 378.020 because Richardson received the season in exchange for valuable consideration.
FINDINGS OF FACT:
On July 11, 1991 Calumet Farm, Inc. ("Calumet") filed a petition for relief under chapter 11 of the U. S. Bankruptcy Code in the U. S. Bankruptcy Court for the Eastern District of Kentucky and became a debtor in possession in this liquidating chapter 11 case. After Calumet Farm was sold the debtor changed its name to Phoenix Corporation, the new name of the plaintiff debtor in possession herein.
On July 9, 1993, within two years of the order for relief, the debtor in possession filed the original complaint herein against Janice Heinz ("Heinz"), Susan McGee ("McGee"), Larry Richardson, and Robert Fox seeking to avoid allegedly fraudulent transfers of breeding rights to the defendants and to recover the value of breeding rights exercised by the defendants in several Calumet stallions. The original complaint was grounded on 11 U.S.C. §§ 548 and 550. The complaint alleged that the transfers of the breeding seasons occurred within one year of bankruptcy, that the transfers were made without consideration, and that the debtor was insolvent at the time of the transfers. As to Heinz and McGee the allegations were that the defendants held lifetime breeding rights in several Calumet stallions and exercised those rights during the 1990 breeding season. As to Richardson the allegations were that he exercised a 1990 WILD AGAIN season transferred to him without charge by Calumet Farm, Inc..
On July 12, 1993 before service of summons on the original complaint the plaintiff filed its First Amended Complaint adding an allegation that the transfer of the season to Richardson was voidable "pursuant to inter alia KRS 378.020" as a conveyance without valuable consideration. The First Amended Complaint was filed two years and one day after the order for relief. Rule 9006(a) of the Federal Rules of Bankruptcy Procedure is not applicable.
Heinz, McGee, Richardson, and their respective counsel were served with a summons and a copy of the original and the First Amended Complaint on July 14, 1993.
Subsequently, Heinz and McGee filed a motion for summary judgment or in the alternative for an extension of time to answer the complaint, and Phoenix filed a motion for leave to file a Second Amended Complaint and a motion for a default judgment against Richardson. Before a hearing could be conducted on the motions, Richardson filed an answer to the First Amended Complaint and a motion to dismiss the original complaint.
On September 9, 1993 the court conducted a hearing on the various motions. An order was entered on September 22, 1993 in which the court stated that the transfers of seasons to defendants other than Richardson occurred at the time of the grant of the lifetime breeding rights and that the transfers of breeding rights to all the defendants, including Richardson, occurred prior to one year before the filing of the bankruptcy petition; thus, the transfers were not avoidable under 11 U.S.C. § 548. The defendants were granted summary judgment on the original complaint. The original complaint was dismissed with prejudice.
As for the allegations in the First Amended Complaint and a tendered Second Amended Complaint grounded on the fraudulent conveyances provisions of state law, KRS 378.020, the court found the allegations therein were insufficient to state a claim for failure to specifically identify the creditor whose position the plaintiff intended to assume for the purpose of avoiding the alleged fraudulent transfers. 11 U.S.C. § 544(b). In addition, the court found that because the allegations concerning Heinz and McGee did not relate back to the filing of the original complaint, those allegations could not be asserted in an amended complaint. With respect to Richardson, Phoenix was permitted to amend its First Amended Complaint to specifically identify the creditor whose position was being assumed for purposes of section 544(b), without prejudice to Richardson's right to argue the action is time barred under section 546(a). Consequently, Phoenix's motion for leave to file the tendered Second Amended Complaint was overruled without prejudice to Phoenix's right to file a new complaint under section 544(b) as that complaint would relate to Heinz and McGee and to amend its First Amended Complaint as the complaint would relate to Richardson, with the issues of whether the claims are time barred under section 546(a) reserved for ruling.
