David A. Sosne v. Reinert & Duree ( 2002 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 01-2852
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In Re: Just Brakes Corporate *
Systems, Inc., *
*
Debtor. *
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David A. Sosne, Trustee, *
* Appeal from the United States
Plaintiff - Appellant, * District Court for the
* Eastern District of Missouri.
v. *
*
Reinert & Duree, P.C., et al., *
*
Defendants - Appellees. *
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Submitted: January 14, 2002
Filed: June 12, 2002 (corrected 6/18/02)
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Before LOKEN, RICHARD S. ARNOLD, and MURPHY, Circuit Judges.
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LOKEN, Circuit Judge.
This is an action by a Chapter 7 bankruptcy Trustee to recover damages from
certain judgment creditors for violating the automatic stay. In a prior appeal, we
upheld a ruling that Defendants had violated the automatic stay but concluded that the
Trustee’s proper remedy was limited to compensatory damages and remanded for a
determination of those damages. In re Just Brakes Corp. Sys., Inc., 108 F.3d 881 (8th
Cir.), cert. denied, 522 U.S. 947 (1997). On remand, the bankruptcy court awarded
the Trustee the proceeds at issue without determining whether the underlying asset
was part of the bankruptcy estate. On appeal, the district court held that this ruling
violated the law of the case established by our prior decision and entered judgment
for the Defendants. The Trustee appeals. We agree with the district court that the
bankruptcy court’s ruling violated our prior remand directions. But we conclude the
Trustee established that the asset in question was part of the bankruptcy estate.
Accordingly, we reverse and order the bankruptcy court’s judgment reinstated.
In January 1991, Just Brakes Corporate Systems, Inc. assigned a registered
trademark, its only valuable asset, to FGR Management, Inc., a corporation whose
president was a shareholder and director of Just Brakes. Defendants sued to have the
conveyance set aside as fraudulent to Just Brakes creditors. The state court enjoined
Just Brakes from making further transfers and ordered a foreclosure sale of the
trademark to satisfy Defendants’ prior judgment against Just Brakes. The foreclosure
sale was scheduled for October 15, 1991. That morning, Just Brakes commenced this
Chapter 7 proceeding, thereby triggering the automatic stay of actions by its creditors
to enforce prior judgments or to collect prior claims against Just Brakes or its estate.
See 11 U.S.C. § 362(a).
The state court allowed the foreclosure sale to proceed over the objection of
FGR Management, with the proceeds to be held in escrow while the parties litigated
the validity of the sale and rights to the sale proceeds. The trademark was sold for
$105,000. Defendants then moved the state court to award them the net sale proceeds
of $100,717, an action that violated the Chapter 7 automatic stay. The state court
granted the motion, Defendants were paid the proceeds, and the Trustee commenced
this action under § 362(a) to recover the proceeds for the bankruptcy estate. The
Trustee also asserted avoidance claims against Defendants and FGR Management
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seeking to recover the trademark and its proceeds under 11 U.S.C. §§ 547-550.
However, the Trustee later dismissed those claims.
The bankruptcy court ordered Defendants to pay the net proceeds of $100,717
into the bankruptcy estate as compensatory or punitive damages for violating the
automatic stay. On appeal, we concluded the Trustee is limited to compensatory
relief under 11 U.S.C. § 362(a). We ordered the sale proceeds paid into escrow and
remanded for determination of compensatory damages. The value of the trademark
was not necessarily an appropriate compensatory remedy, we observed, because the
Trustee had “never established his right to avoid the debtor’s pre-petition transfer and
recover the trademark or its value for the estate.” In re Just Brakes, 108 F.3d at 885.
We further noted that Defendants’ violation of the automatic stay may have caused
the Trustee to incur additional litigation expenses. We encouraged the bankruptcy
court to revisit that issue “after the avoidance issues are finally resolved.” Id. at 886.
On remand, Defendants took the position that what we had referred to as “the
avoidance issues” could only be determined in a separate avoidance proceeding, and
that any such proceeding if commenced by the Trustee would be time-barred. The
contention is patently wrong. In this timely proceeding under § 362(a), liability was
established on the first appeal, and we remanded for a determination of the Trustee’s
damages. That determination was to be made in this proceeding, whether or not it
involved issues that, absent Defendants’ violation of the automatic stay, would have
been litigated in a separate avoidance proceeding. We held that the Trustee had to
prove the trademark was part of the bankruptcy estate before the full sale proceeds
could be awarded as compensatory damages for Defendants’ violation of the
automatic stay. We did not hold that the Trustee had to bring new avoidance claims
under 11 U.S.C. §§ 547-550, or otherwise replead those claims, in order to establish
the estate’s property interest for purposes of this § 362(a) proceeding. Unfortunately,
the bankruptcy court, the district court, and to a large extent the Trustee accepted
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Defendants’ position in this regard, which caused the proceedings on remand to
become seriously misdirected.
