The Bankruptcy Appellate Panel of the Sixth Circuit recently held that a post-confirmation motion to dismiss a bankruptcy case is not a final order that is immediately appealable.

In this case, the appellants filed a judgment lien against debtor, who subsequently filed for Chapter 13 bankruptcy. Debtor sought to avoid the judgment lien, and appellants filed an objection to the confirmation plan. Appellants and debtor resolved the majority of appellants’ objections. The court confirmed the debtor’s plan, and appellants did not appeal from the confirmation order. Instead, they filed a motion to dismiss, seeking dismissal of the bankruptcy case.

The Panel acknowledged that Six Circuit’s recently prescribed two-step approach to determining whether an order of a bankruptcy court is immediately appealable under 28 U.S.C. § 158(a)(1), which provides that a bankruptcy court’s order may be immediately appealed if it is (1) entered in a proceeding, and (2) final — i.e., terminating that proceeding.” The Panel also acknowledged the Cyberco factors, which the Sixth Circuit endorsed as useful determinants of the meaning of finality in the bankruptcy context: (1) the impact on the assets of the bankrupt estate; (2) the necessity for further fact-finding on remand; (3) the preclusive effect of [its] decision on the merits of further litigation; and (4) the interest of judicial economy.

Applying the Sixth Circuit’s approach, the Panel held:

[T]he order denying the Deans’ motion to dismiss resolved the contested matter, it is true, but it did not resolve the relevant judicial unit and certainly did not change the rights of the parties as they existed when the Deans filed their motion. . . . The order has no impact on assets or the status quo. Because the decision does not affect anyone’s substantive rights or the status quo, the remaining three Cyberco factors also suggest that the denial of the motion should not be subject to immediate appeal. . . . The order denying the Deans’ dismissal motion is not itself preclusive on any issues because it simply enforced the preclusive effect of the confirmation order, which was no longer appealable given the passage of time. And, for similar reasons, judicial economy is not served by allowing what amounts to an untimely appeal of the confirmation order by disappointed unsecured creditors.

Therefore, when the Bankruptcy Court entered its confirmation order, it fixed the rights and obligations of the Debtor and her creditors and altered the status quo and the legal relationships among the parties. This was the final order from which the Deans should have appealed. But when the court denied the Deans’ motion to dismiss, the relevant “judicial unit” remained pending, and the status quo and the legal relationships of the parties, established at confirmation, remained unchanged. Although this way of looking at finality may seem unsatisfying because intuitively litigants and courts tend to prefer the tidiness of symmetry (e.g., any decision on a motion to dismiss is appealable) to asymmetry (e.g., the finality of an order is dependent on the outcome), and we assume that every order may be reviewed on appeal, the Supreme Court sees finality differently. That said, asymmetrical or outcome-dependent appellate rights already exist in ordinary civil litigation, such as the asymmetrical review of rulings under Rule 56.

Read the full opinion here.

In ruling a motion to dismiss, the Third Circuit Court of Appeals considered whether the purchaser of the Debtors’ shares post-confirmation was bound by releases contained in the plan of reorganization (the “Plan”).  A copy of the opinion is available here.

The Plan included “broad releases of liability,” that protected the Debtor and its officers from claims related to or arising out of the bankruptcy, with exceptions for gross negligence and willful misconduct.  Id. at 4.  After creditors had been paid in full, a notice was provided that there would be a distribution of dividends to shareholders.

photo of glacierAfter these announcements, appellants purchased millions of shares in the Debtor, Arctic Glacier, assuming that they would be subject to FINRA rules and would receive the dividends.  However, the dividends were paid only to the original owners of the shares.  Appellants then sued Arctic Glacier and four of its officers.  The Delaware Bankruptcy Court dismissed the Complaint as barred by the Plan releases and by the res judicata effect of the Plan.  This decision was affirmed by the District Court.

