- Category: Judge Somers
- Published: 22 May 2009
- Written by Judge Somers
SIGNED this 08 day of May, 2009.
Page 1 of 12
Dale L. Somers
UNITED STATES BANKRUPTCY JUDGE
Designated for On-line Use but not for Print Publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
ALTERNATE FUELS, INC.,
ALTERNATE FUELS, INC.,
THE UNITED STATES OF
AMERICA, ACTING BY AND
THROUGH THE CLERK OF THE
UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF
CASE NO. 09-20173
ADV. NO. 09-06018
MEMORANDUM OPINION AND ORDER GRANTING
TRAVELER’S MOTION TO INTERVENE AND
DEBTOR'S COMPLAINT FOR TURNOVER
Case 09-06018 Doc# 30 Filed 05/08/09 Page 2 of 12
Following argument on March 20, 2009, the Court took under advisement Debtor’s
adversary complaint for turnover (hereafter "Complaint"). Arguments were concurrently heard
on the motion of creditor Travelers Casualty Company ("Travelers") to dismiss or suspend
(hereafter "Motion"),1 in which creditors Beachner Companies2 and W. K. Jenkins3 joined. That
Motion was also taken under advisement and is the subject of a separate order denying the
Motion. The findings of fact and conclusions of law stated therein are incorporated herein by
As to the adversary Complaint, Debtor appeared by Gary Hanson of Stumbo Hanson,
LLP. Defendant United States of America appeared by Assistant United States Attorneys
Andrea Taylor and Christopher Allman. Travelers, which filed a motion to intervene in the
adversary case, appeared by Keith Witten of Balkin Witten and Bernard Reinert and Chris
Michener of Reinert Weishaar & Associates. Additional appearances on the Motion to dismiss
or suspend are noted in the order denying that Motion. The Court has jurisdiction.4
Debtor Alternate Fuels, Inc. ("AFI") filed a voluntary petition under Chapter 11 on
January 28, 2009. Debtor was previously engaged in coal mining operations in Kansas and
1 Doc. 32, case # 09-20173.
2 Doc. 57, case # 09-20173.
3 Doc. 63, case # 09-20173.
4This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and §§ 1334(a) and (b) and the
Standing Order of the United States District Court for the District of Kansas that exercised authority
conferred by § 157(a) to refer to the District’s Bankruptcy judges all matters under the Bankruptcy Code
and all proceedings arising under the Code or arising in or related to a case under the Code, effective July
10, 1984. Orders for turnover of property to the estate are core proceedings which this Court may hear
and determine as provided in 28 U.S.C.§ 157(b)(2)(E). There is no objection to venue or jurisdiction over
Case 09-06018 Doc# 30 Filed 05/08/09 Page 3 of 12
Missouri. The Statement of Financial Affairs reports no income from business for years 2006
through 2008, and the asset schedules report no real property, machinery of unknown value, and
$4,910,807.63 in judgment proceeds on deposit with the Clerk of the District Court for the
Western District of Missouri. Scheduled liabilities are $10,969,807.58, comprised of
$4,666,060.53 in claims secured by assignments of the judgment proceeds, $1,618,703.51
unsecured priority claims, and $4,685,043.54 unsecured nonpriority claims. AFI's liabilities are
of essentially two types. The first are unliquidated and arise from ongoing reclamation
obligations in the State of Missouri, for which bonds have been posted by some creditors, such
as Travelers, Continental, and Jenkins. The second set are claims for money owed. Debtor filed
under Chapter 11 not for the purpose of reorganization of an ongoing business, but to determine
its liabilities and to achieve an orderly liquidation.
Prepetition, on or about September 29, 2006, the District Court for the Western District
of Missouri entered a judgment on a claim of tortious interference with business activities in
favor of AFI on a jury verdict in the amount of $6,463,778 against Tom Cabanas.5 The judgment
was affirmed by the United States Court of Appeals for the Eighth Circuit on August 15, 2008.
On September 8, 2008, Tom Cabanas, as plaintiff in interpleader, but under the same case
number as the tort litigation, filed an interpleader under the authority of 28 U.S.C. § 1335. The
interpleader complaint alleges that as of the date of filing the amount of the judgment plus
interest was $7,103,766.05 and that Cabanas had received conflicting claims for payment of the
5 Alternate Fuels, Inc. v. Tom Cabanas, et al, case no. 02-1182-CV-W-JTM, United States
District Court for the Western District of Missouri.
