United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT June 11, 2003
Charles R. Fulbruge III
Clerk
No. 03-20121
Summary Calendar
IN THE MATTER OF: DIGICON, INC.,
also known as VERITAS DGC, INC.,
Debtor,
0CEAN MARINE SERVICES PARTNERSHIP
NO. 1; OCEAN MARINE SERVICES, INC.,
Appellants,
versus
DIGICON, INC., also known as
VERITAS DGC, INC.,
Appellee.
--------------------
Appeal from the United States District Court
for the Southern District of Texas
(H-02-CV-2191)
--------------------
Before DAVIS, WIENER, and EMILIO M. GARZA, Circuit Judges.
PER CURIAM:*
Appellants Ocean Marine Services Partnership No. 1 and Ocean
Marine Services, Inc. (collectively, “Ocean Marine”) appeal from
the Bankruptcy Court’s Final Order of April 1, 2002, as affirmed by
the district court on appeal, granting the Debtor’s motion to show
cause and enjoining Ocean Marine from attempting to collect from
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
Veritas any debt relating to the Appellant partnership. We affirm
the Bankruptcy Court for essentially the same reasons as did the
district court in its patient, exhaustive, and eminently correct
Memorandum and Order of December 16, 2002.
Having carefully reviewed the record on appeal, including the
writings of the Bankruptcy Court and the district court, and having
considered the arguments of appellate counsel as set forth in their
respective briefs, we conclude that any further writing by this
court would merely be duplicative of the explanations set forth in
the opinions of the Bankruptcy Court and the district court —— and
thus a waste of judicial resources. Instead, we adopt the
Memorandum and Order of the district court in its entirety,
incorporate it by reference, and append a copy hereto.
AFFIRMED.
2
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
OCEAN MARINE SERVICES, INC., §
and OCEAN MARINE SERVICES §
PARTNERSHIP NO. 1, §
§
Appellants, §
§
v. § CIVIL ACTION NO. H-02-2191
§
DIGICON, INC. §
N/K/A VERITAS DGC, INC., §
§
Appellee. §
MEMORANDUM AND ORDER
Pursuant to 28 U.S.C. § 158, Appellants Ocean Marine Services
Inc. and Ocean Marine Services Partnership No. 1 appeal the April
1, 2002, Order of the Bankruptcy Court for the Southern District of
Texas, which granted Debtor Digicon, Inc.’s (n/k/a Veritas DGC,
Inc.) Motion to Show Cause why Ocean Marine Services Inc. and Ocean
Marine Services Partnership No. 1 should not be held in contempt
and enjoined Ocean Marine Services Inc. and Ocean Marine Services
Partnership No. 1 “from attempting to collect on any debt relating
to Ocean Marine Services Partnership No. 1 from Veritas DGC, Inc.”
After having carefully reviewed the record and the applicable law,
the Court concludes that the Bankruptcy Court’s April 1, 2002,
Order should be AFFIRMED.
I. Procedural History
On January 31, 1990, Digicon, Inc. and Digicon Marine Inc., a
wholly owned subsidiary of Digicon, Inc., filed for bankruptcy
under Chapter 11. A Second Amended Plan of Reorganization was
approved by the Bankruptcy Court on June 7, 1991, and such plan was
consummated on April 27, 1992. A Final Closing Order nunc pro tunc
was issued by the Bankruptcy Court on July 31, 1996, reflecting a
closing date for the Chapter 11 proceeding of December 31, 1995.
