United States Court of Appeals,
Fifth Circuit.
No. 95-31137.
In the Matter of ROYALE AIRLINES, INC., Debtor.
Nov. 4, 1996.
Appeal from the United States District Court for the Western District of Louisiana.
Before REYNALDO G. GARZA, DeMOSS and PARKER, Circuit Judges.
ROBERT M. PARKER, Circuit Judge:
The Appellants, Gene Howard and Commercial National Bank appeal the judgment of the
bankruptcy court granting Appellee, Fidelity and Deposit Company of Maryland's, motion for
summary judgment as to its liability as surety for former trustee Jerry Bass. The Appellants
contended that Bass failed to pursue preference actions before they prescribed causing financial loss
to the Appellants. The bankruptcy court based its ruling on two grounds: first, that Commercial
National Bank gained possession of the right to pursue preference claims, and second, based on the
facts of the case, the doctrine of in pari delicto warranted a finding of no liability. The district court
found that the doctrine of in pari delicto barred Commercial National Bank's recovery, and affirmed
the bankruptcy court. Although we find that the bankruptcy court erroneously applied the doctrine
of in pari delicto, given the particular egregious facts of this case, we affirm, finding that Commercial
National Bank implicitly consented to Bass' actions as trustee.
FACTUAL BACKGROUND
Royale Airlines, Inc. ("Royale" or "Debtor") filed a voluntary petition for bankruptcy under
Chapter 11 of the Bankruptcy Code on September 9, 1987. Royale named Commercial National
Bank ("CNB") as its principal creditor, having a secured claim in excess of seven and a half million
dollars. Immediately prior to and during the early stages of the Royale bankruptcy, CNB sought to
improve its collateral position. On October 19, 1987, CNB obtained from the bankruptcy court a
"Final Order" which provided that Royale's pre-petition and post-petition debt to CNB be secured
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in favor of CNB by way of a super-priority lien.1 This order gave CNB a mortgage over all property
that existed at the time of filing or that would exist in the future. To reduce Royale's debt to CNB,
after property was abandoned to Royale, Royale would then convey the property by partial dation
to CNB. CNB would then liquidate the property.
Royale continued to lose money in Chapter 11, and a plan of reorganization had not been
confirmed by December 1988. On December 23, 1988, the Airline Pilots Association International
filed a motion to appoint a custodian for Royale or to have a trustee appointed. Thereafter, on
January 23, 1989, CNB filed a "Motion to Lift Stay under Section 362" and the bankruptcy court on
January 30, 1989 signed an order granting CNB's motion.2 This Order gave CNB the right to take
possession of all assets over which it had a mortgage. Subsequently, the United States Trustee filed
a motion requesting the bankruptcy court to appoint a trustee, or alternatively, to convert Royale's
bankruptcy to a Chapter 7 case. On February 28, 1989, the bankruptcy court entered an order
converting the Royale bankruptcy to a Chapter 7 case. In addition, Jerry Bass ("Bass") was
appointed as interim trustee and became the permanent trustee on July 10, 1989.
During the Chapter 7 proceedings, CNB continued to collect and liquidate the property of the
Royale estate. On November 12, 1991, Jerry Bass resigned as trustee. The United States Trustee
1
The bankruptcy court's order provided that Royale's debt to CNB be secured in favor of
CNB, by:
all of the property of the estate of [Royale], including without limitation all
property of the estate as it existed on the date [Royale] filed its petition, and all
property of the estate acquired, created or generated in any manner whatsoever by
the estate after the date [Royale] filed its petition....
2
The January 30, 1989 order signed by the bankruptcy court states:
IT IS ORDERED that the stay of 11 U.S.C. § 362 be modified to allow CNB to
take possession and control of the property of the estate and the property of the
Debtor which is the subject of [CNB's] mortgages and to secure, preserve, and
protect same pending further order of this Court relating to the collateral.... CNB
may exercise those rights in its discretion deemed necessary by it to secure,
preserve, and protect the property of the estate and the property of the Debtor that
serves as collateral for CNB's loans with powers similar to those granted a keeper
under LSA-R.S. 9:5138.
2
served as trustee until Gene Howard ("Howard") was appointed as successor trustee on May 29,
1992. On March 22, 1993, the Royale bankruptcy was closed leaving an unpaid debt to CNB of over
two million dollars. CNB brought this action hoping to recover damages from Bass and his surety,
Fidelity and Deposit Company of Maryland, for Bass' alleged failure to timely institute preference
actions.3
PROCEEDINGS BELOW
In the adversary proceeding, CNB and Howard alleged that Bass, the former trustee, failed
to pursue the bankruptcy estate's preference actions before they prescribed causing financial loss to
CNB. There were two sureties guaranteeing Bass' performance as trustee, Travelers Indemnity
Company and Fidelity and Deposit Company of Maryland ("Fidelity"). Both sureties were granted
summary judgment in their favor by the bankruptcy court after the court found that CNB was
mutually and equally at fault with Bass in allowing preference actions to prescribe without any action
being taken. CNB appealed the bankruptcy court's grant of summary judgment for Fidelity and
Deposit Company of Maryland.
