In the Matter of: CRAIG'S STORES OF TEXAS, INC., Debtor. Craig's Stores of Texas Inc., Appellant, v. Bank of Louisiana, Appellee, 402 F.3d 522

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., 266 F.3d 388 (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 disbursement order results in the transfer of funds to which the Bank has never proven entitlement before a court of competent jurisdiction. 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., 824 F.2d 1465, 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 circumstances 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 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 bankruptcy 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 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 disbursement 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 answer and (ii) a counterclaim against the Debtor in the Adversary Proceeding No. 96-4354:.” 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.” 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. 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. .

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., 266 F.3d 388 (5th Cir.2001). .

If Craig's had, indeed, agreed to settle with the Bank, the Agreed Order does not memorialize such a settlement. . The power described in Northwestern Fuel Co. v. Brock, 139 U.S. 216, 11 S.Ct. 523, 35 L.Ed. 151 (1891), and United States v. Morgan, 307 U.S. 183, 59 S.Ct. 795, 83 L.Ed. 1211 (1939), "to correct that which has been wrongfully done by virtue of its process," Morgan, 307 U.S. at 197, 59 S.Ct. at 802, is different from the dissent’s concept of an equitable power to determine ownership of funds 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,” 139 U.S. at 219, 11 S.Ct. at 524; 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 28 U.S.C. § 2042. 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.” Id. 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.” Id. 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 28 U.S.C. § 2041 create the statutory duty to disburse funds only to persons judicially determined to be the rightful owners.