Before the Third Circuit Court of Appeals, the appellants argued that plan releases “can never insulate a debtor from liability for post-confirmation acts.”  Id at 8.  The Third Circuit explained that a bankruptcy court order confirming a plan is a “final judgment,” and “like any other judgment, is res judicata. . . It bars all challenges to the plan that could have been raised.”  Id.  Thus, the Third Circuit found that the “entire Plan is res judicata, including its releases.”  Id. at 9.

Regarding whether the releases could preclude liability for acts that took place after confirmation of the plan, the Court explained that appellants’ argument was essentially based on a single sentence contained in a U.S. Supreme Court decision.  Given this, the Third Circuit reasoned that a plan can only be implemented after confirmation and if releases could not bar post-confirmation conduct, that would “nullify the res judicata effect of confirmed plans.”  Id. at 10.  Thus, the Court affirmed the lower court decisions dismissing the Complaint and found that the releases barred the appellants’ claims because the releases precluded claims arising out of the bankruptcy, including those based on to distributions under the Plan.

This decision out of the Third Circuit Court of Appeals serves as a reminder of the nature of confirmation orders — and the releases contained therein — as final judgments that carry res judicata implications.

Yesterday, the Bankruptcy Panel of the Ninth Circuit Court of Appeals issued yet another decision related to standing and rights to appeal bankruptcy court orders.  In Bray v. U.S. Bank National Association, (In re Bray), the Ninth Circuit BAP considered a chapter 7 individual debtor’s appeal from an order reopening his involuntary chapter 7 bankruptcy case.  See Bray, B.A.P. No. CC-17-1373-SKuF (9th Cir. BAP Aug. 7 2018).

Our prior blog posts on similar decisions from the Ninth Circuit regarding rights and standing to appeal bankruptcy court orders are available here and here.

Appeal

In determining whether the debtor here had appellate standing, the Court explained that “reopening a closed case is a ‘ministerial act’ that primarily enables the clerk to manage the case as an active matter.”  Id. at 10 (citation omitted).  The Court further elaborated that a bankruptcy court order reopening a case “lacks legal significance and determines nothing with respect to the merits of the case.”  Id. (citation omitted).

The Court considered the person aggrieved standard, which provides that “‘those persons who are directly and adversely affected pecuniarily by an order of the bankruptcy court’ have standing to appeal.” Id. at (citation omitted).  In order to meet this standard, the debtor would have to show that the order on appeal “diminished his property, increased his burdens or otherwise detrimentally affected his rights.”  Id. at 11.

The Court found that the order reopening the case did not impact Bray in any of these ways, and thus he lacked standing to appeal the bankruptcy court’s order reopening the case.  Id. at 11 (dismissing appeal).

In a recent opinion, the Fifth Circuit affirmed a district court ruling that found that a debtor was judicially estopped from claiming a stay violation by a mortgagee, who foreclosed on the debtor’s property, due to the debtor’s failure to disclose the affected property or his putative claims in his bankruptcy.

The Fifth Circuit explained that the “doctrine of judicial estoppel is equitable in nature and can be invoked by a court to prevent a party from asserting a position in a legal proceeding that is inconsistent with a position taken in a previous proceeding.” The Fifth Circuit further emphasized that judicial estoppel “is particularly appropriate where . . . a party fails to disclose an asset to a bankruptcy court, but then pursues a claim in a separate tribunal based on that undisclosed asset.”

Examining the facts of the case, the Court determined that “Chapter 13 debtors have a continuing obligation to amend financial schedules to disclose assets acquired post-petition,” and the debtor failed to fulfill this duty.  By failing to amend his asset schedule the debtor “impliedly represented” to the bankruptcy court that his financial status was unchanged.

Read the full opinion here.

When a trademark licensor files for bankruptcy, can the licensees of their trademarks continue using those marks, or does the licensor have the right to prohibit their continued use? On Fox’s Above the Fold blog covering advertising law, partner Elizabeth Patton recently wrote a post discussing this open question, which sits at the heart of a case that may be heard by the U.S. Supreme Court.

