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Wagner v. Key Bank of Alaska (1/22/93), 846 P 2d 112
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NOTICE: This opinion is subject to formal correction
before publication in the Pacific Reporter. Readers are
requested to bring typographical or other formal errors to
the attention of the Clerk of the Appellate Courts, 303 K
Street, Anchorage, Alaska 99501, in order that corrections
may be made prior to permanent publication.
THE SUPREME COURT OF THE STATE OF ALASKA
RICHARD E. WAGNER, )
)
Appellant, ) File No. S-4499
)
v. ) 4FA 90 43 CI
)
KEY BANK OF ALASKA, as ) O P I N I O N
Successor to First National )
Bank of Fairbanks, BARBARA J. )
WAGNER, ALASKA 100 INSURANCE, )
INC., VAN ARNEM FINANCIAL )
SERVICES, INC., GEORGE WHITNEY )
KEMPER, KATHLEEN KEMPER, ALASKA )
TITLE GUARANTY AGENCY, and all )
other unknown claimants in and )
to any of the properties being )
foreclosed, )
)
Appellees. ) [No. 3921 - January 22, 1993]
________________________________)
Appeal from the Superior Court of the State
of Alaska, Fourth Judicial District,
Fairbanks, Richard D. Savell, Judge.
Appearances: Karl L. Walter, Jr.,
Anchorage, for Appellant. Barbara L.
Schumann, Staley, DeLisio, Cook & Sherry,
Fairbanks, for Appellees.
Before: Rabinowitz, Chief Justice, Burke,
Matthews, Compton and Moore, Justices.
BURKE, Justice.
COMPTON, Justice, concurring.
The principal issue we address in this appeal is
whether Richard Wagner (Wagner) gained individual contract rights
under the terms of a 1989 settlement agreement with Key Bank of
Alaska (Key Bank). The parties entered into the settlement after
Wagner filed a Chapter 11 bankruptcy petition and was appointed
as "debtor-in-possession" of the bankruptcy estate by the
bankruptcy judge in charge of the case. The settlement was
intended to resolve disputes and facilitate the sale of certain
bankruptcy estate properties which partially secured Wagner's
indebtedness to Key Bank. Wagner maintains that he contracted in
the settlement for an individual right to repurchase some of the
properties which were to be transferred to Key Bank under the
agreement. Therefore, according to Wagner, the right of
repurchase was not part of the bankruptcy estate.
Because this settlement agreement involved bankruptcy
estate property in which Wagner, as debtor-in-possession, acted
as a fiduciary under the supervision of a bankruptcy judge,
sound public policy dictates that we refuse to recognize any
individual contract rights allegedly acquired under the agreement
without the express recognition of those rights by the bankruptcy
judge. We therefore find no merit in Wagner's contention that
the trustee of his bankruptcy estate was improperly substituted
for Wagner as the real party in interest in this foreclosure
action.
I. FACTS & PROCEEDINGS
Because Wagner was effectively dismissed from this
action without a hearing, no findings of facts control this
appeal. However, the following facts are undisputed in the
record.
Wagner and Alaska 100 Insurance, Inc. (Alaska 100), a
corporation in which Wagner held interests, borrowed more than
three million dollars over several years from First National Bank
of Fairbanks, the predecessor in interest of Key Bank. Wagner
personally guaranteed the debts of Alaska 100. Wagner's wife,
Barbara Wagner, personally guaranteed the debts of Wagner and
Alaska 100. The Wagners and Alaska 100 secured the loans through
deeds of trust (and other security agreements) on their real and
personal property.
In March 1988 Wagner filed a Chapter 11 bankruptcy
petition and became the debtor-in-possession of the newly created
bankruptcy estate.1 Key Bank obtained relief from the automatic
stay permitting Key Bank to foreclose its interests in certain
real and personal property belonging to the bankruptcy estate.
