- No. 13-20622 (5th Cir. Sep. 3, 2014)
- Vacating and remanding three district court orders and two bankruptcy court orders, the Fifth Circuit held that both courts lacked subject matter jurisdiction to enter various orders affecting both pending litigation between two nondebtor entities and several million shares of the plaintiff’s stock that the plaintiff claimed to have been fraudulently induced to issue to another nondebtor entity owned by the defendant. The Fifth Circuit concluded that the stock, pledged as collateral to secure postpetition loans to the debtor, was not property of the estate, nor was the related lawsuit over their ownership a core or noncore proceeding within the meaning of 28 U.S.C. § 157.
- Procedural context:
- In a hotly contested case, the bankruptcy court and district court having temporarily withdrawn the reference) entered various orders authorizing the deposit of stock in custodia legis and authorizing postpetition financing and the use of cash collateral by the debtors pledged by the stock. The issuer of the stock appealed.
- Vantage filed suit to recover millions of shares of its stock, which it argued had been fraudulently obtained by the defendant. Defendant’s owner, who also directly or indirectly owned the debtors, caused the shares to be deposited with the court in custodia legis to ensure the debtors’ compliance with court orders and secure any postpetition financing or use f cash collateral by the debtors. A series of orders entered by the bankruptcy and district courts approved the escrow of stock and authorized $20 million in postpetition financing to be secured by the shares. The Fifth Circuit first concluded that the appeal was not rendered statutorily moot by 11 U.S.C. §§ 363(m) and 364(d) because the lender was aware of the existence of Vantage’s adverse claim to the stock pledged as collateral, and therefore could not be found to have extended credit “in good faith.” Thus turning to the merits of the appeal, the appellate court concluded that the stock was not property of the estate, as the debtor neither had an interest in the stock prior to the bankruptcy nor acquired such an interest that was traceable to property of the estate or generated in the normal course of the debtor’s business as required by 11 U.S.C. § 541(a)(7). As the stock was not property of the estate and the related litigation by Vantage would have no conceivable impact on the administration of the estates, the Fifth Circuit concluded that the lower courts lacked subject matter jurisdiction.
- Higginbotham, Davis, and Haynes.
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