United States Court of Appeals Fifth Circuit F I L E D REVISED MARCH 18, 2005 March 4, 2005 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT Charles R. Fulbruge III Clerk

No. 03-20888

In The Matter of: CRAIG’S STORES OF TEXAS INC.

Debtor.

- - - - - - - - - -

CRAIG’S STORES OF TEXAS INC.,

Appellant,

versus

BANK OF LOUISIANA,

Appellee.

Appeal from the United States District Court for the Southern District of Texas

Before REAVLEY, JONES and DENNIS, Circuit Judges.

PER CURIAM:

This case involves a court’s obligations regarding money

deposited into the court’s registry for a proceeding over which

that court had no jurisdiction. During the course of litigation in

bankruptcy court between Craig’s Stores of Texas, Inc. (“Craig’s”)

and Bank of Louisiana (“the Bank”), Craig’s deposited the sum of

$252,440.49 into the court’s registry. This court decided in In re

Craig’s Stores of Texas, Inc.,

(5th Cir. 2001), however, that the bankruptcy court lacked jurisdiction over the

adversary proceeding between Craig’s and the Bank. The district

court released the deposited funds to the Bank because it

determined that the funds had been placed in the registry to secure

the Bank’s account claim. We hold that the district court’s dis-

bursement order results in the transfer of funds to which the Bank

has never proven entitlement before a court of competent juris-

diction. We must reverse the district court’s Order Disbursing

Funds and remand this case with instructions to disburse the funds

to the party that deposited them.

Pursuant to Rule 67 of the Federal Rules of Civil

Procedure, a party may deposit a sum of money with the court. Once

funds are deposited, the court should determine ownership and make

disbursements. Gulf States Utils. Co. v. Alabama Power Co.,

, 1474 (5th Cir. 1987). The conclusion that the funds

must be returned to Craig’s flows from the Agreed Order by which

Craig’s deposited the money in the registry and from the circum-

stances surrounding this transaction.

In mid-1996, eighteen months after the approval of

Craig’s Chapter 11 reorganization plan, Craig’s filed an adversary

proceeding against the Bank in bankruptcy court alleging that the

Bank failed to perform under a charge account contract. At this

time, the Bank filed its own adversary proceeding, seeking an

injunction to prevent Craig’s from disposing of funds within its

possession, requesting the bankruptcy court to convert Craig’s

2 confirmed Chapter 11 plan to a Chapter 7 liquidation, and seeking

to recover money that the Bank contended was owed under the

contract between them. Shortly thereafter, the bankruptcy court

entered an Agreed Order whereby Craig’s would deposit the sum of

$252,440.49 into the Bankruptcy Court’s registry.

Craig’s asserts that it made this deposit for the purpose

of discouraging the Bank from attempting to convert Craig’s bank-

ruptcy proceedings into Chapter 7 liquidation. Craig’s deposited

the money in escrow in order to reassure the Bank that Craig’s

would not transfer or dispose of its liquid funds before the Bank

could litigate and liquidate any underlying claim the Bank might

have against Craig’s.

The Bank urges a different understanding of this deposit.

According to the Bank, Craig’s deposit represented a concession

that it owed the Bank $252,440.49 under the contract. In other

words, Craig’s was relinquishing its claim to the funds, and the

Agreed Order functioned as a kind of “settlement agreement” whereby

Craig’s recognized its liability to the Bank under the contract.

Instead of paying the money directly to the Bank, the Bank made the

accommodation that the funds would be deposited in the registry

pending Craig’s litigation of its state-law claims against the

Bank. The money would be released back to Craig’s only in the

event that Craig’s won a judgment against the Bank.

The Agreed Order supports the understanding advanced by

Craig’s. There are no representations or concessions in this

3 escrow order that the money actually belonged to the Bank. The

Bank’s argument that the Agreed Order constituted an enforceable

“settlement agreement” fails because the Agreed Order treats these

funds as disputed. For example, on the first page of the Agreed

Order, the Bankruptcy Court noted: “Ordered that on or before

Oct. 11, 1996, the Debtor shall deposit . . . into the registry of

this Court (the “Court’s Registry”) $252,440.49, which BOL

represents is the sum of the balances that are 90 days or more past

due on the credit card accounts as of August 30, 1996.” (Emphasis

added).