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proceeds of the judgment from Kempton & Russell, LLC; Foland & Wickens, PC.; Stumbo
W. K. and Earline Jenkins; the Missouri Department of Natural Resources; and Travelers.
Shortly after the filing of the interpleader, the judgment amount was deposited with the clerk of
the court. Additional parties intervened. The parties met for settlement conference/mediation on
December 16, 2008, and $2,199,425.58 was paid out of the registry with consent of all the
parties to the attorneys who represented AFI in the tort litigation.6
THE COMPLAINT AND POSITIONS OF THE PARTIES.
On February 3, 2009, AFI filed this adversary Complaint7 against the United States,
acting through the Clerk of the United States District Court for the Western District of Missouri.
The Complaint alleges in Count I that the current funds in the court’s registry in Case no. 021182-
CV-W-JTM are property of the estate under § 541 and should be turned over to the Debtor
in possession pursuant to §542(a) or § 543(b). In Count II, the Complaint seeks mandatory
injunctive relief under §105 requiring turnover of the funds.
On March 3, 2009, Travelers filed the Motion in the main case to dismiss or suspend
pursuant to § 305.8 It submits that principles of comity require this Court to suspend or dismiss
this Chapter 11 case in deference to the interpleader action in the District Court for the Western
6 Kempton & Russell, LLC and Foland & Wickens, PC.
7 Alternate Fuels v. United States of America, adv. case no. 9-06018.
8 11 U.S.C. § 305 provides in part:
(a) The court, after notice and hearing, may dismiss a case under this title, or may
suspend all proceedings in a case under this title, at any time if –
(1) the interest of creditors and the debtor would be better served by such
dismissal or suspension;
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District of Missouri, which acquired in rem jurisdiction over the impleaded funds approximately
four months before the bankruptcy was filed. Travelers argues that the funds on deposit are not
property of the AFI estate and the § 305 conditions for abstention are present. As stated above,
Beachner Companies9 and W. K. Jenkins10 joined in Traveler’s Motion.
On March 19, 2009, Travelers moved to intervene in the adversary proceeding. It asserts
that it is an interested party, by virtue of its status as a defendant and a claimant in the
interpleader action, and the named defendant in the adversary proceeding, the United States,
does not adequately represent the interests of Travelers and other interpleader defendants. As to
the merits of the Complaint, Travelers incorporated the memoranda filed in support of its Motion
to dismiss or suspend and reasserts that this Court lacks jurisdiction over the impleaded funds
because they are in custodia legis by the Western District of Missouri federal court and therefor
are not property of the estate under § 541. The Court hereby grants Traveler’s motion to
intervene and will consider the memoranda filed in support of the Motion to dismiss or suspend
when ruling on the Complaint.
Defendant United States has not filed an answer, but did appear at the March 20 hearing.
Counsel announced on the record that it supports the Debtor’s turnover Complaint. Counsel
stated as follows:
MS. TAYLOR: Good afternoon, Your Honor. Andrea Taylor
again on behalf of the United States of America. And in particular
the United States District Court for the Western District of
9 Doc. 57, case # 09-20173.
10 Doc. 63, case # 09-20173.
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We have been brought into this case, Your Honor, because we
received $5,000,000 from the State of Missouri on behalf of AFI or
to benefit -- for the benefit of AFI. The clerk had acted as a
custodian of those funds. And although we understand that there
are other outstanding issues like the reclamation issue, our interest
instead, is to make sure that those funds – that the funds are placed
where the Court deems they are supposed to be placed. The
District Court does not agree that the interpleader action is the best
action or the best mechanism to determine where those funds
should be placed.
We believe that the judgment was in favor of AFI, the proceeds
of AFI's judgment are in the Court's registry and AFI has filed for
bankruptcy now. So we would like those funds, AFI's funds, to be
transferred from the registry of the Western District of Missouri to
the debtor in possession account in the registry of the bankruptcy
A number of issues have surfaced, but we believe that the
bankruptcy court is the best suited to resolve all of those
competing claims to AFI's funds. We are in this case as an
adversary defendant because AFI has asked us to turn the funds
over to them but we do not want to do that without direction from
We would be happy to draft the proposed order if the Court
deems that appropriate. But, again, we believe that the Bankruptcy
Court is better suited to oversee the adjudication of completing
[sic] claims and priorities under the Bankruptcy Act within the
framework of the bankruptcy proceeding.
ANALYSIS AND CONCLUSIONS OF LAW.
