Us Bank National Association v. Smf Energy Corporation ( 2011 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
______
No. 11-6005
______
In re: *
*
Interstate Bakeries Corporation, etc. *
Debtor, *
*
U.S. Bank National Association, in its *
capacity as Trustee for the IBC *
Creditors Trust
*
Plaintiff – Appellee, *
*
v. * Appeal from the United States
* Bankruptcy Court for the
SMF Energy Corporation, d/b/a * Western District of Missouri
Streicher Mobile Fueling, Inc. *
*
Defendant – Appellant,
*
Global Crossing Telecommunications, *
Inc., City of Alexandria, Louisiana, *
*
Defendants. *
_____
Submitted: October 13, 2011
Filed: November 25, 2011
_____
Before KRESSEL, Chief Judge, SALADINO and NAIL, Bankruptcy Judges
_____
KRESSEL, Chief Judge
1
SMF Energy Corporation f/k/a or d/b/a Streicher Mobile Fueling, Inc.,
appeals from a January 12, 2011 bankruptcy court 1 order finding that three
payments totaling $54,778.46 received by SMF from Interstate Bakeries
Corporation in the 90-day preference period preceding IBC’s chapter 11 filing
were preferential payments under 11 U.S.C. § 547(b) and were thus subject to
avoidance by U.S. Bank National Association in its capacity as trustee for the IBC
Creditors Trust. We affirm.
BACKGROUND
Between September 27, 2002 and July 17, 2004, SMF provided vehicle fuel
for Merita Bakery, an affiliate of IBC. IBC has done business under a number of
names, including Home Pride, Hostess, Mrs. Cubbison’s, Sunbeam, and Wonder.
Between June 24, 2004 and September 22, 2004, 2 as a result of their business
relationship, Merita made four payments to SMF totaling $67,965.53.
On September 22, 2004, IBC and seven affiliates 3 filed chapter 11
bankruptcy petitions in the Western District of Missouri. On August 25, 2006,
IBC filed a motion “to approve pursuit of certain preference and other potential
actions, and related procedure, pursuant to 11 U.S.C. §§ 105, 363 and 544-554, and
Fed. R. Bankr. P. 7004.” The motion asked the bankruptcy court to authorize IBC
to name approximately 400 potential preference defendants in a single complaint to
“allow the Debtors to preserve the ability to pursue certain actions … that might
otherwise expire under 11 U.S.C. §§ 108 or 546 on or about September 22, 2006,
while simultaneously allowing the Debtors to continue working on and negotiating
1
The Honorable Jerry W. Venters, United States Bankruptcy Judge for the
Western District of Missouri
2
June 24, 2004 to September 22, 2004 is the 90-day preference period.
3
Interstate Brands Corporation; IBC Sales Corporation; IBC Trucking, LLC;
New England Bakery Distributors L.L.C.; Baker’s Inn Quality Baked Goods, LLC;
IBC Services, LLC; Armour and Main Redevelopment Corporation. In 2006, Mrs.
Cubbison’s Foods, Inc. also filed a chapter 11 petition.
2
a potential plan of reorganization that may or may not include prosecution of some
or all of the Proposed Actions.”
On August 30, 2006, the motion and the notice of hearing were mailed to all
potential defendants, including SMF. The hearing was set for September 15, 2006.
SMF did not object to the motion.4 Following the hearing, a September 19, 2006
bankruptcy court order stated “that, for procedural purposes only, the Debtors shall
be and hereby are authorized to file a single Complaint” and also ordered, in
relevant part:
that the deadline established in Fed. R. Bankr. P. 7004, and Fed. R.
Civ. Proc. 4, to commence service of process (“Service Deadline”) on
all defendants identified in all Complaints filed by the Debtors
pursuant to this Order, shall be and hereby is extended to the earlier of
(1) December 31, 2007, or (2) the ninetieth (90th) day after the
effective date of any confirmed plan of reorganization in these cases,
subject to modification, if any, as may be provided in any such plan ...
