In Re: Craig's Store ( 2005 )

United States Court of Appeals
Fifth Circuit
F I L E D
REVISED MARCH 18, 2005
March 4, 2005
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT Charles R. Fulbruge III
Clerk
No. 03-20888
In The Matter of: CRAIG’S STORES OF TEXAS INC.
Debtor.
- - - - - - - - - -
CRAIG’S STORES OF TEXAS INC.,
Appellant,
versus
BANK OF LOUISIANA,
Appellee.
Appeal from the United States District Court
for the Southern District of Texas
Before REAVLEY, JONES and DENNIS, Circuit Judges.
PER CURIAM:
This case involves a court’s obligations regarding money
deposited into the court’s registry for a proceeding over which
that court had no jurisdiction. During the course of litigation in
bankruptcy court between Craig’s Stores of Texas, Inc. (“Craig’s”)
and Bank of Louisiana (“the Bank”), Craig’s deposited the sum of
$252,440.49 into the court’s registry. This court decided in In re
Craig’s Stores of Texas, Inc., 266 F.3d 388 (5th Cir. 2001),
however, that the bankruptcy court lacked jurisdiction over the
adversary proceeding between Craig’s and the Bank. The district
court released the deposited funds to the Bank because it
determined that the funds had been placed in the registry to secure
the Bank’s account claim. We hold that the district court’s dis-
bursement order results in the transfer of funds to which the Bank
has never proven entitlement before a court of competent juris-
diction. We must reverse the district court’s Order Disbursing
Funds and remand this case with instructions to disburse the funds
to the party that deposited them.
Pursuant to Rule 67 of the Federal Rules of Civil
Procedure, a party may deposit a sum of money with the court. Once
funds are deposited, the court should determine ownership and make
disbursements. Gulf States Utils. Co. v. Alabama Power Co., 824
F.2d 1465, 1474 (5th Cir. 1987). The conclusion that the funds
must be returned to Craig’s flows from the Agreed Order by which
Craig’s deposited the money in the registry and from the circum-
stances surrounding this transaction.
In mid-1996, eighteen months after the approval of
Craig’s Chapter 11 reorganization plan, Craig’s filed an adversary
proceeding against the Bank in bankruptcy court alleging that the
Bank failed to perform under a charge account contract. At this
time, the Bank filed its own adversary proceeding, seeking an
injunction to prevent Craig’s from disposing of funds within its
possession, requesting the bankruptcy court to convert Craig’s
2
confirmed Chapter 11 plan to a Chapter 7 liquidation, and seeking
to recover money that the Bank contended was owed under the
contract between them. Shortly thereafter, the bankruptcy court
entered an Agreed Order whereby Craig’s would deposit the sum of
$252,440.49 into the Bankruptcy Court’s registry.
Craig’s asserts that it made this deposit for the purpose
of discouraging the Bank from attempting to convert Craig’s bank-
ruptcy proceedings into Chapter 7 liquidation. Craig’s deposited
the money in escrow in order to reassure the Bank that Craig’s
would not transfer or dispose of its liquid funds before the Bank
could litigate and liquidate any underlying claim the Bank might
have against Craig’s.
The Bank urges a different understanding of this deposit.
According to the Bank, Craig’s deposit represented a concession
that it owed the Bank $252,440.49 under the contract. In other
words, Craig’s was relinquishing its claim to the funds, and the
Agreed Order functioned as a kind of “settlement agreement” whereby
Craig’s recognized its liability to the Bank under the contract.
Instead of paying the money directly to the Bank, the Bank made the
accommodation that the funds would be deposited in the registry
pending Craig’s litigation of its state-law claims against the
Bank. The money would be released back to Craig’s only in the
event that Craig’s won a judgment against the Bank.
The Agreed Order supports the understanding advanced by
Craig’s. There are no representations or concessions in this
3
escrow order that the money actually belonged to the Bank. The
Bank’s argument that the Agreed Order constituted an enforceable
“settlement agreement” fails because the Agreed Order treats these
funds as disputed. For example, on the first page of the Agreed
Order, the Bankruptcy Court noted: “Ordered that on or before
Oct. 11, 1996, the Debtor shall deposit . . . into the registry of
this Court (the “Court’s Registry”) $252,440.49, which BOL
represents is the sum of the balances that are 90 days or more past
due on the credit card accounts as of August 30, 1996.” (Emphasis
added).
