Opinion
Civil Action H-03-5605.
May 28, 2004
Opinion on Appeal
1. Introduction
A trust sued to recover reimbursements from a municipal government on behalf of a debtor. The bankruptcy court held that a subsidiary of the debtor assigned the right to the reimbursements to investors by contract long before the bankruptcy. The trust appeals claiming that the court misinterpreted the contract.
The bankruptcy court's decision will be vacated because it did not have jurisdiction to hear the case. Conditionally, if it did have jurisdiction, the transaction was a sale as the bankruptcy court held.
2. Background.
In 1983, Hickory Creek, Inc., was a wholly-owned subsidiary of General Homes Corporation; it owned land in Fort Bend County, Texas. Hickory agreed with a municipal utility district to build sewer, water, and drainage facilities for the property in exchange for the district's reimbursing construction costs. The district agreed to pay Hickory with future proceeds from bonds.
A year later, Hickory sold the land to two investors, Robert Corson and John Riddle. Hickory conveyed to the investors the right to the first $2.2 million, with interest, of reimbursements it was due under its contract with the district. Hickory also conveyed the land to Hickory Creek Joint Venture, owned by Corson and Riddle. Corson then sold his interest in the Venture for cash and an assignment of the first $1.76 million of the $2.2 million that he and Riddle stood to receive under their contract with Hickory. In sum, (1) Corson was due the first $1.76 million of the reimbursements, (2) the Venture was due the next $440,000, and (3) Hickory got the rest.
In 1985, Hickory dissolved, and General Homes assumed its debts. Shortly thereafter, the district paid Corson $1,666,667. The district's counsel reviewed the remaining payments in a letter to an agent of Corson. He said that Corson's balance would be paid first, then the Venture would get $440,000, and General Homes would receive the remaining reimbursements.
3. Bankruptcy.
In 1990, General Homes filed for bankruptcy. Under the reorganization, it assigned its title to its reimbursements to a group of creditors in exchange for a waiver of their claims. As part of the plan, the creditors established a trust with Realty Advisory Group serving as the trustee.
In 1999, the Group sought a declaration that it had title to all of the remainder of the Fort Bend reimbursements — including the remaining amounts due to Corson and the Venture. It argued that the contract between Hickory and the investors created a debt owed by Hickory to Corson and Riddle that was discharged under the General Homes reorganization plan.
By then, Riddle and the Venture had conveyed their title to the reimbursements to Gaston Katy Land Company, L.L.C. Gaston argued that the contract between Hickory and the investors was an assignment that could not be discharged in bankruptcy.
Initially, the bankruptcy court held that the Group owned the reimbursements. After a trial, it found that the contract between Hickory and the investors was ambiguous. Based on extrinsic evidence, it held that the contract assigned the first $2.2 million of the reimbursements to Corson and Riddle. The Group appeals, and Gaston and the Venture appeal the bankruptcy court's failure to award its attorneys' fees and costs for defending the contract.
4. Jurisdiction.
Although the parties and the bankruptcy court did not question its jurisdiction, this court ordered the parties to explain how the case could have been brought in bankruptcy court. See In re Greenley Energy Holdings of Pa., Inc., 110 B.R. 173, 179 (Bankr. E.D. Pa. 1990). The parties argue that its claims on the contract deal with the implementation of the plan. This would be because General Homes assigned the reimbursements to the Group as part of the plan. See In re Biloxi Casino Belle Inc, 2004 WL 848277 (5th Cir. 2004). They also argue that the bankruptcy court had ancillary jurisdiction to enforce and interpret the assignment of the reimbursements. See Local Loan Co. v. Hunt, 292 U.S. 234, 239 (1934).
Before the confirmation of a plan, this court has original jurisdiction over cases arising in or related to the bankruptcy itself. See 28 U.S.C. § 1334(a), (b). It can refer those cases to the bankruptcy court. See 28 U.S.C. § 157.
After the plan is confirmed, the bankruptcy court's jurisdiction over the administration of the estate is lost because the estate no longer exists. See In re TSP Indus., Inc., 117 B.R. 375, 377 (Bankr. N.D. Ill. 1990); Bobroff v. Continental Bank, 766 F.2d 797 (3rd Cir. 1985). The bankruptcy court may only make sure that the confirmed plan is implemented. See 11 U.S.C. § 1142(b); In re Craig's Stores of Texas, Inc., 266 F.3d 388 (5th Cir. 2001). Its powers include forcing parties to turn over deeds, satisfy liens, and sell stock.