In June 1999, Ocean Marine Services, Inc. (“OMS”) and Ocean
Marine Services Partnership No. 1 (“the Partnership”) filed suit
against Veritas DGC, Inc., the successor in interest to Digicon
Marine Inc. and Digicon, Inc., in state district court. In that
suit, OMS and the Partnership sought to compel Veritas, as the
successor in interest to Digicon, to eliminate the deficit in
4
Digicon’s** capital account in the Partnership, a partnership which
was formed in 1975 between OMS and Digicon Marine, Inc., and which
ceased doing business in 1989. In response, Veritas filed in
Bankruptcy Court a Motion to Show Cause why OMS and the Partnership
should not be held in contempt. On April 1, 2002, after a hearing,
the Bankruptcy Court granted Veritas’s motion and enjoined OMS and
the Partnership from attempting to collect from Veritas any debt
related to the Partnership. In so ruling, the Bankruptcy Court
entered the following written findings of fact and conclusions of
law:
Ocean Marine Services Partnership No. 1 (“the
Partnership”) was formed by written partnership agreement
between Ocean Marine Services, Inc. and Digicon Marine,
Inc. (“Digicon”) on or about April 17, 1975. Digicon was
a wholly owned subsidiary of Digicon, Inc. (“Debtor”).
Upon formation of the Partnership, Digicon made a
$2.7 million capital contribution and Ocean Marine
Services, Inc. contributed $27,000. The Partnership
owned and operated commercial ocean tug boats, the
acquisition of which was financed by MARAD and secured by
the vessels owned by the Partnership. At some point, the
Partnership ceased payment of its indebtedness and MARAD
began foreclosing on the vessels. On July 31, 1989, the
Partnership ceased its business operations since at that
time, all of its vessels had been either sold and/or
foreclosed on by MARAD. Also at that time, Ocean Marine
Services, Inc., the managing partner, began the winding
up [of] the Partnership’s affairs which included: (1) the
pending recovery of more than $500,000 in casualty
insurance claims filed in 1985; (2) the audit of the
Partnership by the Internal Revenue Service; and (3) the
liability of the Partnership and its partners to MARAD
for deficiencies after the foreclosure of the liens
against the vessels. The Partnership Agreement provided
**
In July 1994, Digicon Marine, Inc. was merged into Digicon,
Inc., and no longer existed as a separate corporate entity.
5
that upon completion of the winding up of the
Partnership, if there was a deficit in the capital
account of a partner, such partner would have to
contribute cash necessary to eliminate the deficit. See
Partnership Agreement § 10.04.
Both Digicon, Inc. and Digicon Marine Services, Inc.
(along with other Digicon, Inc. subsidiaries) filed
Chapter 11 bankruptcy petitions on January 31, 1990, and
the cases were jointly administered. Neither Ocean
Marine Services, Inc. nor the Partnership filed any
claims in the bankruptcy cases, nor did either entity
have any opposition to any proposed plan of
reorganization. The Second Amended Plan of
Reorganization was approved by the Court through
confirmation on June 7, 1991, discharging all prepetition
claims and providing for the rejection of all unassumed
executory contracts. Debtors filed a Post-Confirmation
Report representing full consummation of the Plan on
April 27, 1992.
On February 21, 1991, the Internal Revenue Service
completed its audit of the Partnership’s final tax return
with no changes or adjustments made. In 1991, MARAD sued
the Partnership for recovery of deficiencies in the
United States District Court for the Southern District of
Texas, but the lawsuit was settled and subsequently
dismissed on July 16, 1992. Finally, on August 18 1997,
Ocean Marine Services, Inc, and the Partnership received
notice that the last of the insurance claims was being
paid.
In the meantime, Digicon was merged into Debtor and
Digicon ceased as a corporate entity as of July 22, 1994.
Thereafter, Debtor was merged into Veritas DGC, Inc.
(“Veritas”). Ocean Marine Services, Inc. and the
Partnership have notified Veritas of the final
dissolution of the Partnership and they have demanded
Veritas (as putative partner) eliminate its deficit
account in the Partnership. Veritas has refused, thus
leading to the underlying dispute.
Veritas argues that the confirmed Chapter 11 Plan of
Reorganization discharged any monetary liability to Ocean
Marine Services, Inc. and the Partnership. Ocean Marine
Services, Inc. and the Partnership argue: (1) The
Partnership Agreement was an executory contract subject
to the confirmed Second Amended Plan of Reorganization
and after the Plan was fully consummated, Veritas acted
6
to assume it position of partner with all rights and
obligations arising under the Partnership Agreement; and
(2) Neither Ocean Marine Services, Inc. nor the
Partnership had a prepetition claim against Debtor as a
partner to eliminate any deficit capital account in the
Partnership since the claim did not arise until all
matters of dissolution had been settled and all
allocations of income, losses and deductions had been
allocated to the partners’ respective capital accounts in
accordance with the Partnership Agreement.