A necessary prerequisite for turnover under § 542 and § 543 is that the property to be
turned over be property of the estate. The Debtor contends that the impleaded funds are property
of the estate, and defendant United States agrees. However, the intervenor Travelers argues
otherwise. There are surprisingly few cases addressing the question of when funds held by a
clerk of a federal court pursuant to an interpleader proceeding are subject to turnover to a
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Travelers relies upon Casco Chemical11 and National Cooperative Refinery12 when
opposing turnover. Casco concerned a fund held by the clerk of the federal district court which
had been deposited by Bunge in an interpleader action. Bunge had purchased accounts
receivable from Casco through use of sight drafts, which were then purchased by a bank. When
the sight drafts were dishonored, the bank sued Bunge to collect on the accounts receivable
transferred to it. Bunge received notice of competing claims to the accounts and instituted an
interpleader action, depositing funds with the court. Since none of the claimants or the court had
received notice of an involuntary bankruptcy filing against Casco, the deposited funds were
distributed to various claimants other than Casco on the day after the involuntary petition was
filed. After Casco was adjudicated a bankrupt, the Trustee instituted summary turnover
proceedings against the parties to whom the impleaded funds had been distributed. Under the
bankruptcy laws in effect at the time, the actual possession of the funds by the debtor or the
bankruptcy court on the date of the transfers was necessary for recovery. The court held that the
funds were not in the possession of the debtor on the date of transfer because they “had not been
deposited as those belonging to the Bankrupt. They were funds initially of Bunge and as to
which Bunge asserted a number of parties, including Casco and the four identified claimants,
were making adverse claims.”13 Casco is clearly distinguishable from this case. Bankruptcy law
has changed since the Casco case. Under the Code, actual possession of property by the Debtor
on the date of filing is not required for it to be included as property of the estate. Further in this
11 Abramson v. Superintendence Co., Inc. (In re Casco Chemical Co.), 335 F.2d 645 (5th Cir.
12 Nat’l Coop. Refinery Assoc. v. Rouse, 60 B.R. 857 (D. Colo. 1986).
13 In re Casco Chemical Co., 335 F.2d at 649.
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case, in contrast to Casco, the money held by the clerk was initially the money of the Debtor
AFI, whereas in Casco the funds were the proceeds of accounts receivable purchased from
Likewise, the reasoning of National Cooperative does not convince this Court that the
impleaded funds are not property of the AFI estate. In National Cooperative, NCRA had paid
into the registry of the court $42,000 in oil production revenues. The parties claiming a right to
the fund were the trustee of Empire Oil & Gas, the trustee of Alan Gable Oil, and Deep Rock
Oil, a subsidiary of AGOD, also in bankruptcy. The trustee for Empire asserted a cross claim
against the other two claimants. They sought to have the crossclaim dismissed, arguing, in part,
that because the fund was the property of the bankruptcy estates of either AGOD or Empire the
bankruptcy stay applied. The court rejected this contention finding that the purpose of the
interpleader was to determine the title to the fund, and until that determination was made the
deposited funds were not property of any debtor for purposes of § 362(a). In this case, AFI is
not one of several claimants; the fund is a judgment which AFI was awarded in a jury trial. The
claimants are creditors or potential creditors of AFI.
The facts of this case are similar to NLT Computer,14 relied upon by the AFI. NLT had
purchased computer software and licenses from Capital. It commenced an interpleader action
when it owed $150,000 to Capital because it faced competing claims to the $150,000 asserted by
several creditors of Capital, including the United States for unpaid withholding taxes. On the
day the court had scheduled a hearing on the government’s motion for summary judgment,
counsel for two other creditors announced that an involuntary bankruptcy had been filed against
14 NLT Computer Serv. Corp. v. Capital Computer Systems, Inc., 755 F.2d 1253 (6th Cir. 1985).
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Capital. The district court nevertheless proceeded on the government’s motion, but was reversed
on appeal. The Sixth Circuit Court of Appeals in dicta observed that it found unpersuasive the
government’s assertion that because it claimed an overriding lien in all of the proceeds, “the
monies paid into the court’s registry were somehow robbed of their character as property of the
debtor and were, thus, not subject to the Bankruptcy Code with respect to their proper
disposition.”15 It noted that the interpleader’s only function was to allocate the fund between the
creditors of Capital, the same function as vested in the bankruptcy court under the Code.