Shortly thereafter Key Bank, the Wagners and Alaska 100
entered into an agreement "in settlement of any and all claims
. . . arising from and out of loans made by [Key Bank]." The
agreement expressly acknowledged that "Richard E. Wagner's
participation in the settlement was subject to [the]
confirmation, approval or ratification of the Bankruptcy Court."
In the agreement, the parties stipulated that the
borrowers jointly and severally owed Key Bank a principal loan
balance of $2,480,519.44, and Key Bank agreed to limit the
"interest, costs and attorney's fees owed by the Borrowers, to a
total amount of $430,000.00." The agreement further provided
that Key Bank could judicially foreclose on the property which
had been pledged as collateral for the loans. In addition, the
agreement provided as follows:
Excluding the oil leases, properties
transferred or to be transferred to [Key
Bank] may be purchased by the Wagners for the
appraised values listed in the settlement
agreement, for cash, until [Key Bank] has
agreed to sell the properties to someone
else. [Key Bank] may enter into such an
agreement with a third party unless it has
received a tender of the actual cash purchase
price from the Wagners. (Emphasis added).
With the exception of certain senior claims, Alaska 100 and the
Wagners also agreed to hold Key Bank harmless from all claims to
the property by other parties.
The Bankruptcy Court Judge, Herbert Ross, approved the
settlement agreement in December 1989, adding the following note:
The court interprets the duty to
"defend, indemnify, and hold [Key Bank]
harmless"from claims of other parties, as it
relates to debtor, . . . only binds Richard
Wagner as an individual, but not the
bankruptcy estate or R. Wagner as a debtor-in-
possession.
In January 1990 Key Bank filed the foreclosure action
from which this appeal originates. The complaint incorporated
the settlement agreement and prayed for a judgment foreclosing
Key Bank's interests against the pledged properties and enforcing
the terms of the settlement. The Wagners separately filed non-
oppositions to the relief requested. On May 14, 1990, Superior
Court Judge Richard D. Savell entered a Judgment and Order of
Sale. The foreclosure sale was scheduled for July 26, 1990.
Before the sale occurred, Wagner filed a complaint in
bankruptcy court as debtor-in-possession seeking, among other
things, to have the sale postponed. Judge Ross denied the
requested restraining order against the scheduled sale. However,
in the meantime, Barbara Wagner and Alaska 100 had also filed
Chapter 11 bankruptcy petitions which stayed any action on the
May 14th Order of Sale. Key Bank later obtained relief from
these stays.
In October 1990 Key Bank moved to amend its complaint
and requested an "amended judgment and order of sale." Over
Wagner's pro per opposition, Judge Savell allowed the amended
complaint without vacating the earlier Judgment and Order of
Sale. Key Bank filed its amended complaint seeking damages for
alleged breaches of the settlement agreement by Alaska 100 and
the Wagners.
In December 1990 Wagner answered the amended complaint
and asserted a counterclaim seeking specific performance of the
settlement agreement. In January 1991, pursuant to Bankruptcy
Judge Ross' order, Kenneth Battley was appointed Chapter 11
trustee for Wagner's bankruptcy estate, and Wagner was relieved
of his position as debtor-in-possession. Key Bank then requested
that the superior court substitute Battley for Wagner as the real
party in interest in the foreclosure action. Key Bank also filed
a notice with the superior court that it would sell the
foreclosed property based on the May 14th Judgment and Order of
Sale.
On February 14 Battley answered the amended complaint
as trustee of Wagner's bankruptcy estate and requested that Key
Bank be enjoined from proceeding with the sale. On February 25
Judge Savell ordered that Battley be "substituted as defendant in
this case in the place of Richard E. Wagner"and further ordered
that Wagner's answer be stricken.2 Key Bank then requested a
ruling that the first Order of Sale was still in effect. Wagner
opposed the request claiming that he had individual contract
rights under the agreement which were not part of the bankruptcy
estate.