With regard to whether the Partnership Agreement was
an executory contract, the court finds that it was not.
As of the date of filing of Debtor’s bankruptcy case,
[January] 31, 1990, the Partnership had already gone into
dissolution pursuant to Article X, § 10.01 of the
Partnership Agreement. There were no other performance
obligations under the Partnership Agreement other than
the winding up of the Partnership’s affairs. However,
even if the Partnership Agreement was executory in
nature, both Ocean Marine Services, Inc. and the
Partnership agree that the agreement was rejected. See
Brief of Ocean Marine Services, Inc. and the Partnership
on Accrual of Course of Action for Elimination of Deficit
Capital Account in the Partnership (Docket #1162).
The next issue that arises is whether the
Partnership was revived or reaffirmed by Veritas’ or
Debtor’s acceptance of the insurance proceeds after Plan
confirmation. In other words, did the distribution of
insurance proceeds to the partners in proportion to their
historical capital accounts after dissolution and
rejection by the debtor serve to “revitalize” the defunct
and dissolved partnership? Based on the admissions,
stipulations, and evidence (including correspondence
between counsel and/or parties during the post-
confirmation time period), the court finds the
distribution to be a fair settlement under the
circumstances. There was no intent to recreate or
revitalize the old partnership or create a new business
entity. TEX. REV. PARTNERSHIP ACT, Article 6132b-2.03. See
Federal Sav. & Loan Ins. Corp. v. Griffin, 935 F.2d 691
(5th Cir. 1991) (noting that intent to form a partnership
is most important in determining whether a partnership
exists).
Because the court finds that the Partnership
Agreement was not revitalized or reaffirmed, the court
must determine when the claim to eliminate the deficit
7
capital account of Ocean Marine Services, Inc. and the
Partnership actually arose.
Pursuant to 11 U.S.C. § 101(5) a claim is defined
as a:
(A) right to payment, whether or not such
right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal,
equitable, secured or unsecured; or
(B) right to an equitable remedy for breach
of performance if such breach gives rise to a
right of payment, whether or not such right to
an equitable remedy is reduced to judgment,
fixed, contingent, matured, unmatured,
disputed, undisputed, secured or unsecured.
The term “claim” was intended to be defined very
broadly so that “all legal obligations of the debtor, no
matter how remote or contingent will be able to be dealt
with in the bankruptcy case.” H.R. Rep. No. 595, 95th
Cong., 1st Sess. 309 (1977), reprinted in 1978
U.S.C.C.A.N. 5787, 5963, 6266; S.Rep. No. 989, 95th
Cong., 2d Sess. 21-22 (1978), reprinted in 1978
U.S.C.C.A.N. 5787, 5808. The Fifth Circuit has adopted
a very broad definition of “claim” essentially adopting
the prepetition relationship test used in In re Piper
Aircraft Corp., 162 B.R. 619 (Bankr. S.D. Fla. 1994),
aff’d, 168 B.R. 434 (S.D. Fla. 1994), and in In re
National Gypsum Co., 139 B.R. 397 (N.D. Tex. 1992). See
Lemelle v. Universal Mfg. Corp., 18 F.3d 1268 (5th Cir.
1994). In both Piper and National Gypsum, the courts
held that if the claimant has some sort of relationship
with the Debtor at the time the wrongful conduct
occurred, the claim arises at the time of such conduct.
See Piper, 162 B.R. at 627 (holding that to have a claim,
“there must be some prepetition relationship, such as
contact, exposure, impact, or privity, between the
debtor’s prepetition conduct and the claimant); National
Gypsum (holding that claims include “prepetition conduct
that can be fairly contemplated by the parties at the
time of the Debtor’s bankruptcy).