This Court agrees with the observations of the Sixth Circuit in NLT Computers. Whether
funds deposited with the clerk of a federal district court are property of a debtor or a bankruptcy
estate depends upon the specific circumstances of the interpleader case. If the bankrupt debtor is
a claimant to the funds owned by a third party when deposited, only that portion of the
impleaded funds actually owed to the debtor are property of the estate, and that amount generally
should be determined in the interpleader case. In such circumstances, the interpleader serves the
function of identifying the debtor’s interest in property, and a motion for turnover should fail
until that amount is known. However, where the deposited funds were owed by a third party to
an entity that later files for bankruptcy relief and the claims to the fund rest upon the status of the
claimants as creditors of the debtor, the role of the interpleader is similar to that of a bankruptcy
court - to allocate the funds among creditors. This Court sees no reason why in such a situation
the deposited funds should not be turned over to the bankruptcy court, which has been granted
by Congress procedures and powers to resolve disputes concerning allocation of assets of
15 Id., 755 F.2d at 1262.
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The fact that the funds are held in custodia legis by the clerk for the District Court of
Western Missouri does not place them beyond this court’s jurisdiction. The district court in
which a case is commenced under Title 11 or is pending “shall have exclusive jurisdiction . . . of
all the property, wherever located, of the debtor as of the commencement of such case and of
property of the estate.”16 There is no exceptoion for property held by other courts, whether state
or federal. In a Chapter 11 case now pending before this court, In re Brooke Corporation,17 there
was no dispute that the estate included property which at the time of filing was under the control
of a special master appointed prepetition by the federal district court to administer the affairs of
Brooke as an aspect of litigation against it.
Section 543 provides for turnover of property of the debtor by a custodian to the case
trustee. “Custodian” is defined by § 101(11) to include a “receiver or trustee of any property of
the debtor, appointed in a case or proceeding not under this title” and a “trustee, receiver, or
agent . . . that is appointed or authorized to take charge of property of the debtor for the purpose
of . . . general administration of such property for the benefit of the debtor’s creditors.” Courts
have held a state commissioner,18 the clerk of a county court,19 and a state court receiver20 to be
custodians. Although there are no reported cases holding that a court clerk holding a debtor’s
property in conjunction with a federal interpleader case, the Court finds the Clerk of the District
16 28 U.S.C. § 1334(e)(1).
17 In re Brooke Corp., case no. 08-22786.
18 Brown v. Dellinger (In re Brown), 734 F.2d 119 (2nd Cir. 1984).
19 Great Western Coal, Inc. v. Brown (In re Great Western Coal, Inc.), 146 B.R. 702 (Bankr. S.D.
20 In re 245 Assoc., LLC, 188 B.R. 743 (Bankr. S.D.N.Y. 1995).
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Court in this case comes within the plain meaning of the definition of custodian. The clerk is
authorized to take charge of the proceeds of the judgment in favor of AFI, and the district court
is authorized by the interpleader action to administer the property for the benefit of AFI’s
creditors. Pursuant to § 543(b), the clerk is required to deliver the funds to the trustee, which in
this case is the debtor in possession.
Alternatively, even if § 543 were not applicable, the Court would order turnover under its
equitable powers codified in § 105. In this case, the Debtor seeks turnover of the funds held by
the Clerk of the District Court for the Western District of Missouri and the United States agrees
that turnover will better serve the administration of the deposited funds. The Court agrees with
the United States. The Code cannot be implemented in this case if the funds, which are the
Debtor’s primary asset, are not turned over to this Court. As compared with the interpleader
case, this bankruptcy provides a superior forum for the determination of Debtor’s liability to all
claimants, including both those who are and those who are not parties to the interpleader action.
All parties having claims against the Debtor will be given notice and a right to file a claim. The
interpleader action has not progressed beyond the initial pleading stage. This Court, as would
the Missouri federal court, will apply Missouri mining law when appropriate.
For the foregoing reasons, the Court grants the Debtor’s Complaint for turnover of the
funds held by the Clerk of the District Court for the Western District of Missouri in Case no. 021182-
CV-W-JTM to the debtor in possession. The United States shall prepare an appropriate
order and submit it to the Court for consideration.
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The foregoing constitute Findings of Fact and Conclusions of Law under Rule 7052 of
the Federal Rules of Bankruptcy Procedure which makes Rule 52(a) of the Federal Rules of Civil
Procedure applicable to this matter. A judgment based upon this ruling will be entered on a
separate document as required by Federal Rule of Bankruptcy Procedure 9021 and Federal Rule
of Civil Procedure 58.
IT IS SO ORDERED.
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