The Agreement is neutral on the ultimate recipient of the

deposited funds, as evidenced by a paragraph providing for dis-

bursement of accumulated interest “upon further order of the

court.” Likewise, the order authorizes holding the deposited

balance in the registry “pending further order of this Court.” In

neither paragraph is there a reference to a settlement agreement or

to any certainty as to which party will be entitled to the funds.

Finally, the Agreed Order expressly contemplated and

permitted the Bank to assert claims against Craig’s — claims that

would be unnecessary if the Agreed Order constituted a settlement.

On the fifth page of the Agreed Order, the bankruptcy court stated:

“ORDERED that leave is hereby granted to BOL to file (I) an amended

4 answer and (ii) a counterclaim against the Debtor in the Adversary

Proceeding No. 96-4354.”1

According to the terms of the Agreed Order, ownership of

the money in the court’s registry was at all times disputed and the

funds were not deposited pursuant to a “settlement agreement.”2

The funds could be disbursed to the Bank only if there had been a

judgment on the merits in its favor by a court of competent

jurisdiction. After the underlying litigation was dismissed,

however, the Bank never filed an independent lawsuit in state or

federal court to adjudicate any contractual breach. Craig’s may

well be liable to the Bank for contract damages; unfortunately for

the Bank, no such decision has been made in the course of

litigation before a court possessing jurisdiction.

For these reasons, when the underlying litigation was

dismissed for lack of jurisdiction, the disputed registry funds

should have been disbursed back to the party that deposited them in

the registry — Craig’s.3

1 In fact, the Bank actually re-asserted its breach of contract claim immediately after the Agreed Order was entered by the bankruptcy court. The bankruptcy court ultimately granted relief to both parties on their respective contract claims, concluding that Craig’s was entitled to a net recovery against the Bank. This judgment was, of course, subsequently vacated and the adversary proceeding dismissed because the bankruptcy court lacked jurisdiction. See In re Craig's Stores of Texas, Inc.,

(5th Cir. 2001). 2 If Craig’s had, indeed, agreed to settle with the Bank, the Agreed Order does not memorialize such a settlement. 3 The power described in Northwestern Fuel Co. v. Brock,

,

(1891), and United States v. Morgan,

,

(1939), “to correct that which has been wrongfully done by virtue of its process,” Morgan,

,

, is different from the dissent’s concept of an equitable power to determine ownership of funds

5 Accordingly, we REVERSE the district court’s Order

Disbursing Funds and REMAND with instructions to the district court

that the funds be disbursed to Craig’s.

REVERSED AND REMANDED WITH INSTRUCTIONS.

voluntarily placed in the registry of a court lacking jurisdiction. Northwestern Fuel describes the power “to correct by its own order that which, according to the judgment of its appellate court, it had no authority to do in the first instance,”

,

; it does not describe an equitable power to determine the merits of property ownership. In the case before us, there is no order that has been executed under the compulsion of an incorrect or unauthorized court judgment, and thus the inherent equitable power to order restitution for the error does not come into play. See Restatement (First) of Restitution § 74 (1973). No compulsory order stands in need of rectification, remediation or restitution; instead, there is only a sum of money voluntarily deposited by Craig’s in the registry of a court lacking jurisdiction. Lacking jurisdiction to receive money into its registry, the district court’s authority is limited to returning the money to the depositor — this is the only means by which Craig’s original deposit can be “undone,” to use the terminology of Northwestern Fuel and Morgan. Because the $252,440.49 belonged only to Craig’s Stores when and as it was voluntarily deposited, and the court had no jurisdiction to decide the relative merits of the underlying dispute, it still belongs to Craig’s Stores. We also disagree with the dissent’s reading of

. This code section governs the disbursement of registry funds that have languished “for at least five years unclaimed,” and have thereby been forfeited to “the Treasury in the name and to the credit of the United States.”