In the case at bar, Ocean Marine Services, Inc. and
the Partnership’s claim arose from the Debtor’s allegedly
negative capital account. This negative capital account
existed on the date the bankruptcy was filed. The exact
8
amount of this capital account may not have been known,
however, the potential claim did exist and claimants
could have and should have filed a contingent claim.
Again, the Partnership only had three things to do to
wind up partnership affairs: (1) the pending recovery of
more than $500,000 in casualty insurance claims filed in
1985; (2) the audit of the partnership by the IRS; and
(3) the liability of the partnership and its partners to
MARAD for deficiencies after the foreclosure of the liens
against the vessels. The claim for accounting and the
possibility of the receipt of insurance proceeds existed
prepetition and should have been filed as a contingent or
unliquidated claim. The confirmed Second Amended Plan of
Reorganization discharged all prepetition claims.
Therefore, the claim is barred. Veritas now enjoys all
rights of the Debtor under its confirmed plan. Veritas
should take (and maintain) its interest in the property
free of claims of creditors and former partners.
Supplemental Findings of Fact and Conclusions of Law on Debtor’s
Motion to Show Cause (Bankruptcy Document No. 1165).
II. Issues
Appellants set forth five issues for review in this appeal:
1. The Partnership Agreement was an executory contract
on the date the bankruptcy petition was filed, and
the bankruptcy Court erred in holding it was not an
executory contract.
2. The Partnership Agreement was an executory contract
that was neither listed in the bankruptcy; assumed
by the Debtor in the Plan of Reorganization; nor
rejected by the Debtor in the Plan of
Reorganization, as confirmed, and the Bankruptcy
Court erred in holding that the Partnership
Agreement had been rejected.
3. The Bankruptcy Court erred in holding that the
obligations of the debtor/partner, Veritas, as
successor-in-interest to the debtor/partner, to
eliminate its deficit capital account, was a claim
of the Partnership and OMS that accrued as of the
date of the filing of the petition in bankruptcy.
9
4. The Bankruptcy Court erred in holding that Veritas
has an interest in, and right to, a share of the
casualty insurance proceeds of the Partnership
independent of, and without claim of, OMS and the
Partnership.
5. Alternatively, if Veritas has no obligation to
eliminate its deficit capital account to the
Partnership then it has no right to participate in
the dissolution/liquidation distribution as a
partner, and the Partnership and OMS are entitled
to pursue their claim against Veritas for the
recovery of the proceeds distributed to Veritas as
a partner subject to its elimination of its capital
account.
Appellant’s Brief (Document No. 6) at 7.
III. Discussion
Bankruptcy Rule 8013 sets forth the standard of review of
orders and judgments issued by the bankruptcy courts. Rule 8013
provides:
On an appeal the district court or bankruptcy appellate
panel may affirm, modify, or reverse a bankruptcy judge’s
judgment, order, or decree or remand with instructions
for further proceedings. Findings of fact, whether based
on oral or documentary evidence, shall not be set aside
unless clearly erroneous, and due regard shall be given
to the opportunity of the bankruptcy court to judge the
credibility of the witnesses.
Moreover, a district court reviews a bankruptcy court’s legal
conclusions de novo. Matter of Foster Mortgage Corp., 68 F.3d 914,
917 (5th Cir. 1995). A finding of fact premised on an improper
legal standard or on a proper legal standard improperly applied
“loses the insulation of the clearly erroneous rule.” Matter of
10
Missionary Baptist Foundation of America, 818 F.2d 1135, 1142 (5th
Cir. 1987) (citations omitted).
A. The Bankruptcy Court did not err in concluding that the
Partnership Agreement was not an executory contract.
