Bankr. L. Rep. P 69,038in the Matter of First Colonial Corporation of America.first Colonial Corporation of America, Plaintiff-appellant, v. American Benefit Life Insurance Company, Defendant-appellee, 693 F.2d 447 (5th Cir. 1982)

The proceedings, complex and cumbersome, unfolded at a leaden pace. Finally, in July of 1980, the bankruptcy judge, Harvey H. Posner, entered the final orders assessing priority fees and declining to reopen the filing period to accommodate creditors who had failed to file their claims timely. Baddock filed a complaint against the Internal Revenue Service and American Benefit seeking, inter alia, a clearance and discharge of unliquidated tax liabilities as a prelude to termination of the bankruptcy proceeding. The complaint declared that all claims had been satisfied and, subject to a possible IRS levy, the residue of the estate, upon completion of its administration, would total $220,609.83.

Thereafter the trustee petitioned for conversion of the bankruptcy into a Chapter X reorganization. The bankruptcy judge dismissed this petition because "the estate has already been fully administered as a straight bankruptcy case and full relief has already been accorded said corporation and its creditors," and because the petition did not comply with Chapter X. This ruling was not appealed.

Baddock then challenged the venue of the Fournet receivership proceedings. In response, American Benefit petitioned the Nineteenth Judicial District Court, East Baton Rouge Parish, Louisiana, for appointment of James J. Zito as temporary receiver. Baddock did not object to this appointment. Once the bankruptcy court absolved First Colonial and Baddock of any further liability for federal tax, Baddock sought the appointment of a federal receiver in the United States District Court for the Middle District of Louisiana. After the two judges in the Middle District recused themselves, the case was transferred to the Eastern District and alloted to Judge Robert F. Collins.

Within a week of moving for appointment of a federal receiver, Baddock filed his final accounting, reflecting a cash and non-cash residue totaling $216,664.49. All parties were given a copy of the report and notified of a 15-day period for interposing objections. The bankruptcy judge ultimately approved the report and directed the trustee to deliver the surplus to the bankrupt or its legal representative, whereupon the estate would be closed, the trustee would be discharged and his bond would be canceled.

In January of 1981 American Benefit moved for delivery of the residual assets to James J. Zito, in his capacity as temporary receiver for First Colonial. After a hearing, the bankruptcy judge directed Baddock to surrender to Zito all First Colonial assets upon the judge being satisfied of the sufficiency of the receiver's credentials. Zito was ordered to present his letters of appointment.⁴  The trustee appealed this order to the district court.

In reviewing the bankruptcy court's order, Judge Collins traced the origins of equity jurisdiction in a bankruptcy setting and concluded that Judge Posner had acted within his discretion in directing the trustee to deliver the surplus assets to the temporary receiver. The district court opined that given the completion of the administrative process, the only issue remaining was the resolution of the identity of the party entitled to receive the assets of First Colonial. See note 4, supra. The district court found that the broad discretion accorded the bankruptcy judge extended to directing delivery of the surplus assets to a receiver appointed by a state court. Finally, Judge Collins rejected as untimely the trustee's request for the recusal of the bankruptcy judge.

On the basis of his affirmance of the bankruptcy court's order directing delivery to the state receiver, the district court dismissed the trustee's petition for appointment of a federal receiver. Insofar as the record reflects, the bankruptcy proceedings have not been closed; the trustee has not been discharged.

Issues

Invoking the authority purportedly conferred upon him by this court in a prior appeal, In re First Colonial Corporation of America, 544 F.2d 1291 (5th Cir.), cert. denied, 431 U.S. 904, 97 S. Ct. 1696, 52 L. Ed. 2d 388 (1977), the trustee challenges both American Benefit's standing to seek Judge Posner's recognition of a state court receivership for purposes of preserving the debtor's residual assets and the power of the bankruptcy court to do so. Other issues are raised which were not properly presented or preserved for appeal. See In re Novack, 639 F.2d 1274 (5th Cir. 1981); In re Levens, 563 F.2d 1223 (5th Cir. 1977).⁵ 

As we noted in our earlier opinion, the trustee is usually the sole party empowered to proceed on behalf of the bankrupt estate. 544 F.2d at 1297. However, this may not be interpreted as bestowing on a trustee the exclusive right to champion the rights of a bankrupt corporation and its shareholders in and to the residual assets after the administration of the estate is complete and the final account is submitted. See Berl v. Crutcher, 60 F.2d 440 (5th Cir.), cert. denied, 287 U.S. 670, 53 S. Ct. 314, 77 L. Ed. 578 (1932).