It is only “such” forgotten funds that the district court, “upon notice to the United States attorney” as representative of the United States, its new nominal owner, is duty-bound under this code section to determine entitlement, upon “full proof of the right thereto.”

A straightforward reading of this code section indicates that it has a specific and narrow application that is not relevant to this case. Additionally, neither the language of Rule 67 or

create the statutory duty to disburse funds only to persons judicially determined to be the rightful owners.

6 DENNIS, Circuit Judge, concurring in the decree insofar as it

reverses the district court’s judgment and remands the case to that

court, but otherwise dissenting.

The bankruptcy and district courts were retroactively deprived

of bankruptcy jurisdiction by an intervening change-of-law decision

by this court. See In re Craig’s Stores of Texas, Inc.,

(5th Cir. 2001)(“adopt[ing a] more exacting theory of

post-confirmation bankruptcy jurisdiction.”). Nevertheless, in my

opinion, the district court continues to have the jurisdiction or

inherent judicial power, and the statutory duty, to determine the

rightful ownership of funds within its possession and to distribute

them accordingly. Consequently, the district court’s decision that

it did not have authority to make that determination and

distribution was based on a legal error. Therefore, I agree that

the district court’s judgment must be reversed and that the case

should be remanded, but I disagree with the majority’s peremptory

instruction that the district court must distribute the funds to

one of the parties without making a determination of whether that

party is the rightful owner. The district court should, instead,

be instructed to determine rightful ownership and to distribute the

funds accordingly pursuant to Federal Rule of Civil Procedure 67

and

and 2042.

7 The district court has the jurisdiction or inherent judicial

power to undo the wrongs done by the bankruptcy court’s process and

distribute the funds in the court’s registry to the rightful owners

according to law and equity pertinent to this limited purpose.4

Anglo-American courts in general, including the Supreme Court and

this court, have long held that, after a reversal of a district

court’s judgment, for either lack of jurisdiction or legal error,

the district court has the inherent judicial power, with respect to

the parties before it, to distribute funds in its custody, or to

order restitution of property wrongly obtained because of its

erroneous or void judgment, according to equitable principles.5

The right of restitution of what one has lost by the

enforcement of a judgment subsequently reversed was recognized from

a very early period in the law of England and early in our history

by the United Supreme Court.6 In Northwestern Fuel Co. v. Brock,7

4 This case is similar to “numerous other cases involving ‘jurisdiction to determine jurisdiction’ and presenting situations in which the determination of the jurisdictional question involves essentially the same analysis as the determination of the case on the merits.” ECEE, Inc. v. FERC,

, 555 n.4. (5th Cir. 1980)(citing United States v. United Mine Workers,

(1957); Nestor v. Hershey,

(D.C. Cir. 1969); Means v. Wilson,

(D. S.D. 1974), modified on other grounds,

, cert. denied,

)). 5 See, e.g., Northwestern Fuel Co. v. Brock,

(1891)(citing Mayor v. Cooper, 6 Wall 247, 250; Hornthal v. Collector,

; Mansfield, Coldwater & Lake Mich. Ry. Co. v. Swan,

(1884)); W.F. Potts Co. v. Coltrane,

(5th Cir. 1932). 6 See Northwestern Fuel Co.,

and 220 (citing Bank of the United States v. Bank of Washington,

, 17 and 2 Salk. 587, 588; Tidd, Pr. 936, 1137, 1138). 7

.