In re Interstate Bakeries Corp., et. Al, No. 04-45814-JWV (Bankr. W.D. Mo. Sept.
19, 2006).
Notice of the order was electronically sent to certain potential defendants on
September 19, 2006, but SMF Energy Corporation, Streicher Mobile Fuel Inc., and
SMF’s attorney Herbert B. Dell were not among them. The docket indicates that
the order contained instructions to serve the order on any parties that did not
receive electronic notice. On September 20, 2006, IBC filed a certificate of service
of Docket Nos. 7754, 7755, 7757 and 7756. Docket No. 7757 was listed as the
Order Approving Pursuit of Certain Preference and Other Adversary Actions and
Related Procedures. However, Docket No. 7757 is actually a Response to
Omnibus Objection to Claims and Notice to Claimants Debtors’ Twenty-Second
4
Of the 400 potential defendants, only three companies filed objections to
IBC’s motion: (1) American Sugar Refining, (2) Okeelanta Corporation, and (3)
Golden Flake Snack Foods, Inc.. All three objections were withdrawn on or before
the hearing date.
3
Omnibus Objection to Claims filed by Christopher Smith.5 Also on September 20,
2006, two days before the applicable statute of limitations under § 546(a)(1) ran,
IBC filed an omnibus complaint under 11 U.S.C. §§ 547 and 550 against SMF and
approximately 400 others to avoid and recover certain payments made to the
defendants, including the following four payments made by Merita to SMF during
the preference period: (1) June 29, 2004 payment of $13,187.07; (2) August 2,
2004 payment of $7,006.16; (3) August 9, 2004 payment of $31,617.09; and (4)
August 29, 2004 payment of $16,155.21. Pursuant to the court’s September 19,
2006 order, no summons was issued.
IBC filed a certificate of service on September 25, 2006 for Docket No.
7782, Complaint to Avoid Preferential Transfers and for Judgment, the omnibus
complaint, which included a memorandum explaining the complaint and the Order
Approving Pursuit of Certain Preference and Other Adversary Actions and Related
Procedures. “Streicher Mobile Fueling Atlanta GA” was listed as one of the
entities receiving service of the omnibus complaint, the memorandum, and the
order approving the procedures for the omnibus complaint.
On December 5, 2008, the bankruptcy court confirmed the debtors’ plan and
also issued an order approving a settlement involving the debtors, prepetition
lenders and the official committee of unsecured creditors. The court’s order
established a creditors’ trust for the benefit of holders of allowed general
unsecured claims and assigned a number of avoidance claims to the trust, including
the claim against SMF. US Bank is the trustee of the IBC Creditors’ Trust.
According to the procedural order, because a plan was confirmed on December 5,
2008, the deadline for service of the omnibus complaint was March 5, 2009, 90
5
On
September 21, 2006, IBC filed an amended certificate of service of Docket
Nos. 7754, 7755, 7764, and 7756. This certificate of service properly listed
Docket No. 7764 as the Order Approving Pursuit of Certain Preference and Other
Adversary Actions and Related Procedures. Neither SMF Energy Corporation nor
Streicher Mobile Fueling Inc. was listed as one of the entities served by the
original certificate of service or the amended certificate of service.
4
days after confirmation of the plan. However, through a series of motions,6 the
bankruptcy court extended the original procedural deadline for serving the
omnibus complaint to accommodate the debtors’ work on their plan of
reorganization. The last order extended the service date to April 30, 2010.
US Bank filed a motion on May 14, 2009 to “bifurcate” 7 the original
proceeding into actions with fewer defendants, and the bankruptcy court granted
that motion on June 17, 2009. On August 20, 2009, almost three years after the
statute of limitations had run, and nearly five years after the petition, US Bank
filed a new complaint to avoid preferential transfers naming SMF and four other
defendants. The complaint detailed the history of the procedures order, omnibus
complaint, extensions to the deadline for service of process, and the bifurcation
order. SMF filed its answer on September 15, 2009 which included an affirmative
defense that the debtors waited too long to bring the action; hence, avoidance of
the transfers was time barred.
