State v. Federated Dept. Stores, Inc.

175 B.R. 924 (1992)

The STATE OF ARKANSAS, et al., Appellants, v. FEDERATED DEPARTMENT STORES, INC. and Allied Stores Corporation, et al., Appellees.

No. C-1-92-195.

United States District Court, S.D. Ohio, Eastern Division.

October 20, 1992.

COPYRIGHT MATERIAL OMITTED

David Epstein, Unclaimed Property Clearinghouse, Boston, MA, Bernard Nash, Dickstein, Shapiro & Morin, Washington, DC, for appellants.

August L. Fietkau, Office of the Atty. Gen., New York City, for Office of Comptroller of State of N.Y.

Maryann Baker Gall, Jones, Day, Reavis & Pogue, Columbus, OH, Frederick Jaeger McGavran, Frost & Jacobs, Cincinnati, OH, David G. Heiman, Jones, Day, Reavis & Pogue, Cleveland, OH, for Federated Dept. Stores, Inc.

Bondholders Official Committee of Bondholders of Allied Stores Corporation, Coudert Bros., Lawrence C. Gottlieb, Siegel, Sommers & Schwartz, New York City, for Unsecured Creditors Official Committee of Unsecured Creditors of Allied Stores Corporation.

Lewis S. Rosenbloom, Winston & Strawn, Chicago, IL, for Unsecured Creditors Official Committee of Unsecured Creditors of Federated Department Stores, Inc.

Peter A. Ivanick, LeBeouf, Lamb, Leiby & MacRae, New York City, for Pre-Merger Bond Official Committee of the Pre-Merger Bondholders of Federated Department Stores, Inc.

Lawrence R. Handlesman, Stroock, Stroock & Lavan, New York City, for Bondholders Official Committee of Bondholders of Federated Department Stores, Inc.

Ellen R. Werther, Coudert Bros., New York City, for Bondholders of Official Committee of Bondholders of Allied Stores Corp.

OPINION AND ORDER

GRAHAM, District Judge.

The States of Arkansas, Colorado, Connecticut, Delaware, Idaho, Illinois, Indiana, Iowa, Maine, Missouri, Montana, New Jersey, New York, North Carolina, North Dakota, Pennsylvania, Utah and Washington (collectively, "States") appeal from a bankruptcy court order granting the Debtors' objection to the States' proofs of claim under the States' abandoned property laws. The central issue in this case is whether the bankruptcy court erred in concluding that certain provisions of the Bankruptcy Code preempt the States' abandoned property laws. This Court has appellate jurisdiction in this case under 28 U.S.C. § 158(a).

I

Federated Department Stores, Inc., Allied Stores Corporation, and their respective subsidiaries (collectively, "Debtors") filed their petitions for reorganization under Chapter 11 of the Bankruptcy Code on January 15, 1990. In their Schedule of Assets and Liabilities, the Debtors listed as undisputed obligations all uncashed employee paychecks, all uncashed checks to vendors, all uncashed dividend checks to shareholders, and all unclaimed credit balances in customer charge accounts. Included among these were uncashed checks and credit balances that the Debtors reported as unclaimed property to several of the States on November 1, 1989. The Debtors scheduled all untendered shares of stock from the Campeau Corporation acquisitions as disputed obligations.¹

The States timely filed proofs of claim for all property that was presumed abandoned before the filing of Debtors' petitions by operation of the States' respective abandoned property laws. The States also claimed any property that became presumptively abandoned between the time of the filing of the bankruptcy petition and the confirmation of the Debtors' reorganization plan.

The Debtors objected to the States' proofs of claim on the grounds that the claims were preempted by the Bankruptcy Code and conflicted with the bankruptcy court's order establishing a bar date for the filing of such claims. The parties undertook limited discovery concerning the Debtors' treatment and reporting of unclaimed property, and the States' practices with respect to unclaimed property. The bankruptcy court conducted a hearing on the Debtors' objection on October 24, 1991. The bankruptcy court issued an order on January 8, 1992 granting the Debtors' objection on the basis of preemption.