The Agreement is neutral on the ultimate recipient of the
deposited funds, as evidenced by a paragraph providing for dis-
bursement of accumulated interest “upon further order of the
court.” Likewise, the order authorizes holding the deposited
balance in the registry “pending further order of this Court.” In
neither paragraph is there a reference to a settlement agreement or
to any certainty as to which party will be entitled to the funds.
Finally, the Agreed Order expressly contemplated and
permitted the Bank to assert claims against Craig’s — claims that
would be unnecessary if the Agreed Order constituted a settlement.
On the fifth page of the Agreed Order, the bankruptcy court stated:
“ORDERED that leave is hereby granted to BOL to file (I) an amended
4
answer and (ii) a counterclaim against the Debtor in the Adversary
Proceeding No. 96-4354.”1
According to the terms of the Agreed Order, ownership of
the money in the court’s registry was at all times disputed and the
funds were not deposited pursuant to a “settlement agreement.”2
The funds could be disbursed to the Bank only if there had been a
judgment on the merits in its favor by a court of competent
jurisdiction. After the underlying litigation was dismissed,
however, the Bank never filed an independent lawsuit in state or
federal court to adjudicate any contractual breach. Craig’s may
well be liable to the Bank for contract damages; unfortunately for
the Bank, no such decision has been made in the course of
litigation before a court possessing jurisdiction.
For these reasons, when the underlying litigation was
dismissed for lack of jurisdiction, the disputed registry funds
should have been disbursed back to the party that deposited them in
the registry — Craig’s.3
1
In fact, the Bank actually re-asserted its breach of contract claim
immediately after the Agreed Order was entered by the bankruptcy court. The
bankruptcy court ultimately granted relief to both parties on their respective
contract claims, concluding that Craig’s was entitled to a net recovery against
the Bank. This judgment was, of course, subsequently vacated and the adversary
proceeding dismissed because the bankruptcy court lacked jurisdiction. See In
re Craig's Stores of Texas, Inc., 266 F.3d 388 (5th Cir. 2001).
2
If Craig’s had, indeed, agreed to settle with the Bank, the Agreed
Order does not memorialize such a settlement.
3
The power described in Northwestern Fuel Co. v. Brock, 139 U.S. 216,
11 S. Ct. 523 (1891), and United States v. Morgan, 307 U.S. 183, 59 S. Ct. 795
(1939), “to correct that which has been wrongfully done by virtue of its
process,” Morgan, 307 U.S. at 197, 59 S. Ct. at 802, is different from the
dissent’s concept of an equitable power to determine ownership of funds
5
Accordingly, we REVERSE the district court’s Order
Disbursing Funds and REMAND with instructions to the district court
that the funds be disbursed to Craig’s.
REVERSED AND REMANDED WITH INSTRUCTIONS.
voluntarily placed in the registry of a court lacking jurisdiction. Northwestern
Fuel describes the power “to correct by its own order that which, according to
the judgment of its appellate court, it had no authority to do in the first
instance,” 139 U.S. 219, 11 S. Ct. 524; it does not describe an equitable power
to determine the merits of property ownership.
In the case before us, there is no order that has been executed under
the compulsion of an incorrect or unauthorized court judgment, and thus the
inherent equitable power to order restitution for the error does not come into
play. See Restatement (First) of Restitution § 74 (1973). No compulsory order
stands in need of rectification, remediation or restitution; instead, there is
only a sum of money voluntarily deposited by Craig’s in the registry of a court
lacking jurisdiction. Lacking jurisdiction to receive money into its registry,
the district court’s authority is limited to returning the money to the depositor
— this is the only means by which Craig’s original deposit can be “undone,” to
use the terminology of Northwestern Fuel and Morgan. Because the $252,440.49
belonged only to Craig’s Stores when and as it was voluntarily deposited, and the
court had no jurisdiction to decide the relative merits of the underlying
dispute, it still belongs to Craig’s Stores.
We also disagree with the dissent’s reading of 28 U.S.C. § 2042.