On December 2, 1993 Phoenix filed a Second Amended Complaint asserting the rights of unsecured creditors Calumet-Gussin No. 1 and Mutual Benefit Life Insurance Co. and alleging that Calumet's transfer of a 1990 WILD AGAIN breeding season to Richardson was without consideration ("gratuitous"); that the transfer occurred at the time of its use; and thus that the transfer is avoidable pursuant to 11 U.S.C. §§ 544(b) and KRS 378.020. No allegations were asserted against Heinz or McGee. Breeding rights to some of the Calumet stallions were assigned to them several years prior to the intervention of bankruptcy. See Exhibits to the memorandum of Heinz and McGee in support of their motion for summary judgment as to the original complaint.
Richardson and his counsel were served with a summons and a copy of the Second Amended Complaint on December 13, 1993. In his answer filed May 12, 1994 Richardson requested trial by jury.
Both Phoenix and Richardson have filed motions for summary judgment.
CONCLUSIONS OF LAW:
The defendant Richardson contends the action asserted by the debtor in possession in the First and Second Amended Complaints which is grounded on the state fraudulent conveyance statute as made applicable by 11 U.S.C. § 544(b) is barred by the two-year statute of limitations set out in 11 U.S.C. § 546(a)(1). The timely filed original complaint of the debtor in possession sought avoidance of the transfer of stallion seasons to Richardson and other defendants as fraudulent under 11 U.S.C. § 548. The court dismissed the original complaint because the transfer of seasons to Richardson and the other defendants occurred more than one year prior to bankruptcy. 11 U.S.C. § 548(a). State law on which the debtor in possession relies in the First and Second Amended Complaints as a basis for avoiding the transfer of the season to Richardson as constructively fraudulent prescribes a five-year reach back period for avoiding fraudulent conveyances. KRS 413.120(11); KRS 413.130(3). However, the First and Second Amended Complaints were filed after the expiration of the two-year limitation period specified in 11 U.S.C. § 546(a) for commencement by a trustee of an avoidance action under 11 U.S.C. § 544(b).
The majority of the circuit courts that have considered the issue have held the statute of limitations set out in 11 U.S.C. § 546(a)(1) commences to run with respect to a debtor in possession on the date of the order for relief and that avoidance actions by a debtor in possession under 11 U.S.C. §§ 544, 545, 547, 548, or 553 are barred unless commenced within two years of the order for relief. U. S. Brass & Copper Co. v. Caplan (In re Century Brass Prods., Inc.), 22 F.3d 37 (2nd Cir. 1994); Construction Mgt. Servs., Inc. v. Manufacturers Hanover Trust Co. (In re Coastal Group, Inc.), 13 F.3d 81 (3d Cir. 1994); Upgrade Corp. v. Government Tech. Servs., Inc. (In re Softwaire Centre Int'l, Inc., 994 F.2d 682 (9th Cir. 1993); Zilkha Energy Co. v. Leighton, 920 F.2d 1520 (10th Cir. 1990).
However, in the most recent decision on this issue the Fourth Circuit held that the two-year limitation period in § 546(a)(1) begins to run in a chapter 11 case only upon the appointment of a trustee under one of the sections of the Code enumerated in § 546(a)(1), and in particular under section 1104 in a chapter 11 case. In re Maxway Corp., 27 F.3rd 980 (4th Cir. 1994).
This court agrees with the decision of the Fourth Circuit in Maxway and believes the Supreme Court would agree with the plain language of the statute analysis in that case.
Upon the filing of a chapter 11 case the debtor becomes a debtor in possession with the powers and duties of a trustee and with authority to operate the business of the debtor. 11 U.S.C. §§ 1101(1), 1107, 1108. If the debtor in possession is "appointed" trustee by operation of law the "appointment" is under sections 1101(1) and 1107 and not under section 1104. The appointment must be under the latter section to trigger the running of the statute of limitation under section 546(a)(1).
