Appeal from the Ninth Circuit Bankruptcy Appellate Panel Brandt, Montali, and Smith, Bankruptcy Judges, Presiding BAP No. EC-06-1112-BMoS.
The opinion of the court was delivered by: Hug, Circuit Judge
Argued and Submitted May 16, 2008 -- San Francisco, California
Before: Procter Hug, Jr. and N. Randy Smith, Circuit Judges, and Richard Mills,*fn1 District Judge.
In this bankruptcy case, we determine whether a creditor that is required to return to the trustee a payment from the debtor made within the ninety-day preference period still maintains a claim against the debtor for a non-dischargeable claim. Busseto Foods, Inc. ("Busseto") contends that the payment it was required to pay to the trustee was a repayment of funds embezzled by the debtor, Charles Laizure, and thus a non-dischargeable claim. The Bankruptcy Appellate Panel ("BAP"), in affirming the bankruptcy court, held that 11 U.S.C. § 502(h) only allows Busseto to bring a claim against the bankruptcy estate and not against the debtor, Laizure.
We have jurisdiction pursuant to 28 U.S.C. § 158(d)(1) and we reverse the decision of the BAP and remand for further proceedings.
Busseto employed Charles Laizure as its controller and chief financial officer from February 1, 1998 until August 20, 2004. After Laizure left, Busseto discovered he had embezzled a large amount of money during his employment. After admitting he took the money, Laizure agreed to repay the funds in installments. He first paid Busseto $10,000 in December 2004 and then $30,000 on February 18, 2005. On June 5, 2005, Laizure arranged a final payment of $38,833.70 to Busseto to be paid directly from escrow upon the closing of the sale of his house. Shortly thereafter escrow closed and Busseto received the final payment.
Less than ninety days after the $38,833.70 payment to Busseto, Laizure filed a Chapter 7 bankruptcy petition on August 17, 2005. After learning of Laizure's June payment to Busseto, the Chapter 7 trustee pursuant to 11 U.S.C. § 547 sent Busseto a letter demanding the return of the $38,833.70 because Laizure had made the payment during the ninety-day preference period.
Busseto and the trustee then engaged in negotiations to settle the matter. Fearing the negotiations would not resolve the issue as the nondischargeability filing deadline approached, Busseto filed the complaint at issue here on November 17, 2005 to determine the amount and dischargeability of Laizure's debt.*fn2 The complaint alleged that, because of Laizure's embezzlement and other conduct involved with the debt, any amount returned to the trustee pursuant to the demand should be held non-dischargeable under 11 U.S.C. § 523(a)(4).
After filing the complaint, Busseto agreed with the trustee to pay the estate $34,000 to resolve the preference matter. Busseto then filed a claim against the bankruptcy estate for $34,000. During the bankruptcy proceedings, the trustee collected only a total of $34,628.83, $34,000 of which came from Busseto. After deducting compensation and expenses for the trustee in the amount of $4,253.38, the balance of $30,375.45 was used to pay Laizure's priority tax claims.
While the estate was being settled, Laizure filed a motion in bankruptcy court to strike Busseto's November 17 complaint or in the alternative, for a more definite statement. The bankruptcy court granted Laizure's motion to dismiss Busseto's complaint under Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted. The bankruptcy court reasoned that "there was no debt on the day the bankruptcy was filed" because Busseto was fully repaid at that time. In addition, no debt existed on the date the complaint was filed because Busseto had not yet returned any money to the estate on that date. The bankruptcy court also found that ...