In March 1991 Key Bank and Battley as trustee entered
into a new stipulated settlement. The stipulation provided that
Key Bank and Wagner's bankruptcy estate were bound by the
original settlement agreement and also recognized the continued
validity of the first Judgment and Order of Sale. It also
provided that Key Bank was released from:
any and all provisions of the [original]
settlement agreement which in any way provide
rights of repurchase . . . [to] the debtors
or their family members [or] limit post-
settlement interest, costs or attorney's
fees.
The stipulation proclaimed that it is binding upon the
"Bankruptcy Estates of Richard E. Wagner, Barbara J. Wagner, and
Alaska 100 Insurance, Inc., their bankruptcy and other estates .
. . and their assigns, heirs, and transferees."3
Before the bankruptcy court, Wagner opposed the new
settlement stipulation and requested that Bankruptcy Judge Ross
withhold his approval. In the opposition, Wagner again argued
that he and members of his family obtained individual rights
under the settlement that could not be voided without their
consent. Nonetheless, Bankruptcy Judge Ross approved the new
settlement agreement and ruled that it was binding upon Wagner's
estate.4
After the trustees for the three bankruptcy estates
dropped any challenge to the foreclosure sale, Judge Savell ruled
that the first Judgment and Order of Sale was valid and that the
foreclosure sale could proceed. The foreclosure sale was
conducted on March 26, and Key Bank moved for confirmation.
Although Wagner opposed the motion, Judge Savell confirmed the
sale on June 3, 1991.
Wagner now appeals the February 25 order striking his
answer and substituting Battley as the real party in interest.
He also appeals the June 3 order confirming the foreclosure sale.
II. DISCUSSION
Wagner claims an individual contract right to
repurchase certain bankruptcy estate properties that were
transferred to Key Bank in the settlement agreement. Wagner
contends that the superior court should not have named Battley as
the real party in interest in the foreclosure action because
Wagner still retained individual rights to the properties
involved. He further contends that the court erred in striking
his answer and failing to resolve his counterclaim because this
effectively deprived him of a property interest without due
process.
Key Bank maintains that Wagner has no individual rights
under the settlement agreement. In its view, all rights under
the agreement, including the right of repurchase, belonged solely
to Wagner's bankruptcy estate. Thus, Key Bank maintains that
Battley was properly substituted as the real party in interest
when Wagner was removed as debtor-in-possession. Moreover, Key
Bank argues that no error occurred if the court dismissed Wagner
as an individual because Wagner never pled or established any
interest separate from his bankruptcy estate.
Although Wagner claims several procedural errors, this
appeal may be reduced to the question whether the original
settlement agreement effectively gave Wagner an individual right
to repurchase the properties involved in this foreclosure action.5
If, as a matter of law, the agreement did not confer individual
rights on Wagner, he could not possibly have suffered harm as a
result of the alleged errors.
A. Subject Matter Jurisdiction
Wagner appeals his dismissal from a judicial
foreclosure action. Over this, we certainly have jurisdiction.
Nonetheless, resolution of this appeal involves the
interpretation of a settlement agreement which was subject to and
contingent upon the approval of Bankruptcy Judge Ross. See Bankr.
Rule 9019, 11 U.S.C. (1988); Reynolds v. Commissioner, 861 F.2d
469, 473 (6th Cir. 1988) ("In bankruptcy proceedings, as
distinguished from ordinary civil cases, any compromise between
the debtor and his creditors must be approved by the court as
fair and equitable."). As a preliminary matter therefore, we
must determine whether our court has subject matter jurisdiction
to independently interpret this agreement. The relevant
authorities convince us that we do.
The United States District Courts, and by extension the
United States Bankruptcy Courts, have "original and exclusive"
jurisdiction over all bankruptcy cases. 28 U.S.C. 1334(a)
(1988). However, the federal courts' exclusive jurisdiction
extends only to the bankruptcy petition itself. In re Wood, 825
F.2d 90, 92 (5th Cir. 1987). State courts enjoy concurrent
jurisdiction with the federal courts over "all civil proceedings
arising under title 11, or arising in or related to cases under
title 11."28 U.S.C. 1334(b) (1988);6 In re Wood, 825 F.2d at
93 (stating the test for "relatedness"as "whether the outcome of
[the] proceeding could conceivably have any effect on the estate
being administered in bankruptcy") (quoting Pacor, Inc. v.