Under the Bankruptcy Code, executory contracts of the debtor
may be assumed or rejected. 11 U.S.C. § 365(a) (“Except as
provided for in sections 765 and 766 of this title and in
subsections (b), (c), and (d) of this section, the trustee, subject
to the court’s approval, may assume or reject any executory
contract or unexpired lease of the debtor.”) While the Bankruptcy
Code does not define “executory contract”, the Fifth Circuit has,
in the bankruptcy context, considered a contract to be executory if
“performance remains due to some extent on both sides” and “if[,]
at the time of the bankruptcy filing, the failure of either party
to complete performance would constitute a material breach of the
contract, thereby excusing the performance of the other party.”
Matter of Murexco Petroleum, Inc., 15 F.3d 60, 62-63 (5th Cir.
1994). A contract is not executory if the only performance
required by one side is the payment of money. In re Placid Oil
Co., 72 B.R. 135, 138 (Bankr. N.D. Tex. 1987); see also In re Cox,
179 B.R. 495, 498 (Bankr. N.D. Tex. 1995); In re MCorp Financial,
Inc., 122 B.R. 49, 52 (Bankr. S.D. Tex. 1990).
The Bankruptcy Court’s determination that the Partnership
Agreement was not executory is not a clearly erroneous finding of
fact or an erroneous conclusion of law. The parties do not dispute
that the Partnership ceased doing business and was dissolved in
11
1989, before Digicon filed for bankruptcy. Under the terms of the
Partnership Agreement, OMS, as the managing partner of the
Partnership, was required to wind up the Partnership’s affairs.
This included, as found by the Bankruptcy Court, completion of an
IRS audit, resolving the deficiencies owed by the Partnership to
the mortgagor of the Partnership’s vessels, and pursuing pending
casualty insurance claims. Digicon had no countervailing
obligations to perform upon the partnership’s dissolution under the
terms of the Partnership Agreement. Digicon’s only obligation was
to eliminate the deficit in its capital account, essentially an
obligation to pay money. See Appellant’s Brief (Document No. 6) at
23.***
Because at the time of Digicon’s bankruptcy filing Digicon’s
only remaining obligation under the terms of the Partnership
Agreement was to pay money towards any negative capital account
***
In their brief, Appellants state:
Each of the partners, as of the date of the filing
of the petition in bankruptcy, had significant, material
obligations yet to be performed under the Partnership
Agreement. OMS had to settle the audit of the
Partnership by the Internal Revenue Service,; prosecute
the defense of the litigation against the Partnership and
the partners brought by MARAD on the deficiency of over
$8,219,825.00; to secure the payment and receipt of all
outstanding accounts receivable, including the
outstanding casualty insurance proceeds; account for all
assets of the Partnership upon liquidation, including the
recovery of partner deficit capital accounts; and pay the
liquidation distribution due to the partners pursuant to
the Partnership Agreement. The debtor/partner had the
obligation, upon final dissolution and liquidation, to
eliminate its deficit capital account in the Partnership.
12
that may have existed, the contract was not executory. Thus, the
Bankruptcy Court did not err in so finding.
B. The Bankruptcy Court did not err in concluding that the
Partnership Agreement was rejected.
Notwithstanding the finding that the Partnership Agreement was
not executory in nature, the Bankruptcy Court determined,
alternatively, that even if Partnership Agreement could be
considered executory, it was an executory contract that was
rejected by the bankruptcy trustee. That finding is also not
clearly erroneous.
In Defendants’ Response to the Debtor’s Motion to Show Cause,
OMS and the Partnership stated on numerous occasions that the
Debtor (Digicon and Digicon Marine, Inc.) had rejected the
Partnership Agreement. See Defendants’ Response to Debtor’s Motion
to Show Cause (Bankruptcy Document No. 1147) at 4 (“The executory
Partnership Agreement had been rejected by Debtor as a result of
the confirmation of the Second Amended Plan of Reorganization.”);
Defendants’ Reply Brief (Bankruptcy Document No. 1151 at 1
(“Digicon Marine, Inc. rejected its interests and obligations under
the Partnership Agreement pursuant to the confirmation of the
Second Amended Plan of Reorganization.”). Such statements, as
found by the Bankruptcy Court, constitute admissions by OMS and the
Partnership that the Partnership Agreement was rejected. Based on
OMS’s and the Partnership’s admissions, the Bankruptcy Court did
13
not clearly err in finding that the Partnership Agreement, to the
extent it could have been considered executory, was rejected.