The bankruptcy court held that the States' abandoned property laws were preempted because they conflicted with the Bankruptcy Code in three respects. First, the bankruptcy court concluded that the abandoned property laws conflicted with 11 U.S.C. § 1111(a) and Bankr.R. 3003(c)(2), which require, inter alia, the timely filing of proofs of claim. Bankruptcy court order at 5. In this regard, the bankruptcy court opined that if the States' claims were allowed the unclaimed funds would no longer be available for distribution to other creditors who diligently filed proofs of claim. Bankruptcy court order at 5-6. Second, the bankruptcy court held that the abandoned property laws conflicted with 11 U.S.C. § 347(b), which provides that the proceeds of unpresented distribution checks revert to the debtor. The bankruptcy court indicated that allowing the States' claims would effectively defeat the purpose of § 347(b) — to exempt unpresented distribution checks from state escheat laws. Bankruptcy court order at 7-8. Third, the bankruptcy court stated that the States' abandoned property laws conflicted with 11 U.S.C. § 1123(a)(4) which requires debtors to treat creditors in the same class equally. The bankruptcy court stated that the varying state procedures for returning abandoned property to missing owners resulted in unequal distribution in violation of § 1123(a)(4). Bankruptcy court order at 8.

The bankruptcy court also rejected the States' argument that the "wrongdoing" exception to the preemption doctrine should be applied in this case. The bankruptcy court concluded that the wrongdoing exception applies only when such wrongdoing has been previously adjudicated and when no other creditors have claims against the debtor. Bankruptcy court order at 8-11.

The bankruptcy court also gave an additional reason for rejecting the States' claims for property presumed to have been abandoned between the time of the filing of the bankruptcy petition and the confirmation of the Debtors' plan for reorganization. The bankruptcy court held that with respect to such claims, the States were not "creditors" of property pursuant to 11 U.S.C. § 101(10)(A). The bankruptcy court reasoned that the States were not creditors within the meaning of the Bankruptcy Code because their claims for such property arose only after the date of the petition. Bankruptcy court order at 12.

The bankruptcy court also stated that the States' abandoned property laws would serve to confuse the bankruptcy distribution process. Lastly, the bankruptcy court commented that it was "hard pressed to muster much sympathy for those persons who are the `rightful' owners of abandoned property" in light of the notice of the bankruptcy given to creditors through extensive national publication in numerous major newspapers. Bankruptcy court order at 13.

The States now appeal from the bankruptcy court's January 8, 1992 order. 135 B.R. 973. After receiving the parties' briefs, this Court heard oral argument in this case on July 17, 1992.

II

The instant appeal concerns the bankruptcy court's conclusions of law. The bankruptcy court's conclusions of law are subject to de novo review by this Court on appeal. In re Caldwell, 851 F.2d 852, 857 (6th Cir.1988).

III

The central question presented in this appeal is whether the bankruptcy court erred in concluding that the Bankruptcy Code preempts the States' abandoned property laws.

The preemption doctrine has its origins in the Supremacy Clause of the U.S. Constitution, Article VI, Section 2, which provides as follows: "This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land." The United States Supreme Court has identified six situations in which the preemption doctrine applies:

1. when Congress, in enacting a federal statute, expresses a clear intent to preempt state law;

2. when there is outright or actual conflict between federal and state law;

3. where compliance with both federal and state law is in effect physically impossible;

4. where there is implicit in federal law a barrier to state regulation;

5. where Congress has legislated comprehensively, thus occupying an entire field of regulation and leaving no room for the states to supplement federal law; and

6. where the state law stands as an obstacle to the accomplishment and execution of the full objectives of Congress.

Louisiana Public Service Commission v. F.C.C., 476 U.S. 355, 368-69, 106 S.Ct. 1890, 1898, 90 L.Ed.2d 369 (1986).

Historically, courts have held various types of federal legislation to have preempted state abandoned property laws. See, e.g., United States v. Oregon, 366 U.S. 643, 81 S.Ct. 1278, 6 L.Ed.2d 575 (1961) (federal statutes relating to intestate veterans who die without heirs in a Veterans Administration hospital preempted state unclaimed property laws); Blue Cross & Blue Shield v. Department of Banking, 791 F.2d 1501 (11th Cir.1986) (federal government's health benefits contract specifying that unclaimed federal health benefits be credited to the special reserve of the benefit plan preempted state unclaimed property laws); Alabama v. Bowsher, 734 F.Supp. 525 (D.D.C.1990), aff'd., 935 F.2d 332 (D.C.Cir.1991) (federal statute directing that unclaimed funds are to be held by the U.S. Treasury preempted state unclaimed property laws). In all of these cases, the applicable federal law dictated the specific manner in which the property was to be distributed.

On the other hand, the U.S. Supreme Court has held that federal banking statutes do not preempt state unclaimed property laws for custodial takings of unclaimed accounts from solvent national banks. Anderson National Bank v. Luckett, 321 U.S. 233, 64 S.Ct. 599, 88 L.Ed. 692 (1944); cf., Roth v. Delano, 338 U.S. 226, 70 S.Ct. 22, 94 L.Ed. 13 (1949) (stating in dicta that state unclaimed property claims...