Higgins, 743 F.2d 984, 994 (3d Cir. 1984). The dispute
concerning Wagner's settlement with Key Bank thus could have been
pursued in federal bankruptcy court but may also be pursued in
our state courts. See, e.g., Stevenson v. Prairie Power Coop.,
Inc., 794 P.2d 641, 645-46 (Idaho Ct. App. 1989).
B. The Merits
In our view, two features of this case control the
analysis: Wagner's fiduciary duty as debtor-in-possession and the
lack of express bankruptcy court approval for Wagner's claimed
"individual contract rights."
Wagner argues that he bargained both as an individual
and as a debtor-in-possession during settlement negotiations with
Key Bank and obtained rights and incurred liabilities in both
roles. We believe that Wagner's "different hat"argument cannot
be reconciled with the fiduciary duty Wagner owed both to his
creditors and to his bankruptcy estate when he used bankruptcy
estate property to settle the claims with Key Bank.
Loyalty and the disavowal of self interest are
hallmarks of the fiduciary's role. See generally In re Republic
Fin. Corp., 128 B.R. 793, 802 (Bankr. N.D. Okla. 1991); see also
In re Russo, 762 F.2d 239, 241-42 (2d Cir. 1985). Accordingly,
some courts have ruled flatly that a Chapter 11 trustee or debtor-
in-possession "may not deal on his or her behalf with property of
the bankruptcy estate."In re Q.P.S., Inc., 99 B.R. 843, 845
(Bankr. W.D. Tenn. 1989). As one court noted, "[a]ny settlement
between the debtor and one of his individual creditors
necessarily affects the rights of other creditors by reducing the
assets of the estate available to satisfy other creditors'
claims." Reynolds, 861 F.2d at 473. Therefore, Wagner was not
free to bargain in his individual capacity for the right to
repurchase bankruptcy estate property without regard to the
interests of the estate or the estate's creditors.7
Even if Wagner's attempt to obtain individual contract
rights under the agreement was not itself a breach of his
fiduciary duty, he clearly acted improperly in failing to fully
disclose his intentions and obtain express approval for his
claimed individual rights when he went before Bankruptcy Judge
Ross requesting approval for the proposed settlement. In re
Savino Oil & Heating Co., Inc., 99 B.R. 518, 526 (Bankr. E.D.N.Y.
1989) ("One of the most fundamental and crucial duties of a
debtor-in-possession upon the filing of a Chapter 11 petition is
to keep the Court and creditors informed of the nature, status
and condition of the business undergoing reorganization. . . .
Open, honest and straightforward disclosure to the Court and
creditors is intrinsic to the entire reorganization process and
begins on day one, with the filing of the Chapter 11 petition.").
The notation on the order approving the settlement
states that certain obligations were binding on Wagner in his
individual capacity and did not bind the bankruptcy estate.
Nothing in the order, and indeed nothing in the entire record
presented on appeal, indicates that Bankruptcy Judge Ross ever
recognized or approved of Wagner obtaining individual rights
under the settlement. Wagner now argues that the right of
repurchase was a burden to the estate and points to the
bankruptcy trustee's stipulated settlement with Key Bank
disclaiming any interest in the right of repurchase as proof of
the inconsequential value the estate placed on this contract
right. Our response to this argument is that it is being made to
the wrong tribunal. We have no way of determining the value of
this contract right to the estate or Wagner's creditors and will
not infer little or no value from the fact that the bankruptcy
trustee disclaimed this right in settling its dispute with Key
Bank.
We hold, therefore, as a matter of law and sound
policy, that the original settlement agreement gave Wagner no
individual contract rights which we are prepared to recognize.
