2001 WL 34386711 (4th Cir.)

For opinion see 262 F.3d 295

 

Briefs and Other Related Documents

 

United States Court of Appeals, Fourth Circuit.

 

Margaret GILCHRIST et al, Petitioning Creditors in an Involuntary Bankruptcy in

the United States Bankruptcy Court for the Southern District of Georgia, Appellants,

v.

GENERAL ELECTRIC CAPITAL CORPORATION, Plaintiff-Appellee,

SPARTAN INTERNATIONAL, INCORPORATED; Cleveland Mills Company; Home Furnishings,

Incorporated; Avondale Mills, Incorporated, Defendants-Appellees,

Peter L. TOURTELLOT, Receiver, Appellee,

AVONDALE MILLS, INCORPORATED, Movant.

 

No. 01-1823.

July 31, 2001.

On Interlocutory Appeal from the United States District Court for the District of South Carolina

 

Reply Brief of Appellants

 

Louis Saul, Joseph E. Mitchell, III, Saul & Mitchell, P.C., P. O. Box 1726, Augusta, Georgia 30903, (706) 722-6857.

James T. Wilson, Jr., James T. Wilson, Jr., P.C., P. O. Box 2112, Augusta, Georgia 30903, (706) 722-4933.

John B. Long, Tucker, Everitt, Long, Brewton & Lanier, P.A., P.O. Box 2426, Augusta, GA 30903, (706) 722-0771, Counsel for Appellants.

 

*i TABLE OF CONTENTS

 

Table of Contents ... i

 

Table of Authorities ... ii

 

Argument and Citation of Authorities ... 1

 

I. The Appellants have standing to appeal the order appointing a Receiver and the order holding them in contempt of court. ... 1

 

II. The District Court abused its discretion in ex parte appointing a Receiver and in enjoining all parties in interest. ... 6

 

III. The District Court lacks authority to enjoin non-parties who are not acting in concert with parties from filing an involuntary bankruptcy petition.

 

Conclusion ... 17

 

Certificate of Compliance

 

Certificate of Service

 

Note: Table of Contents page numbers missing in original document

 

*ii TABLE OF AUTHORITIES

 

Cases

 

Ameritrust National Bank v. Domore Corp., 19 U.C.C. Rep.2d 270 (N.D. Ind. 1992) ... 16

 

Cooksey v. Beaufort Mfg. Co., 194 S.C. 395, 9 S.E.2d 790 (1940) ... 16

 

Esbitt v. Dutch American Mercantile Corp., 335 F.2d 141, 143 (2nd Cir. 1964) ... 10

 

In re Commodity Corp. of Boston Consumer Account Litigation, 89 B.R. 283 (D. Mass. 1988) ... 14

 

In re Prudence Co., 79 F.2d 77 (2nd Cir. 1935) ... 11

 

Kelleam v. Maryland Casualty Co., 312 U.S. 377, 381, 61 S.Ct. 595, 85 L.Ed. 899 (1941) ... 10

 

Los Angeles Trust Deed & Mortgage Exchange v. Securities and Exchange Commission, 285 F.2d 162, 182 (9th Cir. 1960) ... 10

 

Newberry v. Davison Chemical Co., 65 F.2d 724 (4th Cir. 1933) ... 1, 2

 

Poinsett Construction Co. v. Fischer, 391 S.E.2d 875 (S.C.App. 1990) ... 16

 

Securities and Exchange Commission v. An-Car Oil Co., 604 F.2d 114 (1st Cir. 1979) ... 2

 

Securities and Exchange Commission v. Lincoln Thrift Association, 577 F.2d 600 (9th Cir. 1978) ... 1

 

United States v. Royal Business Funds Corp., 724 F.2d 12, 15 (2nd Cir. 1983) ... 11

 

United States v. Vanguard Investment Co., 907 F.2d 439 (4th Cir. 1990) ... 13

 

United States ex rel. SEC v. Carter, 907 F.2d 484 (5th Cir. 1990) ... 13

 

*iii West v. Radio-Keith Orpheum Corp., 70 F.2d 621 (2nd Cir. 1934) ... 1

 

Statutes

 

11 U.S.C. § 303(j) ... 5, 14

 

11 U.S.C. § 327 ... 11

 

11 U.S.C. § 330 ... 11

 