8 the Supreme Court again recognized that right and further held

that, when the judgment of a court of origin is reversed for lack

of jurisdiction, that court has the inherent power, to “correct by

its own order that, which, according to the judgment of its

appellate court, it had no authority to do in the first instance,”

while the parties are before it and the subject matter of the

controversy is in its custody.8 “Jurisdiction to correct what had

been wrongfully done must remain with the court so long as the

parties and the case are properly before it, either in the first

instance or when remanded to it by an appellate tribunal.”9

Moreover, the original court has this inherent corrective power

even though the mandate of reversal fails to provide for

restitution.10 The Supreme Court explained:

The gist of the whole complaint is that the reversal by this court being for want of jurisdiction in the Circuit Court. . .that court had no authority to act further in the matter than as directed by the mandate; and that that went only to the reversal of its judgment and the collection of the costs incurred in the appellate court. . . .But here the jurisdiction exercised by the court below was only to correct by its own order, that which, according to the judgment of its appellate court, it had no authority to do in the first instance; and the power is inherent in every court, whilst the subject of controversy is in its custody, and the parties are before it, to undo what it had no authority to do originally, and in which it, therefore, acted erroneously, and to

8

. 9

10

.

9 restore, as far as possible, the parties to their former position.11

The inherent power of courts to enforce the right of

restitution after appellate reversals discussed by the Supreme Court

in Northwestern Fuel Co. is now accepted generally. For example,

the Restatement (First) of Restitution demonstrates that virtually

all reported court decisions have adhered to the principles that

Northwestern Fuel Co. articulates. Section 74, which states the

right of restitution when a judgment is subsequently reversed,

provides: “A person who has conferred a benefit upon another in

compliance with a judgment, or whose property has been taken

thereunder, is entitled to restitution if the judgment is reversed

or set aside, unless restitution would be inequitable or the parties

contract that payment is to be final; if the judgment is modified,

there is a right of restitution of the excess.”12 Comment b. under

§ 74 reflects the general view that a court has inherent power to

enforce the right of restitution in this situation even when the

judgment is void because the court lacked jurisdiction. It, in

pertinent part, states: “The rule is applicable whether the judgment

reversed was originally valid or was void.”13 The reporters’ notes

to § 74 demonstrate the courts’ general reliance on the principles

11 Id. at 219-20 (emphasis added). 12 See RESTATEMENT (FIRST) OF RESTITUTION § 74. 13 Id. at cmt. b.

10 of Northwestern Fuel Co.. Citing Northwestern Fuel Co. and other

cases consistently following that decision, they state: “The

tribunal reversed can direct restitution on its own initiative.”14

And further that: “An action lies although the judgment reversed was

‘void,’ the court having power to remedy its own mistake[.]”15

In United States v. Morgan16 the Supreme Court reaffirmed the

principles discussed in Northwestern Fuel Co. and held that a

district court, to the extent not governed by law or guided by

regulatory order, should apply equitable principles in distributing

funds in that court’s custody resulting from its injunction of the

secretary of agriculture’s order reducing scheduled rates for

stockyard services.17 In its opinion, the Court summarized those

principles18 and concluded that, when a court has compelled payments

into its registry of amounts which may be found not to have been

due, justice requires ultimate distribution of the funds to those

14 Id. at notes cmt. a. 15

16

(1939). 17

. 18 See

(stating “[i]t is a power ‘inherent in every court of justice so long as it retains control of the subject-matter and of the parties, to correct that which has been wrongfully done by virtue of its process.’” and citing Arkadelphia Milling Co. v. St. Louis S.W. Ry. Co.,

(1919); Northwest Fuel Co.,

);

(stating “[w]hat has been given or paid under the compulsion of a judgment the court will restore when its judgment has been set aside and justice requires restitution.” and citing Northwestern Fuel Co.,

; Ex parte Lincoln Gas & Electric Light Co.,

(1921); Baltimore & Ohio Ry. Co. v. United States,

(1929)).

11 persons entitled to them.19 “[T]he district court sits as a court

of equity,” the Court also said, “and...assumes the duty of making

dispositions of the fund in conformity to equitable principles.”20

It is also self-evident that a court’s inherent power to require

restitution of property in a party’s possession, rather than in the

registry of the court, after a reversal of its erroneous or void

judgment, necessarily includes the power after such a reversal to

make equitable distribution, to persons entitled to them, of funds

on deposit pending the litigation of the parties controversy.