The bankruptcy court also ruled that the preference actions of the Royale estate were never
abandoned and that, although the law was unclear, CNB gained possession of the right to pursue
Royale's preferential transfers and director and officer claims by virtue of the lift stay order dated
January 30, 1989. The court found that the right to pursue the preference actions was possessed by
CNB, not Bass. The bankruptcy court took judicial notice of the fact that CNB controlled the case
and dominated the trustee's actions to such an extent that it had a duty to preserve these assets. CNB
dominated the Royale estate from the commencement under Chapter 11 and thereafter following the
conversion to Chapter 7. Therefore, the bankruptcy court found that CNB possessed a duty to
prosecute these claims. The court also found that Bass shared a concurrent duty with CNB to pursue
3
On October 28, 1993, Howard filed a motion to reopen the Royale bankruptcy in order to
bring the current adversary proceeding. However, Howard had assigned all remaining causes of
action to CNB in October 1992. CNB reassigned three percent (3%) of its alleged claim back to
Howard in November 1993, thus allowing both CNB and Howard to pursue the adversary action
together.
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the preference actions.
The bankruptcy court reached the legal conclusion that any breach of the duty to investigate
and pursue preference actions did not occur until the prescription date for filing preference claims or
any other claim had passed. Based on this determination and the bankruptcy court's findings that
CNB dominated Bass' actions to such an extent that if CNB wanted preference actions pursued it
could have pes and that Bass was not removed as trustee but resigned, the court found that CNB
breached its duty to preserve or pursue the preference actions in question. Consequently, the court
held the equitable doctrine of in pari delicto barred CNB's claims. The bankruptcy court also
implicitly found that Bass breached his duties owed to the estate.
The district court affirmed the bankruptcy court's denial of CNB's claims, although it
disagreed with one of the reasons relied on by the bankruptcy court. In particular, the district court
found that CNB was mutually at fault with Bass and that the doctrine of in pari delicto barred any
recovery by CNB. The district court likewise found that CNB dominated the Royale estate from
commencement of the case, as well as after the conversion to Chapter 7. However, the district court
disagreed with the bankruptcy court's finding that the right to pursue the preference action had been
transferred to CNB. The district court stated that it was not certain that the bankruptcy court had
the power to transfer that right, but even if it did, the transfer had to be explicit and that neither the
original 1987 financing order nor the January 30, 1989 lift stay order specifically transferred the right
to bring preference actions to CNB. CNB timely filed its appeal.
DISCUSSION
Pursuant to the bankruptcy appellat e process, the Court of Appeals is the second level of
appellate review. Nonetheless, we review a bankruptcy court's grant of summary judgment de novo.
In re Southmark Corp., 88 F.3d 311, 314 (5th Cir.1996). Accordingly, all fact questions are viewed
in the light most favorable to the nonmovant. Summary Judgment is proper when no issue of material
fact exists and the moving party is entitled to judgment as a matter of law. Id.; FED.R.CIV.P. 56(c).
The equitable defense of in pari delicto, which means "in equal fault", is based on the
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common law notion that a plaintiff's recovery may be barred by his own wrongful conduct. Bateman
Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306, 105 S.Ct. 2622, 2626, 86 L.Ed.2d 215
(1985). The Supreme Court in Bateman Eichler, set forth a two part test applying this doctrine to
bar private causes of action in securities cases. The Bateman Eichler test provides that an action
"may be barred on the grounds of the plaintiff's own culpability only where (1) as a direct result of
his actions, the plaintiff bears at least substantial responsibility for the violations he seeks to redress,
and (2) preclusion of suit would not significantly interfere with the effective enforcement of the ...
laws and protection of the ... public." Bateman Eichler, 472 U.S. at 310-11, 105 S.Ct. at 2629. The
first prong of the test sets forth the essential elements of the doctrine, while the second prong
embodies the doctrine's traditional requirement that public policy implications be carefully considered
before the defense is allowed. Pinter v. Dahl, 486 U.S. 622, 633, 108 S.Ct. 2063, 2071, 100 L.Ed.2d
658 (1988). Courts have expanded the defense's application to those situations where the plaintiff
bore at least substantially equal responsibility for his injury and where the plaintiff has participated
in some of "the same sort of wrongdoi ng" as the defendants. Id. at 307, 105 S.Ct. 2627, citing,
Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 138, 88 S.Ct. 1981, 1984, 20
L.Ed.2d 982 (1968).
Under the first prong of the Bateman Eichler test, a plaintiff cannot recover where, as a result
of his own actions, the plaintiff bears at least substantially equal responsibility for the underlying
wrongdoing of which he is complaining. Thus, in determining whether the bankruptcy court properly
applied the doctrine of in pari delicto, we must first consider whether it was settled that CNB had
a duty to bring the preference actions despite Bass' inactions. CNB argues that the bankruptcy court,
as well as the district court, improperly found that CNB and Bass had equivalent duties to bring the
preference actions and that both parties were equally at fault without providing a reasonable basis for
any fault by CNB. Fidelity contends that the bankruptcy court correctly applied the doctrine after
it found that CNB breached its duty to preserve or pursue the preference actions and thus it was
equally at fault with Bass as trustee. We find CNB's argument persuasive.