11 U.S.C. § 363 ... 11

 

11 U.S.C. § 547 ... 16

 

11 U.S.C. § 701 ... 11

 

11 U.S.C. § 702 ... 11

 

18 U.S.C. § 155 ... 9, 10

 

28 U.S.C. §586 ... 11

 

28 U.S.C. § 1409(d) ... 11

 

28 U.S.C. § 2001 ... 9, 10

 

29 U.S.C. § 2100 ... 16

 

Ga. Laws 2000, p.1487 ... 16

 

Ga. Laws 44-14-320 ... 16

 

O.C.G.A. § 11-9-310 ... 16

 

O.C.G.A. § 44-14-380 ... 16

 

S.C. Code § 29-11-10 ... 16

 

Other Authorities

 

Federal Rule of Civil Procedure 65(b)(2) ... 3

 

Federal Rule of Civil Procedure 65(d) ... 13

*1 ARGUMENT AND AUTHORITIES

I. The Appellants have standing to appeal the order appointing a Receiver and the order holding them in contempt of court.

While generally only parties to a case may appeal, there are exceptions. In West v. Radio-Keith Orpheum Corp., 70 F.2d 621 (2nd Cir. 1934), the receiver had hailed the non-party creditor into the proceeding against his will and then asserted that the appellant had no standing to appeal. Judge Learned Hand reasoned that the receiver could not have it both ways; coerce the appellant to appear and then attempt to bar the appellant's door to him.

The logic behind the rule that only parties to an action may appeal is because a non-party is not generally precluded by any decree or court order and his rights are not affected. In this case, the May 22, 2001 ex parte Order appointing the Receiver, as interpreted by the June 7, 2001 ex parte Order granting a temporary restraining order, placed a gag order on the Appellants and all creditors of Spartan. GECC and the Receiver rely upon this Court's opinion in Newberry v. Davison Chemical Co., 65 F.2d 724 (4th Cir. 1933), to support their position that a non-party cannot bring an appeal. In Securities and Exchange Commission v. Lincoln Thrift Association, 577 F.2d 600 (9th Cir. 1978), the court distinguished this Court's *2 decision in Newberry vs. Davison Chemical Co., supra, holding that, if the order of the district court precluded creditors from further protest, the creditors were in essence parties pro hac vici and the reasons for refusing them the right to appeal end. See also, Securities and Exchange Commission v. An-Car Oil Co., 604 F.2d 114 (1st Cir. 1979), where the court held that non-parties had a right to appeal.

Prior to the hearing on May 22, 2001, GECC did nothing to provide notice to the 6,500 parties in interest, even though it had held complete control over the books and records of Spartan since May 2, 2001. (JA996). The only creditor who appeared at the May 22, 2001 hearing was Parkdale Mills, whose attorney, Ms. Deborah Fletcher, did not learn of the hearing until 10:30 a.m. that morning. (JA332).

Generally, when an application for an appointment of a receiver is submitted, the court must give notice to all parties. Individuals cannot be deprived of their property or rights without notice unless providing notice is somehow impractical. Moore's Federal Practice Digest, 3rd Ed., §66.01[3][a], p.66-16. The appointment of a receiver is supposed to be an extraordinary equitable remedy not easily obtained. Moore's Federal Practice Digest, 3rd Ed., §66.04 [2] [a].

*3 When the involuntary bankruptcy was initially filed, GECC did not take the position that paragraph 5 of the May 22, 2001 Order drafted by it enjoined the Appellants from filing an involuntary bankruptcy. (JA589-606; JA609; JA621). In fact, GECC even suggested to the Bankruptcy Court, that

"The Court is free to fashion an order suspending proceedings in part to allow the Receiver to continue liquidation of the debtor's assets pursuant to the Receivership Order while continuing to administer certain aspects of the case, which may include the prosecution of avoidance actions and the allowance and prioritization of claims."

(JA619).

Even after losing its motion to change venue before the Bankruptcy Court on June 6, 2001, GECC did not take the position that paragraph 5 of the May 22, 2001 Order enjoined the filing of the petition. (JA822-823). The Bankruptcy Court had a copy of the District Court's May 22, 2001 Order before it and apparently did not construe paragraph 5 as an injunction enjoining the filing of an involuntary petition. Without any compliance with F.R.C.P. 65(b)(2) and without filing any motion, the Receiver obtained the District Court June 7, 2001 Order *4 granting a temporary restraining order. (JA374-376). When the Bankruptcy Court was informed by the Receiver's attorney that a temporary restraining order had been issued, GECC took the position that this was a new development and that it would honor whatever court controlled, but that it was not an issue in which GECC had participated. (JA899, lns.15-21).

