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In re Gulf Coast Glass & Erection: Section 502(d) Does Not Bar Preference Action After Allowance of Creditor's Claim
Practical Law Legal Update 1-523-5564 (Approx. 6 pages)
In re Gulf Coast Glass & Erection: Section 502(d) Does Not Bar Preference Action After Allowance of Creditor's Claim
by PLC Finance and Practical Law Bankruptcy & Restructuring
| Published on 17 Jan 2013 • USA (National/Federal) |
On January 10, 2013, the US Bankruptcy Court for the Southern District of Texas in Shurn v. Gilbert (In re Gulf Coast Glass & Erection Co., Inc.) granted summary judgment to the liquidating trustee and ruled that section 502(d) of the Bankruptcy Code did not preclude the trustee's preference actions against the defendant, whose claim had already been allowed under the debtor's confirmed plan of reorganization.
On January 10, 2013, the US Bankruptcy Court for the Southern District of Texas in Shurn v. Gilbert (In re Gulf Coast Glass & Erection Co., Inc.) granted summary judgment to the liquidating trustee and ruled that section 502(d) of the Bankruptcy Code did not preclude the trustee's preference actions against the defendant, whose claim had already been allowed under the debtor's confirmed plan of reorganization. Section 502(d) disallows claims by entities who have been ordered to return property to the estate but have not done so. This ruling is consistent with the majority view, which sees section 502(d) as a means to coerce creditors to comply with judicial orders to return property to the estate, rather than as a way of protecting creditors from unanticipated preference actions.
Background
On May 7, 2010, Gulf Coast Glass & Erection Co., Inc., (Debtor) filed a Chapter 11 bankruptcy petition. The defendant, Bobby G. Gilbert, Sr. (Gilbert), received allegedly preferential transfers of $26,700 within a year of the bankruptcy filing.
Gilbert filed an unsecured proof of claim in the bankruptcy and objected to confirmation of the liquidating trustee's proposed plan. The parties negotiated a settlement agreement, which the Court incorporated into its confirmation order confirming the plan and resolving Gilbert's objections. The confirmed plan explicitly reserved the liquidating trustee's right to pursue certain avoidance actions, including the allegedly preferential transfers made to Gilbert.
On March 13, 2012, the liquidating trustee demanded a return of these transfers, which Gilbert ignored. The liquidating trustee then initiated an adversary proceeding against Gilbert to recover the transfers and sought reconsideration and disallowance of Gilbert's claim, until Gilbert returned the transfers. Gilbert responded and filed a motion for summary judgment, claiming that the confirmation order superseded the plan and did not preserve the liquidating trustee's claims against him to recover the transfers. The Court denied summary judgment to Gilbert, finding that the order did not even address that section of the plan which reserved the liquidating trustee's rights to pursue certain avoidance actions.
In the current case, the liquidating trustee's motion for summary judgment argues that there are no issues of material fact and therefore, the $26,700 of transfers that were made to Gilbert within a year of the bankruptcy are avoidable as preferences under section 547(b) of the Bankruptcy Code.
Gilbert asserted three separate arguments in his response:
- The reserved avoidance actions are barred by res judicata since the plan reserved the avoidance actions but the confirmation order, which he claimed superseded the plan, did not. However, the Court previously addressed and rejected this argument, and ruled that the order did not supersede the plan on this issue since it did not deal with that section of the plan which expressly reserved the liquidating trustee's right to pursue certain avoidance actions.
- Avoiding the alleged preferential transfers while also granting Gilbert's allowed claim under the plan violates section 502(d) of the Bankruptcy Code and ignores the settlement agreement. This would require the court to vacate the plan and the confirmation order because the settlement agreement would need to be unwound.
- The liquidating trustee did not meet all the elements of section 547 since the preferential transfers did not cause Gilbert to receive more than he would have received if no transfers occurred and if a hypothetical Chapter 7 case was filed.
Key Litigated Issues
The Interpretation of 502(d)
Section 502(d) of the Bankruptcy Code disallows claims by entities who have been ordered to return property to the estate (for example, because the property was an avoidable preference or the subject of a fraudulent transfer) but have not done so.
Courts are split regarding the meaning, timing and application of section 502(d). Gilbert argues that this section should be read according to the minority interpretation, which holds that as a matter of fairness, all issues concerning a creditor's claim should be resolved at one time. Therefore, a voidable transfer, such as a preference, should be determined as part of the claims process, not after. Following this interpretation, Gilbert argues that by granting his allowed claim in the confirmation order, the parties extinguished the liquidating trustee's right to pursue any of the reserved avoidance actions, including Gilbert's alleged preferential transfers.
The Court rejected Gilbert's argument for the following reasons:
- In a prior opinion, the Court had already found that the confirmation order explicitly reserved, but did not resolve, the liquidating trustee's right to pursue the avoidance actions. Therefore, it is not unfair to allow the liquidating trustee to pursue a section 547 claim to recover the alleged preferential transfers since the issue was not hidden from Gilbert at the time that the parties resolved his claim.
- The minority interpretation of section 502(d) has been criticized by other courts since it is based on a US Supreme Court opinion which did not address the same issue. In addition, since neither the Debtor nor the liquidating trustee objected to Gilbert's proof of claim, there is no re-litigation of prior resolved claims. Therefore allowing the liquidating trustee to pursue them while allowing Gilbert's claim is not a violation of section 502(d).
- The minority interpretation of section 502(d) does not take into account the practical considerations which may cause preference actions to be delayed until after the claims resolution process. For example, the trustee may delay action to preserve the relationship between the parties during the plan confirmation process, or may want to wait until the plan trustee analyzes the preference actions.
Outcome
The Court Adopts the Majority Interpretation of Section 502(d)
The majority view rejects the inflexible minority interpretation of section 502(d) requiring that preferences be determined as part of the claims process. Instead, it holds that section 502(d) merely precludes entities which have received voidable transfers from sharing in the distribution of assets until they have returned their voidable transfers to the estate. The majority interpretation sees section 502(d) as a means to force creditors to comply with judicial orders to return property to the estate. Therefore, the Court held that section 502(d) should only be used by the liquidating trustee if and when the Court finds that the transfers were avoidable preferences, which Gilbert refuses to return. Then the liquidating trustee could invoke section 502(d) to force Gilbert to return the preferential transfers by refusing to pay his claim until he does so.
The Liquidating Trustee has Satisfied All Elements of Section 547(b)
The Court held that Gilbert received more than he would have in a hypothetical Chapter 7 bankruptcy where the alleged preferential transfers had never been made. Therefore, the liquidating trustee proved all the necessary elements of a preference under section 547(b) of the Bankruptcy Code. Once the movant in a motion for summary judgment has established the elements of section 547, the burden shifts to the non-moving party who must raise a genuine issue of material fact. Since Gilbert failed to raise such an issue, the liquidating trustee's motion for summary judgment was granted.
Practical Implications
The Court joined the majority of courts in rejecting the minority interpretation of section 502(d) of the Bankruptcy Code. The minority interpretation views section 502(d) as a protection for unsuspecting creditors and holds that preferences must be determined as part of the claims process. In contrast, by interpreting section 502(d) according to the majority view, the Court sees it as a tool with which trustees can force creditors to comply with judicial orders to return property to the estate. Conversely, this decision makes clear that creditors cannot invoke section 502(d) to protect themselves against avoidance actions after their claims have been resolved.