Standing

Baddock argues that: (1) American Benefit may not act for the state receiver; (2) American Benefit's title to the First Colonial stock is fatally flawed; (3) American Benefit may not champion the rights of First Colonial shareholders. Addressing standing, the bankruptcy judge remarked during the hearing on American Benefit's petition for appointment of Zito as custodian of the residual assets:

American Benefit Life Insurance Company was permitted to intervene generally in this proceeding some five or six years ago, and is a proper party to the proceedings as the Fifth Circuit noted in its opinion in 1977. [544 F.2d at 1297-98.] Irrespective of whether American Benefit Life Insurance Company owns five hundred thousand shares of First Colonial Corporation or whether it owns one share makes no difference whatsoever. It has been determined that it is a proper intervenor and it certainly has the right to suggest to the Court to whom the residual assets should be turned over.

Judge Posner concluded that sua sponte he could have ordered the trustee's turnover of any surplus to the debtor; American Benefit's suggestion of this option could not affect that authority.

We previously held that American Benefit, as a shareholder, has a valid interest in the disposition of the residual assets, including, under the circumstances of this case, appeal of fees awarded to the trustee and others which might diminish the residue. 544 F.2d 1297. We shall not plow that furrow again.

Baddock maintains that he was misinformed about deficiencies in American Benefit's stock ownership claim. He has no cognizable interest in that matter at this stage. The trustee's authority and responsibility for protecting the estate does not extend to a dispute over the validity of the claims of those purporting to own the surplus assets after completion of the bankruptcy proceeding.

Disposition of Surplus

There is no question that the estate has been fully administered and the debtor is entitled to receive the remaining assets. Thus we perceive as the sole issue the identification of the proper person to take possession of the surplus assets in light of the abandonment of the bankrupt corporation by its directors and officers.

Section 2(a) of the Bankruptcy Act, 11 U.S.C. § 11(a), invests the bankruptcy courts with "jurisdiction in equity," a codification of a jurisprudential rule. See Bank of Marin v. England, 385 U.S. 99, 87 S. Ct. 274, 17 L. Ed. 2d 197 (1966); In re Miller, 485 F.2d 74 (5th Cir. 1973). Bankruptcy courts traditionally have been guided by precepts of equity in those areas falling within the interstices of the Act; one such area being the proper disposition of the surplus. In the absence of an express provision for the orderly devolution of surplus monies or other assets after payment of all debts and administrative costs, the courts have relied upon equitable principles in returning such surplus to the debtor. Time Oil Co. v. Wolverton, 491 F.2d 361 (9th Cir.), cert. denied, 417 U.S. 947, 94 S. Ct. 3072, 41 L. Ed. 2d 667 (1974); Hendrie v. Lowmaster, 152 F.2d 83 (6th Cir. 1945); Burton Coal Co. v. Franklin Coal Co., 67 F.2d 796 (8th Cir. 1933); Wheeling Structural Steel Co. v. Moss, 62 F.2d 37 (4th Cir. 1932); Berl v. Crutcher. Where the debtor is a defunct corporation, the bankruptcy court may provide for distribution of the residue to its shareholders. Hendrie v. Lowmaster, Berl v. Crutcher; Johnson v. Norris, 190 F. 459 (5th Cir. 1911), cert. denied, 232 U.S. 723, 34 S. Ct. 479, 58 L. Ed. 815 (1914). See generally 6 Remington, Bankruptcy Law, Sec. 2890 (5th ed. 1952).

The bankruptcy court correctly exercised its power to restore the surplus to First Colonial's shareholders. The bankruptcy court properly directed the trustee to deliver the surplus to the state-appointed receiver. As a leading commentator noted:

... it is outside the scope of bankruptcy to go into conflicting claims of stockholders or as to who is entitled to the assets of a dissolved corporation, and, in such instances, the bankruptcy court may simply hold the assets or provide for their custody pending determination of rights by another tribunal.

6 Remington, Sec. 2890 at 510. Accord, Berl v. Crutcher, 60 F.2d at 444.

The submissibility of a particular controversy arising in bankruptcy to a state court is ordinarily within the bankruptcy court's discretion, to be exercised in the interests of the parties, the estate and the proceeding. 1 Collier on Bankruptcy, p 2.07 at 166 (14th ed. 1974). There was no danger of conflict between the paramount jurisdiction of the bankruptcy court and that of the courts of Louisiana, inasmuch as the trustee's official duties had been fulfilled and the administration of the estate was completed. The district court carefully considered the welfare of the debtor and its shareholders, together with the Act's underlying policy of efficient and expeditious settlement of proceedings in bankruptcy, in affirming the bankruptcy court's order. The court likewise, on this basis, properly dismissed the petition for a federal receiver.

The judgment of the district court, in each case, is, in all respects, AFFIRMED.