This code section governs the disbursement of registry funds that have languished
“for at least five years unclaimed,” and have thereby been forfeited to “the
Treasury in the name and to the credit of the United States.” Id. It is only
“such” forgotten funds that the district court, “upon notice to the United States
attorney” as representative of the United States, its new nominal owner, is
duty-bound under this code section to determine entitlement, upon “full proof of
the right thereto.” Id. A straightforward reading of this code section
indicates that it has a specific and narrow application that is not relevant to
this case. Additionally, neither the language of Rule 67 or 28 U.S.C. § 2041
create the statutory duty to disburse funds only to persons judicially determined
to be the rightful owners.
6
DENNIS, Circuit Judge, concurring in the decree insofar as it
reverses the district court’s judgment and remands the case to that
court, but otherwise dissenting.
The bankruptcy and district courts were retroactively deprived
of bankruptcy jurisdiction by an intervening change-of-law decision
by this court. See In re Craig’s Stores of Texas, Inc.,266 F.3d
388, 391 (5th Cir. 2001)(“adopt[ing a] more exacting theory of
post-confirmation bankruptcy jurisdiction.”). Nevertheless, in my
opinion, the district court continues to have the jurisdiction or
inherent judicial power, and the statutory duty, to determine the
rightful ownership of funds within its possession and to distribute
them accordingly. Consequently, the district court’s decision that
it did not have authority to make that determination and
distribution was based on a legal error. Therefore, I agree that
the district court’s judgment must be reversed and that the case
should be remanded, but I disagree with the majority’s peremptory
instruction that the district court must distribute the funds to
one of the parties without making a determination of whether that
party is the rightful owner. The district court should, instead,
be instructed to determine rightful ownership and to distribute the
funds accordingly pursuant to Federal Rule of Civil Procedure 67
and 28 U.S.C. §§ 2041 and 2042.
7
The district court has the jurisdiction or inherent judicial
power to undo the wrongs done by the bankruptcy court’s process and
distribute the funds in the court’s registry to the rightful owners
according to law and equity pertinent to this limited purpose.4
Anglo-American courts in general, including the Supreme Court and
this court, have long held that, after a reversal of a district
court’s judgment, for either lack of jurisdiction or legal error,
the district court has the inherent judicial power, with respect to
the parties before it, to distribute funds in its custody, or to
order restitution of property wrongly obtained because of its
erroneous or void judgment, according to equitable principles.5
The right of restitution of what one has lost by the
enforcement of a judgment subsequently reversed was recognized from
a very early period in the law of England and early in our history
by the United Supreme Court.6 In Northwestern Fuel Co. v. Brock,7
4
This case is similar to “numerous other cases involving ‘jurisdiction
to determine jurisdiction’ and presenting situations in which the determination
of the jurisdictional question involves essentially the same analysis as the
determination of the case on the merits.” ECEE, Inc. v. FERC, 611 F.2d 554, 555
n.4. (5th Cir. 1980)(citing United States v. United Mine Workers, 330 U.S. 258
(1957); Nestor v. Hershey, 425 F.2d 504 (D.C. Cir. 1969); Means v. Wilson, 383
F. Supp. 378 (D. S.D. 1974), modified on other grounds, 522 F.2d 833, cert.
denied, 424 U.S. 958)).
5
See, e.g., Northwestern Fuel Co. v. Brock, 139 U.S. 216, 219
(1891)(citing Mayor v. Cooper, 6 Wall 247, 250; Hornthal v. Collector, 9 Wall.
560, 566; Mansfield, Coldwater & Lake Mich. Ry. Co. v. Swan, 111 U.S. 379, 387
(1884)); W.F. Potts Co. v. Coltrane, 59 F.3d 375 (5th Cir. 1932).
6
See Northwestern Fuel Co., 139 U.S. at 219 and 220 (citing Bank of
the United States v. Bank of Washington, 6 Pet. 8, 17 and 2 Salk. 587, 588; Tidd,
Pr. 936, 1137, 1138).
7
139 U.S. 216.
8
the Supreme Court again recognized that right and further held
that, when the judgment of a court of origin is reversed for lack
of jurisdiction, that court has the inherent power, to “correct by
its own order that, which, according to the judgment of its
appellate court, it had no authority to do in the first instance,”
while the parties are before it and the subject matter of the
controversy is in its custody.8 “Jurisdiction to correct what had
been wrongfully done must remain with the court so long as the
parties and the case are properly before it, either in the first
instance or when remanded to it by an appellate tribunal.”9
Moreover, the original court has this inherent corrective power
even though the mandate of reversal fails to provide for
restitution.10 The Supreme Court explained:
The gist of the whole complaint is that the reversal by
this court being for want of jurisdiction in the Circuit
Court. . .that court had no authority to act further in
the matter than as directed by the mandate; and that that
went only to the reversal of its judgment and the
collection of the costs incurred in the appellate court.