Before the bankruptcy court on remand, the Trustee sought to avoid
Defendants’ mistaken contention by arguing that the bankruptcy court need not
address the avoidance issues at all. It was “implicit in the Eighth Circuit Opinion”
that the trademark was part of the bankruptcy estate, the Trustee asserted, because
there could be no violation of the automatic stay unless the proceeds were derived
from a sale of the estate’s property. This contention, too, was patently wrong. In the
first appeal, we squarely held that we did not need to decide whether the trademark
or its proceeds were property of the bankruptcy estate because Defendants violated
§ 362(a)(6) by taking post-petition action to collect their pre-petition judgment from
the trademark proceeds, and that violation “prejudiced the Trustee’s ability to litigate
a competing avoidance claim on behalf of all creditors.” 108 F.3d at 884. Because
the avoidance issues were therefore unresolved, we directed the Trustee to prove on
remand that the trademark was in fact property of the bankruptcy estate if he wished
to recover its proceeds as compensatory damages in this § 362(a) proceeding.
Faced with these competing erroneous contentions, the bankruptcy court
concluded that the Trustee is entitled to recover the sale proceeds because the
trademark and its proceeds were subject to an avoidance action by the Trustee that
“could have resulted in the return of the transferred assets.” The district court
concluded that this ruling “did not follow the mandate of the Eighth Circuit on
remand.” We agree. We reversed the prior award of the proceeds because the
Trustee had not established his right to recover the trademark’s value for the estate.
“The law of the case doctrine prevents relitigation of a settled issue in a case and
requires that courts follow decisions made in earlier proceedings to insure uniformity
of decisions, protect the expectations of the parties and promote judicial economy.”
Klein v. Arkoma Prod. Co., 73 F.3d 779, 784 (8th Cir.), cert. denied, 519 U.S. 815 &
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816 (1996); see In re Usery, 242 B.R. 450, 457-59 (8th Cir.BAP 1999), aff’d, 242
F.3d 378 (8th Cir. 2000), cert. denied, 533 U.S. 903 (2001).
Having rejected the bankruptcy court’s reasoning, the district court went on to
grant judgment in favor of Defendants because “the Trustee never established his
power to avoid the pre-petition transfer [of the trademark to FGR Management] and
his right to recover the trademark or its value for the estate.” If the record supported
this conclusion, we would affirm. But it does not. In his initial post-remand brief to
the bankruptcy court, the Trustee argued an alternative theory:
It is further clear from the record that the Trustee makes a prima
facie case and would be entitled to relief. . . . The Sheriff’s seizure [of
the trademark] resulted in an involuntary transfer of an interest in
satisfaction of an antecedent debt which allowed the creditor
(Defendants) to obtain more than it [sic] would have obtained in a
Chapter 7 proceeding. See 11 U.S.C. § 547. Additionally, if the Court
were to allow Defendants to assert that, in spite of their previous legal
positions [in state court], that the assignment to FGR was valid, such a
transfer is a preference based on the record. This is established as a
result of the status of FGR as an unsecured creditor in the amount of
$300,000 at the time of the filing of the bankruptcy Petition. The “look-
back” period for such a transfer is one (1) year in the event the creditor
is an insider. . . There is no dispute that Daryl Dunn, President of FGR
Management, was a twenty-five percent (25%) shareholder and director
of the Debtor [and therefore an insider as defined in 11 U.S.C.
§ 101(31)]. In fact, in an Order in 1991, the Bankruptcy Court found
that Daryl Dunn, president of FGR Management, Inc., was a shareholder
and director of the Debtor. . . . [Thus,] the record evidence before this
Court provides sufficient evidentiary support for the Trustee’s prima
facie case under § 547.
Defendants did not address this argument in their responsive brief to the bankruptcy
court, nor in their brief as appellants to the district court. This alternative argument
to the bankruptcy court was consistent with our directions on remand, and the record
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supports its underlying assertions. Thus, the Trustee was not to blame when the
bankruptcy court violated the law of the case by failing to address this contention.
However, the Trustee did fail to pursue this sound alternative contention in
defending the bankruptcy court’s favorable decision on appeal to the district court,
and in arguing this appeal from the district court’s adverse decision. We have
discretion not to consider a legal theory abandoned on appeal. But in this case we
decline to exercise that discretion. It is apparent that the proceedings on remand were
misdirected by Defendants’ erroneous contention that the Trustee could only prove
his entitlement to the sale proceeds in a separate avoidance proceeding that is now
barred for various reasons. The Trustee erred in not attacking that contention head-
on, and by relying primarily on an argument squarely at odds with our prior opinion.
But we remanded for a determination of an appropriate equitable remedy, and the
equities strongly favor placing the trademark sale proceeds in the bankruptcy estate,
for the benefit of all creditors. In these circumstances, we are unwilling to sacrifice
the interests of those creditors merely because the Trustee made the correct argument
in the bankruptcy court, but failed to pursue that argument on appeal.
For the foregoing reasons, we conclude that the bankruptcy court properly
ordered Defendants to pay the Trustee $100,717.00, plus interest from October 15,
1991, to the date of payment, for the benefit of the bankruptcy estate. In reaching that
decision, the bankruptcy court denied the Trustee an additional award of costs and
attorney’s fees. That ruling was not an abuse of the court’s substantial remedial
discretion, particularly in light of the Trustee’s decision to dismiss his avoidance
claims many years ago, which has resulted in two unnecessary appeals. Accordingly,
the judgment of the district court is reversed, and the case is remanded with
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instructions to reinstate the bankruptcy court’s final Order dated June 29, 2000. The
parties shall bear their own costs and attorneys’ fees for this appeal.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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