Further, the Supreme Court, in Northwestern Fuel Co. and

Morgan, established the procedures and standards to be applied by

a district court in making restitution or distribution of funds

under equitable principles. In Northwestern Fuel Co. the Court

explained:

We are of opinion that the proceeding to enforce the restitution in the cases mentioned is under the control of the court, and that all needed inquiry can be had to guide its judgment in a summary proceeding, upon motion of the parties; the only requisite being that the opposite part[y] shall be heard, so that in directing restitution no further wrong be committed. The restitution is not made to depend at all upon the question whether or not the court rendering the judgment reversed acted within or without its jurisdiction.21

19 Id. at 198. 20 Id. at 191. 21

.(emphasis added).

12 In Morgan, the Court stated that the district court, “[i]n

taking the payments into custody...acted as a court of equity,

charged both with...the responsibility of protecting [and] disposing

of it according to law, and free in the discharge of that duty to

use broad discretion in the exercise of its powers...to avoid an

unjust or unlawful result.”22 The Morgan Court recognized that a

district court is not bound by any contract or understanding with

the litigants; its duty is in distributing the funds in its custody

as “prescribed by the applicable principles of law and equity[.]”23

The Fifth Circuit, in W. F. Potts & Co. v. Cochrane,24 applying

the Northwestern Fuel Co. principle,25 approved of a district

court’s undoing of its erroneous assertion of jurisdiction in taking

custody of property and appointing a receiver,26 but disapproved of

that court’s decision in making restitution because it was “not in

accordance with the equitable principles applicable in the case.”27

In Potts, this court indicated that, under Northwestern Fuel Co.,

“the District Court should have...fully canvassed the situation from

the standpoint of determining where the equities lay to adjudge

22

. 23

. 24

. 25

at 377 (citing, inter alia, Northwestern Fuel Co.,

; Arkadelphia Milling Co.,

; Baltimore & Ohio R. Co.,

). 26 W.F. Potts,

(“[T]he appointment of a receiver is at last the court’s appointment; the administration, its administration.”). 27

13 accordingly. Such a proceeding is purely equitable; it should have

been decided upon equitable grounds.”28

In direct conflict with the foregoing Supreme Court precedents,

the majority follows a rule of its own creation, viz., that

“disputed registry funds should [be] disbursed back to the party

that deposited them in the registry” when it is later determined

that the depositary court lacked subject matter jurisdiction.

However, the majority not only fails to cite any authority for its

rule, it does not even attempt to reconcile the rule with the duty

imposed on depositary courts’ to decide claims to registry funds on

equitable grounds by the Supreme Court decisions, Rule 67 and

and 2042.

Under the principles articulated by the Supreme Court in

Northwestern Fuel and other decisions, the district court has

inherent power to undo any wrong done by the bankruptcy court’s

decree which, unknowingly without jurisdiction, consented to

adjudicate the parties’ claims over disputed funds to be deposited

in court pending the outcome of its decision; and the district court

has the power to distribute the funds in its custody according to

equitable principles, including those provided by

& 2042 for deposits in court, in such manner as to avoid an

unlawful, unjust or inequitable result. Consequently, I believe

that both the majority and the district court here are in error in

28 Id. at 378.

14 failing to recognize the district court’s judicial power and duty

to undo any wrong done by the bankruptcy court’s process and to

distribute the funds in accordance with

and

equitable principles.

Of course, as the Supreme Court’s cases make clear, this does

not mean that the district court should adjudicate the civil action

or review the bankruptcy court’s decision on the merits. Instead,

pursuant to Rule 67 and

, the district court,

and not this court, must determine rightful ownership of the funds

and disburse the funds to the owner.