The Receiver's attorney took the position before the Bankruptcy Court that he was merely seeking further clarification from the District Court as to the meaning of the District Court's Order. At the June 7, 2001 hearing, the Receiver's attorney stated that he had no intention of trying to hold anyone in contempt or to sanction anyone. (JA943, ln.8 through JA944, ln.10).

This Court should not allow parties in litigation to obtain ex parte orders which affect the rights of individuals or which clarify previous orders in such a way as to affect the rights of individuals, and then allow those parties to argue that those individuals have no standing to contest the orders; nor should this Court hold that the standard of review of those orders is "plain error."

GECC acknowledges the fact that the Appellants would have standing to appeal the contempt Order, but contends that by filing the withdrawal of the bankruptcy petition, the appeal of *5 that Order was mooted. Prior to filing a withdrawal of the bankruptcy petition, a Notice of Appeal was filed with this Court. (JA965; JA567-572.) [FN1]

 

    FN1. The Notice of Appeal was initially docketed by the District Court, but later removed from the District Court docket. The Notice was later placed back on the docket of the District Court by direction of this Court.

 

 

 

Despite the fact that a court is not supposed to impose a contempt sanction against anyone if the contempt is not committed in the presence of the court without first satisfying procedural requirements rooted in the due process clause, in this case there was never any motion filed or sanction sought as required by due process. Moore's Federal Practice Digest, 3rd Ed., §37.51[7] [a]. While Appellants have filed the withdrawal of the bankruptcy petition as ordered, the bankruptcy case has not been dismissed and cannot be dismissed under 11 U.S.C. § 303(j) until there is notice given to all creditors. The Bankruptcy Court has ruled that because of the District Court's injunction and because of the Bankruptcy Court's respect for the Orders issued by the District Court, it cannot proceed to give notice to creditors, since giving notice to parties and creditors would be inviting them to violate the June 7, 2001 temporary restraining order and the June 11, 2001 injunction. (JA993-1011).

*6 Appellants should not lose their right to appeal the June 11, 2001 Order holding them in contempt of court because they have obeyed the District Court's Order, even though they do not agree. Lawyers and parties cannot openly defy any court order. Once the District Court had issued the June 7, 2001 temporary restraining order and the June 11, 2001 injunction, the Appellants and their lawyers were silenced in Bankruptcy Court, have followed the specific Order, and have appealed same. (JA923, lns.10-20; JA965-966).

II. The District Court abused its discretion in ex parte appointing a Receiver and in enjoining all parties in interest.

Beginning at page 11 of their brief, GECC and the Receiver argue that there was some sort of "notice" given prior to May 22, 2001. On May 4, 2001, Spartan surrendered all of its assets to GECC. (JA12-13, ¶28). On May 2, 2001, GECC mailed correspondence demanding payment of Spartan's accounts receivable. (JA995). On May 4, 2001, GECC closed the operations of Spartan. (JA995; JA12- 13, ¶28). At the May 22, 2001 hearing, prior to the appointment of the Receiver, GECC's took the position that this was a four-party dispute involving one plaintiff and three defendants. (JA338, lns.5-9). Although GECC had been contacted by a number of employees and creditors, it *7 had only been contacted by three attorneys. One of the attorneys had refused to identify his client. The other claims had been resolved. (JA338). [FN2] Ms. Deborah Fletcher, the attorney for Parksdale Mills, a creditor is owed $750,000, had been in contact with GECC's lawyer and had demanded the return of her client's yarn. She had only by happenstance at 10:30 a.m. on the morning of May 22, 2001 that a receiver was being sought on an ex parte basis. (JA331-332, lns.23-6). Ms. Fletcher repeatedly pointed out at that hearing that due process required some notice to creditors. (JA331, lns.23-24; JA334, lns.15-18; JA335, lns.18- 25).