We invite you to read Elizabeth’s post covering the case and its potential impact:

How Bankruptcy Effects Rights Under Trademark Licenses

An opinion issued yesterday by the U.S. Court of Appeals for the Ninth Circuit reiterates the importance of filing written objections and appearing in the Bankruptcy Court to preserve rights to appeal.  The opinion clarifies the Ninth Circuit’s recent opinion on this issue, which we covered in a recent blog post.  In Reid and Hellyer, APC v. Laski (In re Wrightwood Guest Ranch, LLC), No. 16-56856, D.C. No. 5:16-cv-07168-MFW, the Ninth Circuit considered an appeal of an order issued by the U.S. Bankruptcy Court for the Central District of California that approved a settlement between a chapter 11 trustee and a secured creditor.

GavelIn August 2015, an involuntary petition was filed against the Debtor, Wrightwood Guest Ranch, LLC (the “Debtor”) and a trustee was appointed.  The Trustee elected to settle a $9.6 million claim secured by the estate’s principal asset, a large piece of real estate, by allowing an affiliate of the secured creditor to purchase the property for $8.5 million and having the secured creditor limit its claim to that amount and also carve out funds for estate professionals, expenses and unsecured creditors.

The Official Committee of Unsecured Creditors (the “Committee”) and an individual creditor filed written objections to the proposed settlement.  The Debtor’s counsel and the Committee’s counsel (the “Administrative Claimants”) did not file any written objections on behalf of themselves despite that they had administrative claims in the case.

The bankruptcy court held a hearing on the sale of the property and the settlement and attorneys from the law firms representing the Committee and the Debtor appeared on behalf of the Committee and the Debtor, respectively.  Neither Administrative Claimant stated during the hearing that it was appearing on its own behalf.  The Bankruptcy Court granted the sale motion and approved the settlement under Federal Rule of Bankruptcy Procedure 9019.

Thereafter, Administrative Claimants both filed appeals of the settlement order.  The District Court for the Central District of California consolidated the appeals and the Trustee moved to dismiss the appeals claiming that neither Administrative Claimant / appellant had standing to appeal because neither, in its own capacity, objected to the settlement or appeared at the hearing.  The District Court agreed and dismissed the appeals.

In their appeals to the Ninth Circuit, the Administrative Claimants / appellants argued that despite their failure to “explicitly object” below, the Bankruptcy Court and Trustee were aware of their positions and their intent to object on their own behalves.  The Ninth Circuit noted its recent decision in In re Point Center Fin., Inc. wherein the Ninth Circuit “clarified that attendance and objection are not prudential standing requirements in bankruptcy cases, but rather relate to whether a party has waived or forfeited its right to appeal a given order of the bankruptcy court.”  Wrightwood, at 8.

Here, the Court found that “the law firms have forfeited their claims regarding the propriety of the settlement order because neither firm attended the hearing or objected to the settlement in its own capacity.”  Id. at 9.  The Ninth Circuit further explained its Point Center ruling – “[t]here, although the appellants did not file a written objection or attend the hearing, they quickly realized the error and ‘filed a motion to reconsider with the bankruptcy court before it had issued a written order on the motion,’ which the bankruptcy court considered and rejected on the merits.'”  Id. at 10 (citing Point Center).  Accordingly, the Ninth Circuit affirmed the judgement of the District Court.

The Ninth Circuit’s ruling in Wrightwood is a good reminder – “When a party has not objected to an order in writing and the record contains no explicit indication that a party meant to object, a party has normally failed to preserve its objection to that order.”  Id. at 16.

In an appeal from the U.S. Bankruptcy Court for the District of Hawaii, the U.S. District Court for the District of Hawaii determined when the date of the transfer occurred for the purposes of a preferential transfer asserted by a trustee pursuant to 11 U.S.C. §547.  See Coulson v. Kane (In re Price), Civ. No. 17-00437-LEK-KSC (D. Hi June 29, 2018).  Generally, a preferential transfer under Section 547 of the Bankruptcy Code involves a transfer of the debtor’s funds or property shortly before filing for bankruptcy (within 90 days) and such a transfer can be avoided (and the funds/property returned to the bankruptcy estate) if certain conditions are met.