. . .But here the jurisdiction exercised by the court
below was only to correct by its own order, that which,
according to the judgment of its appellate court, it had
no authority to do in the first instance; and the power
is inherent in every court, whilst the subject of
controversy is in its custody, and the parties are before
it, to undo what it had no authority to do originally,
and in which it, therefore, acted erroneously, and to
8
Id. at 219-220.
9
Id.
10
Id. at 219.
9
restore, as far as possible, the parties to their former
position.11
The inherent power of courts to enforce the right of
restitution after appellate reversals discussed by the Supreme Court
in Northwestern Fuel Co. is now accepted generally. For example,
the Restatement (First) of Restitution demonstrates that virtually
all reported court decisions have adhered to the principles that
Northwestern Fuel Co. articulates. Section 74, which states the
right of restitution when a judgment is subsequently reversed,
provides: “A person who has conferred a benefit upon another in
compliance with a judgment, or whose property has been taken
thereunder, is entitled to restitution if the judgment is reversed
or set aside, unless restitution would be inequitable or the parties
contract that payment is to be final; if the judgment is modified,
there is a right of restitution of the excess.”12 Comment b. under
§ 74 reflects the general view that a court has inherent power to
enforce the right of restitution in this situation even when the
judgment is void because the court lacked jurisdiction. It, in
pertinent part, states: “The rule is applicable whether the judgment
reversed was originally valid or was void.”13 The reporters’ notes
to § 74 demonstrate the courts’ general reliance on the principles
11
Id. at 219-20 (emphasis added).
12
See RESTATEMENT (FIRST) OF RESTITUTION § 74.
13
Id. at cmt. b.
10
of Northwestern Fuel Co.. Citing Northwestern Fuel Co. and other
cases consistently following that decision, they state: “The
tribunal reversed can direct restitution on its own initiative.”14
And further that: “An action lies although the judgment reversed was
‘void,’ the court having power to remedy its own mistake[.]”15
In United States v. Morgan16 the Supreme Court reaffirmed the
principles discussed in Northwestern Fuel Co. and held that a
district court, to the extent not governed by law or guided by
regulatory order, should apply equitable principles in distributing
funds in that court’s custody resulting from its injunction of the
secretary of agriculture’s order reducing scheduled rates for
stockyard services.17 In its opinion, the Court summarized those
principles18 and concluded that, when a court has compelled payments
into its registry of amounts which may be found not to have been
due, justice requires ultimate distribution of the funds to those
14
Id. at notes cmt. a.
15
Id.
16
307 U.S. 183 (1939).
17
Id. at 197-98.
18
See id. (stating “[i]t is a power ‘inherent in every court of justice
so long as it retains control of the subject-matter and of the parties, to
correct that which has been wrongfully done by virtue of its process.’” and
citing Arkadelphia Milling Co. v. St. Louis S.W. Ry. Co., 249 U.S. 134 (1919);
Northwest Fuel Co.,139 U.S. at 219); id. (stating “[w]hat has been given or paid
under the compulsion of a judgment the court will restore when its judgment has
been set aside and justice requires restitution.” and citing Northwestern Fuel
Co., 139 U.S. at 219; Ex parte Lincoln Gas & Electric Light Co., 257 U.S. 6, 7
(1921); Baltimore & Ohio Ry. Co. v. United States, 279 U.S. 781, 786 (1929)).
11
persons entitled to them.19 “[T]he district court sits as a court
of equity,” the Court also said, “and...assumes the duty of making
dispositions of the fund in conformity to equitable principles.”20
It is also self-evident that a court’s inherent power to require
restitution of property in a party’s possession, rather than in the
registry of the court, after a reversal of its erroneous or void
judgment, necessarily includes the power after such a reversal to
make equitable distribution, to persons entitled to them, of funds
on deposit pending the litigation of the parties controversy.