 

    FN2. The record in the Bankruptcy Court indicates that on May 18, 2001, the attorney for the Appellants notified both Spartan and GECC as to their potential claims, and that GECC's lawyer, on May 30, 2001, denied liability. (JA579, ¶5). None of the Petitioning Creditors were notified of the May 22, 2001 hearing to obtain an ex parte receivership order.

 

 

 

It is obvious from the statements of GECC's attorney that GECC did not want to have any notice sent out before it sold real estate and personal property, despite the fact that under Federal statutory provisions such notice is required in a receivership proceeding. GECC's attorney informed the District Court that it would substantially impair the Receiver's ability to liquidate the company for the highest value possible if creditors were notified every time an asset was sold. (JA340, *8 lns.16-19) The Receiver's position was that giving notice would be "cumbersome." (JA359, ln.24). The District Court appears to agree with a sale without notice, a procedure that would require parties in interest to contact the Receiver about what was happening, not vice versa. (JA360, lns.3-13). The Receiver testified that giving notice would diminish the value. (JA357, ln.23 through JA358, ln.12). GECC's position was that it would significantly impede the ability of the Receiver if required to give notice and that, under state law, GECC was not required to give notice. (JA350, lns.4-23).

The Order prepared by GECC's lawyer and entered by the District Court provided in paragraph 3 that the Receiver could sell the property, provided that any property on which GECC claimed a lien would not be sold without GECC's consent. The Order contained no provision for any notice to creditors, nor any provision for the District Court to approve any specific sale. (JA368-369, ¶3). Even though some mention was made about a contemplated sale of the Augusta mill, no appraisals were presented to the Court. The Receiver had not even evaluated the appraisals at that time. (JA358, lns.13-20). He had only seen appraisals ordered by GECC, not any of the appraisals obtained at the time the loan was made. (JA724, ln. 12 through JA727). The Receiver was authorized to turn over the funds to GECC, less *9 his fees or costs, all without any court approval. (JA370-371, ¶8).

The problem with the position advanced by GECC before the District Court and the position adopted by the District Court is that it is inconsistent with the provisions of 28 U.S.C. § 2001, et seq., which sets the standard for sales by receivers, including notice to all interested parties. In addition, from the time of his May 22, 2001 appointment to the time of the filing of the bankruptcy petition on May 30, 2001, the Receiver paid himself $41,000. According to the Receiver's lawyer, Court approval for fees was not required. (JA458, lns.1-16). The Receiver's fees were based on an hourly rate agreed upon between himself and GECC. (JA722, lns.14-25). Such agreements are expressly prohibited by Federal statute. 18 U.S.C. § 155. As the Bankruptcy Court has held, the receivership Order in reality placed the Receiver subject to the control of GECC. (JA996-1000). The Receiver in essence works for GECC. (JA999- 100).

Plain error should not be the standard of review when no notice was given or even requested. This Court should review the Order appointing a Receiver under the abuse of discretion standard. Moore's Federal Practice Digest, 3rd Ed., §66.07[3], p.66-28 through 66-29.

*10 At the time GECC brought the motion to have a receiver appointed, it was in possession of the property. It could have foreclosed its security deed or mortgages and sold the personal property at public or private sale pursuant to Article 9 of the Uniform Commercial Code. Since it was in control of the assets, it did not need a receiver. There was no showing why, on an ex parte basis, a receiver should be appointed; nor why it was necessary to enjoin 6,500 employees and parties in interest, all without notice; nor why the Receiver should sell assets and enter into agreements concerning his compensation, all contrary to Federal statute. 28 U.S.C. § 2001, et seq.; 18 U.S.C. § 155. There was little, if any, inquiry by the District Court concerning the terms of the proposed Order or its necessity. This was an abuse of discretion. Kelleam v. Maryland Casualty Co., 312 U.S. 377, 381, 61 S.Ct. 595, 85 L.Ed. 899 (1941).

It is well-settled that bankruptcy procedures are better geared for creditors. When faced with the issue of whether or not equity receiverships are superior to bankruptcies, the courts have generally held that, except when an estate has been fully administered in a receivership, it would be best to proceed in a bankruptcy. Esbitt v. Dutch American Mercantile Corp., 335 F.2d 141, 143 (2nd Cir. 1964); *11Los Angeles Trust Deed & Mortgage Exchange v. Securities and Exchange Commission, 285 F.2d 162, 182 (9th Cir. 1960); United States v. Royal Business Funds Corp., 724 F.2d 12, 15 (2nd Cir. 1983); In re Prudence Co., 79 F.2d 77 (2nd Cir. 1935).