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The bankruptcy court in making its ruling noted that "it is unsettled law whether such a
transfer [of the right to pursue preference actions] can take place...."4 We need not resolve this
question in order to decide the issue before us. The bankruptcy court further found that "in view of
the fact that it is this court's opinion that [CNB] had possession of these claims ... it is also this court's
opinion that [CNB] had a duty to prosecute these claims." However, it is clear that the bankruptcy
court's January 30, 1989 Final Order did not specifically state that CNB had possession nor the duty
to prosecute these claims. Because the law is admittedly unsettled on the ability to assign preference
actions, and as noted by the district court, the bankruptcy court in its Final Order did not specifically
transfer these act ions to CNB, any determination that CNB had a concurrent legal duty to pursue
those claims is at best speculative. Additionally, the bankruptcy court's ruling is insupportable to
demonstrate the plaintiff bore substantially equal responsibility to pursue the avoidance actions.
Therefore, there can be no finding of equivalent fault, a requisite element to support the defense of
in pari delicto. Thus, the first prong of the Bateman Eichler test is not satisfied. Accordingly, we
find the bankruptcy court erroneously applied the defense of in pari delicto predicated on the finding
that CNB was equally at fault for not pursuing the preference actions when it was unknown whether
CNB had a legal duty to act and, therefore, the bankruptcy court erred in granting summary judgment
on such grounds.
However, our analysis does not end here. In reviewing the record, although we may
conclude that the reasons given by the bankruptcy court do not support summary judgment, this court
is not bound by those grounds art iculated and we may affirm the judgment on any other grounds
supported by the record. See Forsyth v. Barr, 19 F.3d 1527, 1534 n. 12 (5th Cir.), cert. denied, ---
U.S. ----, 115 S.Ct. 195, 130 L.Ed.2d 127 (1994). Therefore, we must proceed to Fidelity's
4
See e.g., In re Pearson Industries, Inc., 178 B.R. 753, 762 (Bankr.C.D.Ill.1995) (stating that
a trustee's right to recover preferences cannot be assigned to another entity), In re North Atlantic
Millwork Corp., 155 B.R. 271, 281 (Bankr.D.Mass.1993) (noting that absent the appointment of
a creditor to bring preference actions in a reorganization plan, there is no statutory authority
bestowing that right); In re Professional Inv. Properties of America, 955 F.2d 623, 626 (9th
Cir.), cert. denied, 506 U.S. 818, 113 S.Ct. 63, 121 L.Ed.2d 31 (1992) (permitting assignment of
a trustee's avoidance powers under particular circumstances outside reorganization plan).
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argument that CNB consented to the actions or inactions of Bass thereby precluding CNB from
recovery.
Fidelity argues that, under the doctrine of consent, CNB's failure to act to preserve the
property of the Royale estate or to object to the actions taken or not taken by Bass as trustee, bars
its recovery in this proceeding. CNB asserts that Fidelity's argument is improperly based on the
assumption that CNB knew that Bass was not going to investigate the preference actions. CNB
contends that it was led to believe that Bass was acting to pursue the preference actions.
It is well recognized that where a party is found to have by their conduct, either expressly or
impliedly, consented to another party's actions, they are precluded from asserting a claim against that
party for damages they may have suffered. In In re Peckinpaugh, 50 B.R. 865 (Bankr.N.D.Ohio
1985), the bankruptcy court reiterated that "a secured creditor cannot remain silent with knowledge
of the Trustee's actions and not act upon it and t hen be heard that the Trustee made the wrong
decision." Peckinpaugh, 50 B.R. at 869. This aptly describes the course of CNB's conduct in the
case sub judice.
While the record discloses that CNB did not expressly consent to Bass' actions, the evidence
before us mandates the finding that CNB implicitly consented to the actions of Bass. However, such
consent should not be lightly inferred. In this case, CNB is a legally sophisticated creditor and
exercised complete control over the trustee's actions throughout the bankruptcy. CNB was the
largest creditor of the Debtor initially and throughout the case. The record discloses that CNB had
a close involvement and was in close contact, if not daily contact, with virtually every aspect of the
Debtor's bankruptcy proceedings. CNB worked with the trustee to liquidate the estate's assets. The
bankruptcy court found that at a el discussed the preference matters; thus, CNB was aware of the
preference claims and when those claims would prescribe, yet CNB's conduct shows that whatever
course of action or inaction Bass pursued, CNB did not complain until the filing of this action. In
addition, during the period of time that Bass served as trustee, the record is void of any
documentation to either Bass, the bankruptcy court, or the United States Trustee's Office expressing
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concern over Bass' performance as trustee. Nor did CNB seek to remove Bass as trustee.
Accordingly, this Court finds that based on CNB's conduct during these proceedings, CNB implicitly
consented to the actions or inactions of Bass in his dut ies as trustee of the Debtor. We find the
remaining arguments of CNB to be without merit.
For the foregoing reasons, we AFFIRM the bankruptcy court's granting of summary judgment
in favor of Fidelity and Deposit Company of Maryland.
AFFIRMED.
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