On August 9, 2010, the parties filed a stipulation of facts. They stipulated
that the $67,695.53 paid to SMF met the statutory criteria for avoidable
preferences. SMF, however, claimed that it provided new value to Merita in the
amount of $28,292.29 pursuant to 11 U.S.C. § 547(c)(4) “in the event that all or a
portion of the payments are adjudicated in favor of the Trustee.” SMF also
claimed the Trustee could not avoid the payments pursuant to 11 U.S.C. §
547(c)(2) because they were made in the ordinary course of business and
reasserted that the claim was time barred via the statute of limitations in an effort
to reserve this issue for appeal.
6
The orders were entered on: (1) December 21, 2007, (2) June 4, 2008, (3)
December 5, 2008, (4) May 12, 2009, and (5) October 16, 2009.
7
In its briefs, SMF complains that the “bifurcation” performed was not proper
and that “severance” was a more apt description of the court’s actions. In the
Sweet Ovations decision below, the bankruptcy court acknowledges that the action
taken could be considered a bifurcation or a severance but states that the term of art
used is immaterial.
5
SMF filed a motion for summary judgment on October 4, 2010 arguing that
the claim was time-barred by the two-year statute of limitations under 11 U.S.C. §
546(a). Specifically, SMF argued that the complaint was filed more than two years
after the debtor became a debtor in possession. Additionally, SMF argued that the
payments were made in the ordinary course of business and thus could not be
avoided pursuant to 11 U.S.C. § 547(c)(2).
In response, US Bank argued that the statute of limitations did not run
because the omnibus complaint was filed prior to September 22, 2006, the
applicable statute of limitations date pursuant to 11 U.S.C. § 546(a). Additionally,
US Bank argued that the bifurcated complaint “related back” to the omnibus
complaint and that SMF took no action to object to the procedures motion, the
omnibus complaint, or the extensions to the service of process deadline. US Bank
filed its own motion for partial summary judgment pointing out that the parties
stipulated to all relevant facts to support the preference action and that the only
remaining legal questions concerning the transfers were whether the transfers were
made on account of an antecedent debt and whether SMF’s new value defense
should be limited to $13,188.07.
The bankruptcy court treated SMF’s motion as a motion for partial summary
judgment and ruled on the parties’ cross-motions on November 1, 2010. The
bankruptcy court denied SMF’s motion and granted US Bank’s motion. The
bankruptcy court noted that it had already ruled on the statute of limitations issue
in a related adversary proceeding, U.S. Bank, N.A. v. Sweet Ovations, LLC, et al.
(In re Interstate Bakeries, Inc.), No. 09 Civ. 4169, in which it held:
The original adversary complaint was timely filed and all defendants
in all of the preference actions have been given notice of the
extensions of time for the service of summonses and complaints.
Don’s Welding Service and all other defendants were placed on notice
in 2006 that the debtor intended to seek the recovery of preferential
payments if the reorganization was successful. The extensions of time
were based on good cause and were in the best interests of all parties.
6
The Court directed the Trustee to sever or bifurcate the original
adversary proceeding into smaller adversaries so as to avoid an
administrative burden on the Court and its staff, and the numerous
defendants have not been prejudiced by such severance or bifurcation
(the term used is immaterial).
U.S. Bank, N.A. v. Sweet Ovations, LLC, et al. (In re Interestate Bakeries, Inc.),
No. 09 Civ. 4169 (Bankr. W.D. Mo. 2010). The bankruptcy court went on to say,
“SMF has not presented any new arguments for departing from the Court’s earlier
ruling, nor does the Court find any reason to do so.” SMF’s statute of limitations
argument was rejected. The bankruptcy court then found that SMF provided
$13,188.07 in new value to Merita during the preference period pursuant to 11
U.S.C. § 547(c)(4).