Under bankruptcy law, interim trustees are not selected by parties in interest or creditors, but are appointed by the United States Trustee's Office, who oversees the performance of the interim trustee's duties. 11 U.S.C. § 701; 28 U.S.C. §586. Even if a subsequent trustee is elected under 11 U.S.C. § 702, the trustee is still under the supervision of the United States Trustee's Office. 28 U.S.C. § 586. Trustees can only employ professional persons, including attorneys, with specific approval of the Courts. 11 U.S.C. § 327. Fees and payments to the Trustee are only made after notice to the parties in interest and the United States Trustee and a hearing. 11 U.S.C. § 330. Procedures are in place for property to be sold only after notice and a hearing as provided for in 11 U.S.C. § 363. In connection with the collection of accounts receivable, trustees are given special venue provisions unlike that of a receiver, who must bring actions in various courts to collect accounts receivable. See, 28 U.S.C. § 1409(d).

Only in rare cases should an equity receivership be utilized by a court for purposes of liquidation. It is an abuse of discretion for a court to merely rubber-stamp an order such *12 as the May 22, 2001 Order of the District Court authorizing the Receiver selected by GECC and paid by GECC to sell assets without any specific court approval or notice to creditors, and enjoining all other creditors from taking any action, including the filing of an involuntary bankruptcy.

III. The District Court lacks authority to enjoin non-parties who are not acting in concert with parties from filing an involuntary bankruptcy petition.

The May 22, 2001 Order was drafted by GECC and was entered by the District Court with very little change, except for the giving of a post-signing notice to creditors. If GECC thought it had the authority to enjoin an involuntary bankruptcy, surely such language would have been included in paragraph 5 of the Order. If GECC thought that the language selected by it enjoined such a bankruptcy filing, it would have taken that position initially before the Bankruptcy Court in connection with its objection to the appointment of an interim trustee and its motion to dismiss or transfer the case to the District of South Carolina or to suspend the proceedings. Surely, it would have so stated before the Bankruptcy Court on June 6th and 7th, 2001. (JA589-606; JA609-621; JA644-843; JA896-947). GECC's position was that it did not participate in obtaining the June 7, 2001 Order clarifying paragraph 5 of the May 22, 2001 Order *13 prepared by it. (JA899, lns.18-21). On page 36 of its brief, GECC cites United States ex rel. SEC v. Carter, 907 F.2d 484 (5th Cir. 1990) for the proposition that a district court can enjoin the filing of an involuntary bankruptcy proceeding. That case involved an action for fraud relating to the sale of securities. One of the defendants, Litchfield, was active in the filing of the involuntary bankruptcy petition. Litchfield fell within the scope of an injunction as set forth in F.R.C.P. 65(d). Carter and Mooney participated with Litchfield in the filing of an involuntary bankruptcy petition. In that case, the Securities and Exchange Commission had scheduled a hearing to confirm a sale on November 10, 1988. Parties to that lawsuit attempted to thwart it by the bankruptcy filing on November 9, 1988. The contempt action was brought as a result of that action.

While the Fifth Circuit never reached the issue of whether the injunction lacked specificity or contained ambiguity, or whether there was a willful violation of the injunction, the facts in that case are more closely identified with this Court's decision in United States v. Vanguard Investment Co., 907 F.2d 439 (4th Cir. 1990), a case with which Appellants do not take issue. However, Appellants do believe that non-parties to a receivership proceeding who are not acting in concert or participating with parties cannot, in an ex parte filing to *14 which they were given absolutely no notice, have their right to file an involuntary bankruptcy petition under 11 U.S.C. § 303 suspended or terminated.

On pages 36 and 37 of their brief, GECC and the Receiver rely upon In re Commodity Corp. of Boston Consumer Account Litigation, 89 B.R. 283 (D. Mass. 1988). Again, the facts in that case are substantially distinguishable. There, the district court was dealing with numerous multidistrict cases and a class action settlement involving 40,000 individuals. Those individuals were given notice about benefits they were to receive. There was no ex parte proceeding. The district court specifically addressed the possibility of an involuntary bankruptcy proceeding, and had specific reasons why it wanted to hear from any potential beneficiaries or other parties prior to the filing of an involuntary bankruptcy proceeding.