In this case, the Appellant was sued by a bankruptcy trustee for receipt of funds out of escrow that occurred during the 90 days immediately preceding the debtor’s bankruptcy filing. The appellant argued, among other things, that the transfer actually occurred outside the 90-day period because the transfer occurred at some earlier time when the funds were put into escrow because bankruptcy courts have previously held that escrow funds are not property that vests in the bankruptcy trustee.  Id. at 16.

Honolulu, Hawaii
Honolulu, Hawaii

The Court explained that “[t]o prevail on his escrow theory, Appellant must show the ultimate transfer of funds to him, which occurred outside the preference period, did not ‘deplete the assets of the estate available for distribution,'” or, in other words, that the “Escrow Instructions diminished the Debtor’s interest in the escrowed funds sufficiently so that they were not property of the bankruptcy estate.”  Id. at 17 (citations omitted).

For example, escrow instructions that have left a debtor with only a “contingent right” to the funds might sufficiently diminish the debtor’s interest in escrow funds such that the funds are no longer estate property.  Id.  Here, however, the Escrow Instructions at issue did not contain any particular terms that caused the Debtor’s interest to be “without value to the bankruptcy estate.”  Id. at 18.

Accordingly, the Hawaii District Court affirmed the Bankruptcy Court’s ruling that the trustee could recover the transfer of the escrowed funds to appellant because that transfer occurred within the 90-day preference period.  Although sometimes receipt of a preferential transfer can’t be avoided, this case serves as an important reminder to review escrow instructions carefully to the extent they could be used as a defense.

Kerri Gallagher writes:

The Eleventh Circuit recently held that when determining whether a plaintiff’s inconsistent statements are intended to make a mockery of the judicial system, a court must evaluate all facts and circumstances of the case rather than simply make an inference.  See Slater v. U.S. Steel Corp., No. 12 15548 (11th Cir. June 12, 2018).

In Slater v. U.S. Steel Corp., the plaintiff failed to disclose to the Bankruptcy Court that she was prosecuting employment discrimination claims against the defendant.  Citing Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1283 (11th Cir. 2002), the defendant moved to dismiss her claims under the judicial estoppel doctrine.  The district court granted the motion to dismiss, and the Eleventh Circuit affirmed.

Rehearing the case en banc, the Eleventh Circuit overruled portions of Burnes, which permitted the inference that a plaintiff intended to make a mockery of the judicial system by failing to disclose a civil claim.  Slater v. U.S. Steel Corp. (“Slater II”), 871 F.3d 1174, 1185 (11th Cir. 2017).  Instead, the Eleventh Circuit held that, instead of making an inference, a court should evaluate “all the facts and circumstances of the particular case,” and provided a non-exhaustive list of facts for consideration.  Id.

Citing its holding in Slater II, the Eleventh Circuit in the instant action, found that the district court failed to consider any relevant facts in granting the defendant’s motion for summary judgment.  Accordingly, the Court vacated the summary judgment order and remanded the case for further proceedings.

Kerri Gallagher is a summer associate in Fox Rothschild’s Philadelphia office.

Samuel Goodstein writes:

The U.S. Supreme Court resolved a dispute about whether debts obtained by false promises to pay (or fraud) can be discharged in bankruptcy.

On June 4, 2018, the U.S. Supreme Court issued an opinion affirming the U.S. Court of Appeals for the Eleventh Circuit’s ruling that false statements related to a single asset (here, a tax refund) that could be used deny discharge of a particular debt may prevent denial of discharge because the statement relates to the Debtor’s financial condition. See Lamar, Archer, & Cofrin, LLP v. Appling, No. 16-1215 (U.S. June 4, 2018).

InvoicesThe case involved R. Scott Appling (“Debtor”) who failed to pay his attorneys, Lamar, Archer & Cofrin (“Creditor”) for legal services provided in a business litigation. Creditor/attorney threatened to withdraw from the case and place a retaining lien on the work product to compel payment.