Only two issues remained for trial: whether any of the transfers were part of
a contemporaneous exchange for new value pursuant to 11 U.S.C § 547(c)(1) and
whether any of the transfers were made during the ordinary course of business as
defined in 11 U.S.C. § 547(c)(2). After the December 17, 2010 trial, the court
entered an order and judgment dated January 12, 2011. The bankruptcy court
found SMF failed to carry its burden on both its § 547 (c)(1) and (c)(2) defenses.
The court further granted a judgment against SMF for $54,778.46, which
represented the total transfers made during the preference period minus the new
value credit of $13,187.07. SMF timely filed a notice of appeal.
On appeal, SMF makes two principal arguments. First, SMF argues that the
bankruptcy court improperly extended the time for service under of Fed. R. Civ. P.
4(m) as incorporated by Fed. R. Bankr. P. 7004(a). Second, SMF argues that the
bankruptcy court erred in denying SMF’s motion for summary judgment on the
statute of limitations grounds. We will take these arguments in turn.
7
JURISDICTION
We have jurisdiction over this appeal from the final order of the bankruptcy
court. See 28 U.S.C. §158(b) (2011).
STANDARD OF REVIEW
“On appeal, we review the bankruptcy court’s factual findings for clear error
and its conclusions of law de novo.” Le Grand ex rel. Le Grand v. Harbaugh (In
re Harbaugh), 301 B.R. 317, 319 (B.A.P. 8th Cir. 2003). “Matters committed to
the bankruptcy court’s discretion will be reversed only if the court has abused its
discretion.” Id. (citing City of Sioux City, Iowa v. Midland Marina, Inc. (In re
Midland Marina, Inc.), 259 B.R. 683, 686 (B.A.P. 8th Cir. 2001)). The bankruptcy
court’s decision to enlarge the period of time for service of process is reviewed for
an abuse of discretion. See Jones v. Automobile Club of Southern California, 26
Fed. Appx. 740, 741 (9th Cir. 2002).
DISCUSSION
1. The bankruptcy court did not abuse its discretion by extending the time
for service of process.
SMF argues that it was not proper for the bankruptcy court to enlarge the
period of time for serving the summons set forth in Fed. R. Bankr. P. 7004. SMF
raises this issue for the first time on appeal. An issue raised for the first time on
appeal is typically deemed a nullity. See U.S. v. Winters, 600 F.3d 963, 970 (8th
Cir. 2010). This is especially true in the present situation when SMF was afforded
six separate opportunities to object to the extension of time (the initial procedures
order and each of the five individual requests for extension). Additionally SMF
failed to raise service defenses in its answer or to the bankruptcy court before or
during trial. In any event, SMF’s argument is without merit.
8
Fed. R. Bankr. P. 7004 incorporates most of Fed. R. Civ. P. 4, specifically
Fed. R. Civ. P. 4(m) which states:
If a defendant is not served within 120 days after the complaint is
filed, the court – on motion or on its own after notice to the plaintiff –
must dismiss the action without prejudice against that defendant or
order that service be made within a specified time. But if the plaintiff
shows good cause for the failure, the court must extend the time for
service for an appropriate period.
Fed. R. Civ. P. 4(m) (2011).
SMF argues, without any real legal support, that Rule 4(m) allows an
extension of time for service only when the plaintiff needs more time to serve the
defendant, but not for purposes unrelated to service of process itself. US Bank
argues that there is nothing inappropriate about extending the time to serve a
preference summons and complaint; it is not uncommon to do so; and it is fully
within the discretion of the bankruptcy court to do so. For the reasons stated
below, we hold that the bankruptcy court’s enlargement of the time for service of
process was not an abuse of discretion.
In its request for the procedural order, IBC relied on 11 U.S.C. § 1058 and
Fed R. Bankr. P. 7004. In its order, the court stated it was extending the time
period for service of process found in Fed. R. Bankr. P. 7004 and Fed. R. Civ. P. 4.