Beginning at page 39 of their brief, GECC and the Receiver argue that the District Court should be permitted to exercise its discretion as to whether an involuntary bankruptcy case should proceed. Prior to the District Court's entry the May 22, 2001 Order, notice should have been given to the Appellants, who not only include employees seeking potential WARN Act claims, but also represent other general unsecured creditors. *15 Appellants' sole aim is not merely to seek immediate payments of alleged WARN Act claims.

At the June 11, 2001 hearing, the District Court heard from the testimony of Ms. Betty Cushman, a 59-year old employee of Spartan's King Mill facility in Augusta, Georgia. Ms. Cushman had worked at the King Mill for 29 years. She had unpaid medical bills totaling some $33,000 which predated the closing of the mill. (JA537-539). Other employees testified that their self-insurance benefits had been immediately terminated. The treatment of one employee's child, who was recovering from cancer, was cancelled by the provider for lack of insurance coverage. (JA706-709; JA709-711; JA829-833; JA833-836; JA836-840). The emergency motion brought before the Bankruptcy Court only related to the payment of medical claims. (JA578-586). Neither the Receiver nor GECC has stated what happened to the funds in the self-insured insurance plan. It is clear that this so-called receivership is designed to only pay GECC.

At this point, the Appellants do not know what a trustee will do, but believes that a trustee in bankruptcy supervised by the United States Trustee's Office and representing unsecured creditors, as opposed to being paid by GECC, will at least look at these claims. The self-insured funds that were in existence should be used to pay pre-filing medical claims. Whether the *16 WARN Act, 29 U.S.C. § 2100, will be considered as existing law that is part of an employee's contract of employment will be an issue before the Bankruptcy Court. Cooksey v. Beaufort Mfg. Co., 194 S.C. 395, 9 S.E.2d 790 (1940). Statutory liens of employees will be entitled to priority over the lien of GECC on accounts receivable and inventory. [FN3] S.C. Code § 29-11-10. See, Poinsett Construction Co. v. Fischer, 391 S.E.2d 875 (S.C.App. 1990); see also, Ameritrust National Bank v. Domore Corp., 19 U.C.C. Rep.2d 270 (N.D. Ind. 1992). Even in Georgia, workers have certain priority. O.C.G.A. § 44- 14-380. While this issue may be disputed based upon O.C.G.A. § 11-9-310, labor liens were last established and given priority in 2000. Ga. Laws 44-14- 320; Ga. Laws 2000, p.1487.

 

    FN3. GECC has taken the position that accounts receivable are located in South Carolina.

 

 

 

Whether GECC is considered an "insider" for purposes of 11 U.S.C. § 547 in that it obtained real estate and fixtures as additional collateral in October and November of 2000 will be issues for a trustee in bankruptcy to explore. (See, JA249, showing mortgage assignment of leases recorded November 17, 2000.) It is obvious from page 40 of its brief and from the timetable included by GECC in this case that the meaning of the May 22, 2001 Order only arose when GECC suffered an adverse *17 ruling on the venue issue. Then, and only then, was the language contained in paragraph 5 of the May 22, 2001 ex parte Order sought to be construed in the manner sought here by GECC and the Receiver who, under the District Court's Orders, are completely free to do as they please without judicial oversight.

CONCLUSION

This Court should reverse the May 22, 2001 decision of the District Court appointing a Receiver based upon an abuse of discretion standard and hold that the District Court had no basis for appointing a Receiver in light of GECC's being in possession of the assets and having control of same. This Court should further hold that the District Court erred in allowing the Receiver to sell property without notice to any creditor or party in interest and without specific court approval; should hold that the District Court erred in allowing the Receiver to be paid pursuant to an agreement between the Receiver and GECC; and should hold that the District Court erred in granting such a broad injunction without any notice or basis for same. Furthermore, this Court should find that the June 7, 2001 Order referred to as a temporary restraining order was improperly obtained without notice and that the ruling of the District Court on June 11, 2001 holding the Appellants in contempt of court and ordering that they purge themselves of the contempt of court by withdrawing the *18 bankruptcy was entered without notice and in an effort to enforce an injunction which exceeded the powers of the District Court.