Further, the Supreme Court, in Northwestern Fuel Co. and
Morgan, established the procedures and standards to be applied by
a district court in making restitution or distribution of funds
under equitable principles. In Northwestern Fuel Co. the Court
explained:
We are of opinion that the proceeding to enforce the
restitution in the cases mentioned is under the control
of the court, and that all needed inquiry can be had to
guide its judgment in a summary proceeding, upon motion
of the parties; the only requisite being that the
opposite part[y] shall be heard, so that in directing
restitution no further wrong be committed. The
restitution is not made to depend at all upon the
question whether or not the court rendering the judgment
reversed acted within or without its jurisdiction.21
19
Id. at 198.
20
Id. at 191.
21
139 U.S. at 220.(emphasis added).
12
In Morgan, the Court stated that the district court, “[i]n
taking the payments into custody...acted as a court of equity,
charged both with...the responsibility of protecting [and] disposing
of it according to law, and free in the discharge of that duty to
use broad discretion in the exercise of its powers...to avoid an
unjust or unlawful result.”22 The Morgan Court recognized that a
district court is not bound by any contract or understanding with
the litigants; its duty is in distributing the funds in its custody
as “prescribed by the applicable principles of law and equity[.]”23
The Fifth Circuit, in W. F. Potts & Co. v. Cochrane,24 applying
the Northwestern Fuel Co. principle,25 approved of a district
court’s undoing of its erroneous assertion of jurisdiction in taking
custody of property and appointing a receiver,26 but disapproved of
that court’s decision in making restitution because it was “not in
accordance with the equitable principles applicable in the case.”27
In Potts, this court indicated that, under Northwestern Fuel Co.,
“the District Court should have...fully canvassed the situation from
the standpoint of determining where the equities lay to adjudge
22
307 U.S. at 193-94.
23
Id. at 194.
24
59 F.2d 375.
25
Id. at 377 (citing, inter alia, Northwestern Fuel Co., 139 U.S. 216;
Arkadelphia Milling Co., 249 U.S. 134; Baltimore & Ohio R. Co., 279 U.S. 781).
26
W.F. Potts, 59 F.2d at 377 (“[T]he appointment of a receiver is at
last the court’s appointment; the administration, its administration.”).
27
Id.
13
accordingly. Such a proceeding is purely equitable; it should have
been decided upon equitable grounds.”28
In direct conflict with the foregoing Supreme Court precedents,
the majority follows a rule of its own creation, viz., that
“disputed registry funds should [be] disbursed back to the party
that deposited them in the registry” when it is later determined
that the depositary court lacked subject matter jurisdiction.
However, the majority not only fails to cite any authority for its
rule, it does not even attempt to reconcile the rule with the duty
imposed on depositary courts’ to decide claims to registry funds on
equitable grounds by the Supreme Court decisions, Rule 67 and 28
U.S.C. §§ 2041 and 2042.
Under the principles articulated by the Supreme Court in
Northwestern Fuel and other decisions, the district court has
inherent power to undo any wrong done by the bankruptcy court’s
decree which, unknowingly without jurisdiction, consented to
adjudicate the parties’ claims over disputed funds to be deposited
in court pending the outcome of its decision; and the district court
has the power to distribute the funds in its custody according to
equitable principles, including those provided by 28 U.S.C. §§ 2041
& 2042 for deposits in court, in such manner as to avoid an
unlawful, unjust or inequitable result. Consequently, I believe
that both the majority and the district court here are in error in
28
Id. at 378.
14
failing to recognize the district court’s judicial power and duty
to undo any wrong done by the bankruptcy court’s process and to
distribute the funds in accordance with 28 U.S.C. §§ 2041-2042 and
equitable principles.
Of course, as the Supreme Court’s cases make clear, this does
not mean that the district court should adjudicate the civil action
or review the bankruptcy court’s decision on the merits. Instead,
pursuant to Rule 67 and 28 U.S.C. §§ 2041-2042, the district court,
and not this court, must determine rightful ownership of the funds
and disburse the funds to the owner.