This suit has nothing do to with the implementation of the General Homes plan. There is no dispute that the Group has title to reimbursements due to General Homes. The parties only complain about how much the trust is entitled to — a simple, pre-petition contract interpretation that does not directly involve the plan or bankruptcy law. See In re Leeds Building Products, Inc, 160 B.R. 689, 691 (Bankr. N.D. Ga. 1993). If a farmer buys a tractor from a debtor, his post-confirmation suit over his title to the tractor does not deal with the consummation of the plan, only the benefit of his bargain.
In addition, this case does not remove ambiguities in the plan or affect the rights of other creditors. See In re Greenley, 110 B.R. at 182. Whether the Group or Gaston is entitled to the disputed portion of the reimbursements does not bear on the recovery of the other creditors. Moreover, this suit is over a pre-petition contract, not a new obligation created by the plan. See In re Craig's Store, 266 F.3d at 391.
The bankruptcy court did not have jurisdiction over the case because the parties' claims to the reimbursements do not involve the consummation of the plan. It does not have control over General Homes's business in perpetuity.
5. Assignment.
Assuming the bankruptcy court had proper jurisdiction to decide the case, its decision was manifestly correct, but its analysis strayed. The contract between Hickory and the investors clearly was an assignment — a conveyance, not a debt.
Under the their contract with Hickory, Corson and Riddle purchased the right to the reimbursements with the land while simultaneously assigning part of their rights to them back to Hickory — with one exception. Hickory agreed that Corson and Riddle could keep the first $2.2 million of reimbursements if the district paid, but reserved the balance. The net effect of the contract was that Hickory kept its title to the proceeds but assigned the right to part of them to Corson and Riddle. Though convoluted, Hickory assigned its right to the first $2.2 million of the district's reimbursements to Corson and Riddle, assuming the reimbursements were paid — without recourse.
While the contract did not refer to the transfer as an assignment, its effect makes it one. See J.C. Whaley Lumber Co. v. Citizens' Nat'l Bank of Lubbock, 57 S.W.2d 637, 638 (Tex.App. — Lubbock 1933). Hickory allowed Corson and Riddle to have the first $2.2 million of reimbursements; therefore, Hickory assigned the portion of the proceeds that Corson and Riddle did not assign to it. Hickory's reservation of the balance of the proceeds is evidence of its partial assignment. It limited the reimbursements to those not assigned back to Hickory.
In addition, Hickory never intended to "pay" Corson and Riddle directly; the contract says that they would only get the portion of the reimbursements that they received up to $2.2 million. Hickory was not responsible for paying Corson and Riddle. Moreover, Hickory disclaimed responsibility for paying Corson and Riddle by admitting that the proceeds may not be realized. The parties recognized the contingent nature of the reimbursements by saying "only to the extent that Seller may be reimbursed", and "the amounts so reimbursed." Hickory's lack of a duty to pay Corson and Riddle is evidence of a transfer. See Farnsworth on Contracts § 11.3 (3rd ed. 2004).
In accounting terms, the reimbursements are a receivable for Hickory. It expected to get paid by the district for the work it had done. It assigned part of its receivable to Corson and Riddle by contract. The rest were assigned back to Hickory through the contract. The transaction reduced the amount of receivables due to Hickory, but it did not transform its receivable from the district to a payable of Hickory to Corson and Riddle.
Gaston is the ultimate owner of part of Hickory's assignment to Corson and Riddle through Corson's contract with the Venture and the Venture's contract with Gaston. Gaston has title to the balance of the $2.2 million that is due to Corson — approximately $440,000, plus interest.
This case is about an assignment from Hickory to Corson and Riddle and back — not about a transaction in bankruptcy. Although they are complicated, the transfers and divisions in this case are not in principle different from an oil deal's working interests, royalties, over-riding royalties, and production payments — more of which is a debt. See Prince Bros. Drilling Co., Inc. v. Fuhrman Petroleum Corp., 150 S.W.2d 314 (1941).
In commercial paper, transfers without recourse are passages of title. The debtor-creditor relation obtains between the originator — the maker — and the holder but not between the intermediaries. See Tyree v. Cox, 267 S.W.2d 233, 234-5 (Tex.App.-San Antonio 1954) ("A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument, but does not impair its negotiability. . . . This transfer . . . relates only to the legal title of the notes."); Wolcott v. Timberman, 28 Iowa 454 (1870).
6. Ambiguity.
Even if the contract was ambiguous, the extrinsic evidence shows that the parties intended an assignment. See National Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995). Despite the casual approach of some bankruptcy lawyers to the substantive distinctions in common law transactions, all obligations are not debts.
In its articles of dissolution, Hickory did not list Corson, Riddle, or the Venture as debtors. In fact, the articles said that all its debts had been paid. If the contract created a debt, the debt should have been listed because entire $2.2 million had not been paid yet. Also, General Homes did not list the Venture, Corson, or Riddle as a creditor on its bankruptcy schedules. If Hickory was a debtor to them, and General Homes assumed its debts, then they should have been listed.