While the bankruptcy court relied on Rules 7004 and 4(m), Rule 4(m) does not
really apply until the plaintiff has failed to serve the defendant for 120 days after
the complaint is filed. Only after the 120 days have lapsed without service of
process “must” the court “dismiss the action without prejudice” or “order that
service be made within a specified period of time.” However, in this case, the 120-
day period under Rule 4(m) never began to run.
8
Section 105, titled, “Power of court,” states “(a) The court may issue any
order, process, or judgment that is necessary or appropriate to carry out the
provisions of this title.” 11 U.S.C. §105 (2010).
9
First, a summons was never issued. Second, on September 19, 2006, the
court ordered the enlargement of the time to serve process. Third, the omnibus
complaint was filed on September 20, 2006. Because the bankruptcy court
extended the time for IBC to serve the defendants in the omnibus complaint, the
120-day period never started.
We agree with US Bank that Fed. R. Bankr. P. 9006 provided the
bankruptcy court with the authority to extend the time for service of process. Rule
9006 states in relevant part:
(1)… when an act is required or allowed to be done at or within a
specified period by these rules or by a notice given thereunder or by
order of court, the court for cause shown may at any time in its
discretion (1) with or without motion or notice order the period
enlarged if the request therefor is made before the expiration of the
period originally prescribed or as extended by a previous order or (2)
on motion made after the expiration of the specified period permit the
act to be done where the failure to act was the result of excusable
neglect.
(2) Enlargement not permitted. The court may not enlarge the time
for taking action under Rules 1007(d), 2003(a), and (d), 7052, 9023,
and 9024.
Fed R. Bankr. P. 9006(b) (2010).
Eighth Circuit case law also supports this contention: “Rule 9006(b) …
permits the court to enlarge the time for an act to be done upon a showing of cause.
The court may act with or without motion or notice if the request is made ‘before
the expiration of the period originally prescribed.’” Agate Holdings Inc. v.
Ceresota Mill Ltd. P’ship (In re Ceresota Mill Ltd. P’ship), 211 B.R. 315, 317-318
(B.A.P. 8th Cir. 1997) (quoting Fed. R. Bankr. P. 9006(b)). The 120-day time
period prescribed by Fed. R. Civ. P. 4(m) for service of process, incorporated by
Fed. R. Bankr. P. 7004, can be properly enlarged within the discretion of the
bankruptcy court. See also, U.S. ex rel. U.S. Department of Education v. Moreu,
10
332 B.R. 20, 22 (Bankr. W.D. Okla. 2005) (citing Fed. R. Bankr. P. 9006(b))
(“Here, the central issue involves the bankruptcy court’s denial of an enlargement
of time—a decision the bankruptcy rules expressly leave to the bankruptcy court’s
discretion.).
Since the 120-day period never started to run, it obviously never expired.
However, even if Rule 4(m) applied, the court also had the discretion under that
rule to extend the period of time. The Eighth Circuit has addressed Rule 4(m) a
couple of times: “[I]f the district court concludes there is good cause for plaintiff’s
failure to serve within 120 days, it shall extend the time for service. If plaintiff
fails to show good cause, the court still may extend the time for service rather than
dismiss the case without prejudice.” Adams v. Allied Signal General Aviation
Avionics, 74 F.3d 882, 887 (8th Cir. 1996). “A showing of good cause requires at
least ‘excusable neglect’ – good faith and some reasonable basis for
noncompliance with the rules.” Id. “To warrant a discretionary extension, the
plaintiff must establish excusable neglect.” Kurka v. Iowa County, Iowa, 628 F.3d
953 (8th Cir. 2010).
Had the 120-day period expired, the court would have been required to
extend the period under Rule 4(m) upon a demonstration of good cause, and could
have extended the period within its discretion upon a showing of excusable
neglect. IBC obtained an extended deadline from the court and provided all
potential defendants with notice and the opportunity to be heard. Under Rule 4(m),
IBC would only be required to demonstrate excusable neglect.