Under Rule 67, the disbursement of funds is governed by 28
U.S.C. §§ 2041 and 2042; these statutory provisions assign the power
and duty of approving disbursements exclusively to the depositary
court; and §§ 2041 & 2042 require that the depositary court disburse
the funds only to persons judicially determined to be rightful
owners. The purpose of a deposit under Rule 67 is to relieve the
depositor of responsibility for the money or thing in dispute while
the parties litigate their differences with respect to the res.29
Once the deposit is made, the funds can be withdrawn only by
order of the depositary court. Rule 67 specifically states that 28
U.S.C. §§ 2041 and 2042 provide the rules that must be followed by
29
Cajun Elec. Power Coop. Inc. v. Riley Stoker Corp., 901 F.2d 441, 444
(5th Cir. 1990). Once the deposit is made, the depositor is no longer liable for
interest on the fund. See 13 MOORE’S FED. PRAC. 3D § 67.03 (citing authorities).
15
the court and the parties with respect to orders of withdrawal or
disbursement. “Money paid into court under [Rule 67] must be
deposited and withdrawn in accordance with the provisions of Title
28, U.S.C., §§ 2041 and 2042...or any like statute.”30 Funds
deposited in court are held only for those persons judicially found
by the court to be entitled to them as rightful owners.31 The
burden is on the claimant to establish his right to withdraw money
deposited with the court.32 The right to recover from a fund
deposited in court must be based on the strength of the title of the
claimant and not on the weakness of the title or another claimant.33
Rule 67 providing for deposit in court, generally, continues in
effect similar special provisions contained in statutes and rules
pertaining to bills of interpleader, bills in the nature of
30
FED. R. CIV. P. 67.
31
See 12 WRIGHT & MILLER, FED. PRAC. & PROC. § 2992. Title 28, U.S.C. §
2041 provides, in relevant part, that “[a]ll moneys paid into any court of the
United States. . .in any case pending or adjudicated in such court, shall be
deposited with the Treasurer of the United States or a designated depositary. .
. .[t]his section shall not prevent delivery to the rightful owners upon
security, according to agreement of parties, under the direction of the court.”
Section 2042 also provides, in relevant part, that “[n]o money deposited under
section 2041 of this title shall be withdrawn except by order of court. In every
case in which the right to withdraw has been adjudicated or is not in dispute and
such money has remained so deposited for at least five years unclaimed by the
person entitled thereto, such court shall cause the money to be deposited in the
Treasury. . . .[a]ny claimant entitled to any such money may, on petition to the
court...and full proof of the right thereto, obtain an order directing payment
to him.”
32
Hansen v. United States, 340 F.2d 142, 144 (8th Cir. 1965); United
States v. Beach, 113 F.3d 188, 191 (11th Cir. 1997)(citing United States v. Kim,
870 F.2d 81, 84-85 (2d Cir. 1989)(applying preponderance of the evidence
standard).
33
United States ex. rel. Home Indem. Co. v. Am. Employers’ Ins. Co.,
192 F. Supp. 873, 876 (D. N.D. 1961)(citing United States v. Chapman, 281 F.2d
862, 867 (10th Cir. 1960)).
16
interpleader, and admiralty.34 Proceedings for disbursement of
funds deposited in court are equitable in nature and in the nature
of interpleader.35
Here, the district court disregarded or was unaware of its duty
under 28 U.S.C. §§ 2041 and 2042 to determine the persons who were
entitled to the funds on deposit and to disburse them only to the
rightful owners. The district court did not take evidence on or
inquire into rightful ownership in accordance with 28 U.S.C. §§ 2041
and 2042. Instead, the district court acted as if it had no
jurisdiction to inquire into equitable entitlement and summarily,
without giving any clear reasons, disbursed the funds first to
Craig’s, but, after reversing itself, to BOL. Consequently, the
district court did not perform its duty under §§ 2041 and 2042 to
determine the rightful owner of the deposited funds by a
preponderance of the evidence before delivering them.
Furthermore, 28 U.S.C. §§ 2041 and 2042 provide that funds
deposited in court may be disbursed only by order of the depositary
court to persons judicially determined to be entitled to them.36
Appellate courts are not vested with original jurisdiction,
34
See 13 MOORE’S FED. PRAC. & PROC. § 67 App.01 (citing former statutes,
admiralty rules, and committee note.)
35
See, e.g., United States v. Beach, 113 F.3d at 191 (quoting United
States v. $17,400 In Currency, 524 F.2d 1105, 1108 (10th Cir. 1975) (Doyle, J.,
dissenting) (describing petition for withdrawal of funds pursuant to 28 U.S.C.