In addition to the admissions by OMS and the Partnership that
the Partnership Agreement had been rejected, the bankruptcy record
shows that as part of the Second Amended Plan of Reorganization,
which was approved by the Bankruptcy Court, all executory contracts
that had not been specifically assumed by the trustee were
rejected. The Second Amended Plan of Reorganization provided in
this respect:
Section 11.2. Other Executory Contracts. Those
executory contracts and unexpired leases listed on the
schedule of Executory Contracts Affirmed (filed with the
Disclosure Statement, and hereby incorporated into this
Plan by reference) are hereby assumed. All other
executory contracts and unexpired leases are rejected.
All damages, if any, suffered by any Person as party to
any such executory contract or unexpired lease rejected
hereby shall be Class 7.1, 7.2, 7.3, 7.8, 8.1, 8.2 or 8.3
Claims in accordance with the criteria for such Class
membership, to the extent such Claims are filed before
the Rejection Damages Bar Date and are allowed by the
Court.
Second Amended Plan of Reorganization (Bankruptcy Document No. 677)
at 30.
While Appellants cite and rely on the case of Matter of
O’Connor, 258 F.3d 392 (5th Cir. 2001) for the proposition that
boilerplate language rejecting all unassumed executory contracts is
insufficient as a matter of law to support the Bankruptcy Court’s
conclusion that the Partnership Agreement was rejected, in O’Connor
the issue was not whether boilerplate language in the plan
rejecting executory contracts was enforceable, but whether the
14
boilerplate language assuming executory contracts was enforceable.
The Fifth Circuit held: “The bankruptcy court’s interpretation is
consistent with the conclusion by other courts that an executory
contract may not be assumed either by implication or through the
use of boilerplate plan language.” Id. at 401 (emphasis in
original). No parallel holding has been made by any Court in this
Circuit relative to the rejection of executory contracts; and, in
fact, other courts have specifically upheld the rejection of
executory contracts and unexpired leases by use of such boilerplate
plan language. See e.g., In re Victory Markets, 221 B.R. 298, 303
(2nd Cir. BAP 1998).
Given the admissions of OMS and the Partnership as to the
rejection of the Partnership Agreement, as well as terms of the
Second Amended Plan of Reorganization, the Bankruptcy Court did not
err in concluding that the Partnership Agreement, if it were
construed as an executory contract, was rejected.
C. The Bankruptcy Court did not err in concluding that the claim
related to the deficit capital account arose pre-petition, and
should have been asserted by OMS and the Partnership in the
bankruptcy proceeding.
Given that the Partnership Agreement was not an executory
contract, or alternatively that the Partnership Agreement was
rejected, the Bankruptcy Court determined, properly, that OMS and
the Partnership, given their actual knowledge of the bankruptcy
proceedings, were required to file a claim against the bankruptcy
15
estate for any amounts that Digicon owed, pursuant to the
Partnership Agreement, to offset the deficit in its capital
account. OMS and the Partnership claim that they were not given
formal notice of the bankruptcy proceedings, and that Digicon
failed to list its interest in the Partnership, failed to list OMS
as a creditor of the bankruptcy estate, failed to list the
Partnership’s liabilities, and failed to list the Partnership as a
contractual obligation. The Bankruptcy Court found, however, and
the record fully supports the finding, that OMS and the partnership
had actual notice of the Bankruptcy proceedings, that no claim was
asserted by either OMS or the Partnership against the bankruptcy
estate, and that neither OMS or the Partnership objected to the
administration of the bankruptcy estate or to the terms of the
Second Amended Plan of Reorganization.