Under Rule 67, the disbursement of funds is governed by

and 2042; these statutory provisions assign the power

and duty of approving disbursements exclusively to the depositary

court; and §§ 2041 & 2042 require that the depositary court disburse

the funds only to persons judicially determined to be rightful

owners. The purpose of a deposit under Rule 67 is to relieve the

depositor of responsibility for the money or thing in dispute while

the parties litigate their differences with respect to the res.29

Once the deposit is made, the funds can be withdrawn only by

order of the depositary court. Rule 67 specifically states that

and 2042 provide the rules that must be followed by

29 Cajun Elec. Power Coop. Inc. v. Riley Stoker Corp.,

(5th Cir. 1990). Once the deposit is made, the depositor is no longer liable for interest on the fund. See 13 MOORE’S FED. PRAC. 3D § 67.03 (citing authorities).

15 the court and the parties with respect to orders of withdrawal or

disbursement. “Money paid into court under [Rule 67] must be

deposited and withdrawn in accordance with the provisions of Title

and 2042...or any like statute.”30 Funds

deposited in court are held only for those persons judicially found

by the court to be entitled to them as rightful owners.31 The

burden is on the claimant to establish his right to withdraw money

deposited with the court.32 The right to recover from a fund

deposited in court must be based on the strength of the title of the

claimant and not on the weakness of the title or another claimant.33

Rule 67 providing for deposit in court, generally, continues in

effect similar special provisions contained in statutes and rules

pertaining to bills of interpleader, bills in the nature of

30 FED. R. CIV. P. 67. 31 See 12 WRIGHT & MILLER, FED. PRAC. & PROC. § 2992. Title

provides, in relevant part, that “[a]ll moneys paid into any court of the United States. . .in any case pending or adjudicated in such court, shall be deposited with the Treasurer of the United States or a designated depositary. . . .[t]his section shall not prevent delivery to the rightful owners upon security, according to agreement of parties, under the direction of the court.” Section 2042 also provides, in relevant part, that “[n]o money deposited under section 2041 of this title shall be withdrawn except by order of court. In every case in which the right to withdraw has been adjudicated or is not in dispute and such money has remained so deposited for at least five years unclaimed by the person entitled thereto, such court shall cause the money to be deposited in the Treasury. . . .[a]ny claimant entitled to any such money may, on petition to the court...and full proof of the right thereto, obtain an order directing payment to him.” 32 Hansen v. United States,

(8th Cir. 1965); United States v. Beach,

(11th Cir. 1997)(citing United States v. Kim,

(2d Cir. 1989)(applying preponderance of the evidence standard). 33 United States ex. rel. Home Indem. Co. v. Am. Employers’ Ins. Co.,

(D. N.D. 1961)(citing United States v. Chapman,

(10th Cir. 1960)).

16 interpleader, and admiralty.34 Proceedings for disbursement of

funds deposited in court are equitable in nature and in the nature

of interpleader.35

Here, the district court disregarded or was unaware of its duty

under

and 2042 to determine the persons who were

entitled to the funds on deposit and to disburse them only to the

rightful owners. The district court did not take evidence on or

inquire into rightful ownership in accordance with

and 2042. Instead, the district court acted as if it had no

jurisdiction to inquire into equitable entitlement and summarily,

without giving any clear reasons, disbursed the funds first to

Craig’s, but, after reversing itself, to BOL. Consequently, the

district court did not perform its duty under §§ 2041 and 2042 to

determine the rightful owner of the deposited funds by a

preponderance of the evidence before delivering them.

Furthermore,

and 2042 provide that funds

deposited in court may be disbursed only by order of the depositary

court to persons judicially determined to be entitled to them.36

Appellate courts are not vested with original jurisdiction,

34 See 13 MOORE’S FED. PRAC. & PROC. § 67 App.01 (citing former statutes, admiralty rules, and committee note.) 35 See, e.g., United States v. Beach,

(quoting United States v. $17,400 In Currency,

(10th Cir. 1975) (Doyle, J., dissenting) (describing petition for withdrawal of funds pursuant to

as “[b]eing in the nature of an interpleader action”)). 36 See

.