The determination of excusable neglect is an equitable one, considering all
relevant circumstances including (1) danger of prejudice to the creditor, (2) length
of delay and its potential impact on judicial proceedings, (3) reasons for delay
including whether it was within the reasonable control of the movant, and (4)
whether the movant acted in good faith. Pioneer Inv. Services Co. v. Brunswick
Associates Ltd. P’ship, 507 U.S. 380, 395 (1993). The key factor in the analysis is
the “reason for delay.” Kurka, 628 F.3d at 959.
11
I. Danger of prejudice to SMF.
The bankruptcy court found that the delay in pursuit of the preference claims
benefited all parties of interest. We agree. Both the estate and SMF specifically
benefitted from the delay. IBC’s goal was to avoid pursuing the preference claims
if at all possible. Had the reorganization plan come together in a way that allowed
IBC to abandon the preference claims and still pay their creditors, this would have
clearly benefited SMF. The fact that the plan was not successful in that regard
does not change the benefit realized from that potential at the time of the
procedural request. We also note that SMF received a specific monetary benefit
from retaining the value and use of the $54,778.46 for an additional three years.
II. Length of delay and potential impact on judicial proceedings.
While the three-year delay was 50% longer than the statute of limitations,
IBC was so completely candid about its motivation for the request, the propriety of
the procedure in which the enlargement was granted, and the benefits gained by all
parties of interest, including the judicial economy achieved by the court. As noted
below, if SMF had been diligent, the length of delay would have been immaterial.
III. Reasons for delay.
The reasons for delay are legion. When IBC requested the procedures order,
it operated 45 bakeries, approximately 800 distribution centers and around 850
retail bakery outlets throughout the country. IBC employed close to 25,000
workers, had over 500,000 parties in interest, and maintained assets of $1.62
billion and liabilities of $1.322 billion. It is clear that this was a complex chapter
11 case and any effective reorganization plan required more time than
contemplated by the statute of limitations.
IBC hoped it would eliminate the need to pursue some, if not all, of the
preference actions by confirming a 100% reorganization plan. However, because
12
of the complexity of the case, it was impossible to determine whether or not the
preference actions could be abandoned as the statute of limitations neared. This
necessitated either allowing the statute of limitations to run, pursuing all 400
preference defendants prior to the expiration of the statute of limitations, or taking
the path IBC chose. IBC hoped it would not need to pursue the preference actions
but desired the option to pursue them if the plan and prudence required. Preserving
the preference claims benefited the creditor body as a whole. The court agreed that
it was in the best interests of all parties to delay pursuit of the preference actions
until it was determined, within the construct of the reorganization plan, that pursuit
was appropriate. The reasons advanced by IBC and approved by the bankruptcy
court justified the delay.
IV. Did IBC act in good faith?
IBC relied on two chapter 11 cases from the District of Delaware in which a
similar procedural order was sought and approved to facilitate the best
reorganization plan possible. In USG Corporation,9 the committee of unsecured
creditors filed a motion to authorize, nunc pro tunc, the committee to pursue
potential preference claims via a single complaint naming all potential preference
defendants and extending the deadline to serve process. Over several objections,
the bankruptcy court granted the motion.
Similarly, in Safety-Kleen,10 the debtors filed a motion to allow the debtor to
file a separate adversary action under seal and extend the deadline to serve process
on the defendants until 180 days after filing, subject to further extensions. Several
motions for extensions were granted. IBC, on the other hand, did not file under
seal and served all defendants identified in the omnibus complaint with the
9
Case No. 0102094, in the United States Bankruptcy Court for the District of
Delaware.
10
Case No. 00-2303, in the United States Bankruptcy Court for the District of
Delaware.
13
procedures motion and each motion for extension of time to serve. Furthermore, it
was IBC’s goal to avoid pursuit of any preference claims unnecessary to an
effective reorganization. This is a good faith goal and resulted in preserving estate
resources, time and effort to focus on an effective reorganization plan.
In summary, we think that under either the discretionary standard of “cause”
under Rule 9006(b) or the “good cause” standard of Rule 4(m) as interpreted by
the Eighth Circuit, the bankruptcy court did not abuse its discretion.