OMS and the Partnership urge in this appeal, as they did
before the Bankruptcy Court, that their actual knowledge of the
bankruptcy proceedings did not compel them to file a claim in the
Bankruptcy Court because they had no claim against Digicon for the
deficit in Digicon’s capital account until after OMS wound up all
other affairs of the partnership. OMS and the Partnership argue,
based on Texas law and the language of the Partnership Agreement,****
****
Partnership Agreement, Article X § 10.04: “Elimination of
Deficit in Capital Account. If, after completion of the matters
discussed in Section 10.02 and 10.03, there is a deficit in the
capital account of either Partner, the Partner shall forthwith
contribute cash to the Partnership in the amount necessary to
eliminate such deficit.”
16
that their claim against Digicon did not arise until (i) after the
IRS had completed the audit of the partnership (February 21, 1991),
(ii) after the partnership’s debt on the mortgage deficiencies had
been settled (July 16, 1992), and (iii) after the amounts available
from the partnership’s pending casualty insurance claims were
recovered (August 1997). By time all of those events had
transpired, the Bankruptcy case had been closed, and thus, OMS and
the Partnership argue, their claim is a post-petition claim for
which they can still recover.
The Bankruptcy Code defines a claim against the bankruptcy
estate quite broadly, and includes contingent and unliquidated
claims. OMS’s and the Partnership’s claim against Digicon for the
deficit in Digicon’s capital account, even though it may not have
accrued under Texas law or the Partnership Agreement when Digicon
filed for bankruptcy, was nonetheless a claim that could have and
should have been anticipated. When Digicon filed for bankruptcy
protection, the Partnership already had been dissolved and there
was a significant deficit in Digicon’s capital account that was
well known to OMS and the Partnership. See Appellant’s Brief
(Document No. 6) at 14.***** Because OMS and the Partnership well
*****
Appellants state in their Appellate Brief:
Throughout the period from April, 1975 to July 31, 1989,
the partnership operated at a loss and DMI received 99%
of the partnership losses and 99% of the investment tax
credits, for income tax purposes. OMS, pursuant to the
agreement, was allocated 1% of the partnership losses and
investment tax credits. As a result, DMI received
$14,137,267.00, more in tax loss benefits than did OMS
17
knew that a deficit existed in Digicon’s capital account when
Digicon filed for bankruptcy, for purposes of the Bankruptcy Code
OMS and the Partnership at that time had a “claim” against the
bankruptcy estate within the meaning of § 101(5). The Bankruptcy
Court did not clearly err in so finding or err, as a matter of law,
in so concluding.
D. Issues related to the Debtor’s acceptance of the insurance
proceeds were waived by OMS and the Partnership when they were
not raised in the Bankruptcy Court.
In their final two appellate issues, OMS and the Partnership
maintain that the Bankruptcy Court erred in concluding that Veritas
was entitled to the insurance proceeds without regard to its
failure to eliminate the deficit in Digicon’s capital account in
the Partnership. OMS and the Partnership make their argument as
follows:
Veritas, as the successor-in-interest to the
debtor/partner DMI, had no claim or property right to the
casualty insurance proceeds of the Partnership. The
subject casualty insurance proceeds were assets of the
Partnership. A partner has no claim to assets of the
Partnership independent of its interest in the
Partnership.
Veritas had no claim to the insurance proceeds
independent of its interest in the Partnership and had no
right thereto without the attendant obligation imposed by
over the same period. This disproportionate allocation
of tax benefits to DMI resulted, as of July 31, 1989, as
reported on the Partnership’s 1988 fiscal year
partnership return of income, in the capital account of
DMI being reduced to a negative sum, (($11,531,528.00).
18
the Partnership to eliminate its capital account deficit.
It was entitled to a liquidation distribution pursuant to
Article X, Section 10.05 of the Partnership Agreement
only after satisfaction of its capital account deficit
cash contribution mandated by Section 10.04. As property
of the Partnership, Veritas had no right to the insurance
proceeds. Veritas only had a right to receive a
liquidation distribution that would necessarily have
included the insurance proceeds pursuant to the
Partnership Agreement as a partner in the Partnership.
Veritas had absolutely no right to claim the benefits of
its interest in the Partnership without its attendant
obligations, and the obligation to eliminate the capital
account deficit was a condition precedent to the right to
receive a liquidation distribution.