Because Wagner could not enforce his claimed contract right in
this foreclosure action, he was not prejudiced when he was
effectively dismissed from the case. Accordingly, we affirm the
superior court's orders substituting Battley for Wagner and
confirming the foreclosure sale.
AFFIRMED.
COMPTON, Justice, concurring.
I concur in the result only because I conclude that
Wagner is pursuing his claim in the wrong forum.
_______________________________
1. The commencement of a Chapter 11 bankruptcy case creates
a bankruptcy "estate" which, except for a few statutory
exceptions, is comprised of all the debtor's pre-bankruptcy
property. 11 U.S.C. 541 (1988); Koch Refining v. Farmers Union
Cent. Exchange, Inc., 831 F.2d 1339, 1343 (7th Cir. 1987), cert.
denied 485 U.S. 906 (1988) ("Once the bankruptcy petition has
been filed, property rights belonging to the debtor under state
law become assets of the estate."). A debtor may retain control
of the bankruptcy estate as "debtor-in-possession," but the
debtor's role is changed from that of outright owner to that of a
fiduciary who represents both the debtor's estate and the
creditors' interests. 11 U.S.C. 1107 (1988); Koch, 831 F.2d at
1342 & n.3; In re V. Savino Oil & Heating Co., 99 B.R. 518, 524-
25 (Bankr. E.D.N.Y. 1989) ("As de jure trustee, the debtor-in-
possession holds its powers in trust for the benefit of
creditors.").
2. The record is unclear as to whether the February 25
order was intended to dismiss Wagner in his individual as well as
his representative capacity. However, this appeal hinges on
whether Wagner may assert individual contract rights under the
first settlement agreement. Therefore, for purposes of this
appeal, we will assume that the February 25 order dismissed
Wagner in both his individual and representative capacities.
3. Key Bank obtained virtually identical stipulated
settlements from the trustees in bankruptcy for Barbara Wagner
and Alaska 100 Insurance, Inc. This is significant because any
individual right of repurchase that Barbara Wagner may have
acquired under the original settlement agreement passed
automatically to her bankruptcy estate upon the filing of her
Chapter 11 bankruptcy petition. See supra, note 1.
4. The order does not indicate Bankruptcy Judge Ross'
reasons for granting approval in the face of Wagner's objections.
5. This issue presents a question of law which we examine
de novo. See National Bank of Alaska v. Univentures 1231, 824
P.2d 1377, 1379 (Alaska 1992).
6. 28 U.S.C. 1334 (a) & (b) provide:
(a) Except as provided in subsection
(b) of this section, the district court shall
have original and exclusive jurisdiction of
all cases under title 11.
(b) Notwithstanding any Act of Congress
that confers exclusive jurisdiction on a
court or courts other than the district
courts, the district courts shall have
original but not exclusive jurisdiction of
all civil proceedings arising under title 11,
or arising in or related to cases under title
11.
7. A federal criminal statute provides:
Whoever being a custodian, trustee,
marshal, or other officer of the court
knowingly purchases, directly or indirectly,
any property of the estate of which he is an
officer in a case under title 11 . . . .
. . . .
Shall be fined not more than $500, and
shall forfeit his office . . . .
18 U.S.C. 154 (1988). Federal courts have treated a debtor-in-
possession as either a "trustee"or "officer of the court" in
applying this statute. See In re Russo, 762 F.2d at 241-42; In re
Q.P.S., 99 B.R. at 844-45. It appears to us that a debtor-in-
possession who contracts for the right to repurchase estate
property which is being transferred to a creditor of the estate
comes perilously close to "indirectly"purchasing property of the
estate. However, this is not to say that Wagner was precluded
from bidding on the property at the foreclosure sale after being
removed from his position. See In re Met-L-Wood Corp., 861 F.2d
1012, 1019 (7th Cir. 1988) ("It is commonplace, and involves no
impropriety, for the debtor himself to bid [on former estate
property] at a foreclosure sale."). Ultimately, it is
unnecessary for us to determine the actual criminality of
Wagner's actions.
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