2) The denial of summary judgment is not reviewable.
It is well settled in the Eighth Circuit that the denial of summary judgment is
not reviewable after a trial on the merits. Studincka v. Pinheiro, 618 F.3d 799, 801
(8th Cir. 2010); Bakker v. McKinnon, 152 F.3d 1007, 1010 (8th Cir. 1998) (Where
appellant appealed summary judgment denial following bench trial, the court held,
“the denial of summary judgment is interlocutory in nature and not appealable after
a full trial on the merits; judgment after a full trial on the merits supersedes earlier
summary judgment proceedings.”). However, because it raised the issue prior to
entry of final judgment, SMF is entitled to argue the statute of limitations on
appeal.
I) The statute of limitations was satisfied.
SMF argues that the enlargement of the time period was an end-run around
the procedural protections of Rule 4(m) and the statute of limitations found in
§ 546(a)(1)(A). Essentially, SMF argues that even if the statute of limitations was
satisfied, they were prejudiced just as if the statute of limitations had run.
First and foremost, the statute of limitations did not run. Fed. R. Civ. P. 3
incorporated by Fed. R. Bankr. P. 7003 clearly states that “[a] civil action is
commenced by filing a complaint with the court.” Fed R. Bankr. P. 7003 (2010).
14
“In a suit on a right created by federal law, filing a complaint suffices to satisfy the
statute of limitations.” Henderson v. U.S., 517 U.S. 654, 657 fn. 2 (1996) (citing
West v. Conrail, 481 U.S. 35, 39 (1987)). IBC filed the omnibus complaint,
naming SMF as a defendant, on September 20, 2006, two days prior to the running
of the applicable statute of limitations found in § 546(a)(1)(A). SMF received
notice of the complaint, a memorandum explaining the procedures order and the
reasons for delay, and the procedures order. A civil action had commenced. SMF
was on notice, and the applicable statute of limitations was satisfied.
Since a civil action was properly commenced, SMF’s argument essentially
boils down to a fairness argument: it is unfair to allow service of process to take so
long – substantively violating the spirit of the statute of limitations even if it was
not technically violated. SMF’s assertion that the claim was stale misses the mark:
A primary purpose of a statute of limitations is to ensure timely notice
to the defendant of a claim against him or her, to permit the defendant
to take necessary steps to gather and preserve the evidence needed to
defend against the suit, so that the defendant is not prejudiced by
having an action filed against him or her long after the time the
defendant could have prepared a defense against the claim.
51 Am. Jur. 2D Limitation § 7 (2011).
“The primary purpose of statutes of limitations is to protect defendants from
having to defend against stale claims at a time when ‘evidence has been lost,
memories have faded, and witnesses have disappeared.’” Billings v. Chicago, R.I.
& P.R. Co., 581 F.2d 707, 710 (8th Cir. 1978) (citing Order of R.R. Telegraphers v.
Railway Express Agency, 321 U.S. 342, 349, (1944)). “The obligation to preserve
evidence begins when a party knows or should have known that the evidence is
relevant to future or current litigations.” E*Trade Securityes LLC. v. Deutsche
Bank AG, et al., 230 F.R.D. 582, 588 (D. Minn. 2005). “When litigation is
imminent or has already commenced, ‘a corporation cannot blindly destroy
documents and expect to be shielded by a seemingly innocuous document retention
policy.’” Id. at 589. (citing Lewy v. Remington Arms Co., 836 F.2d 1104, 1112 (8th
15
Cir. 1988)). “[A]ctual notice to a defendant that an action was filed militates
against a finding of prejudice.” Boley v. Kaymark, 123 F.3d 756, 759 (3rd Cir.
1997).