* * *
In the alternative, as above-stated, Veritas has no
interest in the casualty insurance proceeds of the
Partnership other than as a partner in the Partnership.
The proceeds are Partnership assets, and Veritas has no
independent property interest in them as a matter of law.
Veritas would only be entitled to the proceeds as a
partner through a liquidation distribution pursuant to
the winding up of the Partnership in accordance with the
terms of the Partnership Agreement. That right is
subject to the requirement that the partner satisfy its
deficit capital account with the Partnership.
Appellants’ Brief (Document No. 6) at 31-33 (record references and
citations omitted).
Neither issue raised by OMS and the Partnership relative to
the insurance proceeds was presented to the Bankruptcy Court for
consideration in the manner set forth in this appeal. Rather, the
record shows that OMS and the Partnership argued to the Bankruptcy
Court that Digicon had rejected the Partnership Agreement, and that
Veritas, by virtue of its acceptance of the casualty insurance
proceeds, made itself a putative partner in the Partnership
19
Agreement. Veritas argues that the issues presented herein,
because they were not presented to the Bankruptcy Court, have been
waived for purposes of this appeal.
Issues and arguments that are not raised with the bankruptcy
court cannot be pursued in an appeal of a bankruptcy court’s order.
In Matter of Fairchild, 6 F.3d 1119, 1128 (5th Cir. 1993), the Fifth
Circuit made it clear that
[c]iting cases that may contain a useful argument is
simply inadequate to preserve that argument for appeal;
“to be preserved, an argument must be pressed, and not
merely intimated.” In short the argument must be raised
to such a degree that the trial court may rule on it[.]
Given the new position adopted on appeal by OMS and the Partnership
relative to Veritas’s acceptance of the casualty insurance
proceeds, a position and argument that was not raised in the
Bankruptcy Court, these issues, identified by OMS and the
Partnership in their Brief as issues 4 and 5 (or D and E) have been
waived for purposes of this appeal. Fairchild, 6 F.3d at 1128.
Even if the issues had not been waived, the Bankruptcy Court
did not err in concluding that Veritas, as the Debtors’ successor-
in-interest, enjoys all the rights and benefits of the Debtors
under the terms of the Second Amended Plan of Reorganization,
including the rejection of the Partnership Agreement, and the
discharge of any debts or obligations arising under the Partnership
Agreement. As set forth above, any obligation on the part of
Digicon to eliminate the deficit in its capital account in the
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Partnership was a “claim” against the bankruptcy estate within the
meaning of 11 U.S.C. § 101(5) when Digicon filed for bankruptcy.
OMS’s and the Partnership’s failure to assert their claim against
the bankruptcy estate, as well as the terms of the Second Amended
Plan of Reorganization, operated as a discharge of that obligation.
See Second Amended Plan of Reorganization, Section 2.11
(classifying claims held by Digicon, each Debtor Subsidiary and
each Non-Debtor Subsidiary as a Class 11 Claim); Section 3.11
(providing for the cancellation of Class 11 Claims); Section 15.7
(general discharge of debtors). Veritas’s acceptance of the
casualty insurance proceeds, for whatever reason and in whatever
capacity, did not and could not revive a debt that had already been
discharged. As such, the Bankruptcy Court’s determination that
Veritas could take and maintain its interest in the casualty
insurance proceeds free from any claim arising under the
Partnership Agreement was not erroneous.
IV. Order
Based on the foregoing, and the conclusion that the Bankruptcy
Court’s Order of April 1, 2002, and the attendant findings of fact
and conclusions of law are not clearly erroneous, it is
ORDERED that the April 1, 2002 Order of the Bankruptcy Court
is AFFIRMED.
The Clerk shall notify all parties and provide them with a
true copy of this Order.
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SIGNED at Houston, Texas, on this 13th day of December, 2002.
EWING WERLEIN, JR.
UNITED STATES DISTRICT JUDGE
In Re: Digicon Inc
Combined Opinion