Debtor made remarks to Creditor about certain expected tax refunds that could be used to pay for the legal services; and Creditor agreed not to withdraw from the representation. Debtor thereafter did not pay Creditor for the legal services.  Ultimately, Creditor brought suit against Debtor for the balance due and obtained a judgment, and Debtor then filed for chapter 7 bankruptcy.

In the chapter 7 case, Creditor brought an adversary proceeding claiming that the debt was not dischargeable under 11 U.S.C. § 523(a). Section 523(a)(2)(A) provides an exception to dischargeability of a debt if the debt is obtained by “false pretenses, a false representation, or actual fraud,” but 523(a)(A) itself has an exception and does not deny discharge if the statement is “respecting the debtor’s . . . financial condition.”

When the purported false statement is “respecting” the debtor’s financial condition, §523(B), applies to render the debt not dischargeable if the false statement was in writing.  Here, the Debtor’s promise to pay creditor with his tax refund proceeds were not in writing so Creditor argued that the Debtor’s statements about his tax refund was not a “statement respecting” his financial condition such that the exception to denial of discharge in 523(a)(2)(A) would not apply.

The Supreme Court affirmed the Eleventh Circuit’s ruling and found the debt was still dischargeable because the false promises to pay with the tax refund proceeds constituted a statement “respecting” the Debtor’s financial condition and were not in writing.  The Supreme Court agreed and broadly construed the word “respecting.”  The Supreme Court decided that statements about a single asset (the tax refund) can constitute a “statement respecting the debtor’s financial condition” such that denial of discharge is not appropriate.

The practical implications of this ruling are rather straightforward. Debtors can make, at the very least, a single false statement about their ability to complete payment to creditors as long as it relates to their financial condition and it isn’t memorialized in writing.  It will be interesting to see how this plays out throughout the country.

Samuel Goodstein is a summer associate in Fox Rothschild’s New York Office.

Yesterday a panel of the U.S. Court of Appeals for the Ninth Circuit issued an opinion reversing a district court order dismissing an appeal from the bankruptcy court for lack of standing.  See Harkey v. Grobstein (In re Point Center Financial, Inc.), Bankr. No. 16-56321, D.C. No. 8:16-cv-1336-DSF (May 29, 2018, 9th Cir.).

The appeal was related to the U.S. Bankruptcy Court for the Central District of California’s order authorizing a chapter 7 trustee to assume the operating agreement of a limited liability company whose interests were implicated in the bankruptcy proceedings.

On appeal, the U.S. District Court for the Central District of California found that the members and president of the LLC lacked standing to challenge the Bankruptcy Court order because, despite receiving notice of the trustee’s assumption motion, they did not object or attend the hearing on the motion.  The Ninth Circuit explained that standing to appeal a bankruptcy court order is limited to “persons aggrieved” by the order.  Id. at 7 (collecting cases).

A person aggrieved is someone “‘directly and adversely affected pecuniarily’ by a bankruptcy court’s order.”  Id. (citing Fondiller v. Robertson (In re Fondiller), 707 F.2d 441, 443 (9th Cir. 1983)).  This can include an order “that diminishes one’s property, increases one’s burdens, or detrimentally affects one’s rights….”  Id. (citation omitted).  The Court explained that this standard exists because Bankruptcy Court orders can implicate the interests of various stakeholders, including entities and individuals who are not formally parties to proceedings.

In reversing the District Court opinion, the Ninth Circuit considered whether attendance at the hearing and filing an objection are “prerequisites” to appellate standing under the person aggrieved standard and found that “[b]ankruptcy standing concerns whether an individual or entity is ‘aggrieved,’ not whether one makes that known to the bankruptcy court.”  Id. at 10.  Thus, the Ninth Circuit concluded that an appellant need not attend the hearing or file objections to be adversely affected by a bankruptcy court decision and have standing to appeal.  Id. (reversing and remanding).