SMF was put on notice within the statute of limitations and had nearly three
years in which to prepare its defense. While it was under no obligation to answer
until served with a summons, SMF could have immediately gathered and preserved
the evidence necessary to support its arguments. SMF’s claim of lost documents
due to a change in record keeping cannot be attributed to the court-approved delay
in service of process. It is, quite simply, the result of not being diligent. SMF also
argues that a key witness no longer worked for IBC, and thus was not available for
trial. However, there is no evidence in the record demonstrating any efforts on
SMF’s part to locate this witness.
The statute of limitations was properly satisfied, and the preference claim
was not stale.
II) The bifurcation order was proper.
SMF also argues that the bifurcation requested by US Bank and ordered by
the bankruptcy court was improper and thus the bifurcated complaint did not relate
back to the omnibus complaint.
In Sweet Ovations LLC, et al, No. 09 Civ. 4169 (Bankr. W.D. Mo 2010), the
bankruptcy court stated that the term of art used was immaterial. We agree with
the bankruptcy court that the term of art is immaterial to the analysis of whether
the action was allowed by the rules. Fed. R. Bankr. P. 7042 states in relevant part:
(b) Separate Trials. For convenience, to avoid prejudice, or to
expedite and economize, the court may order a separate trial of one or
more separate issues, claims, crossclaims, counterclaims, or third-
party claims. When ordering a separate trial, the court must preserve
any federal right to a jury trial.
16
Fed. R. Bankr. P. 7042 (2010).
Fed. R. Civ. P. 21, incorporated by Fed. R. Bankr. P. 7021 states “[t]he court
may also sever any claim against a party.” Fed. R. Bankr. P. 7021 (2010). We
believe the action taken by the bankruptcy court, regardless of name, was proper
for the reasons of judicial economy and convenience to the various parties and the
court. It is possible that US Bank could have pursued all 200 preference claims in
one proceeding under the omnibus complaint. However, realizing what an
administrative challenge this presented, US Bank sought direction from the court
on the best way to proceed. The bankruptcy court issued an order requiring US
Bank to group omnibus complaint defendants into separate complaints of up to five
defendants. The rules allow this type of relief.
Furthermore, the bifurcated complaints properly “related back” to the
omnibus complaint. Under Fed. R. Civ. P. 15(c), incorporated by Fed. R. Bankr.
P. 7015, an amended pleading relates back to the date of the original pleading
when “the amendment asserts a claim or defense that arose out of the conduct,
transaction, or occurrence set out – or attempted to be set out – in the original
pleading[.]” Fed. R. Civ. P. 15(c)(1)(B) (2010). “The basic inquiry is whether the
amended complaint is related to the general fact situation alleged in the original
pleading.” Alpern v. UtiliCorp United, Inc., 84 F.3d 1525, 1543 (8th Cir. 1996).
“The rationale … is that ‘a party who has been notified of litigation concerning a
particular occurrence has been given all the notice that statutes of limitations were
intended to provide.’” Maegdlin v. International Ass’n of Machinists and
Aerospace Workers, Dist. 949, 309 F.2d 1051, 1052 (8th Cir. 2002) (quoting
Baldwin County Welcome Ctr. v. Brown, 466 U.S. 147, 149-50 n. 3 (1984)).
The preference payment amount listed in the omnibus complaint is the exact
amount listed in the bifurcated complaint. These payments were made during the
preference period as alleged in both complaints. The only difference worth noting
between the two complaints is the number of defendants. Admittedly, this was
accomplished by filing a series of amended complaints naming a smaller number
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of defendants in each one and giving each amended complaint its own number.
We fail to see how the form of the bankruptcy court’s decision was implemented
trumps the substance of what was accomplished. The form has no bearing on the
type of notice provided to SMF and the other named defendants.
The main purpose of the bifurcation order was to ensure the bifurcated
complaints properly related back to the omnibus complaint ensuring continuity of
the facts and pleadings set out in the omnibus complaint. The bifurcated
complaints were filed for the court’s convenience and at its direction; accordingly,
the bifurcated complaints related back to the omnibus complaint.
CONCLUSION
For the foregoing reasons, the bankruptcy court’s judgment is affirmed.
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