§ 2042 as “[b]eing in the nature of an interpleader action”)).
36
See 28 U.S.C. § 2041-42.
17
authorized by rule or law to make this determination, or permitted
to render disbursement orders. Hence, the majority has fallen into
error by instructing the district court to disburse the funds to
Craig’s without first making a determination under Rule 67 and §§
2041 & 2042 of who is the rightful owner of the money.
Besides, as a purely practical matter, this court is ill-
equipped to perform this function since we cannot easily inquire
into or elicit evidence on the pertinent issues. That is especially
so in the present case. The district court and the parties did not
proceed to inquire into rightful ownership under Rule 67 and §§ 2041
and 2042; apparently they were unaware of these provisions or
mistakenly thought the district court lacked judicial power to
determine rightful ownership. Therefore, the present record does
not contain sufficient evidence on these issues to enable us to
decide them initially, even if it were permissible for us to do so.
Accordingly, I would vacate the district court’s judgment and remand
the case to the depositary court for it to determine how the funds
on deposit shall be distributed according to 28 U.S.C. §§ 2041 and
2042.
Ultimately, the majority’s disposition of this case does not
comply with law, equity or justice and does not return the parties
to their original positions. As the majority notes, “ownership of
the money in the court’s registry was at all times disputed. . .
18
.”37 Thus, the majority’s transfer of all of the funds to Craig’s
simply because Craig’s initially deposited most of the funds into
court overlooks the basic fact that neither party had a clear right
to the money. Instead, both parties had claims to the money and
this is reason that the funds had been deposited into court.
The majority’s peremptory transfer of funds to Craig’s also
disregards the significant changes in position by BOL in
consideration of the deposit and the parties’ agreement to litigate
over the money within the court’s registry. Before the parties
agreed to the consent decree establishing ground rules for the
bankruptcy court’s adjudication of their claims, Craig’s had
possession of most of the funds, but BOL had several viable claims
or actions against Craig’s, i.e., an objection to the bankruptcy
court’s jurisdiction, an injunction action against Craig’s, a
counterclaim against Craig’s, and a claim to have the proceedings
converted to a Chapter 7 proceeding.
The bankruptcy court, upon agreement of the parties, entered
a consent decree which provided, inter alia, that (1) Craig’s shall
deposit and the clerk shall accept into the registry of the court
$251,440.40 being the funds in dispute; (and BOL was later required
to deposit $10,058 into the court) (2) the adversary proceedings
were consolidated; (3) BOL’s objection to the bankruptcy court’s
jurisdiction was withdrawn; (4) BOL’s motion to convert Craig’s
37
Maj. Op. at 5.
19
bankruptcy proceeding to a Chapter 7 proceeding was withdrawn; (5)
BOL allowed its injunction action become moot; (6) BOL was allowed
to file its counterclaim; and,(7) the parties stipulated that the
deposited funds would remain in the court’s registry pending their
litigation over the deposit and the bankruptcy court’s adjudication
of their claims. Thus, both parties significantly changed their
positions and gave and received benefits from their agreement to
litigate over the disputed funds deposited in the bankruptcy court.
The bankruptcy court adjudicated the claims pursuant to the
parties’ agreement, which it had approved. But the bankruptcy
court’s decision and judgment were voided by the decision of this
court that the bankruptcy court did not have jurisdiction to decide
the civil action on the merits. The purpose of the parties’
agreement, to submit their claims against the disputed funds
adjudicated by the bankruptcy court, was frustrated and its full
performance made impossible by the jurisprudential development that
deprived the bankruptcy court of jurisdiction.
Consequently, a disbursement of the funds to Craig’s free and
clear of BOL’s claims, without compensating BOL for the loss of its
claims against the funds and against Craig’s personally will
unjustly enrich Craig’s and be detrimental to BOL. BOL will suffer
the unjust penalty and hardship of being deprived of its claims to
ownership of the funds without a hearing. The result will be highly
20
inequitable and will not return the parties to their former
positions.
For all of these reasons, this case should be remanded to the
district court with instructions that it perform its statutory duty
under Rule 27 and 28 U.S.C. §§ 2041 and 2042, to determine rightful
ownership of the funds in the court’s registry and distribute those
funds accordingly.
21
22