A self-appointed, self-interested debtor in possession, whether an individual, a partnership, or corporate entity, is hardly the functional equivalent of a trustee appointed under section 1104 by the United States trustee at the direction of the court for cause determined after notice and a hearing. An "appointed" trustee must meet the competency test prescribed by section 321(a) and the disinterestedness test prescribed by section 1104(c) as defined by section 101(14). The sections of the Code enumerated in section 546(a)(1) provide for the selection of a trustee by creditors or the United States trustee. According to Black's Law Dictionary "appointment" means the designation of a person, by the person or persons having authority therefor, to discharge the duties of some office or trust. The fact that the debtor in possession arose like Phoenix (pun intended) out of the debtor upon the filing of this chapter 11 case did not result in the "appointment" of the debtor as trustee within the meaning of section 546(a)(1).
The language of section 1107 imposing on a debtor in possession "any limitations on a trustee serving in a case" under chapter 11 refers primarily to restrictions on the administrative powers of a trustee appearing in Subchapter IV of Chapter 3 of the Code, as for example section 361(3) which prohibits granting administrative expense status to the claim of a creditor as a form of adequate protection, section 363 which requires court approval for the use of cash collateral or the sale or lease of property of the estate other than in the ordinary course of business, section 364 which requires court approval for the assumption or rejection of executory contracts or leases, and section 366 which requires adequate assurance of the payment of utility bills. There may be other limitations as well such as the restrictions in section 345 on the deposit and investment of money of estates.
Not all limitations on a trustee serving in a chapter 11 case apply to a debtor in possession. Taken literally the language of section 1107(a) would require a debtor in possession to be a disinterested person as mandated by the provisions of section 1104(c). Obviously a debtor in possession is not a disinterested person. It is for this reason that Congress placed the limitation on avoiding powers of a trustee appearing in section 546(a)(1) on a trustee appointed under section 1104 in a chapter 11 case as the representative of the estate and not on a debtor in possession as the representative of the estate. Limiting the application of section 546(a)(1) in this manner may expose creditors who are recipients of preferential or fraudulent transfers or creditors that hold unperfected consensual liens or unfavored statutory liens to a longer period of uncertainty but it also protects the creditor body generally against inaction for whatever reason by a debtor in possession.
Congress made a policy judgment that the provisions of section 546(a)(1) are inapplicable or are equitably tolled so long as the debtor functions as a debtor in possession. This policy was adopted in recognition of the practicality that a debtor in possession will not necessarily vigilantly pursue causes of action under the Code sections enumerated in section 546(a)(1). A court should be extremely reluctant to substitute its policy judgment for that of Congress when the language of the statute is so patently clear.
As a matter of fact in this particular case the board of directors of Calumet Farm, Inc. (now Phoenix Corporation) declined to authorize the attorney for the debtor in possession to initiate certain actions, particularly actions against members of the board. In lieu of requesting appointment of a trustee the creditors' committee requested and was granted authority to prosecute such actions in behalf of the estate. Dealing with the recalcitrance of a debtor in possession in this manner does not derive from a provision of the Code but rather is a development of judge made law. The fact the courts have found it necessary to develop this remedy tends to confirm rather than undercut the wisdom of the policy judgment made by Congress.
Congress has recently revisited this issue by amendment of section 546(a)(1) by Section 216 of the Bankruptcy Reform Act of 1994. Under the amendment the action of the debtor in possession would be barred because more than two years has elapsed since the order for relief in the Calumet Farm, Inc. case and no trustee has been appointed. However, the amendment does not apply in cases commenced before the date of its enactment. Section 702(b) of the Bankruptcy Reform Act of 1994.
In its memorandum opinion of March 20, 1992 the court left open and did not address the question of whether the transfer of SECRETO and WILD AGAIN seasons to Richardson is avoidable as a fraudulent conveyance. Consequently, that opinion is not dispositive of the issue of whether the transfer of seasons to Richardson was constructively fraudulent.
Accordingly, in conformity with this memorandum opinion of the court the motion of the defendant Richardson for summary judgment dismissing the First and Second Amended complaints as untimely filed shall be overruled. And the motion of the debtor in possession for summary judgment is likewise overruled. There is a factual question as to whether the transfer of the seasons to Richardson was without consideration.
By the court -
William T. Shier
U. S. Trustee