17 authorized by rule or law to make this determination, or permitted

to render disbursement orders. Hence, the majority has fallen into

error by instructing the district court to disburse the funds to

Craig’s without first making a determination under Rule 67 and §§

2041 & 2042 of who is the rightful owner of the money.

Besides, as a purely practical matter, this court is ill-

equipped to perform this function since we cannot easily inquire

into or elicit evidence on the pertinent issues. That is especially

so in the present case. The district court and the parties did not

proceed to inquire into rightful ownership under Rule 67 and §§ 2041

and 2042; apparently they were unaware of these provisions or

mistakenly thought the district court lacked judicial power to

determine rightful ownership. Therefore, the present record does

not contain sufficient evidence on these issues to enable us to

decide them initially, even if it were permissible for us to do so.

Accordingly, I would vacate the district court’s judgment and remand

the case to the depositary court for it to determine how the funds

on deposit shall be distributed according to

and

2042.

Ultimately, the majority’s disposition of this case does not

comply with law, equity or justice and does not return the parties

to their original positions. As the majority notes, “ownership of

the money in the court’s registry was at all times disputed. . .

18 .”37 Thus, the majority’s transfer of all of the funds to Craig’s

simply because Craig’s initially deposited most of the funds into

court overlooks the basic fact that neither party had a clear right

to the money. Instead, both parties had claims to the money and

this is reason that the funds had been deposited into court.

The majority’s peremptory transfer of funds to Craig’s also

disregards the significant changes in position by BOL in

consideration of the deposit and the parties’ agreement to litigate

over the money within the court’s registry. Before the parties

agreed to the consent decree establishing ground rules for the

bankruptcy court’s adjudication of their claims, Craig’s had

possession of most of the funds, but BOL had several viable claims

or actions against Craig’s, i.e., an objection to the bankruptcy

court’s jurisdiction, an injunction action against Craig’s, a

counterclaim against Craig’s, and a claim to have the proceedings

converted to a Chapter 7 proceeding.

The bankruptcy court, upon agreement of the parties, entered

a consent decree which provided, inter alia, that (1) Craig’s shall

deposit and the clerk shall accept into the registry of the court

$251,440.40 being the funds in dispute; (and BOL was later required

to deposit $10,058 into the court) (2) the adversary proceedings

were consolidated; (3) BOL’s objection to the bankruptcy court’s

jurisdiction was withdrawn; (4) BOL’s motion to convert Craig’s

37 Maj. Op. at 5.

19 bankruptcy proceeding to a Chapter 7 proceeding was withdrawn; (5)

BOL allowed its injunction action become moot; (6) BOL was allowed

to file its counterclaim; and,(7) the parties stipulated that the

deposited funds would remain in the court’s registry pending their

litigation over the deposit and the bankruptcy court’s adjudication

of their claims. Thus, both parties significantly changed their

positions and gave and received benefits from their agreement to

litigate over the disputed funds deposited in the bankruptcy court.

The bankruptcy court adjudicated the claims pursuant to the

parties’ agreement, which it had approved. But the bankruptcy

court’s decision and judgment were voided by the decision of this

court that the bankruptcy court did not have jurisdiction to decide

the civil action on the merits. The purpose of the parties’

agreement, to submit their claims against the disputed funds

adjudicated by the bankruptcy court, was frustrated and its full

performance made impossible by the jurisprudential development that

deprived the bankruptcy court of jurisdiction.

Consequently, a disbursement of the funds to Craig’s free and

clear of BOL’s claims, without compensating BOL for the loss of its

claims against the funds and against Craig’s personally will

unjustly enrich Craig’s and be detrimental to BOL. BOL will suffer

the unjust penalty and hardship of being deprived of its claims to

ownership of the funds without a hearing. The result will be highly

20 inequitable and will not return the parties to their former

positions.

For all of these reasons, this case should be remanded to the

district court with instructions that it perform its statutory duty

under Rule 27 and

and 2042, to determine rightful

ownership of the funds in the court’s registry and distribute those

funds accordingly.

21 22