In addition, the district transferred the proceeds from the first bond issuance directly to Corson. It is unclear whether the district got Hickory's consent before paying Corson. At trial, an attorney for the district testified that he usually would have gotten permission of the initial obligee or assignor before making a transfer like this, but he could not recall if he did it in this case.
If this was a debt, it is very likely that the district would have required General Homes to give it written permission to transfer the reimbursements directly to Corson. Because there are no contemporaneous notes, memoranda, or letters that indicate General Homes's consent, it appears that consent was unnecessary, serving as evidence of an assignment. The only objective proof about this are three letters from the district's attorneys explaining that, according to the agreements between the developers, Corson would be paid first, followed by the Venture, with the balance going to General Homes. It does not sound like a debt General Homes owed Corson or the Venture.
Further, the order that authorized the Group to assume the reimbursement contracts of General Homes is evidence of an assignment. The Group got title to the Fort Bend district 34 reimbursements "only to the extent that the proceeds . . . have not been . . . assigned" by the contract between Hickory, Corson, and Riddle. It is illogical to think that the order would have this exception, that the exception would refer to the contract, and the exception would have characterized the transfer as an assignment if the contract only created a debt.
Based on the extrinsic evidence, the parties to the contract intended a present assignment of part of the reimbursements, and a fully informed, disinterested person would have understood the transaction to have been a conveyance rather than a debt.
7. Consent.
The Group also argues that the original contract between the district and Hickory allowed Hickory to assign the right to reimbursements only with the written consent of the district. Again, the Group's position contradicts the language of the contract.
Section five of the original contract requires the written consent of the district if Hickory assigns some or all of the contract. Section six of the contract, titled "Assignment of District Proceeds," allows Hickory to assign the money due to it under the contract without the district's written consent to assist Hickory in its financing of the development and improvements.
The provisions are clear. Section five requires written consent if Hickory wants to assign its duties under the contract, while section six allows Hickory to assign its proceeds without district approval. The provisions also make sense. The district wanted control over who made the improvements, but it did not care who was paid for them. Assuming the provisions are in conflict, this interpretation does not destroy either provision or the contract as a whole. See Northern Natural Gas Co v. Conoco, Inc., 939 S.W.2d 676 (Tex.App.-El Paso, 1996). Hickory did not need the district's consent to assign the right to some of its reimbursements to Corson and Riddle.
The Group argues that the deal between Hickory and Corson and Riddle had nothing to do with financing. Its very limited definition of financing is untethered to real-world transactions. In economic terms, sales, mortgages, and liens are financing deals. In this case, Hickory wanted to sell the subdivision to Corson and Riddle. To finance the deal, it assigned the right to some of the reimbursements it was due. The deal helped Hickory finance its development. The right to convey was not limited in the contract to financing assistance; Hickory could have donated title to the reimbursements to a charity.
8. Attorneys' Fees.
The bankruptcy court's judgment order did not award Gaston or Hickory its attorneys' fees or costs. Gaston and the Venture moved to amend the judgment to include fees and costs, but the bankruptcy court denied its motion without explanation in a footnote in its amended opinion.
Gaston and the Venture may recover its fees and costs if it is allowed under Texas law, the source of substantive law in this case. See Mercantile Nat'l Bank v. Bradford Trust Co., 850 F.2d 215 (5th Cir 1988). In Texas, parties who successfully sue for breach of contract may be awarded fees and costs. See Tex. Civ. Prac. Code § 38.001(8). This statute does not apply to Gaston and the Venture because they successfully defended the Group's contractual claim. See Ventana Investments v. 909 Corp., 879 F. Supp. 676 (E.D Tex. 1995).
In addition, Gaston is not entitled to its fees and costs because of its counterclaim against the Group under the Texas declaratory judgment law. See Tex. Civ. Prac. Code § 37.009. Gaston cannot counterclaim under the statute to get its fees and costs if the counterclaim does not present a new controversy or is merely the converse of the claim already before the court. See Redwine v. AAA Life Ins. Co., 852 S.W.2d 10, 17 (Tex.App. — Dallas 1993). Gaston's claim is identical to the Group's; that it had legal title the reimbursements.
Although Gaston is not entitled to its fees under statute, an equitable adjustment of costs could be warranted because of the meretricious arguments of the Group. Gaston may move for an adjustment. See Fed.R.Civ.Pro. 11; 28 U.S.C. § 1927.
9. Conclusion.
The bankruptcy court did not have jurisdiction of this case because the claims were not related to the implementation of General Homes's confirmed plan. The decision will be vacated. Conditionally, it would be affirmed on other grounds.